<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                  Form 10-KSB

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

      For the fiscal year ended September 30, 2006

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

      For the transition period from ____________ to _______________.

                         Commission file No. 000-27997

                      WESTBOROUGH FINANCIAL SERVICES, INC.
              (Exact name of small business issuer in its charter)

              Massachusetts                          04-3504121

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

           100 E. Main Street                           01581
      Westborough, Massachusetts
(Address of principal executive offices)             (Zip Code)

                                 (508) 366-4111
                (Issuer's telephone number, including area code)

         Securities registered under Section 12(b) of the Exchange Act:

                                     None.

         Securities registered under Section 12(g) of the Exchange Act:

                    Common Stock, par value $0.01 per share
                                (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [X]
<PAGE>

The issuer's revenues for the fiscal year ended September 30, 2006 were
$15,292,000.

The aggregate market value of the common equity held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of the
common stock as of December 8, 2006 was $16,022,058.

State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of December 8, 2006, the
registrant had 1,595,774 shares of common stock, par value $0.01 per share,
outstanding.

                      Documents incorporated by reference.

Portions of the registrant's proxy statement for the 2007 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A within 120 days after
registrant's fiscal year ended September 30, 2006, are incorporated by
reference in Part III of this Form 10-KSB.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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<TABLE>
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                                              TABLE OF CONTENTS

                                                                                                       Page
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<S>                                                                                                     <C>
FORWARD LOOKING STATEMENTS                                                                              (i)

PART I   .........................................................................................        1
         ITEM 1.  DESCRIPTION OF BUSINESS.........................................................        1
         ITEM 2.  DESCRIPTION OF PROPERTY.........................................................       38
         ITEM 3.  LEGAL PROCEEDINGS...............................................................       39
         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................       39

PART II  .........................................................................................       39
         ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................       39
         ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......................       39
         ITEM 7.  FINANCIAL STATEMENTS............................................................       54
         ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE............................................................       55
         ITEM 8A. CONTROLS AND PROCEDURES.........................................................       55
         ITEM 8B. OTHER INFORMATION...............................................................       55

PART III .........................................................................................       55
         ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSONS AND CORPORATE
                  GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...................       55
         ITEM 10. EXECUTIVE COMPENSATION..........................................................       55
         ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS.............................................................       55
         ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.......       56
         ITEM 13. EXHIBITS........................................................................       56
         ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................................       58
         SIGNATURES...............................................................................       59
         CERTIFICATIONS...........................................................................       62
</TABLE>
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FORWARD LOOKING STATEMENTS

      Westborough Financial Services, Inc. (the "Company") and The Westborough
Bank (the "Bank") may from time to time make written or oral "forward-looking
statements" which may be identified by the use of such words as "may," "could,"
"should," "would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan" and similar expressions.

      Forward-looking statements include statements with respect to the
Company's and the Bank's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, which are subject to significant risks
and uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's and the Bank's control, and
other factors identified in the Company's filings with the Securities and
Exchange Commission and those presented elsewhere by management from time to
time, could cause its financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements. Examples of forward-looking statements include, but
are not limited to, estimates with respect to our financial condition, results
of operations and business that are subject to various factors which would
cause actual results to differ materially from these estimates. These factors
include, but are not limited to:

      *  conditions which effect general and local economies;
      *  changes in interest rates, deposit flows, demand for mortgages and
         other loans, real estate values and competition;
      *  changes in accounting principles, policies, or guidelines;
      *  changes in legislation or regulation; and
      *  other economic, competitive, governmental, regulatory, and
         technological factors affecting our operations, pricing, products and
         services.

      This list of important factors is not exclusive. The Company and the Bank
do not undertake any obligation to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company or the Bank.

                                       i
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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

      The Company is a Massachusetts chartered mid-tier holding company that
completed its initial public offering in February 2000 in connection with the
reorganization of The Westborough Bank (the "Bank") from a Massachusetts
chartered mutual savings bank into the Massachusetts mutual holding company
form of organization. Pursuant to the reorganization, the Bank converted to a
Massachusetts chartered stock savings bank as a wholly-owned subsidiary of the
Company, which is majority owned by Westborough Bancorp, MHC ("MHC"), a
Massachusetts chartered mutual holding company. The Company's common stock is
traded on the Over-the-Counter Bulletin Board under the symbol "WFSM.OB."

      On November 13, 2006, the Company, the Bank and the MHC entered into an
agreement and Plan of Merger with Assabet Valley Bancorp, Hudwest Financial
Services, Inc., and Hudson Savings Bank. Under the terms of the agreement, the
mutual holding company structure of the MHC will be eliminated and the Bank
will merge with Hudson Savings Bank. The Company will merge with Hudwest
Financial Services, Inc., with the Company as the surviving corporation and a
wholly-owned subsidiary of Assabet Valley Bancorp. The Company will eventually
be merged into Assabet Valley Bancorp. The stockholders of the Company, other
than the MHC, will receive $35.00 in cash in exchange for each share of common
stock they own. The transaction is subject to regulatory approval and the
approval of the stockholders of the Company and the corporators of the MHC and
Assabet Valley Bancorp. It is anticipated that the transaction will be
completed in spring of 2007.

      The Company's principal business is its investment in the Bank. The Bank
is headquartered in Westborough, Massachusetts and its deposits are insured by
the Federal Deposit Insurance Corporation (the "FDIC") up to the applicable
legal limits and by the Deposit Insurance Fund. As a Massachusetts stock
savings bank, the Bank is examined by the Division of Banks for the
Commonwealth of Massachusetts (the "Division") and the FDIC. The Bank has
offices in the towns of Westborough, Northborough and Shrewsbury,
Massachusetts. The Bank has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Bank attracts
retail deposits from the general public and invests those funds primarily in
loans secured by first mortgages on owner-occupied, one- to four-family
residences and, to a lesser extent, in commercial real estate and commercial
loans to small businesses.

      Unless otherwise indicated, the information presented in this Annual
Report on Form 10-KSB represents the consolidated activity of the Company and
its subsidiary for the year ended September 30, 2006.

      At September 30, 2006, total assets were $301.0 million, deposits were
$211.3 million and total stockholders' equity was $28.4 million.

Market Area

      The Bank is a community- and customer-oriented retail bank offering
traditional deposit products, residential and commercial real estate mortgage
loans and, to a lesser extent, consumer and commercial loans. The Bank operates
four full service-banking offices located in the towns of Westborough,
Northborough and Shrewsbury, Massachusetts. The Bank also operates a
non-public, self-contained office at the "Willows," a retirement community
located in Westborough. Together, these offices serve the Bank's "primary
market area" consisting of Westborough, Northborough, Shrewsbury, Grafton,
Southborough and Hopkinton, Massachusetts. The Bank's deposits are gathered
from the general public in these towns and the surrounding communities. The
Bank's lending activities are

                                       1
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concentrated primarily in the towns where it has offices, as well as contiguous
cities and towns. These cities and towns are located in east central
Massachusetts, near the central Route 495 belt.

      The Bank's market area has grown steadily to achieve a blend of industry,
office parks and residences. The town of Westborough is approximately 12 miles
east of Worcester and 29 miles west of Boston, located at the junction of major
interstate highways constructed in the 1950's and 1960's. The convenient access
provided by Routes 20, 9, I-90 and I-495 has contributed to the diverse
economic base consisting of a retail and commercial section, and a high-tech
manufacturing section.

      Among the largest industries in the Bank's market area are financial
services, health services, high-tech and utilities.

      Public transportation within the Bank's market area has expanded with the
addition of mass transit stations. The Massachusetts Bay Transportation
Authority operates stations in the towns of Grafton, Westborough and
Southborough. These stations provide direct access to Worcester and Boston for
residents in the Bank's market area. Since 1980, the Bank's primary market area
has experienced increases in both population and households as individuals and
families moved from urban areas surrounding Boston to more outlying areas with
lower cost and newer housing stock.

      The Bank anticipates that its future growth opportunities will be
influenced by the growth and stability of the statewide and regional economies,
other demographic population trends and the competitive environment. The Bank
believes that it has developed lending, deposit and non-deposit investment
products and marketing strategies to address the diverse needs of the residents
in its market area.

Business Strategy

      In past years, the Bank's primary management strategy has been to offer
savings and certificate of deposit accounts and residential mortgage loans in
the market area of Westborough, Massachusetts and surrounding communities. The
Bank's loan portfolio historically consisted of one- to four-family residential
first mortgage loans, with relatively few commercial real estate or commercial
loans in its portfolio. In recent years, the Company has adopted a
growth-oriented strategy that has focused on expanding its product lines and
services and providing expanded electronic and traditional delivery systems for
its customers. The Bank believes that this business strategy is best for its
long-term success and viability, and complements its existing commitment to
high quality customer service. In connection with the Bank's overall growth
strategy, it seeks to:

      o  continue to focus on expanding its residential lending and retail
         banking franchise, and increasing the number of households served
         within its market area;

      o  expand its commercial banking products and services for small- and
         medium-sized businesses, as a means to increase the yield and
         re-pricing characteristics on its loan portfolio and to attract lower
         cost transaction deposit accounts;

      o  expand its branch network to increase its market share;

      o  increase the use of alternative delivery channels, such as Internet
         and telephone banking; and

      o  offer a variety of non-deposit investment products (such as mutual
         funds, insurance, etc.,) and services as a means to compete for an
         increased share of its customers' financial service business and
         improve fee-based income.

      In order to create a platform for the accomplishment of the Company's
goals, management has made significant investments in its physical
infrastructure and human and technological resources. The Bank is in the
process of renovating older sections of its Main Office and other branches to
better serve its retail customers. The Bank continues to upgrade its on-line
Internet bill payment and other on-line applications. Such investments have
been necessary to ensure that adequate resources are in place to offer
increased products and services. Management believes that the Company's
long-term profitability is enhanced as it realizes the benefits of diversified
product lines and market share growth.

                                       2
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Lending Activities

      General. The Bank originates loans primarily through its main office. The
principal lending activities of the Bank are the origination and purchase of
first mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties. To a lesser extent,
the Bank also originates commercial real estate loans, commercial and
industrial (C&I) loans and consumer loans.

      The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and percentages at the dates indicated.

<TABLE>
<CAPTION>
                                --------------------------------------------------------------------------------------------------
                                                                         At September 30,
                                --------------------------------------------------------------------------------------------------
                                       2006                2005                2004                2003                2002
                                --------------------------------------------------------------------------------------------------
                                          Percent             Percent             Percent             Percent             Percent
                                 Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total
                                --------------------------------------------------------------------------------------------------
                                                                      (Dollars in thousands)
<S>                             <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
Real estate loans:
  Fixed rate mortgages          $ 54,169   25.44%   $ 57,953   28.31%   $ 64,310   38.51%   $ 65,170   44.84%   $ 47,599   35.01%
  Variable rate mortgages        100,282   47.09%    100,365   49.04%     64,788   38.81%     48,287   33.23%     54,096   39.78%
  Commercial                      32,853   15.43%     26,979   13.18%     23,313   13.96%     17,290   11.90%     20,092   14.78%
  Home equity lines-of-credit     19,530    9.17%     15,452    7.55%     11,295    6.77%     10,303    7.09%      8,792    6.47%
                                --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
    Total real estate loans      206,834   97.13%    200,749   98.08%    163,706   98.05%    141,050   97.06%    130,579   96.04%
                                --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
Consumer loans:
  Personal                           265    0.12%        198    0.10%        322    0.19%        564    0.39%        983    0.72%
  Deposit secured                    212    0.10%        312    0.15%        297    0.18%        358    0.24%        509    0.37%
  Home improvement                    40    0.02%          6    0.00%         85    0.05%         68    0.05%        171    0.13%
                                --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
    Total consumer loans             517    0.24%        516    0.25%        704    0.42%        990    0.68%      1,663    1.22%
                                --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
Commercial loans:
  Commercial lines-of-credit       1,749    0.82%        870    0.43%        965    0.58%      1,824    1.25%      2,549    1.87%
  Commercial installment           3,842    1.81%      2,534    1.24%      1,579    0.95%      1,461    1.01%      1,182    0.87%
                                --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
    Total commercial loans         5,591    2.63%      3,404    1.67%      2,544    1.53%      3,285    2.26%      3,731    2.74%
                                --------  ------    --------  ------    --------  ------    --------  ------    --------  ------

Total loans                      212,942  100.00%    204,669  100.00%    166,954  100.00%    145,325  100.00%    135,973  100.00%
                                          ======              ======              ======              ======              ======
Adjusted by:
Due to borrowers on
 incomplete loans                 (3,360)             (4,287)             (1,507)             (3,550)             (2,866)
Net deferred loan costs              721                 620                 389                 223                 161
Net premium on purchased
 loans and indirect lending          221                 260                 402                 470                 538
Allowance for loan loss             (780)               (785)               (950)               (911)               (926)
                                --------            --------            --------            --------            --------
Net loans                       $209,744            $200,477            $165,288            $141,557            $132,880
                                ========            ========            ========            ========            ========
</TABLE>

                                       3
<PAGE>

      Residential Mortgage Loans. The Bank's primary emphasis is the
origination of first mortgage loans secured by one- to four-family properties
that serve as the primary or secondary residence of the owner. As of September
30, 2006, loans on one- to four-family residential properties accounted for
72.5% of the Bank's total loan portfolio.

      Most of the Bank's loan originations are from internal mortgage
specialists, directors and officers, marketing promotions, referrals from
mortgage brokers (correspondents), existing or past customers, and members of
the Bank's local communities or referrals from local real estate agents,
attorneys and builders. The Bank believes that its branch network is a
significant source of new loan generation. The Bank has two mortgage loan
originators, each of whom have designated call areas. They have extensive
training in residential and equity products and are available to meet with
customers at the office of a realtor or their homes. The Bank's marketing
department provides support in the form of displays, mailings and other
materials which are available to the loan specialists to leave in real estate
offices.

      The Bank currently offers loans that conform to underwriting standards
specified by Fannie Mae ("conforming loans") and also originates non-conforming
loans, as described below. These loans may be fixed-rate one- to four-family
mortgage loans or adjustable-rate one- to four-family mortgage loans with
maturities of between 5 and 30 years. The non-conforming loans generally follow
Fannie Mae guidelines except that the loan amount exceeds Fannie Mae
guidelines' maximum limit of $417,000. The average size of the Bank's first
mortgage loans originated during the year ended September 30, 2006 and the year
ended September 30, 2005 was $243,594 and $282,034, respectively. The average
size of the Bank's first mortgage loans was $193,523 and $186,958 at September
30, 2006 and September 30, 2005, respectively. The Bank is an approved
seller/servicer for Fannie Mae. The Bank generally sells fixed rate one-to
four-family loans in the secondary market. Loan sales were $2.3 million and
$8.1 million for years ended September 30, 2006 and September 30, 2005,
respectively. Such loans, however, continue to be serviced by the Bank.

      The Bank's originations of first mortgage loans amounted to $20.0 million
in fiscal year 2006, $63.6 million in fiscal year 2005 and $49.9 million in
fiscal year 2004. During the latter part of 2004, the Bank entered into
correspondent contracts with a number of mortgage brokers and lenders who
present prospective customer loan applications to the Bank for consideration.
Such loan applications are reviewed by the Bank, and approval is subject to the
loan meeting established underwriting conditions and criteria.

      The Bank offers a variety of adjustable-rate mortgages ("ARM's") and
fixed-rate one- to four-family mortgage loans with maximum loan-to-value ratios
that depend on the type of property and the size of loan involved. The
loan-to-value ratio is the loan amount divided by the appraised value of the
property. The loan-to-value ratio is a measure commonly used by financial
institutions to determine exposure to risk. The majority of the Bank's loans on
owner-occupied one- to four-family homes are originated with a loan-to-value
ratio of 80% or less. For first-time home buyers, the Bank has made loans on
owner-occupied one- to four-family homes with a loan-to-value ratio of up to
95%. The borrower is required to obtain mortgage insurance if the loan-to-value
ratio is over 80%. Subsequently, if the loan-to-value ratio falls to 80% or
less, the borrower is not required to continue to have mortgage insurance.

      The Bank currently offers fixed-rate mortgage loans with terms of 15 to
40 years secured by one- to four-family residences. Fixed rate mortgage loans
are priced to be competitive with the offerings of local area banks, reflecting
current market trends and conditions.

      The Bank currently offers a variety of ARM loans secured by one- to
four-family residential properties that initially adjust after one year, three
years, five years, seven years, or ten years. After the initial adjustment
period, ARM loans adjust on an annual basis. The ARM loans that the Bank
currently originates have a maximum 30 year amortization period and are subject
to the same loan-to-value ratios

                                       4
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applicable to fixed-rate mortgage loans described above. The interest rates on
ARM loans fluctuate based upon a fixed spread above the average yield on United
States treasury securities and generally are subject to a maximum increase of
2% per adjustment period and a limitation on the aggregate adjustment of 6%
over the life of the loan. The Bank originated $15.1 million and $46.6 million
of one-to-four family ARM loans in the years ended September 30, 2006 and 2005,
respectively. At September 30, 2006, 47.1% of the Bank's total loans consisted
of ARM loans, down from 49.0% at September 30, 2005.

      The volume and types of ARM loans the Bank originates are affected by the
level of market interest rates, competition, consumer preferences and the
availability of funds. Although the Bank will continue to offer ARM loans, it
cannot guarantee that it will be able to originate or purchase a volume of ARM
loans sufficient to maintain or perhaps increase the proportion these loans
represent when compared against the aggregate residential loan portfolio.

      The Bank encourages growth in its ARM portfolio since ARM loans help
reduce its exposure to increases in interest rates. However, ARM loans can pose
credit risks different from the risks inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower may
rise. This increases the potential for default.

      The Bank's home equity lines-of-credit, which totaled $19.5 million, or
9.2% of total loans at September 30, 2006, are adjustable-rate loans secured by
a first or second mortgage on owner-occupied one- to four-family residences
located in the Bank's market area. Interest rates on home equity credit lines
are based upon the "prime rate" as published in the "Money Rates" section of
the Wall Street Journal (the "index"). The home equity line product is written
for a term of 20 years, with a 10 year draw period and a 10 year payback
period, with no principal payments required during the draw period. Within the
first 10 year draw period, interest only payments are required monthly. The
subsequent 10 year period requires a minimum monthly payment of 1/120th of the
outstanding principal balance of the loan plus the outstanding interest. The
maximum credit line available is equal to (i) the lesser of $250,000 or 80% of
the Bank's appraisal of the property, or (ii) 50% of the tax assessment on the
property. In each case, these amounts are reduced by the first mortgage
balance. Such loans also have a maximum term of 20 years. The underwriting
standards applicable to these loans generally are the same as one- to
four-family first mortgage loans, except that the combined loan-to-value ratio,
including the balance of the first mortgage, cannot exceed 80% of the assessed
or appraised value of the property.

      In conjunction with the Bank's residential mortgage lending, the Bank
offers construction loans to the future occupants of single family homes. These
loans typically have a term of twelve months and are structured to become
permanent loans upon the completion of construction. All such loans are secured
by first liens on the property and are subject to a maximum loan-to-value ratio
of 80%, which is based upon the "as completed" valuation of the property.
During the construction period, the interest rate for construction loans to
individuals is equal to the index plus 2%. Loans involving construction
financing present a greater risk than loans for the purchase of existing homes
since collateral values and construction costs can only be estimated at the
time the loan is approved.

      Commercial Real Estate Loans. At September 30, 2006, commercial real
estate mortgage loans totaled $32.9 million, or 15.4% of total loans. These
loans are generally secured by office buildings, condominiums, and retail
establishments located within the Bank's market area.

      The Bank's commercial real estate loans are offered on a fixed- and
adjustable-rate basis. Typical terms for fixed rate loans provide for a maximum
five-year re-pricing term with a 20 year amortization and a market interest
rate, based upon the index, as adjusted to reflect inherent risk factors.
Typical terms for adjustable-rate loans provide for a maximum note and
amortization term of 20 years, with a re-pricing schedule every 1, 3, or 5
years. Price readjustments at each scheduled interval are based on a spread
above the index. Loans on commercial properties are also subject to a maximum
loan-to-

                                       5
<PAGE>

value ratio of 80% for the owner occupied and residential investment property
and 75% for commercial property and construction loans.

      Pursuant to the Bank's underwriting standards, a number of factors are
considered before a commercial real estate loan is made. The Bank evaluates
qualifications and financial condition of the borrower, including credit
history, profitability and managerial experience, as well as the appraised
value and condition of the underlying property. Factors that the Bank considers
in evaluating the underlying property include the net operating income of the
mortgaged property before debt service, interest/expense, and depreciation, the
debt service coverage ratio (the ratio of operating income to debt service)
and, as noted above, the ratio of the loan amount to the appraised value of the
property.

      Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family owner
occupied residential mortgage loans. Such loans typically involve large
balances to single borrowers or groups of related borrowers. Because payments
on loans secured by commercial real estate properties are often dependent on
the successful operation or management of the properties, repayment of such
loans may be subject to adverse conditions in the real estate market or the
economy. If the cash flow from the project decreases, or if leases are not
obtained or renewed, the borrower's ability to repay the loan may be impaired.

      The Bank's real estate loan portfolio also includes construction loans to
builders and developers of properties within the Bank's market area.
Construction loans to builders typically are in amounts equal to 70-75% of the
completed appraised value. Construction loans generally have up to twelve
months with a fixed or floating interest rate based upon the index plus a
margin. In addition to securing the loan with the property under construction,
the Bank generally obtains personal guarantees from the borrower. The proceeds
of such loans are disbursed only after certification by in-house personnel or
Bank retained inspection firms that confirm specified stages of construction
have been completed.

      Construction lending is generally considered to carry a higher level of
risk than permanent mortgage financing because of the uncertainty of the value
of the collateral upon completion. Repayment of such loans is also dependent
upon the successful completion of the project and can be adversely affected by
market conditions and other factors not within the control of the Bank or the
borrower. The Bank seeks to control such risks by tying the amount of the loan
advanced to a predetermined construction schedule, with appropriate inspections
by Bank personnel or Bank retained inspection firms, in order to ensure that
loan proceeds are applied appropriately.

      Consumer Loans. At September 30, 2006, $517 thousand, or 0.24 % of the
Bank's total loans, consisted of consumer loans such as personal, deposit
secured and fixed-rate home improvement loans. Consumer loans generally have
shorter terms to maturity, which reduces the Bank's exposure to changes in
interest rates. Consumer loans also carry higher rates of interest than do one-
to four-family residential mortgage loans. The Bank believes that offering
consumer loan products helps to expand and create stronger ties to the Bank's
existing customer base by increasing the number of customer relationships and
providing cross-marketing opportunities.

      The Bank's personal loans consist of unsecured loans to individuals and
secured loans for the purchase of new and used automobiles. The Bank's
unsecured loans have a maximum term of 48 months. The terms of the Bank's
automobile loans generally are determined by the age and condition of the
vehicle. At September 30, 2006, the Bank's personal loans totaled $265
thousand, or 0.12% of total loans.

      The Bank also makes loans secured by deposit accounts up to 90% of the
amount of the depositor's savings account balance. The rate for such loans is
2.0% higher than the rate paid on regular savings accounts and 3.0% higher than
the rate paid on term deposits. For loans secured by term deposits, the
maturity date for the loan is the lesser of 36 months, or the maturity of the
deposit instrument. For loans secured by regular savings deposit accounts, the
term is the lesser of 36 months or

                                       6
<PAGE>

the term desired by the regular savings account customer. Deposit secured loans
totaled $212 thousand, or 0.10% of total loans at September 30, 2006.

      Commercial Loans. The Bank has made a commitment to small business
lending by developing certain products and services for the small- and
medium-sized businesses located in the Bank's market area. Such services are
designed to give business owners borrowing opportunities for, among other
things, modernization, inventory, equipment, consolidation and working capital.
In addition, the Bank has tailored certain products and services, such as its
business checking accounts and treasury, tax and loan service, to better serve
the needs of local businesses. The Bank also is an approved lender of the Small
Business Administration. At September 30, 2006, $5.6 million, or 2.63%, of the
Bank's total loans consisted of commercial loans. The Bank expects that
commercial loans will comprise a growing portion of its total loan portfolio in
the future.

      Commercial loans generally are limited to terms of five to seven years or
less. Commercial loans have fixed or variable interest rates tied to the index.
Where applicable, the Bank collateralizes these loans with a lien on business
assets and equipment and the personal guarantees of the borrower's principal
officers (a lien may also be placed on the guarantors' primary residence for
additional collateral or to secure the guaranty).

      The Bank's commercial services are administered by the Bank's loan
department. The Bank has two experienced commercial lending officers with
considerable commercial lending expertise, including many years of banking
experience in Massachusetts and in the Bank's market area. Also, the Bank has a
commercial loan assistant and a senior credit analyst both with extensive
banking experience.

      Commercial loans generally are considered to involve a higher degree of
risk than residential mortgage loans because the primary collateral may be in
the form of accounts receivable and/or inventory and other fixed assets subject
to market obsolescence. Commercial loans also may involve relatively large loan
balances to single borrowers or groups of related borrowers, with the repayment
of such loans typically dependent on the successful operation and income stream
of the borrower. Such risks can be significantly affected by economic
conditions. In addition, commercial lending ordinarily requires substantially
greater oversight efforts compared to residential real estate lending. To
minimize these risks, the Bank conducts periodic reviews of the commercial loan
portfolio to ensure adherence to underwriting standards and policy
requirements.

      Origination of Loans. The Bank's lending activities are conducted through
its main and branch offices. The Bank's ability to originate loans is dependent
upon the relative customer demand for fixed-rate or adjustable-rate mortgage
loans, which is affected by the current and expected future levels of interest
rates.

      The following table sets forth information with respect to originations,
sales of loans and principal payments for the periods indicated.

                                       7
<PAGE>

<TABLE>
<CAPTION>
                                                ------------------------------------------------------------
                                                              For the Year Ended September 30,
                                                ------------------------------------------------------------
                                                  2006         2005         2004         2003         2002
                                                ------------------------------------------------------------
<S>                                             <C>          <C>          <C>          <C>          <C>
Loans, net:

  Balance outstanding beginning of year         $200,477     $165,288     $141,557     $132,880     $134,957
                                                --------     --------     --------     --------     --------

Originations and Purchased Loans:
  Mortgage loans:
    Residential                                   19,896       63,612       49,850       53,729       30,003
    Commercial                                     7,010        5,109        8,890        1,164        8,866
    Home equity lines-of-credit                   18,750       15,290       10,032        9,488        8,658
                                                --------     --------     --------     --------     --------
      Total mortgage originations                 45,656       84,011       68,772       64,381       47,527
  Commercial loans                                 8,898        6,552        7,552        2,728        1,704
  Consumer loans                                     474          807          656        1,453        2,123
                                                --------     --------     --------     --------     --------
      Total originations                          55,028       91,370       76,980       68,562       51,354
                                                --------     --------     --------     --------     --------

Less:
  Principal repayments, unadvanced
   funds and other, net                          (43,469)     (48,213)     (47,688)     (55,835)     (53,421)
  Sale of mortgage loans, principal balance       (2,297)      (8,133)      (5,522)      (4,065)           0
  Credit (provision) for loan losses                   0          173          (70)           0           (8)
  Net loan charge-offs (recoveries)                    5           (8)          31           15           (2)
  Transfers to foreclosed real estate                  0            0            0            0            0
                                                --------     --------     --------     --------     --------
      Total deductions                           (45,761)     (56,181)     (53,249)     (59,885)     (53,431)
                                                --------     --------     --------     --------     --------
  Net loan activity                                9,267       35,189       23,731        8,677       (2,077)
                                                --------     --------     --------     --------     --------
    Loans, net, end of year                     $209,744     $200,477     $165,288     $141,557     $132,880
                                                ========     ========     ========     ========     ========
</TABLE>

                                       8
<PAGE>

      The following table presents, as of September 30, 2006, the dollar amount
of all loans due after September 30, 2007, and whether such loans have fixed or
adjustable interest rates.

                                -----------------------------------
                                   Due After September 30, 2007
                                -----------------------------------
                                 Fixed      Adjustable      Total
                                -----------------------------------
                                               (In Thousands)
 Mortgage loans                 $53,009      $ 96,153      $149,162
 Commercial mortgages loans      22,548         4,055        26,603
 Home equity loans                4,110             -         4,110
 Consumer loans                     320             -           320
 Commercial loans                 3,625             -         3,625
                                -------      --------      --------
                                $83,612      $100,208      $183,820
                                =======      ========      ========

                                       9
<PAGE>

      Loan Commitments. The Bank generally makes loan commitments to borrowers
not exceeding 45 days. At September 30, 2006, the Bank had $4.7 million in loan
commitments outstanding, primarily for the origination of one- to four-family
residential real estate loans, commercial loans and commercial real estate
loans. Unadvanced funds on home equity lines-of-credit and commercial
lines-of-credit at September 30, 2006 represented $16.9 million and $1.9
million, respectively.

      Loan Solicitation. Loan originations are derived from a number of
sources, including the Bank's existing customers, referrals, realtors, mortgage
companies, advertising and "walk-in" customers at the Bank's offices. The Bank
also employs two full-time "on the road" loan originators who are available to
meet with customers at their convenience. During the latter part of 2004, the
Bank entered into correspondent contracts with a number of mortgage brokers and
lenders who present prospective customer loan applications to the Bank for
consideration. Such loan applications are reviewed by the Bank, and approval is
subject to the loan meeting established underwriting conditions and criteria.

      Loan Approval and Administrative Procedures. On an annual basis the Board
of Directors approves the Bank's lending policies, procedures, loan approval
limits, and outside, independent firms (such as appraisers), that may be
retained during the underwriting process. Depending on the type and size of the
requested loan, coupled with the borrower's aggregate loan balances with the
Bank, loans may be approved by individual loan officers, the loan management
committee or the executive committee. Residential mortgage loan requests for
one-to four-family homes in amounts up to $1.0 million may be approved by the
loan committee. One-to four-family mortgage requests greater than $1.0 million
require approval by the executive committee. Commercial loan (Commercial Real
Estate, Term loans, Lines-of-credit, etc.) requests up to $1.0 million may be
approved by the loan committee. Commercial loan requests exceeding $1.0 million
require approval of the executive committee. The Bank requires that all
prospective borrowers complete a loan application and sign documentation
authorizing the release of financial information to the Bank such as credit
reports, personal financial statements, individual/corporate tax returns,
financial statements and other necessary information. Upon receipt of the
information, the Bank will proceed with the underwriting process. If necessary,
the Bank may require additional financial or credit related information from
the applicant. The Bank requires an appraisal for commercial and residential
mortgage loans, except in some cases where existing mortgages are being
refinanced. Appraisals are performed by licensed or certified third-party
appraisal firms and are reviewed by the Bank's lending department. The Bank
requires title insurance on all mortgage loans, except for home equity credit
lines and fixed-rate home improvement loans. For those exceptions, the Bank
requires evidence of previous title insurance. The Bank requires borrowers to
obtain hazard insurance and may require borrowers to obtain flood insurance
prior to closing. For properties with a private sewage disposal system, the
Bank also requires evidence of compliance with applicable laws. Further, if
requested by the Bank, some borrowers are required to deposit funds on a
monthly basis to an escrow account for the future payment of real estate taxes,
and premium payments for flood insurance and private mortgage insurance.

      Interest rates charged by the Bank on all loans are primarily determined
by competitive loan rates offered in its market area and interest rate costs of
the source of funding for the loan. The Bank may charge a fixed origination fee
on new residential mortgage loans or a percentage fee on new commercial loans.
The origination fees, net of direct origination costs, are deferred and
amortized into income over the life of the loan. At September 30, 2006, the
amount of net deferred loan origination costs was $721 thousand.

      Loan Maturity and Re-pricing. The following table sets forth certain
information as of September 30, 2006 regarding the dollar amount of loans
maturing in the Bank's portfolio based on their contractual terms to maturity.
Demand loans having no stated schedule of repayments and no stated maturity,
and overdrafts are reported as due in one year or less. Adjustable and floating
rate loans are included in the period in which interest rates are next
scheduled to adjust rather than the period in which they contractually mature,
and fixed-rate loans are included in the period in which the final contractual
repayment is due. This table does not include prepayments on scheduled
principal amortizations.

                                      10
<PAGE>

<TABLE>
<CAPTION>
                                 ---------------------------------------------------------------------------------------------
                                                                     At September 30, 2006
                                 ---------------------------------------------------------------------------------------------
                                             Mortgage Loans
                                 ---------------------------------------         Home
                                                 Variable     Commercial       Equity
                                 Fixed Rate          Rate       Mortgage     Lines-of     Consumer     Commercial        Total
                                  Mortgages     Mortgages          Loans      -Credit        Loans          Loans        Loans
                                 ---------------------------------------------------------------------------------------------
                                                                        (In thousands)
<S>                                 <C>          <C>             <C>          <C>             <C>          <C>        <C>
Amounts due:
  Within one year                   $ 1,160      $  4,129        $ 6,250      $15,420         $221         $1,942     $ 29,122
  One to three years                     48        15,756          7,160            0           51            270       23,285
  Over three to five years              206        27,101          4,163            0          151            959       32,580
  Over five to ten years              3,872        51,022         13,986            0           94          2,384       71,358
  Over ten to twenty years           33,927             0          1,294        1,111            0              0       36,332
  Over twenty years                  14,956         2,274              0        2,999            0             36       20,265
                                    -------      --------        -------      -------         ----         ------      -------
    Loans, gross                    $54,169      $100,282        $32,853      $19,530         $517         $5,591      212,942
                                    =======      ========        =======      =======         ====         ======
  Due to borrowers on
   Incomplete loans                                                                                                     (3,360)
  Net deferred loan
   origination costs                                                                                                       721
  Net premium on purchased
   loans and indirect lending                                                                                              221
  Allowance for loan losses                                                                                               (780)
                                                                                                                      --------
    Loans, net                                                                                                        $209,744
                                                                                                                      ========
</TABLE>

      Non-Performing Assets, Asset Classification and Allowances for Losses.
The Senior Lending Officer or designee, working with other members of the loan
committee, continually monitors the status of all delinquent loans. On a
monthly basis, the Senior Lending Officer presents an update of the status of
loans to both the Bank's executive committee and board of directors. One of the
Bank's primary tools utilized to manage and control delinquent and problem
loans is the Watched Asset List. This report identifies all loans or
commitments that are considered to have inherent collateral or cash flow
deficiencies that could result in a potential loss to the Bank if not properly
supervised. The subject loans are managed by the loan committee, which,
together with the executive committee, may meet more frequently to discuss the
status of particular loans and to add or delete loans from the Watched Asset
List, as is deemed appropriate. At September 30, 2006, the Bank had 7 loans
which were 90 days or more past due which totaled $416 thousand. The Bank also
had $1.1 million in assets classified as substandard and $43 thousand
classified as special mention at September 30, 2006. No assets were classified
as doubtful or loss.

      The Bank had $416 thousand and $175 thousand non-performing assets at
September 30, 2006 and 2005, respectively.

                                      11
<PAGE>

      The following table presents information regarding non-accrual mortgage
and consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated:

<TABLE>
<CAPTION>
                                                               ---------------------------------------------
                                                                             At September 30,
                                                               ---------------------------------------------
                                                                2006      2005      2004      2003      2002
                                                               ---------------------------------------------
                                                                            (Dollars in thousands)
<S>                                                            <C>       <C>       <C>       <C>       <C>
Non-accrual first mortgage loans                                 $42      $154       $42      $204      $140
Non-accrual commercial and other loans                           374        21        79       430         0
Accruing loans delinquent 90 days or more                          0         0         0         0         0
                                                               -----     -----     -----     -----     -----
  Total non-performing and delinquent loans                      416       175       121       634       140
Foreclosed real estate, net                                        0         0         0         0         0
                                                               -----     -----     -----     -----     -----
  Total non-performing assets and delinquent loans              $416      $175      $121      $634      $140
                                                               =====     =====     =====     =====     =====

Non-performing and delinquent loans to total loans             0.20%     0.09%     0.07%     0.45%     0.11%
Non-performing assets and delinquent loans to total assets     0.14%     0.06%     0.05%     0.25%     0.06%
</TABLE>

      Loans are placed on non-accrual status when they are 90 days past due or,
in the opinion of management, the collection of principal and interest is
doubtful. When the Bank designates loans as non-accrual loans, it reverses
outstanding interest that it previously recognized to income. The Bank may
recognize income in the period that interest is collected, and when the full
return of principal balances are no longer in doubt. A loan can be returned to
accrual status once there is no longer principal and interest past due, or in
circumstances where an abundance of additional collateral has been obtained and
the loan is in a "positive" state of collection.

      Impaired loans generally are individually assessed to determine whether a
loan's carrying value is not in excess of the fair value of the collateral or
the present value of the loan's cash flows. Groups of smaller balance loans,
however, are collectively evaluated for impairment. Accordingly, the Bank does
not separately identify individual consumer loans for impairment disclosures.
The Bank had $416 thousand of loans classified as impaired at September 30,
2006. There were $175 thousand of loans classified as impaired at September 30,
2005 and $300 thousand at September 30, 2004.

      Troubled debt restructuring generally involves a modification of terms of
a borrower's debt and can affect the carrying value of a loan. At September 30,
2006, 2005 and 2004, the Bank had no loans classified as troubled debt
restructuring.

      Foreclosed real estate consists of property the Bank acquired through
foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties
are initially recorded at the lower of the investment in the loan or fair
value. Thereafter, the Bank carries foreclosed real estate at fair value less
estimated selling costs, net of a valuation allowance account established
through provisions charged to income, which result from the ongoing periodic
valuations of foreclosed real estate properties. The Bank had no foreclosed
real estate at September 30, 2006, 2005 and 2004.

                                      12
<PAGE>

      Allowance for Loan Losses. The following table presents the activity in
the Bank's allowance for loan losses at or for the dates indicated:

<TABLE>
<CAPTION>
                                          -------------------------------------------------------
                                                  At or for the Years Ended September 30,
                                          -------------------------------------------------------
                                             2006        2005        2004        2003        2002
                                          -------------------------------------------------------
                                                          (Dollars in thousands)
<S>                                       <C>         <C>         <C>         <C>         <C>
Balance at beginning of year                 $785        $950        $911        $926        $916
                                          -------     -------     -------     -------     -------
(Credit) provision for loan losses              0        (173)         70           0           8
                                          -------     -------     -------     -------     -------
Charge-off:
  Mortgage loans                                0           0           0           0           0
  Commercial Loans                             (5)          0         (33)          0           0
  Consumer loans                                0           0          (2)        (19)        (11)
                                          -------     -------     -------     -------     -------
    Total charge-offs                          (5)          0         (35)        (19)        (11)
Recoveries                                      0           8           4           4          13
                                          -------     -------     -------     -------     -------
Balance at end of year                       $780        $785        $950        $911        $926
                                          =======     =======     =======     =======     =======

Net charge-offs/(recoveries) for
 the year                                      $5         ($8)        $31         $15         ($2)

Ratio of net charge-offs/(recoveries)
 to average loans outstanding
 during the year                           0.002%     -0.004%      0.021%      0.011%     -0.001%

Allowance for loan losses as a
 percent of total loans before the
 allowance for loan losses                  0.37%       0.39%       0.57%       0.64%       0.69%

Allowance for loan losses as a
 percent of non-performing loans          187.50%     448.57%     785.12%     143.69%     661.43%
</TABLE>

      The allowance for loan losses is a valuation account that reflects the
Bank's evaluation of the losses inherent in its loan portfolio. The Bank
maintains the allowance through provisions for loan losses that it charges to
income. The Bank charges losses on loans against the allowance for loan losses
when it believes the collection of loan principal is unlikely.

                                      13
<PAGE>

      The following table presents the Bank's allocation of the allowance for
loan losses by loan category and the percentage of loans in each category to
total loans at the dates indicated.

<TABLE>
<CAPTION>
                       ------------------------------------------------------------------------------------------------------------
                                                                       At September 30,
                       ------------------------------------------------------------------------------------------------------------
                               2006                  2005                  2004                  2003                  2002
                       ------------------------------------------------------------------------------------------------------------
                                 Percent of            Percent of            Percent of            Percent of            Percent of
                                  Loans in              Loans in              Loans in              Loans in              Loans in
                                  Category              Category              Category              Category              Category
                         Dollar   to Total     Dollar   to Total     Dollar   to Total     Dollar   to Total     Dollar   to Total
                         Amount    Loans       Amount    Loans       Amount    Loans       Amount    Loans       Amount    Loans
                       -----------------------------------------------------------------------------------------------------------
                                                                  (Dollars in thousands)
<S>                    <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>
Real estate-mortgage:
  Residential (1)          $368      81.70%      $369      84.90%      $280      84.09%      $159      85.16%      $133      81.25%
  Commercial                125      15.43%       102      13.18%        89      13.96%       138      11.90%        41      14.78%
Commercial                  270       2.63%       292       1.66%       434       1.52%       487       2.26%       643       2.74%
Consumer                      7       0.24%         3       0.25%         4       0.42%        18       0.68%        24       1.22%
Unallocated                  10       0.00%        19       0.00%       143       0.00%       109       0.00%        85       0.00%
                       --------     -------  --------     -------  --------     -------  --------     -------  --------     -------
  Total Allowance
   for loan losses         $780     100.00%      $785     100.00%      $950     100.00%      $911     100.00%      $926     100.00%
                       ========     =======  ========     =======  ========     =======  ========     =======  ========     =======

Net loans before the
 allowance for loan
 losses                $210,524              $201,262              $166,238              $142,468              $133,806
Allowance as % of
 Gross Loans              0.37%                 0.39%                 0.57%                 0.64%                 0.69%

<FN>
--------------------
<F1>  Includes home equity lines of credit and construction loans.
</FN>
</TABLE>

      The allowance for loan loss was $780 thousand at September 30, 2006 as
compared to $785 thousand at September 30, 2005.

      With regard to determining how the allowance for loan loss is allocated
to various categories of loans, specific individual loans selected to appear on
the Bank's Watched Asset List have been identified by the line officer
(relationship manager) and reviewed by management as having a defined weakness,
such as insufficient cash flow, inadequate collateral, irregular payment
history, etc., which could jeopardize the contractual repayment of the loan.
Potential loss factors are quantified utilizing a "discount factor" against the
collateral held for a specific loan or a related group of loans. All
substandard loan factors are decided by the line officer that has intimate
knowledge of the loan relationship and the collateral supporting the
obligation. The discounts can range from 0% to 100%, depending on the nature of
the collateral and the circumstances behind the loan classification. The
discounted collateral value is then compared with the outstanding loan balance
to determine the adequacy of the specific allowance for loan loss allocated.
The remaining loans not subject to individual review, are evaluated as related,
homogeneous, groups according to specific loan categories. Residential real
estate mortgage loans generally fall into this category of homogeneous groups.
Loss factors are assigned to each related, homogeneous, group according to
factors such as historical losses, delinquency trends, peer group comparisons,
industry and economic data and loss percentages generally used by banking
regulators for similarly graded loans.

      The allowance for loan loss allocated to residential real estate mortgage
loans decreased by $1 thousand to $368 thousand at September 30, 2006 as
compared to $369 thousand at September 30, 2005. The slight decrease in the
allocation is mainly due to the aggregate balances of homogeneous loans in this
group remaining consistent. Most of the $211 million increase in residential
real estate mortgage loans was in the variable-rate mortgage loans and home
equity lines-of-credit categories which, during the periods of generally rising
interest rates, have a higher inherent repayment risk, due to the effect that
higher mortgage payments have upon a borrower's capacity to pay debt. Such loss
characteristics, which

                                      14
<PAGE>

exist throughout the long-term life of such loans, are less obvious in
generally favorable economic conditions.

      The allowance for loan loss allocated to commercial real estate mortgage
loans increased by $23 thousand to $125 thousand at September 30, 2006 as
compared to an allowance for loan loss of $102 thousand at September 30, 2005.
The increase in the allowance for loan losses in this category was due
primarily to the $5.9 million increase in the balance of loans in this
category.

      Primarily due to an improvement in portfolio risk characteristics, the
allowance for loan losses allocated to commercial loans declined by $22
thousand, to $270 thousand at September 30, 2006. The balance of loans in this
homogenous group increased slightly to $5.6 million at September 30, 2006 from
$3.4 million at September 30, 2005, however specifically allocated losses
within the commercial loans have decreased as certain classified loans have
paid-off during the year.

      The allowance for loan loss allocated to consumer loans increased
slightly from September 30, 2005 to September 30, 2006 and primarily reflects a
slight increase in the balance of consumer loans. At September 30, 2006, the
balance of consumer loans was $517 thousand, as compared to $516 thousand at
September 30, 2005.

      The allowance designated as unallocated was $10 thousand at September 30,
2006 as compared to an unallocated balance of $19 thousand at September 30,
2005. The unallocated component of the allowance is maintained to cover
uncertainties that could affect management's estimate of probable losses and
also reflects the margin of imprecision inherent in the underlying assumptions
used in the methodologies for estimating allocated and general losses in the
loan portfolio. The Bank has no established range into which the unallocated
portion of the allowance should fall. The amount of the unallocated allowance
at September 30, 2006 is considered by management to be reasonable.

      Although the management of the Bank believes that it has established and
maintained the allowance for loan losses at adequate levels, future additions
may be necessary if economic and other conditions in the future differ
substantially from the current operating environment. Management believes its
policies with respect to the methodology for its determination of the allowance
for loan losses involve a higher degree of complexity and require management to
make difficult and subjective judgments, which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could cause reported results to differ materially.
This critical policy and its application are periodically reviewed with the
Audit Committee and our Board of Directors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's loan and foreclosed real estate portfolios and the related allowance
for loan losses and valuation allowance for foreclosed real estate. The FDIC,
in conjunction with the other federal banking agencies, has adopted an
inter-agency policy statement on allowance for loan losses and lease losses.
The policy statement provides guidance for financial institutions on both the
responsibilities of management for their assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines.

Investment Activities

      The Company's Board of Directors reviews and approves the investment
policy on an annual basis. The President and Chief Executive Officer, and the
Senior Vice President and Treasurer, as authorized by the Board, implement this
policy. Management reports securities transactions to the Board for review and
approval on a monthly basis.

      The investment policy is designed primarily to manage the interest rate
sensitivity of the Bank's assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity within
established guidelines. In establishing investment strategies, the Bank
considers its interest rate sensitivity, the types

                                      15
<PAGE>

of securities to be held, liquidity and other factors. Massachusetts-chartered
savings banks have authority to invest in various types of assets, including
U.S. Treasury obligations, securities of various federal agencies,
mortgage-backed securities, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements,
loans of federal funds, and, subject to certain limits, corporate debt and
equity securities, commercial paper and mutual funds.

      At September 30, 2006, with the exception of securities of the
government-sponsored enterprises, the Company had no securities of any issuer
where the aggregate market and book value of the securities of such issuer,
exceeded 10 percent of stockholders' equity.

      At September 30, 2006 and September 30, 2005, the Bank's liquidity ratio
was 111.9% and 80.7%, respectively. The increase in the liquidity percentage
was due primarily to an increase in the liquidity of the investment portfolio.
For information regarding the carrying values, yields and maturities of the
Bank's securities, see "Carrying Values, Yields and Maturities" further on in
this section.

      At September 30, 2006, the fair value of the government-sponsored
enterprise obligations portfolio totaled $31.0 million, or 109.2% of
stockholders' equity. This portfolio consists primarily of securities with
maturities of one to five years. Some of the debentures are callable and call
provisions vary following a minimum holding period. The Bank generally does not
purchase structured notes, and at September 30, 2006, there were no structured
notes in the Bank's portfolio.

      At September 30, 2006, the portfolio of other debt obligations, excluding
mortgage-backed securities, totaled $7.4 million. The Bank's policy generally
requires that investment in corporate debt obligations be limited to corporate
bonds with an "A" rating or better by at least one nationally recognized rating
service at the time of purchase.

      At September 30, 2006, the Bank's mortgage-backed securities, all of
which were classified as available for sale, totaled $24.0 million, or 8.0% of
total assets. The Bank generally purchases mortgage-backed securities as a
means to deploy excess liquidity at more favorable yields than other investment
alternatives. In addition, mortgage-backed securities generate positive
interest rate spreads with minimal administrative expense and lower the Bank's
overall credit risk due to the fact that they are directly or indirectly
insured or guaranteed. Purchases of mortgage-backed securities have declined as
the Bank continues to experience an increase in loans. Mortgage-backed
securities generally yield less than the loans that underlie such securities
because of the cost of payment guarantees or credit enhancements that reduce
credit risk. However, mortgage-backed securities are more liquid than
individual mortgage loans and may be used to collateralize the Bank's
borrowings. In general, mortgage-backed securities issued or guaranteed by
Fannie Mae, Freddie Mac and GNMA are weighted at no more than 20% for
risk-based capital purposes, compared to the 50% risk-weighting assigned to
most non-securitized residential mortgage loans. While mortgage-backed
securities carry a reduced credit risk as compared to whole loans, they remain
subject to the risk of a fluctuating interest rate environment. Along with
other factors, such as the geographic distribution of the underlying mortgage
loans, changes in interest rates may alter the prepayment rate of those
mortgage loans and affect both the prepayment rates and value of
mortgage-backed securities.

      Under the Bank's investment policy, the aggregate amount of common stock
that it may purchase may not exceed 13% of its total securities portfolio. The
Bank's policy also has limitations against acquiring concentrations of such
securities in any one issuer or industry. The Bank purchases marketable equity
securities as growth investments that can provide the opportunity for capital
appreciation that is taxed on a more favorable basis than operating income.
There can be no assurance that investment in marketable equity securities will
appreciate in value and, therefore, such investments involve higher risk than
U.S. Government or government-sponsored enterprise securities.

      Unless otherwise noted with respect to certain securities or required by
regulators or accounting standards, the Bank classifies securities available
for sale at the date of purchase. Available for sale

                                      16
<PAGE>

securities are reported at fair market value. The Bank currently has no
securities classified as trading or held to maturity.

      The following table presents activity in the Bank's securities portfolio,
including FHLB stock for the years indicated:

                                               ---------------------------------
                                               For the Year Ended September 30,
                                               ---------------------------------
                                                   2006        2005        2004
                                               ---------------------------------
                                                    (Dollars In Thousands)
Beginning balance                              $ 66,906     $75,001    $ 88,840
  Purchases                                      18,112       7,208      32,029
  Maturities                                    (12,600)     (3,700)     (6,790)
  Sales and calls                                  (830)     (4,259)    (30,525)
  Principal repayments                           (5,586)     (5,634)     (6,285)
  Premium and (discount) amortization, net         (268)       (399)       (522)
  Change in net unrealized gains/(losses)            84      (1,311)     (1,746)
  Write-down                                          0           0           0
                                               --------     -------    --------
Ending balance                                 $ 65,818     $66,906    $ 75,001
                                               ========     =======    ========

      The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's securities at the dates indicated.

<TABLE>
<CAPTION>
                                      -------------------------------------------------------------------------
                                                                  At September 30,
                                      -------------------------------------------------------------------------
                                              2006                      2005                      2004
                                      -------------------------------------------------------------------------
                                      Amortized        Fair     Amortized        Fair     Amortized        Fair
                                           Cost       Value          Cost       Value          Cost       Value
                                      -------------------------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                     <C>         <C>           <C>         <C>           <C>         <C>
Debt securities:
  Government-sponsored enterprise
   obligations                          $31,323     $31,038       $27,917     $27,474       $21,549     $21,514
  Banking and finance obligations         6,119       6,115         7,801       7,726        12,442      12,645
  Other bonds and obligations             1,261       1,261         3,711       3,721         5,299       5,433
                                        -------     -------       -------     -------       -------     -------
    Total debt securities                38,704      38,414        39,429      38,921        39,290      39,592
                                        -------     -------       -------     -------       -------     -------
Mortgage-backed and mortgage-
 related securities:
  FHLMC                                   7,624       7,373         8,079       7,866         9,866       9,816
  FNMA                                   16,034      15,576        16,218      15,866        21,620      21,602
  GNMA                                      246         243           319         316           427         423
  Other                                     837         836           981         971         1,122       1,119
                                        -------     -------       -------     -------       -------     -------
    Total mortgage-backed and
     mortgage-related securities         24,741      24,028        25,597      25,019        33,035      32,960
                                        -------     -------       -------     -------       -------     -------
Marketable equity securities                  1           0             1           0           410         407
FHLB stock                                3,376       3,376         2,966       2,966         2,042       2,042
                                        -------     -------       -------     -------       -------     -------
    Total securities                    $66,822     $65,818       $67,993     $66,906       $74,777     $75,001
                                        =======     =======       =======     =======       =======     =======
</TABLE>

                                      17
<PAGE>

      The following table sets forth the amortized cost and fair value of the
Bank's mortgage-backed and mortgage-related securities, all of which were
classified as available for sale at the dates indicated.

<TABLE>
<CAPTION>
                                 -------------------------------------------------------------------------------------------------
                                                                         At September 30,
                                 -------------------------------------------------------------------------------------------------
                                               2006                             2005                             2004
                                 -------------------------------------------------------------------------------------------------
                                 Amortized  Percent of      Fair  Amortized  Percent of      Fair  Amortized  Percent of      Fair
                                      Cost   Total (1)     Value       Cost   Total (1)     Value       Cost   Total (1)     Value
                                 -------------------------------------------------------------------------------------------------
                                                                      (Dollars in thousands)
<S>                                <C>         <C>       <C>        <C>         <C>       <C>        <C>         <C>       <C>
Mortgage-backed and mortgage-
 related securities:
  FHLMC                             $7,624      30.82%    $7,373     $7,866      31.44%    $8,079     $8,079      31.44%    $7,866
  FNMA                              16,034      64.81%    15,576     15,866      63.42%    16,218     16,218      63.42%    15,866
  GNMA                                 246       0.99%       243        316       1.26%       319        319       1.26%       316
  Other                                837       3.38%       836        971       3.88%       981        981       3.88%       971
                                   -------     -------   -------    -------     -------   -------    -------     -------   -------
  Total mortgage-backed and
   mortgage-related securities     $24,741     100.00%   $24,028    $25,019     100.00%   $25,597    $25,597     100.00%   $25,019
                                   =======     =======   =======    =======     =======   =======    =======     =======   =======

<FN>
<F1>  Based on amortized cost
</FN>
</TABLE>

      Carrying Values, Yields and Maturities. The table below presents
information regarding the carrying values, weighted average yields and
contractual maturities of debt securities at September 30, 2006.
Mortgage-backed securities are presented by issuer. Yields on tax exempt
obligations were not computed on a tax equivalent basis.

<TABLE>
<CAPTION>
                             -----------------------------------------------------------------------------------------------------
                                                                      September 30, 2006
                             -----------------------------------------------------------------------------------------------------
                                                 More than One Year  More than Five Years
                              One Year or Less     to Five Years         to Ten Years      More than Ten Years         Total
                             -----------------------------------------------------------------------------------------------------
                                       Weighted            Weighted            Weighted               Weighted            Weighted
                             Carrying   Average  Carrying   Average  Carrying   Average    Carrying    Average   Carrying  Average
                               Amount     Yield    Amount     Yield    Amount     Yield      Amount      Yield     Amount    Yield
                             -----------------------------------------------------------------------------------------------------
                                                                    (Dollars in thousands)
<S>                           <C>         <C>     <C>         <C>      <C>        <C>       <C>          <C>      <C>        <C>
Debt securities:
  Government-sponsored
   enterprise obligations     $12,194     3.52%   $18,844     4.48%    $    -     0.00%     $     -      0.00%    $31,038    4.11%
  Banking and finance
   obligations                  3,619     4.70%     2,496     4.88%         -     0.00%           -      0.00%      6,615    4.77%
  Other bonds and
   obligations                  1,261     5.63%         -     0.00%         -     0.00%           -      0.00%      1,261    5.63%
                              -------             -------              ------               -------               -------

    Total debt securities      17,074     3.90%    21,340     4.53%         -     0.00%           -      0.00%     38,414    4.25%
                              -------             -------              ------               -------               -------
Mortgage-backed and
 mortgage-related
 securities:
  FHLMC                            81     5.00%        59     6.00%     1,352     4.28%       5,881      4.25%      7,373    4.28%
  FNMA                              -     0.00%     2,620     4.29%       862     5.77%      12,094      4.55%     15,576    4.57%
  GNMA                              -     0.00%         -     0.00%         -     0.00%         243      3.51%        243    3.51%
  Other                             -     0.00%         -     0.00%         -     0.00%         836      4.99%        836    4.99%
                              -------             -------              ------               -------               -------
  Total mortgage-backed
   and mortgage-related
   securities                      81     0.00%     2,679     4.33%     2,214     4.86%      19,054      4.46%     24,028    4.49%
                              -------             -------              ------               -------               -------
Total                         $17,155     3.88%   $24,019     4.51%    $2,214     4.86%     $19,054      4.46%    $62,442    4.34%
                              =======             =======              ======               =======               =======
</TABLE>

                                      18
<PAGE>

Deposit Activity and Other Sources of Funds

      General. Deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of securities
and funds provided by operations are the Bank's primary sources of funds for
use in lending, investing and for other general purposes. The Bank, most
recently, has been utilizing borrowed funds from the Federal Home Loan Bank
("FHLB") in order to fund loans and in connection with the Bank's management of
the interest rate sensitivity of its assets and liabilities.

      Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank currently offers regular savings deposits,
NOW accounts, personal and business demand accounts, money market accounts and
certificates of deposit. The Bank also offers Individual Retirement Accounts
("IRA's"), which at September 30, 2006 totaled $12.4 million.

      Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. The Bank's deposits are primarily obtained from areas surrounding
its offices, and the Bank relies primarily on paying competitive rates, service
and long-standing relationships with customers to attract and retain these
deposits. The Bank has developed deposit products to attract and retain
individual and commercial depositors. Some programs involve the introduction of
commercial deposit products tailored to small-and medium-sized businesses, such
as the Bank's business and commercial checking accounts. The Bank does not use
brokers to obtain deposits.

      When the Bank determines its deposit rates, it considers local and
Internet-based competition, U.S. Treasury securities offerings and the rates
charged on other sources of funds. Core deposits (defined as total savings
accounts, NOW accounts, money market accounts and demand accounts) represented
63.7% of total deposits at September 30, 2006. Certificates of deposit with
remaining terms to maturity of less than one year represented 28.3% of total
deposits at September 30, 2006.

      The following table presents the Bank's deposit activity for the years
indicated.

<TABLE>
<CAPTION>
                                                  ----------------------------------
                                                  For the Years Ended September 30,
                                                  ----------------------------------
                                                    2006         2005         2004
                                                  ----------------------------------
                                                        (Dollars In Thousands)
<S>                                               <C>          <C>          <C>
Beginning balance                                 $210,281     $211,710     $215,898
  Net deposits                                      (3,627)      (4,407)      (6,512)
  Interest paid on deposit accounts                  4,623        2,978        2,324
                                                  --------     --------     --------
Ending Balance                                    $211,277     $210,281     $211,710
                                                  ========     ========     ========
Total (decrease) increase in deposit accounts     $    996     $ (1,429)    $ (4,188)
Percentage (decrease) increase                       0.47%       -0.67%       -1.94%
</TABLE>

                                      19
<PAGE>

      At September 30, 2006, the Bank had $24.1 million in certificates of
deposit with balances of $100,000 and over maturing as follows:

                                           ------------------------
                                            At September 30, 2006
                                           ------------------------
                                                           Weighted
                                                           Average
                                           Amount          Rate
                                           ------------------------
                                            (Dollars in thousands)
Maturity Period:
  Three months or less                     $ 6,258          3.86%
  Over three months through six months       3,004          2.90%
  Over six months through 12 months          8,254          5.22%
  Over 12 months                             6,594          4.51%
                                           -------
Total                                      $24,110          4.38%
                                           =======

      The following table presents the distribution of the Bank's deposit
accounts at the dates indicated by dollar amount and percent of portfolio, and
the weighted average interest rate on each category of deposits.

<TABLE>
<CAPTION>
                                 -------------------------------------------------------------------------------------------------
                                                                         At September 30,
                                 -------------------------------------------------------------------------------------------------
                                              2006                              2005                             2004
                                 -------------------------------------------------------------------------------------------------
                                             Percent   Weighted                Percent   Weighted               Percent   Weighted
                                                  of    Average                     of    Average                    of    Average
                                               total    Nominal                  total    Nominal                 total    Nominal
                                   Amount   deposits       Rate      Amount   deposits       Rate     Amount   deposits      Rate
                                 -------------------------------------------------------------------------------------------------
                                                                      (Dollars in thousands)
<S>                              <C>         <C>          <C>      <C>         <C>          <C>     <C>         <C>          <C>
Non-interest bearing accounts    $ 21,962     10.39%      0.00%    $ 22,245     10.58%      0.00%   $ 25,131     11.87%      0.00%
NOW accounts                       15,547      7.36%      0.13%      17,800      8.46%      0.13%     20,044      9.47%      0.10%
Savings accounts:
  Regular                          26,989     12.77%      0.40%      35,735     16.99%      0.40%     39,932     18.86%      0.40%
  Tiered-rate                      37,808     17.90%      1.97%      66,091     31.44%      1.99%     72,242     34.12%      1.55%
                                 --------    -------               --------    -------              --------    -------
    Total savings accounts         64,797     30.68%      1.32%     101,826     48.43%      1.43%    112,174     52.99%      1.14%
                                 --------    -------               --------    -------              --------    -------
Money market deposit accounts      32,207     15.24%      3.35%       5,161      2.45%      3.19%      6,139      2.90%      1.00%
                                 --------    -------               --------    -------              --------    -------
    Total non-certificate
     accounts                     134,513     63.67%      1.45%     147,032     69.92%      1.12%    163,488     77.22%      0.83%
                                 --------    -------               --------    -------              --------    -------
Certificates of deposit
 accounts:
  Due within 1 year                59,798     28.30%      4.28%      44,371     21.10%      2.97%     34,183     16.15%      1.84%
  Over 1 year through
   3 years                         14,380      6.81%      4.21%      17,831      8.48%      3.46%     12,090      5.71%      2.63%
  Over 3 years                      2,586      1.22%      5.18%       1,047      0.50%      4.05%      1,949      0.92%      3.28%
                                 --------    -------               --------    -------              --------    -------
    Total certificate
     accounts                      76,764     36.33%      4.29%      63,249     30.08%      3.12%     48,222     22.78%      2.08%
                                 --------    -------               --------    -------              --------    -------
    Total deposits               $211,277    100.00%      2.48%    $210,281    100.00%      1.72%   $211,710    100.00%      1.12%
                                 ========    =======               ========    =======              ========    =======
</TABLE>

                                      20
<PAGE>

      Borrowings. The Bank borrows funds from the FHLB for use in connection
with its management of liquidity, interest rate sensitivity of its assets and
liabilities, as well as to fund loan growth and for other general purposes.
Over the past two years, the Bank has increased its advances from the FHLB in
response to a decline in deposit sources of funds and increased lending
activity. The advances are collateralized by certain of the Bank's mortgage
loans and by its investment in stock of the FHLB. The maximum amount the FHLB
will advance to its members, including the Bank, fluctuates from time to time
in accordance with FHLB policies. At September 30, 2006, the Bank had
outstanding advances from the FHLB of $57.5 million and had the capacity to
increase outstanding advances to $102.1 million based on the Bank's qualified
collateral available to the FHLB. The Bank expects to continue to borrow from
the FHLB.

      The following table presents certain information regarding the Bank's
borrowed funds at or for the years ended on the dates indicated.

                                         ---------------------------------------
                                         At or for the Years Ended September 30,
                                         ---------------------------------------
                                          2006            2005            2004
                                         ---------------------------------------
                                                 (Dollars in thousands)
Federal Home Loan Bank advances:
  Average balance outstanding            $52,762         $32,125         $16,215
  Maximum amount outstanding at any
   month-end during the year             $57,500         $50,000         $31,000
  Balance outstanding at end of year     $57,500         $50,000         $21,500
  Weighted average interest rate
   during the year                         4.20%           3.71%           3.94%
  Weighted average interest rate
   end of year                             4.33%           4.02%           3.37%

There were no short-term advances with original maturities of less than ninety
days at September 30, 2006. The average balance outstanding was $3.6 million,
the maximum balance outstanding at any month-end during the year was $6.9
million and the weighted average interest rate during the year was 5.01%.

                                      21
<PAGE>

Selected Financial Ratios and Other Data

      The following information in the table are selected financial ratios and
other data for the Company for the years indicated:

<TABLE>
<CAPTION>
                                                             ---------------------------------------
                                                             At or for the Years Ended September 30,
                                                             ---------------------------------------
Selected Financial Ratios and Other Data (1)                   2006           2005            2004
                                                             ---------------------------------------
<S>                                                          <C>           <C>           <C>
Performance Ratios:
  Return (loss) on average assets                               -0.01%         0.32%         0.46%
  Return (loss) on average stockholders' equity                 -0.15%         3.11%         4.14%
  Average stockholders' equity to average assets                 9.47%        10.43%        11.10%
  Stockholders' equity to assets at end of year                  9.43%         9.81%        10.87%
  Net interest rate spread (2)                                   2.38%         2.99%         3.32%
  Net interest margin (3)                                        2.72%         3.25%         3.53%
  Average interest-earning assets to average
   interest-bearing liabilities                                113.91%       116.44%       117.19%
  Operating expenses as a percent of average assets              2.88%         3.02%         3.05%
  Efficiency ratio (4)                                         102.05%        90.45%        83.81%
Regulatory Capital Ratios: (5)
  Total risk-based capital                                      17.92%        19.51%        20.97%
  Tier 1 risk-based capital                                     17.44%        19.00%        20.29%
  Regulatory tier 1 leverage capital                             9.46%        10.18%        10.79%
Asset Quality Ratios:
  Non-performing loans as a percent of loans                     0.20%         0.09%         0.07%
  Non-performing assets as a percent of total assets             0.14%         0.06%         0.05%
  Allowance for loan losses as a percent of total loans
   before the allowance for loan losses                          0.37%         0.39%         0.57%
Number of:
  Full-service offices (6)                                           4             4             4
  Full-time equivalent employees                                    69            71            68
Share Data:
  Basic number of weighted average shares outstanding        1,562,323     1,554,853     1,541,927
  Dilutive number of weighted average shares outstanding     1,562,323     1,571,204     1,563,727
  Basic earnings (loss) per share                               ($0.03)        $0.58         $0.77
  Dilutive earnings (loss) per share                            ($0.03)        $0.57         $0.76
  Dividends declared per share                                   $0.24         $0.24         $0.20

<FN>
--------------------
<F1>  Asset Quality and Regulatory Capital Ratios are end of year ratios.
<F2>  Net interest rate spread represents the difference between the weighted
      average yield on interest-earning assets and the weighted average cost of
      interest-bearing liabilities.
<F3>  Net interest margin represents net interest income as a percentage of
      average interest-earning assets.
<F4>  Efficiency ratio represents total operating expenses divided by the sum
      of net interest income, customer service fees and miscellaneous income.
<F5>  Ratios are based on consolidation.
<F6>  The number of full service offices does not include the Bank's branch at
      the Willows retirement community.
</FN>
</TABLE>

                                      22
<PAGE>

Competition

      The Bank faces significant competition both in making loans and
attracting deposits. The Bank's service area of central Massachusetts has a
high concentration of financial institutions, many of which are branches of
large money center and regional banks that have resulted from the consolidation
of the banking industry in Massachusetts and surrounding states. Some of these
competitors have greater resources than the Bank does and may offer services
that the Bank does not provide.

      The Bank's competition for loans comes principally from commercial banks,
savings institutions, mortgage companies, credit unions, finance companies,
mutual funds, insurance companies and brokerage and investment banking firms.
The Bank's most direct competition for deposits has historically come from
commercial banks, savings banks, savings and loan associations and credit
unions. The Bank faces additional competition for deposits from short-term
money market funds, corporate and government securities funds, brokerage firms,
Internet banks and insurance companies. The Bank expects competition to
increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the industry.

Employees

      At September 30, 2006, the Bank had 64 full-time and 9 part-time
employees. None of the Bank's employees is represented by a collective
bargaining agreement. Management of the Bank believes that it enjoys excellent
relations with its personnel.

Subsidiary Activities

      Eli Whitney Security Corporation. Eli Whitney Security Corporation is a
wholly-owned subsidiary of the Bank. Eli Whitney was established in 1995 as a
Massachusetts security corporation for the purpose of buying, selling and
holding securities on its own behalf and not as a broker. The income earned on
Eli Whitney's securities is subject to a significantly lower rate of state tax
than that assessed on income earned on securities maintained by the Bank. At
September 30, 2006, Eli Whitney had total assets of $45.8 million, virtually
all of which were in securities.

      The Hundredth Corporation. The Hundredth Corporation is a wholly-owned
subsidiary of the Bank. The Hundredth Corporation was established in 1991 for
the investment in real or personal property. At September 30, 2006, The
Hundredth Corporation had total assets of $992 thousand. Its largest investment
consists of $958 thousand of land on which the Bank constructed its expanded
Maple Avenue, Shrewsbury Branch office.

                                      23
<PAGE>

FEDERAL AND STATE TAXATION

Federal Taxation

      General. The following discussion is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
the Bank, the MHC or the Company. For federal income tax purposes, the Bank
reports income on the basis of a taxable year ending September 30, using the
accrual method of accounting, and the Bank is generally subject to federal
income taxation in the same manner as other corporations. The Bank and the
Company constitute an affiliated group of corporations and, therefore, are
eligible to report their income on a consolidated basis. Because the MHC owns
less than 80% of the common stock of the Company, it is not a member of such
affiliated group and reports its income on a separate return. The Bank is not
currently under audit by the Internal Revenue Service and its federal income
tax returns have not been audited for the past five years.

      Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts and to make, within specified formula limits, annual additions to
the reserve which are deductible for purposes of computing its taxable income.

      Distributions. To the extent that the Bank makes non-dividend
distributions to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve, i.e., its reserve as of
October 31, 1988, to the extent thereof and then from its supplemental reserve
for losses on loans, and an amount based on the amount distributed will be
included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not constitute non-dividend distributions and, therefore, will
not be included in the Bank's taxable income.

      The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations, approximately one and one-half times the
non-dividend distribution would be includible in gross income for federal
income tax purposes, assuming a 34% federal corporate income tax rate. The Bank
does not intend to pay dividends that would result in the recapture of any
portion of its bad debt reserves.

      Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. Because the MHC is not be a member
of such affiliated group, it does not qualify for such 100% dividends
exclusion, but is entitled to deduct 80% of the dividends it receives from the
Company so long as it owns more than 20% of the Company's common stock.

State Taxation

      The Bank files Massachusetts Savings Institution income tax returns.
Generally, the income of savings institutions in Massachusetts, which is
calculated based on federal taxable income, subject to certain adjustments, is
subject to Massachusetts tax. The Bank is not currently under audit with
respect to its Massachusetts income tax returns and its state tax returns have
not been audited for the past five years.

      The Company is required to file a Massachusetts income tax return and is
generally subject to a state income tax rate that is the same tax rate as the
tax rate for savings institutions in Massachusetts. However, if the Company
meets certain requirements, it may be eligible to elect to be taxed as a

                                      24
<PAGE>

Massachusetts Security Corporation, which would allow the Company to be taxed
at a rate that is currently lower than income tax rates for savings
institutions in Massachusetts.

REGULATION

General

      The Bank is a Massachusetts-chartered stock savings bank, and its deposit
accounts are insured up to applicable limits by the Deposit Insurance Fund of
the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is subject to
extensive regulation, examination and supervision by the Commonwealth of
Massachusetts Division of Banks (the "Division") as its primary corporate
regulator, and by the FDIC as the deposit insurer. The Bank must file reports
with the Division and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approval prior to entering into
certain transactions, such as mergers with, or acquisitions of, other
depository institutions and opening or acquiring branch offices. The Division
and the FDIC conduct periodic examinations to assess the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings bank can engage and is
intended primarily for the protection of the deposit insurance fund and
depositors. The Bank is also a member of the Federal Home Loan Bank (the
"FHLB") and is subject to certain regulation by the Board of the Federal
Reserve System.

      The MHC and the Company, as bank holding companies controlling the Bank
are subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and the rules and regulations of the Federal Reserve Board (the "FRB") under
the BHCA and to the provisions of the Massachusetts General Laws applicable to
savings banks and other depository institutions and their holding companies
(the "Massachusetts banking laws") and the regulations of the Division under
the Massachusetts banking laws applicable to bank holding companies. The MHC
and the Company are required to file reports with, and otherwise comply with
the rules and regulations of the FRB and the Division. The Company is required
to file certain reports with, and otherwise comply with, the rules and
regulations of the Securities and Exchange Commission under the federal
securities laws. Any change in such laws and regulations, whether by regulatory
action or through legislation, could have a material adverse impact on the MHC,
the Company and the Bank, and their operations and stockholders.

      The following references to the laws and regulations under which the
Bank, the MHC and the Company are regulated are brief summaries thereof, do not
purport to be complete, and are qualified in their entirety to reference to
such laws and regulations.

Massachusetts Banking Regulation

      Activity Powers. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the Massachusetts
banking laws and its related regulations. Under these laws and regulations,
savings banks, including the Bank, generally may, invest in (a) real estate
mortgages; (b) consumer and commercial loans; (c) specific types of debt
securities, including certain corporate debt securities and obligations of
federal, state and local governments and agencies; (d) certain types of
corporate equity securities; and (e) certain other assets.

      A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the Massachusetts banking laws. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Division. Massachusetts savings banks may
also exercise any power and engage in any activity permissible for national
banks in accordance with regulations adopted by the Division with respect to
such power or activity . The exercise of lending, investment and activity
powers are limited by federal law and the related regulations. See "Federal
Banking Regulation" below.

                                      25
<PAGE>

      Massachusetts Community Reinvestment Act. The Bank is also subject to
provisions of the Massachusetts banking laws that, like the provisions of the
federal Community Reinvestment Act ("CRA"), impose continuing and affirmative
obligations upon a banking institution organized in Massachusetts to serve the
credit needs of its local communities ("Massachusetts CRA"). The obligations of
the Massachusetts CRA are similar to those imposed by the CRA, with the
exception of the assigned exam ratings. Massachusetts banking law provides for
an additional exam rating of "high satisfactory" in addition to the federal CRA
ratings of "outstanding," "satisfactory," "needs to improve" and "substantial
noncompliance." The Division has adopted regulations to implement the
Massachusetts CRA that are based on the CRA. See "Federal Banking Regulation -
Federal Community Reinvestment Act." The Division is required to consider a
bank's Massachusetts CRA rating when reviewing the 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 any such application.
The Massachusetts CRA requires the Division to assess a bank's compliance with
the Massachusetts CRA and to make such assessment available to the public. The
Bank's most recent Massachusetts CRA rating dated February 20, 2003, from the
Division was a rating of "Satisfactory."

      Loans-to-One-Borrower Limitations. With specified exceptions, the total
obligations of a single borrower to a Massachusetts-chartered savings bank may
not exceed 20% of the savings bank's surplus account. A savings bank may lend
additional amounts up to 100% of the bank's surplus account if secured by
collateral meeting the requirements of the Massachusetts banking laws. The Bank
currently complies with applicable loans-to-one-borrower limitations.

      Loans to a Bank's Insiders. Provisions of the Massachusetts banking laws
prohibit a savings bank from making a loan or otherwise extending credit to any
of its officers and directors or trustees and prohibits any such officer,
director or trustee from borrowing, otherwise becoming indebted, or becoming
liable for a loan or other extension of credit by such bank to any other person
except for any of the following loans after approval by a majority of the
members of the Bank's Executive Committee, excluding any member involved in
such loan or extension of credit: (a) loan or extension of credit, secured or
unsecured, to an officer of the bank in an amount not exceeding $35,000; (b)
loan or extension of credit intended or secured for educational purposes to an
officer of the bank in an amount not exceeding $150,000; (c) loan or extension
of credit secured by a mortgage on residential real estate to be occupied in
whole or in part by the officer to whom the loan or extension of credit is
made, in an amount not exceeding $500,000; or (d) loan or extension of credit
to a director or trustee of the bank who is not also an officer of the bank in
an amount permissible under the bank's loan-to-one borrower limit. See
"Massachusetts Banking Regulation - Loans-to-One Borrower Limitations" above.
No such loan may be granted with an interest rate or on other terms that are
preferential in comparison to loans granted to persons not affiliated with the
savings bank.

      Dividends. Under the Massachusetts banking laws, a stock savings bank
may, subject to several limitations, declare and pay a dividend on its capital
stock, which is the bank's common stock and any preferred stock, out of the
bank's net profits. A dividend may not be declared, credited or paid by a stock
savings bank so long as there is any impairment of capital stock. No dividend
may be declared on the bank's common stock for any period other than for which
dividends are declared upon preferred stock, except as authorized by the
Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"). The approval of the Commissioner is also required for a stock
savings bank to declare a dividend, if the total of all dividends declared by
the savings bank in any calendar year shall exceed the total of its net profits
for that year combined with its retained net profits of the preceding two
years, less any required transfer to surplus or a fund for the retirement of
any preferred stock.

      In addition, federal law may also limit the amount of dividends that may
be paid by the Bank. See "Federal Banking Regulation - Prompt Corrective
Action" below.

      Examination and Enforcement. The Division is required to periodically
examine savings banks at least once every calendar year or at least once each
18 month period if the savings bank qualifies as

                                      26
<PAGE>

well capitalized under the prompt corrective action provisions of the Federal
Deposit Insurance Act. See " -- Federal Banking Regulation -- Prompt Corrective
Action" below. The Division may also examine a savings bank whenever the
Division deems an examination expedient. If the Division finds, after an
inquiry, that any trustee, director or officer of a savings bank has, among
other things, violated any law related to such bank or has conducted the
business of such bank in an unsafe or unsound manner, the Division may take
various actions that could result in the suspension or removal of such person
as an officer, director or trustee of the savings bank. If the Division
determines that, among other things, a savings bank has violated its charter or
any Massachusetts law or is conducting its business in an unsafe or unsound
manner or is in an unsafe or unsound condition to transact its banking
business, the Division may take possession of the property and business of the
savings bank and may, if the facts warrant, initiate the liquidation of the
bank.

Federal Banking Regulation

      Capital Requirements. FDIC regulations require insured banks, such as the
Bank, to maintain minimum levels of capital. The FDIC regulations define two
tiers, or classes, of capital.

      Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights) and any net unrealized loss on marketable equity securities.

      The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock, allowance for possible loan losses and up to 45%
of pretax net unrealized holding gains on available for sale equity securities
with readily determinable market values. Allowance for possible loan losses
includible in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of Tier 2 capital that may be included in total
capital cannot exceed 100% of Tier 1 capital.

      The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier
1 capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.

      The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier
2 capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital
to risk-weighted assets of at least 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes
are inherent in the type of asset or item.

      The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines
in the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy

                                      27
<PAGE>

statement providing guidance on interest rate risk management, including a
discussion of the critical factors affecting the agencies' evaluation of
interest rate risk in connection with capital adequacy.

      The following table shows the Leverage, Tier 1 risk-based capital, and
Total risk-based capital ratios, for the Bank and consolidated Company, at
September 30, 2006:

<TABLE>
<CAPTION>
                                        ---------------------------------------------------------------------------
                                                                 As of September 30, 2006
                                        ---------------------------------------------------------------------------
                                                                                            Minimum to be Well
                                                               Minimum for Capital       Capitalized under Prompt
                                              Actual            Adequacy Purposes      Corrective Action Provisions
                                        ---------------------------------------------------------------------------
                                        Amount      Ratio       Amount      Ratio           Amount      Ratio
                                        ---------------------------------------------------------------------------
                                                               (Dollars in thousands)

<S>                         <C>         <C>         <C>         <C>         <C>             <C>         <C>
Total risk-based capital    Company     $29,014     17.92%      $12,952     8.00%             N/A        N/A
                            Bank        $28,627     17.78%      $12,878     8.00%           $16,097     10.00%

Tier 1 risk-based capital   Company     $28,228     17.44%      $ 6,476     4.00%             N/A        N/A
                            Bank        $27,841     17.30%      $ 6,439     4.00%           $ 9,658      6.00%

Tier 1 leverage capital     Company     $28,228      9.46%      $11,937     4.00%             N/A        N/A
                            Bank        $27,841      9.38%      $11,869     4.00%           $14,836      5.00%

<FN>
<F1>  For purposes of calculating Total risk-based capital and Tier 1
      risk-based capital, assets are based on total risk-weighted assets. In
      calculating Tier 1 leverage capital, assets are based on adjusted total
      average assets.
</FN>
</TABLE>

      At September 30, 2006, the Bank was considered "well capitalized" under
FDIC guidelines.

      Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including the 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 to unsafe or unsound practices.

      The FDIC has authority under Federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank is "critically undercapitalized." For this purpose,
"critically undercapitalized" means having a ratio of tangible capital to total
assets of less than 2%. The FDIC may also appoint a conservator or receiver for
a state bank on the basis of the institution's financial condition or upon the
occurrence of certain events, including: (a) insolvency (whereby the assets of
the bank are less than its liabilities to depositors and others); (b)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (c) existence of an unsafe or unsound condition to
transact business; (d) likelihood that the bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (e) insufficient capital or the incurring or likely incurring of
losses that will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal assistance.

      Deposit Insurance. The FDIC merged the Bank Insurance Fund and the
Savings Association Insurance Fund to form the Deposit Insurance Fund (the
"DIF") on March 31, 2006. The Bank is a member of the DIF and pays its deposit
insurance assessments to the DIF.

      Effective January 1, 2007, the FDIC established a risk-based assessment
system for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an
institution to one of four risk categories, with the first category having two
sub-

                                      28
<PAGE>

categories based on the institution's most recent supervisory and capital
evaluations, designed to measure risk. Assessment rates currently range from
0.05% of deposits for an institution in the highest sub-category of the highest
category to 0.43% of deposits for an institution in the lowest category. The
FDIC is authorized to raise the assessment rates as necessary to maintain the
required reserve ratio of 1.25%. The FDIC allows the use of credits for
assessments previously paid. We believe that we have credits that will offset
certain of these assessments.

      In addition, all FDIC insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately 0.0124% of insured
deposits to fund interest payments on bonds issued by the Financing
Corporation, an agency of the federal government established to recapitalize
the predecessor to the Savings Association Insurance Fund. These assessments
will continue until the Financing Corporation bonds mature in 2017 through
2019.

      Transactions with Affiliates of the Bank. Transactions between an insured
bank, such as the Bank, and any of its affiliates is governed by Sections 23A
and 23B of the Federal Reserve Act (the "FRA"). An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Currently, a subsidiary of a bank that is not also a depository
institution is not treated as an affiliate of the bank for purposes of Sections
23A and 23B. Sections 23A and 23B (1) limit the extent to which the bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital stock and retained earnings, and
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and retained earnings, and (2) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of guarantees and other similar types of
transactions. Further, most loans by a bank to any of its affiliates must be
secured by collateral in amounts ranging from 100 to 130 percent of the loan
amounts. In addition, any covered transaction by a bank with an affiliate and
any purchase of assets or services by a bank from an affiliate must be on terms
that are substantially the same, or at least as favorable, to the bank as those
that would be provided to a non-affiliate.

      Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. 1972 on certain tying arrangements. A depository
institution is prohibited, subject to certain exceptions, from extending credit
to or offering any other service, or fixing or varying the consideration for
such extension of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its affiliates or
not obtain services of a competitor of the institution.

      Real Estate Lending Policies. FDIC regulations require that
state-chartered non-member banks adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards,
including loan-to-value limits that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. We believe the Bank's real estate lending policies reflect the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.

      Federal Community Reinvestment Act. Under the Community Reinvestment Act
(the "CRA"), any insured depository institution, including the 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 CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The CRA requires the
FDIC, in connection with its examination of a savings bank, to assess the
depository institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution, including applications for additional branches and
acquisitions.

                                      29
<PAGE>

Among other things, the current CRA evaluation system focuses on three tests:
(1) a lending test, to evaluate the institution's record of making loans in its
service areas; (2) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and (3) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs and other offices. For a small bank, which is a bank with less than $250
million in assets in the year prior to the CRA examination, such as the Bank,
the CRA assessment will be based on: (a) the bank's loan-to-deposit ratio; (b)
the percentage of the bank's loans and any other appropriate lending related
activities located in the bank's assessment areas; (c) the bank's record of
lending to, and other appropriate lending related activities for borrowers of
different income levels and businesses and farms of different sizes; (d) the
geographic distribution of the bank's loans; and (e) the bank's record in
acting in response to written complaints about the bank's performance in
helping to meet the credit needs of its assessment areas. The CRA requires the
FDIC to provide a written evaluation of an institution's CRA performance
utilizing a four-tiered descriptive rating system and requires public
disclosure of an institution's CRA rating. The Bank received a "satisfactory"
rating in its CRA examination conducted by the FDIC on March 22, 2004.

      Safety and Soundness Standards. Pursuant to the requirements of FDICIA,
each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.

      In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions. If a bank fails to comply with such an order, the FDIC may seek to
enforce such an order in judicial proceedings and to impose civil monetary
penalties.

      Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Generally, an institution
will be treated as "well capitalized" if its ratio of total capital to
risk-weighted assets is at least 10%, its ratio of Tier 1 capital to
risk-weighted assets is at least 6%, its ratio of Tier 1 capital to total
assets is at least 5%, and it is not subject to any order or directive by the
FDIC to meet a specific capital level. An institution will be treated as
"adequately capitalized" if its ratio of total capital to risk-weighted assets
is at least 8%, its ratio of Tier 1 capital to risk-weighted assets is at least
4%, and its ratio of Tier 1 capital to total assets is at least 4% (3% if the
bank receives the highest rating under the Uniform Financial Institutions
Rating System) and it is not a well-capitalized institution. An institution
that has total risk-based capital of less than 8%, Tier 1 risk-based-capital of
less than 4% or a leverage ratio that is less than 4% (or less than 3% if the
institution is rated a composite "1" under the Uniform Financial Institutions
Rating System) will be treated as "undercapitalized." An institution that has
total risk-based capital of less than 6%, Tier 1 capital of less than 3% or a
leverage ratio that is less than 3% will be treated as "significantly
undercapitalized," and an institution that has a tangible capital to assets
ratio equal to or less than 2% would be deemed to be "critically
undercapitalized."

                                      30
<PAGE>

      The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to
any controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of: (a) an amount equal to five percent of the bank's total
assets at the time it became "undercapitalized," and (b) the amount that is
necessary (or would have been necessary) to bring the bank into compliance with
all capital standards applicable with respect to such bank as of the time it
fails to comply with the plan. If a bank fails to submit an acceptable plan, it
is treated as if it were "significantly undercapitalized." Banks that are
significantly or critically undercapitalized are subject to a wider range of
regulatory requirements and restrictions.

      Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an "insider") and any
of certain entities affiliated to any such person (an insider's related
interest) are subject to the conditions and limitations imposed by Section
22(h) of the Federal Reserve Act and the FRB's Regulation O thereunder. Under
these restrictions, the aggregate amount of the loans to any insider and the
insider's related interests may not exceed the loans-to-one-borrower limit
applicable to national banks, which is comparable to the loans-to-one-borrower
limit applicable to the Bank's loans. See "Massachusetts Banking Regulation -
Loans-to-One Borrower Limitations." All loans by a bank to all insiders and
insiders' related interests in the aggregate may not exceed the bank's
unimpaired capital and unimpaired retained earnings. With certain exceptions,
loans to an executive officer, other than loans for the education of the
officer's children and certain loans secured by the officer's residence, may
not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of
the bank's capital and unimpaired retained earnings. Regulation O also requires
that any proposed loan to an insider or a related interest of that insider be
approved in advance by a majority of the Board of Directors of the bank, with
any interested director not participating in the voting, if such loan, when
aggregated with any existing loans to that insider and the insider's related
interests, would exceed either (1) $500,000 or (2) the greater of $25,000 or 5%
of the bank's unimpaired capital and retained earnings. Generally, such loans
must be made on substantially the same terms as, and follow credit underwriting
procedures that are not less stringent than, those that are prevailing at the
time for comparable transactions with other persons. An exception is made for
extensions of credit made pursuant to a benefit or compensation plan of a bank
that is widely available to employees of the bank and that does not give any
preference to insiders of the bank over other employees of the bank.

      Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of
personal loans to directors and executive officers of issuers (as defined in
Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced
by an insured depository institution, such as the Bank, that are subject to the
insider lending restrictions of Section 22(h) of the Federal Reserve Act.

      In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.

Federal Home Loan Bank System

      The Bank is a member of the FHLB of Boston. The FHLB system consists of
twelve regional Federal Home Loan Banks subject to supervision and regulation
by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks
provide a central credit facility primarily for member institutions. As part of
a borrowing arrangement with the FHLB, the Bank is required to invest in

                                      31
<PAGE>

classes of common stock of the FHLB in an amount determined on the basis of the
Bank's residential mortgage loans and borrowings from the FHLB. The stock is
redeemable at par and earns dividends declared at the discretion of the FHLB.
At September 30, 2006, the Bank's investment in the common stock of the FHLB
was $3.4 million.

      The FHLB serves as a reserve or central bank for its member institutions
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHFB System. It offers advances to
members in accordance with policies and procedures established by the FHLB and
the Board of Directors of the FHLB.

      Pursuant to regulations promulgated by the FHFB, as required by the
Gramm-Leech-Bliley Financial Services Modernization Act (the "GLB Act"), the
FHLB of Boston adopted, and the FHFB had approved, a capital plan that changed
the foregoing minimum stock ownership requirements for FHLB of Boston stock.
Under the new capital plan, each member of the FHLB of Boston must maintain a
minimum investment in FHLB of Boston capital stock in an amount equal to the
sum of (i) 0.35% of member eligible collateral (subject to a minimum of $10,000
and a maximum of $25.0 million, per member), and (ii) 4.50% of the member's
activity-based assets.

      As a member, the Bank is required to purchase and maintain stock in the
FHLB. At September 30, 2006, the Bank was in compliance with this requirement.

Holding Company Regulation

      Federal Regulation. The MHC and the Company are governed as bank holding
companies under the BHCA. Bank holding companies are subject to examination,
regulation and periodic reporting under the BHCA, as administered by the FRB.
The FRB has adopted capital adequacy guidelines for bank holding companies on a
consolidated basis substantially similar to those of the FDIC for the Bank. As
of September 30, 2006, the Company's total capital and Tier 1 capital ratios
for the MHC and the Company exceed these minimum capital requirements.

      Regulations of the FRB provide that a bank holding company must serve as
a source of strength to any of its subsidiary banks and must not conduct its
activities in an unsafe or unsound manner. Under the prompt corrective action
provisions of FDICIA, a bank holding company parent of an undercapitalized
subsidiary bank would be directed to guarantee, within limitations, the capital
restoration plan that is required of such an undercapitalized bank. See
"Federal Banking Regulation--Prompt Corrective Action" above. If the
undercapitalized bank fails to file an acceptable capital restoration plan or
fails to implement an accepted plan, the FRB may prohibit the bank holding
company parent of the undercapitalized bank from paying any dividend or making
any other form of capital distribution without the prior approval of the FRB.

      As bank holding companies, the MHC and the Company are required to obtain
the prior approval of the FRB to acquire all, or substantially all, of the
assets of any bank or bank holding company. Prior FRB approval is required for
the MHC or the Company to acquire direct or indirect ownership or control of
any voting securities of any bank or bank holding company if, after giving
effect to such acquisition, it would, directly or indirectly, own or control
more than 5% of any class of voting shares of such bank or bank holding
company.

      A bank holding company is required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, will be equal to 10% or more of the company's consolidated net
worth. The FRB may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, FRB order or directive, or any condition imposed
by, or written agreement with, the FRB. Such notice and approval is not
required for a bank holding company that would be treated as "well capitalized"
under applicable regulations of the

                                      32
<PAGE>

FRB, that has received a composite "1" or "2" rating at its most recent bank
holding company inspection by the FRB, and that is not the subject of any
unresolved supervisory issues.

      The status of the Company and the MHC as registered bank holding
companies under the BHCA does not exempt them from certain federal and state
laws and regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.

      In addition, a bank holding company that has elected to be regulated as a
financial holding company under the GLB Act, such as the Company and the MHC,
may generally engage in securities, insurance and other activities that are
financial in nature or incidental to a financial activity. In order to have
qualified to be a financial holding company, each of the bank holding
companies' depository institution subsidiaries must have been "well
capitalized," "well managed," have at least a "satisfactory" CRA rating at its
most recent examination and have filed a certification with the FRB that it
elects to become a financial holding company.

      Under the FDICIA, depository institutions are liable to the FDIC for
losses suffered or anticipated by the FDIC in connection with the default of a
commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would potentially be
applicable to the Company if it ever acquired, as a separate subsidiary, a
depository institution in addition to the Bank.

Acquisition of the Company

      Under federal law, no person may acquire control of the Company or the
Bank without first obtaining, as summarized below, approval of such acquisition
of control by the FRB.

      Federal Restrictions. Under the federal Change in Bank Control Act, any
person (including a company), or group acting in concert, seeking to acquire
10% or more of the outstanding shares of the Company's common stock will be
required to submit prior notice to the FRB, unless the FRB has found that the
acquisition of such shares will not result in a change in control of the
Company. Under the BHCA, the FRB has 60 days within which to act on such
notices, taking into consideration certain factors, including the financial and
managerial resources of the acquirer, the convenience and needs of the
communities served by the Company and the Bank, and the antitrust effects of
the acquisition. Under the BHCA, any company would be required to obtain prior
approval from the FRB before it may obtain "control," within the meaning of the
BHCA, of the Company. The term "control" is defined generally under the BHCA to
mean the ownership or power to vote 25% or more of any class of voting
securities of an institution or the ability to control in any manner the
election of a majority of the institution's directors. An existing bank holding
company would require FRB approval prior to acquiring more than 5% of any class
of voting stock of the Company.

Dividend Waivers by the MHC

      Any dividend declared by the Company that is waived by the MHC will be
subject to the following general restrictions:

      Massachusetts Restrictions. Under applicable Massachusetts regulations, a
mutual holding company may not waive any dividends to be paid by any of its
subsidiary institutions if any shares of the stock to which the waiver would
apply is held by an insider (any officer, director or corporator of the mutual
holding company or a subsidiary banking institution) or a stock benefit plan of
the mutual holding company unless prior written notice of the waiver has been
given to the Division and the Division does not object to the waiver. The
Division may not object to a dividend waiver notice if (a) the waiver would not
be detrimental to the safe and sound operation of the subsidiary banking
institution, and (b) the board of trustees of the mutual holding company
expressly determines, as evidenced by a

                                      33
<PAGE>

resolution of the board of trustees, that such waiver is consistent with the
trustees' fiduciary duties to the mutual members of the mutual holding company.

      Federal Restrictions. In connection with its approval of the
reorganization, the FRB imposed certain conditions on the waiver by the MHC of
dividends paid on the common stock by the Company. Specifically, the FRB
requires the MHC obtain prior approval of the FRB before the MHC may waive any
dividends from the Company. In addition, the terms of the FRB approval of the
Reorganization provides that any dividends waived by the MHC will not be
available for payment to its public stockholders of the Company (i.e.,
stockholders except for the MHC) or may be excluded from the Company's capital
for purposes of calculating dividends payable to the public stockholders.
Moreover, the Company is required to maintain the cumulative amount of
dividends waived by the MHC in a restricted capital account that would be added
to the liquidation account established in the reorganization. This amount is
not available for distribution to public stockholders. The restricted capital
account and liquidation account amounts would not be reflected in the Company's
financial statements, but would be considered as a notional or memorandum
account of the Company. These accounts would be maintained in accordance with
the laws, rules, regulations and policies of the Division and the plan of
reorganization. In addition, if the MHC converted to stock form in the future
(commonly referred to as a second-step conversion), any waived dividends would
reduce the percentage of the converted company's shares of common stock issued
to public stockholders in connection with any such transaction.

      To date, the MHC has not waived dividends declared by the Company. If the
MHC decides that it is in its best interest to waive a particular dividend to
be paid by the Company and the FRB approves such waiver, then the Company will
pay such dividend only to its public stockholders. The amount of the dividend
waived by the MHC would be treated in the manner described above. The MHC's
decision as to whether or not to waive a particular dividend will depend on a
number of factors, including the MHC's capital needs, the investment
alternatives available to the MHC as compared to those available to the
Company, and the possibility of regulatory approvals. The Company cannot
guarantee: (1) the MHC will waive dividends paid by the Company; (2) that if
the application is made to waive a dividend, that the FRB will approve such
dividend waiver request; or (3) what conditions might be imposed by the Federal
Reserve Board on any dividend waiver.

USA Patriot Act.

      The Bank is subject to the Bank Secrecy Act, as amended by the USA
Patriot Act, which gives the federal government powers to address money
laundering and terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. Title III of the USA Patriot Act takes
measures intended to encourage information sharing among financial
institutions, bank regulatory agencies and law enforcement bodies. Further,
certain provisions of Title III impose affirmative obligations on a broad range
of financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.

      Among other requirements, the USA Patriot Act imposes the following
obligations on financial institutions:

      o     All financial institutions must establish risk-based anti-money
            laundering programs that include, at minimum: (i) internal
            policies, procedures, and controls, (ii) specific designation of an
            anti-money laundering compliance officer, (iii) ongoing employee
            training programs, and (iv) an independent audit function to test
            the anti-money laundering program.

      o     All financial institutions must implement a written customer
            identification program appropriate for its size, location and type
            of business.

                                      34
<PAGE>

      o     Financial institutions that establish, maintain, administer, or
            manage private banking accounts or correspondent accounts in the
            United States for non-United States persons or their
            representatives (including foreign individuals visiting the United
            States) must establish appropriate, specific, and, where necessary,
            enhanced due diligence policies, procedures, and controls designed
            to detect and report money laundering through these accounts.

      o     Financial institutions are prohibited from establishing,
            maintaining, administering or managing correspondent accounts for
            foreign shell banks (foreign banks that do not have a physical
            presence in any country), and must take reasonable steps to ensure
            that correspondent accounts provided to foreign banks are not being
            used to indirectly provide banking services to foreign shell banks.

      o     Bank regulators are directed to consider a holding company's
            effectiveness in combating money laundering when ruling on BHCA and
            Bank Merger Act applications.

The Sarbanes-Oxley Act

      The Company is subject to the Sarbanes-Oxley Act of 2002, which
implements a broad range of corporate governance and accounting measures for
public companies designed to promote honesty and transparency in corporate
America and better protect investors from corporate misconduct. The
Sarbanes-Oxley Act's principal legislation and the derivative legislation and
rulemaking promulgated by the SEC includes:

      o     the creation of an independent accounting oversight board;

      o     auditor independence provisions that restrict non-audit services
            that accountants may provide to their audit clients;

      o     additional corporate governance and responsibility measures,
            including the requirement that the chief executive officer and
            chief financial officer certify financial statements;

      o     the forfeiture of bonuses or other incentive-based compensation and
            profits from the sale of an issuer's securities by directors and
            senior officers in the twelve month period following initial
            publication of any financial statements that later require
            restatement;

      o     an increase in the oversight of and enhancement of certain
            requirements relating to audit committees of public companies and
            how they interact with the company's independent auditors;

      o     requirement that audit committee members must be independent and
            are absolutely barred from accepting consulting, advisory or other
            compensatory fees from the issuer;

      o     requirement that companies disclose whether at least one member of
            their audit committee is a "financial expert" (as defined by the
            SEC) and if not, why not;

      o     expanded disclosure requirements for corporate insiders, including
            accelerated reporting of stock transactions by insiders and a
            prohibition on insider trading during pension blackout periods;

      o     a prohibition on personal loans to directors and officers, except
            certain loans made by insured financial institutions;

      o     disclosure of a code of ethics and filing a Form 8-K for a change
            or waiver of such code;

      o     mandatory disclosure by analysts of potential conflicts of
            interest; and

                                      35
<PAGE>

      o     a range of enhanced penalties for fraud and other violations.

Federal Securities Laws

      The Company's common stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
is therefore subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act. The
Company is also required to file annual, quarterly and periodic reports with
the SEC.

                                      36
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

      The Company conducts its business at the main office of the Bank and its
five retail banking offices, four of which are full service branch offices. As
of September 30, 2006, these properties and leasehold improvements owned by the
Company and the Bank had an aggregate net book value of $5.0 million.

                                             Original Date
                               Leased or       Leased or       Date of Lease
      Location                   Owned         Acquired         Expiration
      --------                   -----         --------         ----------

      Main Office:
        100 E. Main Street      Owned          06/10/75             N/A
        Westborough, MA

      Branch Offices:
        33 W. Main Street       Owned          05/01/54             N/A
        Westborough, MA

        53 W. Main Street       Owned          07/01/81             N/A
        Northborough, MA

        23 Maple Avenue         Owned           5/12/03             N/A
        Shrewsbury, MA

      Other Offices:

        The Willows(1)          Leased         08/01/87        Tenant at Will
        One Lyman Street
        Westborough, MA

--------------------
(1)   This office provides limited retail banking services to the residents of
      the Willows. It is not open to the general public and maintains
      restricted operating hours.

                                      37
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

None.

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

      No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
2006.


PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      On September 30, 2006, there were 1,595,774 shares of common stock issued
and outstanding and approximately 624 stockholders, not included persons and
entities holding stock in nominee or street name through brokers and banks. The
Company stock is not actively traded, although the stock is quoted on the OTC
Electronic Bulletin Board under the symbol "WFSM.OB."

      The table below reflects the stock trading price and dividend payment
frequency of the Company's stock for year ending September 30, 2006 and 2005.
The quotations reflect inter-dealer prices, without mark-up, mark-down or
commissions, and may not represent actual transactions.

--------------------------------------------------------------------------------
                     High Price   Low Price   Average Price  Dividends per share
--------------------------------------------------------------------------------
First Quarter-2005     $32.00       $30.10        $30.98            $0.06
--------------------------------------------------------------------------------
Second Quarter-2005    $32.00       $27.20        $29.44            $0.06
--------------------------------------------------------------------------------
Third Quarter-2005     $27.20       $24.00        $24.79            $0.06
--------------------------------------------------------------------------------
Fourth Quarter-2005    $29.19       $25.20        $27.77            $0.06
--------------------------------------------------------------------------------
First Quarter-2006     $28.00       $25.09        $26.61            $0.06
--------------------------------------------------------------------------------
Second Quarter-2006    $27.88       $25.38        $26.14            $0.06
--------------------------------------------------------------------------------
Third Quarter-2006     $29.00       $25.44        $25.98            $0.06
--------------------------------------------------------------------------------
Fourth Quarter-2006    $31.63       $26.49        $27.54            $0.06
--------------------------------------------------------------------------------

The Company has not repurchased any of its common stock.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Forward Looking Statements

      Westborough Financial Services, Inc. (the "Company") and The Westborough
Bank (the "Bank") may from time to time make written or oral "forward-looking
statements" which may be identified by the use of such words as "may," "could,"
"should," "would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan" and similar expressions.

      Forward-looking statements include statements with respect to the
Company's or the Bank's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions, which are subject to significant risks
and uncertainties. The following factors, many of which are subject to change
based on various other factors beyond the Company's and the Bank's control, and
other factors identified in the Company's filings with the Securities and
Exchange Commission and those presented elsewhere by management from time to
time, could cause its financial performance to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such
forward-looking statements. Examples of forward-looking statements include, but
are not limited to, estimates with respect to our financial condition, results
of operations and business that are subject to various factors which would cause
actual results to differ materially from these estimates. These factors include,
but are not limited to:

      *  conditions which effect general and local economies;
      *  changes in interest rates, deposit flows, demand for mortgages and
         other loans, real estate values and competition;
      *  changes in accounting principles, policies, or guidelines;
      *  changes in legislation or regulation; and
      *  other economic, competitive, governmental, regulatory, and
         technological factors affecting our operations, pricing, products and
         services.

      This list of important factors is not exclusive. The Company and the Bank
do not undertake any obligation to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company or the Bank.

                                       38
<PAGE>

General

      The Company is a Massachusetts chartered mid-tier holding company that
completed its initial public offering in February 2000 in connection with the
reorganization of The Westborough Bank (the "Bank") from a Massachusetts
chartered mutual savings bank into the Massachusetts mutual holding company form
of organization. Pursuant to the reorganization, the Bank converted to a
Massachusetts chartered stock savings bank as a wholly-owned subsidiary of the
Company, which is majority owned by Westborough Bancorp, MHC (the "MHC"), a
Massachusetts chartered mutual holding company. The Company's common stock is
traded on the Over-the-Counter Bulletin Board under the symbol "WFSM.OB."

      On November 13, 2006, the Company, the Bank and the MHC entered into an
agreement and Plan of Merger with Assabet Valley Bancorp, Hudwest Financial
Services, Inc., and Hudson Savings Bank. Under the terms of the agreement, the
mutual holding company structure of the MHC will be eliminated and the Bank will
merge with Hudson Savings Bank. The Company will merge with Hudwest Financial
Services, Inc., with the Company as the surviving corporation and a wholly-owned
subsidiary of Assabet Valley Bancorp. The Company will eventually be merged into
Assabet Valley Bancorp. The stockholders of the Company, other than the MHC,
will receive $35.00 in cash in exchange for each share of common stock they own.
The transaction is subject to regulatory approval and the approval of the
stockholders of the Company and the corporators of the MHC and Assabet Valley
Bancorp. It is anticipated that the transaction will be completed in spring of
2007.

      Unless otherwise indicated, the information presented herein represents
the consolidated activity of the Company and its subsidiary. The following
discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes that are included within this report.

      The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of loans primarily in
the towns of Westborough, Northborough, Shrewsbury and Grafton, Massachusetts,
including residential and commercial real estate mortgage loans and, to a lesser
extent, consumer and commercial loans.

      The Company's profitability depends primarily on the Bank's net interest
income, which is the difference between the interest income the Bank earns on
its loans and securities portfolio and its cost of funds, which consists
primarily of interest paid on deposits and borrowings from the Federal Home Loan
Bank of Boston (the "FHLB"). Net interest income is affected by the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on these balances. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.

      The level of other (non-interest) income and operating expenses also
affects the Company's profitability. Other income consists primarily of customer
service fees, gains and losses on sales of securities and mortgages, income from
the sale of non-deposit investment products and income from bank-owned life
insurance. Operating expenses consist of salaries and benefits,
occupancy-related expenses and other general operating expenses.

      The operations of the Company, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial institutions' regulatory agencies. Deposit flows
and the cost of funds are influenced by interest rates on competing investments
and general market rates of interest. Lending activities are affected by the
demand for

                                       39
<PAGE>

financing real estate and other types of loans, which in turn is affected by the
interest rates at which such financing may be offered and other factors
affecting loan demand and the availability of funds.

Business Strategy

      In past years, the Company's primary management strategy has been to offer
savings and certificate of deposit accounts and residential mortgage loans in
the market area of Westborough, Massachusetts and surrounding communities. In
recent years, the Company has adopted a growth-oriented strategy that has
focused on expanding its product lines and services, providing expanded
electronic and traditional delivery systems for its customers and extending its
branch network. The Company believes that this business strategy is best for its
long-term success and viability, and complements its existing commitment to high
quality customer service. In connection with the Company's overall growth
strategy, it seeks to:

      o  continue to focus on expanding its residential lending and retail
         banking franchise, and increasing the number of households served
         within its market area;

      o  expand its commercial banking products and services for small- and
         medium-sized businesses, as a means to increase the yield on its loan
         portfolio and to attract lower cost transaction deposit accounts;

      o  expand its branch network to increase its market share;

      o  increase the use of alternative delivery channels, such as
         Internet-based and telephonic banking; and

      o  offer a variety of non-deposit investment products and services as a
         means to compete for an increased share of its customers' financial
         service business and improve fee-based income.

      In order to create a platform for the accomplishment of the Company's
goals, management has made significant investments in its physical
infrastructure and human and technological resources. The Bank has completed
renovating older sections of its Main Office and other branches to better serve
its retail customers. The Bank continues to upgrade its on-line Internet bill
payment and other on-line applications. Such investments have been necessary to
ensure that adequate resources are in place to offer increased products and
services. Management believes that the Company's long-term profitability is
enhanced as it realizes the benefits of diversified product lines and market
share growth.

Asset/Liability Management; Market Risk Analysis

      A primary component of the Company's market risk is interest rate
volatility. Interest rate risk is the exposure of the Company's net interest
income to adverse movements in interest rates. Since net interest income (the
difference between interest earned on loans and investments and interest paid on
deposits and borrowings) is the Company's primary source of revenue, interest
rate risk is the most significant non-credit related market risk to which the
Company is exposed. Net interest income is affected by changes in interest rates
as well as fluctuations in the level and duration of the Company's assets and
liabilities. Fluctuations in interest rates and the relative difference between
short-term and longer-term interest rates will ultimately impact the Company's
level of interest income and interest expense. Fluctuations in interest rates
will also affect the market value of all interest-earning assets and
interest-costing liabilities, other than those that possess a short term to
maturity.

      The primary objective of the Company's interest rate management strategy
is to optimize its economic value and net income under likely market rate
scenarios. To achieve this objective, the Company has developed policies and
procedures to assist senior management in evaluating and

                                       40
<PAGE>

maintaining acceptable levels of interest rate risk, liquidity risk and capital.
In particular, the Company seeks to coordinate asset and liability decisions to
minimize the effects of interest rate movements.

      Due to the nature of the Company's operations, it is not subject to
foreign currency exchange or commodity price risk. The Company's real estate
loan portfolio, primarily concentrated in the towns of Westborough,
Northborough, Shrewsbury and Grafton, Massachusetts, is, however, subject to
risks associated with the local economy. Historically, the Company's lending
activities have emphasized one- to four-family residential mortgage loans, and
the Bank's primary source of funds has been deposits. More recently, the Company
has increased its borrowing from the FHLB in order to fund loan growth. In
recent years, the Company has attempted to employ certain strategies to manage
the interest rate risk inherent in this asset/liability mix, including: (a)
investing in securities with relatively short maturities or call dates; (b)
maintaining and promoting, through various programs and pricing strategies, a
concentration of less interest rate sensitive "core deposits;" (c) emphasizing
the origination or purchase and retention of adjustable-rate one- to four-family
loans; (d) emphasizing the origination of commercial loans with short-term
maturities; and (e) borrowing funds from the FHLB, which may be used to
originate or purchase loans with similar anticipated cash flow characteristics.
The Company believes that the frequent re-pricing of its adjustable-rate
mortgage loans and short-term securities, which reduces the exposure to interest
rate fluctuations, will help stabilize the Company's net interest margin.

      The actual amount of time before mortgage loans and mortgage-backed
securities are repaid can be significantly impacted by changes in mortgage
prepayment rates and market interest rates. Mortgage prepayment rates vary due
to a number of factors, including the regional economy in the area where the
underlying mortgages were originated, seasonal factors, demographic variables
and the assumability of the underlying mortgages. However, the major factors
affecting prepayment rates are prevailing interest rates, related mortgage
refinancing opportunities and competition. The Company monitors interest rate
sensitivity so that it can make adjustments to its asset and liability mix on a
timely basis.

      Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is deemed to be interest rate sensitive within a specific time
period if it will mature or re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or re-pricing within a specific time period and
the amount of interest-bearing liabilities maturing or re-pricing within that
same time period.

      At September 30, 2006, the Company's cumulative one-year gap position,
which measures the difference between the amount of interest-earning assets
maturing or re-pricing within one year, and interest-bearing liabilities
maturing or re-pricing within one year, was a negative 12.87% of total assets. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. Accordingly, during a period
of rising interest rates, an institution with a negative gap position generally
is not in as favorable a position, compared to an institution with a positive
gap, because the resulting yield on an its assets generally would increase at a
slower rate than the increase in its cost of interest-bearing liabilities.
Conversely, during a period of falling interest rates, an institution with a
negative gap tends to experience a re-pricing of its assets at a slower rate
than its interest-bearing liabilities which, consequently, would generally
result in its net interest income growing at a faster rate than an institution
with a positive gap position.

      The following table sets forth interest-earning assets and
interest-bearing liabilities outstanding at September 30, 2006, which are
anticipated by the Company, based upon certain assumptions, to re-price or
mature in each of the future time periods shown. Except as stated below, the
amount of assets and liabilities shown which re-price or mature during a
particular period were determined in accordance with

                                       41
<PAGE>

the earlier term to re-pricing/call date or the contractual maturity of the
asset or liability. The table sets forth an approximation of the projected
re-pricing of assets and liabilities at September 30, 2006 on the basis of
contractual maturities, anticipated prepayments and scheduled rate adjustments
within a three-month period and subsequent projected time intervals. The loan
amounts in the table reflect principal balances expected to be redeployed and/or
re-priced as a result of contractual amortization and as a result of contractual
rate adjustments on adjustable-rate loans.

                                       42
<PAGE>

<TABLE>
<CAPTION>
GAP Table                                                   Amounts Maturing or Re-pricing as of September 30, 2006
                                          ------------------------------------------------------------------------------------------
                                          less than    3 to 6     6 months      1 to        3 to         5 to      over
                                          3 months     months     to 1 year   3 years     5 years     10 years   10 years     Total
                                          ------------------------------------------------------------------------------------------
<S>                                        <C>        <C>         <C>         <C>         <C>         <C>        <C>        <C>
Interest-earning Assets (1)                                                    ($ in thousands)
  Short-term investments (2)               $ 5,886    $      0    $      0    $      0    $      0    $     0    $     0    $  5,886
  Investment securities (3)                 16,459       3,742       6,969      13,091       1,529          0          0      41,790
  Mortgage and asset backed securities           0         188         617       4,734       1,122      2,214     15,153      24,028
  Loans (4)                                 18,614       6,153       4,576      23,285      33,301     68,623     55,972     210,524
                                           -------    --------    --------    --------    --------    -------    -------    --------
    Total interest-earning assets           40,959      10,083      12,162      41,110      35,952     70,837     71,125     282,228
                                           -------    --------    --------    --------    --------    -------    -------    --------

Interest-bearing Liabilities:
  NOW accounts (5)                           1,555       1,555       1,555       1,555           0          0      9,328      15,547
  Regular and other savings accounts (5)     6,478       6,479       6,480       6,480           0          0     38,880      64,797
  Money market deposit accounts (5)          3,221       3,221       3,221       3,221           0          0     19,323      32,207
  Certificate of deposit accounts           17,534      19,017      23,247      14,380       2,586          0          0      76,764
  Federal Home Loan Bank advances (6)        4,000           0       4,000      22,500      27,000          0          0      57,500
  Mortgage escrow deposits                     380           0           0           0           0          0          0         380
                                           -------    --------    --------    --------    --------    -------    -------    --------
    Total interest-bearing liabilities      33,168      30,271      38,503      48,136      29,586          0     67,531     247,195
                                           -------    --------    --------    --------    --------    -------    -------    --------

Interest sensitivity gap                   $ 7,791    $(20,188)   $(26,341)   $ (7,026)   $  6,366    $70,837    $ 3,594    $ 35,033
                                           -------    --------    --------    --------    --------    -------    -------    ========
Cumulative interest sensitivity gap        $ 7,791    $(12,397)   $(38,738)   $(45,764)   $(39,398)   $31,439    $35,033
                                           =======    ========    ========    ========    ========    =======    =======

Cumulative interest sensitivity gap
as a percent of total assets                  2.59%      -4.12%     -12.87%     -15.21%     -13.09%     10.45%     11.64%

Cumulative interest sensitivity gap as a
percent of total interest-earning assets      2.76%      -4.39%     -13.73%     -16.22%     -13.96%     11.14%     12.41%

Cumulative interest sensitivity gap as
a percent of total interest-bearing
liabilities                                   3.15%      -5.02%     -15.67%     -18.51%     -15.94%     12.72%     14.17%

<FN>
--------------------
<F1>  Interest-earning assets are included in the period in which the balances
      are expected to be redeployed and/or re-priced as a anticipated
      prepayments, scheduled rate adjustments, call dates and contractual
      maturities.
<F2>  Short-term Investments include federal funds, money market mutual funds
      and interest-earning amounts in the Federal Bank of Boston.
<F3>  Investment securities are at market value. Common stock and stock in the
      Federal Home Loan Bank of Boston is less than 3 month column.
<F4>  Loans are principal balances, net of deferred loan
      costs/fees/discounts/premiums on purchased loans and unadvanced
<F5>  60% of NOW, regular and other savings and money market deposit accounts
      are included in the over ten year period and remaining allocated evenly
      within the four intervals up to and including one to three years.
<F6>  Federal Home Loan Bank advances are categorized by contractual maturity
      date.
</FN>
</TABLE>

                                       43
<PAGE>

      Certain shortcomings are inherent in the method of analysis presented in
the Gap Table. For example, although certain assets and liabilities may have
similar maturities or periods to re-price, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate loans, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawals, the level would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.

      The following table sets forth certain information relating to the
Company's financial condition and net interest income at and for the years ended
September 30, 2006, 2005, and 2004, and reflects the average yield on assets and
average cost of liabilities for the years indicated. Such yields and costs are
derived by dividing interest and dividend income or interest expense by the
average balance of assets or liabilities, respectively, for the periods shown.
Average balances are derived from average daily balances. The yields include
fees and costs, which are considered adjustments to yields. Loan interest and
yield does not include any accrued interest from non-accrual loans.

                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                                      For the Year Ended September 30,
                                       ---------------------------------------------------------------------------------------------
                                                    2006                            2005                           2004
                                       -----------------------------   -----------------------------   -----------------------------
                                       Average                Yield    Average                Yield    Average                Yield
                                       Balance    Interest   or Cost   Balance    Interest   or Cost   Balance    Interest   or Cost
                                       ---------------------------------------------------------------------------------------------
                                                                              ($ in thousands)
<S>                                    <C>         <C>         <C>     <C>         <C>         <C>     <C>         <C>         <C>
Assets:
Interest-earning assets:
  Short-term investments (1)           $  3,644    $   187     5.13%   $  4,512    $   108     2.39%   $  5,037    $    47     0.93%
  Investment securities (2)              67,108      2,690     4.01%     73,284      2,896     3.95%     91,511      3,588     3.92%
  Loans (3)                             208,315     11,545     5.54%    180,125      9,560     5.31%    144,942      7,859     5.42%
                                       --------    -------             --------    -------             --------    -------
    Total interest-earning assets       279,067     14,422     5.17%    257,921     12,564     4.87%    241,490     11,494     4.76%
                                                   -------                         -------                         -------
  Non-interest-earning assets            20,190                          18,810                          17,599
                                       --------                        --------                        --------
    Total assets                       $299,257                        $276,731                        $259,089
                                       ========                        ========                        ========

Liabilities and Equity:
Interest-bearing liabilities:
  NOW accounts                         $ 16,498         25     0.15%   $ 19,189         25     0.13%   $ 19,597         20     0.10%
  Savings accounts (4)                   80,187      1,087     1.36%    109,829      1,469     1.34%    115,483      1,229     1.06%
  Money market deposit accounts          25,334        845     3.34%      5,042         52     1.03%      5,325         53     1.00%
  Certificate of deposit accounts        70,204      2,669     3.80%     55,329      1,434     2.59%     49,443      1,021     2.07%
                                       --------    -------             --------    -------             --------    -------
    Total interest-bearing deposits     192,223      4,626     2.41%    189,389      2,980     1.57%    189,848      2,323     1.22%
  FHLB Advances                          52,762      2,215     4.20%     32,125      1,192     3.71%     16,215        639     3.94%
                                       --------    -------             --------    -------             --------    -------
    Total interest-bearing
     liabilities                        244,985      6,841     2.79%    221,514      4,172     1.88%    206,063      2,962     1.44%
                                       --------    -------             --------    -------             --------    -------

  Non-interest bearing deposits          22,145                          23,369                          22,229
  Other non-interest-bearing
   liabilities                            3,787                           2,979                           2,050
                                       --------                        --------                        --------
    Total non-interest-bearing
     liabilities                         25,932                          26,348                          24,279
                                       --------                        --------                        --------
    Total liabilities                   270,917                         247,862                         230,342
    Total stockholders' equity           28,340                          28,869                          28,747
                                       --------                        --------                        --------
    Total liabilities and
     stockholders' equity              $299,257                        $276,731                        $259,089
                                       ========                        ========                        ========

Net interest income                                $ 7,581                         $ 8,392                         $ 8,532
                                                   =======                         =======                         =======
Net interest rate spread (5)                                   2.38%                           2.99%                           3.32%
                                                             ======                          ======                          ======
Net interest margin (6)                                        2.72%                           3.25%                           3.53%
                                                             ======                          ======                          ======
Ratio of interest-earning assets
 to interest-bearing liabilities                             113.91%                         116.44%                         117.19%
                                                             ======                          ======                          ======

<FN>
<F1>  Short-term investments include federal funds, money market mutual funds
      and interest earning amounts in the Federal Home Loan Bank of Boston.
<F2>  All investment securities are considered available for sale.
<F3>  Loans are net of deferred loan origination costs/fees, allowance for loan
      losses, discount/premium on purchased loans and unadvanced funds.
<F4>  Savings accounts include the balance in mortgagors' escrow accounts.
<F5>  Net interest rate spread represents the difference between the weighted
      average yield on interest-earning assets and the weighted average cost of
      interest bearing liabilities.
<F6>  Net interest margin represents net interest income as a percentage of
      average interest-earning assets.
</FN>
</TABLE>

                                       45
<PAGE>

The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
years indicated. Information is provided in each category with respect to:

      o  changes attributable to changes in volume (changes in volume multiplied
         by prior rate);
      o  changes attributable to changes in rate (changes in rate multiplied by
         prior volume); and
      o  the net change.

The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.

<TABLE>
<CAPTION>
                                          Year Ended September 30, 2006    Year Ended September 30, 2005
                                              Compared to Year Ended           Compared to Year Ended
                                                September 30, 2005               September 30, 2004
                                               Increase (Decrease)              Increase (Decrease)
                                          --------------------------------------------------------------
                                                      Due to                           Due to
                                          --------------------------------------------------------------
                                          Volume      Rate        Net      Volume      Rate        Net
                                          --------------------------------------------------------------
                                                                 ($ In thousands)
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>
Interest-earning assets:
  Short-term investments (1)              $  (24)    $  103     $   79     $   (5)    $  66      $   61
  Investment Securities (2)                 (247)        41       (206)      (720)       28        (692)
  Loans (3)                                1,547        438      1,985      1,871      (170)      1,701
                                          ------     ------     ------     ------     -----      ------
    Total interest-earning assets          1,276        582      1,858      1,146       (76)      1,070
                                          ------     ------     ------     ------     -----      ------

Interest-bearing liabilities:
  NOW accounts                                (4)         3         (1)         0         5           5
  Savings accounts (4)                      (402)        20       (382)       (63)      303         240
  Money market deposit accounts              510        283        793         (3)        2          (1)
  Certificate of deposit accounts            451        785      1,236        131       282         413
                                          ------     ------     ------     ------     -----      ------
    Total interest-bearing deposits          555      1,091      1,646         65       592         657
  Borrowed funds                             849        174      1,023        592       (39)        553
                                          ------     ------     ------     ------     -----      ------
    Total interest-bearing liabilities     1,404      1,265      2,669        657       553       1,210
                                          ------     ------     ------     ------     -----      ------
Net change in net interest income         $ (128)    $ (683)    $ (811)    $  489     $(629)     $ (140)
                                          ======     ======     ======     ======     =====      ======

<FN>
<F1>  Short-term investments include federal funds, money market mutual funds
      and amounts in the Federal Home Loan Bank of Boston.
<F2>  All investment securities are considered available for sale.
<F3>  Loans are net of deferred loan origination costs (fees), allowance for
      loan discounts/premiums on purchased loans and unadvanced funds.
<F4>  Savings accounts include the balance in mortgagors' escrow accounts.
<F5>  Some numbers may not foot due to rounding.
</FN>
</TABLE>

                                       46
<PAGE>

Comparison of Financial Condition at September 30, 2006 and September 30, 2005

      The Company's total assets increased by $9.5 million, or 3.3%, to $301.0
million at September 30, 2006 from $291.5 million at September 30, 2005. Loans
increased by $9.2 million, or 4.6%, to $209.7 million at September 30, 2006
from $200.5 million at September 30, 2005. Within the loan portfolio,
commercial loans increased by $7.4 million from September 30, 2005 to September
30, 2006. Residential real estate loans (primarily adjustable-rate) and home
equity lines-of-credit increased by $1.8 million for the same period.
Securities available for sale decreased by $1.5 million, or 2.3%, to $62.4
million at September 30, 2006 as compared to $63.9 million at September 30,
2005. The majority of the proceeds from the sale and maturity of securities
available for sale were reinvested in the loan portfolio.

      Deposits increased by $1.0 million, or 0.5%, to $211.3 million at
September 30, 2006, from $210.3 million at September 30, 2005, primarily in
money market deposit accounts and certificates of deposit. Additionally, FHLB
advances increased by $7.5 million, or 15.0%, to $57.5 million at September 30,
2006 from $50.0 million at September 30, 2005. The increase in FHLB advances
was utilized to fund loan portfolio growth since deposit growth during the year
was not sufficient to fund such loan growth.

      Total stockholders' equity declined by $220 thousand, to $28.4 million at
September 30, 2006 primarily as a result of a combination of dividends paid to
shareholders and the current year net loss, offset to a lesser extent by a
decrease in accumulated other comprehensive loss resulting from changes in the
market value of securities available for sale and stock activities. Accumulated
other comprehensive after-tax loss at September 30, 2006 was $659 thousand, as
compared to an after-tax loss of $714 thousand at September 30, 2005. The
Company's securities consist primarily of interest-rate sensitive securities,
whose market value changes inversely with changes in market interest rates.
Deferred income tax benefits associated with this market value increase were
$29 thousand.

Comparison of Operating Results for the Years Ended September 30, 2006 and 2005

      Net Income. The Company reported a loss per share (dilutive) for fiscal
year ended September 30, 2006 of $0.03 on a net loss of $42 thousand, as
compared to earnings per share of $0.57 per share (dilutive) on net income of
$898 thousand for fiscal year ended September 30, 2005. For year ended
September 30, 2006, net income declined by $940 thousand, primarily due to a
decline in the Company's net interest margin, an increase in operating
expenses, a decline in other income, and a decline in the credit for loan
losses. The Company's return (loss) on average assets was (0.01%) for year
ended September 30, 2006 as compared to 0.32% for year ended September 30,
2005.

      Interest and Dividend Income. Interest and dividend income increased by
$1.9 million, or 14.8%, to $14.4 million for year ended September 30, 2006 from
$12.6 million for year ended September 30, 2005. The increase in interest and
dividend income was mainly the result of an increase in the volume of interest
earning assets, as well as an increase in the interest rates earned on
interest-earning assets. The average rate earned on interest-earning assets was
5.17% on average interest earning assets of $279.1 million for year ended
September 30, 2006 as compared to 4.87% on average interest-earning assets of
$257.9 million for the years ended September 30, 2005.

      The average balance of loans for year ended September 30, 2006 was $208.3
million, earning 5.54% for the year. This compares to an average balance of
loans for year ended September 30, 2005 of $180.1 million, earning 5.31% for
the year. During year ended September 30, 2006, the Company experienced net
one-to-four family residential loan and home equity line growth of $1.8 million
and net commercial real estate loan growth of $7.4 million. The increase in the
earning rate on loans primarily reflects the general increase in market
interest rates for mortgage loans granted during the recent year. The average
balance of investment securities for year ended September 30, 2006 was $67.1
million, earning 4.01% for the year. This compares to an average balance of
investment securities for year ended

                                       47
<PAGE>

September 30, 2005 of $73.3 million, earning 3.95% for the year. Finally, the
average balance of short-term investments for year ended September 30, 2006 was
$3.6 million, earning 5.13% for the year. This compares to an average balance
of short-term investments for year ended September 30, 2005 of $4.5 million,
earning 2.39% for the year. The higher earnings rate on short-term investments
reflects the interest rate increases by the Federal Open Market Committee (the
"FOMC").

      Interest Expense. Interest expense increased by $2.7 million, or 64.0%,
to $6.8 million for year ended September 30, 2006 from $4.2 million for year
ended September 30, 2005. Interest expense increased mainly due to an increase
in the average rate paid on interest-bearing liabilities plus an increase in
the average volume of interest-bearing liabilities. The average volume of
interest-bearing liabilities, which includes interest-bearing deposits and FHLB
advances, increased to $245.0 million with a cost of 2.79% for year ended
September 30, 2006 as compared to $221.5 million with a cost of 1.88% for year
ended September 30, 2005. The primary reason for the increase in costs was due
to increased interest expense related to money market deposit accounts and
certificates of deposit and reflects the Company's reaction to higher
short-term interest rate decisions of the FOMC, coupled with an increase in
expense related to FHLB advances.

      Net Interest Income. Net interest income decreased by $811 thousand for
year ended September 30, 2006, or 9.7%, to $7.6 million from $8.4 million for
year ended September 30, 2006. The Company's net interest rate spread, which
represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities, decreased to 2.38% for year ended September 30, 2006 from 2.99%
for year ended September 30, 2005. The decrease was attributed to the
combination of an increase of $2.7 million in total interest expense offset, to
a lesser extent, by an increase of $1.9 million in total interest and dividend
income. Continued flattening of interest rates challenged the Company by
limiting investment opportunities and returns. Compression of the net interest
rate spread can be expected to result in lower net interest income, and
possibly losses, until such time as the yield curve returns to a more normal,
upward slope.

      Provision for Loan Losses. The Company had no provision for loan losses
for year ended September 30, 2006 compared to a $173 thousand credit for loan
losses for year ended September 30, 2005. The 2005 credit was the result of
paydowns and the high credit quality of specific commercial loans for which a
portion of the allowance for loan losses had been specifically allocated. The
provision for loan losses is a result of management's periodic analysis of
risks inherent in the loan portfolio from time to time, as well as the overall
adequacy of the allowance for loan losses. It is the Company's policy to
provide valuation allowances for estimated losses on loans based upon past loss
experience, current trends in the level of delinquent and specific problem
loans, loan concentrations to single borrowers, adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions in our market area. Accordingly,
the evaluation of the adequacy of the allowance for loan losses is not based
directly on the level of non-performing loans. The allowance for loan losses,
in management's opinion, is sufficient to cover losses in the Company's loan
portfolio at this time. As the Company expands its commercial lending
activities, management believes that growth in the provision for loan losses
may be likely. Additionally, while the Company believes it continues to have
excellent loan quality, with $416 thousand of non-accrual loans and
non-performing assets at September 30, 2006, the Company recognizes that it is
located in a market and geographic area that is considered in the high
technology and financial services belt and, most likely, the Company's
allowance for loan loss will reflect the relative health of these economic
sectors. While management believes that its current level of allowance for loan
losses is adequate, there can be no assurance that the allowance will be
sufficient to cover loan losses or that future adjustments to the allowance
will not be necessary if economic and/or other conditions differ substantially
from the economic and other conditions considered by management in evaluating
the adequacy of the current level of the allowance.

      Other Income. Other income declined by 18.2%, or $193 thousand, to $870
thousand for year ended September 30, 2006. Other income primarily consists of
customer service fees, gains and losses

                                       48
<PAGE>

from the sale of securities and loans and income from bank-owned life
insurance. Gains on the sale of securities and mortgages declined as compared
to September 30, 2005, due to substantially lower volume of sales.
Miscellaneous income decreased by $48 thousand, or 20.3%, to $188 thousand for
year ended September 30, 2006 as compared to year ended September 30, 2005,
resulting from a reduction in income from bank owned life insurance policies.
Income from customer service fees increased by $71 thousand, or 11.8%, to $674
thousand for year ended September 30, 2006 primarily due to increases in
non-deposit investment income and prepayment fees on commercial loans.

      Operating Expenses. For year ended September 30, 2006, operating expenses
increased by $267 thousand, or 3.2%, to $8.6 million, from $8.3 million for
year ended September 30, 2005. Salaries and employee benefits increased by $353
thousand, or 7.9%, to $4.8 million for year ended September 30, 2006, from $4.5
million for year ended September 30, 2005, primarily a result of increased
benefit costs, general salary increases for employees and higher levels of
sales incentive compensation. Professional fees increased by $92 thousand, or
21.8%, to $514 thousand for year ended September 30, 2006. Professional fees
increased primarily due to legal and other expenses related to a civil action
filed against the Bank and also due to expenses related to the examination of
various strategic planning projects and initiatives. Primarily as a result of a
higher volume of services provided, data processing expenses increased by $32
thousand, or 4.3%, to $773 thousand for year ended September 30, 2006.
Marketing expenses declined by $55 thousand to $176 thousand for year ended
September 30, 2006 primarily due to prior year's public relations related to a
civil lawsuit filed against the Company in 2005. Other general and
administrative expenses decreased by $146 thousand, or 11.0%, to $1.2 million
for year ended September 30, 2006, from 1.3 million for year ended September
30, 2005 due to consultant expenses related to an employee opinion survey and
crisis communication related to a civil lawsuit filed against the Company
during 2005.

      Income Taxes. Income (loss) before provision (benefit) for income taxes
decreased by $1.4 million, to ($165) thousand loss for year ended September 30,
2006 as compared to $1.3 million income for year ended September 30, 2005.
Primarily as a result of this decrease, the provision (benefit) for income
taxes decreased by $504 thousand, to ($123) thousand benefit for year ended
September 30, 2006 as compared to $381 thousand provision for year ended
September 30, 2005. The effective income tax rate was (74.5%) and 29.8% for
years ended September 30, 2006 and 2005, respectively. The lower effective tax
rate was attributable to relatively low level of income (loss) before income
taxes for year ended September 30 2006, as compared to September 30, 2005, in
addition to the Bank's utilization of a wholly-owned security investment
subsidiary, and an increase in income from the cash surrender value of
bank-owned life insurance as a percent of pre-tax income.

                                       49
<PAGE>

Liquidity and Capital Resources

      The term "liquidity" refers to the Company's ability to generate adequate
amounts of cash to fund loan originations, deposit withdrawals and operating
expenses. The Company's primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by the
Company's operations. From time to time, including during fiscal 2006, the
Company has utilized borrowing from the FHLB as part of its management of
interest rate risk and to fund loan growth in periods when deposit growth is
not sufficient to meet such loan growth. At September 30, 2006, the Company had
$57.5 million in outstanding borrowings from the FHLB with a weighted average
interest rate of 4.39%, as compared to $50.0 million with a weighted average
interest rate of 4.08% at September 30, 2005.

      The Company generally makes loan commitments to borrowers not exceeding
45 days. At September 30, 2006, the Company had $4.7 million in loan
commitments outstanding. Unadvanced funds on home equity lines of credit and
commercial lines of credit at September 30, 2006 represented $16.8 million and
$1.9 million, respectively. Total deposits increased by $1.0 million during
year ended September 30, 2006. During the year, a significant percentage of
tiered-rate and regular savings account customers chose to move their funds
either to higher rate certificates of deposit or money market deposit accounts,
as a result of the current rate environment. During 2006, tiered-rate and
regular savings accounts declined by $37.0 million, while certificates of
deposit and money market accounts increased by $45.7 million. In order to fund
increased loan volume, the Company increased low-cost borrowing from the FHLB.
The level of deposit flow is affected by interest rates offered by the Company,
products and rates offered by competitors and other factors. Certificate of
deposit accounts scheduled to mature within one year were $60.0 million at
September 30, 2006. Based on the Company's deposit retention experience and
current pricing strategy, the Company anticipates that a significant portion of
these certificates of deposit will remain with the Company. The Company is
committed to maintaining a strong liquidity position; therefore, it monitors
its liquidity position on a daily basis. The Company also periodically reviews
liquidity information prepared by the Federal Deposit Insurance Corporation
(the "FDIC"), Depositors Insurance Fund and other available reports that
compare the Company's liquidity with Company's in its peer group. The Company
anticipates that it will have sufficient funds to meet its current funding
commitments. Further, the Company does not have any balloon or other payments
due on any long-term obligations other than the commitments.

      The following table shows the Tier 1 leverage ratio, Tier 1 risk-based
capital and Total risk-based capital ratios, for the Bank and consolidated
Company, at September 30, 2006:

                                       50
<PAGE>

<TABLE>
<CAPTION>
                                                               As of September 30, 2006
                                          -----------------------------------------------------------------
                                                                                         Minimum to be Well
                                                                 Minimum for Capital     Capitalized under
                                                Actual            Adequacy Purposes      Corrective Action
                                          ------------------     -------------------     ------------------
                                          Amount      Ratio      Amount        Ratio     Amount      Ratio
                                          -----------------------------------------------------------------
                                                                (Dollars in thousands)
<S>                           <C>         <C>         <C>        <C>           <C>       <C>         <C>
Total risk-based capital      Company     $29,014     17.92%     $12,952       8.00%       N/A        N/A
                              Bank        $28,627     17.78%     $12,878       8.00%     $16,097     10.00%

Tier 1 risk-based capital     Company     $28,228     17.44%     $ 6,476       4.00%       N/A        N/A
                              Bank        $27,841     17.30%     $ 6,439       4.00%     $ 9,658      6.00%

Tier 1 leverage capital       Company     $28,228      9.46%     $11,937       4.00%       N/A        N/A
                              Bank        $27,841      9.38%     $11,869       4.00%     $14,836      5.00%

<FN>
<F1>  For purposes of calculating Total risk-based capital and Tier capital,
      assets are based on total risk-weighted assets. In calculating Tier 1
      leverage capital, assets are based on adjusted total average
</FN>
</TABLE>

At September 30, 2006, the Bank was considered "well capitalized" under FDIC
guidelines.

                                       51
<PAGE>

Off-Balance Sheet Arrangements

      The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.

      The following table sets forth information relating to the Company's
payments due under contractual obligations at September 30, 2006:

<TABLE>
<CAPTION>
                                                 ------------------------------------------------------
                                                                 Payments due by period
                                                 ------------------------------------------------------
                                                  Total      < 1 yr     1-3 yrs     3-5 yrs     > 5 yrs
                                                 ------------------------------------------------------
<S>                                              <C>         <C>        <C>         <C>         <C>
Short-term debt (1)                              $     -     $    -     $     -     $     -     $     -

Long-term debt (2)                                57,500      8,000      22,500      27,000           -

Capital lease obligations                              -          -           -           -           -

Operating lease obligations (3)                        -          -           -           -           -

Purchase obligations                                   -          -           -           -           -
Other long-term liabilities reflected on the
 company's balance sheet under GAAP                    -          -           -           -           -
                                                 -------     ------     -------     -------     -------

                                                 $57,500     $8,000     $22,500     $27,000     $     -
                                                 =======     ======     =======     =======     =======

<FN>
<F1>  Consists of FHLB advances with original maturities less than ninety days.
<F2>  Consists of FHLB advances with original maturities greater than one year
      which are scheduled to mature after September 30, 2006. Certain advances
      are callable in 2007.
<F3>  Pertains to noncancelable lease agreements in effect at September 30,
      2006, pertaining to banking premises and equipment and future minimum
      rent commitments. The leases contain options to extend for periods from
      two to ten years.
</FN>
</TABLE>

Impact of Inflation and Changing Prices

      The consolidated financial statements and accompanying notes presented
here have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike industrial companies, the
Company's assets and liabilities are primarily monetary in nature. As a result,
changes in market interest rates have a greater impact on performance than do
the effects of inflation.

Critical Accounting Policies

      The Notes to our Audited Consolidated Financial Statements for year ended
September 30, 2006 included in our Annual Report contain a summary of our
significant accounting policies. We believe our policies with respect to the
methodology for our determination of the allowance for loan losses involves a
higher degree of complexity and requires management to make difficult and
subjective judgments, which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates could
cause reported results to differ materially. The Audit Committee and our Board
of Directors periodically review this critical policy and their application.

                                       52
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                      WESTBOROUGH FINANCIAL SERVICES, INC.

Report of Independent Registered Public Accounting Firm                 F-1

Consolidated Balance Sheets as of September 30, 2006
  and 2005                                                              F-2

Consolidated Statements of Operations for the Years Ended
  September 30, 2006 and 2005                                        F-3 - F-4

Consolidated Statements of Changes in Stockholders' Equity
  for the Years Ended September 30, 2006 and 2005                       F-5

Consolidated Statements of Cash Flows for the
  Years Ended September 30, 2006 and 2005                            F-6 - F-7

Notes to Consolidated Financial Statements                           F-8 - F-47
<PAGE>

            Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders of
 Westborough Financial Services, Inc.


We have audited the accompanying consolidated balance sheets of Westborough
Financial Services, Inc. and subsidiary as of September 30, 2006 and 2005, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. 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 Westborough
Financial Services, Inc. and subsidiary as of September 30, 2006 and 2005, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.


/s/ Wolf & Company, P.C.


Boston, Massachusetts
November 14, 2006
<PAGE>

<TABLE>
<CAPTION>
                     WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                                 CONSOLIDATED BALANCE SHEETS

                                 September 30, 2006 and 2005

                                   (Dollars in thousands)

                                           ASSETS

                                                                       2006          2005
                                                                     --------      --------
<S>                                                                  <C>           <C>
Cash and due from banks                                              $  2,431      $  3,590
Federal funds sold                                                      3,444         1,785
Short-term investments                                                  2,442         3,599
                                                                     --------      --------
      Total cash and cash equivalents                                   8,317         8,974

Securities available for sale, at fair value                           62,442        63,940
Federal Home Loan Bank stock, at cost                                   3,376         2,966
Loans, net of allowance for loan losses of $780 in 2006
 and $785 in 2005                                                     209,744       200,477
Premises and equipment, net                                             6,560         6,094
Accrued interest receivable                                             1,368         1,181
Deferred income taxes                                                   1,268         1,135
Bank-owned life insurance                                               6,555         6,118
Other assets                                                            1,337           605
                                                                     --------      --------
                                                                     $300,967      $291,490
                                                                     ========      ========

                            LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                             $211,277      $210,281
Short-term borrowings                                                       -         4,000
Long-term borrowings                                                   57,500        46,000
Mortgagors' escrow accounts                                               380           409
Accrued expenses and other liabilities                                  3,427         2,197
                                                                     --------      --------
      Total liabilities                                               272,584       262,887
                                                                     --------      --------

Commitments and contingencies (Note 13)
Stockholders' equity:
  Preferred stock - $.01 par value, 1,000,000 shares authorized,
   none outstanding                                                         -             -
  Common stock - $.01 par value, 5,000,000 shares authorized,
   1,595,774 and 1,594,774 shares issued and outstanding at
   September 30, 2006 and 2005, respectively
                                                                           16            16
  Additional paid-in capital                                            5,063         4,990
  Retained earnings                                                    24,289        24,714
  Accumulated other comprehensive loss                                   (659)         (714)
  Unearned compensation - RRP (4,729 and 7,509 shares in
   2006 and 2005, respectively)                                           (83)         (130)
  Unearned compensation - ESOP (24,308 and 27,255 shares in
   2006 and 2005, respectively)                                          (243)         (273)
                                                                     --------      --------
      Total stockholders' equity                                       28,383        28,603
                                                                     --------      --------
                                                                     $300,967      $291,490
                                                                     ========      ========

See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                     WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                            CONSOLIDATED STATEMENTS OF OPERATIONS

                          (Dollars in thousands, except share data)

                                                                  Years Ended September 30,
                                                                  -------------------------
                                                                     2006          2005
                                                                    -------       -------
<S>                                                                 <C>           <C>
Interest and dividend income:
  Interest and fees on loans                                        $11,545       $ 9,560
  Interest and dividends on securities:
    Taxable interest                                                  2,440         2,684
    Non-taxable interest                                                 33            55
    Dividends                                                           217           157
  Interest on federal funds sold                                         76            75
  Interest on short-term investments                                    111            33
                                                                    -------       -------
      Total interest and dividend income                             14,422        12,564
                                                                    -------       -------

Interest expense:
  Interest on deposits                                                4,626         2,980
  Interest on Federal Home Loan Bank advances                         2,215         1,192
                                                                    -------       -------
      Total interest expense                                          6,841         4,172
                                                                    -------       -------

Net interest income                                                   7,581         8,392
(Credit) provision for loan losses                                      -            (173)
                                                                    -------       -------

Net interest income, after (credit) provision for loan losses         7,581         8,565
                                                                    -------       -------

Other income:
  Customer service fees                                                 674           603
  Gain on sales and calls of securities, net                              3            59
  Gain on sales of mortgages, net                                         5           165
  Miscellaneous                                                         188           236
                                                                    -------       -------
      Total other income                                                870         1,063
                                                                    -------       -------

Operating expenses:
  Salaries and employee benefits                                      4,821         4,468
  Occupancy and equipment expenses                                    1,154         1,163
  Data processing expenses                                              773           741
  Marketing and advertising                                             176           231
  Professional fees                                                     514           422
  Other general and administrative expenses                           1,178         1,324
                                                                    -------       -------
      Total operating expenses                                        8,616         8,349
                                                                    -------       -------
                                        (continued)

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

                     WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS (Concluded)

                          (Dollars in thousands, except share data)

<CAPTION>
                                                                  Years Ended September 30,
                                                                  -------------------------
                                                                     2006          2005
                                                                    -------       -------
<S>                                                                 <C>           <C>
Income (loss) before provision (benefit) for income taxes              (165)        1,279
Provision (benefit) for income taxes                                   (123)          381
                                                                    -------       -------
Net (loss) income                                                   $   (42)      $   898
                                                                    =======       =======

Earnings (loss) per share:
  Basic                                                             $ (0.03)      $  0.58
  Diluted                                                           $ (0.03)      $  0.57

See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                                        WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                                               CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                       (Dollars in thousands)

                                              Years Ended September 30, 2006 and 2005

                                             (Dollars in thousands, except share data)

                                                                         Accumulated
                                   Common Stock    Additional               Other        Unearned       Unearned         Total
                                 ----------------   Paid-in   Retained  Comprehensive  Compensation-  Compensation-  Stockholders'
                                  Shares   Amount   Capital   Earnings  Income (Loss)       RRP           ESOP          Equity
                                  ------   ------  ---------- --------  -------------  -------------  -------------  -------------
<S>                              <C>        <C>      <C>      <C>           <C>           <C>            <C>            <C>
Balance at September 30, 2004    1,589,574  $16      $4,843   $24,198       $ 159         $(209)         $(302)         $28,705
                                                                                                                        -------

Comprehensive income:
  Net income                             -    -           -       898           -             -              -              898
  Change in net unrealized gain/
   loss on securities available
   for sale, after
   reclassification adjustment
   and tax effects                       -    -           -         -        (873)            -              -             (873)
                                                                                                                        -------
      Total comprehensive income                                                                                             25
                                                                                                                        -------

Cash dividends declared ($0.24
 per share)                              -    -                  (382)          -             -              -             (382)
ESOP shares released and
 committed to be released
 (2,947 shares)                          -    -          54         -           -             -             29               83
Amortization of RRP stock
 (3,350 shares)                                                                              79                              79
Issuance of common stock under
 stock option plan, including
 tax benefits of $30                 5,200    -          93         -           -             -              -               93
                                 ---------  ---      ------   -------       -----         -----          -----          -------

Balance at September 30, 2005    1,594,774   16       4,990    24,714        (714)         (130)          (273)          28,603
                                                                                                                        -------

Comprehensive income:
  Net income (loss)
                                         -    -           -       (42)          -             -              -              (42)
  Change in net unrealized gain/
   loss on securities available
   for sale, after
   reclassification adjustment
   and tax effects                       -    -           -         -          55             -              -               55
                                                                                                                        -------
      Total comprehensive income                                                                                             13
                                                                                                                        -------

Cash dividends declared ($0.24
 per share)                              -    -           -      (383)          -             -              -             (383)
ESOP shares released and
 committed to be released
 (2,947 shares)                          -    -          49         -           -             -             30               79
Amortization of RRP stock
 (2,780 shares)                                                                              47              -               47
Tax benefit of RRP stock                 -    -           8         -           -             -              -                8
Issuance of common stock under
 stock option plan, including
 tax benefits of $5                  1,000    -          16         -           -             -              -               16
                                 ---------  ---      ------   -------       -----         -----          -----          -------

Balance at September 30, 2006    1,595,774  $16      $5,063   $24,289       $(659)        $ (83)         $(243)         $28,383
                                 =========  ===      ======   =======       =====         =====          =====          =======

See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                  WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                         CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (Dollars in thousands)

                                                             Years Ended September 30,
                                                             -------------------------
                                                                2006          2005
                                                              --------      --------
<S>                                                           <C>           <C>
Cash flows from operating activities:
  Net income (loss)                                           $    (42)     $    898
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    (Credit) provision for loan losses                               -          (173)
    Net amortization of securities                                 268           399
    Amortization of net deferred loan costs and premiums
     on purchased loans and indirect lending                       166           161
    Depreciation expense                                           487           482
    Gain on sales of mortgages, net                                 (5)         (165)
    Gain on sales and calls of securities, net                      (3)          (59)
    Increase in accrued interest receivable                       (187)         (131)
    Deferred income tax provision (benefit)                       (162)           68
    ESOP shares released and committed to be released               79            83
    Amortization of RRP stock                                       47            79
    Increase in bank-owned life insurance                         (190)         (140)
    Other, net                                                     506           361
                                                              --------      --------
      Net cash provided by operating activities                    964         1,863
                                                              --------      --------

Cash flows from investing activities:
  Activity in available-for-sale securities:
    Sales and calls                                                833         4,318
    Maturities                                                  12,600         3,700
    Purchases                                                  (17,702)       (6,284)
    Principal payments                                           5,586         5,634
  Purchase of Federal Home Loan Bank stock                        (410)         (924)
  Loan originations, net                                       (11,730)      (43,226)
  Proceeds from loan sales                                       2,302         8,214
  Purchase of premises and equipment, net                         (953)         (139)
  Premiums paid on bank-owned life insurance                      (247)         (232)
                                                              --------      --------
      Net cash used by investing activities                     (9,721)      (28,939)
                                                              --------      --------

                                      (continued)

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

<CAPTION>
                  WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                   CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)

                                 (Dollars in thousands)

                                                             Years Ended September 30,
                                                             -------------------------
                                                                2006          2005
                                                              --------      --------
<S>                                                           <C>           <C>
Cash flows from financing activities:
  Net increase (decrease) in deposits                              996        (1,429)
  Net (decrease) increase in short-term borrowings              (4,000)          500
  Proceeds from Federal Home Loan Bank advances                 13,500        33,000
  Repayment of Federal Home Loan Bank advances                  (2,000)       (5,000)
  Net (decrease) increase in mortgagors' escrow accounts           (29)           97
  Issuance of common stock under stock option plan,
   net of tax benefits                                              16            93
  Dividends paid                                                  (383)         (382)
                                                              --------      --------
      Net cash provided by financing activities                  8,100        26,879
                                                              --------      --------

Net change in cash and cash equivalents                           (657)         (197)

Cash and cash equivalents at beginning of year                   8,974         9,171
                                                              --------      --------

Cash and cash equivalents at end of year                      $  8,317      $  8,974
                                                              ========      ========

Supplemental cash flow information:
  Interest paid on deposits                                   $  4,623      $  2,978
  Interest paid on Federal Home Loan Bank advances               2,157         1,110
  Income taxes paid (refunded), net                                 (2)          329

See accompanying notes to consolidated financial statements.
</TABLE>

                                      F-7
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    Years Ended September 30, 2006 and 2005
                 (Dollars in thousands, except per share data)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of consolidation and presentation

      The consolidated financial statements include the accounts of Westborough
      Financial Services, Inc. (the "Company") and its wholly-owned subsidiary,
      The Westborough Bank (the "Bank"). The Bank's wholly-owned subsidiaries
      are The Hundredth Corporation, which was formed to own real estate, and
      the Eli Whitney Security Corporation, which is a Massachusetts security
      corporation. All significant intercompany balances and transactions have
      been eliminated in consolidation.

      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 sheet and reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates. The determination of the allowance for losses on loans is a
      material estimate that is particularly susceptible to significant change
      in the near term.

      Business and operating segments

      The Bank provides a variety of financial services to individuals and
      small businesses through its offices in Westborough, Northborough and
      Shrewsbury, Massachusetts. Its primary deposit products are checking,
      savings and term certificate accounts and its primary lending product is
      residential mortgage loans.

      Management evaluates the Company's performance and allocates resources
      based on a single segment concept. Accordingly, there are no separately
      identified operating segments. The Company does not derive revenues from,
      or have assets located in, foreign countries, nor does it derive revenues
      from any single customer that represents 10% or more of the Company's
      total revenues.

      Reclassifications

      Certain amounts in the 2005 consolidated financial statements have been
      reclassified to conform to the 2006 presentation.

                                      F-8
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Cash equivalents

      Cash equivalents include amounts due from banks, federal funds sold on a
      daily basis and short-term investments which mature within ninety days.

      Securities available for sale

      Securities classified as "available for sale" are reflected on the
      consolidated balance sheet at fair value, with unrealized gains and
      losses excluded from earnings and reported in accumulated other
      comprehensive income.

      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 securities that are deemed to be other than temporary are
      reflected in earnings as realized losses. Management evaluates securities
      for other-than-temporary impairment at least on a quarterly basis, and
      more frequently when economic or market concerns warrant such evaluation.
      Consideration is given to (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 disposition of securities are recorded on the trade date and
      computed by the specific identification method.

      Loans

      The Bank grants mortgage, commercial and consumer loans to its customers.
      A substantial portion of the loan portfolio consists of mortgage loans in
      Westborough and the surrounding communities. 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 the allowance
      for loan losses and net deferred costs on originated loans. Interest
      income is accrued on the unpaid principal balance. Net loan origination
      costs are deferred and recognized as an adjustment of the related loan
      yield using the interest method.

      The accrual of interest on mortgage and commercial loans is discontinued
      when in the judgment of management the collection of principal or
      interest is doubtful.

                                      F-9
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Loans (concluded)

      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 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.

      A loan is considered impaired when, based on current information and
      events, it is probable that the Bank 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 the fair value of the collateral.

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

      Allowance for loan losses

      The allowance for loan losses is established as losses are estimated to
      have occurred through a provision for loan losses charged to earnings.
      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 nature
      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 allocated, general and unallocated components.
      The allocated 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 collateral
      value 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.

                                     F-10
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Servicing

      Servicing assets are recognized as separate assets when rights are
      acquired through purchase or through sale of financial assets. For sales
      of mortgage loans, a portion of the cost of originating the loan is
      allocated to the servicing right based on relative fair value. Fair value
      is based on a valuation model that calculates the present value of
      estimated future net servicing income. Capitalized servicing rights are
      reported in other assets and are amortized into non-interest income in
      proportion to, and over the period of, the estimated future net servicing
      income of the underlying financial assets. Servicing assets are evaluated
      for impairment based upon the fair value of the rights as compared to
      amortized cost. Impairment is determined by stratifying rights by
      predominant characteristics, such as interest rates and terms. Fair value
      is based upon discounted cash flows using market-based assumptions.
      Impairment is recognized through a valuation allowance for an individual
      stratum, to the extent that fair value is less than the capitalized
      amount for the stratum.

      Premises and equipment

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

      Retirement plan

      The compensation cost of an employee's pension benefit is recognized on
      the projected unit credit method over the employee's approximate service
      period. The aggregate cost method is utilized for funding purposes.

                                     F-11
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      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 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. The Company has elected to
      continue with the accounting methodology in Opinion No. 25. Stock options
      issued under the Company's stock option plan have no intrinsic value at
      the grant date, and under Opinion No. 25 no compensation cost is
      recognized for them. (Also see recent accounting pronouncement.)

      The following table illustrates the effect on net income (loss) and
      earnings (loss) per share if the Company had applied the fair value
      recognition provisions of SFAS No. 123 to stock-based employee
      compensation.

                                                       Years Ended September 30,
                                                       -------------------------
                                                          2006          2005
                                                         ------        -----

      Net income (loss)                  As reported     $  (42)       $ 898
                                         Pro forma       $  (48)       $ 872

      Basic earnings (loss) per share    As reported     $(0.03)       $0.58
                                         Pro forma       $(0.03)       $0.56

      Diluted earnings (loss) per share  As reported     $(0.03)       $0.57
                                         Pro forma       $(0.03)       $0.55

                                     F-12
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      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 based on debt
      service payments. Other ESOP shares are excluded from earnings per share
      calculations. 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.

      Advertising costs

      All advertising costs are expensed as incurred.

      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 that arose
      before 1987 is a permanent difference for which there is no recognition
      of a deferred tax liability. However, the allowance for loan losses
      maintained for financial reporting purposes is treated as a temporary
      difference with allowable recognition of a related deferred tax asset, if
      it is deemed realizable.

      Earnings per common share

      Basic earnings per share represents income available to common
      stockholders divided by the weighted-average number of common shares
      outstanding during the period. Diluted earnings per share reflects
      additional common shares that would have been outstanding if dilutive
      potential common shares had been issued, as well as any adjustment to
      income that would result from the assumed issuance. Potential common
      shares that may be issued by the Company relate solely to outstanding
      stock options and are determined using the treasury stock method. For the
      year ended September 30, 2006, 30,290 outstanding stock option shares
      were anti-dilutive as the Company had recorded a net loss for the year.
      For the year ended September 30, 2005, there were no anti-dilutive
      potential common shares. Anti-dilutive potential common shares are
      excluded from dilutive earnings per share calculations.

                                     F-13
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Earnings per common share (concluded)

      Earnings per common share for the year ended September 30, 2006 and 2005
      has been computed based on the following:

<TABLE>
<CAPTION>
                                                                 2006          2005
                                                               ---------     ---------

      <S>                                                      <C>           <C>
      Average number of common shares outstanding              1,562,323     1,553,046
      Effect of dilutive options                                       -        18,158
                                                               ---------     ---------
      Average number of common shares outstanding
       used to calculate diluted earnings per common share     1,562,323     1,571,204
                                                               =========     =========
</TABLE>

      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
      securities available for sale are reported in accumulated comprehensive
      income (loss) in the consolidated balance sheet, such items, along with
      net income, are components of comprehensive income.

      The components of the change in accumulated other comprehensive income
      (loss) and related tax effects are as follows:

                                                       Years Ended September 30,
                                                       -------------------------
                                                          2006        2005
                                                          ----       -------

      Change in net unrealized holding gains (losses)
       on securities available for sale                   $87        $(1,252)
      Reclassification adjustment for gains
       realized in income                                  (3)           (59)
                                                          ----       -------
                                                           84         (1,311)

      Tax effect                                          (29)           438
                                                          ----       -------

      Net-of-tax amount                                   $55        $  (873)
                                                          ====       =======

                                     F-14
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Recent accounting pronouncements

      Share-based payments

      On December 16, 2004, the Financial Accounting Standards Board ("FASB")
      issued SFAS No. 123R, "Share-Based Payment," which is an Amendment of
      FASB Statement Nos. 123 and 95. SFAS No. 123R changes, among other
      things, the manner in which share-based compensation, such as stock
      options, will be accounted for by public companies. SFAS 123R will be
      effective for public companies that file as small business issuers as of
      the beginning of the annual reporting period that begins after December
      15, 2005. For public companies, the cost of employee services received in
      exchange for equity instruments including options and similar awards
      generally will be measured at fair value at the grant date. The grant
      date fair value will be estimated using option-pricing models adjusted
      for the unique characteristics of those options and instruments, unless
      observable market prices for the same or similar options are available.
      The cost will be recognized over the requisite service period, often the
      vesting period. The change in accounting will replace existing
      requirements under SFAS No. 123, "Accounting for Stock-Based
      Compensation," and will eliminate the ability to account for share-based
      compensation transactions using APB Opinion No. 25, "Accounting for Stock
      Issued to Employees," which does not require companies to expense options
      if the exercise price is equal to the trading price at the date of grant.
      This Statement is not expected to have a material impact on the Company's
      consolidated financial statements.

      Servicing of financial assets

      In March 2006, the FASB issued Statement No. 156, "Accounting for
      Servicing of Financial Assets," which amends FASB Statement No. 140. This
      Statement requires that all separately recognized servicing rights be
      initially measured at fair value, if practicable. For each class of
      separately recognized servicing assets and liabilities, this Statement
      permits an entity to choose either of the following subsequent
      measurement methods: (1) amortize servicing assets or liabilities in
      proportion to and over the period of estimated net servicing income or
      net servicing loss, or (2) report servicing assets or liabilities at fair
      value at each reporting date and report changes in fair value in earnings
      in the period in which the changes occur. This Statement also requires
      additional disclosures for all separately recognized servicing rights,
      and is effective for new transactions occurring and for subsequent
      measurement at the beginning of an entity's first fiscal year that begins
      after September 15, 2006. This Statement is not expected to have a
      material impact on the Company's consolidated financial statements.

                                     F-15
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Recent accounting pronouncements (continued)

      Income taxes

      In July 2006, the FASB issued Financial Accounting Standards
      Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income
      Taxes." FIN 48 clarifies the accounting for uncertainty in income taxes
      recognized in an enterprises' financial statements in accordance with
      FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes
      a recognition threshold and measurement attributable for the financial
      statement recognition and measurement of a tax position taken or expected
      to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in
      interim periods, disclosures and transitions. FIN 48 is effective for
      fiscal years beginning after December 15, 2006. This Interpretation is
      not expected to have a material impact on the Company's consolidated
      financial statements.

      Endorsement Split-Dollar Life Insurance Arrangements

      The Company has entered into agreements with its Trustees and certain
      executives whereby the Company will pay a death benefit at the lesser of
      (1) an amount based on salary at the date of death, or (2) the amount the
      Company receives as beneficiary of certain life insurance policies on the
      individual minus the policies' cash surrender values. The Company is the
      sole owner of the life insurance policies and may cancel the insurance in
      its sole discretion, which would result in termination of any future
      death benefit, or terminate the agreement to provide death benefits at
      any time. No liability has been recognized on the consolidated balance
      sheet for such death benefits. In September 2006, the Emerging Issues
      Task Force reached a consensus on Issue No. 06-4, "Accounting for
      Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements." As a result, effective for
      fiscal years beginning after December 15, 2007, the Company will be
      required to recognize a liability for future death benefits, and may
      choose to retroactively apply the accounting change to all periods
      presented, or to cumulatively adjust the financial statements as of the
      beginning of the year of adoption. Management is in the process of
      evaluating the impact of Issue No. 06-4 on the Company's consolidated
      financial statements.

                                     F-16
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

      Recent accounting pronouncements (concluded)

      Fair Value Measurement

      In September 2006, FASB issued Financial Standards No. 157, "Fair Value
      Measurement," which defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles and
      expands the disclosures about fair value measurement. This Statement was
      developed to provide guidance for consistency and comparability in fair
      value measurements and disclosures and applies under other accounting
      pronouncements that require or permit fair value measurements. This
      Statement is effective for financial statements issued for fiscal years
      beginning after November 15, 2007 and interim periods within those fiscal
      years. The Company is currently evaluating the impact this statement may
      have on the Company's consolidated financial statements.

      Defined Benefit Pension and Other Postretirement Plans

      In September 2006, the Financial Accounting Standards Board issued
      Statement No. 158, "Employers' Accounting for Defined Benefit Pension and
      Other Postretirement Plans". This Statement will require employers, such
      as the Company, to fully recognize the obligations associated with
      single-employer defined benefit pension, retiree healthcare and other
      postretirement plans in their financial statements. Specifically, the new
      standard requires an employer to (a) recognize on its balance sheet an
      asset for a plan's over-funded status or a liability for a plan's
      under-funded status, (b) measure a plan's assets and its obligations that
      determine its funded status as of the end of the employer's fiscal year,
      and (c) recognize changes in the funded status of a defined benefit
      postretirement plan in the year in which the changes occur.

      The requirement to recognize the funded status of a benefit plan and the
      disclosure requirements are effective for the Company at the end of its
      fiscal year ending September 30, 2007. The requirement to measure plan
      assets and benefit obligations as of the date of the employer's fiscal
      year-end balance sheet is effective for the Company's fiscal year ending
      September 30, 2009. Management is in the process of evaluating the impact
      of this Statement on the Company's consolidated financial statements.

2.    RESTRICTIONS ON CASH AND DUE FROM BANKS

      The Bank is required to maintain average balances on hand or with the
      Federal Reserve Bank. At September 30, 2006 and 2005, these reserve
      balances amounted to $825 and $1,015, respectively.

                                     F-17
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

3.    SECURITIES AVAILABLE FOR SALE

      The amortized cost and estimated fair value of securities available for
      sale, at September 30, 2006 and 2005, with gross unrealized gains and
      losses, is as follows:

<TABLE>
<CAPTION>
                                                          September 30, 2006
                                          ---------------------------------------------------
                                                          Gross          Gross
                                          Amortized     Unrealized     Unrealized      Fair
                                            Cost          Gains          Losses        Value
                                          ---------     ----------     ----------      -----
      <S>                                  <C>             <C>         <C>            <C>
      Government-sponsored enterprise
       obligations                         $31,323         $  5        $  (290)       $31,038
      Banking and finance obligations        6,119           21            (25)         6,115
      Mortgage-backed securities            24,741           40           (753)        24,028
      Other bonds and obligations            1,261            9             (9)         1,261
                                           -------         ----        -------        -------
            Total debt securities           63,444           75         (1,077)        62,442
      Marketable equity securities               1            -             (1)             -
                                           -------         ----        -------        -------

                                           $63,445         $ 75        $(1,078)       $62,442
                                           =======         ====        =======        =======

<CAPTION>
                                                          September 30, 2005
                                          ---------------------------------------------------
                                                          Gross          Gross
                                          Amortized     Unrealized     Unrealized      Fair
                                            Cost          Gains          Losses        Value
                                          ---------     ----------     ----------      -----

      <S>                                  <C>             <C>         <C>            <C>
      Government-sponsored enterprise
       obligations                         $27,917         $  3        $  (446)       $27,474
      Banking and finance obligations        7,801           26           (101)         7,726
      Mortgage-backed securities            25,597           71           (649)        25,019
      Other bonds and obligations            3,711           27            (17)         3,721
                                           -------         ----        -------        -------
            Total debt securities           65,026          127         (1,213)        63,940
      Marketable equity securities               1            -             (1)             -
                                           -------         ----        -------        -------

                                           $65,027         $127        $(1,214)       $63,940
                                           =======         ====        =======        =======
</TABLE>

                                     F-18
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SECURITIES AVAILABLE FOR SALE (continued)

      Proceeds from sales and calls of securities amounted to $833 and $4,318
      for the years ended September 30, 2006 and 2005, respectively. Gross
      realized gains amounted to $3 and $99, respectively. Gross realized
      losses amounted to $40 for the year ended September 30, 2005. There were
      no gross realized losses for the year ended September 30, 2006.

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

<TABLE>
<CAPTION>
                                                September 30, 2006        September 30, 2005
                                               ---------------------    ----------------------
                                               Amortized      Fair       Amortized      Fair
                                                 Cost         Value        Cost         Value
                                               ---------     -------     ---------     -------
      <S>                                       <C>          <C>          <C>          <C>
      Within 1 year                             $17,205      $17,074      $13,427      $13,375
      Over 1 year through 5 years                21,498       21,340       26,002       25,546
                                                -------      -------      -------      -------
                                                 38,703       38,414       39,429       38,921
      Mortgage and asset-backed securities       24,741       24,028       25,597       25,019
                                                -------      -------      -------      -------

                                                $63,444      $62,442      $65,026      $63,940
                                                =======      =======      =======      =======
</TABLE>

      At September 30, 2006 and 2005, a government-sponsored enterprise
      obligation with a carrying value of $1,000 and $1,003, respectively, and
      fair value of $982 and $1,005, respectively, was pledged to secure
      treasury, tax and loan deposits.

                                     F-19
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      SECURITIES AVAILABLE FOR SALE (concluded)

      Information pertaining to securities with gross unrealized losses at
      September 30, 2006 and 2005, aggregated by investment category and length
      of time that individual securities have been in a continuous loss
      position, follows:

<TABLE>
<CAPTION>
                                                      Less Than Twelve Months       Over Twelve Months
                                                      -----------------------     ----------------------
                                                        Gross                       Gross
                                                      Unrealized      Fair        Unrealized      Fair
                                                        Losses        Value         Losses        Value
                                                      ----------     -------      ----------     -------
      <S>                                                <C>         <C>            <C>          <C>
      September 30, 2006:

      Government-sponsored enterprise obligations        $  5        $ 2,995        $  285       $25,042
      Banking and finance obligations                       -              -            25         4,334
      Mortgage-backed securities                            1            115           752        18,372
      Other bonds and obligations                           -              -             9           751
                                                         ----        -------        ------       -------
            Total debt securities                           6          3,110         1,071        48,499
      Marketable equity securities                          -              -             1             -
                                                         ----        -------        ------       -------

      Total temporarily impaired securities              $  6        $ 3,110        $1,072       $48,499
                                                         ====        =======        ======       =======

      September 30, 2005:

      Government-sponsored enterprise obligations        $109        $ 8,310        $  337       $16,653
      Banking and finance obligations                       -              -           101         5,200
      Mortgage-backed securities                           47          3,823           602        18,595
      Other bonds and obligations                           -            500            17           762
                                                         ----        -------        ------       -------
            Total debt securities                         156         12,633         1,057        41,210
      Marketable equity securities
                                                            -              -             1             -
                                                         ----        -------        ------       -------

            Total temporarily impaired securities        $156        $12,633        $1,058       $41,210
                                                         ====        =======        ======       =======
</TABLE>

      At September 30, 2006, 76 debt securities have unrealized losses with
      aggregate depreciation of 2.05% from the Company's amortized cost basis.
      These unrealized losses relate principally to the interest rate
      environment. In analyzing an issuer's financial condition, management
      considers whether the securities are issued by the federal government or
      its agencies, whether downgrades by bond rating agencies have occurred,
      and industry analysts' reports. As management has the ability to hold
      these securities for the foreseeable future, no declines are deemed to be
      other than temporary.

                                     F-20
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

4.    LOANS

      A summary of the balances of loans follows:

<TABLE>
<CAPTION>
                                                                   September 30,
                                                               ---------------------
                                                                 2006         2005
                                                               --------     --------
      <S>                                                      <C>          <C>
      Mortgage loans:
        Fixed rate                                             $ 54,169     $ 57,953
        Variable rate                                           100,282      100,365
        Commercial                                               32,853       26,979
        Home equity lines-of-credit                              19,530       15,452
                                                               --------     --------
            Total mortgage loans                                206,834      200,749
                                                               --------     --------

      Other loans:
        Personal loans                                              265          198
        Deposit secured loans                                       212          312
        Home improvement loans                                       40            6
        Commercial lines-of-credit                                1,749          870
        Commercial installment                                    3,842        2,534
                                                               --------     --------
            Total other loans                                     6,108        3,920
                                                               --------     --------

            Total loans                                         212,942      204,669

      Due to borrowers on incomplete loans                       (3,360)      (4,287)
      Net deferred loan costs                                       721          620
      Net premiums on purchased loans and indirect lending          221          260
      Allowance for loan losses                                    (780)        (785)
                                                               --------     --------

            Loans, net                                         $209,744     $200,477
                                                               ========     ========
</TABLE>

      An analysis of the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                                             Years Ended September 30,
                                                             -------------------------
                                                                 2006         2005
                                                               --------     --------
      <S>                                                      <C>          <C>
      Balance at beginning of year                             $    785     $    950
      (Credit) provision for loan losses                            -           (173)
      Charge-offs                                                    (5)         -
      Recoveries                                                    -              8
                                                               --------     --------
      Balance at end of year                                   $    780     $    785
                                                               ========     ========
</TABLE>

                                     F-21
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      LOANS (concluded)

      The following is a summary of information pertaining to impaired and
      non-accrual loans:

                                                        September 30,
                                                        -------------
                                                        2006     2005
                                                        ----     ----

      Impaired loans without a valuation allowance      $ 10     $175

      Impaired loans with a valuation allowance          411        -
                                                        ----     ----

      Total impaired loans                              $421     $175
                                                        ====     ====

      Valuation allowance related to impaired loans     $147     $  -
                                                        ====     ====

      Total non-accrual loans                           $416     $175
                                                        ====     ====

      At September 30, 2006 and 2005, there were no loans past-due ninety days
      or more and still accruing.

                                                     Years Ended September 30,
                                                     -------------------------
                                                          2006       2005
                                                          ----       ----

      Average investment in impaired loans                $453       $191
                                                          ====       ====

      Interest income recognized on a cash basis
       on impaired loans                                  $ 54       $ 32
                                                          ====       ====

      No additional funds are committed to be advanced in connection with
      impaired loans.

5.    SERVICING

      The Bank has sold mortgage loans, without recourse, in the secondary
      mortgage market and has retained the servicing responsibility and
      receives fees for the services provided. Total loans serviced for others
      at September 30, 2006 and 2005 amounted to $11,537 and $14,673,
      respectively. Mortgage loans serviced for others are not included in the
      accompanying consolidated balance sheets.

      At September 30, 2006 and 2005, $99 and $113, respectively, of
      capitalized servicing rights are included in other assets. During the
      years ended September 30, 2006 and 2005, $26 and $114, respectively, of
      servicing rights were capitalized and $40 and $30, respectively, of
      servicing rights were amortized. The carrying value of servicing rights
      approximates fair value.

                                     F-22
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

6.    PREMISES AND EQUIPMENT

      A summary of the cost and accumulated depreciation of premises and
      equipment and their estimated useful lives follows:

                                            September 30,
                                         -------------------      Estimated
                                          2006        2005       Useful Lives
                                         -------     -------     ------------

      Premises:
        Land                             $ 1,200     $ 1,200
        Buildings                          5,720       5,159     5 - 40 years
       Equipment                           4,503       4,196      3-7 years
                                         -------     -------
                                          11,423      10,555
      Less accumulated depreciation       (4,863)     (4,461)
                                         -------     -------

                                         $ 6,560     $ 6,094
                                         =======     =======

      Depreciation expense for the years ended September 30, 2006 and 2005
      amounted to $487 and $482, respectively.

7.    DEPOSITS

      A summary of deposit balances, by type, is as follows:

                                                     September 30,
                                                 ---------------------
                                                   2006         2005
                                                 --------     --------

      Non-interest bearing accounts              $ 21,962     $ 22,245
      NOW accounts                                 15,547       17,800
      Regular and other savings accounts           64,797      101,826
      Money market deposit accounts                32,207        5,161
                                                 --------     --------
            Total non-certificate accounts        134,513      147,032
                                                 --------     --------

      Term certificates of $100,000 and over       24,110       18,598
      Term certificates less than $100,000         52,654       44,651
                                                 --------     --------
            Total certificate accounts             76,764       63,249
                                                 --------     --------

            Total deposits                       $211,277     $210,281
                                                 ========     ========

                                     F-23
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      DEPOSITS (concluded)

      A summary of certificates, by maturity, is as follows:

                                     September 30, 2006      September 30, 2005
                                    --------------------     ------------------
                                                Weighted                Weighted
                                                Average                 Average
                                    Amount        Rate       Amount       Rate
                                    ------      --------     ------     --------

      Within 1 year                 $59,798      4.28%       $44,371     2.97%
      Over 1 year through 3 years    14,380      4.21         17,831     3.46
      Over 3 years                    2,586      5.18          1,047     4.05
                                    -------                  -------

                                    $76,764      4.30%       $63,249     3.13%
                                    =======                  =======

8.    SHORT-TERM BORROWINGS

      There were no short-term borrowings at September 30, 2006. At September
      30, 2005, short-term borrowings consist of advances from the Federal Home
      Loan Bank of Boston ("FHLB") with original maturities of less than ninety
      days at a weighted average interest rate of 4.21%.

      The Bank also has a $2,999 available line of credit with the FHLB at an
      interest rate that adjusts daily. Borrowings under the line are limited
      to 2% of the Bank's total assets. All borrowings from the FHLB are
      secured by a blanket lien on qualified collateral, defined principally as
      75% of the carrying value of first mortgage loans on owner-occupied
      residential property. As of September 30, 2006 and 2005, there were no
      advances outstanding on the line of credit.

                                     F-24
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

9.    LONG-TERM BORROWINGS

      Long-term borrowings consist of Federal Home Loan Bank advances as
      follows:

                                                  Weighted Average Rate
      Maturing During        September 30,             September 30,
      the Year Ending     -------------------     ---------------------
       September 30,       2006        2005         2006        2005
      ---------------     -------     -------       ----        ----

           2006           $     -     $ 2,500          -%       2.91%
           2007             8,000       8,000       3.06        3.06
           2008             7,000       7,000       3.91        3.91
           2009*           15,500       7,000       4.56        3.81
           2010            18,500      15,000       4.63        4.56
           2011             8,500       6,500       4.81        4.62
                          -------     -------

                          $57,500     $46,000       4.33%       4.02%
                          =======     =======

      * Includes a $3,000,000 advance callable on October 2, 2006.

10.   INCOME TAXES

      Allocation of federal and state income taxes between current and deferred
      portions is as follows:

<TABLE>
<CAPTION>
                                                           Years Ended September 30,
                                                           -------------------------
                                                               2006         2005
                                                               ----         ----
      <S>                                                      <C>          <C>
      Current income tax provision:
        Federal                                                $  16        $291
        State                                                     23          22
                                                               -----        ----
                                                                  39         313
                                                               -----        ----

       Deferred income tax provision (benefit):
         Federal                                                (121)         51
         State                                                   (41)         17
                                                               -----        ----
                                                                (162)         68
                                                               -----        ----

            Total provision (benefit) for income taxes         $(123)       $381
                                                               =====        ====
</TABLE>

                                     F-25
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      INCOME TAXES (continued)

      The following is a reconciliation of the effective income tax rates and
      amounts in the consolidated statements of operations with the statutory
      federal income tax rates and amounts as follows:

<TABLE>
<CAPTION>
                                                           Years Ended September 30,
                                                    ---------------------------------------
                                                          2006                   2005
                                                    ------------------     ----------------
                                                    Amount      Rate       Amount     Rate
                                                    ------      ----       ------     ----

      <S>                                           <C>        <C>         <C>        <C>
      Statutory rate                                $ (56)     (34.0)%     $435       34.0%
      Increase (decrease) resulting from:
        State taxes, net of federal tax benefit       (12)      (7.3)        26        2.0
        Dividends received deduction                   (4)      (2.4)        (7)      (0.5)
        Officers' life insurance                      (55)     (33.3)       (57)      (4.4)
        Municipal income                              (11)      (6.7)       (19)      (1.5)
        Other                                          15        9.2          3        0.2
                                                    -----      -----       ----       ----

            Effective tax rates                     $(123)     (74.5)%     $381       29.8%
                                                    =====      =====       ====       ====
</TABLE>

      The components of the net deferred tax asset are as follows:

                                    September 30,
                                  -----------------
                                   2006       2005
                                  ------     ------

       Deferred tax asset:
         Federal                  $1,361     $1,239
         State                       357        307
                                  ------     ------
                                   1,718      1,546
                                  ------     ------

      Deferred tax liability:
        Federal                     (363)      (334)
        State                        (87)       (77)
                                  ------     ------
                                    (450)      (411)
                                  ------     ------

      Net deferred tax asset      $1,268     $1,135
                                  ======     ======

                                     F-26
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      INCOME TAXES (concluded)

      The tax effects of each item that give rise to deferred taxes are as
      follows:

<TABLE>
<CAPTION>
                                                                        September 30,
                                                                     ------------------
                                                                      2006        2005
                                                                     ------      ------

      <S>                                                            <C>         <C>
      Employee benefit plans                                         $  879      $  697
      Allowance for loan losses                                         392         397
      Net unrealized gain/loss on securities available for sale         344         373
      Depreciation and amortization                                     (42)        (54)
      Net deferred loan costs                                          (295)       (253)
      Other, net                                                        (10)        (25)
                                                                     ------      ------

      Net deferred tax asset                                         $1,268      $1,135
                                                                     ======      ======
</TABLE>

      A summary of the change in the net deferred tax asset is as follows:

<TABLE>
<CAPTION>
                                                            Years Ended September 30,
                                                            -------------------------
                                                              2006          2005
                                                             ------        ------

      <S>                                                    <C>           <C>
      Balance at beginning of year                           $1,135        $  765
      Deferred tax (provision) benefit                          162           (68)
      Deferred tax effect on net unrealized (gain)/loss
       on securities available for sale                         (29)          438
                                                             ------        ------

      Balance at end of year                                 $1,268        $1,135
                                                             ======        ======
</TABLE>

      The federal income tax reserve for loan losses at the Bank's base year
      amounted to $2,423. If any portion of the reserve is used for purposes
      other than to absorb loan losses, approximately 150% of the amount
      actually used (limited to the amount of the reserve) would be subject to
      taxation in the fiscal year in which used. As the Bank intends to use the
      reserve to only absorb loan losses, a deferred income tax liability of
      $994 has not been provided.

                                     F-27
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

11.   STOCKHOLDERS' EQUITY

      Minimum regulatory capital requirements

      The Company (on a consolidated basis) and the Bank are subject to various
      regulatory capital requirements administered by the federal banking
      agencies. Failure to meet minimum capital requirements can initiate
      certain mandatory, and possibly additional discretionary actions by
      regulators that, if undertaken, could have a direct material effect on
      the Company's and the Bank's consolidated financial statements. Under
      capital adequacy guidelines and the regulatory framework for prompt
      corrective action, the Company and the Bank must meet specific capital
      guidelines that involve quantitative measures of their 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 weightings, and other factors. Prompt corrective action
      provisions are not applicable to bank holding companies.

      Quantitative measures established by regulation to ensure capital
      adequacy require the Company and the Bank to maintain minimum amounts and
      ratios (set forth in the following table) of total and Tier 1 capital (as
      defined) to risk-weighted assets (as defined) and of Tier 1 capital (as
      defined) to average assets (as defined). Management believes, as of
      September 30, 2006 and 2005, that the Company and the Bank meet all
      capital adequacy requirements to which they are subject.

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

                                     F-28
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      STOCKHOLDERS' EQUITY (continued)

      Minimum regulatory capital requirements (concluded)

      The Company's and the Bank's actual and minimum required capital amounts
      and ratios as of September 30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                                                                        Minimum
                                                                                       To Be Well
                                                                   Minimum          Capitalized Under
                                                                 For Capital        Prompt Corrective
                                             Actual           Adequacy Purposes     Action Provisions
                                       ------------------     -----------------     -----------------
                                       Amount      Ratio      Amount      Ratio     Amount      Ratio
                                       -------     ------     -------     -----     -------     -----
      <S>                              <C>         <C>        <C>         <C>       <C>         <C>
      September 30, 2006:
        Total capital (to risk
         weighted assets)
          Consolidated                 $29,014     17.92%     $12,952     8.00%       N/A        N/A
          Bank                          28,627     17.78       12,878     8.00      $16,097     10.00%

        Tier 1 capital (to risk
         weighted assets)
          Consolidated                  28,228     17.44        6,476     4.00        N/A        N/A
          Bank                          27,841     17.30        6,439     4.00        9,658      6.00

        Tier 1 capital (to average
         assets)
          Consolidated                  28,228      9.46        11,937    4.00        N/A        N/A
          Bank                          27,841      9.38        11,869    4.00       14,836      5.00

      September 30, 2005:
        Total capital (to risk
         weighted assets)
          Consolidated                 $29,988     19.51%     $12,295     8.00%       N/A        N/A
          Bank                          29,518     19.22       12,286     8.00      $15,357     10.00%

        Tier 1 capital (to risk
         weighted assets)
          Consolidated                  29,203     19.00        6,147     4.00        N/A        N/A
          Bank                          28,733     18.71        6,143     4.00        9,214      6.00

        Tier 1 capital (to average
         assets)
          Consolidated                  29,203     10.18       11,480     4.00        N/A        N/A
          Bank                          28,733     10.09       11,387     4.00       14,234      5.00
</TABLE>

                                     F-29
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      STOCKHOLDERS' EQUITY (concluded)

      Restrictions on dividends, loans and advances

      Federal and state banking regulations place certain restrictions on
      dividends paid and loans or advances made by the Bank to the Company. The
      total amount of dividends which may be paid at any date is generally
      limited to the retained earnings of the Bank, and loans or advances are
      limited to 10% of the Bank's capital stock and surplus, as defined,
      (which for this purpose represents total capital as calculated under the
      risk-based capital guidelines) on a secured basis.

      At September 30, 2006 and 2005, the Bank's retained earnings available
      for the payment of dividends was $15,749 and $17,232, respectively.
      Accordingly, $12,878 and $12,286 of the Company's equity in the net
      assets of the Bank was restricted at September 30, 2006 and 2005,
      respectively. Funds available for loans or advances by the Bank to the
      Company amounted to $1,575 and $1,723 at September 30, 2006 and 2005,
      respectively.

      The Company and the Bank may not declare or pay dividends on, and the
      Company may not purchase any of its shares of, its 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.

                                     F-30
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

12.   EMPLOYEE BENEFIT PLANS

      Pension plan

      The Bank provides pension benefits for eligible employees through a
      defined benefit pension plan which is administered through the Savings
      Bank Employees Retirement Association ("SBERA"). Substantially all
      employees participate in the retirement plan on a non-contributing basis,
      and are fully vested after three years of service. Information pertaining
      to the activity in the plan is as follows:

<TABLE>
<CAPTION>
                                                           Plan Years Ended October 31,
                                                           ----------------------------
                                                              2006              2005
                                                             -------           ------
                                                           (Projected)
      <S>                                                    <C>               <C>
      Change in plan assets:
        Fair value of plan assets at beginning of year       $2,653            $2,693
        Actual gain on plan assets                              342               202
        Employer contribution                                   218               187
        Benefits paid                                          (311)             (429)
                                                             ------            ------
        Fair value of plan assets at end of year              2,902             2,653
                                                             ------            ------

      Change in benefit obligation:
        Benefit obligation at beginning of year               3,000             3,253
        Service cost                                            217               201
        Interest cost                                           173               187
        Actuarial gain                                          (51)             (212)
        Benefits paid                                          (311)             (429)
                                                             ------            ------
        Benefit obligation at end of year                     3,028             3,000
                                                             ------            ------

      Funded status                                            (126)             (347)
      Unrecognized net actuarial gain                          (350)             (181)
      Transition liability                                       14                18
                                                             ------            ------

      Accrued pension cost                                   $ (462)           $ (510)
                                                             ======            ======

      Accumulated benefit obligation                         $2,156            $2,070
                                                             ======            ======
</TABLE>

      At October 31, 2006 and 2005, the assumptions used to determine the
      benefit obligation are as follows:

                                             2006       2005
                                             ----       ----

      Discount rate                          5.75%      5.75%
      Rate of compensation increase          4.50%      4.50%

                                     F-31
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Pension plan (continued)

      The components of net periodic pension cost are as follows:

                                               Plan Years Ended October 31,
                                               ----------------------------
                                                  2006             2005
                                                  ----             ----
                                               (Projected)

      Service cost                                $ 217            $ 201
      Interest cost                                 173              187
      Expected return on plan assets               (214)            (215)
      Transition obligation                           4                2
      Recognized net actuarial loss (gain)          (11)               1
                                                  -----            -----

                                                  $ 169            $ 176
                                                  =====            =====

      Total pension expense for the years ended September 30, 2006 and 2005
      amounted to $185 and $184, respectively.

      For the plan years ended October 31, 2006 and 2005, actuarial assumptions
      used in accounting were as follows:

                                                              2006         2005
                                                              ----         ----
                                                           (Projected)

      Discount rate on benefit obligations                    5.75%        5.75%
      Expected long-term rate of return on plan assets        8.00         8.00
      Annual salary increases                                 4.50         4.50

      In general, the Bank has selected their assumption with respect to the
      long term rate of return based on prevailing yields on high quality fixed
      income investments increased by a premium for equity return expectations.

                                     F-32
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Pension plan (concluded)

      The Bank's pension plan weighted average asset allocation at September
      30, 2006 and 2005, are as follows:

                                              Percentage
                                            of Plan Assets
                                           at September 30,
                                           ----------------
      Asset Category                        2006       2005
      --------------                        ----       ----

      Fixed income                          36.5%      34.2%
      Equity securities                     63.5       65.8
                                           -----      -----

                                           100.0%     100.0%
                                           =====      =====

      SBERA offers a common and collective trust as the underlying investment
      structure for pension plans. The target allocation mix for the common and
      collective trust portfolio calls for an equity-based investment range
      from 55% to 75% of total portfolio assets. The Trustees of SBERA, through
      the Investment Committee, select investment managers for the common and
      collective trust portfolio. A professional investment advisory firm is
      retained by the Investment Committee to provide allocation analysis,
      performance measurement and to assist with manager searches. The overall
      investment objective is to diversify equity investments across a spectrum
      of investment types (e.g., small cap, large cap, international, etc) and
      styles (e.g., growth, value, etc.).

      The Bank expects to contribute $246 to its pension plan in fiscal 2007.

      Estimated future benefit payments, which reflects expected future
      service, as appropriate, are as follows:

                   Years Ending
                   October 31,                              Amount
                   ------------                             ------

                       2007                                 $  153
                       2008                                     23
                       2009                                     86
                       2010                                     86
                       2011                                  1,119
                     2012-2016                               1,168

                                     F-33
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Incentive compensation plan

      Management and employees of the Bank participate in an annual incentive
      compensation plan which is based on a percentage of the Bank's annual net
      profits (as defined) and other factors and objectives set forth and
      administered by the Bank's Executive Committee. Incentive compensation
      expense for the years ended September 30, 2006 and 2005 amounted to $38
      and $50, respectively.

      401(k) Plan

      The Bank has a 401(k) Plan whereby each employee reaching the age of 21
      and having completed at least three months of service, beginning with
      date of employment, automatically becomes a participant in the Plan.
      Employees may contribute up to 75% of their compensation subject to
      certain limits based on federal tax laws. The Bank matches 50% of the
      first 6% of an employee's compensation contributed to the Plan. All
      participants are fully vested. For the years ended September 30, 2006 and
      2005, expense attributable to the Plan amounted to $59 and $53,
      respectively.

      Supplemental retirement plans

      The Bank provides supplemental retirement benefits to certain executive
      officers and Directors. In connection with the supplemental retirement
      plans, the Bank has purchased life insurance contracts as a funding
      source. At September 30, 2006 and 2005, the Bank has accrued $973 and
      $854, respectively, relating to these plans. For the years ended
      September 30, 2006 and 2005, expenses attributable to the plans amounted
      to $271 and $114, respectively. Prior to fiscal 2005, the supplemental
      retirement liability for certain executive officers was based on the
      present value of the future payments and was accrued over the executive's
      employment. During 2005, a plan of deferred compensation ("Plan") was
      adopted which covers the executive officers. The previous agreements were
      terminated and new agreements were entered into under the Plan. The Plan
      is accounted for under SFAS No. 87 "Employers Accounting for Pensions".

                                     F-34
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Supplemental retirement benefits (continued)

      The funded status of the Plan is as follows:

                                                   Plan Years Ended
                                                    September 30,
                                                 --------------------
                                                  2006         2005
                                                 -------      -------

      Fair value of plan assets                  $     -      $     -
      Benefit obligation                           1,310        1,359
                                                 -------      -------
      Funded status                              $(1,310)     $(1,359)
                                                 =======      =======

      Accumulated benefit obligation             $ 1,206      $ 1,065
                                                 =======      =======

      Accrued supplemental pension cost          $   619      $   350
      Additional minimum liability                   587          715
                                                 -------      -------

      Accrued supplemental pension liability     $ 1,206      $ 1,065
                                                 =======      =======
      Intangible asset                           $   587      $   715
                                                 =======      =======

      The following assumptions were used to determine the benefit obligation
      and the net periodic pension cost at or for the years ended September 30,
      2006 and 2005:

                                             2006         2005
                                             ----         ----

      Discount rate                          5.50%        6.50%
      Rate of compensation increase          5.00%        5.00%

      The Company expects to contribute $537 to the Plan in fiscal 2007.

                                     F-35
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Supplemental retirement benefits (concluded)

      Estimated future benefit payments, which reflect expected future
      services, as appropriate, are as follows:

                    Year Ending
                   September 30,                                Amount
                   -------------                            --------------
                                                            (In thousands)

                       2007                                    $  537
                       2011                                     1,013

      Expenses related to the Plan amounted to $269,000 and $222,000,
      respectively, for the years ended September 30, 2006 and 2005.

      The Company purchased bank-owned life insurance ("BOLI") on the lives of
      certain officers and has entered into agreements with certain executives
      to provide their beneficiaries certain benefits upon death from the
      proceeds of the BOLI. The BOLI is carried at cash surrender value on the
      balance sheet, which is less than the face value of the policy less
      benefits to be paid to beneficiaries.

      Deferred compensation plan

      The Company has adopted an Officers' Deferred Compensation Plan whereby
      qualified officers may elect to defer all or a portion of their salary.
      The Company pays monthly interest on amounts deferred at an interest rate
      that is determined annually.

      Employees' stock ownership plan

      The Company established an ESOP for the benefit of each eligible employee
      that has reached the age of 21 and has completed at least 1,000 hours of
      service in the previous twelve-month period. In addition, the Company
      provided a loan to the ESOP which was used to purchase 8%, or 44,200
      shares, of the shares sold to the public in the Company's stock offering.
      The loan bears interest equal to 8% and provides for annual payments of
      principal and interest for 15 years.

                                     F-36
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Employees' stock ownership plan (concluded)

      At September 30, 2006, the remaining principal balance is payable as
      follows:

                   Years Ending
                   September 30,                             Amount
                   -------------                            --------

                       2007                                 $ 25,593
                       2008                                   27,640
                       2009                                   29,852
                       2010                                   32,240
                       2011                                   34,819
                    Thereafter                               169,450
                                                            --------

                                                            $319,594
                                                            ========

      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 by the ESOP which are held in a suspense account for allocation
      among the members as the loans are paid. Total compensation expense
      applicable to the ESOP amounted to $79 and $83 for the years ended
      September 30, 2006 and 2005, respectively.

      Shares held by the ESOP include the following:

                                          September 30,
                                        -----------------
                                         2006       2005
                                        ------     ------

      Allocated                         17,682     14,735
      Committed to be released           2,210      2,210
      Unallocated                       24,308     27,255
                                        ------     ------

                                        44,200     44,200
                                        ======     ======

      Cash dividends received on allocated shares are allocated to members and
      cash dividends received on shares held in suspense are applied to repay
      the outstanding debt of the ESOP.

      The fair market value of unallocated shares at September 30, 2006 and
      2005 was $662 and $763, respectively.

                                     F-37
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (continued)

      Stock option plan

      A summary of the status of the Company's stock option plan for the years
      ended September 30, 2006 and 2005 is presented below:

<TABLE>
<CAPTION>
                                                     2006                     2005
                                             --------------------     --------------------
                                                         Weighted                 Weighted
                                                         Average                  Average
                                                         Exercise                 Exercise
                                             Shares       Price       Shares      Price
                                             ------      --------     ------      --------
      <S>                                    <C>          <C>         <C>          <C>
      Fixed Options:
        Outstanding at beginning of year     28,500       $11.27      33,900       $11.38
        Granted                               2,790        25.50           -
        Forfeited                                 -                     (200)       10.31
        Exercised                            (1,000)       10.31      (5,200)       12.05
                                             ------                   ------

        Outstanding at end of year           30,290       $12.61      28,500       $11.27
                                             ======                   ======

      Options exercisable at year-end        26,100       $10.66      19,880       $10.31
      Weighted-average fair value of
       options granted during the year       $ 9.45                        -
</TABLE>

      The fair value of each option grant when applicable is estimated on the
      date of grant using the Black-Scholes option-pricing model. The
      assumptions used for grants during the year ended September 30, 2006 were
      a dividend yield of .94%, expected life of 10 years, expected volatility
      of 20.94% and a risk-free interest rate of 4.92%.

                                     F-38
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      EMPLOYEE BENEFIT PLANS (concluded)

      Stock option plan (concluded)

      Information pertaining to stock options outstanding at September 30, 2006
      is as follows:

<TABLE>
<CAPTION>
                                               Options Outstanding                 Options Exercisable
                                     ----------------------------------------   --------------------------
                                                      Weighted
                                                       Average       Weighted                     Weighted
                                                      Remaining      Average                      Average
                                       Number        Contractual     Exercise       Number        Exercise
            Exercise Price           Outstanding        Life          Price       Exercisable      Price
      --------------------------     -----------     -----------     --------     -----------     --------

                <S>                    <C>            <C>             <C>           <C>            <C>
                $10.31                 25,400         4.0 years       $10.31        25,400         $10.31
                 23.25                  2,100         5.0              23.25           700          23.25
                 25.50                  2,790         9.6              25.50             -
                                       ------                                       ------

      Outstanding at end of year       30,290         4.6 years                     26,100
                                       ======                                       ======
</TABLE>

      Recognition and retention plan

      On January 25, 2001, the Company's stockholders approved the Company's
      adoption of the Westborough Financial Services, Inc. 2001 Recognition and
      Retention Plan (the "RRP"), which allows the Company to grant restricted
      stock awards ("Awards") to certain officers, employees and outside
      directors. The RRP is authorized to acquire no more than 22,139 shares of
      Common stock in the open market. Shares generally vest at a rate of 20%
      per year with the first vesting period ending April 30, 2002. There were
      no Awards granted during the years ended September 30, 2006 and 2005. The
      aggregate purchase price of all shares acquired by the RRP has been
      reflected as a reduction of stockholders' equity and amortized to
      compensation expense as the Company's employees and directors become
      vested in their stock awards. Compensation expense relating to the RRP
      amounted to $47 and $79 for the years ended September 30, 2006 and 2005,
      respectively. Compensation expense is based on the fair value of common
      stock on the purchase date.

                                     F-39
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

13.   COMMITMENTS AND CONTINGENCIES

      In the normal course of business, there are outstanding commitments and
      contingencies which are not reflected in the accompanying consolidated
      balance sheets.

      Loan commitments

      The Bank 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, which involve elements of credit and interest rate risk in excess
      of the amount recognized in the accompanying consolidated balance sheets.
      The contract amount of these instruments reflects the extent of
      involvement the Bank has in these particular classes of financial
      instruments.

      The Bank's exposure to credit loss is represented by the contractual
      amount of the instruments. The Bank uses the same credit policies in
      making commitments as it does for on-balance sheet instruments.

      At September 30, 2006 and 2005, financial instruments whose contract
      amounts represent credit risk consist of:

                                                        2006        2005
                                                       -------     -------

      Commitments to grant loans                       $ 4,666     $12,094
      Unadvanced funds on home equity and personal
       lines-of-credit                                  16,846      14,810
      Unadvanced funds on commercial loans and
       lines-of-credit                                   1,875       1,978

      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.
      Unadvanced funds on lines-of-credit have fixed expiration dates and may
      expire without being drawn upon. Therefore, the total commitment amount
      does not necessarily represent future cash requirements. The Bank
      evaluates each customer's creditworthiness on a case-by-case basis.
      Except for commercial lines-of-credit, these financial instruments are
      secured by mortgage liens on real estate.

                                     F-40
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      COMMITMENTS AND CONTINGENCIES (concluded)

      Employment and change in control agreements

      The Company and the Bank have entered into employment agreements with its
      President and Chief Financial Officer which generally provide for a base
      salary and the continuation of certain benefits currently received. The
      employment agreements require payments for the remaining base salary due
      to the employee for the remaining term of the agreement and the
      contributions that would have been made on the employee's behalf to any
      employee benefit plans of the Company and the Bank for certain reasons
      other than cause, including a "change in control" as defined in the
      agreement. However, such employment may be terminated for cause, as
      defined, without incurring any continuing obligations.

      Contingencies

      Various legal claims may arise from time to time and, in the opinion of
      management, these claims will have no material effect on the Company's
      consolidated financial statements.

14.   RELATED PARTY TRANSACTIONS

      In the ordinary course of business, the Bank has granted loans to its
      Directors. At September 30, 2006 and 2005, the amount of such loans,
      which exceeded $60 in the aggregate to each related party, was
      approximately $2,405 and $1,776, respectively. Such loans are made in the
      ordinary course of business at the Bank's normal credit terms, including
      interest rate and collateral requirements, and do not represent more than
      a normal risk of collection. During the years ended September 30, 2006
      and 2005, total principal additions were $1,312 and $129, respectively,
      and total principal payments were $683 and $85, respectively.

15.   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. Certain financial
      instruments and all nonfinancial instruments are excluded from disclosure
      requirements. Accordingly, the aggregate fair value amounts presented may
      not necessarily represent the underlying fair value of the Company.

                                     F-41
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

      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 cash and due
            from banks, federal funds sold and short-term investments
            approximate fair value.

            Securities available for sale: Fair values for securities available
            for sale 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.

            Federal Home Loan Bank Stock: The carrying amount approximates fair
            value based on the redemption provisions of the Federal Home Loan
            Bank.

            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 other types of 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 for non-performing loans are estimated
            using discounted cash flow analyses or underlying collateral
            values, where applicable.

            Deposits: The fair values for non-certificate accounts are, by
            definition, equal to the amount payable on demand at the reporting
            date (i.e., their carrying amounts). Fair values for certificate
            accounts 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.

            Short-term borrowings and long-term borrowings: The fair value is
            based upon the Company's current incremental borrowing rate for a
            similar advance.

            Accrued interest: The carrying amounts of accrued interest
            approximate fair value.

            Off-balance sheet instruments: Fair values for off-balance sheet
            lending com-mitments 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
            estimated fair value of off-balance sheet financial instruments at
            September 30, 2006 and 2005, was immaterial.

                                     F-42
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)

      The carrying amounts and related estimated fair values of the Company's
      financial instruments are as follows:

<TABLE>
<CAPTION>
                                                           September 30,
                                          -----------------------------------------------
                                                  2006                      2005
                                          ---------------------     ---------------------
                                          Carrying       Fair       Carrying       Fair
                                           Amount       Value        Amount       Value
                                          --------     --------     --------     --------
      <S>                                 <C>          <C>          <C>          <C>
      Financial assets:
        Cash and cash equivalents         $  8,317     $  8,317     $  8,974     $  8,974
        Securities available for sale       62,442       62,442       63,940       63,940
        Federal Home Loan Bank stock         3,376        3,376        2,966        2,966
        Loans, net                         209,744      205,691      200,477      200,780
        Accrued interest receivable          1,368        1,368        1,181        1,181

      Financial liabilities:
        Deposits                           211,277      210,898      210,281      209,984
        Short-term borrowings                    -            -        4,000        4,000
        Long-term borrowings                57,500       56,758       46,000       45,542
</TABLE>

                                     F-43
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

16.   CONDENSED FINANCIAL STATEMENTS OF WESTBOROUGH FINANCIAL SERVICES, INC.

                                                              September 30,
                                                           -------------------
      BALANCE SHEETS                                        2006        2005
      --------------                                       -------     -------

      Assets
      ------

      Cash and due from bank                               $   537     $   667
      Short-term investments                                   425         359
                                                           -------     -------
            Total cash and cash equivalents                    962       1,026
      Investment in subsidiary                              27,075      27,230
      Loan receivable - ESOP                                   320         343
      Other assets                                              26           4
                                                           -------     -------

            Total assets                                   $28,383     $28,603
                                                           =======     =======

      Liabilities and Stockholders' Equity
      ------------------------------------

      Stockholders' equity                                 $28,383     $28,603
                                                           -------     -------

            Total liabilities and stockholders' equity     $28,383     $28,603
                                                           =======     =======

                                                              Years Ended
                                                             September 30,
                                                           -----------------
      STATEMENTS OF OPERATIONS                              2006       2005
      ------------------------                             ------     ------

      Income:
        Interest on short-term investments                 $  16       $   9
        Interest on loan - ESOP                               26          28
                                                           -----       -----
            Total income
                                                              42          37
      Operating expenses                                     318         161
                                                           -----       -----
      Loss before income taxes and equity in
       undistributed net income of subsidiary               (276)       (124)
      Income tax benefit                                     (94)        (42)
                                                           -----       -----
      Loss before undistributed net income
       of subsidiary                                        (182)        (82)
      Equity in undistributed net income of subsidiary       140         980
                                                           -----       -----

            Net (loss) income                              $ (42)      $ 898
                                                           =====       =====

                                     F-44
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                 (Dollars in thousands, except per share data)

      CONDENSED FINANCIAL STATEMENTS OF WESTBOROUGH FINANCIAL SERVICES, INC.
      (concluded)

                                                                 Years Ended
                                                                September 30,
                                                               ----------------
      STATEMENTS OF CASH FLOWS                                  2006      2005
      ------------------------                                 ------    ------

      Cash flows from operating activities:
        Net (loss) income                                      $  (42)   $  898
        Adjustments to reconcile net income to net
         cash used by operating activities:
          (Increase) decrease in other assets                     (22)       58
          Equity in undistributed earnings of subsidiary         (140)     (980)
                                                               ------    ------
            Net cash used by operating activities                (204)      (24)
                                                               ------    ------

      Cash flows from investing activities:
        Principal paydowns received on ESOP loan                   23        22
                                                               ------    ------
            Net cash provided by investing activities              23        22
                                                               ------    ------

      Cash flows from financing activities:
        Intercompany cash transfer                                500         -
        Dividends paid                                           (383)     (382)
                                                               ------    ------
            Net cash provided (used) by financing activities      117      (382)
                                                               ------    ------

      Net change in cash and cash equivalents                     (64)     (384)

      Cash and cash equivalents at beginning of year            1,026     1,410
                                                               ------    ------

      Cash and cash equivalents at end of year                 $  962    $1,026
                                                               ======    ======

                                     F-45
<PAGE>

<TABLE>
<CAPTION>
                                        WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                                           (Dollars in thousands, except per share data)

17.   QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

                                                                       Years Ended September 30,
                                      -------------------------------------------------------------------------------------------
                                                         2006                                            2005
                                      -------------------------------------------     -------------------------------------------
                                      Fourth       Third      Second       First      Fourth       Third      Second       First
                                      Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter     Quarter
                                      -------     -------     -------     -------     -------     -------     -------     -------

<S>                                   <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Interest and dividend income          $ 3,738     $ 3,611     $ 3,584     $ 3,489     $ 3,324     $ 3,173     $ 3,080     $ 2,987
Interest expense                        1,884       1,761       1,676       1,520       1,262       1,113         983         814
                                      -------     -------     -------     -------     -------     -------     -------     -------

Net interest income                     1,854       1,850       1,908       1,969       2,062       2,060       2,097       2,173
(Credit) provision for loan losses          -           -           -           -           -           -         (48)       (125)
                                      -------     -------     -------     -------     -------     -------     -------     -------

Net interest income, after (credit)
 provision for loan losses              1,854       1,850       1,908       1,969       2,062       2,060       2,145       2,298

Gain on securities, net                     3           -           -           -          10           -          47           2
All other income                          180         200         231         256         191         338         254         221
Operating expenses                      2,109       1,962       2,436       2,109       2,143       2,136       2,045       2,025
                                      -------     -------     -------     -------     -------     -------     -------     -------

Income (loss) before income taxes         (72)         88        (297)        116         120         262         401         496

Provision (benefit) for income taxes      (50)          -         (99)         26          19          91         114         157
                                      -------     -------     -------     -------     -------     -------     -------     -------

Net income (loss)                     $   (22)    $    88     $  (198)    $    90     $   101     $   171     $   287     $   339
                                      =======     =======     =======     =======     =======     =======     =======     =======

Earnings (loss) per common share:
  Basic                               $ (0.01)    $  0.06     $ (0.13)    $  0.06     $  0.06     $  0.11     $  0.18     $  0.22
                                      =======     =======     =======     =======     =======     =======     =======     =======
  Diluted                             $ (0.01)    $  0.06     $ (0.13)    $  0.06     $  0.06     $  0.11     $  0.18     $  0.22
                                      =======     =======     =======     =======     =======     =======     =======     =======
</TABLE>

Differences from the consolidated statements of operations due to rounding.

                                     F-46
<PAGE>

              WESTBOROUGH FINANCIAL SERVICES, INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

                 (Dollars in thousands, except per share data)

18.   SUBSEQUENT EVENT

      On November 13, 2006, the Company, the Bank and Westborough Bancorp, MHC
      entered into an Agreement and Plan of Merger with Assabet Valley Bancorp
      and Hudson Savings Bank. Under the terms of the agreement, the mutual
      holding company structure of Westborough Bancorp, MHC will be eliminated
      and the Bank will merge with Hudson Savings Bank. The stockholders of the
      Company, other than Westborough Bancorp, MHC, will receive $35.00 in cash
      in exchange for each share of common stock. The transaction is expected
      to be completed in the spring of 2007 and is subject to shareholder
      approval and various regulatory approvals.

                                     F-47
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent consolidated financial statements reporting a
change of accountants and/or reporting disagreements on any matter of
accounting principle or financial statement disclosure.

ITEM 8A. CONTROLS AND PROCEDURES

      Management, including the Company's President and Chief Executive Officer
and Senior Vice President, Treasurer and Clerk, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report. Based upon that evaluation, the Company's President and Chief Executive
Officer and Senior Vice President, Treasurer and Clerk concluded that the
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act is (i) recorded, processed, summarized and reported as and when
required and (ii) accumulated and communicated to management, including the
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding disclosure.

                                      53
<PAGE>

      There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or that
is reasonably likely to materially affect, the Company's internal control over
financial reporting.

ITEM 8B. OTHER INFORMATION

      None.


PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

      The information relating to directors and executive officers of the
Company is incorporated herein by reference to the Company's Proxy Statement
for the 2007 Annual Meeting of Shareholders.

ITEM 10. EXECUTIVE COMPENSATION

      The information relating to executive compensation is incorporated herein
by reference to the Company's Proxy Statement for the 2007 Annual Meeting of
Shareholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Company's
Proxy Statement for the 2007 Annual Meeting of Shareholders.

      The following table sets forth the aggregate information of the Company's
equity compensation plans in effect as of September 30, 2006.

<TABLE>
<CAPTION>
                           ---------------------------------------------------------------------------------
                                                                                  Number of securities
                           Number of securities                                  remaining available for
                               to be issued           Weighted-average            future issuance under
                             upon exercise of        exercise price of          equity compensation plans
                           outstanding options,     outstanding options,     (excluding securities reflected
Plan category              warrants and rights      warrants and rights        in column (a)) see note(1)
-------------              ---------------------------------------------------------------------------------
                                   (a)                      (b)                            (c)
<S>                               <C>                      <C>                            <C>
Equity compensation
 plans approved
 by security holders              30,290                   $10.66                         13,237

Equity compensation
 plans not approved by
 security holders                  None                     None                           None
                                  ------                                                  ------

    Total                         30,290                   $10.66                         13,237
                                  ======                                                  ======
</TABLE>

Note (1) This amount represents 10,458 and 2,779 shares remaining to be issued
from the 2001 Stock Option Plan and the 2001 Recognition and Retention Plan,
respectively.

                                      54
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

      The information relating to certain relationships and related
transactions is incorporated herein by reference to the Company's Proxy
Statement for the 2007 Annual Meeting of Shareholders.

ITEM 13. EXHIBITS

      The following exhibits are either filed as part of this report or are
incorporated herein by reference:

2.1         Plan of Reorganization from Mutual Savings Bank to Mutual Holding
            Company and Stock Issuance Plan of Westborough Savings Bank*

3.1         Articles of Organization of Westborough Financial Services, Inc.*

3.2         Bylaws of Westborough Financial Services, Inc.*

3.3         Articles of Organization of The Westborough Bank*

3.4         Bylaws of The Westborough Bank*

3.5         Charter of Westborough Bancorp, MHC*

3.6         Bylaws of Westborough Bancorp, MHC*

3.7         Amendment to Article IV of the Articles of Organization of
            Westborough Financial Services, Inc. filed on December 26, 2000 as
            Exhibit A to the Proxy Statement (File No. 000-27997) is
            incorporated herein by reference.

4.1         Articles of Organization of Westborough Financial Services, Inc.
            (See Exhibit 3.1)

4.2         Bylaws of Westborough Financial Services, Inc. (See Exhibit 3.2)

4.3         Form of Stock Certificate of Westborough Financial Services, Inc.*

10.1(a)     Form of Employee Stock Ownership Plan of Westborough Financial
            Services, Inc.*

10.1(a)1    Amendment No. 2 to Employee Stock Ownership Plan of Westborough
            Financial Services, Inc. ***

10.1(a)2    Amendment No. 3 to Employee Stock Ownership Plan of Westborough
            Financial Services, Inc. ****

10.2        Form of Executive Employment Agreement, by and between Joseph F.
            MacDonough and Westborough Financial Services, Inc.*

10.3        Form of Executive Employment Agreement, by and between John L.
            Casagrande and Westborough Financial Services, Inc.*

                                      55
<PAGE>

10.4        Westborough Financial Services, Inc. 2001 Stock Option Plan filed
            on December 26, 2000 as Exhibit C to the Proxy Statement (File No.
            000-27997) is incorporated herein by reference.

10.5        Westborough Financial Services, Inc. 2001 Recognition and Retention
            Plan filed on December 26, 2000 as Exhibit D to the Proxy Statement
            (File No. 000-27997) is incorporated herein by reference.

10.6        Form of Officers' Deferred Compensation Plan of Westborough
            Financial Services, Inc.**

10.7        Form of Supplemental Executive Retirement agreement.#

10.8        Benefit Restoration Plan of Westborough Financial Services, Inc.##

10.9        Form of Amendment to Supplemental Executive Retirement
            Agreement.###

14.1        Code of Ethics of Senior Financial Officers filed as Exhibit 14.1
            to the Company's Annual Report on Form 10KSB for the fiscal year
            ended September 30, 2003 is incorporated herein by reference.

21.1        Subsidiaries of the Registrant.*

23.1        Independent Registered Public Accounting Firm's Consent

31.1        Certificates of the CEO and CFO pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002

32.1        Certificates of the CEO and CFO pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002

*     Incorporated herein by reference to the Registration Statement on Form
      SB-2 (Registration No. 333-80075), as filed with the Securities and
      Exchange Commission on June 4, 1999, as amended.

**    Incorporated by reference to the Company's Form 10-KSB for the year ended
      September 30, 2001, as filed with the Securities and Exchange Commission
      on December 28, 2001.

***   Incorporated by reference to the Company's Form 10-KSB for the year ended
      September 30, 2003, as filed with the Securities and Exchange Commission
      on December 29, 2003.

****  Incorporated by reference to the Company's Form 8-K filed with the
      Securities and Exchange Commission on September 2, 2005.

#     Incorporated by reference to the Company's Form 8-K filed with the
      Securities and Exchange Commission on December 29, 2005.

##    Incorporated by reference to the Company's Form 8-K filed with the
      Securities and Exchange Commission on January 26, 2006.

###   Incorporated by reference to the Company's Form 8-K filed with the
      Securities and Exchange Commission on December 22, 2006.

                                      56
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information relating to principal accountant fees and services is
incorporated herein by reference to the Company's Proxy Statement for the 2007
Annual Meeting of Shareholders.

                                      57
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                       WESTBOROUGH FINANCIAL SERVICES, INC.

                                       By: /s/ Joseph F. MacDonough
                                           -------------------------------------
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Name                              Title                        Date
----                              -----                        ----

/s/ James E. Tashjian             Chairman of the Board of     December 29, 2006
-------------------------------   Directors
James E. Tashjian

/s/ Joseph F. MacDonough          President, Chief Executive   December 29, 2006
-------------------------------   Officer and Director
Joseph F. MacDonough              (Principal Executive and
                                  Operating Officer)

/s/ James N. Ball                 Director                     December 29, 2006
-------------------------------
James N. Ball

/s/ Nelson P. Ball                Director                     December 29, 2006
-------------------------------
Nelson P. Ball

/s/ Edward S. Bilzerian           Director                     December 29, 2006
-------------------------------
Edward S. Bilzerian

/s/ Nancy M. Carlson              Director                     December 29, 2006
-------------------------------
Nancy M. Carlson

/s/ David E. Carlstrom            Director                     December 29, 2006
-------------------------------
David E. Carlstrom

/s/ John L. Casagrande            Senior Vice President,       December 29, 2006
-------------------------------   Treasurer, Clerk and
John L. Casagrande                Director (Principal
                                  Financial and Accounting
                                  Officer)

/s/ Benjamin H. Colonero, Jr.     Director                     December 29, 2006
-------------------------------
Benjamin H. Colonero, Jr.

/s/ Jeffrey B. Leland             Director                     December 29, 2006
-------------------------------
Jeffrey B. Leland

/s/ Paul F. McGrath               Director                     December 29, 2006
-------------------------------
Paul F. McGrath

                                      58
<PAGE>

Name                              Title                        Date
----                              -----                        ----

/s/ Charlotte C. Spinney          Director                     December 29, 2006
-------------------------------
Charlotte C. Spinney

/s/ Phyllis A. Stone              Director                     December 29, 2006
-------------------------------
Phyllis A. Stone

                                      59