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, 2005

[ ]   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
     Westborough, Massachusetts                         01581
(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. [X]

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, 2005 were
$13,627,000.

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 6, 2005 was $12,017,114.

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 16, 2005,
the registrant had 1,594,774 shares of common stock, par value $0.01 per
share, outstanding.

                    Documents incorporated by reference.

Portions of the registrant's annual report to shareholders for the fiscal
year ended September 30, 2005, attached hereto as Exhibit 13.1, are
incorporated by reference in Part II of this Form 10-KSB.

Portions of the registrant's proxy statement for the annual meeting of
shareholders to be held on January 26, 2006, and to be filed pursuant to
Regulation 14A within 120 days after registrant's fiscal year ended
September 30, 2005, are incorporated by reference in Part III of this Form
10-KSB.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]


<PAGE>


                              TABLE OF CONTENTS

                                                                          Page
                                                                          ----

FORWARD LOOKING STATEMENTS                                                 (i)

PART I                                                                      1
  ITEM 1.  DESCRIPTION OF BUSINESS                                          1
  ITEM 2.  DESCRIPTION OF PROPERTY                                         37
  ITEM 3.  LEGAL PROCEEDINGS                                               38
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             38

PART II                                                                    38
  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS        38
  ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION       38
  ITEM 7.  FINANCIAL STATEMENTS                                            38
  ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE                             39
  ITEM 8A. CONTROLS AND PROCEDURES                                         39
  ITEM 8B. OTHER INFORMATION                                               39

PART III                                                                   39
  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
           PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT      39
  ITEM 10. EXECUTIVE COMPENSATION                                          40
  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT AND RELATED STOCKHOLDER MATTERS                      40
  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                  40
  ITEM 13. EXHIBITS                                                        40
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                          42
  SIGNATURES                                                               43
  CERTIFICATIONS                                                           46


<PAGE>


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 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 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.


<PAGE>  i


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 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."

      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 Depositors 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, 2005.

      At September 30, 2005, total assets were $291.5 million, deposits were
$210.3 million and total stockholders' equity was  $28.6 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 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.


<PAGE>  1


      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:

      *     continue to focus on expanding its residential lending and
            retail banking franchise, and increasing the number of
            households served within its market area;
      *     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;
      *     expand its branch network to increase its market share;
      *     increase the use of alternative delivery channels, such as
            Internet and telephone banking; and
      *     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.


<PAGE>  2


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,
                               --------------------------------------------------------------------------------------------------
                                      2005                2004                2003                2002                2001
                               --------------------------------------------------------------------------------------------------
                                         Percent             Percent             Percent             Percent             Percent
                                Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total   Amount   of Total
                               --------------------------------------------------------------------------------------------------
                                                                    (Dollars in thousands)


                            <c>       <c>       <c>       <c>       <c>       <c>       <c>       <c>       <c>       <c>
Real estate loans:
  Fixed rate mortgages         $ 57,953   28.31%   $ 64,310   38.51%   $ 65,170   44.84%   $ 47,599   35.01%   $ 53,431   39.42%
  Variable rate mortgages       100,365   49.04%     64,788   38.81%     48,287   33.23%     54,096   39.78%     55,859   41.21%
  Commercial                     26,979   13.18%     23,313   13.96%     17,290   11.90%     20,092   14.78%     13,149    9.70%
  Home equity lines-of-credit    15,452    7.55%     11,295    6.77%     10,303    7.09%      8,792    6.47%      6,931    5.11%
                               --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
      Total real estate loans   200,749   98.08%    163,706   98.05%    141,050   97.06%    130,579   96.04%    129,370   95.44%
                               --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
Consumer loans:
  Personal                          198    0.10%        322    0.19%        564    0.39%        983    0.72%      1,196    0.88%
  Deposit secured                   312    0.15%        297    0.18%        358    0.24%        509    0.37%        652    0.48%
  Home improvement                    6    0.00%         85    0.05%         68    0.05%        171    0.13%        759    0.56%
                               --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
      Total consumer loans          516    0.25%        704    0.42%        990    0.68%      1,663    1.22%      2,607    1.92%
                               --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
Commercial loans:
  Commercial lines-of-credit        870    0.43%        965    0.58%      1,824    1.25%      2,549    1.87%      1,783    1.32%
  Commercial installment          2,534    1.24%      1,579    0.95%      1,461    1.01%      1,182    0.87%      1,795    1.32%
                               --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
      Total commercial loans      3,404    1.67%      2,544    1.53%      3,285    2.26%      3,731    2.74%      3,578    2.64%
                               --------  ------    --------  ------    --------  ------    --------  ------    --------  ------
Total loans                     204,669  100.00%    166,954  100.00%    145,325  100.00%    135,973  100.00%    135,555  100.00%
                                         ======              ======              ======              ======              ======
Adjusted by:
Due to borrowers on
 incomplete loans                (4,287)             (1,507)             (3,550)             (2,866)               (480)
Net deferred loan costs             620                 389                 223                 161                 136
Net premiums on purchased
 loans and indirect lending         260                 402                 470                 538                 662
Allowance for loan loss            (785)               (950)               (911)               (926)               (916)
                               --------            --------            --------            --------            --------
Net loans                      $200,477            $165,288            $141,557            $132,880            $134,957
                               ========            ========            ========            ========            ========
</TABLE>


<PAGE>  3


      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, 2005, loans on one- to four-family residential properties
accounted for 77.4% 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 $359,650. The average size of the
Bank's first mortgage loans originated during the year ended September 30,
2005 and the year ended September 30, 2004 was $282,034 and $244,431,
respectively. The average size of the Bank's first mortgage loans was
$186,958 and $156,435 at September 30, 2005 and September 30, 2004,
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 $8.1 million and $5.5 million for years ended
September 30, 2005 and September 30, 2004, respectively. Such loans,
however, continue to be serviced by the Bank.

      The Bank's originations of first mortgage loans amounted to $63.6
million in fiscal year 2005, $49.9 million in fiscal year 2004 and $53.7
million in fiscal year 2003. 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 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


<PAGE>  4


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 $46.6
million and $33.4 million of one-to-four family ARM loans in the years ended
September 30, 2005 and 2004, respectively. At September 30, 2005,  49.0% of
the Bank's total loans consisted of ARM loans, up from 38.8% at September
30, 2004.

      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 $15.5 million,
or 7.6% of total loans at September 30, 2005, 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 1/2 of 1% of the outstanding principal balance of the loan.
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, 2005, commercial real
estate mortgage loans totaled $27.0 million, or 13.2% of total loans. These
loans are generally secured by office buildings, condominiums, retail
establishments and churches 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 seven-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 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-value ratio of 80% for the acquisition of the property and
75% for refinancing of the property.


<PAGE>  5


      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 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
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% of the
completed appraised value. Construction loans generally have up to twelve
months with a fixed 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, 2005, $516 thousand, or  0.25 % 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, 2005, the Bank's personal loans totaled $198
thousand , or 0.10% 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 the term desired by
the regular savings account customer. Deposit secured loans totaled $312
thousand, or  0.15% of total loans at September 30, 2005.


<PAGE>  6


      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 and tax 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, 2005, $3.4
million, or 1.67%, 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 years or less.
Substantially all commercial loans have 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 one's primary residence).

      The Bank's commercial services are administered by the Bank's loan
department. The Bank has three 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 an experienced commercial loan assistant and a senior credit analyst
with extensive national and international banking experience. The Bank also
intends to add additional qualified lending and support staff and enhanced
information systems as the size and complexity of the commercial portfolio
change.

      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 intangible assets and/or inventory 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.


<PAGE>  7


<TABLE>
<CAPTION>

                                                            For the Year Ended September 30,
                                                --------------------------------------------------------
                                                  2005        2004        2003        2002        2001
                                                --------------------------------------------------------


                                             <c>         <c>         <c>         <c>         <c>
Loans, net:

  Balance outstanding beginning of year         $165,288    $141,557    $132,880    $134,957    $113,559
                                                --------    --------    --------    --------    --------

Originations and Purchased Loans:
  Mortgage loans:
    Residential                                   63,612      49,850      53,729      30,003      20,892
    Commercial                                     5,109       8,890       1,164       8,866       7,023
    Home equity lines-of-credit                   15,290      10,032       9,488       8,658       7,326
                                                --------    --------    --------    --------    --------
      Total mortgage originations                 84,011      68,772      64,381      47,527      35,241
  Commercial loans                                 6,552       7,552       2,728       1,704       5,085
  Consumer loans                                     807         656       1,453       2,123       1,956
                                                --------    --------    --------    --------    --------
      Total originations                          91,370      76,980      68,562      51,354      42,282
                                                --------    --------    --------    --------    --------

  Purchased loans                                      0           0           0           0       9,484
                                                --------    --------    --------    --------    --------

Less:
  Principal repayments, unadvanced
   funds and other, net                          (48,213)    (47,688)    (55,835)    (53,421)    (30,326)
  Sale of mortgage loans, principal balance       (8,133)     (5,522)     (4,065)          0           0
  Credit (provision) for loan losses                 173         (70)          0          (8)        (48)
  Net loan charge-off (recoveries)                    (8)         31          15          (2)          6
  Transfers to foreclosed real estate                  0           0           0           0           0
                                                --------    --------    --------    --------    --------
      Total deductions                           (56,181)    (53,249)    (59,885)    (53,431)    (30,368)
                                                --------    --------    --------    --------    --------
  Net loan activity                               35,189      23,731       8,677      (2,077)     21,398
                                                --------    --------    --------    --------    --------
      Loans, net, end of year                   $200,477    $165,288    $141,557    $132,880    $134,957
                                                ========    ========    ========    ========    ========
</TABLE>


<PAGE>  8


      The following table presents, as of September 30, 2005, the dollar
amount of all loans due after September 30, 2006, and whether such loans
have fixed or adjustable interest rates.

<TABLE>
<CAPTION>

                                  Due After September 30, 2006
                               -----------------------------------
                                Fixed      Adjustable      Total
                               -----------------------------------
                                         (In Thousands)


                            <c>          <c>           <c>
Mortgage loans                 $57,181      $92,763       $149,944
Commercial mortgages loans      16,773        7,211         23,984
Home equity loans                2,238            -          2,238
Consumer loans                     285            -            285
Commercial loans                 2,483            -          2,483
                               -------      -------       --------
                               $78,960      $99,974       $178,934
                               =======      =======       ========
</TABLE>


<PAGE>  9


      Loan Commitments. The Bank generally makes loan commitments to
borrowers not exceeding 45 days. At September 30, 2005, the Bank had $12.1
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, 2005 represented
$14.8 million and $2.0 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 committee or the executive committee. Residential mortgage loan
requests for one-to four-family homes in amounts up to $1,000,000 may be
approved by the loan committee. One-to four-family mortgage requests greater
than $1,000,000 require approval by the executive committee. Commercial and
Industrial Loan (Commercial Real Estate, Term loans, Lines-of-credit, etc.)
requests up to $1,000,000 may be approved by the loan committee. Commercial
and Industrial loan requests exceeding $1,000,000 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 an
origination fee on new mortgage loans. The origination fees, net of direct
origination costs, are deferred and amortized into income over the life of
the loan. At September 30, 2005, the amount of net deferred loan origination
costs was $620 thousand.

      Loan Maturity and Re-pricing. The following table sets forth certain
information as of September 30, 2005 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.


<PAGE>  10


<TABLE>
<CAPTION>

                                                                          At September 30, 2005
                                         ---------------------------------------------------------------------------------------
                                                  Mortgage Loans (1)
                                         -------------------------------------      Home
                                                       Variable     Commercial     Equity
                                         Fixed Rate      Rate        Mortgage     Lines-of    Consumer    Commercial     Total
                                         Mortgages     Mortgages      Loans       -Credit      Loans        Loans        Loans
                                         ---------------------------------------------------------------------------------------
                                                                              (In thousands)


                                       <c>          <c>           <c>          <c>           <c>         <c>         <c>
Amounts due:
  Within one year                         $   772      $  7,602      $ 2,995      $13,214       $231        $  921      $ 25,735
  One to three years                        2,329        10,141        9,853            0         93           369        22,785
  Over three to five years                    379        17,245        4,610            0        151           869        23,254
  Over five to ten years                    5,393        62,796        8,425          720         16         1,234        78,584
  Over ten to twenty years                 36,378           253        1,096        1,518          0             0        39,245
  Over twenty years                        12,702         2,328            0            0         25            11        15,066
                                          -------      --------      -------      -------       ----        ------      --------
      Loans, gross                        $57,953      $100,365      $26,979      $15,452       $516        $3,404       204,669
                                          =======      ========      =======      =======       ====        ======
  Due to borrowers on
   Incomplete loans                                                                                                       (4,287)
  Net deferred loan origination costs                                                                                        620
  Net premium on purchased
   loans and indirect lending                                                                                                260
  Allowance for loan losses                                                                                                 (785)
                                                                                                                        --------
  Loans, net                                                                                                            $200,477
                                                                                                                        ========

<FN>
--------------------
<F1>  Net of unadvanced loan funds
</FN>
</TABLE>

      Non-Performing Assets, Asset Classification and Allowances for Losses.
The Senior Lending Officer, 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, 2005, the
Bank had 4 loans which were 90 days or more past due which totaled $175
thousand. The Bank also had $1.2 million in assets classified as substandard
and $361 thousand classified as special mention at September 30, 2005. No
assets were classified as doubtful or loss.

      The Bank had $175 thousand and $121 thousand non-performing assets at
September 30, 2005 and 2004, respectively.


<PAGE>  11


      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,
                                                               -----------------------------------------
                                                               2005     2004     2003     2002     2001
                                                               ----     ----     ----     ----     ----
                                                                        (Dollars in thousands)


                                                            <c>      <c>      <c>      <c>      <c>
Non-accrual first mortgage loans                               $154     $ 42     $204     $140     $  0
Non-accrual consumer and other loans                             21       79      430        0        0
Accruing loans delinquent 90 days or more                         0        0        0        0        0
                                                               ----     ----     ----     ----     ----
Total non-performing and delinquent loans                       175      121      634      140        0
Foreclosed real estate, net                                       0        0        0        0        0
                                                               ----     ----     ----     ----     ----
Total non-performing assets and delinquent loans               $175     $121     $634     $140     $  0
                                                               ====     ====     ====     ====     ====

Non-performing and delinquent loans to total loans             0.09%    0.07%    0.45%    0.11%    0.00%
Non-performing assets and delinquent loans to total assets     0.06%    0.05%    0.25%    0.06%    0.00%
</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 $175 thousand of loans classified
as impaired at September 30, 2005. There were $300 thousand of loans
classified as impaired at September 30, 2004 and $814 thousand at September
30, 2003.

      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, 2005, 2004 and 2003, 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, 2005, 2004 and 2003.


<PAGE>  12


      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,
                                          --------------------------------------------------
                                           2005       2004       2003       2002      2001
                                           ----       ----       ----       ----      ----
                                                        (Dollars in thousands)


                                       <c>        <c>        <c>        <c>        <c>
Balance at beginning of year              $  950     $  911     $  926     $  916     $ 874
                                          ------     ------     ------     ------     -----
(Credit) provision for loan losses          (173)        70          0          8        48
                                          ------     ------     ------     ------     -----
Charge-off:
  Mortgage loans                               0          0          0          0         0
  Commercial Loans                             0        (33)         0          0         0
  Consumer loans                               0         (2)       (19)       (11)      (10)
                                          ------     ------     ------     ------     -----
      Total charge-offs                        0        (35)       (19)       (11)      (10)
Recoveries                                     8          4          4         13         4
                                          ------     ------     ------     ------     -----
Balance at end of year                    $  785     $  950     $  911     $  926     $ 916
                                          ======     ======     ======     ======     =====

Net charge-offs/(recoveries) for
 the year                                 $   (8)    $   31     $   15     $   (2)    $   6

Ratio of net charge-offs/(recoveries)
 to average loans outstanding
 during the year                          -0.004%     0.021%     0.011%    -0.001%    0.005%

Allowance for loan losses as a
 percent of total loans before the
 allowance for loan losses                  0.39%      0.57%      0.64%      0.69%     0.67%

Allowance for loan losses as a
 percent of non-performing loans          448.57%    785.12%    143.69%    661.43%     0.00%
</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.


<PAGE>  13


      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,
                         --------------------------------------------------------------------------------------------------------
                         2005                 2004                 2003                 2002                 2001
                         --------------------------------------------------------------------------------------------------------
                                   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 are in thousands)


                      <c>        <c>       <c>        <c>       <c>        <c>       <c>       <c>        <c>        <c>
Real estate-mortgage:
  Residential (1)        $    369    84.90%   $    280    84.09%   $    159    85.16%   $    133   81.25%    $    165    85.74%
  Commercial                  102    13.18%         89    13.96%        138    11.90%         41   14.78%          39     9.70%
Commercial                    292     1.67%        434     1.52%        487     2.26%        643    2.74%         606     2.64%
Consumer                        3     0.25%          4     0.42%         18     0.68%         24    1.22%          28     1.92%
Unallocated                    19     0.00%        143     0.00%        109     0.00%         85    0.00%          78     0.00%
                         --------             --------             --------             --------             --------
      Total Allowance
       for loan losses   $    785   100.00%   $    950   100.00%   $    911   100.00%   $    926   100.00%   $    916   100.00%
                         ========   ======    ========   ======    ========   ======    ========   ======    ========   ======

Gross Loans              $201,262             $166,238             $142,468             $133,806             $135,873
Allowance as % of Gross
 Loans                                0.39%                0.57%                0.64%               0.69%                 0.67%

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

      The allowance for loan loss was $785 thousand at September 30, 2005 as
compared to $950 thousand at September 30, 2004.

      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 increased by $89 thousand to $369 thousand at September 30,
2005 as compared to $280 thousand at September 30, 2004. The increase is
mainly a result of an increase of $33.4 million aggregate balances of
homogeneous loans in this group. Most of the $33.4 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


<PAGE>  14


mortgage payments have upon a borrower's capacity to pay debt. Such loss
characteristics, which 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 $13 thousand to $102 thousand at September 30,
2005 as compared to an allowance for loan loss of $89 thousand at September
30, 2004. The increase in the allowance for loan losses in this category was
due primarily to the $3.7 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 $142
thousand, to $292 thousand at September 30, 2005. The balance of loans in
this homogenous group increased slightly to $3.4 million at September 30,
2005 from $2.5 million at September 30, 2004.

      The allowance for loan loss allocated to consumer loans declined
slightly from September 30, 2004 to September 30, 2005 and primarily
reflects a decline in the balance of consumer loans. At September 30, 2005,
the balance of consumer loans was $516 thousand, as compared to $704
thousand at September 30, 2004.

      The allowance designated as unallocated was $19 thousand at September
30, 2005 as compared to an unallocated balance of $143 thousand at September
30, 2004. 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, 2005 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 of
securities to be held, liquidity and other factors. Massachusetts-chartered
savings banks have authority


<PAGE>  15


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, 2005, with the exception of securities of the Federal
agencies and corporations, 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, 2005 and September 30, 2004, the Bank's liquidity
ratio was 80.7% and 69.5%, 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, 2005,  the fair value of the Federal agency
securities portfolio totaled $27.5 million, or 90.1% of stockholders'
equity. This portfolio consists primarily of securities with maturities of
one to five years. Some of the agency debentures are callable and call
provisions vary following a minimum holding period. The Bank generally does
not purchase structured notes, and at September 30, 2005, there were no
structured notes in the Bank's portfolio.

      At September 30, 2005, the portfolio of other debt obligations,
excluding mortgage-backed securities, totaled $11.4 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, 2005, the Bank's mortgage-backed securities, all of
which were classified as available for sale, totaled $25.0 million, or 8.6%
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
federal agency 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


<PAGE>  16


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:

<TABLE>
<CAPTION>

                                               For the Year Ended September 30,
                                               ---------------------------------
                                                2005         2004         2003
                                               ---------------------------------
                                                     (Dollars In Thousands)


                                            <c>         <c>          <c>
Beginning balance                              $75,001     $ 88,840     $ 76,888
  Purchases                                      7,208       32,029       55,022
  Maturities                                    (3,700)      (6,790)      (4,955)
  Sales and calls                               (4,259)     (30,525)     (22,754)
  Principal repayments                          (5,634)      (6,285)     (14,788)
  Premium and (discount) amortization, net        (399)        (522)        (333)
  Recognition of expired options                     0            0            0
  Change in net unrealized gains/(losses)       (1,311)      (1,746)        (240)
  Write-down                                         0            0            0
                                               -------     --------     --------
Ending balance                                 $66,906     $ 75,001     $ 88,840
                                               =======     ========     ========
</TABLE>

      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,
                                       -------------------------------------------------------------------------
                                               2005                      2004                      2003
                                       -------------------------------------------------------------------------
                                       Amortized      Fair       Amortized      Fair       Amortized      Fair
                                         Cost         Value        Cost         Value        Cost         Value
                                       -------------------------------------------------------------------------
                                                                (Dollars in thousands)


                                     <c>          <c>          <c>          <c>          <c>          <c>
Debt securities:
  Federal agency obligations            $27,917      $27,474      $21,549      $21,514      $28,806      $29,295
  Banking and finance obligations         7,801        7,726       12,442       12,645       18,329       19,070
  Other bonds and obligations             3,711        3,721        5,299        5,433        7,030        7,358
                                        -------      -------      -------      -------      -------      -------
      Total debt securities              39,429       38,921       39,290       39,592       54,165       55,723
                                        -------      -------      -------      -------      -------      -------
Mortgage-backed and mortgage-
 related securities:
  FHLMC                                   8,079        7,866        9,866        9,816        7,609        7,674
  FNMA                                   16,218       15,866       21,620       21,602       19,435       19,719
  GNMA                                      319          316          427          423          628          630
  Other                                     981          971        1,122        1,119        1,380        1,394
                                        -------      -------      -------      -------      -------      -------
      Total mortgage-backed and
       mortgage-related securities       25,597       25,019       33,035       32,960       29,052       29,417
                                        -------      -------      -------      -------      -------      -------
Marketable equity securities                  1            0          410          407        2,403        2,450
FHLB stock                                2,966        2,966        2,042        2,042        1,250        1,250
                                        -------      -------      -------      -------      -------      -------
      Total Securities                  $67,993      $66,906      $74,777      $75,001      $86,870      $88,840
                                        =======      =======      =======      =======      =======      =======
</TABLE>


<PAGE>  17


      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,
                                    ----------------------------------------------------------------------------------------------
                                                 2005                            2004                            2003
                                    ----------------------------------------------------------------------------------------------
                                    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)


                                  <c>        <c>        <c>       <c>        <c>        <c>       <c>        <c>        <c>
Mortgage-backed and mortgage-
 related securities:
  FHLMC                              $ 8,079     31.44%    $ 7,866   $ 9,866     29.87%    $ 9,816   $ 7,609     26.19%    $ 7,674
  FNMA                                16,218     63.42%     15,866    21,620     65.44%     21,602    19,435     66.90%     19,719
  GNMA                                   319      1.26%        316       427      1.29%        423       628      2.16%        630
  Other                                  981      3.88%        971     1,122      3.40%      1,119     1,380      4.75%      1,394
                                     -------    ------     -------   -------    ------     -------   -------    ------     -------
      Total mortgage-backed and
       mortgage-related securities   $25,597    100.00%    $25,019   $33,035    100.00%    $32,960   $29,052    100.00%    $29,417
                                     =======    ======     =======   =======    ======     =======   =======    ======     =======

<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, 2005. Mortgage-
backed securities are presented by issuer. Yields on tax exempt obligations
were not computed on a tax equivalent basis.

<TABLE>
<CAPTION>

                                                                       September 30, 2005
                              ----------------------------------------------------------------------------------------------------
                                                  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)


                           <c>        <c>      <c>        <c>       <c>       <c>        <c>        <c>      <c>        <c>
Debt securities:
  Federal agency obligations  $ 6,953    3.66%    $20,521    3.65%     $    0    0.00%      $     0    0.00%    $27,474    3.65%
  Banking and finance
   obligations                  4,316    5.94%      3,410    5.78%          0    0.00%            0    0.00%      7,726    5.87%
  Other bonds and obligations   2,106    5.47%      1,615    4.75%          0    0.00%            0    0.00%      3,721    5.16%
                              -------             -------              ------               -------             -------
      Total debt securities    13,375    4.68%     25,546    4.00%          0    0.00%            0    0.00%     38,921    4.24%
                              -------             -------              ------               -------             -------
Mortgage-backed and mortgage-
 related securities
  FHLMC                             0    0.00%        260    5.44%      1,731    4.30%        5,875    4.09%      7,866    4.18%
  FNMA                              0    0.00%      3,679    4.88%        461    6.08%       11,726    4.40%     15,866    4.56%
  GNMA                              0    0.00%          0    0.00%          0    0.00%          316    3.51%        316    3.51%
  Other                             0    0.00%          0    0.00%          0    0.00%          971    3.89%        971    3.89%
                              -------             -------              ------               -------             -------
      Total mortgage-backed
       and mortgage-related
       securities                   0    0.00%      3,939    4.92%      2,192    4.67%       18,888    4.26%     25,019    4.40%
                              -------             -------              ------               -------             -------
Total                         $13,375    4.68%    $29,485    4.13%     $2,192    4.67%      $18,888    4.26%    $63,940    4.30%
                              =======             =======              ======               =======             =======
</TABLE>


<PAGE>  18


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, 2005 totaled $9.8
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 also 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 69.9% of total deposits at September 30, 2005. At September 30,
2005, certificates of deposit with remaining terms to maturity of less than
one year  represented 21.4% of total deposits at September 30, 2005.

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

<TABLE>
<CAPTION>

                                                  For the Years Ended September 30,
                                                  ----------------------------------
                                                    2005         2004         2003
                                                  ----------------------------------
                                                        (Dollars In Thousands)


                                               <c>          <c>          <c>
Beginning balance                                 $211,710     $215,898     $202,063
Net deposits                                        (4,407)      (6,512)      10,542
Interest paid on deposit accounts                    2,978        2,324        3,293
                                                  --------     --------     --------
Ending Balance                                    $210,281     $211,710     $215,898
                                                  ========     ========     ========
Total (decrease) increase in deposit accounts     $ (1,429)    $ (4,188)    $ 13,835
Percentage (decrease) increase                       -0.67%       -1.94%        6.85%
</TABLE>


<PAGE>  19


      At September 30, 2005, the Bank had $18.6 million in certificates of
deposit with balances of $100,000 and over maturing as follows:

<TABLE>
<CAPTION>

                                         At September 30, 2005
                                         ----------------------
                                                      Weighted
                                                      Average
                                         Amount         Rate
                                         ----------------------
                                         (Dollars in thousands)


                                      <c>           <c>
Maturity Period:
Three months or less                     $ 4,465       2.80%
Over three months through six months       3,004       2.90%
Over six months through 12 months          4,537       3.44%
Over 12 months                             6,592       3.67%
                                         -------
Total                                    $18,598       3.28%
                                         =======
</TABLE>

      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,
                                        ----------------------------------------------------------------------------------------
                                                    2005                          2004                          2003
                                        ----------------------------------------------------------------------------------------
                                                            Weighted                      Weighted                      Weighted
                                                  Percent   Average             Percent   Average             Percent   Average
                                                  of total  Nominal             of total  Nominal             of total  Nominal
                                         Amount   deposits    Rate     Amount   deposits    Rate     Amount   deposits    Rate
                                        ----------------------------------------------------------------------------------------
                                                                         (Dollars in thousands)


                                     <c>       <c>        <c>      <c>       <c>        <c>      <c>       <c>        <c>
Non-interest bearing accounts           $ 22,245   10.58%    0.00%    $ 25,131   11.87%    0.00%    $ 19,740    9.14%    0.00%
NOW accounts                              17,800    8.46%    0.13%      20,044    9.47%    0.10%      19,093    8.84%    0.10%
Savings accounts:
  Regular                                 35,735   16.99%    0.40%      39,932   18.86%    0.40%      44,103   20.43%    0.50%
  Tiered-rate                             66,091   31.44%    1.99%      72,242   34.12%    1.55%      73,525   34.06%    1.42%
                                        --------  ------              --------  ------              --------  ------
      Total savings accounts             101,826   48.43%    1.43%     112,174   52.99%    1.14%     117,628   54.49%    1.08%
                                        --------  ------              --------  ------              --------  ------
Money market deposit accounts              5,161    2.45%    3.19%       6,139    2.90%    1.00%       5,247    2.43%    1.00%
                                        --------  ------              --------  ------              --------  ------
      Total non-certificate accounts     147,032   69.92%    1.12%     163,488   77.22%    0.83%     161,708   74.90%    0.83%
                                        --------  ------              --------  ------              --------  ------
Certificates of deposit accounts:
  Due within 1 year                       44,371   21.10%    2.97%      34,183   16.15%    1.84%      42,544   19.71%    2.15%
  Over 1 year through 3 years             17,831    8.48%    3.46%      12,090    5.71%    2.63%      11,646    5.39%    2.82%
  Over 3 years                             1,047    0.50%    4.05%       1,949    0.92%    3.28%           0    0.00%    0.00%
                                        --------  ------              --------  ------              --------  ------
      Total certificate accounts          63,249   30.08%    3.12%      48,222   22.78%    2.08%      54,190   25.10%    2.29%
                                        --------  ------              --------  ------              --------  ------
      Total deposits                    $210,281  100.00%    1.72%    $211,710  100.00%    1.12%    $215,898  100.00%    1.19%
                                        ========  ======              ========  ======              ========  ======
</TABLE>


<PAGE>  20


      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 year, 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, 2005,
the Bank had outstanding advances from the FHLB of $50.0 million and had the
capacity to increase outstanding advances to $115.9 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.

<TABLE>
<CAPTION>

                                         At or for the Years Ended September 30,
                                         ---------------------------------------
                                              2005        2004        2003
                                         ---------------------------------------
                                                 (Dollars in thousands)


                                          <c>         <c>         <c>
Federal Home Loan Bank advances:
  Average balance outstanding                $32,125     $16,215     $9,500
  Maximum amount outstanding at any
   month-end during the year                 $50,000     $31,000     $9,500
  Balance outstanding at end of year         $50,000     $21,500     $9,500
  Weighted average interest rate
   during the year                              3.71%       3.94%      6.42%
  Weighted average interest rate
   end of year                                  4.08%       3.37%      5.36%
</TABLE>

      Of the FHLB advances outstanding at September 30, 2005, $4,000 of
these advances are short-term advances with original maturities of less than
one year at a weighted average interest rate of 4.21%. The average balance
outstanding was $3,109, the maximum balance outstanding at any month-end
during the year was $6,250 and the weighted average interest rate during the
year was 3.11%.


<PAGE>  21


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)                    2005           2004           2003
                                                             ----------------------------------------


                                                          <c>            <c>            <c>
Performance Ratios:
  Return on average assets                                        0.32%          0.46%          0.38%
  Return on average stockholders' equity                          3.11%          4.14%          3.39%
  Average stockholders' equity to average assets                 10.43%         11.10%         11.36%
  Stockholders' equity to assets at end of year                   9.81%         10.87%         11.21%
  Net interest rate spread (2)                                    2.99%          3.32%          3.24%
  Net interest margin (3)                                         3.25%          3.53%          3.52%
  Average interest-earning assets to average
   interest-bearing liabilities                                 116.44%        117.19%        116.40%
  Operating expenses as a percent of average assets               3.02%          3.05%          3.03%
  Efficiency ratio (4)                                           90.45%         83.81%         85.00%
Regulatory Capital Ratios: (5)
  Total risk-based capital                                       19.51%         20.97%         20.68%
  Tier 1 risk-based capital                                      19.00%         20.29%         20.02%
  Regulatory tier 1 leverage capital                             10.18%         10.79%         10.91%
Asset Quality Ratios:
  Non-performing loans as a percent of loans                      0.09%          0.07%          0.45%
  Non-performing assets as a percent of total assets              0.06%          0.05%          0.25%
  Allowance for loan losses as a percent of total loans
   before the allowance for loan losses                           0.39%          0.57%          0.64%
Number of:
  Full-service offices (6)                                           4              4              5
  Full-time equivalent employees                                    75             68             74
Share Data:
  Basic number of weighted average shares outstanding        1,553,046      1,541,927      1,530,003
  Dilutive number of weighted average shares outstanding     1,571,204      1,563,727      1,548,849
  Basic earnings per share                                       $0.58          $0.77          $0.63
  Dilutive earnings per share                                    $0.57          $0.76          $0.62
  Dividends declared per share                                   $0.24          $0.20          $0.20
  Dividend payout ratio (7)                                      41.99%         26.23%         32.07%

<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. Shaw's Supermarket branch closed
      in 2004.
<F7>  Dividend payout ratio represents dividends declared per share divided
      by dilutive earnings per share.
</FN>
</TABLE>


<PAGE>  22


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, 2005, the Bank had 67 full-time and 8 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, 2005, Eli Whitney had total assets of $43.9
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, 2005, The
Hundredth Corporation had total assets of $989 thousand. Its largest
investment consists of $958 thousand of land on which the Bank  constructed
its expanded Maple Avenue, Shrewsbury Branch office.


<PAGE>  23


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


<PAGE>  24


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 Bank Insurance
Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC")
and by the Depositors Insurance Fund. 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.

Financial Services Modernization Legislation

      The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "GLB Act") was signed into law on November 12, 1999. This federal
legislation was intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers.

      As a result of the GLB Act, bank holding companies that have elected
to be regulated as financial holding companies are now permitted to engage
in a wider variety of financial activities than permitted under prior law,
particularly with respect to insurance and securities activities. In
addition, in a change from prior law, financial holding companies are in a
position to be owned, controlled or acquired by any company engaged in
financially-related activities. On October 23, 2000, the MHC and the Company
elected to be regulated as financial holding companies.

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


<PAGE>  25


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.

      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 - 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 $50,000; (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


<PAGE>  26


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 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 BIF-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


<PAGE>  27


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 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, 2005:

<TABLE>
<CAPTION>

                                                                  As of September 30, 2005
                                         ---------------------------------------------------------------------------
                                                                                             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)


                          <c>         <c>         <c>         <c>         <c>             <c>         <c>
Total risk-based capital     Company     $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 risk-based capital    Company     $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 leverage capital      Company     $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%

<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, 2005, 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


<PAGE>  28


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. Pursuant to the Federal Deposit Insurance
Corporation Improvement Act (the "FDICIA"), the FDIC established a system
for setting deposit insurance premiums based upon the risks a particular
bank or savings association posed to its deposit insurance funds. Under the
risk-based deposit insurance assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending six months before
the assessment period. The three capital categories are (1) well
capitalized, (2) adequately capitalized and (3) undercapitalized. With
respect to the capital ratios, institutions are classified as well
capitalized, adequately capitalized or undercapitalized using ratios that
are substantially similar to the prompt corrective action capital ratios
discussed below. The FDIC also assigns an institution to a supervisory
subgroup based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC
determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds which may include information
provided by the institution's state supervisor.

      An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications to which
different assessment rates are applied or combinations of capital groups and
supervisory subgroups. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and
may not be disclosed. A bank's rate of deposit insurance assessments will
depend upon the category and subcategory to which the bank is assigned by
the FDIC. Any increase in insurance assessments could have an adverse effect
on the earnings of insured institutions, including the Bank. In addition,
legislation requires BIF-insured institutions like the Bank to assist in the
payment of the Financing Corporation (the "FICO") bonds.

      Under FDICIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. The Bank's management does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.

      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.

      Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded
its interpretations of Sections 23A and 23B of the FRA and replaced these
interpretations with Regulation W. Regulation W makes various changes to
existing law regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B
and exempting certain subsidiaries of state-chartered banks from the
restrictions of Sections 23A and 23B. Under Regulation


<PAGE>  29


W, all transactions entered into on or before December 12, 2002, which
either became subject to Sections 23A and 23B solely because of Regulation
W, and all transactions covered by Sections 23A and 23B, the treatment of
which will change solely because of Regulation W, became subject to
Regulation W on July 1, 2003.  All other covered affiliate transactions
became subject to Regulation W on April 1, 2003. The Federal Reserve Board
expects each depository institution that is subject to Sections 23A and 23B
to implement policies and procedures to ensure compliance with Regulation W.

      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.

      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. 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


<PAGE>  30


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."

      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


<PAGE>  31


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 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, 2005, the Bank's
investment in the common stock of the FHLB was $3.0 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.

      Federal Home Loan Bank System Modernization Act of 1999. Title 6 of
the GLBA, entitled the Federal Home Loan Bank System Modernization Act of
1999 ("FHLB Modernization Act"), has amended the FHLB Act by allowing for
voluntary membership and modernizing the capital structure and governance of
the FHLB system. The new capital structure established under the FHLB
Modernization Act set forth new leverage and risk-based capital requirements
based on permanence of capital. It also requires some minimum investment in
FHLB stock of all member entities. Capital includes retained earnings and
two forms of stock:  Class A stock redeemable within six months written
notice and Class B stock redeemable within five years written notice. The
FHLB Modernization Act also reduced the period of time in which a member
exiting the FHLB system must stay out of the system.

      Pursuant to regulations promulgated by the FHFB, as required by the
GLBA, 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


<PAGE>  32


maximum of $25,000,000, 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, 2005, 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, 2005, 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 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


<PAGE>  33


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 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


<PAGE>  34


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 USA PATRIOT Act, which gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information
sharing, and broadened anti-money laundering requirements. By way of
amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among 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, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:

      *     Pursuant to Section 352, all financial institutions must
            establish 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.

      *     Pursuant to Section 326, on May 9, 2003, the Secretary of the
            Department of the Treasury, in conjunction with other bank
            regulators, issued Joint Final Rules that provide for minimum
            standards with respect to customer identification and
            verification. These rules, which became effective on October 1,
            2003, require each financial institution to implement a written
            customer identification program appropriate for its size,
            location and type of business that includes certain minimum
            requirements.

      *     Section 312 requires 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) to establish
            appropriate, specific and where necessary, enhanced due
            diligence policies, procedures and controls designed to detect
            and report money laundering through these accounts. A final rule
            under Section 312 was issued by the Treasury Department on
            September 26, 2002.

      *     Section 318, which became effective December 26, 2001, prohibits
            financial institutions 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 requires financial institutions to take
            reasonable steps to ensure that correspondent accounts provided
            to foreign bankers are not being used to indirectly provide
            banking services to foreign shell banks.

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


<PAGE>  35


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:

      *     the creation of an independent accounting oversight board;

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

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

      *     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;

      *     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;

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

      *     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;

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

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

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

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

      *     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.


<PAGE>  36


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, 2005, these properties and leasehold
improvements owned by the Company and the Bank had an aggregate net book
value of $4.3 million.

<TABLE>
<CAPTION>

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

      
                       <c>            <c>             <c>
      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

<FN>
--------------------
<F1>  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.
</FN>
</TABLE>


<PAGE>  37


ITEM 3.  LEGAL PROCEEDINGS

      On October 14, 2004, a suit was filed in the Worcester Superior Court
of the Commonwealth of Massachusetts by Evelyn G. Birnie against Christos
Kyriazis and Tierre Verde Specialty Market, Inc., defendants, and Bank of
America, N.A., trustee. An amended complaint filed on July 1, 2005 by James
L. Birnie, Executor of the Estate of Evelyn G. Birnie, named Westborough
Bank (the "Bank") as an additional defendant. The Bank is the wholly-owned
subsidiary of Westborough Financial Services, Inc. (the "Registrant"). On
July 11, 2005, the Bank received a summons related to the suit.

      The amended suit alleges a fraudulent scheme by a former Bank employee
and defendant Kyriazis against Evelyn G. Birnie, a former customer of the
Bank, and asserts claims for breach of contract, breach of fiduciary duty,
conversion, negligence and unfair and deceptive acts by persons engaged in
trade or commerce. The amended suit alleges losses approximating $1,100,000
and seeks an unspecified amount in damages from the Bank. The amended suit
also seeks the imposition of a constructive trust on the defendants, and an
accounting by the defendants, as to all of plaintiff's funds which have come
into their possession.

      The Bank intends to vigorously defend the suit.

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,
2005.

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Information relating to the market for the Company's common equity,
related stockholder matters and payment of dividends by the Company appears
in the 2005 Annual Report to Shareholders, which is attached to this Form
10-KSB as Exhibit 13.1, and is incorporated herein by reference.

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

<TABLE>
<CAPTION>

                   High Price     Low Price     Average Price     Dividends per share
                   ------------------------------------------------------------------


                  <c>           <c>             <c>                   <c>
First Quarter        $32.00        $30.10          $30.98                $0.06
                   ------------------------------------------------------------------
Second Quarter       $32.00        $27.20          $29.44                $0.06
                   ------------------------------------------------------------------
Third Quarter        $27.20        $24.00          $24.79                $0.06
                   ------------------------------------------------------------------
Fourth Quarter       $29.19        $25.20          $27.77                $0.06
                   ------------------------------------------------------------------
</TABLE>

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

      The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operation" in the 2005
Annual Report to Shareholders, which is attached to this Form 10-KSB as
Exhibit 13.1, and is incorporated herein by reference.

ITEM 7.  FINANCIAL STATEMENTS

      The following information appearing in the Company's 2005 Annual
Report to Shareholders, which is attached to this Form 10-KSB as Exhibit
13.1, is incorporated herein by reference.

<TABLE>
<CAPTION>

      Annual Report Section                                       Pages in Annual Report
      ---------------------                                       ----------------------


<PAGE>  38


      
                                                              <c>
      Report of Independent Registered Public Accounting Firm          F-1

      Consolidated Balance Sheets as of
      September 30, 2005 and 2004                                      F-2

      Consolidated Statements of Income for the
      Years Ended September 30, 2005 and 2004                          F-3 to F-4

      Consolidated Statements of Changes in
      Stockholders' Equity for the Years Ended
      September 30, 2005 and 2004                                      F-5

      Consolidated Statements of Cash Flows for the
      Years Ended September 30, 2005 and 2004                          F-6 to F-7

      Notes to Consolidated Financial Statements                       F-8 to F-43
</TABLE>

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.

      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 AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT


<PAGE>  39


      The information relating to directors and executive officers of the
Company is incorporated  herein by reference to the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 26,
2006.

ITEM 10.  EXECUTIVE COMPENSATION

      The information relating to executive compensation is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on January 26, 2006.

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 Annual Meeting of Shareholders to be held on January
26, 2006.

      The following table sets forth the aggregate information of the
Company's equity compensation plans in effect as of September 30, 2005.

<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)


                               <c>                      <c>                           <c>
Equity compensation
 plans approved
 by security holders              28,500                   $11.27                        17,277

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

      Total                       28,500                   $11.27                        17,277
                                  ------                   ------                        ------

<FN>
Note (1)  This amount represents 13,448 and 3,829 shares remaining to be
      issued from the 2001 Stock Option Plan and the 2001 Recognition and
      Retention Plan, respectively.
</FN>
</TABLE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information relating to certain relationships and related
transactions is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 26,
2006.

ITEM 13.  EXHIBITS

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


<PAGE>  40


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.*

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.**

13.1        Annual Report of Westborough Financial Services, Inc.


<PAGE>  41


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

<FN>
*     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 Exchange Commission on September 2, 2005.
</FN>

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
Annual Meeting of Shareholders to be held on January 26, 2006.


<PAGE>  42


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.

<TABLE>
<CAPTION>

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


                                <c>                               <c>
/s/ James E. Tashjian              Chairman of the Board of          December 29, 2005
------------------------------     Directors
James E. Tashjian

/s/ Joseph F. MacDonough           President, Chief Executive        December 29, 2005
------------------------------     Officer and Director
Joseph F. MacDonough               (Principal Executive and
                                   Operating Officer)

/s/ James N. Ball                  Director                          December 29, 2005
------------------------------
James N. Ball

/s/ Nelson P. Ball                 Director                          December 29, 2005
------------------------------
Nelson P. Ball

/s/ Edward S. Bilzerian            Director                          December 29, 2005
------------------------------
Edward S. Bilzerian

/s/ Nancy M. Carlson               Director                          December 29, 2005
------------------------------
Nancy M. Carlson

/s/ David E. Carlstrom             Director                          December 29, 2005
------------------------------
David E. Carlstrom

/s/ John L. Casagrande             Senior Vice President,            December 29, 2005
------------------------------     Treasurer, Clerk and Director
John L. Casagrande                 (Principal Financial and
                                   Accounting Officer)

/s/ Benjamin H. Colonero, Jr.      Director                          December 29, 2005
------------------------------
Benjamin H. Colonero, Jr.

/s/ Jeffrey B. Leland              Director                          December 29, 2005
------------------------------
Jeffrey B. Leland

/s/ Paul F. McGrath                Director                          December 29, 2005
------------------------------
Paul F. McGrath


<PAGE>  43


/s/ Charlotte C. Spinney           Director                          December 29, 2005
------------------------------
Charlotte C. Spinney

/s/ Phyllis A. Stone               Director                          December 29, 2005
------------------------------
Phyllis A. Stone
</TABLE>


<PAGE>  44