UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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

For the transition period from                      to                     

Commission file number: 0-25251

CENTRAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Massachusetts	04-3447594
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
399 Highland Avenue, Somerville, Massachusetts	02144
(Address of principal executive offices)	(Zip Code)

(617) 628-4000

(Registrant’s telephone number, including area code)

N/A

     (Former name, former address and former fiscal year, if changed since last report)     

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o      Non-Accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ

Common Stock, $1.00 par value	1,639,951 shares
Class	Outstanding at November 3, 2006

CENTRAL BANCORP, INC.

Form 10-Q

Table of Contents

	Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at September 30, 2006 and March 31, 2006		1
Consolidated Statements of Income for the Three and Six Months Ended September 30, 2006 and 2005		2
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended September 30, 2006		3
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2006 and 2005		4
Notes to Unaudited Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		20
Part II. Other Information
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3. Defaults Upon Senior Securities		21
Item 4. Submission of Matters to a Vote of Security Holders		21
Item 5. Other Information		21
Item 6. Exhibits		21
Signatures
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO

Part I. Financial Information

Item 1. Financial Statements

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition

(Unaudited)

	September 30,			March 31,
(Dollars in Thousands)	2006			2006
ASSETS
Cash and due from banks	$	5,249		$	6,590
Short-term investments		4,665			8,673
Cash and cash equivalents		9,914			15,263
Certificates of deposit		642			627
Investment securities available for sale (amortized cost of $94,463 at September 30, 2006 and $99,159 at March 31, 2006)		93,582			97,195
Stock in Federal Home Loan Bank of Boston, at cost		6,318			8,300
The Co-operative Central Bank Reserve Fund		1,576			1,576
Total investments		101,476			107,071
Loans held for sale		—			45
Loans (Note 2)		434,700			415,318
Less allowance for loan losses		3,850			3,788
Net loans		430,850			411,530
Accrued interest receivable		2,555			2,678
Banking premises and equipment, net		4,920			3,870
Deferred tax asset, net		1,957			2,347
Goodwill, net		2,232			2,232
Other assets		1,536			1,612
Total assets	$	556,082		$	547,275
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits (Note 3)	$	388,747		$	393,413
Short-term borrowings		6			—
Federal Home Loan Bank advances		116,500			103,500
Subordinated debenture (Note 4)		5,258			5,258
ESOP Loan		2,337			2,532
Advanced payments by borrowers for taxes and insurance		1,371			1,277
Accrued expenses and other liabilities		1,762			2,106
Total liabilities		515,981			508,086
Commitments and Contingencies (Note 6)
Stockholders’ equity (Note 7):
Preferred stock $1.00 par value; authorized 5,000,000 shares; none issued or outstanding		—			—
Common stock $1.00 par value; authorized 15,000,000 shares; 1,590,951 shares issued at September 30, 2006 and 1,590,181 shares issued at March 31, 2006		2,033			2,033
Additional paid-in capital		2,952			2,938
Retained income		40,367			40,421
Accumulated other comprehensive loss (Note 5)		(588	)		(1,281	)
Unearned compensation – ESOP		(4,663	)		(4,922	)
Total stockholders’ equity		40,101			39,189
Total liabilities and stockholders’ equity	$	556,082		$	547,275

See accompanying notes to unaudited consolidated financial statements.

1

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Interest and dividend income:
Mortgage loans	$	6,630	$	6,087	$	12,771	$	11,972
Other loans		146		104		273		207
Short-term investments		121		53		216		66
Investments		1,344		1,327		2,470		2,694
Total interest and dividend income		8,241		7,571		15,730		14,939
Interest expense:
Deposits		2,877		1,507		5,409		2,859
Advances from Federal Home Loan Bank of Boston		1,329		1,718		2,557		3,441
Other borrowings		159		132		310		266
Total interest expense		4,365		3,357		8,276		6,566
Net interest and dividend income		3,876		4,214		7,454		8,373
Provision for loan losses		—		50		50		100
Net interest and dividend income after provision for loan losses		3,876		4,164		7,404		8,273
Non-interest income:
Deposit service charges		249		235		505		467
Net gains from sales of investment securities		116		96		228		213
Net gains on sales of loans		25		85		59		140
Other income		57		190		145		280
Total non-interest income		447		606		937		1,100
Non-interest expenses:
Salaries and employee benefits		2,177		2,374		4,356		4,440
Occupancy and equipment		543		381		1,047		763
Data processing fees		254		240		487		478
Professional fees		220		199		457		406
Advertising and marketing		100		161		322		344
Other expenses		493		450		964		888
Total non-interest expenses		3,787		3,805		7,633		7,319
Income before income taxes		536		965		708		2,054
Provision for income taxes (Note 6)		185		341		244		724
Net income	$	351	$	624	$	464	$	1,330
Earnings per common share – basic (Note 8)	$	0.24	$	0.44	$	0.32	$	0.93
Earnings per common share – diluted (Note 8)	$	0.24	$	0.43	$	0.32	$	0.93
Weighted average common shares outstanding – basic		1,444		1,427		1,442		1,425
Weighted average common and equivalent shares outstanding — diluted		1,457		1,436		1,455		1,433

See accompanying notes to unaudited consolidated financial statements.

2

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

									Accumulated
			Additional						Other			Unearned			Total
	Common		Paid-In			Retained			Comprehensive			Compensation			Stockholders’
(In Thousands)	Stock		Capital			Income			Income			ESOP			Equity
Six Months Ended September 30, 2006
Balance at March 31, 2006	$	2,033	$	2,938		$	40,421		$	(1,281	)	$	(4,922	)	$	39,189
Net income							464									464
Other comprehensive income net of tax:
Unrealized gain on securities, net of reclassification adjustment (Note 5)										693						693
Comprehensive income																1,157
Proceeds from exercise of stock options (770 shares)				13												13
Tax benefit of stock option exercises				4												4
Dividends paid ($0.36 per share)							(518	)								(518	)
Amortization of unearned compensation – ESOP				(3	)								259			256
Balance at September 30, 2006	$	2,033	$	2,952		$	40,367		$	(588	)	$	(4,663	)	$	40,101

See accompanying notes to unaudited consolidated financial statements.

3

CENTRAL BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	September 30,
(In thousands)	2006			2005
Cash flows from operating activities:
Net income	$	464		$	1,330
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		379			277
Amortization of premiums		49			65
Provision for loan losses		50			100
Stock-based compensation		256			221
Net gains from sales and write-downs of investment securities		(228	)		(213	)
Gain on sales of loans held for sale		(59	)		(140	)
Originations of loans held for sale		(5,266	)		(10,367	)
Proceeds from sale of loans originated for sale		5,370			12,464
Decrease in accrued interest receivable		123			1
Decrease in other assets, net		76			48
Increase in advance payments by borrowers for taxes and insurance		94			207
Increase (decrease) in accrued expenses and other liabilities, net		(344	)		318
Net cash provided by operating activities		964			4,311
Cash flows from investing activities:
Increase in loans		(19,370	)		(27,189	)
Principal payments on mortgage-backed securities		4,430			6,053
Proceeds from the redemption of FHLB stock (net)		1,982			—
Proceeds from sales of investment securities		3,550			2,727
Purchases of investment securities		(10,020	)		(3,061	)
Maturities and calls of investment securities		6,900			1,500
Purchase of banking premises and equipment		(1,429	)		(428	)
Net cash used in investing activities		(13,957	)		(20,398	)
Cash flows from financing activities:
Increase (decrease) in deposits		(4,666	)		17,066
Proceeds from advances from FHLB of Boston		56,000			84,000
Repayment of advances from FHLB of Boston		(43,000	)		(83,335	)
Increase (decrease) in short-term borrowings		6			(141	)
Repayment of ESOP loan		(195	)		(194	)
Proceeds from exercise of stock options		13			25
Tax benefit from exercise of stock options		4			5
Dividends paid, net		(518	)		(421	)
Net directors’ deferred compensation		—			(3	)
Net cash provided by financing activities		7,644			17,002
Net increase (decrease) in cash and cash equivalents		(5,349	)		915
Cash and cash equivalents at beginning of year		15,263			6,383
Cash and cash equivalents at end of period	$	9,914		$	7,298
Supplementary disclosure of cash flows information:
Cash paid during the period for:
Interest	$	8,287		$	6,589
Income taxes	$	578		$	798

See accompanying notes to unaudited consolidated financial statements.

4

CENTRAL BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

September 30, 2006

(1) Basis of Presentation

     The unaudited consolidated financial statements of Central Bancorp, Inc. and its wholly-owned subsidiary Central Co-operative Bank (the “Bank”) (collectively referred to as “the Company”) presented herein should be read in conjunction with the consolidated financial statements of the Company as of and for the year ended March 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The accompanying unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations, changes in stockholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, the accompanying unaudited consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the six months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2007 or any other period.

     The Company owns 100% of the common stock of Central Bancorp Capital Trust I (the “Trust”), which has issued trust preferred securities to the public. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletin No. 51,” as revised by FIN No. 46R (“FIN 46R”), issued in December 2002, the Trust is not included in the Company’s consolidated financial statements. (See Note 4).

     The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended March 31, 2006. For interim reporting purposes, the Company follows the same significant accounting policies.

(2) Loans

     Loans, excluding loans held for sale, as of September 30, 2006 and March 31, 2006 are summarized below (unaudited, in thousands):

	September 30,			March 31,
	2006			2006
Real estate loans:
Residential real estate (1-4 family)	$	176,586		$	160,381
Commercial real estate		206,831			213,935
Construction		37,172			27,680
Home equity lines of credit		6,986			7,505
Total real estate loans		427,575			409,501
Commercial loans		5,882			4,457
Consumer loans		1,243			1,360
Total loans		434,700			415,318
Less: allowance for loan losses		(3,850	)		(3,788	)
Total loans, net	$	430,850		$	411,530

     There were three loans on non-accrual status totaling $1,573,000 as of September 30, 2006 and two loans on non-accrual status totaling $1,221,000 as of March 31, 2006. Net interest income not recognized on non-accrual loans amounted to $65,378 for the quarter ended September 30, 2006 and $75,859 for the fiscal year ended March 31, 2006.

     At September 30, 2006 and March 31, 2006, there were no impaired loans other than non-accrual loans. Impaired loans are measured using the fair value of collateral.

5

CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2006

     A summary of changes in the allowance for loan losses for the three and six months ended September 30, 2006 and 2005 follows (unaudited, in thousands):

	Three Months Ended
	September 30,
	2006			2005
Balance at beginning of period	$	3,843		$	3,731
Provision charged to expense		—			50
Less: charge-offs		(12	)		(11	)
Add: recoveries		19			13
Balance at end of period	$	3,850		$	3,783

	Six Months Ended
	September 30,
	2006			2005
Balance at beginning of period	$	3,788		$	3,681
Provision charged to expense		50			100
Less: charge-offs		(20	)		(20	)
Add: recoveries		32			23
Balance at end of period	$	3,850		$	3,783

(3) Deposits

     Deposits at September 30, 2006 and March 31, 2006 are summarized as follows (unaudited, in thousands):

	September 30,		March 31,
	2006		2006
Demand deposit accounts	$	39,781	$	40,871
NOW accounts		29,266		29,902
Passbook and other savings accounts		58,908		65,546
Money market deposit accounts		34,800		36,051
Total non-certificate accounts		162,755		172,370
Term deposit certificates:
Certificates of $100,000 and above		84,536		84,028
Certificates of less than $100,000		141,456		137,015
Total term deposit certificates		225,992		221,043
Total deposits	$	388,747	$	393,413

(4) Subordinated Debenture

     On September 16, 2004, the Company completed a trust preferred securities financing in the amount of $5.1 million. In the transaction, the Company formed a Delaware statutory trust, known as Central Bancorp Capital Trust I (the “Trust”). The Trust issued and sold $5.1 million of trust preferred securities in a private placement and issued $158,000 of trust common securities to the Company. The Trust used the proceeds of these issuances to purchase $5.3 million of the Company’s floating rate junior subordinated debentures due September 16, 2034 (the “Debentures”). The interest rate on the Debentures and the trust preferred securities is variable and adjustable quarterly at 2.44% over three-month LIBOR. At September 30, 2006, the interest rate was 7.83%. The Debentures

6

CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2006

are the sole assets of the Trust and are subordinate to all of the Company’s existing and future obligations for borrowed money. The trust preferred securities generally rank equal to the trust common securities in priority of payment, but will rank prior to the trust common securities if and so long as the Company fails to make principal or interest payments on the Debentures. Concurrently with the issuance of the Debentures and the trust preferred securities, the Company issued a guarantee related to the trust securities for the benefit of the holders and pursuant to which the Company unconditionally guarantees the Trust’s financial obligations.

(5) Other Comprehensive Income (Loss)

     The Company has established standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by, and distributions to, shareholders. Net income is a component of comprehensive income, with all other components referred to, in the aggregate, as other comprehensive income.

     The Company’s other comprehensive income (loss) and related tax effect for the six months ended September 30, 2006 and 2005 are as follows (unaudited, in thousands):

	For the Six Months Ended
	September 30, 2006
	Before-Tax		Tax		After-Tax
	Amount		Effect		Amount
Unrealized gains on securities:
Unrealized net holding losses during period	$	1,311	$	469	$	842
Less: reclassification adjustment for net gains included in net income		228		79		149
Other comprehensive gain	$	1,083	$	390	$	693

	For the Six Months Ended
	September 30, 2005
	Before-Tax			Tax			After-Tax
	Amount			Effect			Amount
Unrealized losses on securities:
Unrealized net holding losses during period	$	(346	)	$	125		$	(221	)
Less: reclassification adjustment for net gains included in net income		213			72			141
Other comprehensive loss	$	(559	)	$	(197	)	$	(362	)

7

CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2006

(6) Contingencies

Legal Proceedings

     The Company from time to time is involved as a plaintiff or defendant in various legal actions incident to its business. None of these actions are believed to be material, either individually or collectively, to the results of operations and financial condition of the Company.

(7) Subsequent Event

     On October 19, 2006, the Board of Directors voted for the payment of a quarterly cash dividend of $0.18 per share. The dividend is payable on November 17, 2006 to stockholders of record as of November 3, 2006.

(8) Earnings per Share (EPS)

     Unallocated ESOP shares are not treated as being outstanding in the computation of either basic or diluted EPS. At September 30, 2006 and 2005, there were approximately 149,000 and 165,000 unallocated ESOP shares, respectively. For the periods ended September 30, 2006 and 2005 there are no pro forma expenses associated with options granted in either year.

     The following depicts a reconciliation of earnings per share (unaudited):

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(Amounts in thousands, except per share amounts)
Net income available to common shareholders	$	351		$	624		$	464		$	1,330
Weighted average number of common shares outstanding		1,591			1,590			1,591			1,590
Weighted average number of unallocated ESOP shares		(147	)		(163	)		(149	)		(165	)
Weighted average number of common shares outstanding used in calculation of basic earnings per share		1,444			1,427			1,442			1,425
Incremental shares from the assumed exercise of dilutive stock options		13			9			13			8
Weighted average number of common shares outstanding used in calculating diluted earnings per share		1,457			1,436			1,455			1,433
Earnings per share
Basic	$	0.24		$	0.44		$	0.32		$	0.93
Diluted	$	0.24		$	0.43		$	0.32		$	0.93

All option shares granted were dilutive at September 30, 2006. At September 30, 2005, 33,299 shares were anti-dilutive and were excluded from the above calculation.

8

CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2006

(9) Stock Compensation

     Effective April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), Share-Based Payment, (“SFAS 123R”), using the statement’s modified prospective application method. Prior to April 1, 2006, the Company followed SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123, which required entities to recognize as expense over the vesting period the fair value of stock-based awards on the date of grant or measurement date. For employee stock-based awards, however, SFAS Nos. 123 and 148 allowed entities to continue to apply the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and provide pro forma net earnings disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS Nos. 123 and 148 for periods as required prior to April 1, 2006.

     Under the provisions of SFAS 123R, the Company recognizes the estimated fair value of stock based compensation in the consolidated statement of operations over the requisite service period of each option granted. Under the modified prospective application method of SFAS 123R, the Company applies the provisions of SFAS 123R to all awards granted or modified after April 1, 2006 as well as unvested awards issued in a prior period. The Company had no unvested stock options outstanding at March 31, 2006 and made no option grants in the six months ended September 30, 2006. Accordingly, there was no compensation expense recorded in the three and six month periods ended September 2006 and the adoption of SFAS 123R had no impact on the Company’s financial statements.

     The Company has adopted two qualified Stock Option Plans for the benefit of officers and other employees under which an aggregate of 281,500 shares had been reserved for issuance. One of these plans terminated in 1997 and the other plan terminated in 2005.

     The Company adopted the 2006 long term incentive plan at its annual meeting in July. Under the plan 150,000 shares have been reserved for issuance as options, restricted stock, or other stock based awards. As of September 30, 2006, no awards had been made under the plan.

Stock option activity is as follows for the quarter ended September 30, 2006

				Weighted
	Number of			Average
	Shares			Exercise Price
Balance March 31, 2006		59,891		$	24.356
Granted		—			—
Exercised		(770	)		18.490
Canceled
Balance September 30, 2006		59,121			24.430

     The exercise price of an option may not be less than the fair market value of the Company’s common stock on the date of grant of the option and may not be exercisable more than ten years after the date of grant. As of September 30, 2006, no shares remained unissued under the Stock Option Plans.

9

CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
September 30, 2006

     All stock options granted are fully vested and exercisable at the time of grant. The range of exercise prices, weighted average remaining contractual lives of outstanding stock options, and aggregate intrinsic value at September 30, 2006 are as follows:

					Weighted
					Average
					Remaining		Weighted
			Number		Contractual		Average		Aggregate
	Exercise		of Shares		Life		Exercise		Intrinsic
	Price		Outstanding		(Years)		Price		Value
	$	16.625		12,077		4.2	$	16.625	$	182,061
		20.250		13,745		3.0		20.250		157,380
		28.990		33,299		8.3		28.990		90,240
Average/Total	$	24.432		59,121		6.3	$	24.432	$	429,681

(10) Recent Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Interpretation No. 48 (“ FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Management does not expect that the adoption of this standard will have a material impact on the Bank’s consolidated financial statements.

     In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. We do not believe SAB 108 will have a material impact on our results from operations or financial position.

     We have considered all other recently issued accounting pronouncements and do not believe that the adoption of such pronouncements will have a material impact on our financial statements.

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Central Bancorp, Inc. (the “Company” or “Central Bancorp”). The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and footnotes appearing in Part I, Item 1 of this document.

Forward-Looking Statements

     This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in real estate market values in the Bank’s market area, and changes in relevant accounting principles and guidelines. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 26, 2006, which is available through the SEC’s website at www.sec.gov , as well as under “Part II — Item 1A. Risk Factors” of this Form 10Q. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

     The Company is a Massachusetts holding company established in 1998 to be the holding company for Central Co-operative Bank (the “Bank”). The Company’s primary business activity is the ownership of the outstanding capital stock of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related data, relates primarily to the Bank.

     The Bank is a Massachusetts co-operative bank headquartered in Somerville, Massachusetts with nine full-service facilities, a limited service high school branch in suburban Boston, and a stand-alone 24-hour automated teller machine in Somerville. The Company primarily generates funds in the form of deposits and uses the funds to make mortgage loans for construction, purchase and refinancing of residential properties and to make loans on commercial real estate in its market area.

     The operations of the Company and its subsidiary are generally influenced by overall economic conditions, the related monetary and fiscal policies of the federal government and the regulatory policies of financial institution regulatory authorities, including the Massachusetts Commissioner of Banks, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Federal Deposit Insurance Corporation.

     The Bank monitors its exposure to earnings fluctuations resulting from market interest rate changes. Historically, the Bank’s earnings have been vulnerable to changing interest rates due to differences in the terms to maturity or repricing of its assets and liabilities. For example, in a rising interest rate environment, the Bank’s net interest income and net income could be negatively affected as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly to rising interest rates than the Bank’s interest-sensitive assets (loans and investments).

     The following is a discussion and analysis of the Company’s results of operations for the quarters ended September 30, 2006 and 2005 and its financial condition at September 30, 2006 compared to March 31, 2006. Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes.

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Critical Accounting Policies

     Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers the allowance for loan losses to be its critical accounting policy. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

     Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, delinquency trends, nonperforming loan trends, charge-off experience and other asset quality factors. The Company evaluates specific loan status reports on certain commercial and commercial real estate loans rated “substandard” or worse in excess of a specified dollar amount. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category. Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Comparison of Financial Condition at September 30, 2006 and March 31, 2006

     Total assets increased by $8.8 million, or 1.61%, from $547.3 million at March 31, 2006 to $556.1 million at September 30, 2006. During the quarter ended September 30, 2006, total loans (excluding loans held for sale) increased by $19.4 million, or 4.7% reflecting a decrease in commercial real estate loans of $7.1 million to $206.8 million from $213.9 million, and increases in construction and commercial loans of $10.9 million, and an increase in residential loans and home equity loans of $15.7 million. Construction and commercial loans increased primarily as a result of new loans and disbursement of available credit on new and existing loans. Residential real estate loans increase to $176.6 million from $160.4 million primarily due to $14.2 million in purchased loans during the second quarter of the year. The Bank purchases loans from time to time to supplement its own production, especially during times of decreased demand for such loans and to assist in meeting Community Reinvestment Act targets. Management regularly assesses the desirability of holding newly originated long-term fixed-rate residential mortgage loans in portfolio or selling such loans in the secondary market. A number of factors are evaluated to determine whether or not to hold such loans in portfolio including current and projected liquidity, current and projected interest rates, projected growth in other interest-earning assets and the current and projected interest rate risk profile. Based on its consideration of these factors, management determined that most long-term residential mortgage loans originated during the period should not be sold in the secondary market. The decision to sell or hold loans is made at the time the loan commitment is issued and the Bank simultaneously enters into a best efforts forward commitment to sell the loan to manage the interest rate risk associated with the decision to sell the loan. Loans are sold servicing released.

     Cash and cash equivalents decreased $5.3 million, or 35.1% to $9.9 million primarily as a result of a $4.0 million decrease in short-term investments and, to a lesser extent, a $1.3 million decrease in cash and due from banks. The decrease in cash and cash equivalents is primarily due to the decrease in deposits and the funding of loan originations and purchases. Investment securities decreased $3.6

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million, or 3.7%, as the proceeds from the maturity of investment securities were used to fund growth in construction loans and the purchase of residential loans. Stock in the Federal Home Loan Bank of Boston decreased from $8.3 million to $6.3 million due to decreased capital stock requirements for outstanding advances. The allowance for loan losses increased $62,000 from March 31, 2006. Management considered the allowance for loan losses to be adequate at both September 30, 2006 and March 31, 2006. Accrued interest receivable decreased $123,000 from $2.7 million to $2.6 million primarily as a result of a decrease in accrued interest receivable in investment securities of $169,000 and the elimination of accrued dividends for stock in the Federal Home Loan Bank of $107,000, offset by an increase in accrued interest for loans of $152,000. Banking premises and equipment net, increased to $4.9 million at September 30, 2006 from $3.9 million at March 31, 2006 primarily due to the opening of the Bank’s new operations center and branch in Medford and to a lesser extent improvements at other branch offices.

     The Company experienced a net decrease in total deposits of $4.7 million, or 1.2%, primarily as a result of a decrease of $9.6 million in core deposits (consisting of all non-certificate accounts), partly offset by a $4.9 million increase in term deposits. The decrease in core deposits was related to declines in savings accounts, money market deposit accounts, NOW accounts, and demand deposits, at least in part as customers took advantage of higher certificate of deposit rates. The increase in term deposits is the result of special promotional rates offered on shorter term deposits early in the quarter in anticipation of changing interest rates in the market place due to higher interest rates in general and increased competition for these deposit accounts within the Bank’s market. These shorter term deposits have been marketed to a larger target base to solicit new customers and to increase balances of existing customer accounts. During the 2006 quarter, we temporarily discontinued advertising premium rates on certificates of deposit, instead electing to utilize more cost-effective FHLB advances to fund loan growth. New deposits of $6.6 million at the Bank’s new Medford office also contributed to deposit growth.

     Total borrowings increased $12.8 million from $111.3 million at March 31, 2006 to $124.1 million at September 30, 2006. The increased borrowings were used to fund loan originations and purchases and to replace funds from the decline in total deposits. Federal Home Loan Bank long-term advances increased $13.0 million, or 12.6%.

     Accrued expenses and other liabilities decreased from $2.1 million to $1.8 million primarily due to decreased federal tax liability of $336,000 from March 31, 2006.

     Total stockholders’ equity increased during the first six months of fiscal 2007 by $912,000 primarily due to net income of $351,000 and an increase in other comprehensive income, partially offset by dividends paid to stockholders.

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

     Net income decreased from $624,000, or $0.43 per diluted share for the quarter ended September 30, 2005 to $351,000, or $0.24 per diluted share, for the quarter ended September 30, 2006. The decrease in net income for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005 was primarily the result of a decrease in net interest and dividend income from $4.2 million for the 2005 quarter to $3.9 million for the 2006 period and a $159,000 decrease in non-interest income, partially offset by a decrease in non-interest expense of $18,000 and a decrease in the provision for income taxes.

     Net Interest Income. The decrease in net interest and dividend income is primarily the result of the combined effect of a decrease in net interest spread and net interest margin. Net interest and dividend income continued to be adversely affected by the continuing flat to inverted yield curve as well as strong local competition for the products and services we offer. Decreases occurred in the net interest spread and the net interest margin from 2.82% and 3.22%, respectively, for the quarter ended September 30, 2005 to 2.42% and 2.91%, respectively, for the quarter ended September 30, 2006. The decline in the spread and margin were primarily due to increases in both the volume and the rates paid for interest bearing liabilities which were partially offset by increases in the volume and rates charged on interest earning assets. The yield on interest earning assets increased from 5.78% in the 2005 quarter to 6.20%. In addition to the increases in yield on mortgage loans and short term investments, the receipt of a six-month equivalent dividend on our investment stock in the Federal Home Loan Bank of Boston in the amount of $199,000 also contributed to the decline in net interest spread and net interest margin. An overall increase in interest

13

expense contributed to the increase in interest income. However, the cost of interest bearing liabilities increased from 2.96% to 3.78%. As short term rates have increased, deposit and advance rates have increased more than comparable loan and investment yields, resulting in lower net interest spreads and margins. Interest-bearing liabilities repriced upward faster than interest-earning assets primarily due to the increase in short-term interest rates, the continuing flat to inverted yield curve and strong local competition for both deposits and loans in our market.

     The Company’s net interest margin decreased 31 basis points from 3.22% in the prior year’s quarter to 2.91% in the current quarter. The decrease in net interest margin is primarily attributable to the shift in deposit growth from core deposits to certificates of deposit. The average balance of certificates of deposit during the quarter ended September 30, 2006 was $236.6 million or $85.2 million more than the average balance of $151.4 million during the same quarter ended 2005. The Company has continued to hold its core deposit rates at a static level, while pricing its shorter term special certificates of deposit accounts to better compete for these accounts in its markets. During the 2006 quarter, the Company stopped advertising for premium CD’s, which, along with continued strong local competition, resulted in a decline in these types of deposits. The Company funded loan growth with more cost effective FHLB advances.

     Interest Income. Interest and dividend income for the quarter ended September 30, 2006 increased approximately $670,000 to $8.2 million as compared to $7.6 million in the prior year quarter. This increase was primarily a result of a $19.2 million, or 4.8%, increase in the average balance of loans from September 30, 2005 to September 30, 2006 and a $2.6 million increase in the average balance of short-term investments, partially offset by a $13.5 million decrease in the average balance of investment securities. The average balance of loans increased primarily as a result of an increase in the originations of commercial real estate loans, which increased mainly due to the Bank’s continued focus on originating these loans as well as the purchase of residential mortgage loans in the 2006 quarter. The increase in interest income derived from the increase in the average balance of assets was enhanced by a 42 basis point increase in the yield on average interest-earnings assets from 5.78% to 6.20%. Interest and dividend income was also positively impacted as a result of the Federal Home Loan Bank of Boston’s payment of the equivalent of two quarterly dividends during the quarter to compensate for the dividend not paid in the prior quarter.

     Interest Expense. Interest expense for the quarter ended September 30, 2006 increased by $1.0 million to $4.4 million as compared to $3.4 million in the quarter ended September 30, 2005. The increase in interest expense is the combined effect of an increase in average interest-bearing liabilities from $454.4 million at September 30, 2005 to $462.1 million at September 30, 2006 and an increase of 82 basis points in the cost of funds from 2.96% in the quarter ended September 30, 2005 to 3.78% in the quarter ended September 30, 2006. The increase in the cost of funds is primarily the result of the combined effect of general market interest rate increases and the Bank offering premium rates on certain short-term deposits. Average deposits increased by $56.2 million, from $304.2 million in the quarter ended September 30, 2005 to $360,475 in the 2006 quarter. The increase in the average balance of deposits was partially offset by a $48.3 million decrease in the average balance of advances from the Federal Home Loan Bank of Boston and a $74,000 decrease in other borrowings.

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     The following table presents average balances and average rates earned/paid by the Company for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005.

	Three Months Ended September 30,
	2006								2005
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
				(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	415,562		$	6,630		6.38	%	$	397,706		$	6,087		6.12	%
Other loans		7,228			146		8.08			5,852			104		7.18
Investment securities		100,303			1,344		5.36			113,816			1,327		4.66
Short-term investments		9,004			121		5.38			6,450			53		3.29
Total interest-earning assets		532,097			8,241		6.20			523,824			7,571		5.78
Allowance for loan losses		(3,844	)							(3,747	)
Non-interest-earning assets		18,632								17,251
Total assets	$	546,885							$	537,328
Interest-bearing liabilities:
Deposits	$	360,475			2,877		3.19		$	304,262			1,507		1.98
Advances from FHLB of Boston		93,176			1,329		5.71			141,507			1,718		4.86
Other borrowings		8,486			159		7.49			8,560			132		6.15
Total interest-bearing liabilities		462,137			4,365		3.78			454,419			3,357		2.96
Non-interest-bearing liabilities		45,213								43,780
Total liabilities		507,350								498,189
Stockholders’ equity		39,535								39,129
Total liabilities and stockholders’ Equity	$	546,885							$	537,328
Net interest and dividend income				$	3,876							$	4,214
Net interest spread							2.42	%							2.82	%
Net interest margin							2.91	%							3.22	%

     Provision for Loan Losses. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance.

     During the quarters ended September 30, 2006 no provision was made for loan losses compared to a provision of $50,000 in the 2005 quarter. Management did not record a provision for loan losses in the 2006 quarter because it believes the allowance was adequate at September 30, 2006. While the Company’s asset quality, as measured continually by delinquency rates, charge-offs and loan classifications, continues to be satisfactory, the shifting of the mix of the loan portfolio to a greater portion of commercial real estate loans indicates the need for the Company to continue to assess the adequacy of the reserve for loan losses and provide additional provisions when required. Changes in the mix of the loan portfolio are detailed in Note 2 to the Notes to Unaudited Consolidated Financial Statements in this document.

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     Non-Interest Income. Total non-interest income was $447,000 for the quarter ended September 30, 2006 compared to $606,000 in the same period of 2005. The primary reason for the $159,000 decrease in the current year’s quarter was due to the decline in gains on sale of loans and other income, partially offset by increased investment gains and deposit fees. Net gains on sales of investments totaled $116,000 during the current quarter, up $20,000 from the $96,000 recognized in the prior year’s quarter. Gains on sales of loans totaled $25,000 during the current quarter, down $60,000 from the $85,000 recognized in the prior year’s quarter, due to a decline in residential lending volume. Other income was impacted by a decline in brokerage income and prepayment fees.

     Non-Interest Expense. Non-interest expense declined $18,000, to $3.8 million during the quarter ended September 30, 2006, due principally to a net decrease in salaries and employee benefits of $197,000 and a decrease in marketing costs of $61,000, partially offset by increases in office occupancy and equipment of $162,000, increases in data processing expense of $14,000, increases in professional fees of $21,000 and increases in other nonoperating expenses of $43,000.

     The decrease in salaries and employee benefits of $197,000 to $2.2 million during the quarter ended September 30, 2006, was the net effect of the absence of a $283,000 non-recurring restructuring cost for voluntary termination packages that occurred in the 2005 quarter, partially offset by increases in salary in the ordinary course of business, and increases in staffing as the Bank opened a new branch office and operations center, and healthcare care costs.

     Office occupancy and equipment expenses increased $162,000, or 43%, to $543,000 during the current quarter ended September 30, 2006 due to higher utility costs, increased maintenance costs, moving related expenses and increased depreciation of equipment, partly as a result of the Bank’s new branch and operations center.

     Professional fees increased $21,000, or 10.5%, to $220,000 during the current quarter ended September 30, 2006 due primarily to an increase in audit as well as consulting costs associated with complying with the requirements of the provisions of the Sarbanes-Oxley Act.

     Marketing expenses declined $61,000, or 38%, to $100,000 during the current quarter ended September 30, 2006 as compared to September 30, 2005 due to a decision to temporarily discontinue advertising on the Bank’s premium rate certificates of deposit and, instead use FHLB advances to fund loan growth.

     Other non-interest expenses increased $43,000, or 10 %, to $493,000 during the current quarter ended September 30, 2006 due to increases in general overhead costs.

     Income Taxes. The effective tax rates for the quarters ended September 30, 2006 and 2005 were 34.5% and 35.3%, respectively.

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

     For the six months ended September 30, 2006, net income declined 65% to $464,000, or $0.32 per diluted share, compared to $1.3 million, or $0.93 per diluted share, in the year earlier period. This change was largely the result of the Company’s decline in net interest income.

     Interest Income. Interest income for the six months ended September 30, 2006 was $15.7 million, or $791,000 million more than the amount earned in the same period in the prior year due to increased loan balances and increased rates. The yield on interest-earning assets increased from 5.75% in the first six months of the prior year to 5.96% in the same period of the current year. Average interest-earning assets increased by $8.2 million, or 1.6%, to $527.9 million during the six months ended September 30, 2006, from $519.7 million for the six months ended September 30, 2005.

     Interest Expense. Interest expense for the six months ended September 30, 2006 was $8.3 million compared to $6.6 million for the six months ended September 30, 2005, an increase of $1.7 million, or 26.0%. This increase resulted from a 68 basis point increase in the cost of funds from 2.90% in the six months ended September 30, 2005 to 3.58% in the six months ended September 30, 2006 and an increase in average interest-bearing liabilities of $8.6 million to $461.8 million from $453.2 million. The increase in interest bearing liabilities is primarily due to

16

the Bank’s advertising of premium rates on certain certificates of deposit. The Bank temporarily discontinued advertising for these premium rate certificates during the second quarter.

     The increase in the cost of interest bearing liabilities during the first half of the current year was primarily due to an increase in the cost of deposits from 1.90% during the prior year period to 3.02% during the six months ended September 30, 2006. The cost of Federal Home Loan Bank of Boston advances, the Company’s other primary interest-bearing liability, also increased during the first half of the current year to 5.37% from 4.84% in the comparable prior year period as some advances matured and some option advances were called and were replaced with higher rate advances.

     The following table presents average balances and average rates earned/paid by the Company for the six months ended September 30, 2006 compared to the six months ended September 30, 2005:

	Six Months Ended September 30,
	2006								2005
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
				(Dollars in thousands)
Interest-earning assets:
Mortgage loans	$	410,871		$	12,771		6.22		$	393,648		$	11,972		6.08	%
Other loans		6,826			273		8.00			5,999			207		6.90
Investment securities		101,159			2,470		4.88			115,611			2,694		4.66
Short-term investments		9,085			216		4.76			4,484			66		2.94
Total interest-earning assets		527,941			15,730		5.96			519,742			14,939		5.75
Allowance for loan losses		(3,825	)							(3,722	)
Noninterest-earning assets		19,001								16,873
Total assets	$	543,117							$	532,893
Interest-bearing liabilities:
Deposits		358,489			5,409		3.02		$	301,724			2,859		1.90
Advances from FHLB of Boston		95,146			2,557		5.37			142,275			3,442		4.84
Other borrowings		8,199			310		7.56			9,197			266		5.78
Total interest-bearing liabilities		461,834			8,276		3.58			453,196			6,567		2.90
Non-interest-bearing liabilities		41,863								40,865
Total liabilities		503,697								494,061
Stockholders’ equity		39,420								38,832
Total liabilities and stockholders’ equity	$	543,117							$	532,893
Net interest and dividend income				$	7,454							$	8,372
Net interest spread							2.38	%							2.85	%
Net interest margin							2.82	%							3.22	%

     Provision for Loan Losses. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly when appropriate to maintain the adequacy of the allowance.

     During the first half of the current year, the Company provided $50,000 for loan losses. The continuing shift of the mix of the loan portfolio to a greater portion of commercial real estate loans indicated the need for an

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increase in the reserve for loan losses in the first half of fiscal 2007, while $100,000 was recorded in the corresponding period of the prior year.

     Non-interest Income. Non-interest income decreased to $937,000 during the six months ended September 30, 2006 from $1.1 million in the prior year period. An increase in fees for deposit accounts of $38,000 and an increase in gains on sales of investments of $15,000 were offset by a decrease in gains on sales of investment loans of $81,000. Other income decreased by $135,000 primarily due to lower loan prepayment fees and lower fees from third-party investment services.

     Net gains from sales and write-downs of investment securities were $228,000 for the six months ended September 30, 2006 compared to net gains of $213,000 in the comparable prior year period. During the six months ended September 30, 2006 and 2005, the Company did not record any write-downs of equity securities which had experienced a decline in fair value judged to be other than temporary.

     Non-interest Expense. Non-interest expense increased $314,000 during the six months ended September 30, 2006, as compared to the corresponding period in the prior year. Non–interest expenses increased due principally to increases in occupancy costs of $284,000, in professional fees of $51,000, data processing cost increases of $9,000 and other expenses of $76,000. Salary and benefit expenses declined by $84,000, and marketing costs declined by $22,000.

     The decrease in salaries and employee benefits of $84,000 or 1.9%, during the six months ended September 30, 2006, was the net effect of the absence of a $283,000 non-recurring restructuring cost for voluntary termination packages that occurred in the 2005 quarter, partially offset by overall salary increases in the ordinary course of business, increases in staffing to support our new Medford office and increased health care costs.

     Office occupancy and equipment expenses increased $284,000, or 37.2%, to $1.0 million during the six months ended September 30, 2006 due to higher utility costs, increased maintenance costs and increased depreciation of equipment, partly as a result of the opening of our new Medford branch and operations center.

     Data processing costs remained relatively flat, increasing by $9,000, or 1.9%, to $487,000.

     Professional fees increased $51,000, or 12.6%, to $457,000 during the six months ended September 30, 2006 due to an increase of legal expenses of $18,000 and examination and audit expenses of $32,000.

     Marketing expenses decreased $22,000, or 6.4%, to $322,000 during the six months ended September 30, 2006 as compared to September 30, 2005. In the 2006 period, advertising costs were reduced as we temporarily discontinued advertising the Bank’s premium rate CD’s.

     Other non-interest expenses increased $76,000, or 8.6%, to $964,000 during the six months ended September 30, 2006 primarily due to an overall net increase in general overhead costs.

     Income Taxes. The effective tax rates for the six months ended September 30, 2006 and 2005 were 34.5% and 35.2%, respectively.

Liquidity and Capital Resources

     Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s principal sources of liquidity are customer deposits, short-term investments, loan repayments, advances from the Federal Home Loan Bank of Boston and funds from operations. The Bank is a voluntary member of the Federal Home Loan Bank of Boston and, as such, is entitled to borrow up to the value of its qualified collateral that has not been pledged to others. Qualified collateral generally consists of residential first mortgage loans, U.S. Government and agencies securities, mortgage-backed securities and funds on deposit at the FHLB of Boston. At September 30, 2006, the Company had approximately $71.2 million in unused borrowing capacity at the FHLB of Boston.

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     At September 30, 2006, the Company had commitments to originate loans, unused outstanding lines of credit and undisbursed proceeds of loans totaling $41.2 million. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company anticipates that it will have sufficient funds available to meet its current loan commitments.

     The Company’s and the Bank’s capital ratios at September 30, 2006 were as follows:

	Company			Bank
Tier 1 Capital (to average assets)		8.00	%		7.37	%
Tier 1 Capital (to risk-weighted assets)		11.92	%		10.99	%
Total Capital (to risk-weighted assets)		12.99	%		12.06	%

     These ratios place the Company in excess of regulatory standards and the Bank in the “well capitalized” category as set forth by the Federal Deposit Insurance Corporation.

Off-Balance Sheet Arrangements

     In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

     For the year ended March 31, 2006 and for the six months ended September 30, 2006, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company’s earnings are largely dependent on its net interest income, which is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Company seeks to reduce its exposure to changes in interest rate, or market risk, through active monitoring and management of its interest-rate risk exposure. The policies and procedures for managing both on- and off-balance sheet activities are established by the Bank’s asset/liability management committee (“ALCO”). The Board of Directors reviews and approves the ALCO policy annually and monitors related activities on an ongoing basis.

     Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending, borrowing and deposit taking activities.

     The main objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and preserve capital, while adjusting the asset/liability structure to control interest-rate risk. However, a sudden and substantial increase or decrease in interest rates may adversely impact earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis.

     The Company quantifies its interest-rate risk exposure using a sophisticated simulation model. Simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specific time horizon. Simulation analysis involves projecting future interest income and expense under various rate scenarios. The simulation is based on both actual and forecasted cash flows and assumptions of management about the future changes in interest rates and levels of activity (loan originations, loan prepayments, deposit flows, etc). The assumptions are inherently uncertain and, therefore, actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and strategies. The net interest income projection resulting from use of actual and forecasted cash flows and management’s assumptions is compared to net interest income projections based on an immediate shift of 200 basis points upward and 200 basis points downward. Internal guidelines on interest rate risk state that for every immediate shift in interest rates of 100 basis points, estimated net interest income over the next twelve months should decline by no more than 5%.

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     The following table indicates the projected change in net interest income and sets forth such change as a percentage of estimated net interest income, for the twelve-month period following the date indicated assuming an immediate and parallel shift for all market rates with other rates adjusting to varying degrees in each scenario based on both historical and expected spread relationships:

	September 30,						March 31,
	2006						2006
	Amount			% Change			Amount			% Change
	(Dollars in thousands)
200 basis point increase in rates	$	(1,939	)		(13.3	)%	$	(1,530	)		(10.0	)%
200 basis point decrease in rates		669			4.6			611			4.0

     As noted, this policy provides broad, visionary guidance for managing the Bank’s balance sheet, not absolute limits. When the simulation results indicate a variance from the stated parameters, ALCO will intensify its scrutiny of the reasons for the variance and take whatever actions are deemed appropriate under the circumstances. The current simulation was negatively impacted by the current relatively flat yield curve.

Item 4. Controls and Procedures

     The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

     In addition, based on that evaluation, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

     Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The Company did not repurchase any of its securities during the quarter ended September 30, 2006.

Item 3. Defaults Upon Senior Securities

     Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

Item 5. Other Information

     None.

Item 6. Exhibits

Exhibits
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32	Section 1350 Certifications

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CENTRAL BANCORP, INC.
		Registrant
November 13, 2006	By:	/s/ John D. Doherty
		John D. Doherty
		Chairman, President and Chief Executive Officer
November 13, 2006	By:	/s/ Paul S. Feeley
		Paul S. Feeley
		Senior Vice President, Treasurer and
		Chief Financial Officer