UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

OR

¨ 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 0-15137

MASSBANK Corp.

(Exact name of registrant as specified in its charter)

Delaware	04-2930382
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

123 HAVEN STREET

Reading, Massachusetts 01867

(Address of principal executive offices, including Zip Code)

Registrant’s telephone number, including area code: (781) 662-0100

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

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

Large accelerated filer  ¨	Accelerated filer  x
Non-accelerated filer  ¨	Smaller reporting company  ¨
(Do not check if a smaller reporting company)

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

The number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date is:

Class: Common stock $1.00 per share.

Outstanding at April 30, 2008: 4,233,079 shares.

MASSBANK CORP. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION
		Page
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (Unaudited)	3
	Consolidated Statements of Income for the three months ended March 31, 2008 and 2007 (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2008 and 2007 (Unaudited)	5 - 6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (Unaudited)	7 - 8
	Condensed Notes to the Consolidated Financial Statements	9 - 17
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18 - 37
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	38
ITEM 4.	Controls and Procedures	39
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	40
ITEM 1A.	Risk Factors	41
ITEM 2C.	Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 3.	Defaults Upon Senior Securities	42
ITEM 4.	Submission of Matters to a Vote of Security Holders	42
ITEM 5.	Other Information	42
ITEM 6.	Exhibits	43
SIGNATURE		44

2

PART 1. ITEM 1

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands except share data)

(Unaudited)

	March 31, 2008			December 31, 2007
Assets:
Cash and due from banks	$	5,495		$	6,126
Short-term investments (Note 3)		222,850			150,978
Total cash and cash equivalents		228,345			157,104
Term federal funds sold		110,000			91,000
Trading securities, at fair value:
Debt securities		110,284			203,169
Equity securities and mutual funds		3,948			3,397
Securities available for sale, at fair value (amortized cost of $125,021 in 2008 and $127,205 in 2007)		127,463			128,710
Mortgage-backed securities held to maturity, at amortized cost (market value of $7,650 in 2008 and $8,120 in 2007)		7,537			8,098
Loans: (Note 4)
Mortgage loans		182,532			181,945
Other loans		9,278			9,622
Allowance for loan losses		(1,397	)		(1,369	)
Net loans		190,413			190,198
Real estate held for resale		425			425
Accrued interest and income receivable		3,408			4,061
Income tax receivable, net		266			1
Deferred income tax asset, net		46			661
Premises and equipment		8,063			8,163
Goodwill		1,090			1,090
Other assets		8,788			5,722
Total assets	$	800,076		$	801,799
Liabilities and Stockholders’ Equity:
Deposits	$	682,048		$	682,561
Escrow deposits of borrowers		990			968
Allowance for loan losses on off-balance sheet credit exposures		317			345
Other liabilities		8,667			8,964
Total liabilities		692,022			692,838
Stockholders’ Equity:
Preferred stock, par value $1.00 per share; 2,000,000 shares authorized, none issued		—			—
Common stock, par value $1.00 per share; 10,000,000 shares authorized, 7,900,942 and 7,880,642 shares issued in 2008 and 2007, respectively		7,901			7,881
Additional paid-in capital		59,379			58,773
Retained earnings		106,622			107,674
		173,902			174,328
Treasury stock at cost, 3,667,863 and 3,638,863 shares in 2008 and 2007, respectively		(67,673	)		(66,597	)
Accumulated other comprehensive income		1,825			1,230
Shares held in rabbi trust at cost, 20,194 shares in 2008 and 2007 (Note 6)		(503	)		(503	)
Deferred compensation obligation		503			503
Total stockholders’ equity		108,054			108,961
Total liabilities and stockholders’ equity	$	800,076		$	801,799

See accompanying condensed notes to consolidated financial statements.

3

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
(In thousands except share data)	2008			2007
Interest and dividend income:
Mortgage loans	$	2,490		$	2,676
Other loans		161			193
Securities available for sale:
Mortgage-backed securities		1,589			1,806
Other securities		27			31
Mortgage-backed securities held to maturity		115			69
Trading securities		1,665			2,637
Federal funds sold		1,869			2,180
Other investments		846			387
Total interest and dividend income		8,762			9,979
Interest expense:
Deposits		4,663			5,188
Borrowed funds		84			—
Total interest expense		4,747			5,188
Net interest income		4,015			4,791
Provision (credit) for loan losses		28			—
Net interest income after provision (credit) for loan losses		3,987			4,791
Non-interest income:
Deposit account service fees		77			83
Gains (losses) on securities available for sale, net		(45	)		85
Gains on trading securities, net		712			1,049
Option fees		75			75
Deferred compensation plan income (loss)		(49	)		25
Other		167			173
Total non-interest income		937			1,490
Non-interest expense:
Salaries and employee benefits		1,940			1,884
Deferred compensation plan expense (income)		(21	)		48
Occupancy and equipment		593			531
Data processing		149			146
Professional services		669			128
Merger related expense		903			—
Advertising and marketing		38			33
Deposit insurance		26			28
Other		311			302
Total non-interest expense		4,608			3,100
Income before income taxes		316			3,181
Income tax expense		135			1,100
Net income	$	181		$	2,081
Weighted average common shares outstanding:
Basic		4,241,937			4,335,589
Diluted		4,272,073			4,361,453
Earnings per share (in dollars):
Basic	$	0.04		$	0.48
Diluted		0.04			0.48

See accompanying condensed notes to consolidated financial statements.

4

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For The Three Months Ended March 31, 2008 (Unaudited)

(In thousands except share data)

	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			TREASURY STOCK			ACCUMULATED OTHER COMPREHENSIVE INCOME			SHARES HELD IN RABBI TRUST			DEFERRED COMPENSATION OBLIGATION		TOTAL
Balance at December 31, 2007	$	7,881	$	58,773	$	107,674		$	(66,597	)	$	1,230		$	(503	)	$	503	$	108,961
Net Income		—		—		181			—			—			—			—		181
Other comprehensive income, net of tax:
Unrealized gains on securities, net of reclassification adjustment (Note 8)		—		—		—			—			597			—			—		597
Amortization of prior service cost and transition obligation on pension plan, net of tax (Note 8)		—		—		—			—			(2	)		—			—		(2	)
Comprehensive income																				776
Cash dividends paid ($0.29 per share)		—		—		(1,233	)		—			—			—			—		(1,233	)
Purchase of treasury stock		—		—		—			(1,076	)		—			—			—		(1,076	)
Share-based payment compensation		—		30		—			—			—			—			—		30
Exercise of stock options		20		560		—			—			—			—			—		580
Tax benefit on stock options exercised		—		16		—			—			—			—			—		16
Balance at March 31, 2008	$	7,901	$	59,379	$	106,622		$	(67,673	)	$	1,825		$	(503	)	$	503	$	108,054

See accompanying condensed notes to consolidated financial statements.

5

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For The Three Months Ended March 31, 2007 (Unaudited)

(In thousands except share data)

	COMMON STOCK		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			TREASURY STOCK			ACCUMULATED OTHER COMPREHENSIVE LOSS			SHARES HELD IN RABBI TRUST			DEFERRED COMPENSATION OBLIGATION		TOTAL
Balance at December 31, 2006	$	7,850	$	57,953	$	107,055		$	(62,902	)	$	(3,071	)	$	(426	)	$	426	$	106,885
Cumulative effect of adoption of the fair value option, net of tax		—		—		(2,235	)		—			2,235			—			—		—
Net Income		—		—		2,081			—			—			—			—		2,081
Other comprehensive income, net of tax:
Unrealized gains on securities, net of reclassification adjustment (Note 8)		—		—		—			—			408			—			—		408
Pension liability adjustment applying SFAS 158, net of tax (Note 8)		—		—		—			—			(2	)		—			—		(2	)
Comprehensive income																				2,487
Cash dividends paid ($0.28 per share)		—		—		(1,215	)		—			—			—			—		(1,215	)
Share-based payment compensation		—		20		—			—			—			—			—		20
Exercise of stock options		21		391		—			—			—			—			—		412
Tax benefit on stock options exercised		—		37		—			—			—			—			—		37
Balance at March 31, 2007	$	7,871	$	58,401	$	105,686		$	(62,902	)	$	(430	)	$	(426	)	$	426	$	108,626

See accompanying condensed notes to consolidated financial statements.

6

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2008			2007
	(In thousands)
Cash flows from operating activities:
Net income	$	181		$	2,081
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		143			125
Provision for loan losses		28			—
Provision (credit) for loan losses on off-balance sheet credit exposures		(28	)		—
Share-based payment compensation		30			20
Loan interest capitalized		(1	)		(1	)
Decrease in accrued interest and income receivable		653			357
Decrease in other liabilities		(363	)		(8,456	)
(Increase) decrease in income tax receivable, net		(265	)		88
Amortization of premiums (accretion of discounts) on securities, net		(11	)		(15	)
Trading securities activity:
Proceeds from sales of debt securities		3,045			2,974
Proceeds from sales of equity securities		3,384			8,366
Proceeds from maturities and calls of debt securities		258,520			47,750
Purchases of debt securities		(167,683	)		(25,970	)
Purchases of equity securities		(4,185	)		(8,970	)
Principal repayments of securities		—			35
Amortization of premiums (accretion of discounts) on securities, net		(35	)		9
Gains (losses) on securities available for sale, net		7			(85	)
Valuation write downs of equity securities available for sale		38			—
Gains on trading securities, net		(712	)		(1,049	)
(Increase) decrease in net deferred mortgage loan origination costs, net of amortization		(14	)		(1	)
Decrease (increase) in deferred income tax asset, net		340			469
Increase in accrued income taxes, net		—			419
Decrease (increase) in other assets		(3,067	)		16,302
Net cash provided by operating activities		90,006			34,448
Cash flows from investing activities:
Purchases of term Federal funds		(100,000	)		(50,000	)
Proceeds from maturities of term Federal funds		81,000			41,000
Proceeds from sales of securities available for sale		320			2,006
Purchases of securities available for sale		(140	)		(2,216	)
Purchases of mortgage-backed securities available for sale		(4,922	)		(4,001	)
Principal repayments of mortgage-backed securities		7,452			6,567
Loans originated		(9,323	)		(2,763	)
Loan principal payments received		9,096			8,322
Purchases of premises and equipment		(43	)		(278	)
Net cash used in investing activities		(16,561	)		(1,363	)

7

MASSBANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Three Months Ended March 31,
	2008			2007
	(In thousands)
Cash flows from financing activities:
Net decrease in deposits		(513	)		(9,034	)
Increase (decrease) in escrow deposits of borrowers		22			(13	)
Proceeds from borrowed funds		30,000			—
Repayments of borrowings		(30,000	)		—
Payments to acquire treasury stock		(1,076	)		—
Options exercised, including tax benefit		596			449
Cash dividends paid on common stock		(1,233	)		(1,215	)
Net cash used in financing activities		(2,204	)		(9,813	)
Net increase in cash and cash equivalents		71,241			23,272
Cash and cash equivalents at beginning of period		157,104			147,890
Cash and cash equivalents at end of period	$	228,345		$	171,162
Supplemental cash flow disclosures:
Cash transactions:
Cash paid during the period for interest	$	4,679		$	5,201
Cash paid during the period for taxes, net of refunds		107			85
Non-cash transactions:
Transfer of securities from available for sale to trading securities (at fair value) upon early adoption of SFAS No. 159	$	—		$	261,256

See accompanying condensed notes to consolidated financial statements.

8

MASSBANK CORP.

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The financial condition and results of operations of MASSBANK Corp. (the “Company”) essentially reflect the operations of its subsidiary, MASSBANK (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, include all adjustments of a normal recurring nature necessary for the fair presentation of the financial condition of the Company as of March 31, 2008 and December 31, 2007, and its operating results for the three months ended March 31, 2008 and 2007, respectively. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year.

Certain amounts in the prior year’s consolidated financial statements were reclassified to facilitate comparison with the current fiscal year.

The information in this report should be read in conjunction with the financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2007.

9

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(2) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents consist of cash and due from banks, and short-term investments with original maturities of less than 90 days.

(3) Short-Term Investments

Short-term investments consist of the following:

(In thousands)	At March 31, 2008		At December 31, 2007
Federal funds sold (overnight)	$	18,691	$	74,455
Term federal funds sold		47,000		7,000
Money market investment funds		157,156		69,520
Interest-bearing bank money market accounts		3		3
Total short-term investments	$	222,850	$	150,978

The investments above are stated at cost, which approximates market value, and have original maturities of less than 90 days.

(4) Financial Instruments with Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts reflect the extent of involvement the Bank has in particular classes of these instruments. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

	Contract or Notional Amount
(In thousands)	At March 31, 2008		At December 31, 2007
Financial instruments whose contract amounts represent credit risk:
Commitments to originate residential mortgage loans	$	5,218	$	2,514
Unadvanced portions of construction loans		1		261
Unused credit lines, including unused portions of equity lines of credit		25,325		25,897
Other loan commitments		1,901		2,196

Commitments to extend credit are agreements to lend to a customer as long as there is no violation for any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower.

The Bank maintains an allowance for loan losses on off-balance sheet credit exposures. At March 31, 2008 and December 31, 2007 this allowance, which is shown separately on the balance sheet, totaled $317,000 and $345,000, respectively.

10

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(5) Earnings Per Common Share

Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.

Diluted EPS reflects the effect on the weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.

The shares acquired in connection with the Company’s directors’ deferred compensation plan are considered outstanding in the computation of earnings per share and book value per share.

Earnings per share was calculated as follows:

	Three Months Ended March 31,
(In thousands, except per share data)	2008		2007
Denominator for basic earnings per share:
Average common shares outstanding		4,242		4,336
Dilutive common stock options		30		26
Denominator for diluted earnings per share		4,272		4,362
Numerator:
Net income attributable to common shares	$	181	$	2,081
Earnings per share:
Basic	$	0.04	$	0.48
Diluted		0.04		0.48

(6) Directors’ Deferred Compensation Plan

In 1988, the Company established a deferred compensation plan for its directors. The Plan allows the Company’s directors to defer receipt of all or a portion of their compensation until (1) their attaining the age of 72, or (2) their termination as a director of the Company. The Plan was later amended to allow the directors’ compensation to be invested in Company stock held in a rabbi trust. At March 31, 2008 and December 31, 2007, the Trust held 20,194 shares of MASSBANK Corp. common stock. The deferred compensation obligation of the Plan may be settled only by delivery of the shares of MASSBANK Corp. stock to the directors participating in the Plan. These shares are considered outstanding in the computation of earnings per share and book value per share.

11

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(7) Stock Option Plan

Effective January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition method to account for share-based payments to employees and the Company’s Board of Directors.

The only type of share-based payment utilized by the Company to date is stock options. Stock options are awards that allow the employee or director to purchase shares of the Company’s stock at a fixed price. Stock options are granted at an exercise price equal to the Company’s closing stock price at the date of grant. Prior to 2006, the stock options issued by the Company had a contractual term of ten years and vested immediately at the time of issuance. The stock options issued in 2008, 2007 and 2006 vest at 20% per year over five years and have a contractual term of ten years.

The following tables summarize stock option activity during the first three months of 2008:

	Shares Under Option		Weighted Average Exercise Price Per Share
Outstanding at December 31, 2007	247,375		$	30.00
Options Granted	29,000			36.15
Options Exercised	(20,300	)		28.60
Options Forfeited	(1,500	)		29.50
Outstanding at March 31, 2008	254,575		$	30.81
Exercisable at March 31, 2008	177,125		$	29.43

At March 31, 2008		Options Outstanding			Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Avg. Remaining Contractual Life	Weighted Avg. Exercise Price		Number Exercisable	Weighted Avg. Exercise Price
$19.00 to $20.67	45,175	2.1 years	$	19.62	45,175	$	19.62
25.00 to   27.63	43,500	2.0 years		26.18	43,500		26.18
28.44 to   29.60	15,750	4.2 years		28.51	15,750		28.51
32.50 to   32.92	68,150	8.3 years		32.70	19,700		32.73
36.15 to   42.90	82,000	7.1 years		38.31	53,000		39.50
$19.00 to $42.90	254,575	5.5 years	$	30.81	177,125	$	29.43

12

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(7) Stock Option Plan (continued)

The Company estimates the fair value of stock option grants using the Black-Scholes valuation model. The Black-Scholes valuation model uses the following assumptions: expected volatility, expected term of option, risk-free interest rate and dividend yield. Expected volatility estimates are developed by the Company based on historical volatility of the Company’s stock. The Company uses historical data to estimate the expected term of the options. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield in effect at the grant date. The dividend yield represents the expected dividends on the Company stock. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are consistent with SFAS 123R. Estimates of fair value are not intended to predict the actual future value ultimately realized by employees and directors who receive share-based awards, and subsequent events are not indicative of the reasonableness of original estimates of fair value made by the Company under SFAS 123R.

The following table presents the key input assumptions for the Black-Scholes valuation model:

	Three Months Ended March 31,
	2008			2007
Expected Term (years)		7.3 years			7.3 years
Volatility		19.40	%		21.30	%
Risk-free interest rate		3.30	%		4.74	%
Dividend Yield		3.24	%		3.47	%
Fair value per share	$	5.94		$	6.67

The total intrinsic value (amount by which the fair value of the underlying stock exceeds the exercise price of an option on exercise date) of options exercised during the three months ended March 31, 2008 and 2007, was $153,000 and $260,000, respectively. The total cash received from employees and directors as a result of stock option exercises for the three months ended March 31, 2008 and 2007 was $580,000 and $412,000, respectively. The tax benefit realized as a result of the stock options exercised was $16,000 in the first three months of 2008 compared to $37,000 for the same period in 2007.

As of March 31, 2008, there was $467,000 of unearned compensation cost related to non-vested stock options granted in 2008, 2007 and 2006. The Company expects to recognize the expense over a weighted-average period of 3.9 years. The total compensation cost related to options expensed during the three months ended March 31, 2008 and March 31, 2007 was $30,000 and $20,000, respectively. These amounts are included in salary expense in the accompanying consolidated Statements of Income.

13

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(8) Comprehensive Income (Loss)

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

The components of other comprehensive income (loss) and related tax effect for the three months ended March 31, 2008 and 2007 are as follows:

	Three Months Ended March 31,
(In thousands)	2008			2007
Unrealized holding gains (losses) on available for sale securities and when issued securities contracts arising during the period	$	892		$	750
Less: reclassification adjustment for gains (losses) realized in income		(45	)		85
Net unrealized gains		937			665
Tax (expense) or benefit		(340	)		(257	)
Net unrealized gains, net of tax		597			408
Recognized pension prior service cost and transition obligation		(4	)		(3	)
Tax benefit		2			1
Pension liability adjustment, net of tax		(2	)		(2	)
Other comprehensive income	$	595		$	406

14

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(9) Pension Plan

The Bank sponsors a noncontributory defined benefit pension plan that covers all employees who meet specified age and length of service requirements, which is administered by the Savings Banks Employees Retirement Association (“SBERA”). The plan provides for benefits to be paid to eligible employees at retirement based primarily upon their years of service with the Bank and compensation levels near retirement. Contributions to the plan reflect benefits attributed to employees’ service to date, as well as service expected to be earned in the future.

The following table sets forth the amount of net periodic pension expense recognized for the three months ended March 31, 2008 and 2007:

Pension Benefits

	Three Months Ended March 31,
(In thousands)	2008			2007
Service cost	$	115		$	118
Interest cost		162			153
Expected return on plan assets		(198	)		(178	)
Amortization of transition obligation		(6	)		(5	)
Amortization of prior service cost		2			2
Net periodic pension expense	$	75		$	90

The Bank made an annual contribution to its defined benefit pension plan in the amount of $165,000 and $347,000, respectively, in the first three months of 2008 and 2007.

(10) Legal Proceedings

The litigation process is inherently uncertain, and we cannot guarantee that the outcome of the following lawsuit will be favorable for us or that it will not be material to our business, results of operations or financial position.

On March 10, 2008, the Company, the Bank, Eastern Bank Corporation (“Eastern”), Eastern Bank (“Eastern Bank”), and Minuteman Acquisition Corp., a wholly owned subsidiary of Eastern (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Merger Sub will merge with and into the Company, with the Company as the surviving corporation (the “Merger”). As a result of the Merger, the Company will become a wholly owned subsidiary of Eastern.

On March 13, 2008, Pennsylvania Avenue Funds, an alleged Company stockholder, filed a purported class action lawsuit allegedly on behalf of all Company stockholders in the Massachusetts Superior Court against the Company, the Company’s Board of Directors, Eastern, Eastern Bank and Merger Sub. The case is captioned Pennsylvania Avenue Funds v. Brandi, et al., Civ. Act. No. 08-1057. The complaint generally alleges that the Company’s Board of Directors breached its fiduciary duties by approving the Merger Agreement because, plaintiff alleges, the merger consideration is inadequate, the Merger Agreement’s termination fee and no shop provisions discourage bids from other sources, the transaction unfairly benefits the Company’s Board of Directors to the disadvantage of the Company’s stockholders, Mr. Brandi, the Company’s chief executive officer and chairman of the board, during negotiations with Eastern, was also discussing a future position at Eastern, and approval of the Merger by the Company’s Board of Directors was a response by the Company’s Board of Directors to a proxy contest that might have resulted in three members of the Company’s Board of Directors being replaced. The complaint also alleges that the Company and Eastern aided and abetted the Company’s Board of Directors’ breach of fiduciary duties.

15

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(10) Legal Proceedings (continued)

The plaintiff seeks the following relief:

• declaring that the lawsuit is a proper class action;

• enjoining the completion of the Merger unless and until the Company implements a procedure to obtain the highest price for the Company;

• declaring the termination fee provisions in the Merger Agreement to be unfair, unreasonable and improper deal protection devices and enjoining the payment of any termination fee to Eastern or its affiliates;

• declaring that the Company’s Board of Directors has breached its fiduciary duties to the purported class and that Eastern aided and abetted such breaches;

• awarding the plaintiff the costs of the action, including attorneys’ fees and experts’ fees; and;

• granting such other further relief as the Court deems appropriate.

On April 18, 2008, the defendants filed motions to dismiss the lawsuit in its entirety. On May 6, 2008, the plaintiff filed an amended complaint, individually and as a purported class action on behalf of all Company stockholders. The amended complaint generally makes the same allegations as those contained in the initial complaint in support of its claim of a breach of fiduciary duties by the Company’s Board of Directors, but, in addition, alleges that the Company’s Board of Directors breached its fiduciary duties by failing, in the preliminary proxy statement filed with the Securities and Exchange Commission on April 24, 2008 (the “Proxy Statement”), to disclose adequate information to the stockholders necessary for them to make a fully informed decision about the Merger. Generally, the amended complaint alleges that the Proxy Statement fails to adequately describe in sufficient detail the process used by the defendants in deciding to enter into, and agreeing to the terms of, the Merger; provide sufficient detail of the analysis used by the Company’s financial advisor or the criteria for selecting the financial advisor; disclose the fact that a third party investor was seeking to gain control of the Company and any impact of his efforts on the Board of Director’s efforts to sell the Company; and disclose any future employment by Mr. Brandi at Eastern. Like the initial complaint, the amended complaint also alleges that the Company and Eastern aided and abetted the Company’s Board of Directors’ breach of fiduciary duties. The amended complaint seeks the same relief sought in the initial complaint. While this case is in the early stages, the Company believes the lawsuit is without merit and intends to contest it vigorously.

The Company and/or the Bank, from time to time, is involved in the normal course of its business in various other legal proceedings incident to their business. Although the Company is unable to quantify the exact financial impact of any of these matters, it believes that none of these other currently pending matters will have an outcome material to its financial condition or business.

16

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

(11) Fair Value Measurements

Effective January 1, 2007, the Company elected early adoption of Statement of Financial Accounting Standards (“FAS”) 159 and 157. FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” was issued in February 2007 and permits the measurement of selected eligible financial instruments at fair value at specified election dates. The Company elected the fair value option to better manage its U.S. Treasury and Government Agency securities portfolio and to use the fair value measurement for these securities on a recurring basis.

The interest and dividend income from trading securities is included in the Consolidated Statements of Income as “trading securities” and the interest and dividend income from securities available for sale is included in the Consolidated Statements of Income as securities available for sale: “Mortgage-backed securities” and “Other Securities.”

The following table sets forth the assets of the Company as of March 31, 2008 that are measured at fair value on a recurring basis.

			Fair Value Measurements at March 31, 2008 Using						Changes in Fair Values For 3-Month Period Ended March 31, 2008 For Items Measured at Fair Value Pursuant to Election of Fair Value Option
(In thousands)	Assets Measured at Fair Value at 03/31/08		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Other Gains and (Losses)			Total Changes in Fair Values Included in Period Earnings
Trading Securities	$	114,232	$	114,232	$	—	$	—	$	(124	)	$	836
Securities Available for sale		127,463		3,604		123,859		—		(45	)		—

17

PART I. ITEM 2

MASSBANK CORP. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION & ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

March 31, 2008

Forward-Looking Statement Disclosure.

This Form 10-Q may contain forward-looking information, including information concerning the Company’s expectations of future business prospects. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results or performance to be materially different from the results and performance expressed or implied by the forward-looking statements. Forward looking statements include, but are not limited to, statements concerning the Company’s belief, expectations or intentions concerning the Company’s future performance, the financial outlook of the markets its serves and the performance and activities of its competitors. These statements reflect the Company’s current views. They are based on numerous assumptions and are subject to numerous risks and uncertainties, including but not limited to the following: (1) changing economic conditions; (2) movements in interest rates; (3) the credit environment; (4) levels of activity in the capital markets, including the stock and bond market; (5) changes in the levels of non-performing assets; (6) changes in the competitive pricing pressures within the Company’s market which may result in an increase in the Company’s cost of funds, changes in loan originations, a change in deposits and assets; (7) adverse legislative and regulatory developments; (8) a significant decline in residential real estate values in the Company’s market area; (9) adverse impacts resulting from the continuing war on terrorism; (10) a significant increase in employee benefit costs; (11) the impact of changes in accounting principles; (12) the impact of inflation or deflation; (13) the disruption to the Company’s business as a result of the announcement and pending merger with Eastern Bank Corporation (“Eastern”), including the Company’s ability to retain depositors and loan relationships and key personnel; and (14) the Company’s success at managing the risks involved in the foregoing and other factors described in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007. In addition, the completion of the previously announced merger with Eastern is subject to numerous risks and uncertainties, including:

(a) the risk the Company will be unable to satisfy all of the closing conditions set forth in the merger agreement;

(b) the possibility that the Company’s stockholders will not approve the merger agreement;

(c) the possibility that the Company may not obtain the necessary state and federal regulatory approvals to consummate the merger or that an adverse regulatory condition will be imposed in connection with those approvals; and

(d) the outcome of any legal proceeding that has been or may be instituted against the Company, Eastern or others relating to the merger agreement, including the terms of any settlement of such legal proceedings that may be subject to court approval.

18

Critical Accounting Policies

The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. As such, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates and the reported amounts of income and expense during the reporting periods. Actual amounts could differ from such estimates.

The Company believes that the following accounting policies are among the most critical because they involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

Provisions (Credit) for Loan Losses

The provision (credit) for loan losses represents a charge or credit against current earnings and an addition to or deduction from the allowance for loan losses. In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses (“loan allowance”). Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient loan allowance. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various types of loans based on loss experience factors, and an unallocated allowance. The unallocated allowance is maintained based on management’s assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may affect borrowers’ ability to pay and trends in loan delinquencies and charge-offs.

The provision (credit) for loan losses on off-balance sheet credit exposures represents a charge or credit against current earnings (reported in other non-interest expense) and an addition to or deduction from the allowance for loan losses on off-balance sheet credit exposures (“off-balance sheet exposures”). In determining the amount to provide for off-balance sheet exposures, the key factor is the adequacy of the balance. The balance of the off-balance sheet exposures is maintained based on expected draw downs of committed loans, their loss experience factors, management’s assessment of various other factors including current and anticipated economic conditions that may affect the borrowers’ ability to pay and trends in loan delinquencies and charge-offs.

Any significant changes in these assumptions and/or conditions could result in higher than estimated losses that could adversely affect the Company’s earnings results. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances. Such agencies may require the Bank to recognize additional allowances based on judgments different from those of management, which could also adversely affect the Company’s earnings results.

Investment Securities Other Than Temporarily Impaired

Management judgment is involved in the evaluation of declines in value (“impairment”) of individual investment securities held by the Company. Declines in value that are deemed other than temporary are recognized in the income statement through write-downs in the recorded value of the affected securities. Management considers many factors in their analysis of other than temporarily impaired securities, including industry analyst reports, sector credit ratings, volatility in market price and other relevant information, such as the financial condition, earnings capacity and near term prospects of the company and the length of time and extent to which the market value has been less than cost.

19

Investment Securities Other Than Temporarily Impaired (continued)

Whenever a debt or equity security is deemed to be “other than temporarily impaired” due to a fundamental deterioration in its financial condition as determined by management’s analysis, it is written down to its current fair market value. U.S. Treasury securities and other securities backed by the U.S. Government are never considered impaired due to a fundamental deterioration in financial condition.

If “due to general market conditions” an investment security declines in price from its cost basis by 25% or more for more than a year, between 30% and 40% for more than nine months, between 40% and 50% for more than six months or over 50% for more than ninety days, and in each case the value of the investment security has been below its cost basis for the entire period in question, then the security is considered “other than temporarily impaired” and it is written down to its current fair market value and the loss is recognized in earnings. U.S. Treasury and Government Agency securities fluctuate in value based on changes in market interest rates and other factors; however, they can be redeemed at par value if held to maturity and, therefore, if their maturity date is less than one year into the future, regardless of their fair market value, they are considered only temporarily impaired. Any unfavorable change in general market conditions could cause an increase in the Company’s impairment write downs of investment securities. This would have an adverse effect on the Company’s earnings results. Other than temporary impairment write downs of investment securities totaled $38 thousand in the first quarter of 2008. There were no other than temporary impairment write downs of investment securities in the first quarter of 2007.

Securities available for sale deemed temporarily impaired are carried at fair market value in the asset section of the Company’s balance sheet. Any change in value is reflected in accumulated other comprehensive income (loss) in the stockholders’ equity section of the Company’s balance sheet.

20

FINANCIAL OVERVIEW

MASSBANK Corp. provides a broad range of banking services through its subsidiary, MASSBANK (“the Bank”). The Bank offers a full range of retail and commercial deposit products through its fifteen banking offices located in Eastern Massachusetts. The Bank’s lending business includes residential and commercial real estate mortgages, construction loans, commercial loans and a variety of consumer loans. The Bank’s loan portfolio is concentrated among borrowers from the municipalities in which it operates banking offices and all of the contiguous cities and towns. The Bank also invests a significant portion of its funds in U.S. Treasury and Government agency securities, mortgage-backed securities, federal funds sold and other authorized investments. The Bank’s earnings depend largely upon net interest income. Securities gains are also an important source of revenue for the Bank.

The Bank faces strong competition from banks and other financial services providers in its market area. The principal methods of competition are through interest rates, financing terms and other customer conveniences. Among the external factors affecting MASSBANK’s operating results are market interest rates, the shape of the U.S. Treasury securities yield curve, the condition of the financial markets and both regional and national economic conditions.

For the three months ended March 31, 2008, MASSBANK Corp. reported net income of $181,000, or $0.04 in basic and diluted earnings per share, compared with net income of $2,081,000, or $0.48 in basic and diluted earnings per share in the first three months of 2007. The results in the first quarter of 2008 were adversely affected by the incurrence in the quarter of $1,392,000 of expenses related to a proxy contest instituted by a dissident stockholder, litigation initiated by that dissident stockholder, the Company’s merger with Eastern announced on March 10, 2008 and litigation challenging that merger. Excluding these expenses, the Company’s net income would have been $1,100,000, or $0.26 per share in the first quarter of 2008.

21

FINANCIAL OVERVIEW (continued)

The major factors affecting the Company’s earnings results for the first quarter of 2008 compared to the same quarter of 2007 were:

• The decrease in net interest income of $776,000.

• The increase in provision for loan losses of $28,000.

• The change from $85,000 of net gains to net losses of $45,000 on securities available for sale.

• The decrease in net trading securities gains of $337,000.

• The change from deferred compensation plan income of $25,000 to a loss of $49,000.

• The decrease in other non-interest income of $12,000.

• The increase in non-interest expense of $1,508,000.

• The decrease in income tax expense of $965,000.

(In thousands) Quarters Ended March 31,	2008			2007		Variance
Income Statement Data
Total interest and dividend income	$	8,762		$	9,979	$	(1,217	)
Total interest expense		4,747			5,188		441
Net interest income		4,015			4,791		(776	)
Provision (credit) for loan losses		28			—		(28	)
Gains (losses) on securities available for sale, net		(45	)		85		(130	)
Gains on trading securities, net		712			1,049		(337	)
Deferred compensation plan income (loss)		(49	)		25		(74	)
Other non-interest income		319			331		(12	)
Non-interest expense		4,608			3,100		(1,508	)
Income tax expense		135			1,100		965
Net income	$	181		$	2,081	$	(1,900	)
Diluted earnings per share	$	0.04		$	0.48	$	(0.44	)
(In thousands) Quarters Ended March 31,	2008			2007		Variance
Average Balance Sheet Data
Earning assets:
Mortgage and other loans	$	190,959		$	206,322	$	(15,363	)
Mortgage-backed securities		130,316			139,778		(9,462	)
Other securities available for sale		4,146			7,653		(3,507	)
Trading securities		160,374			252,690		(92,316	)
Federal funds sold		191,239			166,908		24,331
Short-term investments		101,161			30,094		71,067
Total earning assets	$	778,195		$	803,445	$	(25,250	)
Total deposits	$	677,800		$	716,246	$	(38,446	)
Total borrowed funds	$	9,230		$	—	$	9,230

22

FINANCIAL OVERVIEW (Continued)

Condensed Consolidated Balance Sheets

(In thousands)	March 31, 2008			December 31, 2007			Variance
Assets:
Short-term investments	$	222,850		$	150,978		$	71,872
Term federal funds sold		110,000			91,000			19,000
Securities available for sale, at fair value		127,463			128,710			(1,247	)
Securities held to maturity, at amortized cost		7,537			8,098			(561	)
Trading securities, at fair value		114,232			206,566			(92,334	)
Total investments		582,082			585,352			(3,270	)
Total loans		191,810			191,567			243
Allowance for loan losses		(1,397	)		(1,369	)		(28	)
Net loans		190,413			190,198			215
Other assets		27,581			26,249			1,332
Total assets	$	800,076		$	801,799		$	(1,723	)
Liabilities:
Total deposits	$	682,048		$	682,561		$	(513	)
Escrow deposits of borrowers		990			968			22
Other liabilities		8,984			9,309			(325	)
Total liabilities		692,022			692,838			(816	)
Total stockholders’ equity		108,054			108,961			(907	)
Total liabilities and stockholders’ equity	$	800,076		$	801,799		$	(1,723	)

Financial Condition

The Company’s total assets were $800.1 million at March 31, 2008, compared to $801.8 million at December 31, 2007, reflecting a decrease of $1.7 million. This includes a decrease of $3.3 million in total investments partially offset by an increase of $0.2 million in total loans and an increase of $1.4 million in other assets. Deposits, the primary funding source for the Company’s assets, decreased $0.5 million during the first three months of 2008, from $682.6 million at December 31, 2007 to $682.1 million at March 31, 2008.

23

Investments

At March 31, 2008, the Company’s total investments were $582.1 million representing 72.8% of total assets compared to $585.4 million representing 73.0% of total assets at December 31, 2007. Total investments have decreased $3.3 million from year-end 2007. The decrease in total investments reflects a decrease in trading securities of $92.3 million partially offset by an increase in short-term investments and term federal funds sold of $90.9 million. Securities available for sale and held to maturity also decreased $1.8 million. The Company in the recent quarter has shortened the average term of its investments due to the pending merger with Eastern.

Loans

The loan portfolio, net of allowance for loan losses, increased $0.2 million in the first three months of 2008. At March 31, 2008, the loan portfolio, net of allowance for loan losses, totaled $190.4 million representing 23.8% of total assets compared to $190.2 million representing 23.7% of total assets at December 31, 2007. The increase in loans is due to the volume of new loan originations exceeding the volume of principal payments and prepayments. New loan originations increased $6.5 million or over 237% to $9.3 million in the first three months of 2008 from $2.8 million in the same period of 2007. Mortgage loan origination activity (particularly refinancing activity) has increased in the Bank’s market area in the recent quarter.

The Bank’s loan portfolio consists predominately of residential mortgages. Residential mortgage loans (excluding residential construction loans) amounted to $175.5 million at March 31, 2008, representing 91.5% of the total loan portfolio. See page 34 of this Form 10-Q for a table setting forth the composition of the loan portfolio at March 31, 2008 and December 31, 2007.

Non-Performing Assets

Non-accrual loans, generally those loans that are 90 days or more delinquent, are near historical lows totaling $46,000 at March 31, 2008 compared to $199,000 at December 31, 2007 and $148,000 as of March 31, 2007. The Bank had no impaired loans

or real estate acquired through foreclosure at March 31, 2008.

Deposits

Deposits have traditionally been the Bank’s primary source of funds for lending and investment activities. The Bank attracts deposits within its primary market area by offering a variety of deposit instruments including demand and NOW accounts, money market accounts, different types of savings accounts, certificates of deposit and retirement savings plans. Deposit flows vary significantly and are influenced by prevailing interest rates, market conditions, economic conditions and competition. The Bank’s management attempts to manage its deposits through selective pricing and marketing.

Deposits at March 31, 2008 totaled $682.1 million, reflecting a decrease of $0.5 million from $682.6 million at December 31, 2007. For information concerning deposit balances at March 31, 2008 and December 31, 2007, see page 37 of this Form 10-Q.

24

Stockholders’ Equity

Total stockholders’ equity decreased $0.9 million to $108.1 million at March 31, 2008, from $109.0 million at December 31, 2007. This represents a book value of $25.53 per share at March 31, 2008, compared to $25.69 per share at December 31, 2007.

The decrease in stockholders’ equity was essentially the result of the following: the payment of dividends to stockholders of $1.2 million and the Company’s repurchase of treasury stock in the amount of $1.1 million, partially offset by the Company’s net income for the first three months of 2008 of $0.2 million, the payments and related tax benefits received from the exercise of stock options by the Company’s officers and directors of $0.6 million and an increase in accumulated other comprehensive income of $0.6 million due to an increase in the fair value of the Company’s available for sale securities portfolio in the recent quarter.

Comparison of Operating Results for the Three Months ended March 31, 2008 and 2007.

Net interest income

Net interest income for the three months ended March 31, 2008 was $4,015,000 compared to $4,791,000 for the same period in 2007. The decrease in net interest income was due in part to a decrease in net interest spread. The Company’s net interest spread in the recent quarter was 1.73% compared to 2.04% for the same quarter last year. The net interest spread in the recent quarter was adversely impacted by the decline in short-term interest rates, when comparing the first quarter of 2008 to the first quarter of 2007; and the higher relative average volume, as compared with the same quarter in 2007, of lower yielding assets such as short-term investments and federal funds sold on the Company’s balance sheet. Also contributing to the decrease in the Company’s net interest income was a decrease in average earning assets.

Average earning assets for the first quarter of 2008 declined to $778.2 million, from $803.4 million in the first quarter of the prior year due to a decrease in deposits. Average total deposits were $677.8 million for the recent quarter compared to $716.2 million for the same quarter last year. Deposits declined during the last twelve months due to intense competition for relatively expensive short-term deposits.

Interest and Dividend Income

Interest and dividend income on a fully taxable equivalent basis for the three months ended March 31, 2008 decreased $1,216,000 to $8,778,000 from $9,994,000 for the three months ended March 31, 2007. The decrease in interest and dividend income resulted from a decrease in yield on the Company’s average earning assets and a decrease of $25.2 million in average earning assets. As reflected in the table on page 26 of this Form 10-Q, the yield on the Company’s average earning assets in the first quarter of 2008 was 4.51%, as compared to 4.98% in the same quarter of 2007.

Interest Expense

Total interest expense for the three months ended March 31, 2008 decreased $441,000, or 8.5% to $4,747,000 from $5,188,000 for the three months ended March 31, 2007. The decrease in interest expense is due primarily to a decrease in the Company’s average deposits and borrowed funds and a lower cost of funds due primarily to a decrease in market rates. The Company’s average cost of funds decreased 16 basis points, from 2.94% in the first quarter of 2007 to 2.78% in the recent quarter. The Company’s average deposits and borrowed funds in the recent quarter, as shown in the table on page 27 of this Form 10-Q, decreased $29.2 million or 4.1% to $687.0 million, from $716.2 million in the same quarter of the prior year.

25

AVERAGE BALANCE SHEETS

	Three Months Ended March 31,
	2008							2007
(In thousands)	Average Balance			Interest Income/ Expense (1)		Average Yield/ Rate		Average Balance			Interest Income/ Expense (1)		Average Yield/ Rate
Assets:
Earning assets:
Federal funds sold	$	191,239		$	1,869	3.93	%	$	166,908		$	2,180	5.30	%
Short-term investments (2)		101,161			846	3.36			30,094			387	5.22
Securities available for sale:
Mortgage-backed securities (3)		122,271			1,589	5.20			134,513			1,806	5.37
Other securities (3)		4,146			38	3.67			7,653			44	2.30
Mortgage-backed securities held to maturity		8,045			115	5.72			5,265			69	5.26
Trading securities		160,374			1,670	4.17			252,690			2,639	4.18
Mortgage loans (4)		181,426			2,490	5.49			196,649			2,676	5.44
Other loans (4)		9,533			161	6.77			9,673			193	8.10
Total earning assets		778,195		$	8,778	4.51	%		803,445		$	9,994	4.98	%
Allowance for loan losses		(1,370	)						(1,382	)
Total earning assets less allowance for loan losses		776,825							802,063
Other assets		23,352							25,615
Total assets	$	800,177						$	827,678

(1) Dividend income on equity securities is included on a tax equivalent basis.

(2) Short-term investments consist of interest-bearing bank money market accounts and investments in institutional money market funds.

(3) Average balances include net unrealized gains (losses) on securities available for sale.

(4) Loans on non-accrual status are included in the average balance.

26

AVERAGE BALANCE SHEETS - (continued)

	Three Months Ended March 31,
	2008						2007
(In thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Liabilities:
Deposits:
Demand and NOW	$	71,924	$	55	0.31	%	$	75,213	$	64	0.35	%
Savings		301,704		1,534	2.05			337,921		1,612	1.93
Time certificates of deposit		304,172		3,074	4.06			303,112		3,512	4.70
Total deposits		677,800		4,663	2.77	%		716,246		5,188	2.94	%
Borrowed funds		9,230		84	3.65	%		—		—	—
Total deposits and borrowed funds		687,030		4,747	2.78	%		716,246		5,188	2.94	%
Other liabilities		5,037						4,558
Total liabilities		692,067						720,804
Stockholders’ equity		108,110						106,874
Total liabilities and stockholders’ equity	$	800,177					$	827,678
Net interest income (tax-equivalent basis)				4,031						4,806
Less adjustment for tax-exempt interest income				16						15
Net interest income			$	4,015					$	4,791
Interest rate spread (5)					1.73	%					2.04	%
Net interest margin (6)					2.07	%					2.39	%

(5) Interest rate spread represents the difference between the yield on earning assets and the cost of the Company’s deposits.

(6) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.

27

Provision (Credit) for Loan Losses

In the first quarter of 2008, the Bank recorded a provision for loan losses of $28 thousand. There was no loan loss provision recorded in the same quarter last year. The provision in the recent quarter was to increase the Bank’s allowance for possible loan losses on its outstanding loan balances due to certain recently funded loan commitments. Conversely, the Bank reduced its allowance for possible losses on outstanding loan commitments by $28 thousand.

In determining the amount to provide for loan losses, the key factor is the adequacy of the allowance for loan losses. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for the purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various loan types based on loss experience factors, and an unallocated allowance, which is maintained based on management’s assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may affect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.

At March 31, 2008, the allowance for loan losses was $1,397,000 representing 0.73% of total loans. This compares to $1,369,000 representing 0.71% of total loans at December 31, 2007. Non-accrual loans totaled $46,000 at March 31, 2008. This compares to $199,000 at December 31, 2007 and $148,000 at March 31, 2007. Management believes that the allowance for loan losses as of March 31, 2008 is adequate to cover the risks inherent in the loan portfolio under current conditions.

The Bank also maintains an allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) that totaled $317,000 and $345,000, at March 31, 2008 and December 31, 2007, respectively. This is intended to protect the Bank against losses on loan commitments made to customers that have not yet been drawn down.

Non-Interest Income

Non-interest income consists of deposit account service fees, net gains on securities and other non-interest income.

Non-interest income for the three months ended March 31, 2008 decreased $553,000 to $937,000 from $1,490,000 for the same quarter last year due essentially to a decrease in securities gains. Gains on securities available for sale and trading securities declined $467,000 to $667,000 in the first quarter of 2008 from $1,134,000 in the first quarter of 2007. The Company recorded a loss of $45,000 on its securities available for sale portfolio for the three months ended March 31, 2008 compared to net gains of $85,000 in the same period last year. Additionally, the net gains on the Company’s trading securities portfolio fell $337,000 to $712,000 in the recent quarter from $1,049,000 in the first quarter of 2007. This reflects an increase in the fair value of the trading portfolio of $836,000 in the first quarter of 2008, down $237,000 from the $1,073,000 increase in fair value recorded in the first quarter of last year. In addition, net losses realized from sales of trading securities were $124,000 in the recent quarter compared to losses of $24,000 in the same quarter last year.

Also contributing to the decline in non-interest income during the recent quarter was a deferred compensation plan loss of $49,000 versus deferred compensation plan income of $25,000 during the same quarter of 2007. This decrease is due primarily to the change in fair value of plan assets recorded in each of the respective quarters.

Deposit account service fees, option fees and other non-interest income totaled $319,000 for the three months ended March 31, 2008 compared to $331,000 for the same period last year.

28

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2008 increased $1,508,000, or 48.6%, to $4,608,000 from $3,100,000 for the same period in 2007. The increases were predominantly in professional services and merger related expenses. In the recent quarter the Company incurred $1,392,000 of expenses relating to a proxy contest instituted by a dissident stockholder, litigation initiated by that dissident stockholder, the Company’s merger with Eastern announced on March 10, 2008 and litigation challenging the merger. Excluding these expenses, the Company’s non-interest expense would have been $3,216,000 reflecting an increase of $116,000 or 3.7% when compared to the first quarter of 2007.

Income Tax Expense

The Company files a consolidated federal income tax return for the Parent Company, its subsidiaries, Knabssam LLC and the Bank, and bank subsidiaries – Melbank Investment Corporation, Readibank Investment Corporation and Readibank Properties, Inc. Each of these companies is subject to a Massachusetts Corporate Excise Tax as calculated in separately filed Massachusetts tax returns.

The Company recorded income tax expense of $135,000 in the first quarter of 2008, a decrease of $965,000 when compared to $1,100,000 in the same quarter last year. The decrease in income tax expense is due primarily to a decrease in income before income taxes partially offset by an increase in effective income tax rate. The Company’s income before income taxes was $316,000 in the recent quarter compared to $3,181,000 for the same quarter a year ago. The effective income tax rate for the three months ended March 31, 2008 and 2007 was 42.72% and 34.58%, respectively.

29

FINANCIAL CONDITION

INVESTMENT SECURITIES

The amortized cost and fair value of investment securities held to maturity and available for sale at March 31, 2008 with gross unrealized gains and losses follows:

(In thousands) At March 31, 2008	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities held to maturity:
Mortgage-backed securities:
Federal National Mortgage Association	$	7,537	$	114	$	(1	)	$	7,650
Total securities held to maturity	$	7,537	$	114	$	(1	)	$	7,650
Securities available for sale:
Debt securities:
Mortgage-backed securities:
Government National Mortgage Association	$	398	$	8	$	—		$	406
Federal Home Loan Mortgage Corporation		119,456		2,223		(31	)		121,648
Federal National Mortgage Association		1,713		33		—			1,746
Collateralized mortgage obligations		58		1		—			59
Total mortgage-backed securities		121,625		2,265		(31	)		123,859
Total debt securities available for sale		121,625		2,265		(31	)		123,859
Equity securities		3,396		431		(223	)		3,604
Total securities available for sale		125,021	$	2,696	$	(254	)	$	127,463
Net unrealized gains on securities available for sale		2,442
Total securities available for sale, net		127,463
Total investment securities, net	$	135,000

TRADING SECURITIES

The trading securities portfolio at March 31, 2008 consist of the following:

(In thousands) At March 31, 2008	Fair Value
U.S. Treasury obligations	$	4,969
U.S. Government agency obligations		105,315
Marketable equity securities		3,945
Investments in mutual funds		3
Total trading securities	$	114,232

30

FINANCIAL CONDITION

INVESTMENT SECURITIES (continued)

The amortized cost and fair value of investment securities held to maturity and available for sale at December 31, 2007 with gross unrealized gains and losses follows:

(In thousands) At December 31, 2007	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities held to maturity:
Mortgage-backed securities:
Federal National Mortgage Association	$	8,098	$	83	$	(61	)	$	8,120
Total	$	8,098	$	83	$	(61	)	$	8,120
Securities available for sale:
Debt securities:
Mortgage-backed securities:
Government National Mortgage Association	$	591	$	9	$	—		$	600
Federal Home Loan Mortgage Corporation		121,087		1,204		(279	)		122,012
Federal National Mortgage Association		1,847		12		—			1,859
Collateralized mortgage obligations		59		—		—			59
Total mortgage-backed securities		123,584		1,225		(279	)		124,530
Total debt securities available for sale		123,584		1,225		(279	)		124,530
Equity securities		3,621		690		(131	)		4,180
Total securities available for sale		127,205	$	1,915	$	(410	)	$	128,710
Net unrealized gains on securities available for sale		1,505
Total securities available for sale, net		128,710
Total investment securities, net	$	136,808

TRADING SECURITIES

The trading securities portfolio at December 31, 2007 consist of the following:

(In thousands) At December 31, 2007	Fair Value
U.S. Treasury obligations	$	1,997
U.S. Government agency obligations		201,172
Marketable equity securities		3,393
Investments in mutual funds		4
Total trading securities	$	206,566

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Investments (continued)

The amortized cost and fair value of debt securities available for sale by contractual maturity at March 31, 2008 and December 31, 2007 are shown in the following table.

The amortized cost and fair value of debt securities available for sale by contractual maturity are as follows:

	March 31, 2008				December 31, 2007
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Investment securities held to maturity:
Mortgage-backed securities: (a)
Maturing after 15 years	$	7,537	$	7,650	$	8,098	$	8,120
Total debt securities held to maturity		7,537		7,650		8,098		8,120
Investment securities available for sale:
Mortgage-backed securities: (a)
Maturing within 1 year		318		323		156		156
Maturing after 1 year but within 5 years		4,771		4,963		5,662		5,831
Maturing after 5 years but within 10 years		18,545		19,051		19,936		20,264
Maturing after 10 years but within 15 years		97,991		99,522		97,830		98,279
Total		121,625		123,859		123,584		124,530
Total debt securities available for sale	$	121,625	$	123,859	$	123,584	$	124,530
Net unrealized gains on debt securities available for sale		2,234				946
Total debt securities available for sale, net carrying value	$	123,859			$	124,530

(a) Maturities of mortgage-backed securities are shown at final contractual maturity and do not reflect any principal amortization or prepayments.

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INVESTMENT SECURITIES (continued)

The following table shows the gross unrealized losses and fair value of the Company’s securities available for sale and held to maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2008, December 31, 2007, and March 31, 2007.

Temporarily Impaired Investment Securities (Unaudited)

	Temporarily Impaired Less Than 12 Months					Temporarily Impaired 12 Months or Longer					Total
(In thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
At March 31, 2008
Mortgaged-backed securities	$	5,765	$	(2	)	$	2,269	$	(30	)	$	8,034	$	(32	)
Equity securities		1,008		(223	)		—		—			1,008		(223	)
Total temporarily impaired investment securities at:
March 31, 2008	$	6,773	$	(225	)	$	2,269	$	(30	)	$	9,042	$	(255	)
December 31, 2007	$	949	$	(131	)	$	34,711	$	(340	)	$	35,660	$	(471	)
March 31, 2007	$	11,281	$	(396	)	$	77,626	$	(1,268	)	$	88,907	$	(1,664	)

As of March 31, 2008 management concluded that the unrealized losses above are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The unrealized losses above (with the exception of the equity securities) are primarily related to market interest rates.

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LOANS

The composition of the Bank’s loan portfolio is summarized as follows:

(In thousands)	At March 31, 2008		At December 31, 2007
Mortgage loans:
Residential:
Conventional:
Fixed rate	$	150,453	$	150,481
Variable rate		25,064		24,789
FHA and VA		4		5
Construction-Variable rate		1,200		1,114
Commercial:
Fixed rate		335		342
Variable rate		4,418		4,450
Construction-Fixed rate		988		708
Total mortgage loans		182,462		181,889
Premium on loans		1		1
Deferred mortgage loan origination costs, net		69		55
Mortgage loans, net		182,532		181,945
Other loans:
Consumer:
Second mortgage loans		1,055		1,231
Installment		284		287
Guaranteed education		399		427
Other secured		415		374
Home equity lines of credit		6,871		7,052
Unsecured		128		125
Total consumer loans		9,152		9,496
Commercial		126		126
Total other loans		9,278		9,622
Total loans	$	191,810	$	191,567

The Bank’s loan portfolio increased $243 thousand during the first three months of 2008, from $191.6 million at December 31, 2007 to $191.8 million at March 31, 2008. This is primarily due to an increase in mortgage loans.

The Bank’s mortgage lending activity, particularly refinancing activity, has increased in 2008 compared to the prior year. Loan originations were $9.3 million in the recent quarter compared to $2.8 million in the same quarter of last year.

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NON-PERFORMING ASSETS

The following table shows the composition of the Bank’s non-performing assets at March 31, 2008 and 2007, and December 31, 2007:

(In thousands)	At March 31, 2008			At December 31, 2007			At March 31, 2007
Non-Performing Assets:
Non-accrual loans	$	46		$	199		$	148
Real estate acquired through foreclosure		—			—			—
Total non-performing assets	$	46		$	199		$	148
Allowance for loan losses	$	1,397		$	1,369		$	1,382
Allowance as a percent of total loans		0.73	%		0.71	%		0.68	%
Non-accrual loans as a percent of total loans		0.02	%		0.10	%		0.07	%

The Bank generally does not accrue interest on loans which are 90 days or more past due. It is the Bank’s policy to place such loans on non-accrual status and to reverse from income all interest previously accrued but not collected and to discontinue all amortization of deferred loan fees.

The Company’s non-accrual loans are near historical lows totaling $46,000 at March 31,2008 down from $199,000 at December 31, 2007 and $148,000 at March 31, 2007.

The Bank did not have any impaired loans as of March 31, 2008, December 31, 2007 or March 31, 2007.

35

ALLOWANCE FOR LOAN LOSSES

An analysis of the activity in the allowance for loan losses is as follows:

	Three Months Ended March 31,
	2008		2007
	(In thousands)
Balance at December 31, 2007 and 2006	$	1,369	$	1,382
Provision (credit) for loan losses		28		—
Recoveries of loans previously charged-off		—		—
Charge-offs		—		—
Balance at March 31,	$	1,397	$	1,382

The Company maintains an allowance for possible losses that are inherent in the Company’s loan portfolio. The allowance for loan losses is increased by provisions charged to operations based on the estimated loan loss exposure inherent in the portfolio. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired, general loss allocations for various loan types based on loss experience factors and an unallocated allowance which is maintained based on management’s assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, current and anticipated economic conditions that may effect the borrower’s ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management.

At March 31, 2008 the balance of the allowance for loan losses was $1,397,000 representing 0.73% of total loans compared to $1,382,000 representing 0.68% of total loans at March 31, 2007. Management believes that the allowance for loan losses is adequate to cover the risks inherent in the portfolio under current conditions.

The Company also maintains an allowance for possible losses on its outstanding loan commitments that totaled $317,000 and $345,000 at March 31, 2008 and 2007, respectively. The allowance for loan losses on off-balance sheet credit exposures (shown separately on the balance sheet) is maintained based on expected drawdowns of committed loans and their loss experience factors and management’s assessment of various other factors including current and anticipated economic conditions that may effect the borrowers’ ability to pay, and trends in loan delinquencies and charge-offs.

36

DEPOSITS

Deposit accounts of all types have traditionally been the primary source of funds for the Bank’s lending and investment activities. The Bank’s deposit flows are influenced by prevailing interest rates, competition and other market conditions. The Bank’s management attempts to manage its deposits through selective pricing and marketing.

The Bank’s total deposits decreased $0.5 million to $682.1 million at March 31, 2008 from $682.6 million at December 31, 2007.

The composition of the Bank’s total deposits as of the dates shown are summarized as follows:

	March 31, 2008		December 31, 2007
	(In thousands)
Demand and NOW	$	76,025	$	71,687
Savings and money market accounts		302,096		307,322
Time certificates of deposit		303,927		303,552
Total deposits	$	682,048	$	682,561

37

PART I. ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. At March 31, 2008 the Company’s trading securities portfolio totaled $114.2 million consisting of both debt and equity securities. Fluctuations in interest rates and movements in equity prices may, respectively, result in changes in the fair value of the debt and equity securities in the portfolio. Since the changes in fair value of the trading securities are included in earnings on a recurring basis, this could have an adverse impact on the Company’s earnings. Also, the fair value of the debt securities in the Company’s trading account as of March 31, 2008 exceeds par value by $1.102 million and if the securities are held to maturity, the amount in excess of par value will reverse and negatively impact Company earnings.

Interest Rate Risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change the interest income and expense streams associated with the Company’s financial instruments also change, which impacts net interest income, the primary component of the Company’s earnings. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process. For additional information about the Company’s asset/liability management and interest rate risk, see the Management Discussion and Analysis section of the Company’s Form 10-K for the year ended December 31, 2007.

Liquidity and Capital Resources

The Bank must maintain a sufficient amount of cash and assets which can readily be converted into cash in order to meet cash outflows from normal depositor requirements and loan demands. The Bank’s primary sources of funds are deposits, loan and mortgage-backed securities amortization and prepayments, sales or maturities of investment securities, investment securities called before maturity and income on earning assets. In addition to loan payments and maturing investment securities, which are relatively predictable sources of funds, the Bank maintains a high percentage of its assets invested in overnight federal funds sold and money market funds, which can be immediately converted into cash and United States Treasury and Government agency securities, which can be sold or pledged to raise funds. At March 31, 2008 the Bank had $175.9 million or 22.0% of total assets and $110.3 million or 13.8% of total assets invested, respectively, in overnight federal funds sold and money market funds, and United States Treasury and Government agency obligations.

The Bank is a Federal Deposit Insurance Corporation (“FDIC”) insured institution subject to the FDIC regulatory capital requirements. The FDIC regulations require all FDIC insured institutions to maintain minimum levels of Tier 1 capital. Highly rated banks (i.e., those with a composite rating of 1 under the CAMELS rating system) are required to maintain a minimum leverage ratio of Tier 1 capital to total assets of at least 3.00%. An additional 100 to 200 basis points are required for all but these most highly rated institutions. The Bank is also required to maintain a minimum level of risk-based capital. Under the risk-based capital standards, FDIC insured institutions must maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and are generally expected to meet a minimum total qualifying capital to risk-weighted assets ratio of 8.00%. The risk-based capital guidelines take into consideration risk factors, as defined by the regulators, associated with various categories of assets, both on and off the balance sheet. Under the guidelines, capital strength is measured in two tiers which are used in conjunction with risk adjusted assets to determine the risk-based capital ratios.

38

Liquidity and Capital Resources (continued)

Tier II components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt and up to 45 percent of the pre-tax net unrealized holding gains on certain available for sale equity securities. Tier I capital plus the Tier II capital components are referred to as total qualifying capital.

The capital ratios of the Bank and the Company currently exceed the minimum regulatory requirements. At March 31, 2008, the Bank had a leverage Tier I capital to average assets ratio of 12.60%, a Tier I capital to risk- weighted assets ratio of 26.31% and a total capital to risk-weighted assets ratio of 26.79%. The Company, on a consolidated basis, had ratios of leverage Tier I capital to average assets of 13.20%, Tier I capital to risk-weighted assets of 27.54% and total capital to risk-weighted assets of 28.02% at March 31, 2008.

PART I. ITEM 4

Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Our principal executive officer and our principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, such officers have concluded that our disclosure controls and procedures are effective as of the end of such period.

(b) Changes in internal controls over financial reporting. There have been no changes during the period covered by this Quarterly Report in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

39

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The litigation process is inherently uncertain, and we cannot guarantee that the outcome of the following lawsuit will be favorable for us or that it will not be material to our business, results of operations or financial position.

On March 10, 2008, the Company, the Bank, Eastern Bank Corporation (“Eastern”), Eastern Bank (“Eastern Bank”), and Minuteman Acquisition Corp., a wholly owned subsidiary of Eastern (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which the Merger Sub will merge with and into the Company, with the Company as the surviving corporation (the “Merger”). As a result of the Merger, the Company will become a wholly owned subsidiary of Eastern.

On March 13, 2008, Pennsylvania Avenue Funds, an alleged Company stockholder, filed a purported class action lawsuit allegedly on behalf of all Company stockholders in the Massachusetts Superior Court against the Company, the Company’s Board of Directors, Eastern, Eastern Bank and Merger Sub. The case is captioned Pennsylvania Avenue Funds v. Brandi, et al., Civ. Act. No. 08-1057. The complaint generally alleges that the Company’s Board of Directors breached its fiduciary duties by approving the Merger Agreement because, plaintiff alleges, the merger consideration is inadequate, the Merger Agreement’s termination fee and no shop provisions discourage bids from other sources, the transaction unfairly benefits the Company’s Board of Directors to the disadvantage of the Company’s stockholders, Mr. Brandi, the Company’s chief executive officer and chairman of the board, during negotiations with Eastern, was also discussing a future position at Eastern, and approval of the Merger by the Company’s Board of Directors was a response by the Company’s Board of Directors to a proxy contest that might have resulted in three members of the Company’s Board of Directors being replaced. The complaint also alleges that the Company and Eastern aided and abetted the Company’s Board of Directors’ breach of fiduciary duties.

The plaintiff seeks the following relief:

• declaring that the lawsuit is a proper class action;

• enjoining the completion of the Merger unless and until the Company implements a procedure to obtain the highest price for the Company;

• declaring the termination fee provisions in the Merger Agreement to be unfair, unreasonable and improper deal protection devices and enjoining the payment of any termination fee to Eastern or its affiliates;

• declaring that the Company’s Board of Directors has breached its fiduciary duties to the purported class and that Eastern aided and abetted such breaches;

• awarding the plaintiff the costs of the action, including attorneys’ fees and experts’ fees; and;

• granting such other further relief as the Court deems appropriate.

On April 18, 2008, the defendants filed motions to dismiss the lawsuit in its entirety. On May 6, 2008, the plaintiff filed an amended complaint, individually and as a purported class action on behalf of all Company stockholders. The amended complaint generally makes the same allegations as those contained in the initial complaint in support of its claim of a breach of fiduciary duties by the Company’s Board of Directors, but, in addition, alleges that the Company’s Board of Directors breached its fiduciary duties by failing, in the preliminary proxy statement filed with the Securities and Exchange Commission on April 24, 2008 (the “Proxy Statement”), to disclose adequate information to the stockholders necessary for them to make a fully informed decision about the Merger.

40

Generally, the amended complaint alleges that the Proxy Statement fails to adequately describe in sufficient detail the process used by the defendants in deciding to enter into, and agreeing to the terms of, the Merger; provide sufficient detail of the analysis used by the Company’s financial advisor or the criteria for selecting the financial advisor; disclose the fact that a third party investor was seeking to gain control of the Company and any impact of his efforts on the Board of Director’s efforts to sell the Company; and disclose any future employment by Mr. Brandi at Eastern. Like the initial complaint, the amended complaint also alleges that the Company and Eastern aided and abetted the Company’s Board of Directors’ breach of fiduciary duties. The amended complaint seeks the same relief sought in the initial complaint. While this case is in the early stages, the Company believes the lawsuit is without merit and intends to contest it vigorously.

The Company and/or the Bank, from time to time, is involved in the normal course of its business in various other legal proceedings incident to their business. Although the Company is unable to quantify the exact financial impact of any of these matters, it believes that none of these other currently pending matters will have an outcome material to its financial condition or business.

Item 1A. Risk Factors

These risk factors should be read in conjunction with those risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The Company, the Company’s Board of Directors, Eastern, Eastern Bank and Merger Sub are named parties to a lawsuit relating to the Merger. Further, defending against this lawsuit may be expensive and could divert the attention of our management.

On March 13, 2008, Pennsylvania Avenue Funds, an alleged Company stockholder, filed a purported class action lawsuit allegedly on behalf of all Company stockholders in the Massachusetts Superior Court against the Company, the Company’s Board of Directors, Eastern, Eastern Bank and Merger Sub. The case is captioned Pennsylvania Avenue Funds v. Brandi, et al., Civ. Act. No. 08-1057. The complaint generally alleges that the Company’s Board of Directors breached its fiduciary duties by approving the Merger Agreement because, plaintiff alleges, the merger consideration is inadequate, the Merger Agreement’s termination fee and no shop provisions discourage bids from other sources, the transaction unfairly benefits the Company’s Board of Directors to the disadvantage of the Company’s stockholders, Mr. Brandi, the Company’s chief executive officer and chairman of the board, during negotiations with Eastern, was also discussing a future position at Eastern, and approval of the Merger by the Company’s Board of Directors was a response by the Company’s Board of Directors to a proxy contest that might have resulted in three members of the Company’s Board of Directors being replaced. The complaint also alleges that the Company and Eastern aided and abetted the Company’s Board of Directors’ breach of fiduciary duties. On May 6, 2008, the plaintiff filed an amended complaint, which generally makes the same allegations and asserts the same causes of action as those set forth in the initial complaint, but, in addition, alleges that the Company’s Board of Directors breached its fiduciary duties by failing to disclose adequate information to the stockholders necessary for them to make a fully informed decision about the Merger in the Proxy Statement.

As with any litigation proceeding, we cannot predict with certainty the eventual outcome of this pending lawsuit. Furthermore, we will have to incur expenses in connection with this lawsuit, which may be substantial. Depending on the outcome of this lawsuit, this action could result in the Court enjoining the Merger or could otherwise impede the closing of the Merger and could have adverse financial effects or cause reputational harm to the Company. Moreover, responding to and defending the pending litigation could result in a significant diversion of management’s attention and resources and an increase in professional fees.

41

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program (1)	Maximum Number of Shares That May Yet Be Purchased Under the Repurchase Program
December 31, 2007	—		—	—	117,017	(1)
January 1-31, 2008	9,000	$	36.09	9,000	108,017
February 1-29, 2008	20,000	$	37.56	20,000	88,017
March 1-31, 2008	—		—	—	88,017
	29,000	$	37.11	29,000

(1) On October 16, 2007 the Registrant’s Board of Directors extended for another year the stock repurchase program previously authorized. Additionally, the Board approved an increase of 100,000 in the number of shares of the Company’s common stock authorized for repurchase in the current program, bringing the total shares available for repurchase to 150,517. During the three months ended December 31, 2007 the Company repurchased 33,500. As of December 31, 2007, there were 117,017 shares available for repurchase in the current program.

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.

42

Item 6. Exhibits

a. Exhibit Index

31.1	Section 302 Certification of Chief Executive Officer. (filed herewith)
31.2	Section 302 Certification of Chief Financial Officer. (filed herewith)
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Gerard H. Brandi, Chief Executive Officer of the Company. (filed herewith)
32.2	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Reginald E. Cormier, Chief Financial Officer of the Company. (filed herewith)

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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.

	MASSBANK Corp.
	(Registrant)
Date: May 8, 2008	/s/ Gerard H. Brandi
	(Signature)
	Gerard H. Brandi
	President and CEO
Date: May 8, 2008	/s/ Reginald E. Cormier
	(Signature)
	Reginald E. Cormier
	Sr. V.P., Treasurer and CFO

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