---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|                                                   |                                                                                    
|-------------------------------------------------- | -----------------------------------------------------------------------------------
|x                                                  | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
|                                                   |                                                                                    
|For the
 quarterly period ended September 30, 2007
|                                                   |                                                                                    
|OR                                                
|                                                   |                                                                                    
|o                                                  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
 EXCHANGE ACT                   
|                                                   |                                                                                    

For the transition period from
_______________ to _______________

Commission file number: 001-33898

|                                                      
|------------------------------------------------------
|Meridian Interstate Bancorp, Inc.                     
|                                                      
|(Exact name of Registrant as specified in its charter)

|                                                                |  |                                     
|--------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                   |  | 20-4652200                          
|                                                                |  |                                     
|(State or other jurisdiction of incorporation
 or organization) |  | (I.R.S. Employer Identification No.)

|                                                     
|-----------------------------------------------------
|10 Meridian Street, East Boston,
 Massachusetts 02128
|                                                     
|(Address of principal executive offices)             

|                                                                                   
|-----------------------------------------------------------------------------------
|(617) 567-1500                                                                     
|                                                                                   
|(Issuers telephone number)                                                        
|                                                                                   
|Not Applicable                                                                     
|                                                                                   
|(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 o    No x

Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of large accelerated filer and
accelerated filer in Rule 12b-2 of the Exchange Act.

|             |                            |                      |                         
|------------ | -------------------------- | -------------------- | ------------------------
|(Check one): | Large
 Accelerated Filer o | Accelerated
 Filer o | Non-accelerated
 Filer x

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

At November
30, 2007, the registrant had 100 shares of no par value common stock
outstanding.

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MERIDIAN INTERSTATE BANCORP, INC.

FORM 10-Q

INDEX

|                              |                                                                                                                            |     
|----------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ----
|                              |                                                                                                                            | Page
|                              |                                                                                                                            |     
|PART I. FINANCIAL INFORMATION |                                                                                                                           
|                              |                                                                                                                            |     
|Item 1.                       | Consolidated Financial Statements                                                                                          |     
|                              |                                                                                                                            |     
|                              | Consolidated Balance Sheets at September 30, 2007 and December 31,
 2006 (Unaudited)                                       | 1   
|                              |                                                                                                                            |     
|                              | Consolidated Statements of Operations for the three and nine months
 ended September 30, 2007 and 2006 (Unaudited)         | 2   
|                              |                                                                                                                            |     
|                              | Consolidated Statements of Changes in Retained Earnings for the nine
 months ended September 30, 2007 and 2006 (Unaudited) | 3   
|                              |                                                                                                                            |     
|                              | Consolidated Statements of Cash Flows for the nine months ended
 September 30, 2007 and 2006 (Unaudited)                   | 4   
|                              |                                                                                                                            |     
|                              | Notes to Unaudited Consolidated Financial Statements                                                                       | 5   
|                              |                                                                                                                            |     
|Item 2.                       | Managements Discussion and Analysis of Financial Condition and
 Results of Operations                                     | 7   
|                              |                                                                                                                            |     
|Item 3.                       | Quantitative and Qualitative Disclosures About Market Risk                                                                 | 21  
|                              |                                                                                                                            |     
|Item 4.                       | Controls and Procedures                                                                                                    | 22  
|                              |                                                                                                                            |     
|PART II. OTHER INFORMATION    |                                                                                                                           
|                              |                                                                                                                            |     
|Item 1.                       | Legal Proceedings                                                                                                          | 23  
|                              |                                                                                                                            |     
|Item 1A.                      | Risk Factors                                                                                                               | 23  
|                              |                                                                                                                            |     
|Item 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds                                                                | 23  
|                              |                                                                                                                            |     
|Item 3.                       | Defaults Upon Senior Securities                                                                                            | 23  
|                              |                                                                                                                            |     
|Item 4.                       | Submission of Matters to a Vote of Security Holders                                                                        | 23  
|                              |                                                                                                                            |     
|Item 5.                       | Other Information                                                                                                          | 23  
|                              |                                                                                                                            |     
|Item 6.                       | Exhibits                                                                                                                   | 24  
|                              |                                                                                                                            |     
|SIGNATURES                    |                                                                                                                           

---



PART
I  FINANCIAL INFORMATION

Item 1. Financial Statements

MERIDIAN INTERSTATE BANCORP, INC.
AND SUBSIDIARYConsolidated Balance Sheets
(In Thousands)(Unaudited)

|                                              |  |                     |         |                    |   |         |  
|--------------------------------------------- |  | ------------------- | ------- | ------------------ | - | ------- | -
|                                              |  | September
 30, 2007 |         | December
 31, 2006 |  
|                                             
|ASSETS                                        |  |                     |         |                    |   |         |  
|                                             
|Cash and due from banks                       |  | $                   | 21,501  |                    | $ | 13,162  |  
|Federal funds sold                            |  |                     | 34,597  |                    |   | 10,332  |  
|                                              |  |                     |         |                    |   |         |  
|Total cash and cash equivalents               |  |                     | 56,098  |                    |   | 23,494  |  
|                                              |  |                     |         |                    |   |         |  
|Securities available for
 sale, at fair value |  |                     | 269,301 |                    |   | 281,662 |  
|Federal Home Loan Bank
 stock, at cost        |  |                     | 3,165   |                    |   | 3,371   |  
|Loans held for sale                           |  |                     | 3,404   |                    |   | 3,594   |  
|                                              |  |                     |         |                    |   |         |  
|Loans                                         |  |                     | 550,225 |                    |   | 533,012 |  
|Less allowance for loan
 losses               |  |                     | (3,620  | )                  |   | (3,362  | )
|                                              |  |                     |         |                    |   |         |  
|Loans, net                                    |  |                     | 546,605 |                    |   | 529,650 |  
|                                              |  |                     |         |                    |   |         |  
|Premises and equipment, net                   |  |                     | 22,895  |                    |   | 19,700  |  
|Accrued interest receivable                   |  |                     | 5,284   |                    |   | 5,502   |  
|Bank-owned life insurance                     |  |                     | 18,086  |                    |   | 19,029  |  
|Investment in affiliate
 bank                 |  |                     | 10,964  |                    |   | 11,313  |  
|Other assets                                  |  |                     | 1,967   |                    |   | 2,248   |  
|                                              |  |                     |         |                    |   |         |  
|                                              |  |                     |         |                    |   |         |  
|Total assets                                  |  | $                   | 937,769 |                    | $ | 899,563 |  
|                                              |  |                     |         |                    |   |         |  
|                                              |  |                     |         |                    |   |         |  
|LIABILITIES
 AND RETAINED EARNINGS            |  |                     |         |                    |   |         |  
|                                              |  |                     |         |                    |   |         |  
|Deposits:                                     |  |                     |         |                    |   |         |  
|Non interest-bearing                          |  | $                   | 27,484  |                    | $ | 23,982  |  
|Interest-bearing                              |  |                     | 737,743 |                    |   | 713,007 |  
|                                              |  |                     |         |                    |   |         |  
|Total deposits                                |  |                     | 765,227 |                    |   | 736,989 |  
|                                              |  |                     |         |                    |   |         |  
|Short-term borrowings                         |  |                     | 17,841  |                    |   | 8,916   |  
|Long-term debt                                |  |                     | 27,223  |                    |   | 31,673  |  
|Accrued expenses and other liabilities        |  |                     | 13,262  |                    |   | 11,710  |  
|                                              |  |                     |         |                    |   |         |  
|Total liabilities                             |  |                     | 823,553 |                    |   | 789,288 |  
|                                              |  |                     |         |                    |   |         |  
|                                              |  |                     |         |                    |   |         |  
|Retained earnings                             |  |                     | 109,199 |                    |   | 106,911 |  
|Accumulated other
 comprehensive income       |  |                     | 5,017   |                    |   | 3,364   |  
|                                              |  |                     |         |                    |   |         |  
|Total retained earnings                       |  |                     | 114,216 |                    |   | 110,275 |  
|                                              |  |                     |         |                    |   |         |  
|                                              |  |                     |         |                    |   |         |  
|Total liabilities and retained earnings       |  | $                   | 937,769 |                    | $ | 899,563 |  
|                                              |  |                     |         |                    |   |         |  

See accompanying notes to unaudited consolidated financial statements.

1

---



MERIDIAN INTERSTATE BANCORP, INC.
AND SUBSIDIARYConsolidated Statements of Operations
(In Thousands)
(Unaudited)

|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|---------------------------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                                     |  | Three
 Months Ended
 September 30, |        | Nine
 Months Ended
 September 30, |  
|                                                     |  |                                    |        |                                   |  
|                                                     |  | 2007                               |        | 2006                              |   | 2007   |   | 2006 |       
|                                                     |  |                                    |        |                                   |  
|Interest and dividend
 income:                       |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Interest and fees on loans                           |  | $                                  | 9,073  |                                   | $ | 8,435  |   | $    | 26,560 |   | $ | 24,063 |  
|Interest on debt securities                          |  |                                    | 2,715  |                                   |   | 2,589  |   |      | 8,264  |   |   | 7,882  |  
|Dividends on equity securities                       |  |                                    | 271    |                                   |   | 267    |   |      | 815    |   |   | 699    |  
|Interest on federal funds sold                       |  |                                    | 331    |                                   |   | 173    |   |      | 726    |   |   | 501    |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Total interest and dividend income                   |  |                                    | 12,390 |                                   |   | 11,464 |   |      | 36,365 |   |   | 33,145 |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Interest expense:                                    |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Interest on deposits                                 |  |                                    | 6,736  |                                   |   | 5,151  |   |      | 19,159 |   |   | 13,960 |  
|Interest on short-term borrowings                    |  |                                    | 97     |                                   |   | 154    |   |      | 288    |   |   | 291    |  
|Interest on long-term debt                           |  |                                    | 370    |                                   |   | 383    |   |      | 1,148  |   |   | 1,027  |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Total interest expense                               |  |                                    | 7,203  |                                   |   | 5,688  |   |      | 20,595 |   |   | 15,278 |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Net interest income                                  |  |                                    | 5,187  |                                   |   | 5,776  |   |      | 15,770 |   |   | 17,867 |  
|Provision for loan losses                            |  |                                    | 117    |                                   |   | 223    |   |      | 260    |   |   | 403    |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Net interest income, after provision for loan losses |  |                                    | 5,070  |                                   |   | 5,553  |   |      | 15,510 |   |   | 17,464 |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Non-interest income:                                 |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Customer service fees                                |  |                                    | 713    |                                   |   | 618    |   |      | 2,075  |   |   | 1,776  |  
|Loan fees                                            |  |                                    | 130    |                                   |   | 116    |   |      | 405    |   |   | 470    |  
|Gain (loss) on sales of loans, net                   |  |                                    | (6     | )                                 |   | 5      |   |      | 19     |   |   | 26     |  
|Gain (loss) on sales of securities, net              |  |                                    | (860   | )                                 |   | (647   | ) |      | 1,172  |   |   | 389    |  
|Income from bank-owned life insurance                |  |                                    | 153    |                                   |   | 196    |   |      | 850    |   |   | 587    |  
|Equity loss on investment in affiliate
bank          |  |                                    | (138   | )                                 |   | (71    | ) |      | (349   | ) |   | (183   | )
|Other                                                |  |                                    | 19     |                                   |   | 17     |   |      | 28     |   |   | 45     |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Total non-interest income                            |  |                                    | 11     |                                   |   | 234    |   |      | 4,200  |   |   | 3,110  |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Non-interest expenses:                               |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Salaries and employee benefits                       |  |                                    | 3,680  |                                   |   | 3,297  |   |      | 10,891 |   |   | 9,878  |  
|Occupancy and equipment                              |  |                                    | 608    |                                   |   | 670    |   |      | 1,932  |   |   | 2,011  |  
|Data processing                                      |  |                                    | 368    |                                   |   | 425    |   |      | 1,100  |   |   | 1,244  |  
|Marketing and advertising                            |  |                                    | 282    |                                   |   | 227    |   |      | 625    |   |   | 707    |  
|Professional services                                |  |                                    | 216    |                                   |   | 193    |   |      | 550    |   |   | 648    |  
|Other general and administrative                     |  |                                    | 553    |                                   |   | 408    |   |      | 1,382  |   |   | 1,310  |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Total non-interest expenses                          |  |                                    | 5,707  |                                   |   | 5,220  |   |      | 16,480 |   |   | 15,798 |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Income (loss) before income
 taxes                   |  |                                    | (626   | )                                 |   | 567    |   |      | 3,230  |   |   | 4,776  |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Provision (benefit) for
 income taxes                |  |                                    | (323   | )                                 |   | 128    |   |      | 942    |   |   | 1,191  |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  
|Net income (loss)                                    |  | $                                  | (303   | )                                 | $ | 439    |   | $    | 2,288  |   | $ | 3,585  |  
|                                                     |  |                                    |        |                                   |   |        |   |      |        |   |   |        |  

See accompanying notes to unaudited consolidated financial statements.

2

---



MERIDIAN INTERSTATE BANCORP, INC.
AND SUBSIDIARYConsolidated Statements of Changes in Retained Earnings
(In Thousands)
(Unaudited)

|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------------------------------- | - | ------------------------- |  | - | ------- | 
|                                                                                                                    |  | Retained
 Earnings |         | Accumulated Other
 Comprehensive
 Income |   | Total
 Retained
 Earnings | 
|                                                                                                                    |  |                    |         |                                          |   |                           | 
|Nine Months Ended September 30, 2007                                                                                |  |                    |         |                                          |   |                           |  |   |         | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Balance at December 31, 2006                                                                                        |  | $                  | 106,911 |                                          | $ | 3,364                     |  | $ | 110,275 | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Comprehensive income:                                                                                               |  |                    |         |                                          |   |                           |  |   |         | 
|Net income                                                                                                          |  |                    | 2,288   |                                          |   |                          |  |   | 2,288   | 
|Change in net unrealized gain on securities
 available for sale, net of reclassification adjustment and tax effects |  |                    |        |                                          |   | 1,653                     |  |   | 1,653   | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Total comprehensive income                                                                                          |  |                    |         |                                          |   |                           |  |   | 3,941   | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|                                                                                                                   
|Balance at September 30, 2007                                                                                       |  | $                  | 109,199 |                                          | $ | 5,017                     |  | $ | 114,216 | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 

|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------------------------------- | - | ------------------------- |  | - | ------- | 
|                                                                                                                    |  | Retained
 Earnings |         | Accumulated Other
 Comprehensive
 Income |   | Total
 Retained
 Earnings | 
|                                                                                                                    |  |                    |         |                                          |   |                           | 
|Nine Months Ended September 30, 2006                                                                                |  |                    |         |                                          |   |                           |  |   |         | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Balance at December 31, 2005                                                                                        |  | $                  | 103,617 |                                          | $ | 626                       |  | $ | 104,243 | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Comprehensive income:                                                                                               |  |                    |         |                                          |   |                           |  |   |         | 
|Net income                                                                                                          |  |                    | 3,585   |                                          |   |                          |  |   | 3,585   | 
|Change in net unrealized gain on securities
 available for sale, net of reclassification adjustment and tax effects |  |                    |        |                                          |   | 1,603                     |  |   | 1,603   | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Total comprehensive income                                                                                          |  |                    |         |                                          |   |                           |  |   | 5,188   | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 
|Balance at September 30, 2006                                                                                       |  | $                  | 107,202 |                                          | $ | 2,229                     |  | $ | 109,431 | 
|                                                                                                                    |  |                    |         |                                          |   |                           |  |   |         | 

See
accompanying notes to unaudited consolidated financial statements.

3

---



MERIDIAN INTERSTATE BANCORP, INC.
AND SUBSIDIARYConsolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

|                                                                                                   |  |                                 |          |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | ---- | - | ------- | -
|                                                                                                   |  | Nine Months Ended September 30, |         
|                                                                                                   |  |                                 |         
|                                                                                                   |  | 2007                            |          | 2006 |  
|                                                                                                   |  |                                 |          |      |  
|Change flows from operating activities:                                                            |  |                                 |          |      |   |         |  
|Net income                                                                                         |  | $                               | 2,288    |      | $ | 3,585   |  
|Adjustments to reconcile net income to net cash
provided by operating
 activities:                 |  |                                 |          |      |   |         |  
|Provisions for loan losses                                                                         |  |                                 | 260      |      |   | 403     |  
|Amortization of net deferred loan originations
fees                                                |  |                                 | (380     | )    |   | (485    | )
|Capitalization of mortgage servicing
rights                                                        |  |                                 | (60      | )    |   | (51     | )
|Amortization of mortgage servicing rights                                                          |  |                                 | 110      |      |   | 166     |  
|Net amortization of securities available for
sale                                                  |  |                                 | 521      |      |   | 725     |  
|Depreciation and amortization expense                                                              |  |                                 | 855      |      |   | 890     |  
|Gain on sales of securities, net                                                                   |  |                                 | (1,172   | )    |   | (389    | )
|Deferred income tax benefit                                                                        |  |                                 | (2,181   | )    |   | (344    | )
|Income from bank-owned life insurance                                                              |  |                                 | (850     | )    |   | (587    | )
|Equity loss on investment in affiliate
bank                                                        |  |                                 | 349      |      |   | 183     |  
|Loans originated for sale                                                                          |  |                                 | (5,840   | )    |   | (3,975  | )
|Principal balance of loans sold                                                                    |  |                                 | 6,030    |      |   | 3,975   |  
|Changes in operating assets and
liabilities:                                                       |  |                                 |          |      |   |         |  
|Accrued
 interest receivable                                                                       |  |                                 | 218      |      |   | (394    | )
|Other
 assets                                                                                      |  |                                 | 1,321    |      |   | (718    | )
|Accrued
 expenses and other liabilities                                                            |  |                                 | 1,552    |      |   | 486     |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Net cash provided by operating activities                                                          |  |                                 | 3,021    |      |   | 3,470   |  
|                                                                                                   |  |                                 |          |      |   |         |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Cash flows from investing activities:                                                              |  |                                 |          |      |   |         |  
|Activity in securities available for sale:                                                         |  |                                 |          |      |   |         |  
|Proceeds from maturities, calls and principal
payments                                             |  |                                 | 79,442   |      |   | 74,115  |  
|Proceeds from sales                                                                                |  |                                 | 40,944   |      |   | 6,543   |  
|Purchases                                                                                          |  |                                 | (104,630 | )    |   | (86,603 | )
|Redemption of Federal Home Loan Bank stock                                                         |  |                                 | 206      |      |   | 99      |  
|Loans originated, net of principal payments
received                                               |  |                                 | (16,835  | )    |   | (46,863 | )
|Proceeds from life insurance                                                                       |  |                                 | 1,793    |      |   |        |  
|Purchases of premises and equipment                                                                |  |                                 | (4,050   | )    |   | (1,765  | )
|                                                                                                   |  |                                 |          |      |   |         |  
|Net cash used in investing activities                                                              |  |                                 | (3,130   | )    |   | (54,474 | )
|                                                                                                   |  |                                 |          |      |   |         |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Cash flows from financing activities:                                                              |  |                                 |          |      |   |         |  
|Net increase in deposits                                                                           |  |                                 | 28,238   |      |   | 53,560  |  
|Net change in Federal Home Loan Bank advances with
maturities less
 than three months              |  |                                 | 8,925    |      |   | 1,939   |  
|Proceeds from issuance of Federal Home Loan Bank
advances with
 maturities of three months or more |  |                                 |         |      |   | 9,612   |  
|Repayment of Federal Home Loan Bank advances with
maturities of three
 months or more              |  |                                 | (4,450   | )    |   | (5,915  | )
|                                                                                                   |  |                                 |          |      |   |         |  
|Net cash provided by financing activities                                                          |  |                                 | 32,713   |      |   | 59,196  |  
|                                                                                                   |  |                                 |          |      |   |         |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Net change in cash and cash equivalents                                                            |  |                                 | 32,604   |      |   | 8,192   |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Cash and cash equivalents at beginning of
period                                                   |  |                                 | 23,494   |      |   | 31,667  |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $                               | 56,098   |      | $ | 39,859  |  
|                                                                                                   |  |                                 |          |      |   |         |  
|                                                                                                   |  |                                 |          |      |   |         |  
|Supplemental cash flow information:                                                                |  |                                 |          |      |   |         |  
|Interest paid on deposits                                                                          |  | $                               | 19,139   |      | $ | 13,724  |  
|Interest paid on Federal Home Loan Bank
advances                                                   |  |                                 | 1,450    |      |   | 1,291   |  
|Income taxes paid, net of refunds                                                                  |  |                                 | 377      |      |   | 2,251   |  

See
accompanying notes to unaudited consolidated financial statements.

4

---



NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

|   |                                           
|-- | ------------------------------------------
|1. | Basis of Presentation and Use of Estimates

The
accompanying unaudited consolidated financial statements of Meridian Interstate
Bancorp, Inc. have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. Such
adjustments were of a normal recurring nature. The results of operations for
the nine-month period ended September 30, 2007 are not necessarily indicative
of the results that may be expected for the entire year or any other interim
period. For additional information, refer to the financial statements and footnotes
thereto of Meridian Interstate Bancorp included in Meridian Interstate
Bancorps prospectus which was filed with the Securities and Exchange
Commission (SEC) on November 27, 2007, and is available through the SECs
website at www.sec.gov.

In
preparing consolidated financial statements in conformity with U. S. generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and income and expenses during the reporting period. Actual results
could differ significantly from those estimates. A material estimate that is
particularly susceptible to significant change in the near term relates to
determination of the allowance for loan losses.

Certain
prior period amounts have been reclassified to correspond with the current
period presentations.

|   |                            
|-- | ---------------------------
|2. | Principles of Consolidation

The
consolidated financial statements as of September 30, 2007 and December 31,
2006 and for the three and nine months ended September 30, 2007 and September
30, 2006 include the accounts of Meridian Interstate Bancorp, East Boston
Savings Bank and its subsidiary, Prospect, Inc. All intercompany balances and
transactions have been eliminated in consolidation.

|   |               
|-- | --------------
|3. | Reorganization

Meridian
Interstate Bancorp was formed in a corporate reorganization in July 2006 to
invest in Hampshire First Bank, a 40% owned de novo bank affiliate, and to own
East Boston Savings Bank and its subsidiary. Following the corporate
reorganization, Meridian Interstate Bancorp became the mid-tier holding company
subsidiary of Meridian Financial Services, Incorporated, a mutual holding
company, and succeeded it as East Boston Savings Banks direct parent.

|   |                       
|-- | ----------------------
|4. | Plan of Stock Issuance

On
July 2, 2007, the Board of Directors of Meridian Interstate Bancorp and the
Board of Directors of East Boston Savings Bank unanimously adopted the Plan of
Stock Issuance pursuant to which Meridian Interstate Bancorp intends to sell
common stock representing a minority ownership of the estimated pro forma
market value of Meridian Interstate Bancorp, which will be determined by an
independent appraisal, to eligible depositors of East Boston Savings Bank and
Meridian Interstate Bancorps qualified employee benefit plans in a stock
subscription offering and, if necessary, to the general public in a community and/or syndicated community offering.
The majority of the common stock will be owned by Meridian Interstate Bancorps
parent company, Meridian Financial Services, Incorporated. The Plan is subject
to the approval of the appropriate regulatory agencies.

5

---



Offering
costs will be deferred and reduce the proceeds from the shares sold in the
offering. If the offering is not completed, all costs will be expensed. At
September 30, 2007, deferred costs of $428,000 had been incurred, and are
included in other assets in the accompanying balance sheet.

As
part of the offering, Meridian Interstate Bancorp will establish a liquidation
account in the amount equal to the net worth of Meridian Interstate Bancorp as
of the date of the latest consolidated balance sheet appearing in the final
prospectus distributed in connection with the offering. The liquidation account
will be maintained for the benefit of the eligible account holders and
supplemental eligible account holders who maintain their accounts at East
Boston Savings Bank after the offering. The liquidation account will be reduced
annually to the extent that such account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
account holders interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder will be entitled to receive
balances for accounts held then.

Subsequent
to the offering, Meridian Interstate Bancorp may not declare or pay dividends
on, and may not repurchase, any of its shares of common stock if the effect
thereof would cause stockholders equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration, payment or
repurchase would otherwise violate regulatory requirements.

|   |                         
|-- | ------------------------
|5. | Earnings per Share (EPS)

When
presented, basic earnings per share are computed by dividing income available
to common stockholders by the weighted average number of common stock
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Because
Meridian Interstate Bancorp had not issued any shares of common stock to the
public as of September 30, 2007, per share earnings data is not meaningful for
this quarter or prior comparative periods and is therefore not presented.

|   |                                 
|-- | --------------------------------
|6. | Recent Accounting Pronouncements

In
March 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 156, Accounting for Servicing of Financial Assets, which amends FASB
Statement No. 140 and requires that all separately recognized servicing rights
be initially measured at fair value, if practicable. For each class of
separately recognized servicing assets and liabilities, this Statement permits
an entity to choose either of the following subsequent measurement methods: (1)
amortize servicing assets or liabilities in proportion to and over the period
of estimated net servicing income or net servicing loss, or (2) report
servicing assets or liabilities at fair value at each reporting date and report
changes in fair value in earnings in the period in which the changes occur (the
fair value method). This Statement also requires additional disclosures for
all separately recognized servicing rights and is effective for new
transactions occurring and for subsequent measurement beginning on January 1,
2007. As management did not adopt the fair value method of accounting for its
servicing rights, this Statement did not have any impact on Meridian Interstate
Bancorps consolidated financial statements, other than expanded disclosures.

6

---



In
July 2006, the FASB issued Financial Accounting Standards Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48) which clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. Meridian Interstate Bancorp adopted FIN
48 as of January 1, 2007 and the adoption did not have a material impact on
Meridian Interstate Bancorps consolidated financial statements.

In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
which defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement is effective for
Meridian Interstate Bancorp on January 1, 2008 and is not expected to have a
material impact on Meridian Interstate Bancorps consolidated financial
statements.

In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities  including an amendment of FASB
Statement No. 115, which provides companies with an option to report selected
financial assets and liabilities at fair value. Statement No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective for
Meridian Interstate Bancorp on January 1, 2008 and is not expected to have a
material impact on its consolidated financial statements.

East
Boston Savings Bank is the sole owner of life insurance policies pertaining to
certain of East Boston Savings Banks employees. East Boston Savings Bank has
entered into agreements with these individuals whereby East Boston Savings Bank
will pay to the individuals estate or beneficiaries a portion of the death
benefit that East Boston Savings Bank will receive as beneficiary of such
policies. No liability has been recognized on the consolidated balance sheet
for such death benefits. In September 2006, the FASB ratified EITF 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue addresses
accounting for split-dollar life insurance arrangements whereby the employer
purchases a policy to insure the life of an employee, and separately enters
into an agreement to split the policy benefits between the employer and the
employee. This EITF states that an obligation arises as a result of a
substantive agreement with an employee to provide future postretirement benefits.
Under EITF 06-4, the obligation is not settled upon entering into an insurance
arrangement. Since the obligation is not settled, a liability should be
recognized in accordance with applicable authoritative guidance. EITF 06-4 is
effective for fiscal years beginning after December 15, 2007 and Meridian
Interstate Bancorp is in the process of evaluating the potential impacts of
adopting EITF 06-4 on its consolidated financial statements.

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 Meridian Interstate 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 Form 10-Q.

7

---



Forward-Looking Statements

This
report contains forward-looking statements that are based on assumptions and
may describe future plans, strategies and expectations of Meridian Interstate
Bancorp. These forward-looking statements are generally identified by use of
the words believe, expect, intend, anticipate, estimate, project or
similar expressions. Meridian Interstate Bancorp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 Meridian
Interstate Bancorp 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
East Boston Savings Banks market area, changes in real estate market values in
East Boston Savings Banks market area, and changes in relevant accounting
principles and guidelines.

Managements
ability to predict results or the effect of future plans or strategies is
inherently uncertain. These factors include, but are not limited to, general
economic conditions, changes in the interest rate environment, legislative or
regulatory changes that may adversely affect our business, changes in
accounting policies and practices, changes in competition and demand for
financial services, adverse changes in the securities markets and changes in
the quality or composition of Meridian Interstate Bancorps loan or investment
portfolios. Additional factors that may affect our results are discussed in our
prospectus which was filed with the Securities and Exchange Commission on
November 27, 2007, under Risk Factors, which is available through the SECs
website at www.sec.gov. 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,
Meridian Interstate Bancorp 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

Meridian
Interstate Bancorp, Inc. is a Massachusetts chartered mid-tier stock holding
company that was formed in 2006 by East Boston Savings Bank to be its holding
company. Meridian Interstate Bancorp owns all of East Boston Savings Banks
capital stock and directs, plans and coordinates East Boston Savings Banks
business activities. In addition, Meridian Interstate Bancorp owns 40% of the
capital stock of Hampshire First Bank, a New Hampshire chartered bank,
organized in 2006 and headquartered in Manchester, New Hampshire. At September
30, 2007, Hampshire First Bank had assets of $52.2 million. At September 30,
2007, Meridian Interstate Bancorp had total assets of $937.8 million, deposits
of $765.2 million and total retained earnings of $114.2 million.

East
Boston Savings Bank is a Massachusetts chartered stock savings bank that
operates from 11 full-service locations and one loan center in the greater
Boston metropolitan area. We offer a variety of deposit and loan products to
individuals and businesses located in our primary market, which consists of
Essex, Middlesex and Suffolk Counties, Massachusetts. At September 30, 2007, we
had total assets of $923.9 million, deposits of $765.2 million and total
retained earnings of $100.4 million.

8

---



Meridian
Financial Services, Incorporated is Meridian Interstate Bancorps Massachusetts
chartered mutual holding company parent. As a mutual holding company, Meridian
Financial Services is a non-stock company. Upon completion of Meridian
Interstate Bancorps stock offering, Meridian Financial Services will own a
majority of Meridian Interstate Bancorps common stock. Following Meridian
Interstate Bancorps stock offering, Meridian Financial Services does not
intend to engage in any business activity other than those relating to owning a
majority of the common stock of Meridian Interstate Bancorp.

9

---



The
following is a summary of operating and financial condition highlights as of
and for the periods indicated:

Selected Financial
Data

|                   |  |                                |         |                        |   |         | 
|------------------ |  | ------------------------------ | ------- | ---------------------- | - | ------- | 
|                   |  | Financial Condition Highlights |        
|                   |  |                                |        
|                   |  | At
 September 30,
 2007        |         | At
 December 31,
 2006 |  
|                   |  |                                |        
|                   |  | (In thousands)                 |        
|                   |  |                                |        
|                   |  |                                |        
|Total
 assets      |  | $                              | 937,769 |                        | $ | 899,563 | 
|Securities         |  |                                | 269,301 |                        |   | 281,662 | 
|Net
 loans         |  |                                | 546,605 |                        |   | 529,650 | 
|Deposits           |  |                                | 765,227 |                        |   | 736,989 | 
|Borrowed
 funds    |  |                                | 45,064  |                        |   | 40,589  | 
|Retained
 earnings |  |                                | 114,216 |                        |   | 110,275 | 

|                                      |  |                                   |       |                                  |   |       |   |      |        |   |   |        |  
|------------------------------------- |  | --------------------------------- | ----- | -------------------------------- | - | ----- | - | ---- | ------ | - | - | ------ | -
|                                      |  | Operating Highlights              |      
|                                      |  |                                   |      
|                                      |  | Three Months Ended
 September 30, |       | Nine Months Ended
 September 30, |  
|                                      |  |                                   |       |                                  |  
|                                      |  | (Dollars in thousands)            |      
|                                      |  | 2007                              |       | 2006                             |   | 2007  |   | 2006 |       
|                                      |  |                                   |       |                                  |  
|                                      |  |                                   |       |                                  |  
|Net
 interest income                  |  | $                                 | 5,187 |                                  | $ | 5,776 |   | $    | 15,770 |   | $ | 17,867 |  
|Provision
 for loan losses            |  |                                   | 117   |                                  |   | 223   |   |      | 260    |   |   | 403    |  
|Non-interest
 income                  |  |                                   | 11    |                                  |   | 234   |   |      | 4,200  |   |   | 3,110  |  
|Non-interest
 expenses                |  |                                   | 5,707 |                                  |   | 5,220 |   |      | 16,480 |   |   | 15,798 |  
|Provision
 (benefit) for income taxes |  |                                   | (323  | )                                |   | 128   |   |      | 942    |   |   | 1,191  |  
|Net
 income (loss)                    |  |                                   | (303  | )                                |   | 439   |   |      | 2,288  |   |   | 3,585  |  
|Interest
 rate spread                 |  |                                   | 2.18  | %                                |   | 2.57  | % |      | 2.23   | % |   | 2.74   | %
|Net
 interest margin                  |  |                                   | 2.48  | %                                |   | 2.89  | % |      | 2.53   | % |   | 3.03   | %

10

---



Average Balance Table

|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|------------------------------------------------------------------------ |  | ----------------------------------------- | ------- | ----------------------- | - | ---------- | - | ---------------- | ---- | ----------------------- | - | ---------- |  | - | ------ | - |  | ---- | -
|                                                                         |  | For The Three Months Ended September
 30, |        
|                                                                         |  |                                           |        
|                                                                         |  | 2007                                      |         | 2006                    |  
|                                                                         |  |                                           |        
|                                                                         |  | Average
 Balance                          |         | Interest and
 Dividends |   | Yield/Cost |   | Average
 Balance |      | Interest and
 Dividends |   | Yield/Cost | 
|                                                                         |  |                                           |        
|                                                                         |  | (Dollars in Thousands)                    |        
|Assets:                                                                  |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Interest-earning
 assets:                                                |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Loans                                                                    |  | $                                         | 545,808 |                         | $ | 9,073      |   |                  | 6.63 | %                       | $ | 517,368    |  | $ | 8,435  |   |  | 6.51 | %
|Securities                                                               |  |                                           | 262,927 |                         |   | 2,986      |   |                  | 4.54 | %                       |   | 269,739    |  |   | 2,856  |   |  | 4.23 | %
|Other
 interest-earning assets                                           |  |                                           | 26,153  |                         |   | 331        |   |                  | 5.02 | %                       |   | 12,867     |  |   | 173    |   |  | 5.32 | %
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total
 interest-earning assets                                           |  |                                           | 834,888 |                         |   | 12,390     |   |                  | 5.94 | %                       |   | 799,974    |  |   | 11,464 |   |  | 5.73 | %
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Non-interest-earning
 assets                                             |  |                                           | 77,934  |                         |   |            |   |                  |      |                         |   | 59,063     |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total assets                                                             |  | $                                         | 912,822 |                         |   |            |   |                  |      |                         | $ | 859,037    |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Liabilities and equity:                                                  |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Interest-bearing
 liabilities:                                           |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|NOW deposits                                                             |  | $                                         | 61,909  |                         | $ | 31         |   |                  | 0.20 | %                       | $ | 66,343     |  | $ | 24     |   |  | 0.15 | %
|Money market
 deposits                                                   |  |                                           | 119,184 |                         |   | 1,144      |   |                  | 3.81 | %                       |   | 102,537    |  |   | 823    |   |  | 3.19 | %
|Regular and other
 deposits                                              |  |                                           | 127,363 |                         |   | 371        |   |                  | 1.15 | %                       |   | 140,302    |  |   | 412    |   |  | 1.17 | %
|Certificates of
 deposit                                                 |  |                                           | 419,575 |                         |   | 5,190      |   |                  | 4.91 | %                       |   | 364,285    |  |   | 3,892  |   |  | 4.24 | %
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total
 interest-bearing deposits                                         |  |                                           | 728,031 |                         |   | 6,736      |   |                  | 3.70 | %                       |   | 673,467    |  |   | 5,151  |   |  | 3.03 | %
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|FHLB advances                                                            |  |                                           | 38,663  |                         |   | 467        |   |                  | 4.83 | %                       |   | 46,006     |  |   | 537    |   |  | 4.63 | %
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total
 interest-bearing liabilities                                      |  |                                           | 766,694 |                         |   | 7,203      |   |                  | 3.76 | %                       |   | 719,473    |  |   | 5,688  |   |  | 3.16 | %
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Noninterest-bearing
 demand deposits                                     |  |                                           | 25,111  |                         |   |            |   |                  |      |                         |   | 25,711     |  |   |        |   |  |      |  
|Other
 noninterest-bearing liabilities                                   |  |                                           | 8,232   |                         |   |            |   |                  |      |                         |   | 7,679      |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total liabilities                                                        |  |                                           | 800,037 |                         |   |            |   |                  |      |                         |   | 752,863    |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total equity                                                             |  |                                           | 112,785 |                         |   |            |   |                  |      |                         |   | 106,174    |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Total liabilities
 and equity                                            |  | $                                         | 912,822 |                         |   |            |   |                  |      |                         | $ | 859,037    |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Net interest income                                                      |  |                                           |         |                         | $ | 5,187      |   |                  |      |                         |   |            |  | $ | 5,776  |   |  |      |  
|                                                                         |  |                                           |         |                         |   |            |   |                  |      |                         |   |            |  |   |        |   |  |      |  
|Interest rate
 spread                                                    |  |                                           |         |                         |   |            |   |                  | 2.18 | %                       |   |            |  |   |        |   |  | 2.57 | %
|Net interest
 margin                                                     |  |                                           |         |                         |   |            |   |                  | 2.48 | %                       |   |            |  |   |        |   |  | 2.89 | %
|Average
 interest-earning assets to average interest-bearing liabilities |  |                                           |         |                         |   | 108.89     | % |                  |      |                         |   |            |  |   | 111.19 | % |  |      |  

11

---



Average Balance Table

|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|------------------------------------------------------------------------- |  | --------------------------------------- | ------- | -------------------------- | - | ---------- | - | ----------------- | ---- | -------------------------- | - | ---------- |  | - | ------ | - |  | ---- | -
|                                                                          |  | For The Nine Months Ended September 30, |        
|                                                                         
|                                                                          |  | 2007                                    |         | 2006                       |  
|                                                                         
|                                                                          |  | (Dollars
  in thousands)                |        
|                                                                          |  | Average
  Balance                       |         | Interest
  and
  Dividends |   | Yield/Cost |   | Average
  Balance |      | Interest
  and
  Dividends |   | Yield/Cost | 
|                                                                          |  |                                        
|Assets:                                                                   |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Interest-earning assets:                                                  |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Loans                                                                     |  | $                                       | 541,108 |                            | $ | 26,560     |   |                   | 6.55 | %                          | $ | 499,914    |  | $ | 24,063 |   |  | 6.42 | %
|Securities                                                                |  |                                         | 269,448 |                            |   | 9,079      |   |                   | 4.49 | %                          |   | 273,258    |  |   | 8,581  |   |  | 4.19 | %
|Other interest-earning assets                                             |  |                                         | 18,900  |                            |   | 726        |   |                   | 5.14 | %                          |   | 13,718     |  |   | 501    |   |  | 4.88 | %
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total interest-earning assets                                             |  |                                         | 829,456 |                            |   | 36,365     |   |                   | 5.85 | %                          |   | 786,890    |  |   | 33,145 |   |  | 5.62 | %
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Non-interest-earning
  assets                                             |  |                                         | 74,542  |                            |   |            |   |                   |      |                            |   | 57,560     |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total assets                                                              |  | $                                       | 903,998 |                            |   |            |   |                   |      |                            | $ | 844,450    |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Liabilities and equity:                                                   |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Interest-bearing liabilities:                                             |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|NOW deposits                                                              |  | $                                       | 63,322  |                            | $ | 79         |   |                   | 0.17 | %                          | $ | 68,292     |  | $ | 72     |   |  | 0.14 | %
|Money market deposits                                                     |  |                                         | 107,266 |                            |   | 2,852      |   |                   | 3.55 | %                          |   | 107,884    |  |   | 2,382  |   |  | 2.95 | %
|Regular and other deposits                                                |  |                                         | 131,199 |                            |   | 1,142      |   |                   | 1.16 | %                          |   | 145,492    |  |   | 1,279  |   |  | 1.18 | %
|Certificates of deposit                                                   |  |                                         | 418,279 |                            |   | 15,086     |   |                   | 4.82 | %                          |   | 345,642    |  |   | 10,227 |   |  | 3.96 | %
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total interest-bearing deposits                                           |  |                                         | 720,066 |                            |   | 19,159     |   |                   | 3.56 | %                          |   | 667,310    |  |   | 13,960 |   |  | 2.80 | %
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|FHLB advances                                                             |  |                                         | 40,095  |                            |   | 1,436      |   |                   | 4.79 | %                          |   | 40,615     |  |   | 1,318  |   |  | 4.34 | %
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total interest-bearing liabilities                                        |  |                                         | 760,161 |                            |   | 20,595     |   |                   | 3.62 | %                          |   | 707,925    |  |   | 15,278 |   |  | 2.88 | %
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Non-interest-bearing demand deposits                                      |  |                                         | 24,275  |                            |   |            |   |                   |      |                            |   | 25,573     |  |   |        |   |  |      |  
|Other non-interest-bearing liabilities                                    |  |                                         | 7,417   |                            |   |            |   |                   |      |                            |   | 7,389      |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total liabilities                                                         |  |                                         | 791,853 |                            |   |            |   |                   |      |                            |   | 740,887    |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total equity                                                              |  |                                         | 112,145 |                            |   |            |   |                   |      |                            |   | 103,563    |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Total liabilities and equity                                              |  | $                                       | 903,998 |                            |   |            |   |                   |      |                            | $ | 844,450    |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Net interest income                                                       |  |                                         |         |                            | $ | 15,770     |   |                   |      |                            |   |            |  | $ | 17,867 |   |  |      |  
|                                                                          |  |                                         |         |                            |   |            |   |                   |      |                            |   |            |  |   |        |   |  |      |  
|Interest rate spread                                                      |  |                                         |         |                            |   |            |   |                   | 2.23 | %                          |   |            |  |   |        |   |  | 2.74 | %
|Net interest margin                                                       |  |                                         |         |                            |   |            |   |                   | 2.53 | %                          |   |            |  |   |        |   |  | 3.03 | %
|Average interest-earning assets to average interest-bearing
  liabilities |  |                                         |         |                            |   | 109.12     | % |                   |      |                            |   |            |  |   | 111.15 | % |  |      |  

12

---



Comparison of Financial Condition
at September 30, 2007 and December 31, 2006

Total
assets increased by $38.2 million from December 31, 2006 to September 30, 2007
due primarily to an increase in net loans of $17.0 million and a $24.3 million
increase in overnight federal funds. The loan portfolio increased $17.0
million, while deposits increased by $28.2 million. Net interest income
declined by $589,000 and $2.1 million for the three and nine months ended
September 30, 2007 compared to the same periods in 2006, respectively. Other
non-interest expenses increased by $487,000 and $682,000 for the three and nine
months ended September 30, 2007 compared to the same periods in 2006,
respectively. Commentary on these factors, as well as others, is presented on
the following pages.

Loan Portfolio Analysis

|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|--------------------------- |  | ---------------------- | ------- | -------------------- |  | ------ | - | ------- | ------- | - |  | ------ | -
|                            |  | At September 30, 2007  |         | At December 31, 2006 | 
|                           
|                            |  | Amount                 |         | Percent              |  | Amount |   | Percent |        
|                           
|                            |  | (Dollars in thousands) |        
|Real estate loans:          |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|One- to four-family         |  | $                      | 217,555 |                      |  | 39.46  | % | $       | 204,559 |   |  | 38.27  | %
|Multi-family                |  |                        | 24,603  |                      |  | 4.46   | % |         | 26,781  |   |  | 5.01   | %
|Commercial real estate      |  |                        | 167,934 |                      |  | 30.45  | % |         | 169,422 |   |  | 31.70  | %
|Home equity lines of credit |  |                        | 21,025  |                      |  | 3.81   | % |         | 20,663  |   |  | 3.87   | %
|Construction                |  |                        | 108,361 |                      |  | 19.65  | % |         | 101,495 |   |  | 18.99  | %
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|Total real estate loans     |  |                        | 539,478 |                      |  | 97.83  | % |         | 522,920 |   |  | 97.84  | %
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|Commercial business loans   |  |                        | 10,256  |                      |  | 1.86   | % |         | 10,220  |   |  | 1.91   | %
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|Consumer loans              |  |                        | 1,731   |                      |  | 0.31   | % |         | 1,330   |   |  | 0.25   | %
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|Total loans                 |  |                        | 551,465 |                      |  | 100.00 | % |         | 534,470 |   |  | 100.00 | %
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|Net deferred loan fees      |  |                        | (1,240  | )                    |  |        |   |         | (1,458  | ) |  |        |  
|Allowance for losses        |  |                        | (3,620  | )                    |  |        |   |         | (3,362  | ) |  |        |  
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  
|Loans, net                  |  | $                      | 546,605 |                      |  |        |   | $       | 529,650 |   |  |        |  
|                            |  |                        |         |                      |  |        |   |         |         |   |  |        |  

The
one- to four-family loan portfolio increased by $13.0 million to $217.6 million
at September 30, 2007 as a result of continued growth in the residential real
estate market and customers returning to adjustable rate loans which we
generally retain in our portfolio, from fixed-rate loans, which we generally
sell to the secondary market consistent with our asset-liability management
objectives. In addition, construction loans increased by $6.9 million to $108.4
million at September 30, 2007 due to increased originations as well as existing
customers drawing down on their outstanding lines. Our multi-family and
commercial real estate loan portfolios decreased during the nine month period
by $2.2 million and $1.5 million, to $24.6 million and $167.9 million,
respectively, at September 30, 2007, primarily due to payments, payoffs, or
refinancing at other institutions.

13

---



Securities

The
following table sets forth the amortized cost and fair value of our securities,
all of which at the date indicated were available for sale.

|                                        |  |                       |         |                      |   |                  |  |              |         |  |   |         | 
|--------------------------------------- |  | --------------------- | ------- | -------------------- | - | ---------------- |  | ------------ | ------- |  | - | ------- | 
|                                        |  | At September 30, 2007 |         | At December 31, 2006 |  
|                                       
|                                        |  | Amortized
  Cost      |         | Fair
  Value         |   | Amortized
  Cost |  | Fair
  Value |        
|                                       
|                                        |  | (In Thousands)        |        
|                                        |  |                       |         |                      |   |                  |  |              |         |  |   |         | 
|Securities available for sale:          |  |                       |         |                      |   |                  |  |              |         |  |   |         | 
|                                        |  |                       |         |                      |   |                  |  |              |         |  |   |         | 
|U.S. Government  sponsored enterprises |  | $                     | 12,003  |                      | $ | 11,942           |  | $            | 9,005   |  | $ | 8,831   | 
|Corporate bonds                         |  |                       | 216,316 |                      |   | 215,516          |  |              | 235,823 |  |   | 233,142 | 
|Mortgage-backed securities              |  |                       | 44      |                      |   | 44               |  |              | 46      |  |   | 46      | 
|                                        |  |                       |         |                      |   |                  |  |              |         |  |   |         | 
|Total debt securities                   |  |                       | 228,363 |                      |   | 227,502          |  |              | 244,874 |  |   | 242,019 | 
|Marketable equity securities            |  |                       | 31,165  |                      |   | 41,799           |  |              | 29,759  |  |   | 39,643  | 
|                                        |  |                       |         |                      |   |                  |  |              |         |  |   |         | 
|Total securities available for sale     |  | $                     | 259,528 |                      | $ | 269,301          |  | $            | 274,633 |  | $ | 281,662 | 
|                                        |  |                       |         |                      |   |                  |  |              |         |  |   |         | 

The
total available for sale securities portfolio declined by $12.4 million due to
a combination of maturing securities as well as the sale of the entire position
(face value of $22.1 million) in certain corporate bonds of large capitalization
companies that we identified, after a review of our corporate bond portfolio,
as having significant exposure in the subprime mortgage market. At September
30, 2007, unrealized losses in our debt portfolio ranged from 0% to 4.0%, and
unrealized losses in our equity portfolio ranged from 0% to 13%. Although
management cannot confirm at this time that the companies that we have invested
in have no additional exposure to the subprime markets, management will
continue to monitor our investment portfolio. We do not make loans generally
known as subprime loans or Alt-A loans. The funds generated were invested in
overnight federal funds which reflect an increase of $24.3 million as of
September 30, 2007 from the December 31, 2006 balance.

Deposits

|                           |  |                        |         |                      |  |        |   |         |         |  |  |        |  
|-------------------------- |  | ---------------------- | ------- | -------------------- |  | ------ | - | ------- | ------- |  |  | ------ | -
|                           |  | At September 30, 2007  |         | At December 31, 2006 | 
|                          
|                           |  | Amount                 |         | Percent              |  | Amount |   | Percent |        
|                          
|                           |  | (Dollars in Thousands) |        
|                           |  |                        |         |                      |  |        |   |         |         |  |  |        |  
|NOW and demand deposits    |  | $                      | 89,784  |                      |  | 11.73  | % | $       | 89,118  |  |  | 12.09  | %
|Money market deposits      |  |                        | 125,340 |                      |  | 16.38  |   |         | 96,744  |  |  | 13.13  |  
|Regular and other deposits |  |                        | 122,069 |                      |  | 15.95  |   |         | 130,878 |  |  | 17.76  |  
|Certificates of deposit    |  |                        | 428,034 |                      |  | 55.94  |   |         | 420,249 |  |  | 57.02  |  
|                           |  |                        |         |                      |  |        |   |         |         |  |  |        |  
|Total                      |  | $                      | 765,227 |                      |  | 100.00 | % | $       | 736,989 |  |  | 100.00 | %
|                           |  |                        |         |                      |  |        |   |         |         |  |  |        |  

Deposits
increased by $28.2 million over the nine month period. Money market deposits
increased by $28.6 million to $125.3 million at September 30, 2007 as we
introduced several deposit generating initiatives targeting this deposit
category over the period. Certificates of deposit increased by $7.8 million to
$428.0 million at September 30, 2007, primarily due to a promotion starting in
October 2006 of highly competitive higher rate certificates of deposit, which
also resulted in the movement of customer funds from our other deposit
categories.

14

---



Retained Earnings

Retained
earnings increased by $3.9 million over the nine month period to $114.2 million
at September 30, 2007. Net income represented $2.3 million of the increase,
while an increase in the after-tax value of available for sale securities
contributed $1.6 million.

Results of Operations for the
Three and Nine Months Ended September 30, 2007

Financial Highlights. We recorded a
loss in the
three month period ended September 30, 2007, and net income decreased during
the nine month period ended September 30, 2007, primarily due to decreases in
net interest income and increases in non-interest expenses.

Analysis of Net Interest Income

|                                    |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|----------------------------------- |  | ------------------------------------ | ------- | ----------------------------------- | - | ------- | - | ---------- | ------ | ---- |  | ------ | - | ------ | ------- | ---------- | - | ------- | - | - | ------ | - |  | ------ | -
|                                    |  | Three
  Months Ended
  September 30, |         | Nine
  Months Ended
  September 30, |  
|                                    |  |                                      |         |                                     |  
|                                    |  | 2007                                 |         | 2006                                |   | Change  |   | %
  Change |        | 2007 |  | 2006   |   | Change |         | %
  Change |  
|                                    |  |                                      |         |                                     |  
|                                    |  | (Dollars
  in Thousands)             |        
|                                    |  |                                      |        
|Components
  of net interest income |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|Loans                               |  | $                                    | 9,073   |                                     | $ | 8,435   |   | $          | 638    |      |  | 7.56   | % | $      | 26,560  |            | $ | 24,063  |   | $ | 2,497  |   |  | 10.38  | %
|Securities                          |  |                                      | 2,986   |                                     |   | 2,856   |   |            | 130    |      |  | 4.55   |   |        | 9,079   |            |   | 8,581   |   |   | 498    |   |  | 5.80   |  
|Other
  interest-earning assets     |  |                                      | 331     |                                     |   | 173     |   |            | 158    |      |  | 91.33  |   |        | 726     |            |   | 501     |   |   | 225    |   |  | 44.91  |  
|                                    |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|Total interest
  income             |  |                                      | 12,390  |                                     |   | 11,464  |   |            | 926    |      |  | 8.08   |   |        | 36,365  |            |   | 33,145  |   |   | 3,220  |   |  | 9.71   |  
|Deposits                            |  |                                      | 6,736   |                                     |   | 5,151   |   |            | 1,585  |      |  | 30.77  |   |        | 19,159  |            |   | 13,960  |   |   | 5,199  |   |  | 37.24  |  
|Borrowings                          |  |                                      | 467     |                                     |   | 537     |   |            | (70    | )    |  | (13.04 | ) |        | 1,436   |            |   | 1,318   |   |   | 118    |   |  | 8.95   |  
|                                    |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|Total interest
  expense            |  |                                      | 7,203   |                                     |   | 5,688   |   |            | 1,515  |      |  | 26.64  |   |        | 20,595  |            |   | 15,278  |   |   | 5,317  |   |  | 34.80  |  
|                                    |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|Net interest
  income               |  | $                                    | 5,187   |                                     | $ | 5,776   |   | $          | (589   | )    |  | (10.20 | ) | $      | 15,770  |            | $ | 17,867  |   | $ | (2,097 | ) |  | (11.74 | )
|Average balances                    |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|Loans                               |  | $                                    | 545,808 |                                     | $ | 517,368 |   | $          | 28,440 |      |  | 5.50   | % | $      | 541,108 |            | $ | 499,914 |   | $ | 41,194 |   |  | 8.24   | %
|Securities                          |  |                                      | 262,927 |                                     |   | 269,739 |   |            | (6,812 | )    |  | (2.53  | ) |        | 269,448 |            |   | 273,258 |   |   | (3,810 | ) |  | (1.39  | )
|Other
  interest-earning assets     |  |                                      | 26,153  |                                     |   | 12,867  |   |            | 13,286 |      |  | 103.26 |   |        | 18,900  |            |   | 13,718  |   |   | 5,182  |   |  | 37.78  |  
|Deposits                            |  |                                      | 753,142 |                                     |   | 699,178 |   |            | 53,964 |      |  | 7.72   |   |        | 744,341 |            |   | 692,883 |   |   | 51,458 |   |  | 7.42   |  
|Borrowings                          |  |                                      | 38,663  |                                     |   | 46,006  |   |            | (7,343 | )    |  | (15.96 | ) |        | 40,095  |            |   | 40,615  |   |   | (520   | ) |  | (1.28  | )
|Average
  yield and rates paid      |  |                                      |         |                                     |   |         |   |            |        |      |  |        |   |        |         |            |   |         |   |   |        |   |  |        |  
|Interest-earning
  assets           |  |                                      | 5.94    | %                                   |   | 5.73    | % |            | 0.21   |      |  | 3.66   | % |        | 5.85    | %          |   | 5.62    | % |   | 0.23   |   |  | 4.09   | %
|Interest-bearing
  liabilities      |  |                                      | 3.76    |                                     |   | 3.16    |   |            | 0.60   |      |  | 18.99  |   |        | 3.62    |            |   | 2.88    |   |   | 0.74   |   |  | 25.69  |  
|Interest rate
  spread              |  |                                      | 2.18    |                                     |   | 2.57    |   |            | (0.39  | )    |  | (15.18 | ) |        | 2.23    |            |   | 2.74    |   |   | (0.51  | ) |  | (18.61 | )
|Net interest
  margin               |  |                                      | 2.48    |                                     |   | 2.89    |   |            | (0.41  | )    |  | (14.19 | ) |        | 2.53    |            |   | 3.03    |   |   | (0.50  | ) |  | (16.50 | )

Net Interest
Income.Net
interest income decreased during both periods primarily due to the increase in
the average balance and average costs of deposits, particularly certificates of
deposit and money market accounts. Certificates of deposits increased as we
promoted highly competitive higher rate certificates of deposit starting in
October 2006. These deposits began to mature in October 2007 and will continue
to mature through the first quarter of 2008. In addition, the introduction of
an aggressive money market campaign in the second quarter of 2007 motivated
some customers to transfer funds from lower cost savings accounts to the higher
yielding money market instrument. The promotion was scaled back in the
beginning of 2007, but the higher yields are guaranteed through December 31,
2007. The average rate paid on certificates of deposit and money market
deposits increased due to these promotions and the average rate paid on
borrowings increased due to an increase in long-term rates.

The
average balance of interest-earning assets increased in 2007 primarily as a
result of loan portfolio growth. Continued growth in construction, multi-family
and commercial real estate and residential mortgage loans during 2007 and 2006
contributed to the loan growth. The average yield on loans and
securities increased as a result of the increasing rate environment. The
average balance of other interest-earning assets increased due to an increase
in investment in overnight federal funds due to a favorable yield curve.

15

---



Analysis of Loan Loss Experience

The following table sets
forth an analysis of the allowance for loan losses for the periods indicated.

|                                                                              |  |                                   |       |      |   |        |  
|----------------------------------------------------------------------------- |  | --------------------------------- | ----- | ---- | - | ------ | -
|                                                                              |  | Nine Months Ended
  September 30, |      
|                                                                              |  |                                   |      
|                                                                              |  | 2007                              |       | 2006 |  
|                                                                              |  |                                   |      
|                                                                              |  | (Dollars in Thousands)            |      
|Allowance at beginning of
  period                                            |  | $                                 | 3,362 |      | $ | 2,937  |  
|Provision for loan losses                                                     |  |                                   | 260   |      |   | 403    |  
|Charge offs:                                                                  |  |                                   |       |      |   |        |  
|Real estate loans                                                             |  |                                   | 16    |      |   | 0      |  
|Commercial business loans                                                     |  |                                   | 0     |      |   | 0      |  
|Consumer loans                                                                |  |                                   | 14    |      |   | 12     |  
|                                                                              |  |                                   |       |      |   |        |  
|Total charge-offs                                                             |  |                                   | 30    |      |   | 12     |  
|                                                                              |  |                                   |       |      |   |        |  
|Recoveries:                                                                   |  |                                   |       |      |   |        |  
|Real estate loans                                                             |  |                                   | 16    |      |   | 0      |  
|Commercial business loans                                                     |  |                                   | 0     |      |   | 0      |  
|Consumer loans                                                                |  |                                   | 12    |      |   | 3      |  
|                                                                              |  |                                   |       |      |   |        |  
|Total recoveries                                                              |  |                                   | 28    |      |   | 3      |  
|                                                                              |  |                                   |       |      |   |        |  
|Net (charge-offs)
  recoveries                                                |  |                                   | (2    | )    |   | (9     | )
|                                                                              |  |                                   |       |      |   |        |  
|                                                                              |  |                                   |       |      |   |        |  
|Allowance at end of period                                                    |  | $                                 | 3,620 |      | $ | 3,331  |  
|                                                                              |  |                                   |       |      |   |        |  
|                                                                             
|Allowance to non-performing
  loans                                           |  |                                   | 72.49 | %    |   | 146.80 | %
|                                                                             
|Allowance to total loans
  outstanding at the end of the period               |  |                                   | 0.66  | %    |   | 0.63   | %
|Net (charge-offs)
  recoveries to average loans outstanding during the period |  |                                   | 0.00  | %    |   | 0.00   | %
|                                                                              |  |                                   |       |      |   |        |  

Based
on our evaluation of loan loss factors, management made provisions of $117,000
and $260,000 for the three and nine months ended September 30, 2007,
respectively, compared to provisions of $223,000 and $403,000 for the same 2006
periods, respectively. We recorded net charge-offs of $0 and $2,000 in the 2007
three and nine month periods, respectively, as compared to net charge-offs of $11,000
and $9,000 in the same 2006 periods, respectively. Nonperforming loans
increased to $5.0 million at September 30, 2007 from $2.7 million at December
31, 2006. Of the $2.3 million increase, $1.1 million represents the principal
balance of a customer relationship who sought the protection of the bankruptcy
court. Management will continue to report this relationship as impaired until
such time as the borrower shows a sustained payment history. In addition,
$928,000 of the nonperforming loans represents matured loans. The notes have
become due, and while the customers continue to make payments, we continue to
work with the customer to modify or extend the notes. These loans will continue
to be reported as non-accrual until such time as documentation is executed to
modify or extend the loan, or the loan is paid off. The allowance for loan
losses was $3.6 million, or
0.66% of total loans outstanding as of September 30, 2007, as compared to $3.4
million, or 0.63% of total loans as of December 31, 2006. Growth in the entire
loan portfolio, including commercial real estate and construction loans, was
slower in the 2007 periods as compared to 2006.

16

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Non-Performing Assets

The
following table provides information with respect to our non-performing assets
at the dates indicated. We did not have any troubled debt restructurings or
accruing loans past due 90 days or more at the dates presented.

|                                             |  |                        |       |                   |   |       |  
|-------------------------------------------- |  | ---------------------- | ----- | ----------------- | - | ----- | -
|                                             |  | At
  September 30,     |       | At
  December 31, |  
|                                             |  |                        |       |                   |  
|                                             |  | 2007                   |       | 2006              |  
|                                             |  |                        |       |                   |  
|                                             |  | (Dollars in thousands) |      
|                                             |  |                        |      
|One- to four-family real
  estate            |  | $                      | 1,401 |                   | $ | 824   |  
|Multi-family real estate                     |  |                        | 0     |                   |   | 0     |  
|Commercial real estate                       |  |                        | 2,084 |                   |   | 0     |  
|Home equity                                  |  |                        | 170   |                   |   | 29    |  
|Construction                                 |  |                        | 1,218 |                   |   | 1,814 |  
|Commercial business loans                    |  |                        | 120   |                   |   | 0     |  
|Consumer loans                               |  |                        | 1     |                   |   | 0     |  
|                                             |  |                        |       |                   |   |       |  
|Total nonaccrual loans                       |  |                        | 4,994 |                   |   | 2,667 |  
|Foreclosed real estate                       |  |                        | 220   |                   |   |      |  
|Total nonperforming assets                   |  | $                      | 5,214 |                   | $ | 2,667 |  
|                                             |  |                        |       |                   |   |       |  
|                                             |  |                        |       |                   |   |       |  
|Total nonperforming loans
  to total loans   |  |                        | 0.91  | %                 |   | 0.50  | %
|Total nonperforming loans
  to total assets  |  |                        | 0.53  | %                 |   | 0.30  | %
|Total nonperforming assets
  to total assets |  |                        | 0.56  | %                 |   | 0.30  | %



---

Interest income that would have been recorded
for the nine months ended September 30, 2007 and the year ended December 31,
2006, had nonaccruing loans and accruing loans past due 90 days or more been
current according to their original terms amounted to $268,000 and $202,000,
respectively.


Non-interest Income. Non-interest
income decreased to $11,000 for the three months ended September 30, 2007 from
$234,000 for the same 2006 period. The primary reason for the decrease in
non-interest income was losses on the sale of securities, which were
approximately $860,000 in the 2007 period, as we realized losses on the sale of
debt securities which had exposure in the sub-prime mortgage market.

Non-interest
income increased to $4.2 million for the nine months ended September 30, 2007
from $3.1 million for the same 2006 period. In addition to the increase in
gains on sale of securities of $783,000, customer service fees increased in the
2007 nine month period by $299,000, primarily as a result of the introduction
of a courtesy overdraft program, and income from bank-owned life insurance
increased primarily due to the receipt of proceeds from life insurance for one
insured individual which resulted in $382,000 of income in the 2007 period. We
also realized losses for the nine months ended September 30, 2007 and 2006 of
$349,000 and $183,000, respectively, on our investment in our affiliate bank,
Hampshire First Bank.

17

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Non-interest
Expenses. Non-interest expenses increased by 9.33%
for the three months ended September 30, 2007 and 4.32% for the nine month
period ended September 30, 2007 compared to the  corresponding
prior periods. The increases in both periods were primarily due to increases in
salaries and employee benefits expense. We opened new branch offices in late
2006 and mid 2007 which increased staff levels as well as occupancy costs.
Increases in health care costs, as well as modest salary increases and new staff
additions to Meridian Interstate Bancorp, reflect the remaining increases.
Partially offsetting these increases were decreases in expenses relating to
professional services and marketing and advertising as management has
instituted various budget initiatives aimed at reducing expenses.

Income Tax Expense. We recorded a
tax benefit of $323,000, or a 51.60% effective tax rate, for the three months
ended September 30, 2007 compared to a tax expense of $128,000, or a 22.57%
effective tax rate, for the same 2006 period. Income taxes were $942,000 for
the nine months ended September 30, 2007, reflecting an effective tax rate of
29.16%, compared to income taxes of $1.2 million for the same 2006 period,
reflecting an effective tax rate of 24.94%. The tax benefit recorded in the
2007 three month period was due to a revised estimate of income for the year
ended December 31, 2007 and the impact of a higher anticipated percent of
non-taxable income (income on Bank-owned life insurance and dividends on equity
securities) to our pre-tax income.

Liquidity and Capital Management

Liquidity Management. Liquidity is
the ability to meet current and future financial obligations of a short-term
nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities of and payments on investment securities and borrowings
from the Federal Home Loan Bank of Boston. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.

We
regularly adjust our investments in liquid assets based upon our assessment of
(1) expected loan demand, (2) expected deposit flows, (3) yields available
on interest-earning deposits and securities and (4) the objectives of our
asset/liability management policy.

Our
most liquid assets are cash and cash equivalents. The levels of these assets
depend on our operating, financing, lending and investing activities during any
given period. At September 30, 2007, cash and cash equivalents totaled $56.1
million. In addition, at September 30, 2007, we had $80.1 million of available
borrowing capacity with the Federal Home Loan Bank of Boston, including a $9.4
million line of credit. On September 30, 2007, we had $45.1 million of advances
outstanding.

A
significant use of our liquidity is the funding of loan originations. At
September 30, 2007, we had $139.1 million in loan commitments outstanding,
which primarily consisted of $38.6 million in unadvanced portions of
construction loans, $52.6 million in commitments to fund real estate mortgage
loans, $19.6 million in unused home equity lines of credit, $1.5 million
in unused commercial letters of credit and $26.8 million in unadvanced
revolving lines of credit. Historically, many of the commitments expire without
being fully drawn; therefore, the total amount of commitments do not
necessarily represent future cash requirements. Another significant use of our
liquidity is the funding of deposit withdrawals. Certificates of deposit due
within one year of September 30, 2007 totaled $263.6 million, or 61.6% of
certificates of deposit, of which $98.5 million are due by December 31, 2007.
The large percentage of certificates of deposit that mature within one year
reflects our October 2006 promotion and customers hesitancy to invest their
funds for long periods in the recent low interest rate environment. If these
maturing deposits do not remain with us, we will be required to seek other
sources of funds, including other certificates of deposit and borrowings.
Depending on market conditions, we
may be required to pay higher rates on such deposits or other borrowings than
we currently pay on the certificates of deposit due on or before September 30,
2008. We believe, however, based on past experience, that a significant portion
of our certificates of deposit will remain with us. We have the ability to
attract and retain deposits by adjusting the interest rates offered.

18

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Our
primary investing activities are the origination of loans and the purchase of
securities. Our primary financing activities consist of activity in deposit
accounts and Federal Home Loan Bank advances. Deposit flows are affected by the
overall level of interest rates, the interest rates and products offered by us
and our local competitors and other factors. We generally manage the pricing of
our deposits to be competitive. Occasionally, we offer promotional rates on certain
deposit products to attract deposits.

Capital Management. Both Meridian
Interstate Bancorp and East Boston Savings Bank are subject to various
regulatory capital requirements administered by the Federal Reserve Board and
Federal Deposit Insurance Corporation, respectively, including a risk-based
capital measure. The risk-based capital guidelines include both a definition of
capital and a framework for calculating risk-weighted assets by assigning
balance sheet assets and off-balance sheet items to broad risk categories. At
September 30, 2007, both Meridian Interstate Bancorp and East Boston Savings
Bank exceeded all of their respective regulatory capital requirements. East
Boston Saving Bank is considered well capitalized under regulatory guidelines.

The
capital from the stock offering will significantly increase our liquidity and
capital resources. Over time, the initial level of liquidity will be reduced as
net proceeds from the stock offering are used for general corporate purposes,
including the funding of lending activities. Our financial condition and
results of operations will be enhanced by the capital from the offering,
resulting in increased net interest-earning assets and net income. However, the
large increase in equity resulting from the capital raised in the offering
will, initially, have an adverse impact on our return on equity. Following the
offering, we may use capital management tools such as cash dividends and common
share repurchases. However, Massachusetts Commissioner of Banks regulations
restrict stock repurchases by Meridian Interstate Bancorp within three years of
the offering unless the repurchase: (i) is part of a general repurchase made on
a pro rata basis pursuant to an offering approved by the Commissioner of the
Banks and made to all stockholders of Meridian Interstate Bancorp (other than
Meridian Financial Services with the approval of the Commissioner of Banks);
(ii) is limited to the repurchase of qualifying shares of a director; (iii) is
purchased in the open market by a tax-qualified or nontax-qualified employee
stock benefit plan of Meridian Interstate Bancorp or East Boston Savings Bank
in an amount reasonable and appropriate to fund the plan; or (iv) is limited to
stock repurchases of no greater than 5% of the outstanding capital stock of
Meridian Interstate Bancorp where compelling and valid business reasons are
established to the satisfaction of the Commissioner of Banks. In addition,
pursuant to Federal Reserve Board approval conditions imposed in connection
with the formation of Meridian Interstate Bancorp, Meridian Interstate Bancorp
has committed (i) to seek the Federal Reserve Boards prior approval before
repurchasing any equity securities from Meridian Financial Services and (ii)
that any repurchases of equity securities from stockholders other than Meridian
Financial Services will be at the current market price for such stock
repurchases. Meridian Interstate Bancorp will also be subject to the Federal
Reserve Boards notice provisions for stock repurchases.

19

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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. We had no investment in
derivative securities at September 30, 2007.

For
the three and nine months ended September 30, 2007, 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.

20

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Item
3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk Management. Our
earnings and the market value of our assets and liabilities are subject to
fluctuations caused by changes in the level of interest rates. We manage the
interest rate sensitivity of our interest-bearing liabilities and
interest-earning assets in an effort to minimize the adverse effects of changes
in the interest rate environment. Deposit accounts typically react more quickly
to changes in market interest rates than mortgage loans because of the shorter
maturities of deposits. As a result, sharp increases in interest rates may
adversely affect our earnings while decreases in interest rates may
beneficially affect our earnings. To reduce the potential volatility of our
earnings, we have sought to improve the match between asset and liability
maturities and rates, while maintaining an acceptable interest rate spread. Our
strategy for managing interest rate risk emphasizes: originating loans with
adjustable interest rates; selling the residential real estate fixed-rate loans
with terms greater than 15 years that we originate; and promoting core deposit
products and short-term time deposits.

We
have an Asset/Liability Management Committee to coordinate all aspects
involving asset/liability management. The committee establishes and monitors
the volume, maturities, pricing and mix of assets and funding sources with the
objective of managing assets and funding sources to provide results that are
consistent with liquidity, growth, risk limits and profitability goals.

Net Interest Income Simulation Analysis. We
analyze our interest rate sensitivity position to manage the risk associated
with interest rate movements through the use of interest income simulation. The
matching of assets and liabilities may be analyzed by examining the extent to
which such assets and liabilities are interest sensitive. An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period.

Our
goal is to manage asset and liability positions to moderate the effects of
interest rate fluctuations on net interest income. Interest income simulations
are completed quarterly and presented to the Asset/Liability Committee and the
board of directors. The simulations provide an estimate of the impact of
changes in interest rates on net interest income under a range of assumptions.
The numerous assumptions used in the simulation process are reviewed by the
Asset/Liability Committee and the Executive Committee on a quarterly basis.
Changes to these assumptions can significantly affect the results of the
simulation. The simulation incorporates assumptions regarding the potential
timing in the repricing of certain assets and liabilities when market rates
change and the changes in spreads between different market rates. The
simulation analysis incorporates managements current assessment of the risk
that pricing margins will change adversely over time due to competition or
other factors.

Simulation
analysis is only an estimate of our interest rate risk exposure at a particular
point in time. We continually review the potential effect changes in interest
rates could have on the repayment of rate sensitive assets and funding
requirements of rate sensitive liabilities.

The
table below sets forth an approximation of our exposure as a percentage of
estimate net interest income for the next 12 months using interest income
simulation. The simulation uses projected repricing of assets and liabilities
at September 30, 2007 on the basis of contractual maturities, anticipated
repayments and scheduled rate adjustments. Prepayment rates can have a
significant impact on interest income simulation. Because of the large
percentage of loans we hold, rising or falling interest rates have a
significant impact on the prepayment speeds of our earning assets that in turn
affect the rate sensitivity position. When interest rates rise, prepayments
tend to slow. When interest rates fall, prepayments tend to rise. Our asset
sensitivity would be reduced if prepayments slow and vice versa. While we
believe such assumptions to be reasonable, there can be no assurance that assumed
prepayment rates will approximate actual future mortgage-backed security and
loan repayment activity.

21

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The
following table reflects changes in estimated net interest income for East
Boston Savings Bank at September 30, 2007 through September 30, 2008. At
September 30, 2007, our net interest income exposure and NPV exposure related
to these hypothetical changes in market interest rates was within our established
guidelines.

Net
Portfolio Value is the discounted present value of expected cash flows from
interest-earning assets, interest-bearing liabilities and any off-balance sheet
contracts.

Interest Rate Risk Analysis

|                                                            |          |                        |          |                               |          |        |     |  |          |   |          |         |  |   |         |   |  |        |   
|----------------------------------------------------------- | -------- | ---------------------- | -------- | ----------------------------- | -------- | ------ | --- |  | -------- | - | -------- | ------- |  | - | ------- | - |  | ------ | --
|Increase (Decrease)
 in Market Interest
 Rates (Rate Shock) |          | Net Interest Income    |          | Net Portfolio Value Estimated |         
|                                                            |          |                        |          |                              
|                                                            | $ Amount |                        | $ Change |                               | % Change |        | NPV |  | $ Change |   | % Change |        
|                                                            |          |                        |         
|                                                            |          | (Dollars in thousands) |         
|300 bp                                                      |          | $                      | 22,046   |                               | $        | 1,109  |     |  | 5.30     | % | $        | 85,226  |  | $ | (32,533 | ) |  | (27.63 | )%
|200                                                         |          |                        | 21,695   |                               |          | 758    |     |  | 3.62     |   |          | 96,477  |  |   | (21,282 | ) |  | (18.07 | ) 
|100                                                         |          |                        | 21,326   |                               |          | 389    |     |  | 1.86     |   |          | 107,390 |  |   | (10,369 | ) |  | (8.81  | ) 
|0                                                           |          |                        | 20,937   |                               |          | 0      |     |  | 0.00     |   |          | 117,759 |  |   | 0       |   |  | 0.00   |   
|(100)                                                       |          |                        | 20,502   |                               |          | (435   | )   |  | (2.08    | ) |          | 126,798 |  |   | 9,039   |   |  | 7.68   |   
|(200)                                                       |          |                        | 19,969   |                               |          | (968   | )   |  | (4.62    | ) |          | 133,556 |  |   | 15,797  |   |  | 13.41  |   
|(300)                                                       |          |                        | 19,287   |                               |          | (1,650 | )   |  | (7.88    | ) |          | 138,512 |  |   | 20,753  |   |  | 17.62  |   

This
analysis indicates the impact of changes in net interest income for a given set
of rate changes and assumptions. It does not incorporate any balance sheet
growth, and it assumes that the structure and composition of the balance sheet
will remain comparable to the structure at the start of the simulation. It does
not account for other factors that might impact this analysis, including
changes by management to mitigate the impact of interest rate changes or
secondary impacts such as changes to our credit risk profile as interest rates
change. Furthermore, loan prepayment rate estimates and spread relationships
change regularly. Interest rate changes create changes in actual loan
prepayment rates that differ from the market estimates incorporated in this analysis.
Changes that vary significantly from the assumptions may have significant
effects on our net interest income.

Item 4. Controls and Procedures

(a)
Disclosure Controls and Procedures

Meridian
Interstate Bancorps management, including Meridian Interstate Bancorps
principal executive officer and principal financial officer, have evaluated the
effectiveness of Meridian Interstate Bancorps disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon
their evaluation, the principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, Meridian
Interstate Bancorps disclosure controls and procedures were effective for the
purpose of ensuring that the information required to be disclosed in the
reports that Meridian Interstate Bancorp files or submits under the Exchange
Act with the Securities and Exchange Commission (the SEC) (1) is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms and (2) is accumulated and communicated to Meridian Interstate
Bancorps management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.

22

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(b)
Internal Control over Financial Reporting

There
have not been any changes in Meridian Interstate Bancorps internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, Meridian Interstate Bancorps internal control over financial
reporting.

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

For
information regarding our risk factors, see Risk Factors, in our prospectus
which was filed with the SEC on November 27, 2007, and is available through the
SECs website at www.sec.gov. As of September 30, 2007, the risk factors of
Meridian Interstate Bancorp have not changed materially from those reported in
the prospectus. The risks described in Meridian Interstate Bancorps prospectus
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

Not
applicable.

Item 3. Defaults Upon Senior Securities

Not
applicable.

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

None.

Item 5. Other Information

None.

23

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Item 6. Exhibits

| |      |                                                                                   
| | ---- | ----------------------------------------------------------------------------------
| | 3.1  | Articles of
 Organization of Meridian Interstate Bancorp, Inc. (1)                
| | 3.2  | Bylaws of Meridian
 Interstate Bancorp, Inc. (1)                                  
| | 4.0  | Stock
 Certificate of Meridian Interstate Bancorp, Inc. (1)                       
| | 31.1 | Rule
 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                
| | 31.2 | Rule 13a-14(a)/15d-14(a)
 Certification of Chief Financial Officer                
| | 32.0 | Section 1350
 Certification of Chief Executive Officer and Chief Financial Officer

| |     |                                                                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    
| | (1) | Incorporated
 by reference into this document from the Exhibits filed with the Securities
 and Exchange Commission on the Registration Statement on Form S-1 (File No. 333-146373), as amended, initially filed with the
Securities and Exchange
 Commission on September 28, 2007.

24

---



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.

|                       |                                                    
|---------------------- | ---------------------------------------------------
|                       | MERIDIAN INTERSTATE BANCORP, INC.                  
|                       |                                                    
|                       | (Registrant)                                       
|                       |                                                    
|Date: January
 4, 2008 | /s/ Robert
 F. Verdonck                            
|                       |                                                    
|                       | Robert F.
 Verdonck                                
|                       | President                                          
|                       |                                                    
|Date: January
 4, 2008 | /s/ Leonard
 V. Siuda                              
|                       |                                                    
|                       | Leonard V.
 Siuda                                  
|                       | Chief
 Financial Officer and Treasurer             
|                       | (principal
 financial and chief accounting officer)

25

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