The objective of this section is to help readers understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in the annual report.

Critical Accounting Policies

Note 1 to the Company's Consolidated Financial Statements included in this
Annual Report on Form 10-K for the year ended December 31, 2008, contains a summary of the Company's significant accounting policies. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Loan Losses

The determination of the allowance for loan losses is considered critical due to the high degree of judgment involved, the subjectivity of the underlying assumptions used, and the potential for changes in the economic environment that could result in material changes in the amount of the allowance for loan losses considered necessary. The allowance for loan losses is utilized to absorb losses inherent in the loan portfolio. The allowance represents management's estimate of losses as of the date of the financial statements. The allowance includes a specific component for impaired loans and a general component for pools of non-impaired loans.

The adequacy of the allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making its determinations. Because the estimation of inherent losses cannot be made with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loan deteriorate as a result of the factors noted above. Any material increase in the allowance for loan losses may adversely affect the financial condition and results of operations and will be recorded in the period in which the circumstances become known.

Other-than-temporary Impairment of Securities

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Continued weakness in the market for these securities could result in impairment charges or additional losses on any sale of these securities.

Foreclosed Real Estate

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. The excess, if any, of the loan balance over the fair value of the asset at the time of transfer from loans to foreclosed assets is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in foreclosed real estate expenses. While the Company utilizes certified appraisers, the valuation of these estimates is subject to change, especially in a period of rapidly changing real estate market values.

Income Taxes

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. A valuation reserve is established related to the deferred tax assets when, in the judgment of management, it is more likely than not that all or a portion of such deferred tax assets will not be realized. The Bank's base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if deemed realizable

Certain aspects of income tax accounting require management judgment, including determining the expected realization of deferred tax assets. Such judgments are subjective and involve estimates and assumption about matters that are inherently uncertain. Should actual factors and conditions differs materially from those used by management, the actual realization of the net deferred tax assets could differ materially from the amounts recorded in the financial statements.

Operating Strategies

Our mission is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategies of:

1. Managing credit risk to maintain a low level of nonperforming assets, and interest rate risk to optimize our net interest margin;

2. Expanding our franchise through the opening of additional branch offices and the possible acquisition of existing financial service companies or their assets;

3. Increasing core deposits through aggressive marketing and offering new deposit products; and

4. Continuing to grow and diversify our sources of non-interest income.

Managing credit risk to maintain a low level of nonperforming assets, and interest rate risk to optimize our net interest margin;

Managing risk is an essential part of successfully managing a financial institution. Credit risk and interest rate risk are two prominent risk exposures that we face. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. We believe that high asset quality is a key to long-term financial success. We have sought to grow and diversify the loan portfolio, while maintaining a high level of asset quality and moderate credit risk, using underwriting standards that we believe are conservative, as well as diligent monitoring of the portfolio and loans in non-accrual status and on-going collection efforts. Although we will continue to originate commercial real estate, commercial business and construction loans, we intend to continue our philosophy of managing large loan exposures through our experienced, risk-based approach to lending. In addition, we intend to remain focused on lending within the Bank's immediate market area, with a specific focus on commercial customers disaffected by their relationships with larger banks as a result of turmoil in the industry.

We continually monitor the investment portfolio for credit risk, with a monthly formal review by the Company's Executive Committee of any issuers that have heightened credit risk factors such as rating agency and analyst downgrades and declines in market valuation. In addition, the Executive Committee reviews new investments for credit-worthiness before purchase. The Company generally purchases marketable equity securities in lots over time, while debt securities are purchased individually. We intend to replace maturing investments in 2009 as determined to be appropriate in accordance with our risk management policies and our funding needs. In 2008, the Company increased its investment in money market mutual funds significantly, from $1.3 million to $25.0 million, obtaining an improved yield compared to federal funds sold, after due diligence regarding the fund sponsors, which are primarily Fidelity and Vanguard. We expect to continue to utilize these money market accounts as an alternative to investing all of the Company's excess funds in federal funds.

Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. 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. 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.

In order to improve our risk management, in 2006 we hired a Risk Management Specialist to oversee the bank-wide risk management process. These responsibilities include the implementation of an overall risk program and strategy, determining risks and implementing risk mitigation strategies in the following areas: interest rates, operational/compliance, liquidity, strategic, reputation, credit and legal/regulatory. This position provides counsel to members of our senior management team on all issues that effect our risk positions.

Expanding our franchise through the opening of additional branch offices and the possible acquisition of existing financial service companies or their assets;

We are always looking to expand our franchise in the greater Boston metropolitan area. Since 2001, we have opened five de novo branches, the most recent in October 2008. We intend to continue our geographic expansion in the greater Boston metropolitan area by opening de novo branches in communities contiguous to those currently served by East Boston Savings Bank, as opportunities present themselves in favorable locations. In the short-term, we anticipate relocating staff from existing branches for new locations instead of hiring additional employees. In addition to branching, we are focusing on upgrading existing facilities in an effort to better serve our customers. The new branches and the renovations to our existing branches are expected to be funded by cash generated by our business. Consequently, we do not currently expect to borrow funds for these expansion projects.

We have also diversified our market area through our acquisition in 2006 of 40% of the capital stock of Hampshire First Bank, a de novo New Hampshire chartered bank, organized in 2006 and headquartered in Manchester, New Hampshire. Due to the consolidation of financial institutions in New Hampshire and in Hampshire First Bank's primary market, Hillsborough County, New Hampshire, we believe there is a significant opportunity for a community-focused bank to provide a full range of financial services to small and middle-market commercial and retail customers. We account for our investment in Hampshire First Bank by the equity method of accounting under which our share of the net income or loss of Hampshire First Bank is recognized as a component of non-interest income in our consolidated financial statements. However, as a new financial institution, Hampshire First Bank has incurred operating losses during its initial years of operations. During the years ended December 31, 2008 and 2007, Meridian Interstate Bancorp recorded losses of $396,000 and $541,000, respectively, from this investment. We hope to continue to increase our franchise by pursuing expansion through the acquisition of existing financial service companies or their assets, although we currently have no specific plans or agreements regarding any acquisitions.

Increasing core deposits through aggressive marketing and the offering of new deposit products;

Retail deposits are our primary source of funds for investing and lending. Core deposits, which include all deposit account types except certificates of deposit, comprised 48.0% of our total deposits at December 31, 2008. We value our core deposits because they represent a lower cost of funding and are generally less sensitive to withdrawal when interest rates fluctuate as compared to certificate of deposit accounts. We market core deposits through the internet, in-branch and local mail, print and television advertising, as well as programs that link various accounts and services together, minimizing service fees. We will continue to customize existing deposit products and introduce new products to meet the needs of our customers.

Continuing to grow and diversify our sources of non-interest income.

Our profits rely heavily on the spread between the interest earned on loans and securities and interest paid on deposits and borrowings. In order to decrease our reliance on interest rate spread income, we have pursued initiatives to increase non-interest income. In 2005, we introduced a courtesy overdraft protection program that generated fee income of $1.0 million, $970,000 and $746,000 in 2008, 2007 and 2006 respectively. In addition during 2005, we began originating reverse mortgages for sale which generated $168,000, $233,000 and $348,000 of non-interest income in 2008, 2007 and 2006, respectively. We also offer non-deposit investment products, including mutual funds, annuities, stocks, bonds, life insurance and long-term care. Our non-deposit financial products generated $146,000 $118,000 and $43,000 of non-interest income during the years ended December 31, 2008, 2007 and 2006, respectively.

Balance Sheet Analysis

Assets

The Company's total assets increased by $62.1 million, or 6.2%, to $1.1 billion at December 31, 2008 from December 31, 2007. Net loans increased by $136.0 million, or 23.9%, with the most significant growth in residential and commercial real estate loans. Securities available for sale decreased $14.5 million, or 5.4%, and federal funds sold decreased by $81.4 million, as these funds were utilized to fund loan growth. Asset growth reflects, in part, the utilization of $89.4 million of net offering proceeds and the conversion of $62.5 million of stock subscriptions from an escrow account to paid in capital. Loan growth was primarily funded by net stock offering proceeds and borrowings.

Deposits increased by $22.4 million, or 2.9%, for the year ended December 31, 2008, due mainly to an increase in money market balances of $34.2 million, or 24.7%. Outstanding borrowings also increased $29.0 million, to $65.5 million, as the Company opted to replace some higher rate maturing advances with lower cost borrowings to help fund loan growth.

Loans

At December 31, 2008, total loans, net, were $704.1 million, or 66.1% of total assets. During the year ended December 31, 2008, the loan portfolio increased $136.0 million, or 23.9%. Growth in total real estate loans was $135.9 million, or 24.3%, and included increases of $50.6 million, or 22.6% in one- to four- family real estate and $92.2 million, or 52.0%, in commercial real estate loans. One- to four- family real estate loans increased due to customers, new to the Bank, who refinanced existing loans, as well as a moderation of competition from non-bank residential lenders in the local market. The commercial real estate portfolio increased as a result of increased marketing by the Company and an increase in loan participations. At December 31, 2008, loan participations were $42.6 million, compared to $16.1 million at December 31, 2007. The increase in participations was due to an increase in participations with the Company's 40%-owned affiliate, Hampshire First Bank ("HFB"). Participations with HFB were $17.0 million and $3.0 million, respectively, at December 31, 2008 and 2007. The construction loan portfolio decreased by $18.0 million, or 16.4%. Commercial business loans increased by $3.5 million, or 29.5%. Loan growth was supported by net proceeds received from our offering as well as an increased level of Federal Home Loan Bank borrowings.

Loan Portfolio Analysis

Loan Portfolio Composition at December 31,

                                      2008                        2007                      2006                      2005                      2004
(Dollars in thousands)        Amount                %      Amount             %      Amount             %      Amount             %      Amount             %
Real estate loans:
  One-to four-family       $     274,716         38.6 %   $ 224,109        39.1 %   $ 204,559        38.3 %   $ 205,044        42.2 %   $ 189,586        44.2
  Multi-family                    31,212          4.4        26,855         4.7        26,781         5.0        19,392         4.0        20,633         4.8
  Commercial real
estate                           269,454         37.7       177,233        30.9       169,422        31.7       156,995        32.3       150,181        35.1
  Home equity lines
   of credit                      28,253          4.0        21,541         3.8        20,663         3.9        16,794         3.5        13,305         3.1
  Construction                    91,652         12.9       109,635        19.1       101,495        19.0        76,041        15.7        44,106        10.3
    Total real estate
loans                            695,287         97.6       559,373        97.6       522,920        97.9       474,266        97.7       417,811        97.5

Commercial business
loans                             15,355          2.2        11,859         2.1        10,220         1.9        10,149         2.1         9,695         2.3

Consumer loans                     1,379          0.2         1,576         0.3         1,330         0.2           999         0.2         1,034         0.2
     Total loans                 712,021        100.0 %     572,808       100.0 %     534,470       100.0 %     485,414       100.0 %     428,540       100.0 %
Net deferred loan
origination fees                  (1,005 )                   (1,067 )                  (1,458 )                  (1,644 )                  (1,637 )
Allowance for loan
losses                            (6,912 )                   (3,637 )                  (3,362 )                  (2,937 )                  (2,485 )
     Loans, net            $     704,104                  $ 568,104                 $ 529,650                 $ 480,833                 $ 424,418

Loan Maturity

The following tables set forth certain information at December 31, 2008 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The tables do not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude net deferred loan origination fees. Our adjustable-rate mortgage loans generally do not provide for downward adjustments below the initial discounted contract rate, other than declines due to a decline in the index rate.

                                                     Commercial
                                   Real Estate        Business        Consumer        Total
 (In thousands)                       Loans            Loans           Loans          Loans

 Amounts due in:
  One year or less                $     120,661     $      5,318     $      282     $ 126,261
  More than one to five years           354,543            8,150          1,097       363,790
  More than five to ten years            81,239               92              -        81,331
  More than ten years                   138,844            1,795              -       140,639
    Total                         $     695,287     $     15,355     $    1,379     $ 712,021

 Interest rate terms on amounts
  due after one year:
  Fixed-rate loans                $     191,742     $      8,396     $    1,097     $ 201,235
  Adjustable-rate loans                 382,884            1,641              -       384,525
    Total                         $     574,626     $     10,037     $    1,097     $ 585,760

At December 31, 2008, our loan portfolio consisted of $262.7 million of fixed-rate loans and $449.3 million of adjustable-rate loans.

Credit Risk Management

Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Executive Committee monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the Board of Directors on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.

Analysis of Non-performing and Classified Assets

We consider repossessed assets and loans that are 90 days or more past due to be non-performing assets. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest is reversed against interest income. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest in no longer in doubt.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income. The following table provides information with respect to our non-performing assets at the dates indicated.

At December 31, (Dollars in thousands) 2008 2007 2006 2005 2004 Loans accounted for on a non-accrual basis:

 Real estate loans:
   One-to four-family            $         3,962     $ 2,059     $   824     $   167     $   168
   Multi-family                                -           -           -           -           -
   Commercial real estate                    883       1,561           -         123           -
  Home equity lines of credit                  -          98          29          27          14
  Construction                             9,387       1,218       1,814           -           -
     Total real estate loans              14,232       4,936       2,667         317         182
 Commercial business loans                     -          45           -           -           -
 Consumer loans                                -           1           -           -           8
   Total non-accrual loans                14,232       4,982       2,667         317         190

 Accruing loans past due 90
 days or more:
 Real estate loans                             -           -           -           -           -
 Commercial business loans                     -           -           -           -           -
 Consumer loans                                -           -           -           -           -
   Total accruing past due 90
 days or more                                  -           -           -           -           -
     Total non-performing
 loans                                    14,232       4,982       2,667         317         190

 Foreclosed assets                         2,604         560           -           -           -
 Other non-performing assets                   -           -           -           -           -
      Total non-performing
 assets                          $        16,836     $ 5,542     $ 2,667     $   317     $   190

 Restructured loans              $         4,273     $     -     $     -     $     -     $     -

 Non-performing loans to
 total loans                                2.00 %      0.87 %      0.50 %      0.07 %      0.04 %
 Non-performing loans to
 total assets                               1.34 %      0.55 %      0.30 %      0.04 %      0.02 %

Non-performing assets (non-accrual loans and property acquired through foreclosure) were $16.8 million, or 1.58% of total assets at December 31, 2008, compared to 0.55% at December 31, 2007. The increase in non-performing assets from 2007 resulted primarily from two construction loans totaling $9.4 million which became non-performing in 2008. Such contructions loans consist of a loan for the development of a 45-unit townhouse development located in Massachusets and a 32-unit over-55 residential development located in Massachusets. These loans had a carrying value of $9.4 million as of December 31, 2008, reflecting the charge-off of a specific impairment reserve of $1.1 million during 2008 for one of these loans.

Total property acquired through foreclosure at December 31, 2008 was $2.6 million, compared to $560,000 at December 31, 2007. The increase in property acquired through foreclosure from the prior year is due primarily to foreclosures on two construction loans to the same borrower and and several residential properties. Refer to the Analysis and Determination of the Allowance . . .