10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2007

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

For the Transition Period from              to             

Commission File Number: 0-50801

SI FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

United States	84-1655232
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

803 Main Street, Willimantic, Connecticut	06226
(Address of principal executive offices)	(Zip Code)

(860) 423-4581

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of Exchange on which registered
Common stock, par value $0.01 per share	Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

Large Accelerated Filer  ¨            Accelerated Filer                    ¨

Non-Accelerated Filer    ¨            Smaller Reporting Company  x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $55.7 million, which was computed by reference to the closing price of $11.31, at which the common equity was sold as of June 30, 2007. Solely for the purposes of this calculation, the shares held by SI Bancorp, MHC and the directors and officers of the registrant are deemed to be affiliates.

As of March 14, 2008, there were 11,891,600 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Annual Report to Stockholders and the Proxy Statement for the 2008 Annual Meeting of Stockholders are incorporated by reference in Parts II and III of this Form 10-K.

SI FINANCIAL GROUP, INC.

TABLE OF CONTENTS

		Page No.
PART I.
Item 1.	Business	1
Item 1A.	Risk Factors	34
Item 1B.	Unresolved Staff Comments	37
Item 2.	Properties	38
Item 3.	Legal Proceedings	40
Item 4.	Submission of Matters to a Vote of Security Holders	40
PART II.
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	40
Item 6.	Selected Financial Data	41
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	43
Item 9A(T).	Controls and Procedures	43
Item 9B.	Other Information	44
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	44
Item 11.	Executive Compensation	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45
Item 13.	Certain Relationships and Related Transactions and Director Independence	45
Item 14.	Principal Accountant Fees and Services	45
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	46
	Signatures	48

Forward-Looking Statements

This report may contain certain “forward-looking statements” within the meaning of the federal securities laws, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather, they are statements based on management’s current expectations regarding our business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “projects” and similar expressions. Management’s ability to predict results of the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of SI Financial Group, Inc. (the “Company”) and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the United States government, including policies of the United States Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area and changes in relevant accounting principles and guidelines. Additional factors that may affect the Company’s results are discussed in Item 1A. “Risk Factors” in the Company’s annual report on Form 10-K and in other reports filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

PART I.

Item 1. Business.

General

In certain instances where appropriate, the terms “we,” “us” and “our” refer to SI Financial Group, Inc. and Savings Institute Bank and Trust Company or both.

SI Financial Group, Inc. was established on August 6, 2004 to become the parent holding company for Savings Institute Bank and Trust Company (the “Bank” or “Savings Institute”) upon the conversion of the Bank’s former parent, SI Bancorp, Inc., from a state-chartered to a federally-chartered mutual holding company. At the same time, the Bank also converted from a state-chartered to a federally-chartered savings bank. On September 30, 2004, the Company completed its minority stock offering with the sale of 5,025,500 shares of its common stock to the public, 251,275 shares contributed to SI Financial Group Foundation and 7,286,975 issued to SI Bancorp, MHC. The Bank is a wholly-owned subsidiary of the Company and management of the Company and the Bank are substantially similar. The Company neither owns nor leases any property, but instead uses the premises, equipment and other property of the Bank. Thus, the financial information and discussion contained herein primarily relates to the activities of the Bank.

The Bank operates as a community-oriented financial institution offering a full range of financial services to consumers and businesses in its market area, including insurance, trust and investment services. The Bank attracts deposits from the general public and uses those funds to originate one- to four-family residential, multi-family and commercial real estate, commercial business and consumer loans, which it holds primarily for investment.

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Branch Acquisitions

On January 14, 2008, the Company completed its acquisition of Eastern Federal Bank’s branch office located in Colchester, Connecticut, which was announced in October 2007. In accordance with Financial Accounting Standards Board No. 141, “Business Combinations” the Company accounted for the branch acquisition as a purchase in January 2008. The Company acquired assets, including cash, loans and fixed assets totaling $423,000 and assumed deposit liabilities of $18.4 million.

On November 14, 2007, the Company reached an agreement with The Bank of Southern Connecticut to acquire their New London branch office. The Company completed the acquisition, which was accounted for as a purchase, during the first quarter of 2008. The Company acquired assets, including cash, loans and fixed assets, aggregating $8.0 million and assumed deposit liabilities totaling $9.3 million.

Availability of Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on the Company’s website, www.mysifi.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). The information on the Company’s website shall not be considered as incorporated by reference into this Form 10-K.

Market Area

The Company is headquartered in Willimantic, Connecticut, which is located in eastern Connecticut approximately 30 miles east of Hartford. The Bank operates offices in Windham, New London, Tolland and Hartford Counties, which the Bank considers its primary market area. The economy in its market area is primarily oriented to the educational, service, entertainment, manufacturing and retail industries.

The major employers in the area include several institutions of higher education, the Mohegan Sun and Foxwoods casinos, General Dynamics Defense Systems and Pfizer, Inc. According to published statistics, Windham County’s population in 2007 was 118,000 and consisted of 43,000 households. The population increased 8.6% from 2000. Median household income in Windham County is $54,000, compared to $66,000 for Connecticut as a whole and $44,000 nationally. The surrounding counties of Hartford, New London and Tolland Counties have median household incomes of $61,000, $61,000 and $72,000, respectively.

Competition

The Bank faces significant competition for the attraction of deposits and origination of loans. The most direct competition for deposits has historically come from the several financial institutions operating in the Bank’s market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. The Bank also faces competition for investors’ funds from money market funds and other corporate and government securities. At June 30, 2007, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (“FDIC”), the Bank held approximately 19.38% of the deposits in Windham County, which is the largest market share out of 10 financial institutions with offices in this county. Also, at June 30, 2007, the Bank held approximately 0.97% of the deposits in Hartford, New London and Tolland Counties, which is the 15^th market share out of 38 financial institutions with offices in these counties. Banks owned by Bank of America Corp., Webster Bank Financial Corporation, TD Banknorth Group, Inc., Sovereign Bancorp., Inc. and Citizens Financial Group, Inc., all of which are large regional bank holding companies, also operate

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in the Bank’s market area. These institutions are significantly larger and, therefore, have significantly greater resources than the Bank does and may offer products and services that the Bank does not provide.

The Bank’s competition for loans comes primarily from financial institutions in its market area, and to a lesser extent from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

The Bank expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit the Company’s growth in the future.

Lending Activities

General. The Bank’s loan portfolio consists primarily of one- to four-family residential mortgage loans, multi-family and commercial real estate loans and commercial business loans. To a much lesser extent, the loan portfolio includes construction and consumer loans. The Bank historically and currently originates loans primarily for investment purposes. At December 31, 2007, the Bank had $410,000 in loans that were held for sale.

The following table summarizes the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the respective portfolio at the dates indicated.

	At December 31,
	2007					2006					2005					2004					2003
(Dollars in Thousands)	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
Real estate loans:
Residential – 1 to 4 family	$	330,389		55.87	%	$	309,695		53.65	%	$	266,739		51.66	%	$	252,180		55.99	%	$	226,881		58.29	%
Multi-family and commercial		132,819		22.46			118,600		20.55			100,926		19.54			82,213		18.25			73,428		18.87
Construction		37,231		6.29			44,647		7.73			47,325		9.16			35,773		7.94			20,652		5.30
Total real estate loans		500,439		84.62			472,942		81.93			414,990		80.36			370,166		82.18			320,961		82.46
Consumer loans:
Home equity		17,774		3.01			18,489		3.20			20,562		3.98			18,335		4.07			14,411		3.70
Other		3,330		0.56			10,616		1.84			3,294		0.64			2,790		0.62			3,107		0.80
Total consumer loans		21,104		3.57			29,105		5.04			23,856		4.62			21,125		4.69			17,518		4.50
Commercial business loans		69,850		11.81			75,171		13.03			77,552		15.02			59,123		13.13			50,746		13.04
Total loans		591,393		100.00	%		577,218		100.00	%		516,398		100.00	%		450,414		100.00	%		389,225		100.00	%
Deferred loan origination costs, net of deferred fees		1,390					1,258					1,048					743					387
Allowance for loan losses		(5,245	)				(4,365	)				(3,671	)				(3,200	)				(2,688	)
Loans receivable, net	$	587,538				$	574,111				$	513,775				$	447,957				$	386,924

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One- to Four-Family Residential Loans. The Bank’s primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new residential dwellings in its market area. The Bank offers fixed-rate and adjustable-rate mortgage loans with terms up to 40 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on the Bank’s interest rate risk. The loan fees charged, interest rates and other provisions of mortgage loans are determined on the basis of the Bank’s own pricing criteria and competitive market conditions. Additionally, the Bank offers reverse mortgages to its customers, through a correspondent relationship with another institution, in response to increasing demand for this type of product.

The Bank offers fixed-rate loans with terms of 10, 15, 20, 30 or 40 years. The Bank’s adjustable-rate mortgage loans are based primarily on 30 year amortization schedules. Interest rates and payments on adjustable-rate mortgage loans adjust annually after a one, three, five, seven or ten-year initial fixed period. Interest rates and payments on adjustable-rate loans are adjusted to a rate typically equal to 2.75% (2.875% for jumbo loans) above the one-year constant maturity Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.

While the Bank anticipates that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make the Bank’s asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Generally, the Bank does not originate conventional loans with loan-to-value ratios exceeding 95% and generally originates loans with a loan-to-value ratio in excess of 80% only when secured by first liens on owner-occupied one- to four-family residences. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. The Bank requires all properties securing mortgage loans to be appraised by a board approved independent licensed appraiser and requires title insurance on all first mortgage loans. Borrowers must obtain hazard insurance and flood insurance for loans on property located in a flood zone, before closing the loan.

In an effort to provide financing for moderate income and first-time buyers, the Bank offers Federal Housing Authority, Veterans Administration and Connecticut Housing Finance Agency loans and a first-time home buyers program. The Bank offers fixed-rate residential mortgage loans through these programs to qualified individuals and originates the loans using modified underwriting guidelines.

Multi-Family and Commercial Real Estate Loans. The Bank offers fixed-rate and adjustable-rate mortgage loans secured by multi-family and commercial real estate. The Bank’s multi-family and commercial real estate loans are generally secured by condominiums, apartment buildings, single-family subdivisions as well as owner-occupied properties located in its market area and used for businesses. The Bank intends to continue to emphasize this segment of its loan portfolio.

The Bank originates adjustable-rate multi-family and commercial real estate loans for terms up to 25 years. Interest rates and payments on these loans typically adjust every five years after a five-year initial fixed-rate period. Interest rates and payments on adjustable-rate loans are adjusted to a rate typically

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2.0-3.0% above the classic advance rates offered by the Federal Home Loan Bank of Boston (the “FHLB”). There are no adjustment period or lifetime interest rate caps. Loans are secured by first mortgages that generally do not exceed 75% of the property’s appraised value. At December 31, 2007, the largest outstanding multi-family or commercial real estate loan was $4.2 million. This loan is secured by office space and storage units and was performing according to its terms at December 31, 2007.

Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans. In reaching a decision on whether to make a multi-family or commercial real estate loan, consideration is given to the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. In addition, with respect to commercial real estate rental properties, the Bank will also consider the term of the lease and the quality of the tenants. The Bank generally requires that the properties securing these real estate loans have debt service coverage ratios of at least 1.20. The debt service coverage ratio is equal to cash flows before interest, depreciation and required principal payments. Appropriate environmental assessments are generally required for commercial real estate loans over $100,000, based upon the environmental risk factors for the subject collateral property.

Construction and Land Loans. The Bank originates loans to individuals, and to a lesser extent, builders, to finance the construction of residential dwellings. The Bank also originates construction loans for commercial development projects, including condominiums, apartment buildings, single-family subdivisions as well as owner-occupied properties used for businesses. Residential construction loans generally provide for the payment of interest only during the construction phase, which is usually twelve months. At the end of the construction phase, the loan generally converts to a permanent mortgage loan. Commercial construction loans generally provide for the payment of interest only during the construction phase which may range from three months to a maximum of twenty-four months as allowed by the Bank’s Loan Policy. Loans generally can be made with a maximum loan-to-value ratio of 90% on residential construction and 75% on commercial construction for nonresidential properties and 80% on commercial multi-family construction of the lower of appraised value or cost of the project, whichever is less. At December 31, 2007, the largest outstanding residential construction loan commitment was for $580,000, of which $554,000 was outstanding. At December 31, 2007, the largest outstanding commercial construction loan commitment, for the construction of a nursing home and rehabilitation facility, was $7.3 million, of which all was outstanding. These loans were performing according to their terms at December 31, 2007. Primarily all commitments to fund construction loans require an appraisal of the property by a board approved independent licensed appraiser. Also, inspections of the property are required before the disbursement of funds during the term of the construction loan.

Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost, including interest, of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with

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repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project before or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

The Bank also originates land loans to individuals and local contractors and developers only for the purpose of making improvements on approved building lots, subdivisions and condominium projects within two years of the date of the loan. Such loans to individuals generally are written with a maximum loan-to-value ratio based upon the appraised value or purchase price of the land. Maximum loan-to-value ratio on raw land is 50%, while the maximum loan-to-value ratio for land development loans involving approved projects is 65%. The Bank offers fixed-rate land loans and variable-rate land loans that adjust annually. Interest rates and payments on adjustable-rate land loans are adjusted to a rate typically equal to the then current The Wall Street Journal prime rate plus a 1.0 – 2.0% margin. The maximum amount by which the interest rate may be increased or decreased is generally 2% annually and the lifetime interest rate cap is generally 6% over the initial rate of the loan.

Commercial Business Loans. The Bank originates commercial business loans to a variety of professionals, sole proprietorships and small businesses primarily in its market area. The Bank offers a variety of commercial lending products, the maximum amount of which is limited by the Bank’s in-house loans to one borrower limit. At December 31, 2007, the largest commercial loan was a $1.4 million loan, which is secured by a business asset consisting of a waste processing system. This loan was performing according to its terms at December 31, 2007.

The Bank offers loans secured by business assets other than real estate, such as business equipment and inventory. These loans are originated with maximum loan-to-value ratios of 75% of the value of the personal property. The Bank originates lines of credit to finance the working capital needs of businesses to be repaid by seasonal cash flows or to provide a period of time during which the business can borrow funds for planned equipment purchases. These loans convert to a term loan at the expiration of a draw period, which is not to exceed twelve months and will be paid over a pre-defined amortization period. Additional products such as time notes, letters of credit and Small Business Administration guaranteed loans are offered.

When originating commercial business loans, the Bank considers the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, viability of the industry in which the customer operates and the value of the collateral.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

The Bank offers equipment lease financing to its commercial customers. Financing is available up to 100% of the leased equipment and amortized over a period of one to three years. All commercial leasing loans, totaling $561,000, were performing according to terms at December 31, 2007.

Consumer Loans. The Bank offers a variety of consumer loans, primarily home equity lines of credit, and, to a lesser extent, loans secured by marketable securities, passbook or certificate accounts, motorcycles,

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automobiles and recreational vehicles as well as unsecured loans. Generally, the Bank offers automobile loans with a maximum loan-to-value ratio of 100% of the purchase price for new vehicles. Unsecured loans generally have a maximum borrowing limit of $15,000 and a maximum term of five years.

In February 2006, the Bank purchased a participation interest in a pool of automobile loans from UnitedOne Credit Union, which were serviced by Flatiron Financial Services, Inc. (formerly Centrix Financial, LLC), for a total purchase price of $10.3 million. These loans were secured by new and used automobiles. The indirect automobile loans had fixed interest rates and generally had terms up to seven years. In June 2007, the Company sold the remaining $5.2 million of the indirect automobile loan portfolio in accordance with the recourse provisions of the original purchase agreement.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and their ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as reported in The Wall Street Journal. The Bank will offer home equity loans with maximum combined loan-to-value ratio of 100%, provided that loans in excess of 80% will be charged a higher rate of interest and require private mortgage insurance. A home equity line of credit may be drawn down by the borrower for an initial period of five years from the date of the loan agreement. During this period, the borrower has the option of paying, on a monthly basis, either principal and interest or only interest. If not renewed, the borrower has to pay back the amount outstanding under the line of credit over a term not to exceed ten years, beginning at the end of the five-year period.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Loan Originations, Purchases, Sales and Servicing. Loan originations come from a number of sources. The primary source of loan originations are the Bank’s in-house loan originators, and to a lesser extent, local mortgage brokers, advertising and referrals from customers.

From time to time, the Bank will purchase whole participations in loans fully guaranteed by the United States Department of Agriculture and the Small Business Administration. The loans are primarily for commercial and agricultural properties located throughout the United States. The Bank purchased no loans during 2007 and $675,000 of these loans in fiscal 2006. Additionally, the Bank purchased no indirect automobile loans during 2007 and $10.3 million of indirect automobile loans in 2006.

The Bank generally originates loans for portfolio but from time to time will sell loans in the secondary market, primarily fixed-rate one- to four-family residential mortgage loans with servicing retained, based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management. Generally, loans are sold without recourse. The Bank utilizes the proceeds from these sales primarily to meet liquidity needs. Proceeds from the sale of loans totaled $13.8 million and $11.0 million for the years ended December 31, 2007 and 2006, respectively.

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At December 31, 2007, the Bank retained the servicing rights on $75.7 million of loans for others, consisting primarily of fixed-rate mortgage loans sold with or without recourse to third parties. Loan repurchase commitments are agreements to repurchase loans previously sold upon the occurrence of conditions established in the contract, including default by the underlying borrower. At December 31, 2007, the balance of loans sold with recourse totaled $52,000. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, processing insurance and tax payments on behalf of borrowers, assisting in foreclosures and property dispositions when necessary and general administration of loans. The gross servicing fee income from loans sold with servicing rights retained is typically 25.0 or 37.5 basis points of the total balance of serviced loans. The related servicing rights for these loans was $422,000 and $392,000 at December 31, 2007 and 2006, respectively. Amortization of mortgage servicing rights totaled $94,000 and $78,000 for the years ended December 31, 2007 and 2006, respectively.

The following table sets forth the Bank’s loan originations, loan purchases, loan sales, principal repayments, charge-offs and other reductions on loans for the years indicated.

	Years Ended December 31,
(Dollars in Thousands)	2007		2006		2005
Loans at beginning of year	$	577,218	$	516,398	$	450,414
Originations:
Real estate loans		112,372		144,533		154,166
Commercial business loans		13,285		11,094		12,635
Consumer loans		10,479		13,096		17,011
Total loan originations		136,136		168,723		183,812
Purchases		—		11,007		22,211
Deductions:
Principal loan repayments, prepayments and other, net		106,948		107,672		104,126
Loan sales		13,666		11,039		35,534
Loan charge-offs		434		199		29
Transfers to other real estate owned		913		—		350
Total deductions		121,961		118,910		140,039
Net increase in loans		14,175		60,820		65,984
Loans at end of year	$	591,393	$	577,218	$	516,398

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Loan Maturity. The following table shows the contractual maturity of the Bank’s loan portfolio at December 31, 2007. The table does not reflect any estimate of prepayments, which significantly shortens the average life of all loans, and may cause actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less.

	Amounts Due In
(Dollars in Thousands)	One Year or Less		More Than One Year to Five Years		More Than Five Years		Total Amount Due
Real estate loans:
Residential – 1 to 4 family	$	87	$	5,737	$	324,565	$	330,389
Multi-family and commercial		2,395		5,305		125,119		132,819
Construction		10,831		1,007		25,393		37,231
Total real estate loans		13,313		12,049		475,077		500,439
Commercial business loans		9,208		6,751		53,891		69,850
Consumer loans		187		1,703		19,214		21,104
Total loans	$	22,708	$	20,503	$	548,182	$	591,393

While one- to four-family residential real estate loans are normally originated with terms of up to 40 years, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon the sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase, sale and refinancing activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

The following table sets forth, at December 31, 2007, the dollar amount of gross loans receivable contractually due after December 31, 2008, and whether such loans have either fixed interest rates, floating or adjustable interest rates. The amounts shown below exclude deferred loan fees and costs and the allowance for loan losses but include $7.6 million of nonperforming loans.

	Due After December 31, 2008
(Dollars in Thousands)	Fixed Rates		Floating or Adjustable Rates		Total
Real estate loans:
Residential – 1 to 4 family	$	199,153	$	131,149	$	330,302
Multi-family and commercial		10,792		119,632		130,424
Construction		20,749		5,651		26,400
Total real estate loans		230,694		256,432		487,126
Commercial business loans		34,685		25,957		60,642
Consumer loans		6,768		14,149		20,917
Total loans	$	272,147	$	296,538	$	568,685

9

Loan Approval Procedures and Authority. The Bank’s lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by the Board of Directors and management. All residential mortgages and consumer home equity lines of credit in excess of $6.0 million or all commercial loans and other consumer loans in excess of $2.0 million require the approval of the Board of Directors. The Loan Committee of the Board of Directors has the authority to approve: (1) residential mortgage loans and consumer home equity lines of credit of up to $6.0 million and (2) commercial and other consumer loans of up to $2.0 million. The President and the Senior Credit Officer have approval for: (1) residential mortgage loans that conform to Fannie Mae and Freddie Mac standards up to $2.0 million or $417,000 for those that are non-conforming, (2) consumer and commercial loans up to $250,000 individually or $2.0 million jointly for consumer home equity lines of credit or $1.0 million jointly for commercial and other consumer loans. The Senior Commercial Real Estate Officer may approve home equity lines of credit and commercial loans of up to $250,000 individually or $500,000 with the additional approval of the President or Senior Credit Officer. Various Bank personnel have been delegated authority to approve loans up to $417,000.

Loans to One Borrower. The maximum amount that the Bank may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of the Bank’s stated capital and reserves. At December 31, 2007, the Bank’s regulatory limit on loans to one borrower was $10.7 million. At that date, the Bank’s largest lending relationship was $8.5 million, representing two commercial business loans and a commercial construction loan for the construction of a nursing home and rehabilitation facility, of which $8.1 million was outstanding and performing according to the original repayment terms at December 31, 2007.

Loan Commitments. The Bank issues commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to customers and generally expire in 90 days or less from the date of the application.

Delinquencies. When a borrower fails to make a required loan payment, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank makes initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. When the loan becomes 90 days past due, a letter is sent notifying the borrower that foreclosure proceedings will commence if the loan is not brought current within 30 days. Generally, when the loan becomes 120 days past due, the Bank will commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer or commercial loan. 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 is typically sold at foreclosure. The Bank may consider loan repayment arrangements with certain borrowers under certain circumstances.

On a monthly basis, management informs the Board of Directors of the amount of loans delinquent more than 30 days, all loans in foreclosure and all foreclosed and repossessed property.

10

The following table sets forth the delinquencies in the Bank’s loan portfolio as of the dates indicated.

	December 31, 2007						December 31, 2006
	60 – 89 Days			90 Days or More			60 – 89 Days			90 Days or More
(Dollars in Thousands)	Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans		Number of Loans	Principal Balance of Loans
Real estate loans:
Residential – 1 to 4 family	4	$	494	5	$	618	2	$	256	—	$	—
Multi-family and commercial	—		—	1		42	—		—	—		—
Construction	2		3,677	2		2,405	—		—	—		—
Total real estate loans	6		4,171	8		3,065	2		256	—		—
Consumer loans:
Home equity	—		—	—		—	—		—	—		—
Other (1)	3		21	1		2	15		134	99		1,039
Total consumer loans	3		21	1		2	15		134	99		1,039
Commercial business loans	3		499	1		8	1		72	—		—
Total delinquent loans	12	$	4,691	10	$	3,075	18	$	462	99	$	1,039

⁽¹⁾ Includes 110 indirect automobile loans totaling $1.2 million at December 31, 2006.

At December 31, 2007, total delinquencies of 60 days or more past due totaled $7.8 million, which represented an increase of $6.3 million compared to $1.5 million at December 31, 2006. Of the $6.3 million increase during 2007, $6.1 million represented two commercial construction loan relationships. The Company has identified the aforementioned loans as nonperforming and has recorded a specific reserve of $1.0 million against the outstanding balance of these loans.

Classified Assets. Management of the Bank, including the Managed Asset Committee, consisting of a number of the Bank’s officers, review and classify the assets of the Bank on a monthly basis and the Board of Directors reviews the results of the reports on a quarterly basis. Federal regulations and the Bank’s internal policies require that management utilize an internal asset classification system to monitor and evaluate the credit risk inherent in its loan portfolio. The Bank currently classifies problem and potential problem assets as “substandard,” “doubtful,” “loss” or “special mention.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those assets that are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets characterized as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the additional characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, questionable, and there is a high probability of loss. Assets classified as “loss” are those assets considered uncollectible and of such little value that their continuance as assets, without the establishment of a specific loss reserve, is not warranted. In addition, assets that do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated “special mention.” When an asset is classified as “substandard” or “doubtful,” a specific allowance for loan losses may be established. If an asset is classified as a “loss,” the Bank charges-off an amount equal to the portion of the asset classified as “loss.” All the loans mentioned above are included in the Bank’s Managed Asset Report. This report serves as an integral part in the evaluation of the adequacy of the Bank’s allowance for loan losses.

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The following table sets forth the principal balance of the Bank’s classified loans as of December 31, 2007.

(Dollars in Thousands)	Loss		Doubtful		Substandard		Special Mention
Real estate loans:
Residential – 1 to 4 family	$	—	$	—	$	754	$	—
Multi-family and commercial		—		—		658		7,393
Construction		—		—		6,082		5,511
Total real estate loans		—		—		7,494		12,904
Consumer loans:
Home equity		—		—		—		—
Other		1		18		3		—
Total consumer loans		1		18		3		—
Commercial business loans		—		9		800		418
Total classified loans	$	1	$	27	$	8,297	$	13,322

At December 31, 2007, the Bank had one loss rated loan and five loans rated as doubtful. Of the $8.3 million of substandard loans at December 31, 2007, $7.6 million were considered nonperforming loans. The largest substandard loan, a commercial construction loan, was $2.3 million, which is not more than 90 days past due. Of the $13.3 million of special mention loans, only one loan, a commercial mortgage loan, totaling $896,000, was 30 days past due at December 31, 2007.

At December 31, 2007, total classified loans related predominately to seven commercial construction loans totaling $11.6 million and eleven commercial real estate loans totaling $8.1 million. Declining economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans. The continued weakening of both the local and national real estate markets has contributed to the inability of commercial developers to sell completed units, which resulted in declining collateral values and an increased risk of default.

Nonperforming Assets and Restructured Loans. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on nonaccrual loans are applied to the outstanding principal and interest balance as determined at the time of collection of the loan.

The Bank considers repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs or fair value at the date of the foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income as incurred.

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The following table provides information with respect to the Bank’s nonperforming assets and troubled debt restructurings as of the dates indicated.

	December 31,
(Dollars in Thousands)	2007			2006			2005			2004			2003
Nonaccrual loans:
Real estate loans	$	6,879		$	392		$	224		$	943		$	1,295
Commercial business loans		733			71			—			—			—
Consumer loans (1)		20			929			16			1			—
Total nonaccrual loans		7,632			1,392			240			944			1,295
Accruing loans past due 90 days or more:
Real estate loans		—			—			—			—			—
Commercial business loans		—			—			—			—			—
Consumer loans		—			—			—			—			—
Total accruing loans past due 90 days or more		—			—			—			—			—
Total nonperforming loans		7,632			1,392			240			944			1,295
Real estate owned, net (2)		913			—			325			—			328
Total nonperforming assets		8,545			1,392			565			944			1,623
Troubled debt restructurings		71			72			74			76			77
Total nonperforming assets and troubled debt restructurings	$	8,616		$	1,464		$	639		$	1,020		$	1,700
Ratios:
Total nonperforming loans to total loans		1.29	%		0.24	%		0.05	%		0.21	%		0.33	%
Total nonperforming loans to total assets		0.97			0.18			0.03			0.15			0.25
Total nonperforming assets and troubled debt restructurings to total assets		1.09			0.19			0.09			0.16			0.33

⁽¹⁾ Includes indirect automobile loans totaling $925,000 at December 31, 2006.

⁽²⁾ Real estate owned balances are shown net of related loss allowance.

In addition to the loans disclosed in the above table, at December 31, 2007, management identified 21 loans totaling $9.8 million in which the borrowers had possible credit problems that caused management to have doubts about the ability of the borrowers to comply with the present loan repayment terms and that may result in the future inclusion of such loans in the table above. All of the aforementioned loans have been classified as either substandard or special mention and are contained in the classified loan table on the previous page and are not more than 30 days delinquent.

13

Interest income that would have been recorded for the year ended December 31, 2007 had nonaccruing loans and troubled debt restructurings been current in accordance with their original terms and had been outstanding throughout the period amounted to $462,000. The amount of interest related to nonaccrual loans and troubled debt restructurings included in interest income was $21,000 for the year ended December 31, 2007.

Allowance for Loan Losses. The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. The Bank evaluates the allowance for loan losses on a monthly basis.

The methodology for assessing the appropriateness of the allowance for loan losses consists of the following key elements:

• Specific allowances for identified impaired loans;

• General valuation allowance on the remainder of the loan portfolio

The loan portfolio is segregated first between loans that are on the Bank’s “Managed Asset Report” and loans that are not. The Managed Asset Report includes: (1) loans that are 60 or more days delinquent, (2) loans with anticipated losses, (3) loans referred to attorneys for collection or in the process of foreclosure, (4) nonaccrual loans, (5) loans classified as “substandard,” “doubtful,” “loss” or “special mention” by either the Bank’s internal classification system or by regulators during the course of their examination of the Bank and (6) troubled debt restructurings and other nonperforming loans.

Specific Allowance for Identified Impaired Loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan.

The Bank reviews and establishes, as needed, a specific allowance for certain identified non-homogeneous problem loans. In accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” as amended by Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan- – an amendment of FASB Statement No. 114,” a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the original loan agreement. Measurement of the impairment is based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. A specific allowance on impaired loans is established if the present value of the expected future cash flows, or fair value of the collateral for collateral dependent loans, is lower than the carrying value of the loan.

General Valuation Allowance on the Remainder of the Loan Portfolio. The Bank establishes a general allowance on the remainder of the loan portfolio, after excluding impaired loans. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on the Bank’s historical loss experience and delinquency trends. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting the Bank’s primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated annually to ensure their relevance in the current economic environment.

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Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. In addition, because future events affecting borrowers and collateral cannot be predicted 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 loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses would adversely affect the Company’s financial condition and results of operations.

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

	Years Ended December 31,
(Dollars in Thousands)	2007			2006			2005			2004			2003
Allowance at beginning of year	$	4,365		$	3,671		$	3,200		$	2,688		$	3,067
Provision for loan losses		1,062			881			410			550			1,602
Charge-offs:
Real estate loans		(246	)		—			(17	)		—			(1,523	)
Commercial business loans		—			—			(1	)		(13	)		(374	)
Consumer loans		(188	)		(199	)		(11	)		(62	)		(216	)
Total charge-offs		(434	)		(199	)		(29	)		(75	)		(2,113	)
Recoveries:
Real estate loans		135			4			70			19			89
Commercial business loans		—			2			3			6			24
Consumer loans		117			6			17			12			19
Total recoveries		252			12			90			37			132
Net (charge-offs) recoveries		(182	)		(187	)		61			(38	)		(1,981	)
Allowance at end of year	$	5,245		$	4,365		$	3,671		$	3,200		$	2,688
Ratios:
Allowance to total loans outstanding at end of year		0.89	%		0.76	%		0.71	%		0.71	%		0.69	%
Allowance to nonperforming loans		68.72			313.58			1529.58			338.98			207.57
Net (charge-offs) recoveries to average loans outstanding during the year		(0.03	)		(0.03	)		0.01			(0.01	)		(0.55	)
Recoveries to charge-offs		58.06			6.03			310.34			49.30			6.25

The higher provision for 2007 reflects increases in the Bank’s classified and nonperforming loans, specific reserves for impaired loans and loan growth from the prior year-end. Specific reserves relating to impaired loans increased to $1.3 million at December 31, 2007 compared to $14,000 at December 31, 2006. The ratio of the allowance for loan losses to total loans increased from 0.76% at December 31, 2006 to 0.89% at December 31, 2007. At December 31, 2007, nonperforming loans totaled $7.6 million, compared to $1.4 million at December 31, 2006. Two commercial construction loans accounted for $6.1 million of nonperforming loans and $1.0 million in specific reserves. While the Company has no direct exposure to sub-prime mortgages in its loan portfolio, declining economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for

15

commercial loans. As a result, the Company has increased its provision for loan losses on this portion of the loan portfolio during the second half of 2007 to reflect the increased risk of loss associated with this type of lending.

Charge-offs for 2003 included the charge-off of two commercial business loans and two commercial real estate loans that aggregated $1.8 million. The larger of the two commercial real estate loans, which at the time of charge-off had a principal balance of $1.6 million, was charged-off after the loan was nonperforming and the Bank determined that the value of the real estate underlying the loan was insufficient to cover the outstanding principal balance. Additionally, because we held a junior collateral position, the Bank determined that the likelihood of any recovery was remote. During the year ended December 31, 2003, charge-offs exceeded the provision for loan losses as specific allowances of $237,000 were established in prior periods for a portion of the charged-off loans once it had been determined that collection or liquidation in full was unlikely.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

	December 31,
	2007						2006						2005
(Dollars in Thousands)	Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans		Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans		Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans
Real estate loans	$	4,155	79.22	%	84.62	%	$	3,244	74.32	%	81.93	%	$	2,639	71.89	%	80.36	%
Commercial business		922	17.57		11.81			783	17.94		13.03			892	24.29		15.02
Consumer loans		168	3.21		3.57			338	7.74		5.04			140	3.82		4.62
Total allowance for loan losses	$	5,245	100.00	%	100.00	%	$	4,365	100.00	%	100.00	%	$	3,671	100.00	%	100.00	%

	December 31,
	2004						2003
(Dollars in Thousands)	Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans		Amount		% of Allowance in each Category to Total Allowance		% of Loans in each Category to Total Loans
Real estate loans	$	2,403	75.08	%	82.18	%	$	2,093	77.86	%	82.46	%
Commercial business		641	20.02		13.13			461	17.15		13.04
Consumer loans		152	4.74		4.69			80	2.98		4.50
Unallocated		4	0.16		—			54	2.01		—
Total allowance for loan losses	$	3,200	100.00	%	100.00	%	$	2,688	100.00	%	100.00	%

16

Investment Activities

The Company has legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, government-sponsored enterprises, state and municipal governments, mortgage-backed securities and certificates of deposit of federally-insured institutions. Within certain regulatory limits, the Company also may invest a portion of its assets in corporate securities and mutual funds. The Company is also required to maintain an investment in FHLB stock. While the Company has the authority under applicable law and its investment policies to invest in derivative securities, the Company had no such investments at December 31, 2007.

The Company’s primary source of income continues to be derived from its loan portfolio. The investment portfolio is mainly used to meet the cash flow needs of the Company, provide adequate liquidity for the protection of customer deposits and yield a favorable return on investments. The type of securities and the maturity periods are dependent on the composition of the loan portfolio, interest rate risk, liquidity position and tax strategies of the Company. The Company’s investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak, to generate a favorable return and to assist in the financing needs of various local public entities, subject to credit quality review and liquidity concerns. The Company’s Board of Directors has the overall responsibility for the investment portfolio, including approval of the Company’s Investment Policy and appointment of the Investment Committee. The Investment Committee is responsible for the approval of investment strategies and monitoring investment performance. The execution of specific investment initiatives and the day-to-day oversight of the Company’s investment portfolio is the responsibility of the Chief Executive Officer and the Chief Financial Officer. These officers, and others designated by the Board, are authorized to execute investment transactions up to specified limits based on the type of security without prior approval of the Investment Committee. Transactions exceeding these limitations require the approval of two of these officers, one of whom must be either the President and Chief Executive Officer or the Chief Financial Officer. Individual investment transactions are reviewed and approved by the Board of Directors on a monthly basis, while portfolio composition and performance are reviewed at least quarterly by the Investment Committee.

Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), requires that securities be categorized as either “held to maturity,” “trading securities” or “available for sale” based on management’s intent as to the ultimate disposition of each security. Debt securities may be classified as “held to maturity,” and reported in the financial statements at amortized cost, only if the Company has the positive intent and ability to hold those securities until maturity. Securities purchased and held principally for the purpose of trading in the near term are classified as “trading securities.” These securities are reported at fair value in the financial statements, with unrealized gains and losses recognized in earnings. Debt and equity securities not classified as either “held to maturity” or “trading securities” are classified as “available for sale securities.” These securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.

At December 31, 2007, the Company’s investment portfolio, which consisted solely of available for sale securities, totaled $141.9 million and represented 18.0% of assets. The Company’s available for sale securities consisted primarily of “agency” mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less, AAA-rated “private-label” mortgage-backed securities with maturities of 30 years or less, government-sponsored enterprises with maturities of five years or less and corporate debt securities.

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The following table sets forth the amortized costs and fair values of the Company’s securities portfolio at the dates indicated.

	December 31,
	2007				2006				2005
(Dollars in Thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government and agency obligations	$	1,156	$	1,132	$	1,596	$	1,602	$	4,820	$	4,813
Government-sponsored enterprises		32,551		32,762		66,190		65,263		73,135		71,490
Mortgage-backed securities		92,184		92,864		45,481		44,815		37,346		36,538
Corporate debt securities		10,075		10,038		3,917		3,903		4,537		4,528
Obligations of state and political subdivisions		2,000		2,018		2,000		2,024		1,499		1,546
Tax-exempt securities		350		350		420		420		490		490
Foreign government securities		100		100		100		99		75		74
Total debt securities		138,416		139,264		119,704		118,126		121,902		119,479
Marketable equity securities		2,734		2,650		1,336		1,382		555		540
Total available for sale securities	$	141,150	$	141,914	$	121,040	$	119,508	$	122,457	$	120,019

The Company had no individual investments that had an aggregate book value in excess of 10% of its stockholders’ equity at December 31, 2007.

The following table sets forth the amortized cost, weighted-average yields and contractual maturities of securities at December 31, 2007. Weighted-average yields on tax-exempt securities are not presented on a tax equivalent basis because the impact would be insignificant. Certain mortgage-backed securities have adjustable interest rates and will reprice periodically within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2007, the amortized cost of mortgage-backed securities with adjustable rates totaled $15.3 million.

	One Year or Less				More than One Year to Five Years				More than Five Years to Ten Years				More than Ten Years				Total
(Dollars in Thousands)	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
U.S. Government and agency obligations	$	—	—	%	$	42	8.52	%	$	694	6.60	%	$	420	7.54	%	$	1,156	7.01	%
Government-sponsored enterprises		14,832	3.80			17,719	4.52			—	—			—	—			32,551	4.19
Mortgage-backed securities		—	—			1,840	3.58			11,177	4.86			79,167	5.42			92,184	5.32
Corporate debt securities		—	—			—	—			—	—			10,075	6.93			10,075	6.93
Obligations of state and political subdivisions		1,000	6.79			—	—			500	3.59			500	5.60			2,000	5.69
Tax-exempt securities		70	3.87			280	3.87			—	—			—	—			350	3.87
Foreign government securities		25	5.10			75	5.35			—	—			—	—			100	5.29
Total debt securities		15,927	3.99			19,956	4.43			12,371	4.91			90,162	5.60			138,416	5.19
Marketable equity securities		—	—			—	—			—	—			2,734	6.04			2,734	6.04
Total available for sale securities	$	15,927	3.99	%	$	19,956	4.43	%	$	12,371	4.91	%	$	92,896	5.61	%	$	141,150	5.20	%

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Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of the Company’s funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. Substantially all of the Bank’s depositors are residents of the State of Connecticut. Deposits are attracted from within the Bank’s market area through the offering of a broad selection of deposit instruments, including NOW, money market accounts, regular savings accounts and certificates of deposit. The Bank also utilizes brokered certificates of deposits, which at December 31, 2007 amounted to $2.1 million, as an alternate source of funds. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rates offered, among other factors. In determining the terms of the Bank’s deposit accounts, the Bank considers the rates offered by its competition, liquidity needs, profitability, matching deposit and loan products and customer preferences and concerns. The Bank generally reviews its deposit mix and pricing weekly. The Bank’s current strategy is to offer competitive rates, and even higher rates on long-term deposits, but not be the market leader in every account type and maturity.

The Bank also offers a variety of deposit accounts designed for the businesses operating in its market area. Business banking deposit products include a commercial checking account that provides an earnings credit to offset monthly service charges and a checking account specifically designed for small business and nonprofit organizations. Additionally, sweep accounts and money market accounts are available for businesses. The Bank has sought to increase its commercial deposits through the offering of these products, particularly to its commercial borrowers and to local municipalities.

The following table sets forth the deposit activity for the years indicated, including mortgagors’ and investors’ escrow accounts and brokered deposits.

	Years Ended December 31,
(Dollars in Thousands)	2007			2006		2005
Beginning balance	$	541,922		$	512,282	$	460,480
(Decrease) increase before interest credited		(5,928	)		16,483		43,265
Interest credited		15,778			13,157		8,537
Net increase in deposits		9,850			29,640		51,802
Ending balance (1)	$	551,772		$	541,922	$	512,282

(1) Includes mortgagors’ and investors’ escrow accounts in the amount of $3.4 million, $3.2 million and $3.0 million at December 31, 2007, 2006 and 2005, respectively. Includes brokered deposits of $2.1 million, $7.1 million and $5.0 million at December 31, 2007, 2006 and 2005, respectively.

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The following table sets forth the distribution of the Bank’s deposit accounts for the dates indicated.

	December 31,
	2007				2006				2005
(Dollars in Thousands)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Noninterest-bearing demand deposits	$	56,762	10.29	%	$	55,703	10.28	%	$	51,996	10.15	%
NOW and money market accounts		151,237	27.41			126,567	23.36			125,156	24.43
Savings accounts (1)		69,876	12.66			81,020	14.94			90,879	17.74
Certificates of deposit (2)		273,897	49.64			278,632	51.42			244,251	47.68
Total deposits	$	551,772	100.00	%	$	541,922	100.00	%	$	512,282	100.00	%

(1) Includes mortgagors’ and investors’ escrow accounts in the amount of $3.4 million, $3.2 million and $3.0 million at December 31, 2007, 2006 and 2005, respectively.

(2) Includes brokered deposits of $2.1 million, $7.1 million and $5.0 million at December 31, 2007, 2006 and 2005, respectively.

The Bank had $80.7 million of certificates of deposit of $100,000 or more outstanding as of December 31, 2007, maturing as follows:

(Dollars in Thousands)	Amount		Weighted Average Rate
Maturity Period:
Three months or less	$	17,715	4.44	%
Over three through six months		16,489	4.79
Over six through twelve months		27,035	4.77
Over twelve months		19,478	4.59
Total	$	80,717	4.66	%

The following table presents the amount of certificates of deposit accounts outstanding by the various rate categories, years to maturity and percent of total certificate accounts at December 31, 2007.

	Amount Due
(Dollars in Thousands)	Less Than One Year		One to Two Years		Two to Three Years		Three to Four Years		More Than Four Years		Total		Percent of Total Certificate Accounts
0.40 – 2.00%	$	18,002	$	—	$	—	$	—	$	—	$	18,002	6.57	%
2.01 – 3.00%		7,746		3,005		—		—		—		10,751	3.93
3.01 – 4.00%		9,892		8,470		2,338		500		7		21,207	7.74
4.01 – 5.00%		127,094		13,626		23,002		512		3,286		167,520	61.16
5.01 – 6.00%		49,101		2,611		3,307		787		487		56,293	20.55
6.01 – 6.78%		124		—		—		—		—		124	0.05
Total	$	211,959	$	27,712	$	28,647	$	1,799	$	3,780	$	273,897	100.00	%

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Borrowings. The Bank utilizes advances from the FHLB to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness. The FHLB determines specific lines of credit for each member institution.

Advances from the FHLB increased $29.7 million, or 26.5%, for the year ended December 31, 2007 to $141.6 million. For 2007, new advances tended to be shorter in duration to provide the Company flexibility to repay the advances in the future because of their higher interest rates. The increased borrowings were used to fund asset growth.

Junior Subordinated Debt Owed to Unconsolidated Trusts. In 2002, SI Capital Trust I (the “Trust”), a business trust, issued $7.0 million of preferred securities in a private placement and issued approximately 217 shares of common stock at $1,000 par value to the Company. The Trust used the proceeds of these issuances to purchase $7.2 million of the Company’s floating rate junior subordinated deferrable interest debentures. The interest rate on the debentures and the trust preferred securities was variable based on 3.70% over the six-month LIBOR. The trust securities were redeemed at par on April 22, 2007 and the Trust was subsequently dissolved.

In 2006, the Company formed SI Capital Trust II (“Trust II”), which issued $8.0 million of trust preferred securities through a pooled trust preferred securities offering. The Company owns all of the common securities of Trust II, which has no independent assets or operations. Trust II was formed to issue trust preferred securities and invest the proceeds in an equivalent amount of junior subordinated debentures issued by the Company. A portion of the proceeds from the offering were used to redeem trust preferred securities of the Trust. The trust preferred securities mature in 30 years and bear interest at three-month LIBOR plus 1.70%. The interest rate on these securities at December 31, 2007 was 6.69%. The Company may redeem the trust preferred securities, in whole or in part, on or after September 15, 2011, or earlier under certain conditions.

The debentures are the sole assets of Trust II and are subordinate to all of the Company’s existing and future obligations for borrowed money, its obligations under letters of credit and certain derivative contracts and any guarantees by the Company of any such obligations. The trust preferred securities generally rank equal to the trust common securities in priority of payment, but rank before the trust common securities if and so long as the Company fails to make principal or interest payments on the debentures. Concurrently with the issuance of the debentures and the trust preferred and common securities, the Company issued a guarantee related to the trust securities for the benefit of the holders. The Company’s obligations under the guarantee and the Company’s obligations under the debentures, the related indentures and the trust agreement relating to the trust securities, constitute a full and unconditional guarantee by the Company of the obligations of Trust II under the trust preferred securities. If the Company defers interest payments on the junior subordinated debt, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.

The debentures are also subject to redemption before September 15, 2011, at a specified price after the occurrence of certain events that would either have a negative tax effect on Trust II or the Company or would result in Trust II being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the debentures at their stated maturity or

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following their redemption, Trust II will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities.

Additionally, the Company occasionally utilizes collateralized borrowings, which represent loans sold that do not meet the criteria for derecognition, due primarily to recourse and other provisions that could not be measured at the date of transfer. Such borrowings are derecognized when all recourse and other provisions that could not be measured at the time of transfer either expire or become measurable. The Company had no collateralized borrowings at December 31, 2007.

The following table sets forth information regarding the Company’s borrowings at the dates or for the years indicated.

	At or For the Years Ended December 31,
(Dollars in Thousands)	2007			2006			2005
Maximum amount of advances outstanding at any month-end during the year:
FHLB advances	$	141,619		$	117,982		$	93,190
Subordinated debt		15,465			15,465			7,217
Average balance outstanding during the year:
FHLB advances	$	114,960		$	101,902		$	79,596
Subordinated debt		10,463			9,522			7,217
Weighted-average interest rate during the year:
FHLB advances		4.59	%		4.27	%		3.90	%
Subordinated debt		7.42			8.21			6.86
Balance outstanding at end of year:
FHLB advances	$	141,619		$	111,956		$	87,929
Subordinated debt		8,248			15,465			7,217
Weighted-average interest rate at end of year:
FHLB advances		4.53	%		4.44	%		3.97	%
Subordinated debt		6.69			8.01			8.15

Trust Services

The Bank’s trust department provides fiduciary services, investment management and retirement services, to individuals, partnerships, corporations and institutions. Additionally, the Bank acts as guardian, conservator, executor or trustee under various trusts, wills and other agreements. The Bank has implemented comprehensive policies governing the practices and procedures of the trust department, including policies relating to investment of trust property, maintaining confidentiality of trust records, avoiding conflicts of interest and maintaining impartiality. Consistent with its operating strategy, the Bank will continue to emphasize the growth of its trust business in order to accumulate assets and increase fee-based income. At December 31, 2007, trust assets under administration were $169.8 million, consisting of 340 accounts, the largest of which totaled $9.2 million, or 5.4%, of the trust department’s total assets. The acquisition of SI Trust Servicing, in Rutland, Vermont, in November 2005 represented an opportunity for significant growth of the Bank’s wealth management business. SI Trust Servicing offers third-party trust outsourcing services to other community banks located throughout the

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country. As of December 31, 2007, SI Trust Servicing provided trust outsourcing services to 12 clients, consisting of 4,937 accounts totaling $5.4 billion in assets. For the years ended December 31, 2007, 2006 and 2005, total trust services revenue was $3.6 million, $3.2 million and $1.0 million, respectively.

Subsidiary Activities

The Company’s subsidiaries include Savings Institute Bank and Trust Company and SI Capital Trust II. SI Capital Trust II was established in 2006 as a statutory trust under Delaware law to issue trust preferred securities. The trust has no independent assets or operations. SI Capital Trust II issued $8.0 million of trust preferred securities in September 2006. All of the common securities of SI Capital Trust II are owned by the Company.

The following are descriptions of the Bank’s wholly-owned subsidiaries.

803 Financial Corp. 803 Financial Corp. was established in 1995 as a Connecticut corporation to maintain an ownership interest in a third-party registered broker-dealer, Infinex Investments, Inc. Infinex operates offices at the Bank and offers customers a complete range of nondeposit investment products, including mutual funds, debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities. The Bank receives a portion of the commissions generated by Infinex from sales to customers. Due to a regulatory restriction on federally-chartered thrifts, on December 31, 2004, 803 Financial Corp. sold its interest in Infinex which was subsequently purchased by the Company. As a result, 803 Financial Corp. had no other holdings or business activities.

SI Realty Company, Inc. SI Realty Company, Inc., established in 1999 as a Connecticut corporation, holds real estate owned by the Bank, including foreclosure properties. At December 31, 2007, SI Realty Company, Inc. had $1.1 million in assets.

SI Mortgage Company. In January 1999, the Bank formed SI Mortgage Company to manage and hold loans secured by real property. SI Mortgage Company qualifies as a “passive investment company,” which exempts it from Connecticut income tax under current law. Income tax savings to the Bank from the use of a passive investment company was $89,000 and $188,000 for the years ended December 31, 2007 and 2006, respectively.

Personnel

At December 31, 2007, the Company had 227 full-time employees and 42 part-time employees. None of the Company’s employees are represented by a collective bargaining unit. The Company believes its relationship with its employees is good.

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REGULATION AND SUPERVISION

General

The Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision (“OTS”), as its primary federal regulator, and the FDIC, as the insurer of its deposits. The Bank is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and, under certain circumstances, the FDIC, to evaluate the Bank’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, SI Bancorp, MHC and the Bank and their operations. The Company and SI Bancorp, MHC, as savings and loan holding companies, are required to file certain reports with, are subject to examination by, and otherwise must comply with the rules and regulations of the OTS. The Company is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Certain of the regulatory requirements that are applicable to the Bank, the Company and SI Bancorp, MHC are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank, the Company and SI Bancorp, MHC are qualified in their entirety by reference to the actual statutes and regulations.

Regulation of Federal Savings Associations

Business Activities. Federal law and regulations, primarily the Home Owners’ Loan Act and the regulations of the OTS, govern the activities of federal savings banks, such as the Bank. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements. The OTS’s capital regulations require federal savings institutions to meet three minimum capital standards:

• a tangible capital ratio requirement of 1.5% of adjusted total assets;

• a leverage ratio of 4% of Tier 1 (core) capital to adjusted total assets (3% for institutions receiving the highest rating on the CAMELS examination rating system); and

• a risk-based capital ratio requirement of 8% of total capital (core and supplementary capital) to total risk-weighted assets of which at least half must be core capital

In addition, the prompt corrective action standards discussed below also established, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio standard (3% for institutions receiving the highest rating on the CAMELS examination rating system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

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In determining compliance with the risk-based capital requirement, savings institutions must compute its risk-weighted assets by multiplying its assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, by risk-weight factors ranging from 0% for cash and obligations of the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks believed inherent in the type of asset.

Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles (other than certain mortgage servicing rights) and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses is limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available for sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2007, the Bank exceeded each of these capital requirements.

Prompt Corrective Regulatory Action. The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” An institution must file a capital restoration plan with the OTS within 45 days of the date it receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, a savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. See Item 1. Business. “Lending Activities – Loans to One Borrower.”

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines, which set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS

25

determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard. The Bank has not received any notice from the OTS that it has failed to meet any standard prescribed by the guidelines.

Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution must still provide prior notice to the OTS of the capital distribution if, like the Bank, it is a subsidiary of a holding company. If the Bank’s capital were ever to fall below its regulatory requirements or the OTS notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.

Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least nine months out of each twelve-month period. “Portfolio assets” represent, in general, total assets less the sum of:

• specified liquid assets up to 20% of total assets;

• goodwill and other intangible assets; and

• the value of property used to conduct business

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.” As of December 31, 2007, the Bank maintained 78.28% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

Transactions with Related Parties. Federal law limits the Bank’s authority to lend to, and engage in certain other transactions with (collectively, “covered transactions”), “affiliates” (e.g., any company that controls or is under common control with an institution, including the Company, SI Bancorp, MHC and their non-savings institution subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Loans and other specified transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

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The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities in which such persons control, is limited. The law restricts both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to the person and his or her related interest, are in excess of the greater of $25,000, or 5% of the Bank’s capital and surplus, and in any event any loans totaling $500,000 or more, must be approved in advance by a majority of the disinterested members of the Board of Directors.

Enforcement. The OTS has primary enforcement responsibility over federal savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order for removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1.0 million per day in especially egregious cases. The FDIC has authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Assessments. Federal savings banks are required to pay assessments to the OTS to fund its operations. The general assessments, paid on a semi-annual basis, are based upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report, financial condition and complexity of portfolio. The OTS assessments paid by the Bank for 2007 were $190,000.

Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC recently amended its risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include more than 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points. No institution may pay a dividend if in default of the FDIC assessment.

The Reform Act also provided for a one-time credit for eligible institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits can be used to offset assessments until exhausted. The Bank’s one-time credit was

27

approximately $344,000, of which $100,000 is remaining as of December 31, 2007. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the Deposit Insurance fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the calendar year ending December 31, 2007 averaged 1.18 basis points of assessable deposits.

The Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC as the level that the fund should achieve, was established by the agency at 1.25% for 2008, which is unchanged from 2007.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

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

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in FHLB. The Bank was in compliance with this requirement with an investment in FHLB at December 31, 2007 of $7.8 million.

The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Company’s net interest income would be negatively impacted.

Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the OTS, in connection with its examination of a savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the OTS to provide a written evaluation of an association’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system. The Bank received an “outstanding” rating, which is the highest possible rating, as a result of its most recent Community Reinvestment Act assessment.

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Federal Reserve System. The Federal Reserve Board regulations require savings institutions to maintain noninterest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal “NOW” and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $43.9 million; a 10% reserve ratio is applied above $43.9 million. The first $9.3 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.

Holding Company Regulation

General. The Company and SI Bancorp, MHC are savings and loan holding companies within the meaning of federal law. As such, they are registered with the OTS and are subject to OTS regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the OTS has enforcement authority over the Company, SI Bancorp, MHC and their non-savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the Bank.

Restrictions Applicable to Mutual Holding Companies. According to federal law and OTS regulations, a mutual holding company, such as SI Bancorp, MHC, may generally engage in the following activities: (1) investing in the stock of a bank; (2) acquiring a mutual association through the merger of such association into a bank subsidiary of such holding company or an interim bank subsidiary of such holding company; (3) merging with or acquiring another holding company, one of whose subsidiaries is a bank; (4) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (5) furnishing or performing management services for a savings association subsidiary of such company; (6) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (7) holding or managing properties used or occupied by a savings association subsidiary of such company properties used or occupied by a savings association subsidiary of such company; (8) acting as trustee under deeds of trust; (9) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act, unless the OTS, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (10) purchasing, holding or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the OTS.

The Gramm-Leach Bliley Act of 1999 was designed to modernize the regulation of the financial services industry by expanding the ability of bank holding companies to affiliate with other types of financial services companies such as insurance companies and investment banking companies. The legislation also expanded the activities permitted for mutual savings and loan holding companies to include any activity permitted a “financial holding company” under the legislation, including a broad array of insurance and securities activities.

Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings institution, or its holding company, without prior written approval of the OTS. Federal law also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other than those authorized for savings and loan holding companies by federal law; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider

29

the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permits such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

If the savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institution’s failure to so qualify.

Although savings and loan holding companies are not currently subject to regulatory capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Stock Holding Company Subsidiary Regulation. The OTS has adopted regulations governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies. The Company has adopted this form of organization. The Company is the stock holding company subsidiary of SI Bancorp, MHC. The Company is permitted to engage in activities that are permitted for SI Bancorp, MHC subject to the same restrictions and conditions.

Waivers of Dividends by SI Bancorp, MHC. OTS regulations require SI Bancorp, MHC to notify the OTS if it proposes to waive receipt of dividends from the Company. The OTS reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the waiver would not be detrimental to the safe and sound operating of the savings association subsidiary; and (ii) the mutual holding company’s Board of Directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual holding company’s members.

Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the OTS. Under the Change in Bank Control Act, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

• Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

• Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

• Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of the Bank also are subject to the:

• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumers’ financial records and prescribes procedures for complying with administrative subpoenas of financial records;

• Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

• Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

Federal Income Taxation

General. The Company reports its income on a calendar year basis using the accrual method of accounting. The federal income tax laws apply to the Company in the same manner as to other corporations with some exceptions, including particularly the Bank’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and its subsidiaries. The Company’s federal income tax returns have been either audited or closed under the statute of limitations through tax year 2003. The Company’s maximum federal income tax rate was 34.0% for 2007.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts for institutions with assets in excess of $500.0 million and the percentage of taxable income method for all institutions for tax years beginning after 1995 and required savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. However, those tax-based bad debt reserves accumulated prior to 1988 (“Base Year Reserves”) were not required to be recaptured unless the institution failed certain tests. Approximately $3.7 million of the Bank’s accumulated tax-based bad debt reserves would not be recaptured into taxable income unless it makes a “non-dividend distribution” to the Company as described below.

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Distributions. If the Bank makes “non-dividend distributions” to the Company, the distributions will be considered to have been made from the Bank’s unrecaptured tax-based bad debt reserves, including the balance of its Base Year Reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from the Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. Dividends paid out of the Bank’s current or accumulated earnings and profits will not be so included in the Bank’s taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. The Bank does not intend to pay non-dividend distributions that would result in a recapture of any portion of its bad debt reserves.

State Income Taxation

The Company and its subsidiaries are subject to the Connecticut corporation business tax. The Company and its subsidiaries are eligible to file a combined Connecticut income tax return and pay the regular corporation business tax. The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions of the Company and its subsidiaries and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for fiscal year 2007) to arrive at Connecticut income tax.

In May 1998, the State of Connecticut enacted legislation permitting the formation of passive investment company subsidiaries by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. The Bank’s formation of a passive investment company in January 1999 substantially eliminates the state income tax expense of the Company and its subsidiaries under current law. See Item 1. Business. “Subsidiary Activities – SI Mortgage Company” for a discussion of the Bank’s passive investment company.

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Executive Officers of the Registrant

Certain executive officers of the Bank also serve as executive officers of the Company. The day-to-day management duties of the executive officers of the Company and the Bank relate primarily to their duties as to the Bank. The executive officers of the Company currently are as follows:

Name	Age (1)	Position
Rheo A. Brouillard	53	President and Chief Executive Officer of Savings Institute Bank and Trust Company, SI Financial Group and SI Bancorp, MHC
Brian J. Hull	47	Executive Vice President, Chief Financial Officer and Treasurer of Savings Institute Bank and Trust Company, SI Financial Group and SI Bancorp, MHC
Sonia M. Dudas	57	Senior Vice President and Senior Trust Officer of Savings Institute Bank and Trust Company
William E. Anderson, Jr.	38	Vice President and Retail Banking Officer of Savings Institute Bank and Trust Company
Laurie L. Gervais	43	Vice President and Director of Human Resources of Savings Institute Bank and Trust Company
John P. Kearney	54	Senior Vice President and Senior Credit Officer of Savings Institute Bank and Trust Company

⁽¹⁾ Ages presented are as of December 31, 2007.

Biographical Information:

Rheo A. Brouillard has been the President and Chief Executive Officer of Savings Institute Bank and Trust Company, SI Financial Group and SI Bancorp, MHC since 1995, 2000 and 2004, respectively. Mr. Brouillard has been a director of the Company since 1995.

Brian J. Hull has been Executive Vice President since 2002 and Chief Financial Officer and Treasurer since he joined Savings Institute Bank and Trust Company in 1997. Mr. Hull has served as Chief Financial Officer and Treasurer of Savings Institute Bank and Trust Company, SI Financial Group and SI Bancorp, MHC since 2000 and 2004, respectively.

Sonia M. Dudas has been Senior Vice President and Senior Trust Officer since 1999. Ms. Dudas oversees wealth management services, which includes trust, investment and insurance operations since she joined Savings Institute Bank and Trust Company in 1992.

William E. Anderson, Jr. has been Vice President and Retail Banking Officer since 2002 and 2004, respectively. Mr. Anderson joined Savings Institute Bank and Trust Company in 1995.

Laurie L. Gervais has been Vice President and Director of Human Resources since 2003 and 2001, respectively. Ms. Gervais joined Savings Institute Bank and Trust Company in 1983.

John P. Kearney has been Senior Vice President and Senior Credit Officer since 2007. Mr. Kearney joined Savings Institute Bank and Trust Company in 2006. Prior to joining Savings Institute Bank & Trust Company, Mr. Kearney was a Partner in a Connecticut-based public accounting firm and a Senior Vice President of HSBC Group, a banking and financial services organization.

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Item 1A. Risk Factors.

Prospective investors in the Company’s common stock should carefully consider the following factors.

• The Company’s increased emphasis on commercial lending may expose it to increased lending risks. At December 31, 2007, $202.7 million, or 34.3%, of the Company’s loan portfolio consisted of commercial real estate and commercial business loans. The Company intends to continue to emphasize these types of lending. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of the Company’s commercial borrowers have more than one loan outstanding with the Company. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Company to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

• The Company’s inability to achieve profitability on new branches may negatively impact its earnings. The Company considers its primary market area to consist of Hartford, New London, Tolland and Windham counties. However, the majority of the Company’s facilities are located in and a substantial portion of the Company’s business is derived from Windham county, which has a lower median household income and a higher unemployment rate than other counties in the Company’s market area and the rest of Connecticut. To address this, in recent years, the Company has expanded its presence throughout its market area and intends to pursue further expansion through the establishment of additional branches in Hartford, New London, Tolland and Middlesex counties, each of which has more favorable economic conditions than Windham County. The profitability of the Company’s expansion policy will depend on whether the income that it generates from the additional branches it establishes or purchases will offset the increased expenses resulting from operating new branches. The Company expects that it may take a period of time before new branches can become profitable, especially in areas in which it does not have an established presence. During this period, operating these new branches may negatively impact the Company’s net income.

• Fluctuations in interest rates could reduce the Company’s profitability and affect the value of its assets. Like other financial institutions, the Company is subject to interest rate risk. The Company’s primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in the general level of interest rates can affect the Company’s net interest income by affecting the difference between the weighted-average yield earned on the Company’s interest-earning assets and the weighted-average rate paid on the Company’s interest-bearing liabilities, or interest rate spread and the average life of the Company’s interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect: (1) the ability to originate loans; (2) the value of the Company’s interest-earning assets and the Company’s ability to realize gains from the sale of such assets; (3) the ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of the Company’s borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond the Company’s control. Although the Company believes that the estimated maturities of its interest-earning assets currently are well balanced in relation to the estimated maturities of its interest-bearing liabilities, there can be no assurance that the Company’s profitability would not be adversely affected during any period of changes in interest rates.

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• Strong competition within the Company’s market area could hurt the Company’s profits and slow growth. The Company faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for the Company to make new loans and at times has forced the Company to offer higher deposit rates. Price competition for loans and deposits might result in the Company earning less on its loans and paying more on its deposits, which reduces net interest income. As of June 30, 2007, the Company held approximately 0.97% of the deposits in Hartford, New London, Tolland and Windham counties in Connecticut, which represented the 15^th market share of deposits out of 38 financial institutions in these counties. Some of the institutions with which the Company competes have substantially greater resources and lending limits than the Company has and may offer services that the Company does not provide. The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. The Company’s profitability depends upon its continued ability to compete successfully in its market area.

• The trading history of the Company’s common stock is characterized by low trading volume. The Company’s common stock may be subject to sudden decreases due to the volatility of the price of the Company’s common stock. The Company’s common stock trades on the NASDAQ Global Market. Over the past 50 days, the average daily trading volume of its common stock was approximately 8,000 shares. The Company cannot predict whether a more active trading market in its common stock will occur or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of its common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control.

The market price of the Company’s common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

• actual or anticipated fluctuations in the Company’s operating results;

• changes in interest rates;

• changes in the legal or regulatory environment in which the Company operates;

• press releases, announcements or publicity relating to the Company or the Company’s competitors or relating to trends in the Company’s industry;

• changes in expectations as to the Company’s future financial performance, including financial estimates or recommendations by securities analysts and investors;

• future sales of the Company’s common stock;

• changes in economic conditions in the Company’s marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and

• other developments affecting the Company’s competitors or the Company

These factors may adversely affect the trading price of the Company’s common stock, regardless of its actual operating performance, and could prevent you from selling your common stock at or above the price you desire. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of the Company’s common stock, regardless of its trading performance.

• If the value of real estate in eastern Connecticut were to decline materially, a significant portion of the Company’s loan portfolio could become under-collateralized, which would have a material adverse effect on the Company. With most of the Company’s loans concentrated in eastern Connecticut, a decline in local economic conditions could adversely affect the value of the

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real estate collateral securing the Company’s loans. A decline in property values would diminish the Company’s ability to recover on defaulted loans by selling the real estate collateral, making it more likely that the Company would suffer losses on defaulted loans. Additionally, a decrease in asset quality could require additions to the allowance for loan losses through increased provisions for loan losses, which would hurt the Company’s profits. Also, a decline in local economic conditions may have a greater effect on earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies and natural disasters.

• The Company’s level of nonperforming loans and classified assets expose it to increased lending risks. Further, the Company’s allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolio. At December 31, 2007, loans that were classified as either special mention, substandard, doubtful or loss totaled $21.6 million, representing 3.7% of total loans, including nonperforming loans of $7.6 million, representing 1.29% of total loans. In addition, the Company’s nonperforming and classified loans have increased in each of the last two years. If these loans do not perform according to their terms and the value of the collateral is insufficient to pay the remaining loan balance, we would experience loan losses, which could have a material adverse effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses at a level representing management’s best estimate of known losses in the portfolio based upon management’s evaluation of the portfolio’s collectibility as of the corresponding balance sheet date. However, the Company’s allowance for loan losses may be insufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect the Company’s operating results.

At December 31, 2007, the Company’s allowance for loan losses totaled $5.2 million, which represented 0.89% of total loans, 68.72% of nonperforming loans and 242.30% of classified assets. The Company’s regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge-off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on the Company’s operating results.

• Office of Thrift Supervision policy on remutualization transactions could prohibit acquisition of the Company, which may adversely affect its stock price. Current OTS regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. The possibility of a remutualization transaction has recently resulted in a degree of takeover speculation for mutual holding companies that is reflected in the per share price of mutual holding companies’ common stock. However, the OTS has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the OTS intends to give these issues special scrutiny and reject applications providing for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the OTS’s concerns are not warranted in the particular case. Should the OTS prohibit or otherwise restrict these transactions in the future, the Company’s per share stock price may be adversely affected.

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• SI Bancorp, MHC’s majority control of the Company’s common stock enables it to exercise voting control over most matters put to a vote of shareholders, including preventing a sale, a merger or a second-step conversion transaction. SI Bancorp, MHC owns a majority of the Company’s common stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of shareholders. The same directors and officers who manage the Company and the Bank also manage SI Bancorp, MHC. As a federally-chartered mutual holding company, the Board of Directors of SI Bancorp, MHC must ensure that the interests of depositors of the Bank are represented and considered in matters put to a vote of shareholders of the Company. Therefore, the votes cast by SI Bancorp, MHC may not be in your personal best interests as a shareholder. For example, SI Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction in which shareholders could receive a premium for their shares or to defeat a shareholder nominee for election to the Board of Directors of the Company. In addition, SI Bancorp, MHC may exercise its voting control to prevent a second-step conversion transaction. Preventing a second-step conversion transaction may result in a lower value of the Company’s stock price than otherwise could be achieved as, historically, fully-converted institutions trade at higher multiples than mutual holding companies. The matters as to which shareholders, other than SI Bancorp, MHC, will be able to exercise voting control are limited.

• The Company operates in a highly regulated environment and it may be adversely affected by changes in laws and regulations. The Company is subject to extensive regulation, supervision and examination by the OTS, the Company’s chartering authority and the FDIC, as insurer of the Bank’s deposits. SI Bancorp, MHC, the Company and the Bank are all subject to regulation and supervision by the OTS. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on the Company’s operations, the classification of its assets and determination of the level of the Bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on the Company’s operations.

• The Company is subject to security and operational risks relating to use of its technology that could damage its reputation and business. Security breaches in the Company’s internet banking activities could expose it to possible liability and damage its reputation. Any compromise of the Company’s security also could deter customers from using its internet banking services that involve the transmission of confidential information. The Company relies on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect its systems from compromises or breaches of its security measures that could result in damage to its reputation and business. Additionally, the Company outsources its data processing to a third party. If the Company’s third party provider encounters difficulties or if the Company has difficulty in communicating with such third party, it will significantly affect the Company’s ability to adequately process and account for customer transactions, which would significantly affect its business operations.

Item 1B. Unresolved Staff Comments.

None.

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Item 2. Properties.

The Bank conducts its business through its main office, branch offices and other properties. The following table sets forth certain information relating to these facilities as of December 31, 2007.

Location	Year Opened	Square Footage	Own/ Lease		Date of Lease Expiration		Net Book Value as of December 31, 2007
							(Dollars in thousands)
Main Office:
803 Main Street	1870	26,210	Own		—		$1,773
Willimantic, Connecticut 06226
Branch Offices:
115 Main Street	1974	2,400	Own		—		491
Hebron, Connecticut 06248
554 Exeter Road, Route 207	1978	2,128	Own		—		223
Lebanon, Connecticut 06249
9 Proulx Street	1990	1,538	Lease	(1)	2010		160
Brooklyn, Connecticut 06234
85 Freshwater Boulevard	1992	4,365	Lease		2012	(2)	—
Enfield, Connecticut 06082
596 Hartford Pike	1996	2,575	Lease		2026	(3)	599
Dayville, Connecticut 06241
971 Poquonnock Road	1997	3,373	Lease		2012	(4)	22
Groton, Connecticut 06340
Big Y, 224 Salem Turnpike	1998	600	Lease		2008	(2)	—
Norwich, Connecticut 06360
108 Salem Turnpike	1998	3,208	Lease	(1)	2027	(5)	923
Norwich, Connecticut 06360
344 Prospect Street	1998	2,160	Lease		2008	(2)	219
Moosup, Connecticut 06354
Shaw’s, 60 Cantor Drive	1998	421	Lease		2010	(4)	—
Willimantic, Connecticut 06226
180 Westminster Road, Route 14	1998	1,781	Lease		2008	(2)	3
Canterbury, Connecticut 06331
Walmart, 474 Boston Post Road	2000	540	Lease		2010	(4)	32
North Windham, Connecticut 06256

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Walmart, Lisbon Landing, 180 River Road	2001	695	Lease		2011	(4)		63
Lisbon, Connecticut 06351
East Brook Mall, 95 Storrs Road	2002	2,200	Lease		2022	(3)		446
Mansfield, Connecticut 06250
1000 Sullivan Avenue	2005	2,955	Lease		2025	(2)		19
South Windsor, Connecticut 06074
Mystic Plaza, 80 Stonington Road	2005	3,436	Lease		2015	(3)		307
Stonington, Connecticut 06378
200 Merrow Road, Route 195	2005	2,870	Lease		2015	(2)		223
Tolland, Connecticut 06084
303 Flanders Road, Unit 8	2006	3,075	Lease		2015	(3)		285
East Lyme, Connecticut 06333
2 Chapman Lane	2006	2,575	Lease		2015	(5)		728
Gales Ferry, Connecticut 06335
50 High Street	2007	2,573	Lease		2027	(6)		901
East Hampton, Connecticut 06424
Other Properties:
779 Main Street	1999	8,182	Own	(7)	—			194
Willimantic, Connecticut 06226
579 North Windham Road	2005	10,000	Lease	(8)	2010	(5)		339
North Windham, Connecticut 06256
80 West Street	2005	7,496	Lease	(9)	2011	(4)		—
Rutland, Vermont 05701
Total:							$	7,950

⁽¹⁾ The relocation of the Norwich, Connecticut office was completed in January 2008 and the Bank intends to relocate its Brooklyn, Connecticut office in June 2008.

⁽²⁾ The Company has an option to renew this lease for two additional five-year periods.

⁽³⁾ The Company has an option to renew this lease for four additional five-year periods.

⁽⁴⁾ The Company has an option to renew this lease for one additional five-year period.

⁽⁵⁾ The Company has an option to renew this lease for three additional five-year periods.

⁽⁶⁾ The Company has an option to renew this lease for two additional ten-year periods.

⁽⁷⁾ A portion of this property includes a parking lot for the main office. The remainder of this property has been leased to a subtenant under a lease that expires in December 2013. The subtenant has an option to renew this lease for two additional five-year periods.

⁽⁸⁾ A portion of this facility is used for an employee training center.

⁽⁹⁾ This facility houses trust operations.

39

Item 3. Legal Proceedings.

At December 31, 2007, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. 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 interest, claims involving the making and servicing of real property loans and other issues incident to our business. However, neither the Company nor the Bank is a party to any pending legal proceedings that management believes would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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

None.

PART II.

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The market for the registrant’s common equity and related stockholder matters required by this item is incorporated herein by reference to the section captioned “Common Stock Information” in the Company’s Annual Report to Stockholders.

For a description of restrictions on the Company’s ability to pay cash dividends, see Item 1. Business. “Regulation and Supervision – Limitation on Capital Distributions” in this annual report on Form 10-K and Note 17 in the Company’s Consolidated Financial Statements included in the Company’s Annual Report to Stockholders, attached hereto as Exhibit 13, for more information.

The following table provides certain information with regard to shares repurchased by the Company in the fourth quarter of 2007.

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
October 1, 2007 through October 31, 2007	25,000	$	10.81	25,000	275,350
November 1, 2007 through November 30, 2007	100,000		10.44	100,000	175,350
December 1, 2007 through December 31, 2007	40,000		9.93	40,000	135,350
Total	165,000	$	10.37	165,000

⁽¹⁾ On November 23, 2005, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the Company to repurchase up to 628,000 shares of the Company’s common stock. The repurchase program will continue until it is completed or terminated by the Board of Directors.

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On September 22, 2006, a trust formed by the Company completed the sale of $8.0 million of trust preferred capital securities to a pooled investment vehicle in a private placement offering pursuant to an applicable exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. FTN Financial Capital Markets and Keefe Bruyette & Woods, Inc. acted as underwriters. There were no underwriting discounts or commissions. In April 2007, the Company utilized a portion of the net proceeds from the offering for the redemption of previously issued trust preferred securities which carried significantly higher interest rates.

Item 6. Selected Financial Data.

The Company has derived the following selected consolidated financial and other data in part from its consolidated financial statements and notes appearing elsewhere in this annual report.

Selected Financial Condition Data:	At December 31,
(Dollars in Thousands)	2007		2006		2005		2004		2003
Total assets	$	790,198	$	757,037	$	691,868	$	624,649	$	518,141
Cash and cash equivalents		20,669		26,108		25,946		30,775		29,577
Securities held to maturity		—		—		—		—		1,728
Securities available for sale		141,914		119,508		120,019		120,557		77,693
Loans receivable, net		587,538		574,111		513,775		447,957		386,924
Deposits (1)		551,772		541,922		512,282		460,480		417,311
Federal Home Loan Bank advances		141,619		111,956		87,929		72,674		57,168
Junior subordinated debt owed to unconsolidated trust		8,248		15,465		7,217		7,217		7,217
Total stockholders’ equity		82,087		82,386		80,043		80,809		34,099
Selected Operating Data:	Years Ended December 31,
(Dollars in Thousands, Except Per Share Data)	2007		2006		2005		2004		2003
Interest and dividend income	$	43,347	$	40,777	$	33,905	$	28,603	$	27,930
Interest expense		21,783		18,261		12,131		9,400		9,346
Net interest income		21,564		22,516		21,774		19,203		18,584
Provision for loan losses		1,062		881		410		550		1,602
Net interest income after provision for loan losses		20,502		21,635		21,364		18,653		16,982
Noninterest income		9,378		8,258		6,310		4,185		4,722
Noninterest expenses		27,928		25,959		22,588		21,031		16,606
Income before income tax provision		1,952		3,934		5,086		1,807		5,098
Income tax provision		540		1,156		1,689		519		1,713
Net income	$	1,412	$	2,778	$	3,397	$	1,288	$	3,385
Basic earnings per share	$	0.12	$	0.24	$	0.28		N/A		N/A
Diluted earnings per share	$	0.12	$	0.23	$	0.28		N/A		N/A

41

Selected Operating Ratios:	At or For the Years Ended December 31,
	2007		2006		2005		2004		2003
Performance Ratios:
Return on average assets	0.18	%	0.38	%	0.52	%	0.23	%	0.67	%
Return on average equity	1.71		3.44		4.19		2.77		10.34
Interest rate spread (2)	2.47		2.81		3.19		3.41		3.81
Net interest margin (3)	2.98		3.26		3.56		3.64		3.98
Noninterest expenses to average assets (4)	3.66		3.56		3.47		3.71		3.30
Dividend payout ratio (5)	133.33		66.67		42.86		N/A		N/A
Efficiency ratio (6)	90.57		83.58		80.60		89.29		71.62
Average interest-earning assets to average interest-bearing liabilities	117.02		117.07		118.38		112.93		108.70
Average equity to average assets	10.88		11.07		12.45		8.21		6.51
Regulatory Capital Ratios:
Total risk-based capital ratio	15.21		15.84		16.79		18.03		12.45
Tier 1 risk-based capital ratio	14.37		14.86		15.87		17.12		11.50
Tier 1 capital ratio (7)	8.75		8.97		9.31		9.99		6.81
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans	0.89		0.76		0.71		0.71		0.69
Allowance for loan losses as a percent of nonperforming loans	68.72		313.58		1529.58		338.98		207.57
Net (charge-offs) recoveries to average outstanding loans during the year	(0.03	)	(0.03	)	0.01		0.01		0.55

⁽¹⁾ Includes mortgagors’ and investors’ escrow accounts.

⁽²⁾ Represents the difference between the weighted-average yield on average interest-earning assets and the weighted-average cost of interest-bearing liabilities.

⁽³⁾ Represents net interest income as a percent of average interest-earning assets.

⁽⁴⁾ The noninterest expenses to average assets ratio, excluding the effect of the contribution expense to SI Financial Group Foundation, was 3.27% for the year ended December 31, 2004.

⁽⁵⁾ Dividends declared per share divided by basic net income per common share. Dividends paid on shares held by SI Bancorp, MHC are waived and are excluded from this ratio. Comparable figures for 2004 and 2003 are not available since no dividends were paid during these periods.

⁽⁶⁾ Represents noninterest expenses divided by the sum of net interest income and noninterest income, less any realized gains or losses on the sale of securities. The efficiency ratio, excluding the effect of the contribution to SI Financial Group Foundation, was 78.62% for the year ended December 31, 2004.

⁽⁷⁾ Represents Tier 1 capital to total assets as required by OTS regulations at December 31, 2007, 2006, 2005 and 2004 and Tier 1 capital to total average assets at December 31, 2003 as required by FDIC regulations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information required by this item is incorporated herein by reference to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report to Stockholders attached hereto as Exhibit 13.

42

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable as the Company is a smaller reporting company.

Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data required by this item are incorporated herein by reference to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders attached hereto as Exhibit 13.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T).   Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (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 the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no changes in the Company’s internal control over financial reporting occurred during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and of the preparation of our consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

43

The Company’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2007, using the criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective based on the criteria.

This annual report does not include an attestation report of the Company’s Independent Registered Public Accounting Firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s Independent Registered Public Accounting Firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B. Other Information.

None.

PART III.

Item 10. Directors, Executive Officers and Corporate Governance.

Directors

Information relating to the directors of the Company required by this item is incorporated herein by reference to the section captioned “Item to be Voted on by Stockholders – Item 1 – Election of Directors” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

Executive Officers

Information relating to officers of the Company required by this item is incorporated herein by reference to Part I, Item 1, “Business — Executive Officers of the Registrant” to this annual report on Form 10-K.

Compliance with Section 16(a) of the Exchange Act

Information regarding compliance with Section 16(a) of the Exchange Act required by this item is incorporated herein by reference to the cover page to this annual report on Form 10-K and the section captioned “Other Information Relating to Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

Disclosure of Code of Ethics

Information concerning the Company’s code of ethics required by this item is incorporated herein by reference to the information contained under the section captioned “Corporate Governance – Code of Ethics and Business Conduct” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders. A copy of the code of ethics and business conduct is available to stockholders on the “Governance Documents” portion of the Investor Relations’ section on the Company’s website at www.mysifi.com.

Corporate Governance

Information regarding the audit committee and its composition and the audit committee’s financial expert required by this item is incorporated herein by reference to the section captioned “Corporate Governance – Committees of the Board of Directors – Audit Committee” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

44

Item 11. Executive Compensation.

Information regarding executive compensation required by this item is incorporated herein by reference to the sections captioned “Executive Compensation” and “Directors’ Compensation” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information relating to the security ownership of certain beneficial owners and management required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

The following table sets forth information about the Company’s common stock that may be issued upon the exercise of stock options, warrants and rights under all of the Company’s equity compensation plans as of December 31, 2007.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	503,550	$10.32	112,073
Equity compensation plans not approved by security holders	—	—	—
Total	503,550	$10.32	112,073

Item 13. Certain Relationships and Related Transactions and Director Independence.

Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions required by this item is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers - Transactions with Related Persons” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

Corporate Governance

Information regarding director independence required by this item is incorporated herein by reference to the section captioned “Corporate Governance – Director Independence” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

Item 14. Principal Accountant Fees and Services.

Information relating to the principal accountant fees and expenses required by this item is incorporated herein by reference to the section captioned “Items to be Voted on by Stockholders – Item 2 - Ratification of Independent Registered Public Accounting Firm – Audit Fees” and “Items to be Voted on by Stockholders – Item 2 - Ratification of Independent Registered Public Accounting Firm – Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by the Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

45

PART IV.

Item 15. Exhibits and Financial Statement Schedules.

(1) Financial Statements

The following consolidated financial statements of the Company and its subsidiaries are filed as part of this report:

• Report of Independent Registered Public Accounting Firm

• Consolidated Balance Sheets as of December 31, 2007 and 2006

• Consolidated Statements of Income for the Years Ended December 31, 2007 and 2006

• Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2007 and 2006

• Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006

• Notes to Consolidated Financial Statements

Such financial statements are incorporated by reference to the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders.

(2) Financial Statement Schedules

All financial statement schedules have been omitted because they are either not applicable or the required information is included in the consolidated financial statements or notes thereto included in the Company’s Annual Report to Stockholders.

(3) Exhibits

The exhibits listed below are filed as part of this report or are incorporated by reference herein.

3.1	Charter of SI Financial Group, Inc. (1)
3.2	Bylaws of SI Financial Group, Inc. (2)
4.0	Specimen Stock Certificate of SI Financial Group, Inc. (1)
10.1	* Employment Agreement by and among SI Financial Group, Inc. and Savings Institute Bank and Trust Company and Rheo A. Brouillard (3)
10.2	* Employment Agreement by and among SI Financial Group, Inc. and Savings Institute Bank and Trust Company and Brian J. Hull (3)
10.3	* Form of Savings Institute Bank and Trust Company Employee Severance Compensation Plan (1)
10.4	* Savings Institute Directors Retirement Plan (1)
10.5	* Form of Amended and Restated Savings Institute Bank and Trust Company Supplemental Executive Retirement Plan (4)
10.6	* Savings Institute Group Term Replacement Plan (1)
10.7	* Form of Savings Institute Executive Supplemental Retirement Plan – Defined Benefit (1)
10.8	* Form of Savings Institute Director Deferred Fee Agreement (1)

46

10.9	* Form of Savings Institute Director Consultation Plan (1)
10.10	* Change in Control Agreement by and among SI Financial Group, Inc., Savings Institute Bank and Trust Company and Sonia M. Dudas (5)
10.11	* SI Financial Group, Inc. 2005 Equity Incentive Plan (6)
10.12	* Change in Control Agreement by and among SI Financial Group, Inc., Savings Institute Bank and Trust Company and Laurie L. Gervais (4)
13.0	Annual Report to Stockholders
21.0	List of Subsidiaries
23.1	Consent of Wolf & Company, P.C.
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	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

^* Management contract or compensatory plan, contract or arrangement.

⁽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, and any amendments thereto, Registration No. 333-116381.

⁽²⁾ Incorporated by reference into this document from the Exhibits filed with the Company’s Form 8-K, filed with the Securities and Exchange Commission on November 26, 2007.

⁽³⁾ Incorporated by reference into this document from the Exhibits filed with the Company’s Form 10-Q for the quarter ended September 30, 2004, filed with the Securities and Exchange Commission on November 15, 2004.

⁽⁴⁾ Incorporated by reference into this document from the Exhibits filed with the Company’s Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 29, 2007.

⁽⁵⁾ Incorporated by reference into this document from the Exhibits filed with the Company’s Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 29, 2005.

⁽⁶⁾ Incorporated by reference into this document from the Appendix to the Proxy Statement for the 2005 Annual

Meeting of Stockholders filed with the Securities and Exchange Commission on April 6, 2005.

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

SI Financial Group, Inc.
By:	/s/ Rheo A. Brouillard
	Rheo A. Brouillard
	President and Chief Executive Officer
	March 27, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Name	Title	Date
/s/ Rheo A. Brouillard Rheo A. Brouillard	President and Chief Executive Officer (principal executive officer)	March 27, 2008
/s/ Brian J. Hull Brian J. Hull	Executive Vice President, Treasurer and Chief Financial Officer (principal accounting and financial officer)	March 27, 2008
/s/ Henry P. Hinckley Henry P. Hinckley	Chairman of the Board	March 27, 2008
/s/ Robert C. Cushman, Sr. Robert C. Cushman, Sr.	Director	March 27, 2008
/s/ Donna M. Evan Donna M. Evan	Director	March 27, 2008
/s/ Roger Engle Roger Engle	Director	March 27, 2008
/s/ Robert O. Gillard Robert O. Gillard	Director	March 27, 2008
/s/ Steven H. Townsend Steven H. Townsend	Director	March 27, 2008
/s/ Mark D. Alliod Mark D. Alliod	Director	March 27, 2008
/s/ Michael R. Garvey Michael R. Garvey	Director	March 27, 2008

48

EX-13.0

Exhibit 13.0

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding changes in the Company’s financial condition as of December 31, 2007 and 2006 and the results of operations for the years ended December 31, 2007 and 2006. The information contained in this section should be read in conjunction with the consolidated financial statements and notes contained elsewhere in this annual report.

This report may contain certain “forward-looking statements” within the meaning of the federal securities laws, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts; rather, they are statements based on management’s current expectations regarding our business strategies, intended results and future performance. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “projects” and similar expressions.

Management’s ability to predict results of the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the United States government, including policies of the United States Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area and changes in relevant accounting principles and guidelines. Additional factors that may affect the Company’s results are discussed in Item 1A. “Risk Factors” in the Company’s annual report on Form 10-K and in other reports filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Management Strategies

The Company’s mission is to operate and grow a profitable community-oriented financial institution. The Company plans to achieve this by continuing its strategies of:

• offering a full range of financial services;

• expanding the branch network into new market areas;

• pursuing opportunities to increase commercial lending in the Bank’s market area;

• applying conservative underwriting practices to maintain the high quality of the Bank’s loan portfolio;

• managing net interest margin and net interest spread by seeking to increase lending levels;

• managing investment and borrowing portfolios to provide liquidity, enhance income and manage interest rate risk; and

• increasing deposits by continuing to offer exceptional customer service and emphasizing the Bank’s commercial deposit offerings.

Offer a full range of financial services. The Bank has a long tradition of focusing on the needs of consumers and small and medium-sized businesses in the community and being an active corporate citizen. The Bank delivers personalized service and responds with flexibility to customers needs. The

- 1 -

Bank believes its community orientation is attractive to its customers and distinguishes it from the large regional banks that operate in its market area and it intends to maintain this focus as it grows. In this context, the Bank is striving to become a true financial services company offering its customers one-stop shopping for all of their financial needs through banking, investments, insurance and trust products and services. The Bank hopes that its broad array of product offerings will deepen its relationships with its current customers and entice new customers to begin banking with them, ultimately increasing fee income and profitability.

SI Trust Servicing, the third-party provider of trust outsourcing services for community banks that was acquired by the Bank in November 2005, expands the products offered by the Bank, and offers trust services to other community banks, while presenting significant growth opportunities for the Company’s wealth management business and earnings.

Expand branch network into new market areas. Since 2000, the Bank has opened a new branch office in each of North Windham, Lisbon, Mansfield Center, Tolland, South Windsor and East Hampton, Connecticut. The Bank intends to continue to pursue expansion in Hartford, New London, Tolland and Windham Counties in future years, whether through de novo branching or acquisition. In January 2008, the Bank completed its acquisition of Eastern Federal Bank’s branch office located in Colchester, Connecticut and the relocation of its Norwich, Connecticut office. In February 2008, the Bank completed the acquisition of the Bank of Southern Connecticut’s New London, Connecticut branch office. The Bank also anticipates the relocation of its Brooklyn, Connecticut office to occur during the second quarter of 2008.

Pursue opportunities to increase commercial lending. Commercial real estate and commercial business loans increased $8.9 million and $15.3 million for the years ended December 31, 2007 and 2006, respectively, and comprised approximately 34.3% of total loans at December 31, 2007. There are many multi-family and commercial properties and businesses located in the Bank’s market area and the larger lending relationships associated with these commercial opportunities may be pursued, while continuing to originate any such loans in accordance with what the Bank believes are conservative underwriting guidelines.

Apply conservative underwriting practices and maintain high quality loan portfolio. The Bank believes that high asset quality is a key to long-term financial success. The Bank has sought to maintain a high level of asset quality and moderate credit risk by using underwriting standards which it believes are conservative, and by diligent monitoring and collection efforts. Despite the Bank’s conservative underwriting practices, nonperforming loans increased from $1.4 million at December 31, 2006 to $7.6 million at December 31, 2007. At December 31, 2007, nonperforming loans were 1.29% of the total loan portfolio and 0.97% of total assets. Although the Bank intends to increase its multi-family and commercial real estate and commercial business lending, it intends to continue its philosophy of managing large loan exposures through a conservative approach to lending.

Manage net interest margin and net interest spread. The Company intends to continue to manage its net interest margin and net interest spread by seeking to increase lending levels. Loans secured by multi-family and commercial real estate and commercial business loans are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Consequently, multi-family and commercial real estate loans and commercial business loans typically have higher yields, which increase the Company’s net interest margin and net interest spread.

Manage investment and borrowing portfolios. The Company’s liquidity, income and interest rate risk are affected by the management of its investment and borrowing portfolios. The Company has and may continue to leverage its balance sheet by borrowing funds from the Federal Home Loan Bank of Boston (the “FHLB”) and investing the funds in loans and investment securities in a manner consistent with its

- 2 -

current portfolio. This leverage strategy, if implemented and assuming favorable market conditions, will provide additional liquidity, enhance earnings and help to manage interest rate risk.

Increase deposits. The Company’s primary source of funds is retail deposit accounts. Deposits have continued to increase primarily due to competitive interest rates and the movement of customer funds out of riskier investments, including the stock market. The Company intends to continue to increase its deposits by continuing to offer exceptional customer service and by focusing on increasing its commercial deposits from small and medium-sized businesses through additional business banking products.

Critical Accounting Policies

The Company considers accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The Company considers the allowance for loan losses, deferred income taxes and the impairment of long-lived assets to be its critical accounting policies.

Allowance for Loan Losses. Determining the amount of allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the size and the composition of the loan portfolio, delinquency levels, loss experience, economic conditions and other factors related to the collectibility of the loan portfolio. The level of the allowance for loan losses fluctuates primarily due to changes in the size and composition of the loan portfolio and in the level of nonperforming loans, classified assets and charge-offs. A portion of the allowance is established by segregating the loans by loan category and assigning allocation percentages based on our historical loss experience and delinquency trends. The applied loss factors are re-evaluated annually to ensure their relevance in the current real estate environment. Accordingly, increases in the size of the loan portfolio and the increased emphasis on commercial real estate and commercial business loans, which carry a higher degree of risk of default and, thus, a higher allocation percentage, increases the allowance. Additionally, a portion of the allowance is established based on the level of specific nonperforming loans, classified assets or charged-off loans.

Although the Bank believes that it uses the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. See Notes 1 and 4 in the Company’s Consolidated Financial Statements for additional information.

Deferred Income Taxes. The Company uses the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. These judgments and estimates, which are inherently subjective, are reviewed periodically as regulatory and business factors change. A reduction in estimated future taxable income may require the Company to record a valuation allowance against its deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. See Note 10 in the Company’s Consolidated Financial Statements.

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Impairment of Long-Lived Assets. The Company is required to record certain assets it has acquired, including identifiable intangible assets such as core deposit intangibles, goodwill and certain liabilities that it assumed at fair value, which may involve making estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Further, long-lived assets, including intangible assets and premises and equipment, that are held and used by us, are presumed to have a useful life. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for such intangible and long-lived assets. Additionally, long-lived assets are reviewed for impairment annually at a minimum or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expenses. Testing for impairment is a subjective process, the application of which could result in different evaluations of impairment. See Notes 1, 4, 6 and 7 in the Company’s Consolidated Financial Statements for additional information.

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Analysis of Net Interest Income

Average Balance Sheet. The following sets forth information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resulting yields and rates paid, interest rate spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the periods indicated.

	Years Ended December 31,
	2007							2006
(Dollars in Thousands)	Average Balance		Interest & Dividends			Average Yield/ Rate		Average Balance		Interest & Dividends			Average Yield/ Rate
Interest-earning assets:
Loans (1)(2)	$	584,237	$	36,703		6.28	%	$	553,631	$	34,857		6.30	%
Securities (3)		131,100		6,363		4.85			130,121		5,702		4.38
Other interest-earning assets		8,339		286		3.43			7,966		226		2.84
Total interest-earning assets		723,676		43,352		5.99			691,718		40,785		5.90
Noninterest-earning assets		38,609							37,741
Total assets	$	762,285						$	729,459
Interest-bearing liabilities:
Deposits:
NOW and money market	$	135,568		1,960		1.45	%	$	124,136		1,001		0.81	%
Savings (4)		76,517		1,053		1.38			83,963		961		1.14
Certificates of deposit		280,924		12,718		4.53			271,352		11,165		4.11
Total interest-bearing deposits		493,009		15,731		3.19			479,451		13,127		2.74
FHLB advances		114,960		5,276		4.59			101,902		4,352		4.27
Subordinated debt		10,463		776		7.42			9,522		782		8.21
Total interest-bearing liabilities		618,432		21,783		3.52			590,875		18,261		3.09
Noninterest-bearing liabilities		60,952							57,808
Total liabilities		679,384							648,683
Total stockholders’ equity		82,901							80,776
Total liabilities and stockholders’ equity	$	762,285						$	729,459
Net interest-earning assets	$	105,244						$	100,843
Tax equivalent net interest income (3)				21,569							22,524
Tax equivalent interest rate spread (5)						2.47	%						2.81	%
Tax equivalent net interest margin as a percentage of interest-earning assets (6)						2.98	%						3.26	%
Average interest-earning assets to average interest-bearing liabilities						117.02	%						117.07	%
Less: Tax equivalent adjustment (3)				(5	)						(8	)
Net interest income			$	21,564						$	22,516

⁽¹⁾ Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.

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⁽²⁾ Loan fees are included in interest income and are immaterial.

⁽³⁾ Municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amounts reported in the statements of income.

⁽⁴⁾ Includes mortgagors’ and investors’ escrow accounts.

⁽⁵⁾ Tax equivalent net interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.

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

Rate/Volume Analysis. The following table sets forth the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have on the Company’s interest income and interest expense for the periods presented. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the rate and volume columns. For purposes of this table, changes attributable to both changes in rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

	2007 Compared to 2006
	Increase (Decrease) Due To
(Dollars in Thousands)	Rate			Volume		Net
Interest-earning assets:
Interest and Dividend Income:
Loans (1)(2)	$	(77	)	$	1,923	$	1,846
Securities (3)		618			43		661
Other interest-earning assets		49			11		60
Total interest-earning assets		590			1,977		2,567
Interest-bearing liabilities:
Interest Expense:
Deposits (4)		2,216			388		2,604
FHLB advances		392			532		924
Subordinated debt		(79	)		73		(6	)
Total interest-bearing liabilities		2,529			993		3,522
Change in net interest income (5)	$	(1,939	)	$	984	$	(955	)

⁽¹⁾ Amount is net of deferred loan origination fees and costs. Average balances include nonaccrual loans and loans held for sale.

⁽²⁾ Loan fees are included in interest income and are immaterial.

⁽³⁾ Municipal securities income and net interest income are presented on a tax equivalent basis using a tax rate of 34%. The tax equivalent adjustment is deducted from tax equivalent net interest income to agree to the amounts reported in the statements of income.

⁽⁴⁾ Includes mortgagors’ and investors’ escrow accounts.

⁽⁵⁾ Presented on a tax equivalent basis.

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

Assets. Total assets increased $33.2 million, or 4.4%, to $790.2 million at December 31, 2007, as compared to $757.0 million at December 31, 2006, primarily due to increases in available for sale securities, net loans receivable, and to a lesser extent, premises and equipment and FHLB stock. Available for sale securities increased $22.4 million, or 18.7%, from $119.5 million at December 31, 2006 to $141.9 million at December 31, 2007 as a result of purchases of predominately mortgage-backed securities with longer-term maturities with funds provided by proceeds from the sale of government-sponsored enterprise securities, cash and cash equivalents and Federal Home Loan Bank advances. Net loans receivable increased $13.4 million, or 2.3%, to $587.5 million at December 31, 2007. The increase in net loans receivable included increases in residential and commercial mortgage loans of $20.7 million and $14.2 million, respectively, offset by decreases in construction and consumer loans of $7.4 million and $8.0 million, respectively. The conversion of construction loans to permanent mortgage loans, principal pay-offs and a reduction in new loan originations contributed to the decrease in construction loans. Consumer loans decreased as a result of the disposition of the indirect automobile loan portfolio totaling $5.2 million during the second quarter of 2007. In 2007, loan originations for residential mortgage loans decreased $29.8 million over 2006. Consumer and commercial loan originations decreased $2.6 million and $137,000, respectively, for 2007 as compared to 2006. The increase in net loans receivable was offset by loan sales of $13.7 million of fixed-rate residential mortgage loans in an effort to manage interest rate risk. Premises and equipment, net, increased $1.3 million, or 12.3%, to $11.8 million primarily as a result of leasehold improvements related to the Bank’s new location in East Hampton, Connecticut and the relocation of the Norwich, Connecticut office. FHLB stock increased $1.1 million to $7.8 million at December 31, 2007 to support a higher level of FHLB borrowings.

Liabilities. Total liabilities increased $33.5 million, or 5.0%, from December 31, 2006 to December 31, 2007 primarily as a result of increases in FHLB advances and deposits. Borrowings increased from $127.4 million at December 31, 2006 to $149.9 million at December 31, 2007, resulting from an increase of $29.7 million, or 26.5%, in FHLB advances, offset by the redemption of $7.2 million of debentures in April 2007. The increase in FHLB advances was primarily fixed-rate advances with terms of six months to seven years used to fund the growth of securities and loans and to manage interest rate risk. Deposits, including mortgagors’ and investors’ escrow accounts, increased $9.9 million, or 1.8%, to $551.8 million at December 31, 2007. The Company experienced an increase in NOW and money market accounts of $24.7 million, offset by decreases in savings accounts and certificates of deposit of $11.3 million and $4.7 million, respectively. The increase in NOW and money market accounts was predominately related to branch expansion and new deposit products with competitive promotional rates. Savings accounts decreased as customers transferred their deposits to certain higher-yielding NOW and money market products. The decrease in certificates of deposit included a $5.0 million brokered deposit that matured in December 2007.

Equity. Total stockholders’ equity decreased $299,000 from $82.4 million at December 31, 2006 to $82.1 million at December 31, 2007. The decrease in equity related to stock repurchases of 350,820 shares at a cost of $3.7 million and dividends of $733,000, offset by earnings of $1.4 million, increase in net unrealized holding gains on available for sale securities aggregating $1.5 million (net of taxes) and the amortization of equity awards of $784,000.

Comparison of Operating Results for the Years Ended December 31, 2007 and 2006

General. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates noninterest income such as gains on securities and loan sales, fees from deposit and trust and investment management services, insurance commissions and other fees. The Company’s noninterest expenses primarily consist of employee compensation and benefits,

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occupancy, computer services, furniture and equipment, outside professional services, electronic banking fees, marketing and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, governmental policies and actions of regulatory agencies.

The Company recorded net income of $1.4 million for the year ended December 31, 2007, a decrease of $1.4 million, compared to net income of $2.8 million for the year ended December 31, 2006. The decrease in net income was primarily attributable to a $2.0 million increase in noninterest expenses, a decrease of $952,000 in net interest income and an increase of $181,000 in the provision for loan losses, offset by an increase of $1.1 million in noninterest income and a decrease of $616,000 in the provision for income taxes.

Interest and Dividend Income. Total interest and dividend income increased $2.6 million, or 6.3%, for 2007. Average interest-earning assets increased $32.0 million, or 4.6%, to $723.7 million in 2007, mainly due to higher loan volume. Average loans increased $30.6 million while the rate earned on loans decreased 2 basis points to 6.28% for 2007 from 6.30% for 2006. The decrease in the average yield on loans was attributable to unrecognized interest related to nonaccrual loans during the period. Average securities rose $979,000 and the yield increased to 4.85% in 2007 from 4.38% in 2006, due in part to the purchase of higher-yielding mortgage-backed securities during 2007.

Interest Expense. Interest expense increased $3.5 million, or 19.3%, to $21.8 million for 2007 compared to $18.3 million in 2006, primarily attributable to the rates paid on deposit accounts, and to a lesser extent, the higher volume of interest-bearing liabilities. The yield on deposit accounts increased 45 basis points due to rising market interest rates. In addition, the average balance of deposits rose $13.6 million in 2007. NOW and money market accounts contributed the largest increase to the average balance for deposit accounts, as customers shifted from savings accounts to NOW and money market accounts, resulting in increases in the average balance of $11.4 million. The average yield on these deposits increased 64 basis points. The average balance of certificates of deposit increased $9.6 million and the average rate paid on these deposit accounts increased 42 basis points to 4.53%. The average balance of FHLB advances increased $13.1 million and the average yield increased 32 basis points to 4.59% for 2007. Rates on subordinated borrowings decreased 79 basis points as a result of the pay-off of $7.2 million of debentures, with higher interest rates, during the second quarter of 2007 with the proceeds from a trust preferred securities issuance at lower interest rates.

Provision for Loan Losses. The Company’s provision for loan losses increased $181,000 to $1.1 million in 2007 from $881,000 in 2006. The higher provision reflects an increase in the Bank’s classified and nonperforming loans, specific reserves related to impaired loans and loan growth. Specific reserves relating to impaired loans increased to $1.3 million at December 31, 2007 compared to $14,000 at December 31, 2006. The ratio of the allowance for loan losses to total loans increased from 0.76% at December 31, 2006 to 0.89% at December 31, 2007. At December 31, 2007, nonperforming loans totaled $7.6 million, compared to $1.4 million at December 31, 2006. Two commercial construction loans accounted for $6.1 million of nonperforming loans and $1.0 million in specific reserves. For the year ended December 31, 2007, net loan charge-offs totaled $182,000, compared to net loan charge-offs of $187,000 for the year ended December 31, 2006. While the Company has no direct exposure to sub-prime mortgages in its loan portfolio, declining economic conditions have negatively impacted the residential and commercial construction markets and contributed to the decrease in credit quality for commercial loans. As a result, the Company increased its provision for loan losses on this portion of the loan portfolio during the second half of 2007 to reflect the increased risk of loss associated with this type of lending.

Noninterest Income. Total noninterest income increased $1.1 million, or 13.6%, to $9.4 million in 2007. The following table shows the components of noninterest income and the dollar and percentage changes from 2006 to 2007.

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	Years Ended December 31,					Change
(Dollars in Thousands)	2007		2006			Dollars		Percent
Service fees	$	4,838	$	4,637		$	201	4.3	%
Wealth management fees		3,843		3,420			423	12.4
Increase in cash surrender value of BOLI		294		279			15	5.4
Net gain (loss) on sale of securities		106		(284	)		390	(137.3	)
Net gain on sale of loans		167		104			63	60.6
Other		130		102			28	27.5
Total noninterest income	$	9,378	$	8,258		$	1,120	13.6	%

Wealth management fees were higher principally due to growth in the market value of assets under management. Increases in service fees relate to fees associated with a new deposit product and electronic banking usage. The net gain on the sale of securities in 2007 included a gain of $321,000 from the sale of marketable equity securities, offset by a net loss of $215,000 on the sale of $17.2 million of government-sponsored enterprise securities as a result of the repositioning of the Company’s investment portfolio to benefit from the steeper yield curve. The proceeds were reinvested into longer-term and higher-yielding mortgage-backed securities.

Noninterest Expenses. Noninterest expenses increased by $2.0 million, or 7.6%, for 2007 as compared to 2006. The following table shows the components of noninterest expenses and the dollar and percentage changes from 2006 to 2007.

	Years Ended December 31,				Change
(Dollars in Thousands)	2007		2006		Dollars			Percent
Salaries and employee benefits	$	15,029	$	14,277	$	752		5.3	%
Occupancy and equipment		5,379		4,825		554		11.5
Computer and electronic banking services		2,654		2,458		196		8.0
Outside professional services		1,029		967		62		6.4
Marketing and advertising		773		783		(10	)	(1.3	)
Supplies		509		527		(18	)	(3.4	)
Other		2,555		2,122		433		20.4
Total noninterest expenses	$	27,928	$	25,959	$	1,969		7.6	%

The increase in noninterest expenses reflected an increase in operating costs associated with the expansion of branch offices and other noninterest expenses. Compensation costs were higher in 2007 due to increased staffing levels associated with new branch offices, offset by a reduction in performance-based compensation, which included lower loan origination commissions resulting from a decline in new loan volume. New branch offices resulted in higher occupancy and equipment expense. Outside professional services expense was higher for 2007 due to the termination of the agreement to purchase a mortgage company during the first quarter resulting in a charge to operations for purchase-related transaction costs associated with the termination of $200,000, offset by a reduction in legal and auditing expenditures and lower consulting costs for assistance with Sarbanes-Oxley compliance. An increase in the provision for credit losses for off-balance sheet commitments contributed to the increase in other noninterest expenses for 2007.

Income Tax Provision. The Company’s income tax provision decreased $616,000 to $540,000 for 2007 compared to $1.2 million for 2006 primarily resulting from a decrease in taxable income. The effective tax rate was 27.7% and 29.4% for 2007 and 2006, respectively.

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Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and sales, maturities and sales of securities and borrowings from the FHLB. 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.

The Company regularly adjusts its investment in liquid assets based upon its assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of the Company’s asset/liability management, funds management and liquidity policies. The Company’s policy is to maintain liquid assets less short-term liabilities within a range of 10.0% to 20.0% of total assets. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term government-sponsored enterprises and mortgage-backed securities.

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets depend on the Company’s operating, financing, lending and investing activities during any given period. At December 31, 2007, cash and cash equivalents totaled $20.7 million, including interest-bearing deposits and federal funds sold of $6.1 million. Securities classified as available for sale, which provide additional sources of liquidity, totaled $141.9 million at December 31, 2007. In addition, at December 31, 2007, the Company had the ability to borrow a total of approximately $235.7 million from the FHLB, which includes overnight lines of credit of $10.0 million. On that date, the Company had FHLB advances outstanding of $141.6 million and no overnight advances outstanding. The Company believes that its most liquid assets combined with the available line from the FHLB provide adequate liquidity to meet its current financial obligations.

At December 31, 2007, the Bank had $72.0 million in loan commitments outstanding, which included $16.3 million in commitments to grant loans, $22.0 million in undisbursed construction loans, $20.2 million in unused home equity lines of credit, $11.5 million in commercial lines of credit, $1.5 million in overdraft protection lines and $605,000 in standby letters of credit. Certificates of deposit due within one year of December 31, 2007 totaled $212.0 million, or 38.41%, of total deposits (including mortgagors’ and investors’ escrow accounts). Management believes that the amount of deposits in shorter-term certificates of deposit reflects customers’ hesitancy to invest their funds in longer-term certificates of deposit due to the uncertain interest rate environment. To compensate, the Bank has increased the duration of its borrowings with the FHLB. The Bank will be required to seek other sources of funds, including other certificates of deposit and lines of credit, if maturing certificates of deposit are not retained. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than are currently paid on certificates of deposit. Additionally, a shorter duration in the securities portfolio may be necessary to provide liquidity to compensate for any deposit outflows. The Bank believes, however, based on past experience, a significant portion of its certificates of deposit will be retained. The Bank has the ability, if necessary, to adjust the interest rates offered to its customers in an effort to attract and retain deposits.

The Company’s primary investing activities are the origination of loans and the purchase of securities and loans. For the year ended December 31, 2007, the Bank originated $136.1 million of loans and purchased $66.0 million of securities. In fiscal 2006, the Bank originated $168.7 million of loans and purchased $31.7 million of securities.

Financing activities consist primarily of activity in deposit accounts and in FHLB advances. Asset growth has outpaced deposit growth during the last two years. The increased liquidity needed to fund asset growth has been provided through increased FHLB borrowings, raising capital through the issuance of trust preferred securities and proceeds from the initial public offering. The net increase in total deposits, including mortgagors’ and investors’ escrow accounts was $9.9 million and $29.6 million for the years

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ended December 31, 2007 and 2006, respectively. 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. The Bank generally manages the pricing of its deposits to be competitive and to increase core deposit and commercial banking relationships. Occasionally, the Bank offers promotional rates on certain deposit products to attract deposits. The Bank experienced increases in FHLB advances of $29.7 million and $24.0 million for the years ended December 31, 2007 and 2006, respectively.

In November 2005, the Company’s Board of Directors approved a plan to repurchase approximately 628,000 shares of the Company’s common stock. In 2007, the Company repurchased 350,820 shares, at a cost of $3.7 million, under this plan. At December 31, 2007, the remaining shares to be purchased under this plan totaled 135,350. Subsequently, in February 2008, the Company’s Board of Directors approved the repurchase of up to 596,000 shares of the Company’s outstanding common stock.

The Bank is subject to various regulatory capital requirements administered by the OTS, 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 December 31, 2007, the Bank exceeded all of its regulatory capital requirements and is considered “well capitalized” under regulatory guidelines. As a savings and loan holding company regulated by the OTS, the Company is not subject to any separate regulatory capital requirements. See Note 14 in the Company’s Consolidated Financial Statements for additional information relating to the Bank’s regulatory capital requirements.

Off-Balance Sheet Arrangements

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, are not recorded in its 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, lines of credit and letters of credit.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral becomes worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at December 31, 2007 and 2006 are as follows:

	December 31,
(Dollars in Thousands)	2007		2006
Commitments to extend credit: (1)
Future loan commitments (2)	$	16,288	$	7,658
Undisbursed construction loans		21,961		27,010
Undisbursed home equity lines of credit		20,203		21,554
Undisbursed commercial lines of credit		11,496		12,070
Overdraft protection lines		1,464		1,424
Standby letters of credit (3)		605		1,178
Total commitments	$	72,017	$	70,894

⁽¹⁾ Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments may require payment of a fee and generally have fixed expiration dates or other termination clauses.

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⁽²⁾ Includes fixed-rate loan commitments of $3.9 million at interest rates ranging from 5.38% to 8.50% and $2.6 million at interest rates ranging from 5.13% to 8.00% at December 31, 2007 and 2006, respectively.

⁽³⁾ Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.

In 2007, the Bank became a limited partner in Small Business Investment Corporation (“SBIC”) and made a commitment to make a capital investment of $1.0 million in the limited partnership. At December 31, 2007, the Bank’s remaining off-balance sheet commitment for the capital investment was $847,000. See Note 12 in the Company’s Consolidated Financial Statements.

In 2004, the Bank established an Employee Stock Ownership Plan (“ESOP”) for the benefit of its eligible employees. At December 31, 2007, the Bank had repaid principal payments on the loan to the ESOP of $780,000, allocated 67,865 shares and committed to release 32,295 shares held in suspense for allocation to participants in 2008. As of December 31, 2007, the amount of unallocated common shares held in suspense totaled 387,545, with a fair value of $3.8 million, which represents a potential commitment of the Bank to the ESOP. See Note 11 in the Company’s Consolidated Financial Statements.

As of December 31, 2007, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows. See Note 12 in the Company’s Consolidated Financial Statements.

Impact of Inflation and Changes in Prices

The financial statements and financial data presented within this document have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Impact of Recent Accounting Standards

For information relating to new accounting pronouncements, reference Note 1 - Nature of Business and Summary of Significant Accounting Policies – Recent Accounting Pronouncements in the Company’s Consolidated Financial Statements.

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Certified Public Accountants
and Business Consultants

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

SI Financial Group, Inc.

We have audited the accompanying consolidated balance sheets of SI Financial Group, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SI Financial Group, Inc. and subsidiaries as of December 31, 2007 and 2006, and their results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Boston, Massachusetts

March 14, 2008

99 High Street • Boston, Massachusetts • 02110-2320 • Phone 617-439-9700 • Fax 617-542-0400

1500 Main Street • Suite 1500 • Springfield, Massachusetts • 01115 • Phone 413-747-9042 • Fax 413-739-5149

125 Wolf Road • Suite 209 • Albany, New York • 12205 • Phone 518-454-0880 • Fax 518-454-0882

www.wolfandco.com

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SI FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands, Except Share Amounts)

	December 31,
	2007			2006
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	14,543		$	14,984
Interest-bearing		5,126			3,824
Federal funds sold		1,000			7,300
Total cash and cash equivalents		20,669			26,108
Available for sale securities, at fair value		141,914			119,508
Loans held for sale		410			135
Loans receivable (net of allowance for loan losses of $5,245 at
December 31, 2007 and $4,365 at December 31, 2006)		587,538			574,111
Accrued interest receivable		3,528			3,824
Federal Home Loan Bank stock, at cost		7,802			6,660
Bank-owned life insurance		8,410			8,116
Other real estate owned		913			—
Premises and equipment, net		11,806			10,512
Goodwill and other intangibles		643			741
Deferred tax asset, net		3,270			3,361
Other assets		3,295			3,961
Total assets	$	790,198		$	757,037
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposits:
Noninterest-bearing	$	56,762		$	55,703
Interest-bearing		491,573			482,973
Total deposits		548,335			538,676
Mortgagors’ and investors’ escrow accounts		3,437			3,246
Federal Home Loan Bank advances		141,619			111,956
Junior subordinated debt owed to unconsolidated trusts		8,248			15,465
Accrued expenses and other liabilities		6,472			5,308
Total liabilities		708,111			674,651
Commitments and contingencies (Notes 6, 11 and 12)
Stockholders’ Equity:
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued)		—			—
Common stock ($.01 par value; 75,000,000 shares authorized; 12,563,750
shares issued; 12,071,100 shares outstanding at December 31, 2007 and 12,421,920 shares outstanding at December 31, 2006)		126			126
Additional paid-in capital		51,852			51,481
Unallocated common shares held by ESOP		(3,876	)		(4,199	)
Unearned restricted shares		(1,181	)		(1,679	)
Retained earnings		39,933			39,254
Accumulated other comprehensive income (loss)		504			(1,011	)
Treasury stock, at cost (492,650 shares at December 31, 2007 and 141,830 shares at December 31, 2006)		(5,271	)		(1,586	)
Total stockholders’ equity		82,087			82,386
Total liabilities and stockholders’ equity	$	790,198		$	757,037

See accompanying notes to consolidated financial statements.

- 14 -

SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Share Amounts)

	Years Ended December 31,
	2007		2006
Interest and dividend income:
Loans, including fees	$	36,703	$	34,857
Securities:
Taxable interest		5,808		5,260
Tax-exempt interest		16		24
Dividends		534		410
Other		286		226
Total interest and dividend income		43,347		40,777
Interest expense:
Deposits		15,731		13,127
Federal Home Loan Bank advances		5,276		4,352
Subordinated debt		776		782
Total interest expense		21,783		18,261
Net interest income		21,564		22,516
Provision for loan losses		1,062		881
Net interest income after provision for loan losses		20,502		21,635
Non interest income:
Service fees		4,838		4,637
Wealth management fees		3,843		3,420
Increase in cash surrender value of bank-owned life insurance		294		279
Net gain (loss) on sale of securities		106		(284	)
Net gain on sale of loans		167		104
Other		130		102
Total noninterest income		9,378		8,258
Noninterest expenses:
Salaries and employee benefits		15,029		14,277
Occupancy and equipment		5,379		4,825
Computer and electronic banking services		2,654		2,458
Outside professional services		1,029		967
Marketing and advertising		773		783
Supplies		509		527
Other		2,555		2,122
Total noninterest expenses		27,928		25,959
Income before income taxes		1,952		3,934
Income tax provision		540		1,156
Net income	$	1,412	$	2,778
Net income per common share:
Basic	$	0.12	$	0.24
Diluted	$	0.12	$	0.23

See accompanying notes to consolidated financial statements.

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007 AND 2006

(Dollars in Thousands, Except Share Amounts)

	Common Stock			Additional Paid-in		Unallocated Common Shares			Unearned Restricted			Retained			Accumulated Other Comprehensive			Treasury			Total Stockholders’
	Shares	Dollars		Capital		Held by ESOP			Shares			Earnings			Income (Loss)			Stock			Equity
BALANCE AT DECEMBER 31, 2005	12,563,750	$	126	$	51,155	$	(4,521	)	$	(2,176	)	$	37,216		$	(1,609	)	$	(148	)	$	80,043
Cash dividends declared ($0.16 per share)	—		—		—		—			—			(740	)		—			—			(740	)
Equity incentive plan shares earned	—		—		268		—			497			—			—			—			765
Allocation of 32,295 ESOP shares	—		—		45		322			—			—			—			—			367
Excess tax benefit from share-based stock compensation	—		—		13		—			—			—			—			—			13
Treasury stock purchased (129,266 shares)	—		—		—		—			—			—			—			(1,438	)		(1,438	)
Comprehensive income:
Net income	—		—		—		—			—			2,778			—			—			2,778
Net unrealized gain on available for sale securities, net of reclassification adjustment and tax effects	—		—		—		—			—			—			598			—			598
Total comprehensive income																						3,376
BALANCE AT DECEMBER 31, 2006	12,563,750		126		51,481		(4,199	)		(1,679	)		39,254			(1,011	)		(1,586	)		82,386
Cash dividends declared ($0.16 per share)	—		—		—		—			—			(733	)		—			—			(733	)
Equity incentive plan shares earned	—		—		286		—			498			—			—			—			784
Allocation of 32,295 ESOP shares	—		—		49		323			—			—			—			—			372
Excess tax benefit from share-based stock compensation	—		—		36		—			—			—			—			—			36
Treasury stock purchased (350,820 shares)	—		—		—		—			—			—			—			(3,685	)		(3,685	)
Comprehensive income:
Net income	—		—		—		—			—			1,412			—			—			1,412
Net unrealized gain on available for sale securities, net of reclassification adjustment and tax effects	—		—		—		—			—			—			1,515			—			1,515
Total comprehensive income																						2,927
BALANCE AT DECEMBER 31, 2007	12,563,750	$	126	$	51,852	$	(3,876	)	$	(1,181	)	$	39,933		$	504		$	(5,271	)	$	82,087

See accompanying notes to consolidated financial statements.

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Years Ended December 31,
	2007			2006
Cash flows from operating activities:
Net income	$	1,412		$	2,778
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,062			881
Employee stock ownership plan expense		372			367
Equity incentive plan expense		784			765
Excess tax benefit from share-based compensation		(36	)		(13	)
Accretion of investment premiums and discounts, net		(229	)		(126	)
Amortization of loan premiums and discounts, net		509			972
Depreciation and amortization of premises and equipment		2,098			1,795
Amortization of core deposit intangible		98			97
Amortization of deferred debt issuance costs		35			79
Net (gain) loss on sales of securities		(106	)		284
Deferred income tax benefit		(690	)		(865	)
Loans originated for sale		(13,941	)		(10,963	)
Proceeds from sale of loans held for sale		13,833			11,039
Net gain on sale of loans		(167	)		(104	)
Net loss on the sale of premises and equipment		—			20
Net loss on sale of other real estate owned		—			11
Increase in cash surrender value of bank-owned life insurance		(294	)		(279	)
Change in operating assets and liabilities:
Accrued interest receivable		296			(525	)
Other assets		631			(1,493	)
Accrued expenses and other liabilities		1,200			877
Net cash provided by operating activities		6,867			5,597
Cash flows from investing activities:
Purchases of available for sale securities		(65,969	)		(31,713	)
Proceeds from sale of available for sale securities		17,551			12,284
Proceeds from maturities of and principal repayments on available for sale securities		28,643			20,688
Net increase in loans		(15,911	)		(62,189	)
Purchases of Federal Home Loan Bank stock		(1,142	)		(1,022	)
Purchase of trust subsidiary		—			(21	)
Proceeds from sale of premises and equipment		—			244
Proceeds from sale of other real estate owned		—			314
Purchases of premises and equipment		(3,392	)		(3,733	)
Net cash used in investing activities		(40,220	)		(65,148	)

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SI FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded

(Dollars in Thousands)

	Years Ended December 31,
	2007			2006
Cash flows from financing activities:
Net increase in deposits		9,659			29,379
Net increase in mortgagors’ and investors’ escrow accounts		191			261
Proceeds from Federal Home Loan Bank advances		106,011			195,513
Repayments of Federal Home Loan Bank advances		(76,348	)		(171,486	)
(Repayments of) proceeds from subordinated debt borrowings		(7,217	)		8,248
Cash dividends on common stock		(733	)		(777	)
Excess tax benefit from share-based compensation		36			13
Treasury stock purchased		(3,685	)		(1,438	)
Net cash provided by financing activities		27,914			59,713
Net change in cash and cash equivalents		(5,439	)		162
Cash and cash equivalents at beginning of year		26,108			25,946
Cash and cash equivalents at end of year	$	20,669		$	26,108
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds	$	21,844		$	17,998
Income taxes paid, net		1,352			1,727
Transfer of loans to other real estate owned		913			—

See accompanying notes to consolidated financial statements.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

SI Financial Group, Inc. (the “Company”) is the holding company for Savings Institute Bank and Trust Company (the “Bank”). Established in 1842, the Bank is a community-oriented financial institution headquartered in Willimantic, Connecticut. The Bank provides a variety of financial services to individuals, businesses and municipalities through its twenty offices in eastern Connecticut. The primary products include savings, checking and certificate of deposit accounts, residential and commercial mortgage loans, commercial business loans and consumer loans. In addition, wealth management services, which include trust, financial planning, life insurance and investment services, are offered to individuals and businesses through the Bank’s Connecticut offices. The Company does not conduct any business other than owning all of the stock of the Bank.

SI Trust Servicing, the third-party provider of trust outsourcing services for community banks that was acquired by the Bank in November 2005, expands the products offered by the Bank, and offers trust services to other community banks.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank’s wholly-owned subsidiaries, 803 Financial Corp., SI Mortgage Company and SI Realty Company, Inc. All significant intercompany accounts and transactions have been eliminated.

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the balance sheet and reported amounts of revenues and expenses for the years presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of long-lived assets and the valuation of deferred tax assets.

Reclassifications

Certain amounts in the Company’s 2006 consolidated financial statements have been reclassified to conform to the 2007 presentation. Such reclassifications had no effect on net income.

Significant Group Concentrations of Credit Risk

Most of the Company’s activities are with customers located within eastern Connecticut. The Company does not have any significant concentrations in any one industry or customer. Refer to Notes 3 and 4, respectively, in the Notes to the Consolidated Financial Statements for details of the Company’s securities and lending activities.

Cash and Cash Equivalents and Statements of Cash Flows

Cash and due from banks, Federal funds sold and short-term investments with original maturities of less than 90 days are recognized as cash equivalents in the statements of cash flows. Federal funds sold generally mature in one day. For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash flows from loans and deposits are reported net. The Company maintains amounts due from banks and Federal funds sold that, at times, may exceed federally insured limits. The Company has not experienced any losses from such concentrations.

- 19 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Securities

Management determines the appropriate classification of securities at the date individual securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date.

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities purchased and held principally for the purpose of trading in the near term are classified as “trading securities.” These securities are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other-than-temporary are reported in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (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. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The sale of a held to maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.

Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value on the date of transfer. The unrealized holding gain or loss on the date of transfer is retained in accumulated other comprehensive income (loss) and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining contractual lives of the securities by the interest method.

Federal Home Loan Bank (“FHLB”) of Boston stock is recorded at cost.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold on the trade date.

- 20 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for the transferor and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.

Loans Receivable

Loans receivable are stated at current unpaid principal balances, net of the allowance for loan losses and deferred loan origination fees and costs. Management has the ability and intent to hold its loans receivable for the foreseeable future or until maturity or pay-off.

A loan is impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impairment is measured on a loan by loan basis for residential and commercial mortgage loans and commercial business loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures.

A loan is classified as a restructured loan when certain concessions have been made to the original contractual terms, such as reductions of interest rates or deferral of interest or principal payments, due to the borrowers’ financial condition.

Management considers all nonaccrual loans and restructured loans to be impaired. In most cases, loan payments less than 90 days past due, are considered minor collection delays, and the related loans are generally not considered impaired.

Allowance for Loan Losses

The allowance for loan losses, a material estimate which could change significantly in the near-term, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Loan losses are charged against the allowance for loan losses when management believes that the uncollectibility of the principal loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. In the determination of the allowance for loan losses, management may obtain independent appraisals for significant properties, if necessary.

Management’s judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is evaluated on a monthly basis by management and is based on the evaluation of the known and inherent risk characteristics and size and composition of the loan portfolio, the assessment of current economic and real estate market conditions, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, historical loan loss experience and evaluations of loans and other relevant factors.

- 21 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The allowance for loan losses consists of the following key elements:

• Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

• General valuation allowance on the remainder of the loan portfolio, which represents a general valuation allowance on the remainder of the loan portfolio, after excluding impaired loans, segregated by loan category and assigned allowance percentage based on historical loan loss experience adjusted for qualitative factors.

The majority of the Company’s loans are collateralized by real estate located in eastern Connecticut. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance or write-downs may be necessary based on changes in economic conditions, particularly in eastern Connecticut.

Derivative Financial Instruments

Derivative Loan Commitments. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in other noninterest income, if material.

The Company records a zero value for the loan commitment at inception (at the time the commitment is issued to a borrower (“the time of rate lock”)) and does not recognize the value of the expected normal servicing rights until the underlying loan is sold. Subsequent to inception, changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised and the passage of time. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.

Forward Loan Sale Commitments. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Generally, the Company’s best efforts contracts meet the definition of derivative instruments when the loans to the underlying borrowers close, and are accounted for as derivative instruments at that time. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair value recorded in other noninterest income, if material.

The Company estimates the fair value of its forward loan sales commitments using methodology similar to that used for derivative loan commitments.

- 22 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Interest and Fees on Loans

Interest on loans is accrued and included in operating income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued when loan payments are 90 days or more past due, based on contractual terms, or when, in the judgment of management, collectibility of the loan or loan interest becomes uncertain. Subsequent recognition of income occurs only to the extent payment is received subject to management’s assessment of the collectibility of the remaining interest and principal. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectibility of interest and principal is no longer in doubt. Interest collected on nonaccrual loans and impaired loans is recognized only to the extent cash payments are received, and may be recorded as a reduction to principal if the collectibility of the principal balance of the loan is unlikely.

Loan origination fees and direct loan origination costs are deferred, and the net amount is recognized as an adjustment of the related loan’s yield utilizing the interest method over the contractual life of the loan.

Other Real Estate Owned

Other real estate owned consists of properties acquired through, or in lieu of, loan foreclosure or other proceedings and is initially recorded at the lower of the related loan balances less any specific allowance for loss or fair value at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, the properties are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of acquisition is charged to the allowance for loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose. Revenue and expense from the operation of other real estate owned and the provision to establish and adjust valuation allowances are included in operations. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. Gains or losses are included in operations upon disposal.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax assets and liabilities. These judgments require us to make projections of future taxable income. These judgments and estimates, which are inherently subjective, are reviewed periodically as regulatory and business factors change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized.

The Company had transactions in which the related tax effect was recorded directly to stockholders’ equity instead of operations. Transactions in which the tax effect was recorded directly to stockholders’ equity included the tax effects of unrealized gains and losses on available for sale securities and the excess tax benefit from share-based payment arrangements.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 provides guidance on financial statement recognition, measurement and disclosure of tax positions taken, or expected to be taken in the

- 23 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

future, in the Company’s tax returns. The initial adoption of FIN 48 had no impact on the Company’s financial statements. The Company has no material uncertain tax positions as of December 31, 2007.

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is charged to operations using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the estimated economic lives of the improvements or the expected lease terms. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. The estimated useful lives of the assets are as follows:

Classification	Estimated Useful Lives
Buildings	5 to 40 years
Furniture and equipment	3 to 10 years
Leasehold improvements	3 to 20 years

Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.

Impairment of Long-lived Assets

Long-lived assets, including premises and equipment and certain identifiable intangible assets that are held and used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expenses.

Goodwill and other intangibles are evaluated for impairment on an annual basis. The Company records goodwill as the excess purchase price over the fair value of net identifiable assets acquired. The Company follows the guidance provided in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which prescribes a two-step process to test and measure the impairment of goodwill.

In connection with branch acquisitions that do not represent business combinations, the excess of deposit liabilities assumed from other banks over assets acquired is recorded as a core deposit intangible and amortized over the expected life of the asset.

Other Investments

The Company is a limited partner in two Small Business Investment Companies that are recorded at cost and evaluated annually for impairment. Impairment that is considered by management to be other-than-temporary, results in a write-down of the investment which is recognized as a realized loss in earnings. The Company did not recognize write-downs on these investments during the years ended December 31, 2007 and 2006. These investments, with a combined net book value of $715,000 and $585,000 at December 31, 2007 and 2006, respectively, are included in other assets. The SBICs are licensed by the Small Business Administration. They provide mezzanine financing and private equity investments to small companies which may not otherwise qualify for standard bank financing.

- 24 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Trust Assets

Trust assets held in a fiduciary or agency capacity, other than trust cash on deposit at the Bank, are not included in these consolidated financial statements because they are not assets of the Company. Trust fees are recognized on the accrual basis of accounting.

Related Party Transactions

Directors, officers and affiliates of the Company and the Bank have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who were not directors, officers or affiliates. In the opinion of management, the transactions with related parties did not involve more than the normal risk of collectibility, favored treatment or terms or present other unfavorable features. See Note 13 for details regarding related party transactions.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of stockholders’ equity, such items, along with net income, are components of comprehensive income. See Note 15 for components of other comprehensive income and the related tax effects.

Earnings Per Share

Basic net income per common share is calculated by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per common share is computed in a manner similar to basic net income per common share except that the weighted-average number of common shares outstanding is increased to include the incremental common shares (as computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. The Company’s common stock equivalents relate solely to stock option and restricted stock awards. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented. The Company had anti-dilutive common shares outstanding of 303,112 and 468,000 for the years ended December 31, 2007 and 2006, respectively. Treasury shares and unallocated common shares held by the Employee Stock Ownership Plan (“ESOP”) are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted net income per common share. Unvested restricted shares are only included in dilutive net income per common share computations.

- 25 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

	Years Ended December 31,
(Dollars in Thousands, Except Share Amounts)	2007		2006
Net income	$	1,412	$	2,778
Weighted-average common shares outstanding:
Basic		11,751,800		11,798,711
Effect of dilutive stock option and restricted stock awards		46,275		44,570
Diluted		11,798,075		11,843,281
Net income per common share:
Basic	$	0.12	$	0.24
Diluted	$	0.12	$	0.23

Bank-owned Life Insurance

Bank-owned life insurance policies are presented on the consolidated balance sheet at cash surrender value. Changes in cash surrender value are reflected in noninterest income on the consolidated statement of income. See Note 11 for additional discussion.

Employee Stock Ownership Plan

The Company accounts for the ESOP in accordance with Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans” (“SOP 93-6”). The value of unearned shares to be allocated to ESOP participants is recognized as a reduction to stockholders’ equity in the Company’s balance sheet. Unallocated ESOP shares, not yet committed to be released, are not considered outstanding for the purpose of calculating net income per common share. Dividends paid on allocated ESOP shares are charged to retained earnings and dividends paid on unallocated ESOP shares are used to satisfy debt service. The loan to the ESOP is repaid principally from the Bank’s contributions to the ESOP and dividends payable on common stock held by the ESOP over a period of 15 years. Compensation expense is recognized as ESOP shares are committed to be released.

Equity Incentive Plan

Statement of Financial Accounting Standards No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123(R)”) requires all entities to follow the same accounting standard and recognize the cost of share-based payment transactions in their financial statements. In accordance with SFAS 123R, the Company has recorded share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis. The fair value of each restricted stock allocation, equal to the market price at the date of grant, was recorded as unearned restricted shares. Unearned restricted shares are amortized to salaries and employee benefits expense over the vesting period of the restricted stock awards. The fair value of each stock option award was estimated on the date of grant using the Black-Scholes option pricing model, which includes several assumptions such as expected volatility, dividends, term and risk-free rate for each stock option award. See Note 11 for additional discussion.

Business Segment Reporting

In June 1997, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This Statement requires public companies to report (i) certain financial and descriptive information about “reportable operating segments,” as defined, and (ii) certain enterprise-wide financial information about products and services, geographic areas and major customers. An operating segment is a component of a business for which separate financial information is available and evaluated regularly by the chief

- 26 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

operating decision-maker in deciding how to allocate resources and evaluate performance. The Company’s operations are limited to financial services provided within the framework of a community bank, and decisions are generally based on specific market areas and or product offerings. Accordingly, based on the financial information presently evaluated by the Company’s chief operating decision-maker, the Company’s operations are aggregated in one reportable operating segment.

Advertising Costs

Advertising costs are expensed as incurred.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the disclosures about fair value measurement. This Statement was developed to provide guidance for consistency and comparability in fair value measurements and disclosures and applies to other accounting pronouncements that require or permit fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, FASB issued Staff Position No. FAS 157-2 (“FSP FAS 157-2”) which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008, and interim periods within these fiscal years for items within the scope of this Financial Staff Position. SFAS 157 and FSP FAS 157-2 are not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB ratified the Emerging Task Force (“EITF”) consensus on Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”). 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. The Company has evaluated the provisions of EITF 06-4 and determined that it will not have a material effect on the Company’s consolidated financial statements. See Note 11 – Benefit Plans – Group Term Replacement Plan for more details.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement provides companies with an option to report selected financial assets and liabilities at fair value. The Standard’s objective is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 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 as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its consolidated financial statements.

- 27 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (Revised 2007), “Business Combinations” (“FASB 141(R)”), which requires an acquiring entity to recognize all assets acquired and liabilities assumed in a transaction at their fair value as of the acquisition date, with limited exception, changes the accounting treatment for certain specific items and expands disclosure requirements. FASB 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with early adoption prohibited.

NOTE 2. RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain cash reserve balances against its respective transaction accounts and non-personal time deposits. At December 31, 2007 and 2006, the Bank was required to maintain cash and liquid asset reserves of $982,000 and $753,000, and to maintain $3.0 million in the Federal Reserve Bank for clearing purposes to satisfy such reserve requirements.

NOTE 3. SECURITIES

The amortized cost, gross unrealized gain and losses and approximate fair values of securities at December 31, 2007 and 2006 are as follows:

	December 31, 2007
(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities:
U.S. Government and agency obligations	$	1,156	$	2	$	(26	)	$	1,132
Government-sponsored enterprises		32,551		261		(50	)		32,762
Mortgage-backed securities		92,184		1,112		(432	)		92,864
Corporate debt securities		10,075		208		(245	)		10,038
Obligations of state and political subdivisions		2,000		18		—			2,018
Tax-exempt securities		350		—		—			350
Foreign government securities		100		—		—			100
Total debt securities		138,416		1,601		(753	)		139,264
Equity securities:
Marketable equity securities		2,734		33		(117	)		2,650
Total available for sale securities	$	141,150	$	1,634	$	(870	)	$	141,914

- 28 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

	December 31, 2006
(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities:
U.S. Government and agency obligations	$	1,596	$	21	$	(15	)	$	1,602
Government-sponsored enterprises		66,190		64		(991	)		65,263
Mortgage-backed securities		45,481		109		(775	)		44,815
Corporate debt securities		3,917		5		(19	)		3,903
Obligations of state and political subdivisions		2,000		24		—			2,024
Tax-exempt securities		420		—		—			420
Foreign government securities		100		—		(1	)		99
Total debt securities		119,704		223		(1,801	)		118,126
Equity securities:
Marketable equity securities		1,336		46		—			1,382
Total available for sale securities	$	121,040	$	269	$	(1,801	)	$	119,508

The following tables present information pertaining to securities with gross unrealized losses at December 31, 2007 and 2006, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.

December 31, 2007:	Less Than 12 Months					12 Months Or More					Total
(Dollars in Thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government and agency obligations	$	—	$	—		$	683	$	(26	)	$	683	$	(26	)
Government-sponsored enterprises		—		—			15,884		(50	)		15,884		(50	)
Mortgage-backed securities		14,353		(61	)		17,457		(371	)		31,810		(432	)
Corporate debt securities		2,661		(238	)		992		(7	)		3,653		(245	)
Marketable equity securities		292		(117	)		—		—			292		(117	)
Total	$	17,306	$	(416	)	$	35,016	$	(454	)	$	52,322	$	(870	)

December 31, 2006:	Less Than 12 Months					12 Months Or More					Total
(Dollars in Thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government and agency obligations	$	—	$	—		$	981	$	(15	)	$	981	$	(15	)
Government-sponsored enterprises		—		—			53,063		(991	)		53,063		(991	)
Mortgage-backed securities		5,770		(26	)		23,255		(749	)		29,025		(775	)
Corporate debt securities		1,408		(2	)		990		(17	)		2,398		(19	)
Foreign government securities		—		—			24		(1	)		24		(1	)
Total	$	7,178	$	(28	)	$	78,313	$	(1,773	)	$	85,491	$	(1,801	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation.

- 29 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

At December 31, 2007, 55 debt securities with gross unrealized losses have aggregate depreciation of approximately 1.4% of the Company’s amortized cost basis. Management believes that none of the unrealized losses on these securities are other-than-temporary because primarily all of the unrealized losses relate to debt and mortgage-backed securities issued by government agencies or government-sponsored enterprises and private issuers that maintain investment grade ratings, which the Company has both the intent and the ability to hold until maturity or until the fair value fully recovers. In addition, management considers the issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest related to these investments.

The unrealized losses on marketable equity securities relate solely to holdings in the financial industry. These unrealized losses have existed for less than twelve months and management believes that the declines in market value are temporary. The Company has the ability to hold these investments until the value recovers.

The amortized cost and fair value of debt securities at December 31, 2007 by contractual maturities are presented below. Actual maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without any penalties. Because mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

(Dollars in Thousands)	Amortized Cost		Fair Value
Maturity:
Within 1 year	$	15,927	$	15,909
After 1 but within 5 years		18,116		18,363
After 5 but within 10 years		1,194		1,180
After 10 years		10,995		10,948
		46,232		46,400
Mortgage-backed securities		92,184		92,864
Total debt securities	$	138,416	$	139,264

At December 31, 2007 and 2006, government-sponsored enterprise securities with an amortized cost of $4.0 million and a fair value of $4.0 million and $3.9 million, respectively, were pledged to secure U.S. Treasury tax and loan payments and public deposits.

Proceeds from the sales of available for sale securities during the years ended December 31, 2007 and 2006 amounted to $17.6 million and $12.3 million, respectively.

The following is a summary of realized gains and losses on the sale of securities for the years ended December 31, 2007 and 2006:

	Years Ended December 31,
(Dollars in Thousands)	2007			2006
Gross gains on sales	$	321		$	98
Gross losses on sales		(215	)		(382	)
Net gain (loss) on sale of securities	$	106		$	(284	)

- 30 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loan Portfolio

The composition of the Company’s loan portfolio at December 31, 2007 and 2006 is as follows:

	December 31,
(Dollars in Thousands)	2007			2006
Real estate loans:
Residential – 1 to 4 family	$	330,389		$	309,695
Multi-family and commercial		132,819			118,600
Construction		37,231			44,647
Total real estate loans		500,439			472,942
Commercial business loans		69,850			75,171
Consumer loans		21,104			29,105
Total loans		591,393			577,218
Deferred loan origination costs, net of deferred fees		1,390			1,258
Allowance for loan losses		(5,245	)		(4,365	)
Loans, net	$	587,538		$	574,111

Impaired and Nonaccrual Loans

The following is a summary of information pertaining to impaired loans, which include all nonaccrual and restructured loans.

	December 31,
(Dollars in Thousands)	2007		2006
Impaired loans without valuation allowance	$	2,239	$	6,078
Impaired loans with valuation allowance		5,443		64
Total impaired loans	$	7,682	$	6,142
Valuation allowance related to impaired loans	$	1,293	$	14
Nonaccrual loans	$	7,632	$	1,392
Total loans past due 90 days or more and still accruing	$	—	$	—

- 31 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Additional information related to impaired loans is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2007		2006
Average recorded investment in impaired loans	$	4,740	$	3,189
Interest income recognized on impaired loans	$	21	$	6
Cash interest received on impaired loans	$	44	$	18

No additional funds are committed to be advanced to those borrowers whose loans are impaired.

Interest income that would have been recorded had nonaccrual loans been performing in accordance with their original terms totaled $462,000 and $110,000 for the years ended December 31, 2007 and 2006, respectively.

Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31, 2007 and 2006 are as follows:

	Years Ended December 31,
(Dollars in Thousands)	2007			2006
Balance at beginning of year	$	4,365		$	3,671
Provision for loan losses		1,062			881
Loans charged-off		(434	)		(199	)
Recoveries of loans previously charged-off		252			12
Balance at end of year	$	5,245		$	4,365

Related Party Loans

Reference Note 13 for a discussion of related party transactions, including loans with related parties.

Loans Held for Sale

At December 31, 2007 and 2006, total loans held for sale were $410,000 and $135,000, respectively, consisting of fixed-rate residential mortgage loans.

Loans Serviced for Others

The Company services certain loans that it has sold with and without recourse to third parties and other loans for which the Company acquired the servicing rights. Loans serviced for others are not included in the Company’s consolidated balance sheets. The aggregate of loans serviced for others amounted to $75.7 million and $72.5 million at December 31, 2007 and 2006, respectively.

- 32 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 5. OTHER REAL ESTATE OWNED

Other real estate owned is presented at net realizable value. A summary of expenses applicable to other real estate operations for the years ended December 31, 2007 and 2006, is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2007		2006
Net loss from sales or write-downs of other real estate owned, net	$	—	$	11
Other real estate expense, net		113		12
Expense from other real estate operations	$	113	$	23

NOTE 6. PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2007 and 2006 are summarized as follows:

	December 31,
(Dollars in Thousands)	2007			2006
Land	$	145		$	145
Buildings		5,600			5,455
Leasehold improvements		6,986			5,225
Furniture and equipment		9,391			9,166
Construction in process		390			418
		22,512			20,409
Accumulated depreciation and amortization		(10,706	)		(9,897	)
Premises and equipment, net	$	11,806		$	10,512

At December 31, 2007 and 2006, construction in process primarily relates to design and site costs associated with new branch locations and other incidental branch improvements. Outstanding commitments relative to the construction of new branches in the aggregate totaled $591,000 at December 31, 2007.

Depreciation and amortization expense for the years ended December 31, 2007 and 2006 was $2.1 million and $1.8 million, respectively.

Reference Note 12 for a schedule of future minimum rental commitments pursuant to the terms of noncancelable lease agreements in effect at December 31, 2007 relating to premises and equipment.

- 33 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

In November 2005, the Bank acquired the net assets of SI Trust Servicing, with a fair value of $58,000, for a purchase price of $701,000, resulting in goodwill of $643,000. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized for financial reporting purposes but rather evaluated for impairment. No impairment charges relating to goodwill were recognized during the years ended December 31, 2007 and 2006.

Core Deposit Intangible

In 1998, the Bank acquired certain assets and assumed certain deposit liabilities of the Canterbury, Connecticut branch of Chelsea Groton Savings Bank. In consideration of the assumption of $8.1 million of deposit liabilities, the Bank received $7.1 million in cash and other assets. The resulting core deposit premium intangible was amortized over 10 years using the straight-line method. The net book value of this asset at December 31, 2007 and 2006 is as follows:

	December 31,
(Dollars in Thousands)	2007			2006
Core deposit intangible	$	973		$	973
Accumulated amortization		(973	)		(875	)
Core deposit intangible, net	$	—		$	98

Amortization expense, relating solely to the core deposit intangible, was $98,000 and $97,000 for the years ended December 31, 2007 and 2006, respectively.

NOTE 8. DEPOSITS

A summary of deposit balances, by type, at December 31, 2007 and 2006 is as follows:

	December 31,
(Dollars in Thousands)	2007		2006
Noninterest-bearing demand deposits	$	56,762	$	55,703
Interest-bearing accounts:
NOW and money market accounts		151,237		126,567
Savings accounts		66,439		77,774
Certificates of deposit (1)		273,897		278,632
Total interest-bearing accounts		491,573		482,973
Total deposits	$	548,335	$	538,676

⁽¹⁾ Includes brokered deposits of $2.1 million and $7.1 million at December 31, 2007 and 2006, respectively.

- 34 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Certificates of deposit in denominations of $100,000 or more were $80.7 million and $74.3 million at December 31, 2007 and 2006, respectively. With the exception of self-directed retirement accounts which are insured up to $250,000, deposits in excess of $100,000 are not federally insured.

Contractual maturities of certificates of deposit as of December 31, 2007 are summarized below.

(Dollars in Thousands)
2008	$	211,959
2009		27,712
2010		28,647
2011		1,799
2012		3,298
Thereafter		482
Total certificates of deposit	$	273,897

A summary of interest expense by account type for the years ended December 31, 2007 and 2006 is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2007		2006
NOW and money market accounts	$	1,960	$	1,001
Savings accounts (1)		1,053		961
Certificates of deposit (2)		12,718		11,165
Total	$	15,731	$	13,127

⁽¹⁾ Includes interest expense on mortgagors’ and investors’ escrow accounts.

⁽²⁾ Includes interest expense on brokered deposits.

Related Party Deposits

Reference Note 13 for a discussion of related party transactions, including deposits from related parties.

NOTE 9. BORROWINGS

Federal Home Loan Bank Advances

The Bank is a member of the Federal Home Loan Bank of Boston. At December 31, 2007 and 2006, the Bank had access to a pre-approved secured line of credit with the FHLB of $10.0 million and $6.2 million, respectively, and the capacity to obtain additional advances up to a certain percentage of the value of its qualified collateral, as defined in the FHLB Statement of Credit Policy. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At December 31, 2007 and 2006, there were no advances outstanding under the line of credit. Other outstanding advances from the FHLB aggregated $141.6 million and $112.0 million at December 31, 2007 and 2006, respectively, at interest rates ranging from 2.65% to 5.84% and 2.34% to 5.85%, respectively.

FHLB advances are secured by the Company’s investment in FHLB stock and other qualified collateral, which is based on a percentage of its outstanding residential first mortgage loans. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the FHLB.

- 35 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Junior Subordinated Debt Owed to Unconsolidated Trusts

SI Capital Trust I (the “Trust “), a wholly-owned subsidiary of the Company, was formed on March 25, 2002. The Trust had no independent assets or operations, and was formed to issue $7.0 million of trust securities and invest the proceeds thereof in an equivalent amount of junior subordinated debentures issued by the Company. Interest on the junior subordinated debentures was based on six-month LIBOR plus 3.70%. The trust securities were redeemed at par on April 22, 2007 and the Trust was subsequently dissolved.

On August 31, 2006, the Company formed SI Capital Trust II (“Trust II”), and issued $8.0 million of trust preferred securities through a pooled trust preferred securities offering. The Company owns all of the common securities of Trust II, which has no independent assets or operations. SI Capital Trust II was formed to issue trust preferred securities and invest the proceeds in an equivalent amount of junior subordinated debentures issued by the Company. The trust preferred securities mature in 30 years and bear interest at three-month LIBOR plus 1.70%. The Company may redeem the trust-preferred securities, in whole or in part, on or after September 15, 2011, or earlier under certain conditions.

The subordinated debt securities are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the subordinated debt securities and the declaration of trust governing Trust and Trust II, including its obligations to pay costs, expenses, debts and liabilities, other than trust securities, provides a full and unconditional guarantee of amounts on the capital securities. If the Company defers interest payments on the junior subordinated debt securities, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.

The contractual maturities of borrowings, by year, at December 31, 2007 are as follows:

(Dollars in Thousands)	FHLB Advances(1)(2)			Subordinated Debt			Total
2008 (1)	$	41,119		$	—		$	41,119
2009		27,500			—			27,500
2010 (2)		40,000			—			40,000
2011 (2)		12,000			—			12,000
2012		14,000			—			14,000
Thereafter (2)		7,000			8,248			15,248
Total long-term debt	$	141,619		$	8,248		$	149,867
Weighted-average rate		4.53	%		6.69	%		4.65	%

⁽¹⁾ Interest rates on the FHLB advances are primarily fixed. A variable rate advance of $2.0 million matures in 2008.

⁽²⁾ Includes FHLB advances that are callable in the aggregate of $8.0 million during 2008. These advances are reported based on their scheduled maturity in the summary table presented above.

- 36 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 10. INCOME TAXES

The components of the income tax provision for the years ended December 31, 2007 and 2006 are as follows:

	Years ended December 31,
(Dollars in Thousands)	2007			2006
Current tax provision:
Federal	$	1,229		$	2,020
State		1			1
Total current tax provision		1,230			2,021
Deferred tax benefit:
Federal		(690	)		(865	)
Total deferred tax benefit		(690	)		(865	)
Total provision for income taxes	$	540		$	1,156

A reconciliation of the anticipated income tax provision, based on the statutory tax rate of 34.0%, to the provision for income taxes as reported in the statements of income is as follows:

	Years Ended December 31,
(Dollars in Thousands)	2007			2006
Provision for income tax at statutory rate	$	664		$	1,338
Increase (decrease) resulting from:
Dividends received deduction		(21	)		(13	)
Bank-owned life insurance		(100	)		(95	)
Tax-exempt income		(9	)		(12	)
Employee benefit plans		72			70
Nondeductible expenses		6			6
Other		(72	)		(138	)
Total provision for income taxes	$	540		$	1,156
Effective tax rate		27.7	%		29.4	%

- 37 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below:

	December 31,
(Dollars in Thousands)	2007		2006
Deferred tax assets:
Allowance for loan losses	$	1,884	$	1,517
Goodwill and other intangibles		95		104
Unrealized losses on available for sale securities		296		612
Depreciation of premises and equipment		594		434
Investment write-downs		67		67
Charitable contribution carry-forward		234		408
Deferred compensation		931		646
Employee benefit plans		292		227
Capital loss carry-forward		90		160
Interest receivable on nonaccrual loans		164		9
Other		188		246
Total deferred assets		4,835		4,430
Deferred tax liabilities:
Unrealized gains on available for sale securities		556		91
Deferred loan costs		866		845
Mortgage servicing asset		143		133
Total deferred liabilities		1,565		1,069
Deferred tax asset, net	$	3,270	$	3,361

At December 31, 2007, the charitable contribution carry-forward, primarily related to the contribution of the Company’s common stock to SI Financial Group Foundation, Inc. in 2004, was approximately $688,000. The utilization of charitable contributions for any tax year is limited to 10% of taxable income without regard to charitable contributions, net operating losses and dividend received deductions. An organization is permitted to carry over contributions that exceed the annual 10% limitation as a deduction to the five succeeding tax years provided the organization has sufficient earnings. The Company estimates that the deferred tax asset related to this contribution carry-forward will be realized prior to its expiration in 2009 and therefore, no valuation allowance has been established.

Retained earnings at December 31, 2007 and 2006 includes a contingency reserve for loan losses of $3.7 million, which represents the tax reserve balance existing at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to savings banks. Amounts transferred to the reserve have been claimed as deductions from taxable income, and, if the reserve is used for purposes other than to absorb losses on loans, a federal income tax liability could be incurred. It is not anticipated that the Company will incur a federal income tax liability relating to this reserve balance, and accordingly, deferred income taxes of approximately $1.3 million at December 31, 2007 and 2006 have not been recognized.

- 38 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Effective for taxable years commencing after December 31, 1998, financial services companies doing business in Connecticut are permitted to establish a “passive investment company” (“PIC”) to hold and manage loans secured by real property. PICs are exempt from Connecticut corporation business tax, and dividends received by the financial services companies from PICs are not taxable. In January 1999, the Bank established a PIC, as a wholly-owned subsidiary, and in June 2000, began to transfer a portion of its residential and commercial mortgage loan portfolios from the Bank to the PIC. A substantial portion of the Company’s interest income is now derived from the PIC, an entity whose net income is exempt from State of Connecticut taxes, and accordingly, state income taxes represent minimum state tax amounts. The Bank’s ability to continue to realize the tax benefits of the PIC is subject to the PIC continuing to comply with all statutory requirements related to the operations of the PIC.

In accordance with the provisions of FIN 48, in future periods, the Company may record a liability for unrecognized tax benefits related to the recognition, derecognition or change in measurement of a tax position as a result of new tax positions, changes in management’s judgment about the level of uncertainty of existing tax positions, expiration of open income tax returns due to the statutes of limitation, status of examinations and litigation and legislative activity.

The Company has elected to report future interest and penalties related to unrecognized tax benefits, if any, as income tax expense in the Company’s Consolidated Statements of Income.

With limited exception, the Company is no longer subject to United States federal, state and local income tax examinations by the tax authorities for the years prior to 2004.

NOTE 11. BENEFIT PLANS

Profit Sharing and 401(k) Savings Plan

The Bank’s Profit Sharing and 401(k) Savings Plan (the “Plan”) is a tax-qualified defined contribution plan for the benefit of its eligible employees. The Bank’s profit sharing contribution to the Plan is a discretionary amount authorized by the Board of Directors, based on the financial results of the Bank. An employee’s share of the profit sharing contribution represents the ratio of the employee’s salary to the total salary expense of the Bank. Participants vest in the Bank’s discretionary profit sharing contributions based on years of service, with 100% vesting attained upon five years of service. There were no profit sharing contributions for the years ended December 31, 2007 and 2006.

The Bank’s Plan also includes a 401(k) feature. Eligible participants may make salary deferral contributions of up to 100% of earnings subject to Internal Revenue Services limitations. The Bank makes matching contributions equal to 50% of the participants’ contributions up to 6% of the participants’ earnings. Participants are immediately vested in their salary deferral contributions, employer matching contributions and earnings thereon. Bank contributions were $229,000 and $222,000 for the years ended December 31, 2007 and 2006, respectively.

Group Term Replacement Plan

The Bank maintains the Group Term Replacement Plan to provide a death benefit to executives designated by the Compensation Committee of the Board of Directors. The death benefits are funded through certain insurance policies that are owned by the Bank on the lives of the participating executives. The Bank pays the life insurance premiums, which fund the death benefits from its general assets, and is the beneficiary of any death benefits exceeding any executive’s maximum dollar amount specified in his or her split-dollar endorsement policy. The maximum dollar amount of each executive’s split-dollar death benefit equals three times the executive’s annual compensation less $50,000 pre-retirement and

- 39 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

three times final annual compensation post-retirement not to exceed a specified dollar amount. For purposes of the plan, annual compensation includes an executive’s base compensation, commissions and cash bonuses earned under the Bank’s bonus plan. Participation in the plan ceases if an executive is terminated for cause or the executive terminates employment for reasons other than death, disability or retirement. If the Bank wishes to maintain the insurance after a participant’s termination in the plan, the Bank will be the direct beneficiary of the entire death proceeds of the insurance policies.

At December 31, 2007, no liability has been recognized on the consolidated balance sheets for such death benefits. In September 2006, the EITF reached a consensus on EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” As a result, effective for fiscal years beginning after December 15, 2007, the Company will recognize the provisions of the consensus as a change in accounting principle through a cumulative effect adjustment to retained earnings in the amount of $547,000 in January 2008 and recognize changes in the actuarial present value of the future death benefit liability as a charge to earnings. See Note 1 – Recent Accounting Pronouncements.

Executive Supplemental Retirement Agreements – Defined Benefit

The Bank maintains unfunded supplemental defined-benefit retirement agreements with its directors and members of senior management. These agreements provide for supplemental retirement benefits to certain executives based upon average annual compensation and years of service. Entitlement of benefits commence upon the earlier of the executive’s termination of employment (other than for cause), at or after attaining age 65 or, depending on the executive, on the date when the executive’s years of service and age total 80 or 78. Total expenses incurred under these agreements for the years ended December 31, 2007 and 2006 were $812,000 and $740,000, respectively.

Performance-Based Incentive Plan

The Bank has an incentive plan whereby all management and staff members are eligible to receive a bonus tied to both Company and individual performance. Discretionary contributions to the plan require the approval of the Board of Directors’ Compensation Committee. Total expense recognized was $267,000 and $352,000 for the years ended December 31, 2007 and 2006, respectively.

Supplemental Executive Retirement Plan

The Bank maintains the Supplemental Executive Retirement Plan to provide restorative payments to executives, designated by the Board of Directors, who are prevented from receiving the full benefits of the Bank’s Profit Sharing and 401(k) Savings Plan and Employee Stock Ownership Plan. The supplemental executive retirement plan also provides supplemental benefits to participants upon a change in control prior to the complete scheduled repayment of the ESOP loan. For the years ended December 31, 2007 and 2006, the President and Chief Executive Officer was designated by the Board of Directors to participate in the plan. Total expense incurred under this plan was $7,000 and $6,000 for the years ended December 31, 2007 and 2006, respectively.

Employee Stock Ownership Plan

In September 2004, the Bank established an Employee Stock Ownership Plan for the benefit of its eligible employees. The Company provided a loan to the Savings Institute Bank and Trust Company Employee Stock Ownership Plan of $4.9 million which was used to purchase 492,499 shares of the Company’s outstanding stock. The loan bears interest equal to 4.75% and provides for annual payments of interest and principal over the 15-year term of the loan.

- 40 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

At December 31, 2007, the remaining principal balance on the ESOP debt is payable as follows:

(Dollars in Thousands)
2008	$	264
2009		277
2010		290
2011		304
2012		318
Thereafter		2,693
Total	$	4,146

The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid.

Shares held by the ESOP include the following at December 31, 2007 and 2006:

	December 31,
(Dollars in Thousands)	2007		2006
Allocated		67,865		38,963
Committed to be Allocated		32,295		32,295
Unallocated		387,545		419,840
Total shares		487,705		491,098
Fair value of unallocated shares	$	3,813	$	5,151

Total compensation expense recognized in connection with the ESOP was $372,000 and $367,000 for the years ended December 31, 2007 and 2006, respectively.

Equity Incentive Plan

The 2005 Equity Incentive Plan (the “Incentive Plan”) allows the Company to grant up to 615,623 stock options and 246,249 shares of restricted stock to its employees, officers, directors and directors emeritus. Both incentive stock options and non-statutory stock options may be granted under the plan. All options have a contractual life of ten years and vest equally over a period of five years beginning on the first anniversary of the date of grant. At December 31, 2007, a total of 112,073 stock options were available for future grants. All restricted stock awards under the Company’s Incentive Plan were granted in May 2005 and vest equally over a period of five years beginning on the first anniversary of the date of grant.

In accordance with SFAS 123(R), the Company recognized share-based compensation expense related to the stock option and restricted stock awards for the years ended December 31, 2007 and 2006 of $784,000 and $765,000, respectively.

- 41 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The fair value of each option is determined at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:

	December 31,
	2007			2006
Expected term (years)		10.0			10.0
Expected dividend yield		1.50	%		1.50	%
Expected volatility		19.24			20.02
Risk-free interest rate		4.38			4.57
Fair value of options granted	$	3.84		$	3.64

The expected term is based on the estimated life of the stock options. The dividend yield assumption is based on the Company’s historical and expected dividend pay-outs. The expected volatility is based on the Company’s historical volatility. The risk-free interest rate is based on the implied yields of U.S. Treasury zero-coupon issues for periods within the contractual life of the awards in effect at the time of the stock option grants.

The following is a summary of activity for the Company’s stock options for the years ended December 31, 2007 and 2006:

	December 31, 2007				December 31, 2006
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Options outstanding at beginning of year	467,500		$	10.13	463,500		$	10.10
Options granted	41,500			12.51	10,000			11.39
Options forfeited/cancelled	(5,450	)		10.10	(6,000	)		10.10
Options outstanding at end of year	503,550		$	10.32	467,500		$	10.13
Options exercisable at end of year	184,200		$	10.11	91,500		$	10.10

The following table summarizes information relating to stock options outstanding and exercisable at December 31, 2007:

	Options Outstanding				Options Exercisable
Exercise Prices	Number of Shares	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price
$10.10	452,050	7.38	$	10.10	182,200	7.38	$	10.10
11.39	10,000	8.15		11.39	2,000	8.15		11.39
12.51	41,500	9.46		12.51	—	—		—
	503,550	7.57	$	10.32	184,200	7.39	$	10.11

- 42 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

There were no stock options exercised during the years ended December 31, 2007 and 2006. The intrinsic value of all stock options outstanding and exercisable at December 31, 2007 was zero. At December 31, 2007, there was $786,000 of total unrecognized compensation costs related to outstanding stock options, which is expected to be recognized over a period of 4.5 years.

The grant date fair value for each of the 246,249 shares of restricted stock granted was $10.10. The aggregate fair value of restricted stock awards that vested during the years ended December 31, 2007 and 2006 was $603,000 and $535,000, respectively. At December 31, 2007, there was $1.2 million of total unrecognized compensation costs related to unvested restricted stock awards granted under the Incentive Plan, which is expected to be recognized over a period of 2.4 years.

Bank-Owned Life Insurance

The Company has an investment in, and is the beneficiary of, life insurance policies on the lives of certain officers. The purpose of these life insurance investments is to provide income through the appreciation in cash surrender value of the policies, which is used to offset the costs of various benefit and retirement plans. These policies had aggregate cash surrender values of $8.4 million and $8.1 million at December 31, 2007 and 2006, respectively. Income earned on these life insurance policies aggregated $294,000 and $279,000 for the years ended December 31, 2007 and 2006, respectively.

NOTE 12. OTHER COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are outstanding commitments and contingencies that are not reflected in the accompanying consolidated financial statements. The Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Loan Commitments and Letters of Credit

The contractual amounts of commitments to extend credit represent the amounts of potential loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral be determined as worthless. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at December 31, 2007 and 2006 were as follows:

	December 31,
(Dollars in Thousands)	2007		2006
Commitments to extend credit:
Future loan commitments (1)	$	16,288	$	7,658
Undisbursed construction loans		21,961		27,010
Undisbursed home equity lines of credit		20,203		21,554
Undisbursed commercial lines of credit		11,496		12,070
Overdraft protection lines		1,464		1,424
Standby letters of credit		605		1,178
Total	$	72,017	$	70,894

⁽¹⁾ Includes fixed rate loan commitments of $3.9 million at interest rates ranging from 5.38% to 8.50% and $2.6 million at interest rates ranging from 5.13% to 8.00% at December 31, 2007 and 2006, respectively.

- 43 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, accounts receivable, inventory, property, plant and equipment, deposits and securities.

Undisbursed commitments under construction, home equity or commercial lines of credit are commitments for future extensions of credit to existing customers. Total undisbursed amounts on lines of credit may expire without being fully drawn upon and therefore, do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit are primarily issued to support public or private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year.

The Company adopted the provisions of Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” effective July 1, 2003, which includes the Company’s commitments to fund loans held for sale. Newly issued or modified guarantees that are not derivative contracts, are required to be recorded on the Company’s consolidated balance sheets at their fair value at the date of inception. The Company did not record a liability related to such guarantees on the consolidated balance sheets at December 31, 2007 and 2006.

Loans Sold with Recourse

At December 31, 2007 and 2006, the outstanding balance of loans sold with recourse was $52,000 and $59,000, respectively. Loan repurchase commitments are agreements to repurchase loans previously sold upon the occurrence of conditions established in the contract, including default by the underlying borrower. The Company determined that losses relating to loans sold with recourse were not probable and therefore, a liability was not recorded on the consolidated balance sheets at December 31, 2007 and 2006.

Operating Lease Commitments

The Company leases certain of its branch offices and equipment under operating lease agreements that expire at various dates through 2027. In addition to rental payments, the branch leases require payments for property taxes in excess of base year taxes.

- 44 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Future minimum rental commitments pursuant to the terms of noncancelable lease agreements, by year and in the aggregate, at December 31, 2007, are as follows:

(Dollars in Thousands)
2008	$	1,390
2009		1,370
2010		1,275
2011		1,115
2012		974
Thereafter		9,572
Total	$	15,696

Rental expense charged to operations for cancelable and noncancelable operating leases was $1.2 million and $1.1 million for the years ended December 31, 2007 and 2006, respectively.

Rental Income Under Subleases

The Company subleased excess office space to one tenant under a noncancelable operating lease with a remaining term of five and one half years. Future minimum lease payments receivable for the noncancelable lease at December 31, 2007, is as follows:

(Dollars in Thousands)
2008	$	14
2009		15
2010		16
2011		17
2012		19
Thereafter		10
Total	$	91

Rental income under noncancelable leases was $13,000 for each of the years ended December 31, 2007 and 2006.

Legal Matters

The Company is involved in various legal proceedings that occur in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.

Investment Commitments

In 2007, the Bank became a limited partner in a second SBIC and committed to make a capital investment of $1.0 million in the limited partnership. At December 31, 2007, the Bank’s remaining off-balance sheet commitment for the capital investment was $847,000.

- 45 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 13. RELATED PARTY TRANSACTIONS

Loans Receivable

In the normal course of business, the Bank grants loans to related parties. Related parties include directors and certain officers of the Company and its subsidiaries and their immediate family members and respective affiliates in which they have a controlling interest. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with customers, and did not involve more than the normal risk of collectibility. At December 31, 2007 and 2006, all related party loans were performing in accordance with their terms.

Changes in loans outstanding to such related parties during the years ended December 31, 2007 and 2006 are as follows:

	Years Ended December 31,
(Dollars in Thousands)	2007			2006
Balance at beginning of year	$	1,899		$	1,743
Additions		368			1,731
Repayments		(194	)		(1,575	)
Balance at end of year	$	2,073		$	1,899

Deposits

Deposit accounts of directors, certain officers and other related parties aggregated $2.2 million and $1.7 million at December 31, 2007 and 2006, respectively.

Operating Expenses

During the years ended December 31, 2007 and 2006, the Company paid $21,000 and $24,000, respectively, for supplies and advertising, to companies related to directors of the Company.

SI Bancorp, MHC – Mutual Holding Company Parent

SI Bancorp, MHC owns a majority of the Company’s common stock and, through its Board of Directors, exercise voting control over most matters put to a vote of shareholders. The same directors and officers who manage the Company and the Bank also manage SI Bancorp, MHC. As a federally-chartered mutual holding company, the Board of Directors of SI Bancorp, MHC must ensure that the interests of depositors of the Bank are represented and considered in matters put to a vote of shareholders of the Company. Therefore, the votes cast by SI Bancorp, MHC may not be in the best interest of all shareholders. For example, SI Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction, a second-step conversion transaction or defeat a shareholder nominee for election to the Board of Directors of the Company. The matters as to which shareholders, other than SI Bancorp, MHC, will be able to exercise voting control are limited and include any proposal to implement a stock-based incentive plan.

NOTE 14. REGULATORY CAPITAL

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items, as calculated

- 46 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to total assets (as defined). As of December 31, 2007 and 2006, the Bank met the conditions to be classified as “well capitalized” under the regulatory framework for prompt corrective action. As a savings and loan holding company regulated by the Office of Thrift Supervision, the Company is not subject to any separate regulatory capital requirements.

The Bank’s actual capital amounts and ratios at December 31, 2007 and 2006 were:

December 31, 2007:	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Risk-based Capital Ratio	$	71,444	15.21	%	$	37,577	8.00	%	$	46,972	10.00	%
Tier I Risk-based Capital Ratio		67,483	14.37			18,784	4.00			28,177	6.00
Tier I Capital Ratio		67,483	8.75			30,849	4.00			38,562	5.00
Tangible Equity Ratio		67,483	8.75			11,569	1.50			n/a	n/a

December 31, 2006:	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in Thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Risk-based Capital Ratio	$	70,127	15.84	%	$	35,418	8.00	%	$	44,272	10.00	%
Tier I Risk-based Capital Ratio		65,776	14.86			17,706	4.00			26,558	6.00
Tier I Capital Ratio		65,776	8.97			29,332	4.00			36,664	5.00
Tangible Equity Ratio		65,776	8.97			10,999	1.50			n/a	n/a

A reconciliation of the Company’s total capital to the Bank’s regulatory capital is as follows:

	December 31,
(Dollars in Thousands)	2007			2006
Total capital per consolidated financial statements	$	82,087		$	82,386
Holding company equity not available for regulatory capital		(13,442	)		(16,767	)
Accumulated (gains) losses on available for sale securities		(519	)		898
Intangible assets		(643	)		(741	)
Total tier 1 capital		67,483			65,776
Adjustments for total capital:
Unrealized gains on available for sale equity securities		15			—
Allowance for loan losses		3,946			4,351
Total capital per regulatory reporting	$	71,444		$	70,127

- 47 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 15. OTHER COMPREHENSIVE INCOME

Other comprehensive income, which is comprised solely of the change in unrealized gains and losses on available for sale securities, for the years ended December 31, 2007 and 2006 is as follows:

	December 31, 2007
(Dollars in Thousands)	Before Tax Amount			Tax Effects			Net of Tax Amount
Unrealized holding gains on available for sale securities	$	2,402		$	(817	)	$	1,585
Reclassification adjustment for gains recognized in net income		(106	)		36			(70	)
Unrealized holding gains on available for sale securities, net of taxes	$	2,296		$	(781	)	$	1,515

	December 31, 2006
(Dollars in Thousands)	Before Tax Amount		Tax Effects			Net of Tax Amount
Unrealized holding gains on available for sale securities	$	622	$	(211	)	$	411
Reclassification adjustment for losses recognized in net income		284		(97	)		187
Unrealized holding gains on available for sale securities, net of taxes	$	906	$	(308	)	$	598

NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK

Financial Accounting Standards Board Statement No. 107, “Disclosures About Fair Value of Financial Instruments” (“FAS 107”), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

- 48 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The following methods and assumptions were used by the Company in estimating fair value disclosures of its financial instruments:

• Cash and cash equivalents. The carrying amounts of these instruments approximate the fair values.

• Securities. Fair values, excluding restricted FHLB stock, are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

• Loans held for sale. The fair value of loans held for sale is estimated using quoted market prices.

• Loans receivable. For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans are estimated by discounting the future cash flows using the year-end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

• Accrued interest receivable. The carrying amount of accrued interest approximates fair value.

• Deposits. The fair value of demand deposits, negotiable orders of withdrawal, regular savings, certain money market deposits and mortgagors’ and investors’ escrow accounts is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits.

• Federal Home Loan Bank advances. The fair value of the advances is estimated using a discounted cash flow calculation that applies current FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances.

• Junior subordinated debt owed to unconsolidated trust. Based on the floating rate characteristic of these instruments, the carrying value is considered to approximate fair value.

• Off-balance sheet instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2007 or 2006. The estimated fair value amounts for 2007 and 2006 have been measured as of their respective year-ends, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

- 49 -

SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other banks may not be meaningful.

As of December 31, 2007 and 2006, the recorded carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

	2007				2006
(Dollars in Thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Noninterest-bearing deposits	$	14,543	$	14,543	$	14,984	$	14,984
Interest-bearing deposits		5,126		5,126		3,824		3,824
Federal funds sold		1,000		1,000		7,300		7,300
Available for sale securities		141,914		141,914		119,508		119,508
Loans held for sale		410		410		135		135
Loans receivable, net		587,538		584,882		574,111		566,421
Federal Home Loan Bank stock		7,802		7,802		6,660		6,660
Accrued interest receivable		3,528		3,528		3,824		3,824
Financial Liabilities:
Savings deposits		66,439		66,439		77,774		77,774
Demand deposits, negotiable orders of withdrawal and money market accounts		207,999		207,999		182,270		182,270
Certificates of deposit		273,897		276,023		278,632		280,212
Mortgagors’ and investors’ escrow accounts		3,437		3,437		3,246		3,246
Federal Home Loan Bank advances		141,619		142,814		111,956		109,867
Junior subordinated debt owed to unconsolidated trust		8,248		8,248		15,465		15,465

Off-Balance Sheet Instruments

Loan commitments on which the committed interest rate is less than the current market rate are insignificant at December 31, 2007 and 2006.

The Company assumes interest rate risk, which represents the risk that general interest rate levels will change, as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed-rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 17. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be declared in a given calendar year is generally limited to the net income of the Bank for that year plus retained net income for the preceding two years.

At December 31, 2007 and 2006, the Bank’s retained earnings available for payment of dividends was $6.4 million and $8.3 million, respectively. Accordingly, $62.2 million and $57.3 million of the Company’s equity in the net assets of the Bank were restricted at December 31, 2007 and 2006, respectively.

In addition, the Company is further restricted, under its junior subordinated debt obligation, from paying dividends to its shareholders if the Company has deferred interest payments or has otherwise defaulted on its junior subordinated debt obligations.

Under federal regulation, the Bank is also limited to the amount it may loan to the Company, unless such loans are collateralized by specific obligations. Loans or advances to the Company by the Bank are limited to 10% of the Bank’s capital stock and surplus on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof, would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

At December 31, 2007, SI Bancorp, MHC owned 7.3 million shares of the Company’s common stock. Upon regulatory approval, SI Bancorp, MHC may seek to waive receipt of future dividends declared by the Company. For the years ended December 31, 2007 and 2006, SI Bancorp, MHC waived receipt of all dividends declared by the Company.

NOTE 18. COMMON STOCK REPURCHASE PROGRAM

In November 2005, the Board of Directors approved a plan to repurchase up to 5%, or approximately 628,000 shares, of the Company’s common stock through open market purchases or privately negotiated transactions. Stock repurchases under the program are accounted for as treasury stock, carried at cost, and reflected as a reduction in stockholders’ equity. As of December 31, 2007, the Company repurchased a total of 492,650 shares at a cost of approximately $5.3 million under this plan.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

NOTE 19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Condensed financial information pertaining only to the parent company, SI Financial Group, Inc., is as follows:

Condensed Balance Sheets	December 31,
(Dollars in Thousands)	2007			2006
Assets:
Cash and cash equivalents	$	5,013		$	6,973
Available for sale securities		9,931			17,748
Investment in Savings Institute Bank and Trust Company		68,645			65,619
Other assets		8,023			8,404
Total assets	$	91,612		$	98,744
Liabilities and Stockholders’ Equity:
Liabilities	$	9,525		$	16,358
Stockholders’ equity		82,087			82,386
Total liabilities and stockholders’ equity	$	91,612		$	98,744
Condensed Statements of Income	Years Ended December 31,
(Dollars in Thousands)	2007			2006
Interest and dividends on investments	$	662		$	605
Other income		289			387
Total income		951			992
Operating expenses		1,157			1,188
Loss before income taxes and equity in undistributed income of subsidiary		(206	)		(196	)
Income tax benefit		167			166
		(39	)		(30	)
Equity in undistributed income of subsidiary		1,451			2,808
Net income	$	1,412		$	2,778

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Condensed Statements of Cash Flows	Years Ended December 31,
(Dollars in Thousands)	2007			2006
Cash flows from operating activities:
Net income	$	1,412		$	2,778
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary		(1,451	)		(2,808	)
Excess tax benefit from share-based payment arrangements		(36	)		(13	)
Other, net		(7	)		(60	)
Cash used in operating activities		(82	)		(103	)
Cash flows from investing activities:
Purchase of available for sale securities		(2,394	)		(5,763	)
Proceeds from maturities of available for sale securities		7,875			131
Proceeds from sale of available for sale securities		2,472			—
Other, net		1,848			2
Cash provided by (used in) investing activities		9,801			(5,630	)
Cash flows from financing activities:
Treasury stock purchased		(3,685	)		(1,438	)
Cash dividends on common stock		(733	)		(777	)
Excess tax benefit from share-based payment arrangements		36			13
(Repayments of) proceeds from subordinated debt borrowings		(7,217	)		8,248
Other, net		(80	)		—
Cash (used in) provided by financing activities		(11,679	)		6,046
Net change in cash and cash equivalents		(1,960	)		313
Cash and cash equivalents at beginning of year		6,973			6,660
Cash and cash equivalents at end of year	$	5,013		$	6,973
Supplemental Cash Flow Information:
Declared dividends	$	733		$	740

NOTE 20. SUBSEQUENT EVENTS

Branch Acquisition Agreements

On January 14, 2008, the Company announced that it had completed its acquisition of Eastern Federal Bank’s branch office located in Colchester, Connecticut, which was announced in October 2007. In accordance with FASB No. 141, “Business Combinations” the Company accounted for the branch acquisition as a purchase in January 2008. The Company acquired assets, including cash, loans and fixed assets totaling $423,000 and assumed deposit liabilities of $18.4 million.

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SI FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

On November 14, 2007, the Company announced that it had reached an agreement with the Bank of Southern Connecticut to acquire their New London branch office. The Company completed the acquisition, which was accounted for as a purchase, during the first quarter of 2008. The Company acquired assets, including cash, loans and fixed assets, aggregating $8.0 million and assumed deposit liabilities totaling $9.3 million.

Stock Repurchase Program

On February 20, 2008, the Company’s Board of Directors approved the repurchase of up to 5%, or approximately 596,000 shares, of the Company’s outstanding common stock. Repurchases, which will be conducted through open market purchases or privately negotiated transactions, will be made from time to time depending on market conditions and other factors. Repurchased shares will be held as treasury stock and carried at cost.

- 54 -

COMMON STOCK INFORMATION

The common stock of the Company is listed on the NASDAQ Global Market (“NASDAQ”) under the trading symbol “SIFI.” As of March 14, 2008, there were 11,891,600 shares of common stock outstanding, which were held by approximately 907 stockholders of record, including SI Bancorp, MHC.

The following table sets forth the market price and dividend information for the Company’s common stock for the periods indicated, as reported by NASDAQ.

	Price Range				Dividends Declared
Year Ended December 31, 2007:	High		Low
First Quarter	$	13.94	$	11.77	$	0.04
Second Quarter		12.84		11.19		0.04
Third Quarter		11.97		9.95		0.04
Fourth Quarter		11.10		9.15		0.04

	Price Range				Dividends Declared
Year Ended December 31, 2006:	High		Low
First Quarter	$	11.75	$	10.35	$	0.04
Second Quarter		11.16		10.72		0.04
Third Quarter		11.99		11.00		0.04
Fourth Quarter		12.75		11.31		0.04

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EX-21.0

Exhibit 21.0

LIST OF SUBSIDIARIES

Registrant:            SI Financial Group, Inc.

Subsidiaries	Percentage Ownership	Jurisdiction or State of Incorporation
Savings Institute Bank and Trust Company	100%	United States
SI Capital Trust II (1)	100%	Delaware
803 Financial Corp. (2)	100%	Connecticut
SI Realty Company, Inc. (2)	100%	Connecticut
SI Mortgage Company (2)	100%	Connecticut

(1) In accordance with Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities,” SI Capital Trust II is not included in the Company’s consolidated financial statements.

(2) Wholly-owned subsidiary of Savings Institute Bank and Trust Company.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in SI Financial Group, Inc. Registration Statement Nos. 333-119685 and 333-125659 on Forms S-8 of our report dated March 14, 2008 relating to our audit of the consolidated financial statements of SI Financial Group, Inc. and subsidiaries as of December 31, 2007 appearing in this Annual Report on Form 10-K.

Boston, Massachusetts

March 26, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Rheo A. Brouillard, President and Chief Executive Officer of SI Financial Group, Inc., certify that:

1. I have reviewed this report on Form 10-K of SI Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Rheo A. Brouillard

Rheo A. Brouillard

President and Chief Executive Officer

March 27, 2008

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Brian J. Hull, Executive Vice President, Treasurer and Chief Financial Officer of SI Financial Group, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of SI Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Brian J. Hull

Brian J. Hull

Executive Vice President, Treasurer and Chief

Financial Officer

March 27, 2008

EX-32.0

Exhibit 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of SI Financial Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company as of and for the period covered by this Report.

By:	/s/ Rheo A. Brouillard
	Rheo A. Brouillard President and Chief Executive Officer March 27, 2008
By:	/s/ Brian J. Hull
	Brian J. Hull Executive Vice President, Treasurer and Chief Financial Officer March 27, 2008