FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

         For the quarterly period ended March 31,1999

                                       OR

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

         For the transition period from _______________ to ___________________

                        Commission file number 000-24761

                            GOUVERNEUR BANCORP, INC.
             (Exact name of registrant as specified in its charter)

             UNITED STATES                         04-3429966
             -------------                         ----------
      (State or other jurisdiction of            (I.R.S. Employer
       incorporation or organization)            Identification No.)


                        42Church Street, Gouverneur, New York 13642
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (315) 287-2600

         Indicate by check mark whether the  registrant  has filed all documents
and  reports  required  to be filed  by  Section  13 or 15(d) of the  Securities
Exchange Act of 1934 dutring 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 [ ]

          As of April 30, 1999 there were 2,384,040 shares outstanding.

<PAGE>

                            GOUVERNEUR BANCORP, INC.
                                    FORM 10-Q
                                TABLE OF CONTENTS


PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements - Unaudited

             Consolidated  Statements  of Financial  Condition at March 31,
             1999 and September 30, 1998                                       4

             Consolidated  Statements of Income for the three and six month
             periods ended March 31, 1999 and March 31, 1998                   5

             Consolidated    Statements   of   Shareholders'   Equity   and
             Comprehensive Income for the six months ended March 31, 1999      6

             Consolidated Statements of Cash Flows for the six months ended
             March 31, 1999 and 1998                                           7

             Notes to Consolidated Financial Statements                        8

Item 2.      Management's  Discussion  and Analysis of Financial  Condition
             and Results of Operations.                                       10

Item 3.      Quantitative and Qualitative Disclosure About Market Risk        19

PART II - OTHER INFORMATION

Item 1.      Legal Proceedings                                                22

Item 2.      Changes in Securities and Use of Proceeds                        22

Item 6.      Exhibits and Reports on Form 8-K                                 23

<PAGE>



                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The financial  statements presented in this Form 10-Q beginning on the following
page reflect the consolidated  financial  condition and results of operations of
the  Gouverneur  Bancorp,  Inc.  ("We"  or the  "Company")  and  its  subsidiary
Gouverneur  Savings and Loan  Association  (the "Bank") for periods on and after
March 23, 1999. Financial statements presented for periods before March 23, 1999
are for the Bank.

                                       3

<PAGE>

<TABLE>
<CAPTION>
                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                        (In thousands, except share data)
                                  (Unaudited)

                                                              MARCH 31  SEPTEMBER 30
                                                                1999        1998
                                                              --------   ---------
<S>                                                           <C>         <C>     
ASSETS

Cash and due from banks                                       $  1,033    $  1,179
Interest-bearing deposits with other financial institutions      1,765       3,255
Securities available for sale, at fair value                    12,982      10,546
Securities held to maturity, fair value of
  $7,002 in 1999 and $7,787 in 1998                              7,009       7,717
Loans, net of deferred fees                                     39,217      35,691
Allowance for loan losses                                         (533)       (484)
                                                              --------    --------

Loans, net                                                      38,684      35,207

Bank premises and equipment, net                                   269         288
Federal Home Loan Bank stock, at cost                              386         379
Accrued interest receivable                                        359         346
Real estate owned                                                   70          51
Other assets                                                        55         369
                                                              --------    --------

Total assets                                                  $ 62,612    $ 59,337
                                                              ========    ========

LIABILITIES

Deposits:  Non-interest bearing                               $    222    $    210
           Interest bearing                                     44,731      46,172
                                                              --------    --------
Total deposits                                                  44,953      46,382

Advance payments by borrowers for property taxes
  and insurance                                                    189         105
Other liabilities                                                1,589       1,382
                                                              --------    --------

Total liabilities                                               46,731      47,869
                                                              --------    --------

SHAREHOLDERS' EQUITY

Preferred stock, $.01 par value per share;
 authorized 1,000,000 shares, issued: none                          --          --
Common stock, $.01 par value per share;
 authorized 9,000,000 shares, issued:2,384,040                      24          --
Additional paid in capital                                       4,555          --
Retained earnings                                               11,145      10,929
Accumulated other comprehensive income                             586         539
Unallocated shares of Employee Stock Ownership Plan
  (ESOP) 85,825 shares in 1999                                    (429)         --
                                                              --------    --------

Total shareholders' equity                                      15,881      11,468
                                                              --------    --------

Total liabilities & shareholders' equity                      $ 62,612    $ 59,337
                                                              ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>

<TABLE>
<CAPTION>
                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                        (In thousands, except share data)
                                  (Unaudited)

                                          THREE MONTHS ENDED          SIX MONTHS ENDED
                                                MARCH 31                  MARCH 31
INTEREST INCOME                            1999         1998         1999         1998
---------------                         ----------   ----------   ----------   ----------

<S>                                     <C>          <C>          <C>          <C>       
Loans                                   $      871   $      811   $    1,699   $    1,622
Securities                                     272          235          551          483
Other short-term investments                    16           22           46           38
                                        ----------   ----------   ----------   ----------

Total interest income                        1,159        1,068        2,296        2,143
                                        ----------   ----------   ----------   ----------

INTEREST EXPENSE

Deposits                                       489          460        1,003          936
Borrowings                                       4           --            4           --
                                        ----------   ----------   ----------   ----------

Total interest expense                         493          460        1,007          936
                                        ----------   ----------   ----------   ----------

Net interest income                            666          608        1,289        1,207
Provision for loan losses                       11           42           44           85
                                        ----------   ----------   ----------   ----------

Net interest income after
provision for loan losses                      655          566        1,245        1,122

Non-interest income:
  Service charges                               14           10           31           24
  Net gain on sale of securities                 4           --            4           --
  Other                                         37           30           79           60
                                        ----------   ----------   ----------   ----------
    Total non-interest income                   55           40          114           84

Non-interest expenses:
  Salaries and employee benefits               191          149          391          312
  Directors fees                                16           16           35           30
  Building, occupancy and equipment             59           46          113           89
  Data processing                               23           21           46           41
  Postage and supplies                          23           16           41           38
  Professional fees                             13           12           34           23
  Deposit insurance premium                      7            7           14           14
  Real estate owned                             16           31           47           51
  Other                                         59           47          130           94
                                        ----------   ----------   ----------   ----------
Total non-interest expenses                    407          345          851          692

Income before income taxes                     303          261          508          514
Income taxes                                   114           98          192          208
                                        ----------   ----------   ----------   ----------

NET INCOME                              $      189   $      163   $      316   $      306
                                        ==========   ==========   ==========   ==========

BASIC EARNINGS PER SHARE (See Note 3)          N/A          N/A          N/A          N/A

Weighted average shares outstanding      2,298,215          N/A    2,298,215          N/A
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

<TABLE>
<CAPTION>
                                 GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                       AND COMPREHENSIVE INCOME (In
                                      thousands, except share data)
                                               (Unaudited)

                                                                                   Accumulated
                                            Additional              Other          Unallocated
                                  Common     Paid-in    Retained    Comprehensive     ESOP
                                  Stock      Capital    Earnings    Income           Shares       Total

<S>                              <C>         <C>         <C>         <C>             <C>        <C>     
Balances at
September 30, 1998               $     --    $     --    $ 10,929    $    539        $    --    $ 11,468

Net proceeds from issuance
 of 1,072,818 shares of
 common stock                          11       4,568                                              4,579
Common stock acquired by
    ESOP (85,825 shares)                                                                (429)       (429)
Initial capital contribution
 and issuance of shares
 to Cambray MHC
 (1,311,222 shares)                    13         (13)       (100)                                  (100)

Comprehensive Income:
 Change in net unrealized gain
 (Loss) on available-for-sale
 securities, net of tax                                                    47                         47
 Net Income                                                   316                                    316
                                                                                                --------
Total Comprehensive Income                                                                           363
                                 --------    --------    --------    --------        -------    --------

Balances at
March 31, 1999                   $     24    $  4,555    $ 11,145    $    586        ($  429)   $ 15,881
                                 ========    ========    ========    ========        =======    ========

                      See accompanying notes to consolidated financial statements.
</TABLE>

                                                    6

<PAGE>
                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (In thousands, except share data)
                                   (Unaudited)

                                                             SIX MONTHS ENDED
                                                                 MARCH 31

                                                              1999       1998
                                                            -------    -------
OPERATING ACTIVITIES

Net income                                                  $   316    $   306

Adjustments to  reconcile  net  income  to  net  cash
 provided  by  operating activities:
  Depreciation and amortization                                  33         29
  Increase in accrued interest receivable                       (13)        (6)
  Provision for loan losses                                      44         85
  Net gains on sales of securities                               (4)        --
  Net (gain) loss on sale of real estate owned                  (12)         2
  Net amortization (accretion) of premiums/discounts              3          3
  Decrease other liabilities                                    176         (7)
  Decrease in other assets                                      314         90
                                                            -------    -------

         Net cash provided by operating activities              857        502
                                                            -------    -------

INVESTING ACTIVITIES

  Net (increase) decrease in loans                           (3,573)       405
  Proceeds from sales of securities available-for-sale          504        836
  Proceeds from maturities and principal reductions of
    securities available-for-sale                             1,500      1,000
  Purchases of securities available-for-sale                 (4,358)    (2,353)
  Purchases of securities held-to-maturity                     (695)      (714)
  Proceeds from maturities and principal reductions of
    securities held-to-maturity                               1,400      2,249
  Proceeds from sale of real estate owned                        45         47
  Additions to premises and equipment                           (14)       (49)
  (Purchase) of FHLB stock                                       (7)        (4)
                                                            -------    -------

         Net cash (used) provided by investing activities    (5,198)     1,417
                                                            -------    -------


FINANCING ACTIVITIES

  Net decrease in deposits                                   (1,429)      (658)
  Net increase in advance payments by
    borrowers for property taxes and insurance                   84         71
  Net proceeds from issuance of common stock                  4,579         --
  Purchase of shares of common stock by ESOP                   (429)        --
  Initial capital contribution to Cambray MHC                  (100)        -- 
                                                            -------    -------

         Net cash provided (used) by financing activities     2,705       (587)
                                                            -------    -------

  Net (decrease) increase in cash and
    cash equivalents                                         (1,636)     1,332
  Cash and cash equivalents at beginning of period            4,434      2,486
                                                            -------    -------

  Cash and cash equivalents at end of period                $ 2,798    $ 3,818
                                                            =======    =======

Supplemental disclosure of cash flow information

  Non-cash investing activities:
         Additions to real estate owned                          52         68
  Cash paid during the period for:
         Interest                                             1,007        936
         Income taxes                                           404         --

           See accompanying notes to consolidated financial statements

                                       7

<PAGE>

                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.       BUSINESS

                  Gouverneur  Bancorp,  Inc. (the Company) operates as a savings
                  and loan holding  company.  Its only  subsidiary is Gouverneur
                  Savings  and Loan  Association  (the Bank).  The  consolidated
                  financial  statements  include the accounts of the Company and
                  its  wholly   owned   subsidiary,   the  Bank.   All  material
                  intercompany accounts and transactions have been eliminated in
                  the consolidation.


2.       BASIS OF PRESENTATION

                  The consolidated  financial statements included herein reflect
                  all adjustments which are, in the opinion of management,  of a
                  normal  recurring  nature and necessary to present  fairly the
                  Company's   financial  position  as  of  March  31,  1999  and
                  September 30, 1998,  and results of  operations  for the three
                  and six  month  periods  ended  March 31,  1999 and 1998.  The
                  statements of shareholders'  equity and cash flows are for the
                  six months ended March 31, 1999 and 1998.

3.       EARNINGS PER SHARE

                  Basic  earnings per share is calculated by dividing net income
                  available  to  common  shareholders  by the  weighted  average
                  number of shares outstanding  during the period.  Prior to the
                  mutual  holding  company  reorganization  of the  Bank,  which
                  occurred  on  March  23,  1999,  earnings  per  share  are not
                  applicable  as  neither  the  Company  nor the Bank had shares
                  outstanding.  Earnings per share was $0.01 for  earnings  from
                  March 23, 1999, to the end of the reporting  period based upon
                  the  weighted  average  number of shares  outstanding  for the
                  period. The income included in the computation is based on the
                  actual  results  of  operations  only for the  post-conversion
                  period.  Unallocated shares held by the Company's ESOP are not
                  included in the weighted average number of shares outstanding.

4.       IMPACT OF NEW ACCOUNTING STANDARDS

                  On October 1, 1998,  the  Company  adopted the  provisions  of
                  Statement of Financial  Accounting Standards ("SFAS") No. 130,
                  REPORTING  COMPREHENSIVE  INCOME.  This statement  establishes
                  standards for reporting  and display of  comprehensive  income
                  and  its  components.  At the  Company,  comprehensive  income
                  represents net income plus other comprehensive  income,  which
                  consists  of the net change in  unrealized  gains or losses on
                  securities  available  for  sale for the  period.  Accumulated
                  other comprehensive income represents the net unrealized gains
                  or losses on  securities  available for sale as of the balance
                  sheet  dates,  net of  the  related  tax  effect.  Prior  year
                  consolidated  financial  statements have been  reclassified to
                  conform to the requirements of SFAS 130.

                  A   summary   of   unrealized   gains   and   reclassification
                  adjustments, net of tax, of available-for-sale  securities for
                  the six-month periods ended March 31, 1999 and 1998 follows:

                                       8

<PAGE>

                                                                  1999      1998
                                                                  ----      ----

         Unrealized holding gains arising during
         the period net of tax (pre-tax
            amount of $82,000 and $213,000)                       $  49     $128

            Reclassification adjustment for gains
            realized in net income during the
            period, net of tax (pre-tax amount of $4,000 and $0)     (2)      --
                                                                  -----     ----

               Change in net unrealized gains on securities       $  47     $128

Effective  October 1, 1998, the Company  adopted the provisions of SFAS No. 131,
DISCLOSURES  ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED  INFORMATION.  SFAS No.
131 requires  publicly-held  companies to report financial and other information
about key revenue-producing segments of the entity for which such information is
available  and is  utilized  by the chief  operation  decision  maker.  Specific
information  to be reported for  individual  segments  includes  profit or loss,
certain revenue and expense items and total assets. A reconciliation  of segment
financial  information to amounts  reported in the financial  statements is also
provided.  The Company has  determined  that it has no  reportable  segments and
therefore  the  adoption  of SFAS No.  131 caused no  significant  change in the
Company's reporting.

                                       9

<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

         We were  formally  chartered by the Office of Thrift  Supervision  (the
"OTS") on March 23,  1999.  On that date,  the Bank  completed a mutual  holding
company  reorganization so that it became our wholly owned  subsidiary.  We then
sold 45% of our  common  stock  (1,072,818  shares)  to the public for $5.00 per
share and issued 55% of our common stock  (1,311,222  shares) to Cambray  Mutual
Holding  Company  ("Cambray  MHC")  without any cash  payment.  Cambray MHC is a
mutual holding company also chartered by the OTS. As part of the reorganization,
the Bank contributed $100,000 to Cambray MHC as its initial capital. We received
$4.8 million of net proceeds from the sale of our stock. We used one half of the
net proceeds to acquire all the Bank's common stock.

         OTS  regulations  require  that  Cambray  MHC  own a  majority  of  our
outstanding  stock. In order to dispose of that stock, OTS regulations  require,
in most instances,  that the depositors of the Bank must approve the transaction
in which the sale will occur, and then the shares must first be offered to those
depositors.

         The Bank has been and  continues to be a community  oriented  financial
institution offering a variety of financial services. The Bank attracts deposits
from the general public and uses those  deposits,  together with other funds, to
make  loans and  other  investments.  Most of the  loans are one to four  family
residential mortgages. The Bank also makes consumer (including home equity lines
of credit),  commercial,  and multi-family  real estate and other loans. Most of
the loans are in the Bank's primary market area,  which is southern St. Lawrence
and northern  Jefferson and Lewis counties in New York State. The Bank's deposit
accounts are insured by the Savings  Association  Insurance Fund ("SAIF") of the
Federal  Deposit  Insurance  Corporation  ("FDIC"),  and the Bank is  subject to
regulation by the FDIC and the OTS.

         Our  profitability  depends,  to a large  extent,  on our net  interest
income,  which is the difference between the interest we receive on our interest
earning  assets,  such as loans  and  investments,  and the  interest  we pay on
interest bearing liabilities. Other categories of expenses generally include the
provision for loan losses, salaries and employee benefits costs, net expenses on
real estate owned and various other categories of operational expenses. External
factors,  such as general  economic  and  competitive  conditions,  particularly
changes in  interest  rates,  government  policies  and  actions  of  regulatory
authorities, can also have a substantial effect on profitability.

ANALYSIS OF NET INTEREST INCOME

         Net  interest  income,  the  Bank's  primary  income  source,   depends
principally  upon (i) the amount of  interest-earning  assets  that the Bank can
maintain  based  upon  its  funding  sources;   (ii)  the  relative  amounts  of
interest-earning  assets  versus  interest-bearing  liabilities;  and  (iii) the
difference between the yields earned on those assets and the rates paid on those
liabilities.  Non-performing  loans adversely affect net interest income because
they  must  still be  funded by  interest-bearing  liabilities,  but they do not
provide  interest  income.  Furthermore,  when the Bank  designates  an asset as
non-performing, all interest which has been accrued but not actually received is
deducted from current period income, further reducing net interest income.

                                       10

<PAGE>

AVERAGE BALANCES, INTEREST RATES AND YIELDS

         The following tables present,  for the periods  indicated,  the average
interest-earning  assets and average  interest-bearing  liabilities by principal
categories,  the interest income or expense for each category, and the resultant
average  yields earned or rates paid. No tax equivalent  adjustments  were made.
All average balances are daily average balances.  Non-interest-bearing  checking
accounts  are  included  in the tables as a  component  of  non-interest-bearing
liabilities.

<TABLE>
<CAPTION>
                                                               For the Six Months Ended March 31,
                                               ---------------------------------------------------------------
                                                            1999                            1998
                                               -------------------------------  ------------------------------

                                                                      Average                          Average
                                               Average                 Yield/   Average                 Yield/
                                               Balance   Interest     Cost (6)  Balance   Interest    Cost (6)
                                               -------   --------     --------  -------   --------    --------

                                                                    (Dollars in thousands)
<S>                                             <C>          <C>        <C>      <C>          <C>       <C>  
Loans (1)                                      $36,824   $ 1,699        9.25%   $34,763   $ 1,622       9.36%
Securities (2)                                  18,361       551        6.02%    15,555       483       6.23%
Other short-term investments                     1,943        46        4.75%     1,499        38       5.08%
                                               -------   -------                -------   -------
     Total interest-earning assets              57,128     2,296        8.06%    51,817     2,143       8.29%
Non-interest-earning assets                      2,905                            2,223
                                               -------                          -------
     Total assets                              $60,033                          $54,040
                                               =======                          =======

Savings and club accounts (3)                  $17,482       299        3.43%   $14,630       254       3.48%
Time certificates                               23,722       647        5.47%    22,454       628       5.61%
NOW and money market accounts                    5,777        57        1.98%     5,446        54       1.99%
Borrowings                                         159         4        5.05%        --        --         --
                                               -------   -------                -------   -------
     Total interest-bearing liabilities         47,140     1,007        4.28%    42,530       936       4.41%
Non-interest-bearing liabilities                 1,313                            1,003
                                               -------                          -------
     Total liabilities                          48,453                           43,533
Equity                                          11,580                           10,507
                                               -------                          -------
     Total liabilities and equity              $60,033                          $54,040
                                                                                =======
Net interest income/spread (4)                           $ 1,289        3.78%             $ 1,207       3.88%
                                               -------   =======    ========    =======   =======       ====
Net earning assets/net interest margin (5)     $ 9,988                  4.53%   $ 9,287                 4.67%
                                               =======              ========    =======                 ====
Ratio of average interest-earning assets
     to average interest-bearing liabilities               1.21x                            1.22x



                                                                                NOTES APPEAR ON FOLLOWING PAGE.
</TABLE>

                                                      11

<PAGE>

AVERAGE BALANCES, INTEREST RATES AND YIELDS (CONTINUED)
<TABLE>
<CAPTION>
                                                                For the Three Months Ended March 31,
                                               ---------------------------------------------------------------
                                                            1999                            1998
                                               -------------------------------  ------------------------------

                                                                      Average                          Average
                                               Average                 Yield/   Average                 Yield/
                                               Balance   Interest     Cost (6)  Balance   Interest    Cost (6)
                                               -------   --------     --------  -------   --------    --------

                                                                    (Dollars in thousands)
<S>                                             <C>          <C>        <C>      <C>          <C>       <C>  
Loans (1)                                      $37,541       871        9.41%   $34,540   $   811       9.52%
Securities (2)                                  19,365       272        5.70%    15,273       235       6.24%
Other short-term investments                     1,483        16        4.38%     1,755        22       5.08%
                                               -------   -------                -------   -------
     Total interest-earning assets              58,389     1,159        8.05%    51,568     1,068       8.40%
Non-interest-earning assets                      2,296                            2,161
                                               -------                          -------
     Total assets                              $60,685                          $53,729
                                               =======                          =======

Savings and club accounts (3)                  $17,532       147        3.40%   $14,410       125       3.52%
Time certificates                               23,696       314        5.37%    22,330       308       5.59%
NOW and money market accounts                    5,786        28        1.96%     5,388        27       2.03%
Borrowings                                         322         4        5.04%        --        --         --
                                               -------   -------                -------   -------
     Total interest-bearing liabilities         47,336       493        4.22%    42,530       460       4.43%
Non-interest-bearing liabilities                 1,519                              864
                                               -------                          -------
     Total liabilities                          48,855                           42,992
Equity                                          11,830                           10,737
                                               -------                          -------
     Total liabilities and equity              $60,685                          $53,729
                                                                                =======
Net interest income/spread (4)                           $   666        3.83%             $   608       3.97%
                                               -------   =======    ========    =======   =======       ====
Net earning assets/net interest margin (5)     $11,053                  4.63%   $ 9,440                 4.78%
                                               =======              ========    =======                 ====
Ratio of average interest-earning assets
     to average interest-bearing liabilities               1.23x                            1.22x


(1) Shown net of the allowance for loan losses.  Average loan balances include non-accrual loans.  Interest is
    recognized on non-accrual loans only as and when received.
(2) Securities are included at amortized cost, with net unrealized gains or losses on securities available for
    sale included as a component of non-earning assets.  Securities include Federal Home Loan Bank of New York
    stock.
(3) Includes advance payments by borrowers for taxes and insurance (mortgage escrow deposits).
(4) The spread represents the difference between the weighted average yield on interest-earning assets and the
    weighted average cost of interest-bearing liabilities.
(5) The net interest margin, also known as the net yield on average  interest-earning  assets,  represents net
    interest income as a percentage of average interest-earning assets.
(6) Yields and related ratios for the six month periods have been annualized when appropriate.
</TABLE>

                                                      12

<PAGE>

RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

         One method of analyzing net interest  income is to consider how changes
in average  balances  and  average  rates from one period to the next affect net
interest  income.  The  following  table shows  changes in the dollar  amount of
interest income and interest  expense for major  components of  interest-earning
assets and  interest-bearing  liabilities.  It shows the amount of the change in
interest  income or expense  caused by either  changes in  outstanding  balances
(volume)  or  changes  in  interest  rates.  The effect of a change in volume is
measured by  applying  the  average  rate during the first  period to the volume
change  between  the two  periods.  The effect of changes in rate is measured by
applying the change in rate between the two periods to the average volume during
the first period.  Changes attributable to both rate and volume, which cannot be
segregated,  have been allocated proportionately to the change due to volume and
the change due to rate.

<TABLE>
<CAPTION>
                                         Six Months Ended            Three Months Ended
                                             March 31,                    March 31,
                                   ---------------------------  ---------------------------
                                           1999 VS. 1998               1999 VS. 1998
                                           -------------               -------------
                                   Increase (Decrease) Due To:  Increase (Decrease) Due To:

                                     Volume  Rate    Total       Volume    Rate     Total

                                                       (In thousands)

<S>                                  <C>     <C>      <C>         <C>      <C>      <C>  
INTEREST-EARNING ASSETS:
Loans                                $  95   $ (18)   $  77       $  69    $  (9)   $  60
Securities                              85     (17)      68          59      (22)      37
Other short-term investments            11      (3)       8          (3)      (3)      (6)
                                     -----   -----    -----       -----    -----    -----
Total interest-earning assets          191     (38)     153         125      (34)      91
                                     =====   =====    =====       =====    =====    =====

INTEREST-BEARING LIABILITIES:
Savings and club accounts               49      (4)      45          27       (5)      22
Time certificates                       35     (16)      19          18      (12)       6
NOW and money market accounts            3      --        3           2       (1)       1
Borrowings                               4      --        4           4       --        4
                                     -----   -----    -----       -----    -----    -----
Total interest-bearing liabilities      91     (20)      71          51      (18)      33
                                     =====   =====    =====       =====    =====    =====

Net change in net interest income    $ 100   $ (18)   $  82       $  74    $ (16)   $  58
                                     =====   =====    =====       =====    =====    =====
</TABLE>


COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND SEPTEMBER 30, 1998.

         Our total assets increased $3.3 million from $59.3 million at September
30, 1998 to $62.6 million at March 31, 1999.  The principal  reason was the sale
of 45% of our common stock as part of the mutual holding company  reorganization
of the Bank. At September 30, 1998, we held $3.54 million of stock subscriptions
for our stock offering, including $1.97 million of funds paid by subscribers and
$1.57 million in withdrawal authorizations from existing accounts. From November
1998 through  February 1999,  part of these  subscriptions  were canceled and we
refunded the related payments. By the end of March, 1999, we received additional
stock  subscriptions  and we completed the stock sale. We received net new funds
of approximately $4.2 million, after deducting expenses and our $429,000 loan to
our Employee Stock  Ownership  Plan. The Employee Stock  Ownership Plan used the
loan to buy 8% of the stock we sold.

         During the six months from  September  30, 1998 through March 31, 1999,
we actively  pursued an increase in our loan portfolio  because loans  generally
have higher yields than securities  investments.  As a result of our efforts, we
were able to increase  our loans,  net, by $3.5  million.  If we had not had the
stock offering,  our level of securities and other short term investments  would
have declined  because we would have used the proceeds of those  investments  to
fund the new loans.  However,  the stock  subscriptions  which we received,  and
which became part of our capital

                                       13

<PAGE>

when we  completed  the  reorganization  on  March  23,  could  not be  invested
immediately  in loans.  Therefore,  during the first six  months of this  fiscal
year, we also had a $2.4 million  increase in securities  available for sale. We
reduced our  securities  classified as held to maturity by $708,000  because all
new  securities  purchases  were  classified  at available  for sale to increase
flexibility in dealing with our securities portfolio.

         During the first six months of the fiscal  year,  we had a $1.4 million
decline  in  deposits.  The  reason  for  this  decline  was  that  some  of our
stockholders  purchased  their  stock  with  deposits  which were at the Bank on
September  30, 1998.  When we completed  the  reorganization  on March 23, 1999,
these  customers  used their  deposits  to pay for stock,  and the funds  became
capital  rather than  deposits.  In  addition,  on September  30, 1998,  we were
holding some stock  subscriptions  which were later canceled.  The subscriptions
had been  classified as deposits  pending the completion of the  reorganization,
and  thus  the  cancellation  of the  subscriptions  resulted  in an  additional
decrease in  deposits.  We believe  that if we exclude the effect of the deposit
inflows and outflows  related to the  reorganization,  total deposits would have
increased during the six months ended March 31, 1999.

         We increased  our total  capital by $4.4  million  during the first six
months of the fiscal  year.  This  increase was caused  almost  entirely by $4.2
million of net stock sale proceeds,  plus retained earnings of $216,000.  During
the six month  period,  we had total  earnings  of  $316,000,  but the Bank used
$100,000 to capitalize  Cambray  Mutual Holding  Company,  which owns 55% of our
stock, resulting in the net increase in retained earnings of $216,000.

COMPARISON  OF RESULTS OF  OPERATIONS  FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 1998.

         GENERAL.  Our net income for the three  months ended March 31, 1999 was
$189,000,  an  increase  of  $26,000,  or 16%,  over our net income for the same
period  last year.  The primary  reasons for the  increase in net income were an
increase in our size,  which provided a higher level of average  earning assets,
and a decrease in our  provision  for loan losses.  However,  increases in other
operating expenses,  primarily salaries and employee benefits expense,  offset a
portion of the two positive factors.

         INTEREST INCOME.  Interest income  increased by $91,000,  or 8.5%, from
the three  months ended March 31, 1998 to the three months ended March 31, 1999.
We generated the increase  entirely as a result of efforts to increase our level
of interest-earning assets. Average interest-earning assets increased from $51.6
million for the 1998 quarter to $58.4 million for the 1999 quarter. We were able
to  generate  this  increase  through the active  solicitation  of loans and the
hiring of additional loan origination staff. The increase in the average balance
of loans would have been  accompanied  by a decrease  in the average  balance of
other interest-earning  assets if our total sources of funds had remained level.
However,  we invested the stock  subscriptions we held pending completion of the
reorganization, and then the additional capital raised in the reorganization, in
securities and other short term investments.  Therefore,  the average balance of
those investments, and the interest earned on them, also increased.

         The average  interest rate we earned on our loans and securities was 35
basis  points  (0.35%)  lower in this year's  quarter  than last year,  with the
average rate earned on loans  decreasing by 11 basis points and the average rate
earned  on  securities  decreasing  by 54 basis  points.  The  reason  for these
decreases in average rates was that market interest rates generally declined, so
that new loans and  securities  tended to be  originated at lower rates than the
existing  loans  and  securities  in our  portfolios  and the  rates  earned  on
adjustable rate loans and securities declined.  We worked to limit the effect of
the decline in interest rates by originating  commercial and consumer loans with
higher rates than residential  mortgage loans.  Also adding to the lower average
rate earned on our total earning  assets was the fact that we received  funds to
purchase  our stock  more  rapidly  than we were able to  increase  our level of
loans.  We invested the new funds in lower  yielding  securities and other short
term  investments  pending  redeployment,  as  opportunities  arise,  in  higher
yielding  loans.  However,  we  cannot  guaranty  that  we  will be able to find
acceptable prudent loan opportunities which will allow us to increase our yields
earned.

         Overall,  we  estimate  that the  increase  in the  average  volume  of
interest-earning assets caused a $125,000 increase in interest income, while the
decrease in interest rates resulted in a $34,000 decrease in interest income.

                                       14

<PAGE>

         It is important to remember that we did not complete the Reorganization
until March 23, 1999,  so the increase in capital  from the  Reorganization  was
present only for nine days in the 1999 quarter. We did not receive a substantial
part of the funds used to  purchase  the stock  until late  February or March of
1999.  Since  the funds  were  only  available  for  investment  for part of the
quarter,  they only had a partial  quarter's  effect on average assets available
for investment.

         INTEREST EXPENSE.  As in the case of interest income,  interest expense
also  increased  from the 1998 to the 1999 quarter as a result of an increase in
the average volume of interest bearing  liabilities.  The increase in the volume
of interest-bearing liabilities was a result of our efforts to increase deposits
and thus  provide  funds so we could grow our assets.  However,  the increase in
interest expense was only $33,000,  compared to the $91,000 increase in interest
income.  The  interest  expense  increase  was less than the  interest  earnings
increase  because  average  capital  increased by $1.1  million  between the two
quarters  and  because  the rate earned on the new assets was more than the rate
paid on the new  liabilities.  We  estimate  that the  increase in the volume of
interest-bearing liabilities caused a $51,000 increase in interest expense while
a decrease in our average  cost of funds  caused an $18,000  decline in interest
expense.

         Please remember that we paid interest on stock  subscriptions  from the
day we received them until we completed the reorganization.  They became part of
our capital  and ceased  bearing  interest  for only the last nine days of March
1999.  Capital has no interest cost. In future  periods,  we anticipate that the
percentage of our earning assets that are funded by interest-bearing liabilities
should be lower than  before the  reorganization,  until we are able to leverage
the new capital through additional growth.

         NET INTEREST INCOME.  The net effect of the increase in interest income
and the  lower  increase  in  interest  expense  was a $58,000  increase  in net
interest income.  This increase was the result of our growth,  partially reduced
by a reduction of our interest rate spread,  representing the difference between
the average rate we earned and the average rate we paid. Our spread decreased by
14 basis  points from 3.97% for the 1998  quarter to 3.83% for the 1999  quarter
for a number of reasons.  The percentage of our assets  invested in loans versus
securities  and other  short  term  investments  declined  because  we were only
gradually  able to deploy new funds in loans.  This reduced spread because loans
generally  have  higher  yields than our other  investments.  In  addition,  the
average yield on our loans  declined due to generally  declining  interest rates
and our decision to impose stricter loan underwriting requirements.  Our cost of
funds  declined more slowly  because we maintained  slightly  higher than market
interest  rates in order to retain and grow  deposits.  These  higher rates were
necessary to maintain a competitive edge at a time when other investments,  such
as the stock  market,  were  perceived  by many  people,  including  some of our
customers, as providing opportunities for higher yields.

         Our net  interest  margin  (also  known  as the net  yield  on  average
interest-earning  assets)  declined by 15 basis  points for the same reasons and
because  our  increase  in  average  capital  between  the  two  periods  was at
approximately the same rate as the increase in average earning assets. In future
periods, until we can leverage our increased capital, we anticipate that our net
interest  margin  will  increase  because of the  increase in the portion of our
earning assets that will be funded by non-interest-bearing capital.

         PROVISION FOR LOAN LOSSES.  The provision for loan losses  results from
our analysis of the  adequacy of the  allowance  for loan losses.  If we believe
that the  allowance  should be higher,  then we increase it with a provision for
loan losses which is an expense on our income statement. However, our assessment
of the  adequacy  of the  allowance  is always  speculative,  based upon what we
expect to occur in the future with our loan portfolio,  especially default rates
and the level of  losses  when our  customers  do not repay  their  loans.  This
requires  estimates of many future events,  such as future interest  rates,  the
health of the local and national economy and the effects of government policies.
If our  predictions  about the  future are  inaccurate,  then  increases  in the
allowance  may be  necessary  in  future

                                       15

<PAGE>

periods even if the level of our loan portfolio  remains the same.  Furthermore,
the Office of Thrift  Supervision may disagree with our judgments  regarding the
potential  risks in our loan  portfolio  and could  require us to  increase  the
allowance in the future.

         For the three  months  ended March 31,  1999,  we provided  $11,000 for
possible  loan losses,  compared to $42,000 in the same  quarter  last year.  We
reduced  the  provision   principally  because  we  had  a  net  recovery  after
charge-offs of $2,000 for the 1999 quarter compared to net charge-offs of $3,000
for the same quarter the prior year.  We had also had a net recovery  during the
quarter ended December 31, 1998. Therefore,  it was not necessary for us to make
a provision for loan losses to replenish the allowance.  Furthermore,  our level
of non-accruing loans (generally loans past due 90 days or more) was $233,000 at
March 31, 1999  compared to $348,000 at March 31, 1998.  At March 31, 1999,  our
allowance was $533,000,  or 1.36% of total loans, compared to $464,000, or 1.34%
of total loans at March 31, 1998.

         NON-INTEREST  INCOME. Our non-interest income increased by $15,000 from
the 1998 to the 1999  quarter.  The  increase  was  principally  the  result  of
increased size of our institution as a whole,  which generated more  transaction
fees. We also  implemented more rigorous  policies  regarding the collection and
non-waiver of account-related charges.

         NON-INTEREST  EXPENSES.  Our non-interest expenses increased by $62,000
from the 1998 to the 1999 quarter.  The primary  reason for this increase was an
increase in staff to generate  loan growth,  which caused a $42,000  increase in
salaries and employee benefits expense.  By the end of the 1999 quarter,  we had
20 full time and one part time  employees,  compared  to 16 full time and 2 part
time  employees at the end of March 1998.  We believe that we have begun to reap
the  benefits of the increase in the level of employees as the increase in loans
shows.  However,  we  believe  that our  existing  employee  group  can  support
additional  growth.  We also believe  that the  reorganization  itself  caused a
temporary disruption in employee productivity as we allocated employees to tasks
necessary to complete the reorganization.

         INCOME TAX EXPENSE.  Our income tax expense  increased  by $16,000,  or
16%,  from the 1998 to the 1999  quarter.  The  increase  corresponded  to a 16%
increase in income before taxes.

COMPARISON OF RESULTS OF OPERATIONS  FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND
1998.

         GENERAL.  Our net income for the six months  ended  March 31,  1999 was
$316,000,  an  increase of  $10,000,  or 3.3%,  over our net income for the same
period  last year.  The  primary  reason for the  increase in net income was the
increase  in our size,  as  discussed  above,  coupled  with a  decrease  in our
provision  for loan losses and a slight  reduction  in our  effective  tax rate.
Partially  offsetting  these  improvements  were an  increase  in  salaries  and
employee benefits expense and an increase in other general operating expenses.

         INTEREST INCOME.  Interest income increased by $153,000,  or 7.1%, from
the six months ended March 31, 1998 to the six months  ended March 31, 1999.  We
generated  the  increase  through our efforts to increase  our  interest-earning
assets.  Average  interest-earning  assets  increased from $51.8 million for the
1998 period to $57.1  million for the 1999 period.  The factors which enabled us
to generate  the  increase  were the same as  discussed  above in the  quarterly
comparison.  Our $2.1 million  increase in the average  balance of loans between
the 1998 and the 1999 quarters did not cause a decline in the average balance of
other  interest-earning   investments.  This  was  because  our  growth  efforts
generated a $4.6  million  increase in average  interest-bearing  deposits and a
$1.0 million increase in average  capital,  which provided funds for investment.
As a result,  we increased our average  securities  investments by $2.8 million.
The average  interest  rate we earned on our loans and  securities  was 23 basis
points (0.23%) lower during the first six months of this fiscal year than during
the same period last year. The reason for the decrease was the same as discussed
above in the quarterly period comparison.

                                       16

<PAGE>

         Overall,  we  estimate  that the  increase  in the  average  volume  of
interest-earning assets caused a $191,000 increase in interest income, while the
decrease  in  interest  rates  resulted  in a  decrease  in  interest  income by
approximately $38,000.

         INTEREST EXPENSE.  As in the case of interest income,  interest expense
also  increased  from the 1998 to the 1999 periods as a result of an increase in
the average  volume of  interest-bearing  liabilities as we sought funds to grow
our assets. However, for the reasons we explained above in the discussion of the
three month  comparison,  the  increase in  interest  expense was only  $71,000,
compared to a $153,000  increase in interest  income.  The average  rate paid on
deposits and other  liabilities  declined by 13 basis points between the periods
as generally  lower market  interest  rates  allowed us to decrease our rates on
certificates of deposit.  At the same time, our average  capital  increased $1.1
million, which provided us with an increase in zero cost funding sources.

         NET INTEREST INCOME.  The net effect of the increase in interest income
and the lower  increase  in  interest  expense  was an $82,000  increase  in net
interest  income.  As discussed  above,  this increase was the result of growth,
partially  offset  by a  reduction  of our  interest  rate  spread.  The  spread
reduction  was  generally  caused  by the same  factors  discussed  above in the
quarterly comparison.

         PROVISION FOR LOAN LOSSES.  For the six months ended March 31, 1999, we
provided  $44,000  for  possible  loan  losses,  compared to $85,000 in the same
period last year.  We reduced  the  provision  principally  because our level of
non-accruing  loans had declined as discussed  above and because during the 1999
period our recoveries on loans  previously  charged off exceeded our loan losses
by $5,000.  This net recovery plus the $44,000  provision allowed us to increase
the allowance by $49,000,  or 10.1%,  during the first six months of fiscal 1999
compared to an increase in our loan portfolio, net of 9.9%.

         NON-INTEREST  INCOME. Our non-interest income increased by $30,000 from
the 1998 to the 1999  periods.  The  increase  was the result of an  increase in
account  fees for the same reasons  discussed  above  regarding  the three month
period.

         NON-INTEREST  EXPENSES. Our non-interest expenses increased by $159,000
from the 1998 to the 1999 periods.  The primary reason for this increase was the
increase in staff  discussed  above,  which was the  primary  cause of a $79,000
increase in salaries and employee benefits expense. A number of other categories
of  non-interest  expense also increased  because of our efforts to increase our
size.

         INCOME TAX EXPENSE. Our income tax expense decreased by $16,000, or 8%,
from  the 1998 to the 1999  periods.  The  decrease  was  more  than the  $6,000
decrease in pre-tax income because of a slight shift in our tax accruals and the
resolution of uncertainties.

LIQUIDITY AND CAPITAL RESOURCES

         Our  primary  sources  of funds  are  deposits  and  proceeds  from the
principal  and  interest  payments  on  loans  and  securities.  Maturities  and
scheduled  principal payments on loans and securities are predictable sources of
funds.  However,  general  economic  conditions and interest rate conditions can
cause increases or decreases in deposit outflows and loan prepayments  which can
also affect the level of funds we have available for investment.

         In general,  we manage our liquidity by maintaining a sufficient  level
of short term investments so that funds are normally available for investment in
loans when needed.  During the six months  ended March 31, 1999,  we reduced our
cash and cash equivalents by $1.6 million.  The primary reason for the reduction
was that we invested  available  funds in loans and securities  investments,  so
that our net  increases in those  investments  exceeded the net cash we received
from our stock  offering  minus a reduction  in  deposits.  We  originated  $8.9
million of new loans during the six months ended March 31, 1999. However, loans,
net, after payments,  charge-offs and transfers to real estate owned,  increased
by $3.5 million during the period.

                                       17

<PAGE>

         Deposits  decreased by $1.4  million  during the six months ended March
31, 1999. As we discussed above, we believe the decrease was primarily caused by
the use of  deposits  to purchase  stock and by the  cancellation  of some stock
subscriptions  which had been  carried as deposits on  September  30,  1998.  In
addition to factors within our control,  such as our deposit pricing  strategies
and our  marketing  efforts,  deposit flows are affected by the level of general
market interest rates, the availability of alternate  investment  opportunities,
general economic conditions, and other factors outside our control.

         We monitor our  liquidity  regularly.  Excess  liquidity is invested in
overnight  federal  funds  sold and other  short  term  investments.  If we need
additional  funds,  we can borrow  those  funds,  although the cost of borrowing
money is normally  higher than the average cost of deposits.  As a member of the
Federal Home Loan Bank of New York,  the Bank can arrange to borrow in excess of
$10 million,  but to do so it must provide  appropriate  collateral  and satisfy
other requirements for Federal Home Loan Bank borrowings.  We have not needed to
use borrowings to fund deposit  outflows or new loans in the past.  However,  in
the future,  we anticipate  that we will use borrowed  funds to help us leverage
the capital we  received  from our stock sale.  In  addition to  borrowings,  we
believe  that,  if we need  to do so,  we can  attract  additional  deposits  by
increasing the rates we offer.

         We had $1.9 million of  outstanding  commitments to make loans at March
31, 1999,  along with $435,000 of unused home equity,  commercial  and overdraft
lines of  credit.  We  anticipate  that we will  have  enough  funds to meet our
current loan  commitments and to fund drawn downs on the lines of credit through
the normal turnover of our loan and securities  portfolios and the re-investment
of short term  investments in longer term assets when  opportunities  arise.  At
March 31,  1999,  we had $12.3  million of  certificates  of  deposit  which are
scheduled to mature in one year. We anticipate that we can retain  substantially
all of those deposits if we need to do so to fund loans and other investments as
part of our efforts to grow and leverage our new capital.

         The OTS has minimum capital ratio requirements which apply to the Bank,
but there are no comparable  minimum capital  requirements that apply to us as a
savings and loan  holding  company.  At March 31,  1999,  the Bank  exceeded all
regulatory capital requirements of the OTS applicable to it, with Tier I capital
of $13.5 million, or 21.78% of average assets and 47.29% of risk-weighted assets
and with total risk-based  capital of $13.9 million,  or 48.55% of risk-weighted
assets.  The Bank  also had  tangible  capital  of $13.5  million,  or 21.79% of
average tangible assets.  The Bank was classified as "well capitalized" at March
31, 1998 under OTS regulations.

         OTS  regulations  require that the Bank maintain liquid assets equal to
4% of withdrawable accounts.  This ratio is measured on a monthly average basis.
The Bank had a liquidity ratio of 35.1% for March 1999.

         YEAR 2000 COMPLIANCE

         Our  progress  on  becoming  Year  2000   compliant  is  continuing  as
scheduled.  We have  continued  to review and test all our own systems  while we
also analyze the potential  adverse  effects on us if major  suppliers,  such as
telephone and electric utility companies, are not Year 2000 compliant. Thus far,
we have not  identified any material risks in any of our own systems and we have
received reasonable assurances that our material outside vendors will be able to
continue to provide services to us. We have completed all testing of the primary
systems of our  principal  data  processing  provider and no problems  have been
discovered.  We have also completed testing of all in house systems and the test
results were  satisfactory.  We have  developed  contingency  plans to move to a
manual system in the event of an emergency.  Although we would certainly  rather
not do so, we know from our recent  experience with a severe ice storm that shut
down power in the area that we can operate for at least five days using entirely
manual systems.

                                       18

<PAGE>

         We are also  participating in customer awareness programs to let people
know that we are Year 2000 compliant in order to avoid large deposit withdrawals
in  anticipation  of year end  brought on by  customer  panic.  Although  we are
working to avoid the adverse effects of such panic, it is  substantially  out of
our control.  Non-compliance by a local utility,  for example, may not only have
an adverse direct effect on our ability to conduct business, but may also create
local panic which could affect our  liquidity.  However,  we anticipate  that we
will be able to satisfy customer  demands for cash if necessary  through the use
of our liquid assets.

         FORWARD-LOOKING STATEMENTS

         When we use words or phrases like "will probably  result," "we expect,"
"will  continue,"  "we  anticipate,"  "estimate,"  "project,"  "should cause" or
similar expressions in this 10-Q or in any press releases, public announcements,
filings with the Securities and Exchange Commission or other disclosures, we are
making  "forward-looking  statements"  as  described  in the Private  Securities
Litigation Reform Act of 1995. In addition,  certain information we will provide
in the  future on a regular  basis,  such as  analysis  of the  adequacy  of our
allowance for loan losses or an analysis of the interest rate sensitivity of our
assets and liabilities,  is always based on predictions of the future. From time
to time,  we may  also  publish  other  forward-looking  statements  anticipated
financial performance, business prospects, and similar matters.

         The Private  Securities  Litigation  Reform Act of 1995 provides a safe
harbor  for  forward-looking  statements.  We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what was anticipated in our forward-looking  statements.  Some of the risks
and uncertainties that may affect our operations,  performance,  development and
results,  the interest rate sensitivity of our assets and  liabilities,  and the
adequacy of our allowance for loan losses, include:

o   local, regional, national or global economic conditions which could cause an
    increase in loan  delinquencies,  a decrease in property values, or a change
    in the housing turnover rate;

o   the failure of our customers or major  suppliers to have computers and other
    systems which are Year 2000 compliant;

o   changes in market  interest  rates or  changes in the speed at which  market
    interest rates change;

o   changes in laws and regulations affecting us;

o   changes in competition; and

o   changes in consumer preferences.

         Please do not rely unduly on any forward-looking statements,  which are
valid only as of the date made. Many factors,  including those described  above,
could affect our  financial  performance  and could cause our actual  results or
circumstances for future periods to differ materially from what we anticipate or
project.  We have no  obligation  to update any  forward-looking  statements  to
reflect future events which occur after the statements are made.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         QUALITATIVE  ANALYSIS.  We try to avoid taking undue interest rate risk
while satisfying customer demand for loans. Substantially all of our residential
mortgage loans have fixed interest rates and terms of up to 25 years. Adjustable
residential  mortgage  loans are not in demand  during the current low  interest
rate  conditions and they  represent  only a very small part of our  residential
mortgage loan portfolio.  Therefore,  in a rising interest rate environment,  we
expect that the yields on our residential  mortgage loan portfolio will increase
relatively  slowly,  as loans are repaid and the payments are reinvested,  while
our cost of funds will rise more rapidly.  In order to reduce this risk, we have

                                       19

<PAGE>

adopted a multi-part strategy.  First, we are working to originate higher levels
of automobile  loans,  home equity lines of credit,  and commercial  loans which
tend to have shorter terms or adjustable rates. Second, we have concentrated our
securities  investments  in  short-term  or  adjustable-rate   securities.  U.S.
Treasury and federal agency securities are purchased with terms to maturity that
generally do not exceed two years. Most of our  mortgage-backed  securities have
adjustable rates or relatively short terms with balloon payments. We also try to
cushion our operations  against interest rate fluctuations by preserving a loyal
customer  base  through  paying  above  market rates on savings and club account
deposits during present periods of low interest rates. We believe this may cause
our  customers  to be less  likely to shift  their  funds to high  rate  deposit
products as interest rates rise.

         Interest rate pricing and interest rate risk  strategy  objectives  are
implemented,  in the first instance, by an internal committee which meets weekly
to review and assess  deposit  and loan  pricing.  The OTS  prepares a quarterly
interest-rate sensitivity report for the Bank based upon its asset and liability
profile  which seeks to estimate the effect of interest  rate changes on the net
value of the Bank's  assets and  liabilities.  This report is reviewed  with the
Board of the Bank quarterly

         QUANTITATIVE  ANALYSIS. The OTS report seeks to estimate how changes in
interest  rates will affect the Bank's  "net  portfolio  value."  Net  portfolio
value,  or "NPV," akin to net worth,  represents  the net  present  value of the
Bank's cash flow from assets,  liabilities  and off balance  sheet  items.  Each
calendar quarter,  the OTS calculates the Bank's estimated NPV and the estimated
effect on NPV of  instantaneous  and permanent 1% to 4% (100 to 400 basis point)
increases and decreases in market interest  rates.  The  calculations  are based
upon the OTS's assumptions  regarding loan prepayments  rates,  deposit turnover
and other factors  affecting the  repricing of assets and  liabilities.  The OTS
does not include in its analysis  any assets held by  Gouverneur  Bancorp,  Inc.
which are not owned by the Bank.

         The following  table presents the Bank's  estimated NPV at December 31,
1998, and the estimated effect on NPV of the specified interest rate changes, as
calculated by the OTS. At December 31, 1998,  the portfolio  value of the Bank's
assets as estimated by the OTS was $62.1  million.  The December 31, 1998 report
is the most recent OTS report that the Bank has received.

<TABLE>
<CAPTION>
    Hypothetical Change          Estimated            Estimated Change in  Estimated Percentage 
     in Interest Rate        Net Portfolio Value      Net Portfolio Value  Change in Npv(1)
     ----------------        -------------------      -------------------  ----------------
                           (Dollars in thousands)



<S>       <C>                      <C>                     <C>                  <C>
         +4.00%                    $10,886                 $ -2,690            -20%
         +3.00%                     11,776                   -1,799            -13%
         +2.00%                     12,593                     -982             -7%
         +1.00%                     13,222                     -353             -3%
          0.00%                     13,575                       --             --
         -1.00%                     14,072                     +497             +4%
         -2.00%                     14,600                   +1,025             +8%
         -3.00%                     15,299                   +1,724            +13%
         -4.00%                    $15,953                 $ +2,377            +18%
</TABLE>


(1) Calculated as the amount of estimated change in NPV divided by the estimated
    current NPV.

         The above table indicates that in a rising  interest rate  environment,
the Bank's net portfolio value should decrease, while net portfolio value should
increase  in a  declining  interest  rate  environment.  These  changes  in  net
portfolio  value should be accompanied by a decline in net income during periods
of rising  interest  rates and an  increase  in net  income  during  periods  of
declining interest rates. However,  these expected changes in net income may not
occur for many reasons  including,  among others,  the  possibility  that we may
decide  not to reduce the rates we offer on our  deposits  when  interest  rates
decline in order to retain and increase our deposit base.

                                       20

<PAGE>

         We  have  initially  invested  the  new  capital  we  received  in  the
Reorganization in short term securities and other short term investments.  Those
short term  investments  should  reduce our  exposure  to market  interest  rate
increases  because as interest rates increase,  the short term  investments will
mature more quickly than long term loans and the proceeds can then be reinvested
at the  higher  market  interest  rates.  However,  the short  term  investments
normally earn interest at lower rates than loans.  Therefore,  we are working to
find  acceptable  loan  opportunities  to reinvest our capital.  Reinvestment in
loans,  if they have  fixed  rates and long  terms to  maturity,  would have the
effect of increasing our exposure to increases in market interest rates.

         There are  shortcomings in the methodology used by the OTS to calculate
changes in NPV. In order to estimate  changes in NPV, the OTS makes  assumptions
about repayment and turnover rates which may not turn out to be correct. The NPV
table assumes that the composition of the Bank's interest  sensitive  assets and
liabilities  existing at the  beginning  of a period  remain  constant  over the
period being measured.  So, for example, the NPV analysis assumes that the ratio
of adjustable versus fixed-rate loans or short-term loans versus long-term loans
remains the same and that interest  rates will change equally for both long term
and short term assets.  Therefore,  although  the OTS NPV analysis  provides the
Board of the Bank with an indication of the Bank's  interest rate risk exposure,
it does not  provide a precise  forecast  of the  effect  of  changes  in market
interest rates on net interest income.

                                       21

<PAGE>

                           PART II - OTHER INFORMATION

         Item 1. Legal Proceedings

         In the  ordinary  course  of  business,  the  Company  and the Bank are
subject to legal actions which involve claims for monetary  relief.  Management,
based on advice of counsel,  does not  believe  that any  currently  known legal
actions,  individually  or in the aggregate,  will have a material effect on its
consolidated financial condition or results of operation.

         Item 2. Changes in Securities and Use of Proceeds

         We engaged in an offering  of our stock,  as we have  described  above,
during the period  covered by this report.  The following is  information  about
that offering.

         Effective date of Registration Statement: August 12, 1998

         Commission File No.: 333-57845

         Date offering commenced: August 17, 1998

         The offering terminated on March 23, 1999. Less than all the securities
         registered were sold.

         The managing underwriter was First Albany Corporation.

         All securities registered were common stock, par value $0.01 per share.

         The number of shares originally registered was 1,834,969. The number of
shares  registered was  subsequently  increased to 2,201,962 shares because of a
reduction in the offering price

         The aggregate price of the offering amount registered was $11,009,814.

         1,072,818 shares were sold at $5.00 per share.

         The aggregate price of the 1,072,818 shares sold was $5,364,090.

         Total expenses incurred were approximately $785,000, including $207,000
paid to underwriters  (including  approximately  $72,000 of sales commissions on
shares sold  through a  syndicate  of  broker-dealers)  and  $568,000  for other
expenses.  The amount paid for "other  expenses"  includes  estimates of certain
items for which bills have not yet been  received.  None of these  expenses were
paid directly or  indirectly  to our directors or officers or their  associates,
persons owning ten percent or more of any class of our equity securities,  or to
our affiliates.

         The net offering proceeds were $4.6 million after deducting expenses.

         We intend  to use as  working  capital  in the  ordinary  course of its
business.  Initially,  we have  invested  those the net  proceeds in  short-term
liquid assets or deposits with the Bank. We lent $429,000 of the net proceeds to
our Employee Stock  Ownership Plan to purchase 85,825 shares of our common stock
and one-half of the net proceeds was used to purchase all the stock of the Bank.

                                       22

<PAGE>

         Item 6. Exhibits and Reports on Form 8-K
                 (a) Exhibits

                 (3.1)    Federal Stock Charter of Gouverneur  Bancorp,  Inc. as
                          formally issued by the Office of Thrift Supervision on
                          March 23, 1999  (incorporated  by reference to Exhibit
                          3.1 to the pre-effective amendment no. 1 to Gouverneur
                          Bancorp,  Inc.'s  registration  statement  on Form S-1
                          filed on August 5, 1998 (File No. 333-57845)).

                 (3.2)    Bylaws of Gouverneur  Bancorp,  Inc.  (incorporated by
                          reference   to  Exhibit   3.2  to  the   pre-effective
                          amendment   no.  1  to  Gouverneur   Bancorp,   Inc.'s
                          registration  statement on Form S-1 filed on August 5,
                          1998 (File No. 333-57845)).

         (1)     Financial  Data  Schedule   (included  only  in EDGAR filings).

         (b) Reports on Form 8-K

         No  reports on Form 8-K have been filed  during the  quarter  for which
         this report is filed.

                                   SIGNATURES

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

                                Gouverneur Bancorp, Inc.


Date: May 14, 1999              By:  /s/ RICHARD F. BENNETT
                                     -------------------------------------------
                                         President and Chief  Executive  Officer
                                         (principal    financial   officer   and
                                         officer  duly  authorized  to  sign  on
                                         behalf of the registrant)

                                       23

<PAGE>


                                  EXHIBIT INDEX

EXHIBIT
NUMBER            DESCRIPTION


         3.1      Federal Stock Charter of Gouverneur Bancorp,  Inc. as formally
                  issued by the Office of Thrift  Supervision  on March 23, 1999
                  (incorporated by reference to Exhibit 3.1 to the pre-effective
                  amendment no. 1 to  Gouverneur  Bancorp,  Inc.'s  registration
                  statement  on Form S-1  filed on  August  5,  1998  (File  No.
                  333-57845))


         3.2      Bylaws of Gouverneur Bancorp, Inc.  (incorporated by reference
                  to  Exhibit  3.2  to  the  pre-effective  amendment  no.  1 to
                  Gouverneur Bancorp,  Inc.'s registration statement on Form S-1
                  filed on August 5, 1998 (File No. 333-57845))


         27       Financial Data Schedule (included only in EDGAR filings)

                                       24