UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

(Mark One)

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

                                    For the quarterly period ended June 30, 2003

                                                         or

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



`NORTHEAST PENNSYLVANIA FINANCIAL CORP.
                                       (Exact name of registrant as specified in its charter)

DELAWARE                                                                 06-1504091
(State or other jurisdiction of incorporation or organization)          (I.R.S. Employer Identification No.)12 E. BROAD STREET, HAZLETON, PENNSYLVANIA                               18201
(Address of principal executive offices)                                 (Zip Code)

                                                        (570) 459-3700
                                       (Registrant's telephone number, including area code)
Not Applicable
                             (Former name, former address and former fiscal year, if changed since last report)`

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.

`Yes     X       No
                                                                    ---------      -------`

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

`Yes             No   X
                                                                    ---------      -------`

The Registrant had  4,176,593 shares of Common Stock outstanding as of August 19, 2003.

`Item
No.
---
                                                                                        Page
                                                                                        Number
PART  I - CONSOLIDATED FINANCIAL INFORMATION

Item 1   CONSOLIDATED FINANCIAL STATEMENTS

         Consolidated Statements of Financial Condition at
         June 30, 2003 and September 30, 2002 (unaudited)................................ 1

         Consolidated Statements of Operations for the Three and Nine Months
         Ended June 30, 2003 and 2002 (unaudited)........................................ 2

         Consolidated Statements of Comprehensive Income for the Three and Nine
         Months Ended June 30, 2003 and 2002 (unaudited)................................. 3

         Consolidated Statements of Cash Flows for the Nine Months Ended
         June 30, 2003 and 2002 (unaudited).............................................. 4

         Notes to Consolidated Financial Statements (unaudited).......................... 6

Item 2   Management Discussion and Analysis of Financial Condition
         and Results of Operations.......................................................20

Item 3   Quantitative and Qualitative Disclosures about Market Risk......................27

Item 4   Controls and Procedures.........................................................27

Part II - OTHER INFORMATION

Item 1   Legal Proceedings...............................................................28

Item 2   Changes in Securities and Use of Proceeds.......................................28

Item 3   Defaults Upon Senior Securities.................................................28

Item 4   Submission of Matters to a Vote of Security Holders.............................28

Item 5   Other Information...............................................................28

Item 6   Exhibits and Reports on Form 8 - K..............................................28

Signatures`

`As Restated 1
                                                                          June 30,              September 30,
                                                                           2003                      2002
                                                                   ---------------------       -----------------
                                                                   ---------------------------------------------
                                                                              (in thousands)
ASSETS
        Cash and cash equivalents                                   $        38,740            $     25,302
        Securities available-for-sale                                       295,980                 327,886
        Securities held-to-maturity (estimated fair
          market value of $3,624 at June 30, 2003
          and $3,707 at September 30, 2002)                                   3,555                   3,652
        Loans (less allowance for loan loss of
           $5,748 at June 30, 2003 and $5,449 at
           September 30, 2002)                                              493,930                 489,186
        Accrued interest receivable                                           3,792                   4,298
        Assets acquired through foreclosure                                     641                     547
        Property and equipment, net                                          12,622                  12,840
        Goodwill                                                              3,655                   3,655
        Intangible assets                                                     8,804                   9,093
        Bank-owned life insurance                                            10,749                  10,303
        Other assets                                                         13,318                  15,850
                                                               ---------------------       -----------------
               TOTAL ASSETS                                         $       885,786            $    902,612
                                                               =====================       =================

LIABILITIES
        Deposits                                                    $       578,765            $    606,412
        Federal Home Loan Bank advances                                     208,406                 208,421
        Other borrowings                                                      1,061                   3,184
        Trust-preferred debt                                                 22,000                   7,000
        Advances from borrowers for taxes and
          insurance                                                           1,639                     852
        Accrued interest payable                                              1,557                   1,458
        Other liabilities                                                     7,896                   9,591
                                                               ---------------------       -----------------
              TOTAL LIABILITIES                                             821,324                 836,918
                                                               ---------------------       -----------------

STOCKHOLDERS' EQUITY
        Preferred stock ($.01 par value; 2,000,000
           authorized shares; 0 shares)
        Common stock, $.01 par value; 16,000,000
           Shares authorized, 6,427,350 shares issued                            64                      64
        Additional paid-in capital                                           61,956                  62,047
        Retained earnings - substantially restricted                         35,155                  35,981
        Accumulated other comprehensive income, net                           2,937                   3,443
        Common stock acquired by stock benefit plans                         (4,738)                 (4,156)
        Treasury stock, at cost (2,250,757 shares at
           June 30, 2003 and 2,256,526 shares at
           September 30, 2002)                                              (30,912)                (31,685)
                                                               ---------------------       -----------------
              TOTAL STOCKHOLDERS' EQUITY                                     64,462                  65,694
                                                               ---------------------       -----------------

                   TOTAL LIABILITIES AND STOCKHOLDERS'
                        EQUITY                                      $       885,786            $    902,612
                                                               =====================       =================`

See accompanying notes to the unaudited consolidated financial statements.1 See Footnote 2 which describes the restatement effects.

`Three Months Ended                      Nine Months Ended
                                                                June 30,                                June 30,
                                                                         As Restated 1                          As Restated 1
                                                        2003                2002                2003                 2002
                                                                      (in thousands, except per share data)
   INTEREST INCOME
        Interest and fees on loans                   $  8,165           $  9,356            $  25,297            $   28,631
        Mortgage-related securities                     1,512              2,232                5,193                 6,261
        Investment securities:
             Taxable                                    1,166              1,346                3,620                 4,404
             Tax-exempt                                   233                236                  700                   711
                                                     --------           --------            ---------            ----------
                      Total interest income            11,076             13,170               34,810                40,007
                                                     --------           --------            ---------            ----------

   INTEREST EXPENSE
        Deposits                                        2,870              4,148                9,790                12,802
        Federal Home Loan Bank advances and
           other borrowings                             2,978              2,990                8,934                 8,835
        Trust-preferred debt                              267                 96                  784                    96
                                                     --------           --------            ---------            ----------
                      Total interest expense            6,115              7,234               19,508                21,733
                                                     --------           --------            ---------            ----------

   NET INTEREST INCOME                                  4,961              5,936               15,302                18,274

   Provision for loan losses                              850                726                1,830                 1,969
                                                     --------           --------            ---------            ----------

   NET INTEREST INCOME AFTER
      PROVISION FOR LOAN LOSSES                         4,111              5,210               13,472                16,305
                                                     --------           --------            ---------            ----------

   NON-INTEREST INCOME
        Service charges and other fees                    684                499                1,958                 1,502
        Insurance premium income                        1,084                822                2,911                 2,264
        Trust income                                      215                167                  660                   515
        Gain (loss) on sale of:
             Assets acquired through foreclosure           70                (10)                 129                   (30)
             Loans                                        562                509                1,165                   748
             Available-for-sale securities                237                  4                1,379                    (7)
        Impairment loss on equity investment           (1,488)                 -               (1,488)                    -
        Other                                             350                244                1,346                   430
                                                     --------           --------            ---------            ----------
                       Total non-interest income        1,714              2,235                8,060                 5,422
                                                     --------           --------            ---------            ----------

   NON-INTEREST EXPENSE
        Salaries and employee benefits                  3,486              2,994                9,962                 8,814
        Occupancy costs                                   797                752                2,453                 2,169
        Amortization of intangibles                       255                296                  772                   809
        Data processing costs                             200                182                  579                   514
        Advertising                                       255                165                  783                   438
        Professional fees                                 345                434                1,321                 1,129
        Federal Home Loan Bank and other charges          240                260                  702                   742
        Other                                           1,226                920                3,349                 2,485
                                                     --------           --------            ---------            ----------
                       Total non-interest expense       6,804              6,003               19,921                17,100
                                                     --------           --------            ---------            ----------
   Income (loss) before income taxes                     (979)             1,442                1,611                 4,627
   Income taxes                                           125                498                  967                 1,612


   NET INCOME (LOSS)                                 $ (1,104)          $    944            $     644            $    3,015
                                                     ========           ========            =========            ==========

   EARNINGS (LOSS) PER SHARE:
      Basic                                          $  (0.29)          $   0.23            $    0.17            $     0.73
      Diluted                                           (0.28)              0.22                 0.16                  0.69`

See accompanying notes to the unaudited consolidated financial statements.1 See Footnote 2 which describes the restatement effects.

`Three Months Ended                 Nine Months Ended
                                                                                  June 30,                           June 30,
                                                                                               As                             As
                                                                                           Restated 1                     Restated 1
                                                                            2003             2002            2003            2002
                                                                      ---------------    -------------   ------------    ------------
                                                                                                (in thousands)


   Net income (loss)                                                    $  (1,104)        $     944        $   644         $    3,015
   Other comprehensive income (loss), net of tax
        Unrealized losses on securities and on retained
          interest on asset securitization:

       Unrealized holding gains (losses) arising during the
         period                                                             1,537              3,090        (1,352)               756
       Less:  Reclassification adjustment for gains (losses)
         included in net income                                               145                  3           846                 (5)
                                                                      ---------------    -------------   ------------    ------------
       Other comprehensive income (loss)                                    1,392              3,087          (506)               761
                                                                      ---------------    -------------   ------------    ------------

   Comprehensive income (loss)                                          $     288         $    4,031       $   138         $    3,776
                                                                      ===============    =============   ============    ============`

See accompanying notes to the unaudited consolidated financial statements.1 See Footnote 2 which describes the restatement effects.

`Nine Months Ended
                                                                                                                As Restated 1
                                                                               June 30,                           June 30,
                                                                                 2003                              2002
                                                                           ---------------                    ----------------
OPERATING ACTIVITIES
     Net income                                                             $     644                       $      3,015
     Adjustments to reconcile net income to
       net cash provided by operating activities:
              Provision for loan losses                                         1,830                              1,969
              Provision for assets acquired
                through foreclosure                                               208                                 90
              Depreciation                                                      1,063                              1,079
              Amortization of intangibles                                         772                                809
              Deferred income taxes                                            (1,597)                             3,325
              ESOP expense                                                        580                                619
              Stock award expense                                                 392                                373
              Bank-owned life insurance income                                   (446)                              (149)
              Amortization and accretion on:
                Held to maturity securities                                        (1)                                (9)
                Available for sale securities                                   4,651                                519
              Amortization of deferred loan fees                                 (724)                              (439)
              (Gain) loss on sale of:
                Assets acquired through foreclosure                              (129)                                30
                Loans                                                          (1,165)                            (1,195)
                Available for sale securities                                  (1,379)                                 7
                Disposal of fixed assets                                           19                                  -

Changes in assets and liabilities:
              Decrease in accrued interest receivable                             506                                297
              Increase in other assets                                           (136)                            (5,432)
              Increase  in accrued interest payable                                99                                479
              Increase (decrease) in accrued taxes payable                      2,185                             (2,072)
              Increase in other liabilities                                       440                              1,289
                                                                           ---------------                    ----------------
                    Net cash provided by operating activities                   7,812                              4,604
                                                                           ---------------                    ----------------

INVESTING ACTIVITIES
     Investment securities available for sale:
              Proceeds from repayments and maturities                         128,727                             53,484
              Purchases                                                      (193,289)                          (160,628)
              Proceeds from sales                                              93,193                             16,837
     Investment securities held to maturity:
              Proceeds from repayments and maturities                              98                             14,199
     Increase in loans, net                                                   (40,656)                           (40,461)
     Proceeds from sales of loans                                              35,105                             62,073
     Purchase of regulatory stock                                              (1,041)                              (450)
     Purchase of premises and equipment                                          (864)                            (1,677)
     Proceeds from assets acquired through foreclosure                            693                                775
     Purchase of bank-owned life insurance                                          -                            (10,000)
                                                                           ---------------                    ----------------
                  Net cash provided for (used for) investing activities    $   21,966                         $  (65,848)
                                                                           ---------------                    ----------------`

`Nine Months Ended
                                                                                                   June 30,
                                                                                                          As Restated 1
                                                                                    2003                       2002
                                                                                  ----------                ----------
FINANCING ACTIVITIES
     Net increase (decrease ) in deposits                                      $   (27,647)              $    56,312
     Decrease in Federal Home Loan Bank
       short-term advances                                                               -                    (6,000)
     Borrowings of Federal Home Loan Bank
       long-term advances                                                                -                    10,000
     Repayments of Federal Home Loan Bank
       long-term advances                                                              (15)                      (15)
     Net increase in advances from borrowers for
       taxes and insurance                                                             787                       727
     Proceeds from other borrowings                                                                            1,599

     Repayment of other borrowings                                                  (2,123)                        -
     Proceeds from issuance of trust-preferred securities                           15,000                     7,000
     Purchase of treasury stock                                                          -                    (9,087)
     Purchase of stock for stock employee
       compensation trust                                                           (1,110)                        -
     Stock issued for purchase of
     Higgins Insurance Associates, Inc.                                                100                        85
     Exercise of stock options                                                         138                       477
     Cash dividends                                                                 (1,470)                   (1,461)
                                                                                  ----------                ----------
                  Net cash provided by (used in) financing activities              (16,340)                   59,637
                                                                                  ----------                ----------
                  Increase (decrease) in cash
                    and cash equivalents                                            13,438                    (1,607)

CASH AND CASH EQUIVALENTS
   AT BEGINNING OF YEAR                                                             25,302                     9,060
                                                                                  ----------                ----------
CASH AND CASH EQUIVALENTS
   AT END OF YEAR                                                              $   38,740                $     7,453
                                                                                  ==========                ==========

SUPPLEMENTAL INFORMATION

      Cash paid during the year for:
         Interest on deposits and borrowings                                   $    19,409               $    21,254
         Income taxes                                                                1,749                       482
Supplemental disclosures - non-cash and financing information:
     Transfer from loans to assets acquired
       through foreclosure                                                             866                      1847
     Net change in unrealized gains on securities
       available for sale, net of tax                                                 (506)                      761`

1See Footnote 2 which describes restatement effects.

1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Business

Northeast Pennsylvania
Financial Corp. (the Company), through its subsidiaries, provides a
wide range of financial products and services to individual, corporate, and
municipal customers through offices in Northeastern and Central Pennsylvania.
These products include Banking, Insurance, Investment and Trust lines of
business. Banking products, which are offered through the Companys
subsidiary, First Federal Bank (the Bank), include checking accounts
(interest and non-interest bearing), savings accounts, certificates of deposit,
commercial and consumer loans, real estate loans and home equity loans. The Bank
also serves its loan customers through a loan production office located in
Monroe County, Pennsylvania. Insurance products, which are offered through the
Companys subsidiary, Higgins Insurance Associates, Inc.
(Higgins), include property and casualty, life, long-term care and
employee benefit programs. Investment products are offered through licensed Bank
employees, Higgins agents and Smith Barney financial consultants who rent space
from the Bank. Trust services, which are offered by the Companys
subsidiary Northeast Pennsylvania Trust Co. (the Trust Co.), include
estate management and trustee services. The Company also provides title
insurance through Abstractors, Inc., its wholly-owned title agency. The Company
and the Bank are subject to the regulations of certain federal regulatory
agencies and undergoes periodic examinations by such regulatory authorities. The
Trust Co. is subject to state regulation.

Basis of
Financial Statements Presentation

The accompanying
consolidated financial statements were prepared in accordance with instructions
to Form 10-Q, and therefore, do not include information or footnotes necessary
for a complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in the
United States of America (GAAP). However, all normal recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial statements have been included. The results for the nine months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2003.

Principles of
Consolidation and Presentation

The accompanying financial
statements of the Company include the accounts of the Bank, Higgins,
Abstractors, Inc., Trust Co., FIDACO, Inc., NEP Capital Trust I and NEP Capital
Trust II. The Bank, Higgins, Abstractors, Inc. and the Trust Co. are
wholly-owned subsidiaries of the Company. NEP Capital Trust I and NEP Capital
Trust II are statutory trusts all of the voting securities of which are owned by
the Company, which were created under the laws of the state of Delaware in
connection with two issuances of trust-preferred securities on April 10 and
October 29, 2002, respectively. All material inter-company balances and transactions
have been eliminated in consolidation. Prior period amounts are reclassified,
when necessary, to conform with the current years presentation.

The Company follows
accounting principles and reporting practices which are in accordance with GAAP.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
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, the evaluation of the realizability of deferred tax assets and the evaluation of other
than temporary impairment for certain non-marketable equity investments and residual interests in the securitization trusts.

Recent
Accounting Developments

In June 2002, the FASB
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of this
Statement did not have an impact on its earnings, financial condition or equity.

On October 1, 2002, the
FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions, effective for all business combinations initiated after
October 1, 2002. This Statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of SFAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB

Opinions No. 16 and 17,"When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method. The acquisition of all
or part of a financial institution that meets the definition of a business
combination shall be accounted for by the purchase method in accordance with
SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 was adopted on
October 1, 2001. This Statement also provides guidance on the accounting for the
impairment or disposal of acquired long-term customer-relationship intangible
assets (such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets), including those acquired in transactions
between two or more mutual enterprises. Upon early adoption of this statement,
as of October 1, 2001, the carrying amount of the previously recognized
unidentifiable intangible asset related to the Schuylkill Savings branch
acquisitions that was reclassified to goodwill was $200,000, while the related
2002 amortization expense that was reversed was $81,000, pre-tax. The Company
will continue to review the remaining goodwill on an annual basis for
impairment. However, $10.9 million in core deposit intangible will continue to
be amortized and reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.

In December 2002, the FASB
issued Statement No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement
No. 123. This statement amends FASB Statement No.123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for fiscal years ending after December 15, 2002, except
for financial reports containing condensed financial statements for interim
periods for which disclosure is effective for periods beginning after December
15, 2002. This Statement announces, in the near future, the Board plans to
consider whether it should propose changes to the U.S. standards on accounting for stock-based compensation."

As permitted, the Company
continues to account for stock options with the methodology prescribed by
Accounting Principles Board Opinion No. 25. The following table represents the
effect on net income and earnings per share had the Company applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation:

`Three Months Ended June 30,            Nine Months Ended June 30,
                                                             As Restated 1                          As Restated 1
                                               2003               2002                2003               2002
                                         -----------------  -----------------   -----------------  -----------------
                                                        (Dollars in thousands, except per share data)

Net income (loss), as reported:          $        (1,104)   $            944    $           644     $        3,015
Less: proforma expense related
      to stock options
                                                     (44)                  -               (239)              (218)
                                         -----------------  -----------------   -----------------  -----------------
Proforma net income (loss)                        (1,148)                944                405              2,797
                                         =================  =================   =================  =================


Basic net income (loss) per common share:

     As reported                         $         (0.29)   $           0.23    $           0.17   $           0.73
     Pro forma                                     (0.31)               0.23                0.11               0.67
Diluted net income (loss) per common share:
     As reported                         $         (0.28)   $           0.22    $           0.16   $           0.69
     Pro forma                                     (0.29)               0.22                0.10               0.64`

In April 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. The amendments
set forth in SFAS No. 149 require that contracts with comparable characteristics
be accounted for similarly. In particular, this statement clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This statement is effective for
contracts entered into or modified after June 30, 2003, except as stated below
and for hedging relationships designated after June 30, 2003. The guidance
should be applied prospectively. The provisions of this statement

that relate to
SFAS No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The adoption of this statement is
not expected to have a material effect on the Companys financial position
or results of operations.

In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This Statement establishes
how an issuer classifies financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify these financial
instruments as a liability (or, in certain circumstances, an asset). Previously
these financial instruments would have been classified entirely as equity, or
between the liabilities section and equity section of the statement of financial
condition. This Statement also addresses questions about the classification of
certain financial instruments that embody obligations to issue equity shares.
The provisions of this Statement are effective for interim periods beginning
after June 15, 2003. Management does not expect the adoption of this statement
to have an impact on the Companys consolidated earnings, financial
condition, or equity.

In November 2002, the FASB
issued Interpretation No. 45, Guarantors Accounting and Disclosure
requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. This interpretation clarifies that
a guarantor is required to disclose (a) the nature of the guarantee, including
the approximate term of the guarantee, how the guarantee arose, and the events
or circumstances that would require the guarantor to perform under the
guarantee; (b) the maximum potential amount of future payments under the
guarantee; (c) the carrying amount of the liability, if any, for the
guarantors obligations under the guarantee; and (d) the nature and extent
of any recourse provisions or available collateral that would enable the
guarantor to recover the amounts paid under the guarantee. This interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The disclosure
requirements in this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of this
interpretation did not have a material effect on the Companys financial
position or results of operations.

In January 2003, the FASB
issued Interpretation No. 46, Consolidation of Variable Interest
Entities, (FIN 46)in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. The objective of this interpretation is not to restrict the use
of variable interest entities but to improve financial reporting by companies
involved with variable interest entities. Until now, one company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. This interpretation changes that
by requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of the entitys
residual returns or both. The consolidation requirements of this interpretation
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adaption of the interpretation did not have a
material effect on the Compnay's financial position of results of operations.

2. EFFECTS OF RESTATEMENT

The
consolidated financial statements as presented for the three and nine month
periods ended June 30, 2002 and the consolidated statement of financial condition at
September 30, 2002 have been restated to reflect the correction of accounting
errors for the Companys indirect auto, mortgage and consumer loan
portfolios. Such errors were primarily the result of computer coding errors and
do not impact any loan customers and had no affect on the Companys cash
flow. These errors were identified during July 2003 and reduced the
Companys stockholders equity and aggregate net earnings as follows
for the periods presented:

`Three months ended      Nine months ended
                                                                     June 30, 2002          June 30, 2002
                                                                 --------------------    --------------------
                                                                    (in thousands, except per share data)

Net income prior to restatement                                      $1,551                   $4,059
Adjustment for interest and fees on loans, net of tax benefit          (318)                    (755)
Adjustment for gain on sale of loans, net of tax benefit               (289)                    (289)
                                                                       -----                    -----

Net income, as adjusted                                              $  944                   $3,015
                                                                     =======                 ========

Earnings Per Share (EPS)

Basic EPS prior to restatement                                     $   0.39                 $   0.98
     Adjustment for interest and fees on loans, net of tax benefit    (0.08)                   (0.18)
     Adjustment for gain on sale of loans, net of tax benefit         (0.07)                   (0.07)
                                                                       -----                    -----

Basic EPS, as adjusted, net of tax benefit                         $   0.24                 $   0.73
                                                                   =========                =========`

`Diluted EPS prior to restatement                                    $  0.36                 $   0.93
    Adjustment for interest and fees on loans, net of tax benefit     (0.07)                   (0.17)
    Adjustment for gain on sale of loans, net of tax benefit          (0.07)                   (0.07)
                                                                    --------                ---------

Diluted EPS, as adjusted, net of tax benefit                        $  0.22                 $   0.69
                                                                    ========                =========




                                                                                     At September 30, 2002
                                                                                     ---------------------

Stockholders' Equity, prior to restatement                                                   $68,385
Cumulative effect of interest and fees on loans, net of tax benefit                           (2,487)
Cumulative effect of gain on sale of loans, net of tax benefit                                  (204)
                                                                                           ----------

Stockholders' Equity, as adjusted                                                            $65,694
                                                                                             ========`

In addition to the
items above, the Companys Consolidated Statement of Financial
Condition for September 30, 2002 contained the following restatements and
reclassifications:

`Balance           Balance
                                            As Restated       As Reported
                                                  September 30, 2002             Change          Description
                                             ----------------------------------  ------          ------------------
                                                     (in thousands)

Assets
------
Loans, net of allowance for loan loss      $489,186         $489,373          $   (187)          Carrying value adjusted to reflect
                                                                                                 changes in amortization of premiums
                                                                                                 for purchased consumer and mortgage loans

Accrued interest receivable                   4,298            7,632            (3,334)          Correction of error on indirect autos

Other assets                                 15,850            7,759             8,091           Reclassification for accrued/deferred taxes
                                                                                                 of $8,713 and the tax effect of correction of errors of ($622)

Deposits                                   $606,412         $604,966            $1,446           Reclassification of borrowing/deposits

Other borrowings                              3,184            4,630            (1,446)          Reclassification of deposits/borrowings

Other liabilities                             9,591            2,330             7,261           Reclassification for accrued taxes of $5,909 and the tax effect
                                                                                                 of correction of errors of $1,352

Retained earnings-substantially restricted   35,981           38,672            (2,691)          Net adjustments to earnings for correction
                                                                                                 of errors`

The following table describes the effects of the restatement on net income and earnings per share for each of the prior fiscal years:

`Twelve months ended   Twelve months ended   Twelve months ended   Twelve months ended       Year ended
                                                September 30, 2002    September 30, 2001    September 30, 2000    September 30, 1999    September 30, 1998

Net income prior to restatement                        4,498                4,807                   3,936                4,565                   (47)

   Adjustment for interest and fees on loans, net     (1,029)                (605)                   (389)                (321)                 (142)
       of tax benefit

   Adjustment for gain on sale of loans, net of
       tax benefit                                      (204)                   -                       -                    -                     -
                                                      -------              -------                 -------              -------               -------

NET INCOME, AS ADJUSTED                                3,265                4,202                   3,547                4,244                  (189)
                                                      =======              =======                 =======              =======               =======

EARNINGS PER SHARE (EPS)


Basic EPS prior to restatement                          1.11                 1.03                    0.84                 0.84                  (.20)

   Adjustment for interest and fees on loans,
       net of tax benefit                              (0.25)               (0.13)                  (0.08)               (0.06)                (0.02)

   Adjustment for gain on sale of loans, net
       of tax benefit                                  (0.05)                   -                       -                    -                     -
                                                      -------              -------                 -------              -------               -------


Basic EPS, as adjusted, net of tax benefit              0.81                 0.90                    0.76                 0.78                 (0.22)
                                                      =======              =======                 =======              =======               =======


Diluted EPS prior to restatement                        1.05                 1.02                    0.81                 0.80                 (0.20)

   Adjustment for interest and fees on loans,
       net of tax benefit                              (0.24)               (0.13)                  (0.08)               (0.06)                (0.02)

   Adjustment for gain on sale of loans, net of
       tax benefit                                     (0.04)                   -                       -                    -                     -
                                                      -------              -------                 -------              -------               -------


Diluted EPS, as adjusted, net of tax benefit            0.77                 0.89                    0.73                 0.74                 (0.22)
                                                      =======              =======                 =======              =======               =======`

The following table describes the effects of the restatement on net income, earnings per share and stockholders' equity for each of the prior quarters, where material.

`Three months    Three months    Three months    Three months   Three months    Three months  Three months Three months  Three months  Three months    Three months Three months Three months    Three months
                                        ended           ended           ended           ended          ended           ended         ended        ended         ended         ended           ended        ended        ended           ended
                                    March 31,    December 31,   September 30,        June 30,      March 31,    December 31, September 30,     June 30,     March 31,  December 31,   September 30,     June 30,    March 31,    December 31,
                                         2003            2002            2002            2002           2002            2001          2001         2001          2001          2000            2000         2000         2000            1999
                                   ----------      ----------      ----------      ----------     ----------      ----------    ----------   ----------    ----------    ----------      ----------   ----------   ----------      ----------
Net Income prior to
   restatement                          1,289             943             439           1,551          1,230           1,278         1,237        1,256         1,023         1,291             515        1,176        1,099           1,146
Adustment for interest and
   fees on loans, net of tax benefit     (302)           (293)           (274)           (318)          (226)           (211)         (180)        (160)         (135)         (130)           (117)         (99)         (92)            (81)
Adjustment for gain on sale
   of loans, net of tax benefit            44              66              85            (289)             -               -             -            -             -             -               -            -            -               -
                                   ----------      ----------      ----------      ----------     ----------      ----------    ----------   ----------    ----------    ----------      ----------   ----------   ----------      ----------

NET INCOME, AS ADJUSTED                 1,031             716             250             944          1,004           1,067         1,057        1,096           888         1,161             398        1,077        1,007           1,065
                                   ==========      ==========      ==========      ==========     ==========      ==========    ==========   ==========    ==========    ==========      ==========   ==========   ==========      ==========
EARNINGS PER SHARE (EPS)

Basic EPS prior to restatement           0.34            0.25            0.12            0.39           0.31            0.29          0.27         0.27          0.21          0.28            0.11         0.25         0.23            0.22
Adjustment for interest and fees on
   loans, net of tax benefit            (0.08)          (0.08)          (0.08)          (0.08)         (0.06)          (0.05)        (0.04)       (0.03)        (0.03)        (0.03)          (0.03)       (0.02)       (0.02)          (0.01)
Adjustment for gain on sale of loans,
   net of tax benefit                    0.01            0.02            0.02          (0.07)              -               -             -            -             -             -               -            -            -               -
                                   ----------      ----------      ----------      ----------     ----------      ----------    ----------   ----------    ----------    ----------      ----------   ----------   ----------      ----------
Basic EPS, as adjusted, net
   of tax benefit                        0.27            0.19            0.06            0.24           0.25            0.24          0.23         0.24          0.18          0.25            0.08         0.23         0.21            0.21
                                   ==========      ==========      ==========      ==========     ==========      ==========    ==========   ==========    ==========    ==========      ==========   ==========   ==========      ==========
Diluted EPS prior to restatement         0.33            0.24            0.11            0.36           0.29            0.28          0.26         0.26          0.21          0.27            0.11         0.24         0.22            0.22
Adjustment for interest and fees on
   loans, net of tax benefit            (0.08)          (0.07)          (0.07)          (0.07)         (0.05)          (0.05)        (0.04)       (0.03)        (0.03)        (0.03)          (0.03)       (0.02)       (0.02)          (0.02)
Adjustment for gain on sale of loans,
   net of tax benefit                    0.01            0.01            0.01           (0.07)             -               -             -            -             -             -               -            -            -               -
                                   ----------      ----------      ----------      ----------     ----------      ----------    ----------   ----------    ----------    ----------      ----------   ----------   ----------      ----------
Diluted EPS, as adjusted,
   net of tax benefit                    0.26            0.18            0.05            0.22           0.24            0.23          0.22         0.23          0.18          0.24            0.08         0.22         0.20            0.20
                                   ==========      ==========      ==========      ==========     ==========      ==========    ==========   ==========    ==========    ==========      ==========   ==========   ==========      ==========



                                         At March 31,     At December    At September  At June 30,  At March 31,     At December    At September     At June     At March     At December    At September     At June     At March     At December
                                                 2003        31, 2002        30, 2002         2002          2002        31, 2001        30, 2001    30, 2001     31, 2001        31, 2000        30, 2000    30, 2000     31, 2000        31, 1999

Stockholders' Equity, prior to restatement  $ 67,326        $ 68,320        $ 68,385     $ 71,663      $ 67,258        $ 74,204        $ 75,837    $ 74,701     $ 78,675        $ 73,769        $ 72,975    $ 71,105     $ 71,535        $ 72,893
Cumulative effect of interest and fees
   on loans, net of tax benefit               (3,081)         (2,779)         (2,487)      (2,212)       (1,894)         (1,668)         (1,457)     (1,277)      (1,117)           (982)           (852)       (735)        (636)           (544)
Cumulative effect of gain on sale of
   loans, net of tax benefit                     (94)           (138)           (204)        (289)            -               -               -           -            -               -               -           -            -               -
                                        -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

STOCKHOLDERS' EQUITY, AS ADJUSTED           $ 64,151        $ 65,403        $ 65,694     $ 69,162      $ 65,364        $ 72,536        $ 74,380    $ 73,424     $ 77,558        $ 72,787        $ 72,123    $ 70,370     $ 70,899        $ 72,349
                                        ===========================================================================================================================================================================================================`

The Company expects to
submit an amended Form 10-K for the fiscal year ended September 30, 2002 and
amended Forms 10-Q for the December 2002 and March 2003 quarters as soon as
practical.

3. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share
(EPS), basic and diluted, were $(0.29) and $(0.28), respectively,
for the three months ended June 30, 2003 compared to $0.23 and $0.22,
respectively, for the three months ended June 30, 2002. EPS, basic and diluted,
were $0.17 and $0.16, respectively, for the nine months ended June 30, 2003
compared to $0.73 and $0.69, respectively, for the nine months ended June 30,
2002.

The following table
presents the reconciliation of the numerators and denominators of the basic and
diluted EPS computations.

`Three Months Ended                   Nine Months Ended
                                                          June 30,                            June 30,
                                                                   As Restated 1                       As Restated 1
                                                   2003              2002              2003              2002
                                              ----------------  ----------------  ----------------  ----------------
                                                        (Dollars in thousands, except per share data)

Net income (loss)                              $      (1,104)      $      944       $       644       $     3,015
                                              ================  ================  ================  ================

Weighted-average common shares
  outstanding                                      6,427,350        6,427,350         6,427,350         6,427,350

Average treasury stock shares                     (2,250,756)      (1,998,188)       (2,253,695)       (1,851,705)

Average common stock acquired by stock benefit plans:

    Stock employee compensation trust               (108,769)          (6,259)          (87,499)           (6,259)
    Stock awards unallocated, net                    (75,636)        (117,414)          (75,636)         (117,814)
    ESOP shares unallocated, net                    (237,808)        (289,228)         (250,663)         (302,083)
                                              ----------------  ----------------  ----------------  ----------------

Weighted-average common shares used
  to calculate basic earnings per share            3,754,381        4,016,261         3,759,857         4,149,489

Dilutive effect of stock awards                        9,777           26,084            11,317            26,366

Dilutive effect of outstanding
  stock options                                      169,977          213,385           169,977           202,786
                                              ----------------  ----------------  ----------------  ----------------

Weighted-average common shares used
  to calculate diluted earnings per share          3,934,135        4,255,730         3,941,151         4,378,641
                                              ================  ================  ================  ================

Earnings (loss) per share-basic                    $   (0.29)        $   0.23          $   0.17          $   0.73
Earnings (loss) per share-diluted                  $   (0.28)        $   0.22          $   0.16          $   0.69`

Diluted earnings (loss) per
share include the dilutive effect of the Companys weighted-average stock
options/awards outstanding using the Treasury Stock method. The Company had
anti-dilutive common stock options outstanding of 10,485 and 8,100 for the three
months ended June 30, 2003 and 2002, repectively, and 10,485 and 9,650 for the
nine months ended June 30, 2003 and 2002, respectively. These options are not
included in the calculation of diluted earnings per share for the periods
presented.

4. INVESTMENT
SECURITIES

The amortized cost and
estimated market values of investment securities are summarized as follows:

`June 30, 2003
                                         ---------------------------------------------------------------------------
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Available-for-sale securities:                 Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
                                         -----------------  -----------------   -----------------  -----------------

     U.S. Government agency
        securities                       $         28,186   $            489    $             -    $         28,675
     Municipal securities                          14,981                240                  -              15,221
     Corporate securities                          38,899              2,109                  -              41,008
     Trust Preferred securities                    12,762                674               (389)             13,047
     Mortgage-backed securities                   176,398              1,910               (265)            178,043
                                         -----------------  -----------------   -----------------  -----------------
         Total debt securities                    271,226              5,422               (654)            275,994
                                         -----------------  -----------------   -----------------  -----------------

     FHLB Stock
                                                   11,693                  -                   -             11,693
     Freddie Mac stock                              2,241                134               (580)              1,795
     Fannie Mae stock                               6,000                189                (65)              6,124
     Other equity securities                          284                148                (58)                374
                                         -----------------  -----------------   -----------------  -----------------
         Total equity securities                   20,218                471               (703)             19,986
                                         -----------------  -----------------   -----------------  -----------------
              Total                      $        291,444   $          5,893    $        (1,357)   $        295,980
                                         =================  =================   =================  =================





                                                                       June 30, 2003
                                         ---------------------------------------------------------------------------
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Held-to-maturity securities:                   Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
                                         -----------------  -----------------   -----------------  -----------------


     Municipal securities                $          3,555   $             69    $              -   $          3,624
                                         -----------------  -----------------   -----------------  -----------------
                       Total             $          3,555   $             69    $              -   $          3,624
                                         =================  =================   =================  =================`

`September 30, 2002
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Available-for-sale securities:                 Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
                                         -----------------  -----------------   -----------------  -----------------

     U.S. Government agency
        securities                       $         24,032                414                  -              24,446
     Municipal securities                          16,247                197                  -              16,444
     Corporate securities                          32,545              1,442                (18)             33,969
     Trust Preferred securities                    12,604                336               (511)             12,429
     Mortgage-backed securities                   221,383              4,047               (143)            225,287
                                         -----------------  -----------------   -----------------  -----------------
         Total debt securities                    306,811              6,436               (672)            312,575
                                         -----------------  -----------------   -----------------  -----------------

     FHLB Stock                                    10,971                  -                   -             10,971
     Freddie Mac stock                              2,241                151               (324)              2,068
     Fannie Mae stock                               2,000                100               (108)              1,992
     Other equity securities                          284                 24                (28)                280
                                         -----------------  -----------------   -----------------  -----------------
         Total equity securities                   15,496                275                (460)            15,311
                                         -----------------  -----------------   -----------------  -----------------
              Total                      $        322,307   $          6,711    $        (1,132)   $        327,886
                                         =================  =================   =================  =================



                                                                     September 30, 2002
                                         ---------------------------------------------------------------------------
                                         ---------------------------------------------------------------------------
                                                                       (in thousands)
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
Held-to-maturity securities:                   Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
                                         -----------------  -----------------   -----------------  -----------------


     Municipal securities                $          3,553   $            55     $            -     $          3,608
     Certificates of deposit                           99                 -                  -                   99
                                         -----------------  -----------------   -----------------  -----------------
                       Total             $          3,652   $            55     $            -     $          3,707
                                         =================  =================   =================  =================`

5. LOANS

Loans consists of the following:

`As Restated
                                                                                    June 30,        September 30,
                                                                                      2003               2002
                                                                                -----------------  -----------------
                                                                                ------------------------------------
                                                                                          (in thousands)

     Real Estate Loans:
       One-to four-family                                                        $       159,354     $      198,225
       Multi-family and commercial                                                        71,009             75,912
       Construction                                                                       17,275              7,157
                                                                                -----------------  -----------------
         Total real estate loans                                                         247,638            281,294
                                                                                -----------------  -----------------

     Consumer Loans:
       Home equity loans and lines of credit                                              74,760             79,167
       Automobile                                                                        122,315             80,016
       Unsecured lines of credit                                                           3,073              2,297
       Other                                                                               9,572             10,376
                                                                                -----------------  -----------------
         Total consumer loans                                                            209,720            171,856
                                                                                -----------------  -----------------

     Commercial Loans                                                                     43,895             43,014
                                                                                -----------------  -----------------
         Total loans                                                                     501,253            496,164

     Less:
       Deferred loan fees, net                                                             1,575              1,529
       Allowance for loan losses                                                           5,748              5,449
                                                                                -----------------  -----------------

               Net loans                                                         $       493,930     $      489,186
                                                                                =================  =================`

The activity in the allowance for loan losses is as follows (in thousands):

`Nine Months                           Nine Months
                                                              Ended            Year Ended           Ended
                                                             June 30,        September 30,         June 30,
                                                               2003               2002               2002
                                                         -----------------  -----------------  -----------------
                                                         -------------------------------------------------------
                                                                             (in thousands)

Balance, Beginning of Period                              $         5,449       $      4,497       $      4,497
Add:
     Provisions charged to operation                                1,830              3,001              2,204
     Sale of indirect auto loans                                        -               (235)              (235)
     Recoveries                                                       320                179                104
Less: loans charged off                                             1,851              1,993              1,686
                                                         -----------------  -----------------  -----------------

Balance, End of Period                                    $         5,748       $      5,449       $      4,884
                                                         =================  =================  =================`

6. ASSET
SECURITIZATION

In June 2002, the Bank sold
$50.0 million in automobile loan receivables through a securitization
transaction. In the transaction, automobile loan receivables were transferred to
an independent trust (the Trust) that issued certificates
representing ownership interests in the Trust, primarily to institutional
investors. Although the Bank continues to service the underlying accounts and
maintain the customer relationships, this transaction is treated as a sale for
financial reporting purposes to the extent of the investors interest in
the Trust. Accordingly, the receivables associated with the investors
interests are not reflected on the Statement of Financial Condition. In
connection with this transaction, the Bank enhanced the credit protection of the
certificateholders by funding a cash reserve account.

In connection with this
June 2002 transaction, the Bank originally recorded a pre-tax gain on the sale
of automobile loans of $854,000, which was included in gain on sale of loans in
the consolidated statement of operations. In July 2003, the Company discovered
that computer coding errors related to the indirect automobile loan portfolio
also impacted the original gains related to this securitization. As such, the
Company has retroactively adjusted the original gain, as well as several key
assumptions, to collectively reflect a pre-tax gain of $406,000. The Bank has
recognized a retained interest related to the loan sale, which, in aggregate,
totaled $3.0 million at June 30, 2003. The retained interest includes an
interest-only strip and cash reserve account. The cash reserve account is
subject to liens by the providers of the credit enhancement facilities for the
securitizations.

The key assumptions used in
measuring the fair value of the retained interest-only strip and cash collateral
account for the transaction is shown in the following table:

`June 30,            June 30,
                                                                                      2003                2002
                                                                                                      As Restated
                                                                                -----------------   -----------------

Retained interest
     Average annual repayment rate                                                      1.5 %               1.5 %
     Average annual expected default rate                                               1.5                 1.5
     Discount rate                                                                     10.0                10.0
     Weighted average remaining life of underlying automobile loans
         (in months)                                                                     37                  48`

The
key economic assumptions and the sensitivity of the fair value of the retained
interest asset to an immediate adverse change of 10% and 20% to those
assumptions are as follows for the period indicated:

`June 30, 2003
                                                                               -------------
                                                                           (dollars in thousands)

    Fair value of retained interest                                      $         3,083

    Weighted-average repayment rate assumption:
          Pre-tax decrease to fair value due to a 10% adverse change     $            44
          Pre-tax decrease to fair value due to a 20% adverse change     $            83

    Weighted-average expected default rate:
          Pre-tax decrease to fair value due to a 10% adverse change     $            44
          Pre-tax decrease to fair value due to a 20% adverse change     $            87

    Weighted-average discount rate:
          Pre-tax decrease to fair value due to a 10% adverse change     $            31
          Pre-tax decrease to fair value due to a 20% adverse change     $            62`

As of June 30, 2003, the
weighted-average remaining life of the underlying automobile loans in the Trust was 37
months. The terms of the transaction included provisions related to the
performance of the underlying receivables and other specific conditions that
could result in an early payout of invested amounts to the certificateholders.

6. ASSET
SECURITIZATION (Continued)

Changes in fair value based
on a 10% adverse variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value
may not be linear. Also, the effect of an adverse variation on a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption. However, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might magnify or
counteract the sensitivities.

7. DEPOSITS

Deposits consist of the
following major classifications:

`June 30, 2003                           September 30, 2002
                                      -------------------------------------     ------------------------------------
                                                              Percent                                  Percent
                                           Amount            of Total                Amount            of Total
                                      -----------------  ------------------     -----------------  -----------------
                                                                     (in thousands)

Noninterest-bearing                     $       34,668                5.99%       $       32,428               5.35%
                                      -----------------  ------------------     -----------------  -----------------
                                      -----------------  ------------------     -----------------  -----------------
Interest-bearing:
     Savings                                    99,878               17.26                95,779              15.78
     NOW accounts                               93,266               16.11                78,684              12.98
     Money market                              103,333               17.85               100,274              16.54
                                      -----------------  ------------------     -----------------  -----------------
                                               296,477               51.22               274,737              45.30

                                      -----------------  ------------------     -----------------  -----------------

Certificates of deposit greater
  than $100,000:                                45,679                7.90                71,379              11.77
Certificates of deposit less
  than $100,000:                               201,941               34.89               227,868              37.58
                                      -----------------  ------------------     -----------------  -----------------
                                               247,620               42.79               299,247              49.35
                                      -----------------  ------------------     -----------------  -----------------
               Total                    $      578,765              100.00%       $      606,412             100.00%
                                      =================  ==================     =================  =================`

8. FEDERAL HOME LOAN BANK ADVANCES

Under terms of its
collateral agreement with the Federal Home Loan Bank of Pittsburgh
(FHLB), the Bank maintains otherwise unencumbered qualifying assets
(principally one-to four-family residential mortgage loans and U.S. Government
and Agency notes and bonds) in the amount of at least as much as its advances
from the FHLB. The Banks FHLB stock is also pledged to secure these
advances. At June 30, 2003 and September 30, 2002, such advances mature as
follows:

`June 30,
                                                            Weighted                  2003
           Due by June 30,                                Average Rate           (in thousands)
     -----------------------------                      -----------------       -----------------
                 2004                                               5.60 % $              59,000
                 2005                                               6.34                  52,000
                 2006                                               5.33                  42,000
                 2007                                               5.05                   5,086
                 2008                                                  -                       -
              Thereafter                                            5.29                  50,320
                                                        -----------------       -----------------
     Total FHLB advances                                            5.64 % $             208,406
                                                        =================       =================

                                                                                 September 30,
                                                            Weighted                  2002
         Due by September 30,                             Average Rate           (in thousands)
     -----------------------------                      -----------------       -----------------

                 2003                                                  - % $                   -
                 2004                                               5.60                  59,000
                 2005                                               6.34                  52,000
                 2006                                               5.33                  42,000
                 2007                                               5.05                   5,089
              Thereafter                                            5.29                  50,332
                                                        -----------------       -----------------
     Total FHLB advances                                            5.64 % $             208,421
                                                        =================       =================`

9. TRUST
PREFERRED SECURITIES

On March 25, 2002, the
Company sponsored the creation of NEP Capital Trust I, a Delaware statutory
business trust. The Company is the owner of all of the common securities of the
Trust. On April 10, 2002, the Trust issued $7.0 million of floating rate capital
securities through a pooled trust preferred securities offering. The proceeds
from this issuance, along with the Companys $217,000 payment for the
Trusts common securities, were used to acquire $7.2 million aggregate
principal amount of the Companys floating rate junior subordinated
deferrable interest debentures due April 22, 2032 (the Debentures),
which constitute the sole asset of the Trust. The interest rate on the
Debentures and the distribution rate on the capital securities are variable and
adjust semi-annually at 3.70% over the six-month LIBOR, with an initial rate of
6.02%. A rate cap of 11% is effective through April 11, 2007. The Company has,
through the Trust agreement establishing the Trust, a Guarantee Agreement, the
Debentures and the related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the trusts obligations under the capital
securities.

The stated maturity of the
Debentures is April 22, 2032. In addition, the Debentures are subject to
redemption at par at the option of the Company, subject to prior regulatory
approval, in whole or in part on any interest payment date after April 22, 2007.
The Debentures are also subject to redemption prior to April 22, 2007 after the
occurrence of certain events that would either have a negative tax effect on the
Trust or the Company or would result in the trust 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 following
their redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common
securities.

9. TRUST
PREFERRED SECURITIES (Continued)

The Company has the right,
at one or more times, to defer interest payments on the Debentures for up to ten
consecutive semi-annual periods. All deferrals will end on an interest payments
date and will not extend beyond April 22, 2032, the stated maturity date of the
Debentures. If the Company defers interest payments on the Debentures, the Trust
will also defer distributions on the capital securities. During any deferral
period, each installment of interest that would otherwise have been due and
payable will bear additional interest (to the extent payment of such interest
would be legally enforceable) at the applicable distribution rate, compounded
quarterly. Furthermore in 2002, the Company recognized an amortizable intangible
asset with a value of $220,000 relating to the issuance costs of these trust
preferred securities.

On October 15, 2002, the
Company sponsored the creation of NEP Capital Trust II, a Delaware statutory
business trust. The Company is the owner of all of the common securities of the
Trust. On October 29, 2002, the Trust issued $15.0 million in the form of
floating rate capital securities through a pooled trust preferred securities
offering. The proceeds from this issuance, along with the Companys
$464,000 payment for the Trusts common securities, were used to acquire
$15.5 million aggregate principal amount of the Companys floating rate
junior subordinated deferrable interest debentures due November 7, 2032 (the
Debentures), which constitute the sole asset of the Trust. The
interest rate on the Debentures and the distribution rate on the capital
securities are variable and adjust quarterly at 3.45% over the three-month
LIBOR, with an initial rate of 5.27%. A rate cap of 12.5% is effective through
November 7, 2007. The Company has, through the Trust agreement establishing the
Trust, a Guarantee Agreement, the Debentures and the related Indenture, taken
together, fully irrevocably and unconditionally guaranteed all of the
trusts obligations under the capital securities.

The stated maturity of the
Debentures is November 7, 2032. In addition, the Debentures are subject to
redemption at par at the option of the Company, subject to prior regulatory
approval, in whole or in part on any interest payment date after August 7, 2007.
The Debentures are also subject to redemption after the occurrence of certain
events that would either have a negative tax effect on the Trust or the Company
would result in the trust 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 following their
redemption, the Trust will use the proceeds of such repayment to redeem an
equivalent amount of outstanding trust preferred securities and trust common
securities.

The Company has the right,
at one or more times, to defer interest payments on the Debentures for up to
twenty consecutive quarterly periods. All deferrals will end on an interest
payment date and will not extend beyond November 7, 2032, the stated maturity
date of the Debentures. If the Company defers interest payments on the
Debentures, the Trust will also defer distributions on the capital securities.
During any deferral period, each installment of interest that would otherwise
have been due and payable will bear additional interest (to the extent payment
of such interest would be legally enforceable) at the applicable distribution
rate, compounded quarterly. The Company recognized an amortizable intangible
asset with a value of $450,000 relating to the issuance costs of these trust
preferred securities.

A summary of the trust securities issued and outstanding at June 30, 2003 is as follows:

`Amount
                             Outstanding at                   Prepayment                            Distribution
                                June 30,                        Option                                Payment
Name                              2003           Rate            Date              Maturity          Frequency
-------------------------   -----------------  ---------   -----------------   -----------------  -----------------

NEP Capital Trust I      $         7,000,000      5.32%       4/22/2007               4/22/2032    Semi-annually
NEP Capital Trust II     $        15,000,000      4.79%        8/7/2007               11/7/2032      Quarterly`

10. GOODWILL AND OTHER INTANGIBLE ASSETS

A summary of goodwill and
other intangible assets is as follows:

`At June 30, 2003
                                                            -----------------------------------------------------------
                                                                 Gross                                      Net
                                                                Carrying           Accumulated           Carrying
     Goodwill                                                    Amount            Amortization           Amount
     ----------------------------------                     -----------------------------------------------------------
                                                                                  (in thousands)
     Acquisition of:
       Abstractors                                        $                248 $             (160) $        88
       Security Savings Association of Hazleton                            571                (28)         543
       Higgins Insurance Associates, Inc.                                2,919                (95)       2,824
       Schuylkill Savings and Loan Association                             200                  -          200
                                                            -------------------   -----------------  ------------------

     Total goodwill                                       $              3,938 $             (283) $     3,655
                                                            ===================   =================  ==================


                                                                   Gross                                    Net
                                                                 Carrying            Accumulated          Carrying
     Other Intangible Assets                                      Amount            Amortization           Amount
     -----------------------------------------------------  -------------------   -----------------  ------------------
     -----------------------------------------------------  -----------------------------------------------------------
                                                                                  (in thousands)
     Amortizing:
       Omega core deposit intangible                      $            1,537 $               (918) $               619
       Security Savings Association of Hazleton
         core deposit intangible                                       9,086               (1,933)               7,153
       Schuylkill Savings and Loan Association
         core deposit intangible                                         255                  (43)                 212
       Other intangibles                                                 929                 (184)                 745

     Nonamortizing intangible assets
       Other intangible assets                                            75                    -                   75
                                                            -----------------     -----------------  ------------------

     Total other intangible assets                        $           11,882 $             (3,078) $             8,804
                                                            =================     =================  ==================`

Nonamortizing intangible
assets consist of title plant of $75,000 at June 30, 2003 and 2002.

10. GOODWILL
AND OTHER INTANGIBLE ASSETS (Continued)

Amortization expense of other
amortizing intangible assets for the three and nine months ended June 30, 2003
and June 30, 2002 is as follows:

`For the Three Months Ended             For the Nine Months Ended
                                                      June 30,                               June 30,
                                               2003              2002                2003               2002
                                         -----------------  ----------------   -----------------  -----------------
                                         --------------------------------------------------------------------------
                                                                   (Dollars in thousands)

     Core deposit intangibles          $              204 $             230 $               619 $              708
     Other amortizing intangibles                      51                65                 153                101
                                         -----------------  ----------------   -----------------  -----------------

     Total amortizing intangibles      $              255 $             295 $               772 $              809
                                         =================  ================   =================  =================`

The estimated amortization
expense of amortizing intangible assets for each of the five succeeding fiscal
years is as follows:

`Core               Other              Total
                                                                 Deposit           Amortizing         Amortizing
                                                               Intangibles         Intangibles        Intangibles
                                                            -----------------   -----------------  -----------------
                                                                                 (in thousands)
     Estimated Annual Amortization Expense
     -------------------------------------------------------
     For the year ended September 30, 2003                $              849 $               176 $            1,025
     For the year ended September 30, 2004                               750                 176                926
     For the year ended September 30, 2005                               644                 176                820
     For the year ended September 30, 2006                               586                 145                731
     For the year ended September 30, 2007                               558                  90                648`

Intangible assets acquired
during the nine months ended June 30, 2003 are as follows:

`Weighted
                                                                                                        Average
                                                                                                     Amortization
                                                                 Amount             Residual            Period
                                                                Assigned              Value            in Years
                                                            -----------------   -----------------  -----------------
                                                                             (dollars in thousands)

     Other intangibles                                    $              450 $                 -                  5`

11. IMPAIRMENT LOSS ON EQUITY INVESTMENT

The Company has a $1.5 million equity investment in the convertible prefered stock of a private entity, which makes loans to and provides services to residential construction builders in the Eastern United States.  The Company had previously been accounting for such investment on a cost method.  During the June 2003 quarter, the Company recognized an impairment loss to write-off its entire $1.5 million investment in this entity since efforts to raise additional equity capital have proven unsuccessful.  While this entity and its lending programs continue to operate, the Bank is no longer a lender in such programs.  Additionally, no tax benefit has been recognized in the current impairment loss since such loss is a capital loss and is deductible only against other capital gains.

Item 2.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

In addition to
historical information, this Form 10-Q includes certain forward-looking
statements based on current management expectations. These forward-looking
statements are generally identified by use of the words believe,
expect, intend, anticipate,
estimate, project or similar expressions. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions of the Private Securities Reform Act of 1995 and is including this
statement for purposes of such safe harbor provisions. The Companys actual
results could differ materially from those management expectations. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Banks loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the Companys operations,
markets, products, services and prices. These factors should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Company does not undertake  and specifically
disclaims any obligation  to publicly revise any forward  looking
statements to reflect events or circumstances after the date of the statements
to reflect the occurrence of anticipated or unanticipated events. Further
description of the risks and uncertainties to the business are included in
detail in Section B, Management Strategy, Section C, Critical Accounting
Policies, and Section E, Liquidity and Capital Resources.

A. General

The Companys results
of operations are dependent primarily on the results of operation of the Bank
and thus are dependent to a significant extent on net interest income, which is
the difference between the income earned on its loan and investment portfolios
and its cost of funds, consisting of the interest paid on deposits and
borrowings. However, non-interest income has become a meaningful component of
the Companys operations mainly due to fees earned by non-bank
subsidiaries. Results of operations are also affected by the Companys
provision for loan losses, loan and security sales activities, service charges
and other fee income, and non-interest expense. The Companys non-interest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, data processing, professional fees, and
advertising and business promotion expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities.

The Companys results
of operations are being restated for the fiscal years 1998 through 2002 and for
the December 2002 and March 2003 quarters to reflect the correction of
accounting errors primarily related to the Companys indirect auto,
mortgage and consumer loan portfolios. The net effect of such restatements was
to reduce interest income and retained earnings for prior periods. See Footnote
1 to the unaudited Consolidated Financial Statements for a description of the
effect during the periods presented in the Companys current report on Form
10-Q.

On January 2, 2002, the
Company purchased three banking offices from Schuylkill Savings and Loan
Association of Schuylkill Haven, Pa. The Company purchased $11.4 million of
loans and assumed $12.8 million of deposits from these offices. On January 8,
2002, Higgins acquired the DeAndrea Agency, which specializes in personal and
commercial insurance.

On September 4, 2002, the
Bank formed a relationship with Smith Barney under which Smith Barney Investment
Centers provides retail brokerage products and services at all of the First
Federal offices. This is Smith Barneys first relationship with a bank in
the Commonwealth of Pennsylvania. Smith Barney, an independent, registered
broker-dealer, is not affiliated with the Bank.

B. Management
Strategy

The Companys
operating strategy is that of a community-based financial services company,
offering a wide variety of financial products to its retail customers, while
concentrating on residential and consumer lending and, to a lesser extent,
multi-family and commercial real estate lending, construction lending and small
business and municipal commercial lending. In order to promote long-term
financial strength and profitability, the Company has focused on: (i)
maintaining strong asset quality by originating one- to four-family loans
located in its market area; (ii) emphasizing higher yielding consumer loans,
specifically indirect automobile loans, and commercial loans, primarily to small
businesses and municipalities; (iii) managing its interest rate risk by
emphasizing shorter-term, fixed-rate, one- to four-family loans, in addition to
consumer and commercial loans; limiting its retention of newly originated
longer-term fixed-rate one- to four-family loans; soliciting longer-

term
deposits; utilizing longer-term advances from the Federal Home Loan Bank of
Pittsburgh (the FHLB) and proceeds from the issuance of Trust
Preferred securities; and investing in investment and mortgage-related
securities having shorter estimated durations; (iv) meeting the financial needs
of its customers through expanded products, such as personal and business
insurance from Higgins, trust and investment management services from the Trust
Co., title insurance from Abstractors, Inc., all with improved delivery systems
through technological advances and integration of products; and (v) maintaining
a strong regulatory capital position.

As a result of its policy
to limit its retention of newly originated longer-term, fixed-rate one- to
four-family loans to 25% of total loan originations during a fiscal year, and in
light of the low interest rate environment, the Company is selling conforming
mortgage loan originations with interest rate adjustments of fifteen years or
greater. These loan products are sold at origination in the secondary market.

C. Critical
Accounting Policies

Other Investment.
The Company has a $1.5 million equity investment in the convertible preferred
stock of a private entity, which makes loans to and provides services to
residential construction builders in the Eastern United States. The Company had
previously been accounting for such investment on a cost method. During the June
2003 quarter, the Company recognized an impairment loss to write-off its entire
$1.5 million investment in this entity since efforts to raise additional equity
capital have proven unsuccessful. While this entity and its lending programs
continue to operate, the Bank is no longer a lender in such programs.
Additionally, no tax benefit has been recognized in the current impairment loss
since such loss is a capital loss and is deductible only against other capital
gains.

Allowances for Loan
Losses. The allowance for loan losses is maintained at a level representing
managements best estimate of known and inherent losses in the portfolio,
based upon managements evaluation of the portfolios collectibility.
Managements evaluation is based upon an analysis of the portfolio, past
loss experience, current economic conditions and other relevant factors. While
management uses the best information available to make evaluations, such
evaluations are highly subjective, and future adjustments to the allowance may
be necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Companys
allowance for losses on loans. Such agencies may require the Company to
recognize additions to the allowance. The allowance is increased by the
provision for loan losses, which is charged to operations. Loan losses are
charged directly against the allowance, and recoveries on previously charged-off
loans are added to the allowance.

Loans are deemed to be
impaired if upon managements assessment of the relevant facts
and circumstances, it is probable that the Company will be unable to collect all
proceeds due according to the contractual terms of the loan agreement. For
purposes of applying the measurement criteria for impaired loans, the Company
excludes large groups of smaller balance homogeneous loans, primarily consisting
of residential real estate and consumer loans, as well as commercial loans with
balances of less than $100,000. The uncollected portion of impaired loans are
charged off when the Company determines that foreclosure is probable, and the
fair value of the collateral is less than the recorded investment of the
impaired loan or in the case of unsecured loans that management determines the
loan to be uncollectable.

Intangible Assets.Intangible assets include core deposit intangibles and certain other
miscellaneous intangibles. The core deposit intangibles are being amortized to
expense over a 10 to 31-year life on an accelerated basis and other intangible
assets are being amortized to expense on an accelerated basis over a period of
3.7 to 5 years. The recoverability of the carrying value of intangible assets is
evaluated on an ongoing basis, and permanent declines in value, if any, are
charged to expense.

Income Taxes. The
Company accounts for income taxes under the asset/liability 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, as well as
operating loss and tax credit carryforwards. 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 effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established against deferred tax assets when in the
judgment of management, it is more likely than not that such deferred tax assets
will not become available. Because the judgment about the level of future
taxable income is dependent to a great extent on matters that may, at least in
part go beyond the Companys control, it is at least reasonably possible
that managements judgment about the need for a valuation allowance for
deferred taxes could change in the near term.

D.
Nonperforming Assets and Impaired Loans

The following table
presents information regarding the Banks nonperforming loans, real estate
owned and other repossessed assets at the dates indicated (unaudited):

`June 30,         September 30,
                                                                                     2003                2002
                                                                               -----------------   -----------------
                                                                               -------------------------------------
                                                                                      (dollars in thousands)

Nonperforming loans:
     Nonaccrual loans                                                        $            6,270 $             4,200
     Real estate owned and other repossessed assets                                         641                 547
                                                                               -----------------   -----------------
         Total nonperforming assets                                                       6,911               4,747
     Troubled debt restructurings                                                             -                  55
                                                                               -----------------   -----------------

         Troubled debt restructurings and total nonperforming assets         $            6,911 $             4,802
                                                                               =================   =================

     Total nonperforming loans as a percentage of total loans                              1.26 %              0.85 %
     Total nonperforming assets as a percentage of total assets                            0.78                0.53`

The increase in
nonperforming assets was primarily due to the addition of a $1.7 million
commercial loan. Such loan was placed on nonaccrual status when the borrower
filed bankruptcy during 2003. The Bank has previously written-off $100,000 of
this loan, established additional reserves and believes this loan is adequately
collateralized by the U.S. Department of Agriculture and other collateral.

E. Liquidity
and Capital Resources

Liquidity is the ability to
meet current and future financial obligations. The Bank further defines
liquidity as the ability to respond to deposit outflows as well as maintain
flexibility to take advantage of lending and investment opportunities. The
Banks primary sources of funds are deposits, principal and interest
payments on loans, sales and maturities of mortgage-backed and investment
securities, and FHLB advances. The Bank uses the funds generated to support its
lending and investment activities as well as any other demands for liquidity
such as deposit outflows. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit flows, mortgage
prepayments and the exercise of call features are greatly influenced by general
interest rates, economic conditions and competition.

The Banks most liquid
assets are cash and cash equivalents and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Banks operating, financing, lending and investing activities during any
given period. At June 30, 2003, cash and cash equivalents and investment and
mortgage-related securities available-for-sale totaled $334.7 million, or 37.8%
of total assets.

The Bank has other sources
of liquidity if a need for additional funds arises, including FHLB advances. At
June 30, 2003, the Bank had $208.4 million in advances outstanding from the FHLB
under its overall borrowing capacity from the FHLB of $264.4 million. The Bank
plans to use the proceeds from the sale of current investments to pay the $59.0
million of fixed-rate FHLB borrowings that will mature within the next twelve
months. Depending on market conditions, the pricing of deposit products and FHLB
advances, the Bank may continue to rely on FHLB borrowings to fund asset growth.
In addition to these traditional funding sources, the Bank may use alternative
funding sources, such as the sale and securitization of automobile loans.

At June 30, 2003, the Bank
had commitments to originate and purchase loans and unused outstanding lines of
credit and undisbursed proceeds of construction mortgages totaling $120.5
million. The Bank anticipates that it will have sufficient funds available to
meet these commitments. Certificate accounts, including Individual Retirement
Account and KEOGH accounts, which are scheduled to mature in less than one year
from June 30, 2003 totaled $89.8 million. Based on past experience, the Bank
expects that substantially all of these maturing certificate accounts, with the
exception of jumbo certificates of deposit, will be retained by the Bank at
maturity. At June 30, 2003, the Bank had $18.0 million in jumbo certificates,
the majority of which are deposits from local school districts and
municipalities that mature in less than one year.

The primary sources of
funding for the Company are dividend payments from the Bank, sales and
maturities of investment securities, the issuance of trust-preferred securities
and, to a lesser extent, earnings on investments and deposits of the Company.
Dividend payments by the Bank have primarily been used to fund the
Companys repurchase of its stock, to pay cash dividends, and to pay
interest on the trust-preferred securities. The Banks ability to pay
dividends and other capital distributions to the Company is generally limited by
the regulations of the Office of Thrift Supervision. During April 2002, the
Company obtained $7.0 million through a trust-preferred offering, and in October
2002, the Company obtained an additional $15.0 million through a trust-preferred
offering. Of the total trust-preferred proceeds, $10.0 million was used to
purchase bank-owned life insurance, $5.0 million was used to further capitalize
the Bank, and the remaining amount at the Company level was used for general
corporate purposes, including to fund the trust established to purchase the
Companys stock, which would be used to satisfy obligations under employee
benefit plans. To date, the Company has contributed $1.8 million to the trust,
which has used such funds to purchase 114,174 shares of common stock.

At June 30, 2003, the Bank
exceeded all of its regulatory capital requirements with a tangible capital
level of $57.5 million, or 6.7% of total adjusted assets, which is above the
required level of $12.9 million, or 1.5%; a core capital level of $57.5 million,
or 6.7% of total adjusted assets, which is above the required level of $25.8
million, or 3.0%; and a risk-based capital of $59.8 million, or 10.5% of
risk-weighted assets, which is above the required level of $45.5 million, or
8.0%. An institution with a ratio of tangible capital to total assets of greater
than or equal to 5% is considered to be well-capitalized pursuant to
OTS regulations.

The appropriate balance sheet classification of trust-preferred securities is currently under review pursuant to FIN 46.  Although the Federal Reserve Board and other banking regulatory agencies have issued interim guidance that continues to recognize trust-preferred securities as a component of Tier 1 capital, it is possible that a change may result in these securities qualifying for Tier 2 capital rather than Tier 1 capital.  If Tier 2 capital treatment had been required at June 30, 2003, the Bank would remain "well capitalized" under applicable federal bank regulatory definitions.

F. Comparison of Financial Condition at June 30, 2003 and September 30, 2002 (As Restated)

Total assets decreased
$16.8 million from $902.6 million at September 30, 2002 to $885.8 million at
June 30, 2003. The decrease was generated by an $85.3 million sale of
mortgage-backed securities, offset by security purchases, loan originations and
a $13.4 million increase in cash and cash equivalents. Securities classified as
available-for-sale decreased $31.9 million, from $327.9 million at September 30,
2002 to $296.0 million at June 30, 2003. The decrease was attributable to the
sale in the March 2003 quarter of $60.3 million of mortgage-backed securities
with an average yield of 2.89% and an average life of 1.18 years, with a portion
of the proceeds reinvested in securities with average lives of 4.5 years and an
average yield of 3.48%. The restructuring continued into the June 2003 quarter
with the sale of $25.0 million of mortgage-backed securities. These securities
had an average yield of 1.10%, and an average life of .28 years. This
restructuring was done to minimize the effect of prepayments of mortgage-backed
securities in the lower market interest rate environment.

Net loans increased $4.7
million from September 30, 2002. Consumer loans increased $37.9 million due to a
$42.3 million increase in indirect automobile loan originations within the
Companys market area offset by a decrease in other consumer loan balances.
Total real estate loans decreased $33.7 million due to a $38.9 million decrease
in one- to four-family residential real estate loans primarily the result of
prepayments of mortgages due to the lower interest rate environment, offset by a
$10.1 million increase in commercial construction loans.

Total liabilities decreased
$15.6 million from $836.9 million at September 30, 2002 to $821.3 million at
June 30, 2003, due primarily to a $27.6 million decrease in deposits offset by
the issuance of $15.0 million in trust-preferred securities.

Deposits decreased $27.6
million from $606.4 million as of September 30, 2002 to $578.8 million at June
30, 2003. The largest decrease was in certificates of deposit, which decreased
$51.6 million as a result of matured certificates being rolled into checking and
other interest-bearing accounts as well as municipalities and local school
districts withdrawing funds for use in operations.

In October 2002, the
Company issued $15.0 million of trust-preferred securities. The interest rate on
the trust-preferred securities is variable based on three-month LIBOR and
adjusts quarterly with a rate as of June 30, 2003 of 4.79%. The trust preferred
securities are subject to an interest rate cap of 12.5% through November 7,
2007.

Total equity decreased by
$1.2 million primarily due to a $506,000 decrease in accumulated other
comprehensive income as a result of a decrease in unrealized gains on
securities. Because of interest rate volatility, accumulated other comprehensive
income could materially fluctuate from period to period depending on economic
and interest rate conditions. Equity also decreased due to the purchase of
69,133 shares for the stock employee compensation trust at a cost of $1.1
million and dividend payments of $1.5 million. These decreases were offset by
net income for the nine months of $644,000, the release of shares under the
employee stock ownership plan and the vesting of previously granted shares of
restricted stock.

G. Comparison of Operating Results for the Three Months ended June 30, 2003 and June 30, 2002 (As Restated)

General.  The Company  had a net loss of $1.1  million and net income of  $944,000  for the three  months  ended June 30, 2003 and June
30, 2002,  respectively.  Basic and diluted  earnings  (loss) per share decreased to $(0.29) and $(0.28) per share,  respectively,  for
the three months ended June 30, 2003 as compared to $0.23 and $0.22 per share, respectively, for the same period in 2002.

Interest Income.
Total interest income decreased $2.1 million, or 15.9%, from $13.2 million for
the three months ended June 30, 2002 to $11.1 million for the three months ended
June 30, 2003. This decrease was primarily due to a 120 basis point decline on
the tax-equivalent yield on earning assets to 5.34% for the three months ended
June 30, 2003 as compared to 6.54% for the same period ended 2002 due to the
lower interest rate environment. Interest income on loans decreased $1.2 million
primarily due to a 78 basis point decrease in the yield due to lower rates,
combined with an $11.6 million decrease in the average balance of loans.
Interest income on mortgage related securities decreased $950,000 as the yield
on such securities declined 231 basis points, offset by an increase in the
average balance of $13.0 million. Interest income on taxable investment
securities increased $50,000 despite a 70 basis point decline. Rapid
repayment of mortgage-backed securities has occurred while reinvestment options
are at substantially lower rates than the previous year.

Interest Expense.
Interest expense decreased $1.1 million, or 15.4%, from $7.2 million for the
three months ended June 30, 2002 to $6.1 million for the three months ended June
30, 2003. The decrease in interest expense was primarily attributable to a
declining interest rate environment that resulted in the cost of deposits
decreasing to 2.08% for the three months ended June 30, 2003 from 3.11% for the
same period ended 2002. Offsetting the declining rates was an increase in the
average balance of interest-bearing liabilities of $35.0 million to $785.9
million for the three months ended June 30, 2003. The decrease in interest
expense on deposits of $1.3 million was primarily due to a $1.2 million decrease
in interest expense on certificates of deposit, which was the result of an 89
basis point decrease in interest rates and a $56.1 million decrease in the
average balance, offset by a $70.9 million increase in the average balance on
checking accounts. Interest expense on trust-preferred debt increased $171,000
due to the issuance of $15.0 million trust-preferred securities in October 2002.

Provision for Loan
Losses. The provision for loan losses increases the allowance for loan
losses. The Banks provision for loan losses for the three months ended
June 30, 2003 increased $124,000 compared to the comparable 2002 period. The
increase was due to increased mortgage and consumer charge offs and an increase
in nonperforming loans and classified assets. During the preceding quarter, the
Company enhanced its loan servicing function to promote the prompt resolution of
delinquencies and employed a new collections and recovery manager to address the
risk of deterioration in loan quality. As a result, total delinquencies for
mortgage and consumer loans were reduced during the quarter to 0.73% and 0.28%
of total loans, respectively, at June 30, 2003, from 1.13% and 0.40% at June 30,
2002. Net loan charge-offs of $672,000 for the quarter ended June 30, 2003,
compared to net loan charge-offs of $879,000 for the quarter ended June 30,
2002. Net loan charge-offs, as a percentage of total loans for the current
quarter, were 13 basis points. At June 30, 2003, delinquent commercial loans
were 0.81% of total loans, an increase from the 0.48% level at June 30, 2002,
due to a $1.7 million commercial loan being placed on nonaccrual as the borrower
went into bankruptcy.

Non-interest Income.
Non-interest income decreased $521,000, or 23.3% from $2.2 million for the three
months ended June 30, 2002 to $1.7 million for the three months ended June 30,
2003. Other income for the three months ended June 30, 2003 decreased $1.4
million due to the recognition of the $1.5 million impairment loss for the
Companys equity investment in the convertible preferred stock of a
start-up mortgage banking firm specializing in multi-state, small builder loans.
Insurance commission income increased $262,000, due to continued growth in
insurance related services. Service charges and other fees increased $185,000
due to a larger customer base. Gain on sale of available-for-sale securities
increased $233,000 due primarily to the gain on the sale of $25.0 million in
mortgage-backed securities as part of the restructuring of the investment
portfolio.

Non-interest
Expense. Total non-interest expense increased $801,000, or 13.3%, from $6.0
million for the three months ended June 30, 2002 to $6.8 million for the three
months ended June 30, 2003. This increase was due primarily to an increase in
salaries and benefits of $492,000 due to the increased cost of employee benefits
and new employees to staff expanding lines of business.

Other non-interest
expense increased $306,000 due to one of the Banks commercial loan
customer that had significant cash flow difficulty during the quarter which
required the Bank to provide cash flow and other support. The expenses
associated with the workout of this loan totaled $156,000. In late March 2003,
the Bank decided to close three retail offices, sell the buildings occupied by
two of these offices and reduce the office hours at a fourth office. These
actions are expected to result in savings of $330,000 per year beginning with
the fourth fiscal quarter of 2003. Deposit services will be provided by nearby
First Federal offices. The Company recognized a $108,000 impairment loss in
connection with the closure of these offices. Non-interest expense also
increased due to costs associated with foreclosed properties combined with
general increases in operating expenses such as supplies and telephone and other
incremental increases that resulted from operating a larger organization.
Installation of a new telephone system was completed in the Hazleton offices in
June 2003 with the remaining office installations to be completed by September
30, 2003. The new system is expected to reduce annual long distance telephone
costs by approximately $125,000 by transmitting over inter-office data lines.
Advertising costs increased $90,000 over the previous year quarter as the
Company continued the promotion of a new branding campaign. Occupancy expenses
increased $45,000 due to seasonal operating expenses such as utilities and
maintenance. The increase in non-interest expense was offset by an $89,000
decrease in professional fees due to prior year quarter engagement of
consultants to assist in the continuation of a branding campaign to integrate
all lines of business.

Income Taxes. The
Company had an income tax provision of $125,000 for the three months ended June
30, 2003, compared to a provision of $498,000 for the three months ended June
30, 2002, resulting in effective tax rates of (12.8)%, and 34.5%, respectively.
This decrease was due to a decrease in income before taxes, offset by an
increase to a deferred tax asset valuation allowance related to the
Companys ability to use a charitable contribution carryforward. Although the Company reported a pre-tax loss for the June 2003 quarter, the Company still provided for income taxes due to no tax benefit being provided on the $1.5 million impairment loss the Company recognized.
Such loss is a capital loss for federal income tax purposes which can only be used to offset capital gain income is not expected to result in a
tax deduction for the Company.

H. Comparison of Operating Results for the Nine Months ended June 30, 2003 and June 30, 2002 (As Restated)

General.  The Company had net income of  approximately  $644,000  and $3.0 million for the nine months ended June 30, 2003 and June 30,
2002,  respectively.  Basic and diluted  earnings  per share were $0.17 and $0.16 per share,  respectively,  for the nine months  ended
June 30, 2003 and $0.73 and $0.69, respectively, for the nine months ended June 30, 2002.

Interest Income.
Total interest income decreased $5.2 million, or 13.0%, from $40.0 million for
the nine months ended June 30, 2002 to $34.8 million for the nine months ended
June 30, 2003. This decrease was primarily due to a 124 basis point decline on
the tax-equivalent yield on earning assets to 5.53% for the nine months ended
June 30, 2003 as compared to 6.77% for the same period ended 2002 due to lower
rates. Interest income on loans decreased $3.3 million primarily due to a 78
basis point decrease in the yield. Interest income on mortgage-related
securities decreased $1.1 million as the yield on such securities declined 182
basis points, offset by an increase in average balance of $46.6 million. Rapid
repayment of mortgage-backed securities has occurred while reinvestment options
are at substantially lower rates than the previous year. Interest income on
taxable investment securities decreased $784,000 as a result of a 141 basis
point decline.

Interest Expense.
Interest expense decreased $2.2 million, or 10.2%, from $21.7 million for the
nine months ended June 30, 2002 to $19.5 million for the nine months ended June
30, 2003. The decrease in interest expense was primarily attributable to a
declining interest rate environment that resulted in the cost of deposits
decreasing to 2.31% for the nine months ended June 30, 2003 as compared to 3.30%
for the same period in 2002. Offsetting the declining rates was an increase in
the average balance of interest-bearing liabilities of $65.4 million to $795.9
million for the nine months ended June 30, 2003. In particular, the average
balance of interest-bearing transaction accounts increased $77.2 million to
$200.0 million. This increase was the result of the competitively priced
products being marketed throughout the Companys market area. The decrease
in interest expense on deposits of $3.0 million was primarily due to a $3.3
million decrease in interest expense on certificates of deposit, which was the
result of a 103 basis point decrease in interest rates. Interest expense on
trust-preferred debt increased $688,000 as a result of the issuance of $15.0
million trust-preferred securities in October 2002.

Provision for Loan
Losses. The Companys provision for loan losses for the nine months
ended June 30, 2003 decreased $139,000 compared to the comparable 2002 period.
Nonperforming assets at June 30, 2003 were $6.9 million, or 0.78% of total
assets, from $4.9 million, or 0.57% of total assets as of June 30, 2002. The
Company enhanced its loan servicing function to promote the prompt resolution of
delinquencies and employed a new collections and recovery manager to address the
risk of deterioration in loan quality. As a result, total delinquencies for
mortgage and consumer loans were reduced to 0.73% and 0.28% of total loans,
respectively, at June 30, 2003, from 1.13% and 0.40% at June 30, 2002. The Bank
also completed a full review of its mortgage and consumer loan portfolios and
charged-off loans where the fair value of assets fell below the book

value. This
analysis led to net loan charge-offs of $1.2 million for the nine months ended
June 30, 2003, compared to net loan charge-offs of $702,000 for the nine months
ended June 30, 2002. Net loan charge-offs, as a percentage of total loans for
the fiscal year-to-date were 31 basis points. At June 30, 2003, delinquent
commercial loans were 0.81% of total loans, an increase from the 0.48% level at
June 30, 2002.

Non-Interest Income.
Non-interest income increased $2.6 million, or 48.7%, from $5.4 million for the
nine months ended June 30, 2002 to $8.1 million for the nine months ended June
30, 2003. During the nine months ended June 30, 2003 there was an $85.3 million
sale of mortgage-backed securities, which resulted in gains on sale of
securities of $1.4 million. Insurance commission income increased $647,000 due
to continued growth in insurance related services. Service charges and other
fees increased $456,000 due to a larger customer base. Gain-on-sale of loans
increased $417,000 as $35.1 million of originations of fixed-rate mortgages, in
excess of the Banks retention policy, were sold in the nine months ended
June 30, 2003 compared to $10.6 million of such loans sold in the same period in
2002. Other income decreased $572,000 due to the recognition of the $1.5 million
impairment loss for an equity investment, offset by a $564,000 increase in
income associated with the prior year sale and securitization of $50.0 million
of automobile loans and $356,000 of income on bank-owned life insurance.

Non-interest
Expense. Total non-interest expense increased $2.8 million, or 16.5%, from
$17.1 million for the nine months ended June 30, 2002 to $19.9 million for the
nine months ended June 30, 2003. This increase was due primarily to an increase
in compensation and employee benefits of $1.1 million for increased benefit
costs and new employees to staff the growth in the Companys business
lines. Other non-interest expense increased $864,000 due to the $156,000 expense
of providing cash flow support to a commercial loan customer who had significant
cash flow difficulty. Other non-interest income increased due to an impairment
loss in connection with the closure of three bank offices as well as costs
associated with foreclosed properties combined with general increases in
operating expenses such as supplies and telephone and other incremental
increases that resulted from operating a larger organization. Advertising costs
increased to $345,000 over the previous year quarter as the Company continued
the promotion of a new branding campaign. Occupancy expenses increased $284,000
period over period due to Company expansion. Professional fees increased
$192,000 as a result of increased accounting fees coupled with an increase in
consulting services during the transition between chief financial officers.

Income Taxes. The
Company had an income tax provision of $967,000 for the nine months ended June
30, 2003, compared to a provision of $1.6 million for the nine months ended June
30, 2002 resulting in effective tax rates of 60.0%, and 34.8%, respectively. The
decline in income tax expense was primarily attributable to a decrease in
taxable income, offset by the increase in taxes as a result of an increase in a
deferred tax asset valuation allowance related to the Companys ability to
use a charitable contribution carryforward. The large increase in the effective
tax rate during the nine month period ended June 30, 2003 was due to the $1.5
million impairment loss the Company recognized. Such loss is a capital loss for
federal income tax purposes which can only be used to offset capital gain income.  Such loss is not expected to result in a tax deduction for the Company.

|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|        | As
of June 30, 2003, there have been no material changes in the quantative and
qualitative disclosures about market risks presented in the Companys
Annual Report on Form 10-K for the fiscal year ended September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Item 4. | CONTROLS AND PROCEDURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | (a)Evaluation of disclosure controls and procedures: The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon her evaluation of those controls
and procedures performed at June 30, 2003, the
chief executive officer and the chief financial officer of the Company
concluded that the Companys disclosure controls and procedures were
not effective, as further described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | During the preparation and review of this Form 10-Q Quarterly Report, the Registrant discovered that its
financial statements for its fiscal years 1998 through 2002 and for the December 2002 and March 2003 quarters required restatement as
discussed under Management's Discussion and Analysis and Note 1 to the Financial Statements included in this Quarterly Report. The
Company believes that it maintained effective controls and procedures designed to ensure that information required to be
disclosed in its reports filed under the Securities Exchange Act of 1934 with respect to those prior periods, except that the
individuals responsible for implementing such controls and procedures, including reviewing the work performed and authorizing the final
results, failed to detect certain errors, including a computer coding error related to the Company's indirect automobile loan portfolio, which required the
restatement. Subsequent to the discovery of the errors, Management has implemented staffing, system and procedural changes designed to
improve the training of the individuals involved in implementing and reviewing the controls and procedures to strengthen the
review and authorization process so that such errors do not occur in the future.  The Chief Executive Officer
and Chief Financial Officer believes that the corrective actions taken should be adequate to remedy the aforementioned control inadequacies.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | (b)Changes in internal  controls.The Company  made no  significant  changes in its internal  controls or in other  factors that
                  could  significantly  affect these  controls  subsequent to the date of the evaluation of those controls by the chief
                  executive officer, except for the corrective actions referred to in item (a) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Part II - OTHER INFORMATION

|Item 1. | Legal Proceedings                                                                                                                                                                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                            
|        | The
Company is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to the Companys financial condition or results of operation.
|        |                                                                                                                                                                                                                                                                                                            
|Item 2. | Changes in Securities and Use of Proceeds                                                                                                                                                                                                                                                                  
|        |                                                                                                                                                                                                                                                                                                            
|        | Not applicable.                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                            
|Item 3. | Defaults Upon Senior Securities                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                            
|        | Not applicable.                                                                                                                                                                                                                                                                                            
|Item 4. | Other information                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                            
|        | Not applicable.                                                                                                                                                                                                                                                                                            
|Item 5. | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                            
|(A)     | Exhibits                                                                                                                                                                                                                                                                                                   
|        |                                                                                                                                                                                                                                                                                                            
|3.1     | Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*                                                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                            
|3.2     | Bylaws of Northeast Pennsylvania Financial Corp.**                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                            
|4.0     | Form of Stock Certificate of Northeast Pennsylvania Financial Corp.*                                                                                                                                                                                                                                       
|        |                                                                                                                                                                                                                                                                                                            
|11.0    | Statement regarding Computation of Per Share Earnings (See Notes to Consolidated Financial Statements)                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                            
|31.1    | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                     
|        |                                                                                                                                                                                                                                                                                                            
|32.0    | Section 1350 Certification                                                                                                                                                                                                                                                                                 
|        |                                                                                                                                                                                                                                                                                                            
|*       | Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, and any amendments thereto, Registration No.
333-43281.                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                            
|**      | Incorporated herein by reference into this document from the Exhibits to the
Form 10-K/A as filed with the Securities and Exchange Commission on January 8,
2003.                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                            
|        |                                                                                                                                                                                                                                                                                                            
|(B)     | Reports on Form 8-K                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                            
|        | On
April 25, 2003, the Company filed a Form 8-K in which it announced its financial
results for the quarter ended March 31, 2003.  A press release announcing the financial results was filed by exhibit.                                                                                                  

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

|                         | NORTHEAST PENNSYLVANIA
FINANCIAL CORP.                                                           
|------------------------ | -------------------------------------------------------------------------------------------------
|                        
|                        
|                        
|                        
|Date:    August 19, 2003 | By: /s/ E. Lee Beard
E. Lee Beard
President, Chief Executive
Officer, and chief financial officer