SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q


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

     For the quarterly period ended December 31, 1998

                                       OR

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

     For the transition period from _________ to _________

                         Commission File Number 0-26574

                           DAMEN FINANCIAL CORPORATION
                           ---------------------------
             (Exact name of registrant as specified in its charter)

          Delaware                                                  36-4029638
----------------------------                                     ---------------
(State or other jurisdiction                                     I.R.S. Employer
    of incorporation or                                           Identification
       organization)                                                  Number


200 West Higgins Road, Schaumburg, Illinois                           60195
-------------------------------------------                        ----------
(Address of Principal executive offices)                           (Zip Code)

Registrant telephone number, including area code:                 (847) 882-5320
                                                                  --------------

     Check whether the issuer (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
             -----    -----

     As of February  12, 1999 there were  2,820,154  shares of the  Registrant's
common stock issued and outstanding.

     Transitional Small Business Disclosure Format(check one): Yes      No   X
                                                                  -----    -----
<PAGE>

                           DAMEN FINANCIAL CORPORATION

                                    FORM 10-Q

                                TABLE OF CONTENTS



Part I.  FINANCIAL INFORMATION                                              PAGE
                                                                            ----
     Item 1.  Financial Statements

              Consolidated Statements of Financial Condition at
              December 31, 1998 (Unaudited) and September 30, 1998 .......    4

              Consolidated Statements of Earnings for the three
              months ended December 31, 1998 and 1997 (unaudited) ........    5

              Consolidated Statements of Changes in
              Stockholders' Equity for the three months
              ended December 31, 1998 (unaudited) ........................    6

              Consolidated Statements of Cash Flows for the three
              months ended December 31, 1998 and 1997 (unaudited) ........    7

              Notes to Unaudited Consolidated Financial Statements .......  8-9

     Item 2.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations ........................ 10-15


Part II. OTHER INFORMATION ...............................................   16

         Signatures ......................................................   17

         Index to Exhibits ...............................................   18

         Earnings Per Share Analysis (Exhibit 11) ........................   19

         Financial Data Schedule (Exhibit 27) ............................   20


                                       -2-

<PAGE>








                         PART I - FINANCIAL INFORMATION









                                       -3-

<PAGE>

                           DAMEN FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                 Consolidated Statements of Financial Condition

<TABLE>
<CAPTION>
                                                           December 31,   September 30,
                                                               1998            1998
                                                           ------------   -------------
                                                            (unaudited)
<S>                                                        <C>                 <C>    
Assets
------

Cash and amounts due from depository institutions ......   $    486,008        541,682
Interest-bearing deposits ..............................      2,587,335      1,245,446
                                                           ------------    -----------
    Total cash and cash equivalents ....................      3,073,343      1,787,128
Investment securities held to maturity
  (fair value: $1,764,800 at December 31, 1998
  and $1,728,900 at September 30, 1998) ................      1,764,829      1,728,931
Investment securities, available for sale, at fair value     37,250,754     40,377,371
Mortgage-backed securities held to maturity
  (fair value: $13,563,500 at December 31, 1998
  and $16,478,500 at September 30, 1998) ...............     13,601,243     16,434,332
Mortgage-backed securities, available for sale,
  at fair value ........................................     43,300,540     48,617,275
Loans receivable (net of allowance for loan losses:
  $449,000 at December 31, 1998 and
  $449,000 at September 30, 1998) ......................    112,228,000    109,417,586
Stock in Federal Home Loan Bank and
  Federal Reserve Bank of Chicago ......................      3,530,150      3,815,150
Accrued interest receivable ............................      1,500,055      1,755,466
Office properties and equipment - net ..................      3,538,723      3,530,443
Prepaid expenses and other assets ......................        416,354        569,040
                                                           ------------    -----------
    Total assets .......................................    220,203,991    228,032,722
                                                           ============    ===========

Liabilities and Stockholders' Equity
------------------------------------

Liabilities
-----------

Deposits ...............................................    116,513,549    115,698,518
Borrowed money .........................................     57,000,000     61,800,000
Advance payments by borrowers for taxes and insurance ..      1,588,434      2,598,991
Other liabilities ......................................      1,929,190      2,681,029
                                                           ------------    -----------
    Total liabilities ..................................    177,031,173    182,778,538
                                                           ------------    -----------

Stockholders' Equity
--------------------

Preferred stock, $.01 par value; authorized
  100,000 shares; none outstanding .....................             --             --
Common stock, $.01 par value; authorized
  4,500,000 shares;  3,981,434 shares issued and
  2,820,154 shares outstanding at December 31, 1998
  and 2,957,154 shares outstanding at September 30, 1998         39,814         39,814
Additional paid-in capital .............................     38,860,638     38,837,468
Retained earnings, substantially restricted ............     23,055,484     22,882,928
Accumulated other comprehensive income,
  net of income taxes ..................................      1,296,980      1,740,980
Treasury stock, at cost (1,161,280 shares at
 December 31, 1998 and 1,024,280 shares at
 September 30, 1998) ...................................    (16,892,277)   (14,913,027)
Common stock acquired by Employee Stock Ownership Plan .     (2,286,300)    (2,339,200)
Common stock awarded by Recognition and Retention Plan .       (901,521)      (994,779)
                                                           ------------    -----------
    Total stockholders' equity .........................     43,172,818     45,254,184
                                                           ------------    -----------
    Total liabilities and stockholders' equity .........   $220,203,991    228,032,722
                                                           ============    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       -4-
<PAGE>

                           DAMEN FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                       Consolidated Statements of Earnings

<TABLE>
<CAPTION>
                                                                Three Months Ended
                                                                   December 31,
                                                              ----------------------
                                                                 1998         1997
                                                              ----------   ---------
                                                                    (unaudited)
<S>                                                           <C>          <C>      
Interest income:
  Loans ...................................................   $2,186,441   2,046,023
  Mortgage-backed securities ..............................    1,012,407   1,424,569
  Tax-exempt securities ...................................      283,321     332,537
  Interest and dividends on other investments .............      393,178     277,460
  Dividends on FHLB and FRB stock .........................       60,757      63,728
                                                              ----------   ---------
    Total interest income .................................    3,936,104   4,144,317
                                                              ----------   ---------
Interest expense:
  Deposits ................................................    1,450,414   1,650,303
  Borrowings ..............................................      897,198     896,110
                                                              ----------   ---------
    Total interest expense ................................    2,347,612   2,546,413
                                                              ----------   ---------
    Net interest income before provision for loan losses ..    1,588,492   1,597,904
Provision for loan losses .................................           --      21,000
                                                              ----------   ---------
    Net interest income after provision for loan losses ...    1,588,492   1,576,904
                                                              ----------   ---------
Non-interest income:
  Loan fees and service charges ...........................       50,044      13,047
  Gain on sale of investment securities, available for sale       90,767     131,237
  Rental income ...........................................       43,863      14,542
  Other income ............................................       32,150      17,636
                                                              ----------   ---------
    Total non-interest income .............................      216,824     176,462
                                                              ----------   ---------
Non-interest expense:
  Compensation, employee benefits, and related expenses ...      742,692     661,856
  Advertising and promotion ...............................       25,997     143,426
  Occupancy and equipment expense .........................      208,854     185,959
  Data processing .........................................       32,000      32,298
  Insurance expense .......................................       19,860      18,238
  Federal deposit insurance premiums ......................       17,919      19,115
  Legal, audit, and examination services ..................       56,137      62,192
  Other operating expenses ................................       82,629      74,164
                                                              ----------   ---------
    Total non-interest expense ............................    1,186,088   1,197,248
                                                              ----------   ---------
Net income before income taxes ............................      619,228     556,118
Provision for federal and state income taxes ..............      132,005      97,328
                                                              ----------   ---------
    Net income ............................................   $  487,223     458,790
                                                              ==========   =========

Earnings per share - basic ................................        $ .19         .16
                                                                   -----       -----
Earnings per share - diluted ..............................          .18         .15
                                                                   -----       -----
Dividends declared per common share .......................        $ .12         .06
                                                                   -----       -----
</TABLE>


See accompanying notes to consolidated financial statements.

                                       -5-

<PAGE>

                           DAMEN FINANCIAL CORPORATION
                                AND SUBSIDIARIES

           Consolidated Statements of Changes in Stockholders' Equity

                      Three Months Ended December 31, 1998

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      Accumulated                   Common      Common
                                              Additional                 Other                      Stock       Stock
                                      Common    Paid-In    Retained  Comprehensive   Treasury      Acquired    Awarded
                                      Stock     Capital    Earnings      Income        Stock       by ESOP      by RRP      Total
                                     -------  ----------  ---------- ------------- ------------  -----------  ---------  ----------
<S>                                  <C>      <C>         <C>          <C>         <C>           <C>          <C>        <C>       
Balance at September 30, 1998 ...... $39,814  38,837,468  22,882,928   1,740,980   (14,913,027)  (2,339,200)  (994,779)  45,254,184
                                     -------  ----------  ----------   ---------   -----------   ----------   --------   ----------
  Additions (deductions) for the
    period ended December 31, 1998:

    Comprehensive income:
      Net income ...................                         487,223                                                        487,223
      Other comprehensive income,
        net of tax:
          Unrealized holding loss
            during the period ......                                    (384,720)                                          (384,720)
          Less: reclassification
            adjustment of gains
            included in net income .                                     (59,280)                                           (59,280)
                                     -------  ----------  ----------   ---------   -----------   ----------   --------   ----------
    Total comprehensive income .....      --          --     487,223    (444,000)           --           --         --       43,223
                                     -------  ----------  ----------   ---------   -----------   ----------   --------   ----------
    Purchase of treasury
      stock (137,000 shares) .......                                                (1,979,250)                          (1,979,250)

    Amortization of award
      of RRP stock .................                                                                            93,258       93,258

    Contribution to fund ESOP loan .              23,170                                             52,900                  76,070

    Dividends declared on
      common stock .................                        (314,667)                                                      (314,667)
                                     -------  ----------  ----------   ---------   -----------   ----------   --------   ----------
Balance at December 31, 1998 ....... $39,814  28,860,638  23,055,484   1,296,980   (16,892,277)  (2,286,300)  (901,521)  43,172,818
                                     =======  ==========  ==========   =========   ===========   ==========   ========   ==========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       -6-

<PAGE>

                           DAMEN FINANCIAL CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                           Three Months Ended
                                                                              December 31,
                                                                       --------------------------
                                                                           1998           1997
                                                                       ------------   -----------
                                                                               (unaudited)
<S>                                                                    <C>            <C>    
Cash flows from operating activities:
  Net income ........................................................  $    487,223       458,790
  Adjustments to reconcile net income to
    net cash from operating activities:
      Depreciation ..................................................        70,731        58,876
      Amortization of cost of stock benefit plans ...................       169,328       178,438
      Provision for loan losses .....................................            --        21,000
      Decrease in deferred loan income ..............................       (49,859)      (89,651)
      Change in current and deferred federal
        and state income taxes ......................................       154,895       283,517
      Gain on sale of investment securities, available for sale .....       (90,767)     (131,237)
      Decrease in accrued interest receivable .......................       255,411        26,323
      Increase in accrued interest payable ..........................        40,976        38,900
      Decrease in other assets ......................................        32,886        39,731
      Increase (decrease) in other liabilities ......................      (519,898)       79,372
                                                                       ------------   -----------
Net cash provided by operating activities ...........................       550,926       964,059
                                                                       ------------   -----------
Cash flows from investing activities:
     Purchase of investment securities, available for sale ..........      (500,000)   (4,074,729)
     Purchase of investment securities ..............................      (132,757)           --
     Purchase of mortgage-backed securities, available for sale .....            --    (2,009,139)
     Proceeds from sales of investment securities, available for sale     1,160,823       381,237
     Proceeds from maturities of investment securities,
       available for sale ...........................................     2,286,561     1,498,963
     Proceeds from maturities of investment securities ..............        96,859        21,407
     Proceeds from maturities of mortgage-backed securities,
       available for sale ...........................................     4,834,735     3,351,339
     Proceeds from maturities of mortgage-backed securities .........     2,833,089     2,482,608
     Proceeds from redemption of Federal Home Loan Bank stock .......       285,000            --
     Disbursements for loans ........................................   (10,636,241)   (5,064,593)
     Loan repayments ................................................     7,875,686     3,354,948
     Property and equipment expenditures ............................       (91,211)      (14,853)
                                                                       ------------   -----------
Net cash provided by (for) investing activities .....................     8,012,544       (72,812)
                                                                       ------------   -----------
Cash flows from financing activities:
     Proceeds from exercise of stock options ........................            --       115,867
     Deposit receipts ...............................................    28,288,860    17,233,287
     Deposit withdrawals ............................................   (28,869,963)  (17,900,523)
     Interest credited to deposit accounts ..........................     1,396,134     1,122,154
     Proceeds from borrowed money ...................................     3,300,000    21,200,000
     Repayment of borrowed money ....................................    (8,100,000)  (18,700,000)
     Increase (decrease) in advance payments by borrowers
       for taxes and insurance ......................................    (1,010,557)      916,975
     Purchase of treasury stock .....................................    (1,979,250)           --
     Dividends paid on common stock .................................      (302,479)     (163,394)
                                                                       ------------   -----------
Net cash provided by (for) financing activities .....................    (7,277,255)    3,824,366
                                                                       ------------   -----------
Increase in cash and cash equivalents ...............................     1,286,215     4,715,613
Cash and cash equivalents at beginning of period ....................     1,787,128     2,090,984
                                                                       ------------   -----------
Cash and cash equivalents at end of period ..........................  $  3,073,343     6,806,597
                                                                       ============   ===========
Cash paid during the period for:
     Interest .......................................................  $  2,306,636     2,507,513
     Income taxes ...................................................        27,504         2,388
                                                                       ============   ===========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       -7-

<PAGE>

                           DAMEN FINANCIAL CORPORATION
                                AND SUBSIDIARIES


Notes to Consolidated Financial Statements
------------------------------------------

1.   Statement of Information Furnished
---------------------------------------

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in accordance with Form 10-Q  instructions and Article 10 of Regulation
S-X, and in the opinion of management contains all adjustments (all of which are
normal and  recurring  in nature)  necessary  to  present  fairly the  financial
position as of December 31, 1998, the results of operations for the three months
ended  December  31,  1998 and 1997 and cash  flows for the three  months  ended
December 31, 1998 and 1997.  These results have been  determined on the basis of
generally  accepted   accounting   principles.   The  preparation  of  financial
statements in conformity with generally accepted accounting  principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities  and disclosures 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 from those
estimates.  The attached  consolidated  statements are those of Damen  Financial
Corporation  (the "Company") and its  consolidated  subsidiaries  Damen National
Bank (the "Bank") and Dasch Inc. The results of  operations  for the three month
period ended December 31, 1998 are not necessarily  indicative of the results to
be expected for the full year.


2.   Earnings Per Share
-----------------------

     Earnings per share for the three month periods ended  December 31, 1998 and
1997 were  determined  by dividing  net income for the  periods by the  weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding (see Exhibit 11 attached). Stock options are regarded as
common stock  equivalents and are therefore  considered in diluted  earnings per
share  calculations.  Common stock  equivalents  are computed using the treasury
stock method.  ESOP shares not committed to be released to participants  are not
considered outstanding for purposes of computing earnings per share amounts.


                                       -8-

<PAGE>

3.   Impact of New Accounting Standards
---------------------------------------

     Disclosures  about  Segments of an Enterprise and Related  Information.  In
December 1997, the FASB issued Statement of Financial  Accounting  Standards No.
131,  "Disclosures  about  Segments of an  Enterprise  and Related  Information"
("SFAS No.  131") which  becomes  effective  for fiscal  years  beginning  after
December 15, 1997.  SFAS No. 131  establishes  standards for the way that public
business  enterprises  report  information about operating segments and requires
enterprises to report selected  information about operating  segments in interim
financial  reports.  Management  does not believe that  adoption of SFAS No. 131
will have a material impact on the Company's consolidated financial condition or
results of operations.

     Employers'  Disclosures  about  Pension  and Other  Employee  Benefits.  In
February 1998, the FASB issued Statement of Financial  Accounting  Standards No.
132, "Employers'  Disclosures about Pensions and Other Postretirement  Benefits"
("SFAS No. 132"). SFAS No. 132 alters current disclosure  requirements regarding
pensions  and other  postretirement  benefits  in the  financial  statements  of
employers who sponsor such benefit plans.  The revised  disclosure  requirements
are designed to provide  additional  information to assist readers in evaluating
future costs related to such plans.  Additionally,  the revised  disclosures are
designed to provide  changes in the  components  of pension and benefit costs in
addition to the year end  components of those factors in the resulting  asset or
liability  related to such plans.  The  statement is effective  for fiscal years
beginning after December 15, 1997 with earlier application available. Management
does not believe  that  adoption of SFAS No. 132 will have a material  impact on
the Company's consolidated financial condition or results of operations.

     Accounting for Derivative  Instruments and for Hedging Activities.  In June
1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"),  entitled  "Accounting  for  Derivative  Instruments  and for Hedging
Activities." SFAS No. 133 provides a comprehensive  and consistent  standard for
the  recognition  and  measurement of derivatives  and hedging  activities.  The
statement  requires all  derivatives to be recorded on the balance sheet at fair
value and establishes special accounting for the following three different types
of hedges:  hedges of changes in the fair value of assets,  liabilities  or firm
commitments  (referred to as fair value  hedges);  hedges of the  variable  cash
flows of  forecasted  transactions  (cash  flow  hedges);  and hedges of foreign
currency  exposures  of  net  investments  in  foreign  operations.  Though  the
accounting  treatment  and  criteria  for each of the  three  types of hedges is
unique, they all result in recognizing  offsetting changes in value or cash flow
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair  value of  derivatives  that do not meet the  criteria  of one of these
three categories of hedges are included in earnings in the period of the change.
SFAS No. 133 is effective for years beginning after June 15, 1999, but companies
can adopt SFAS No. 133 as early as the  beginning  of any  fiscal  quarter  that
begins after June 1998.  Management  does not believe that  adoption of SFAS No.
133  will  have a  material  impact  on  the  Company's  consolidated  financial
condition or results of operations.

     Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage  Loans Held for Sale by a Mortgage  Banking  Enterprise.  In October
1998,  the FASB issued  Statement of  Financial  Accounting  Standards  No. 134,
"Accounting for Mortgage-Backed  Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134"),
which is effective for the first fiscal  quarter after  December 15, 1998.  This
statement   amends  SFAS  No.  65  "Accounting  for  Certain   Mortgage  Banking
Activities." This statement  revises the accounting for retained  securities and
beneficial interests.  Management does not believe that adoption of SFAS No. 134
will have a material impact on the Company's consolidated financial condition or
results of operations.

     The foregoing does not constitute a  comprehensive  summary of all material
changes or  developments  affecting  the manner in which the  Company  keeps its
books and records and performs its financial accounting responsibilities.  It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.

                                       -9-

<PAGE>

                Management's Discussion and Analysis of Financial
                       Condition and Results of Operations

                               FINANCIAL CONDITION
                               -------------------

                December 31, 1998 compared to September 30, 1998

Total assets  decreased  $7.8 million to $220.2  million as of December 31, 1998
from $228.0  million as of September 30, 1998 as excess cash flows  generated by
liquidating  investment  securities  were used to reduce FHLB  advances and fund
treasury stock purchases.  Interest-bearing  deposits  increased $1.4 million to
$2.6 million as of December 31, 1998. Investment  securities  available-for-sale
decreased  $3.1 million to $37.3 million at December 31, 1998 from $40.4 million
at September 30, 1998 due  primarily to a market value  decrease of $270,000 and
sales  and  maturities  of  $3.4  million.  Mortgage-backed  securities  held to
maturity  decreased to $13.6  million at December 31, 1998 from $16.4 million at
September  30, 1998 due  primarily  to  repayments.  Mortgage-backed  securities
available-for-sale  decreased $5.3 million to $43.3 million at December 31, 1998
from $48.6  million at September  30, 1998 due  primarily to  repayments of $4.8
million and a market value decrease of $480,000. Loans receivable increased $2.8
million to $112.2  million at December 31, 1998 from $109.4 million at September
30,  1998 due  primarily  to new loan  originations  of $10.2  million  and loan
purchases of $400,000  exceeding  repayments of $7.9 million.  Loan originations
consisted  primarily of mortgage  loans and home equity line of credit loans and
increased due to favorable interest rates.

Total  deposits  increased  $815,000 to $116.5 million at December 31, 1998 from
$115.7 million at September 30, 1998. The increase was primarily due to interest
credited.  FHLB advances decreased $4.8 million to $57.0 million at December 31,
1998 from $61.8 million at September 30, 1998.  The decreased  advances were the
result of excess cash flows  generated  by  investment  maturities,  accelerated
repayments and sales.

Stockholders'  equity  decreased  $2.1 million to $43.2  million at December 31,
1998 from $45.3  million at September  30, 1998 due primarily to the purchase of
treasury stock at a cost of $2.0 million,  a decrease in net unrealized gains of
$444,000 due partially to a decrease in the  available-for-sale  portfolio,  and
the payment of dividends  totaling  $315,000,  partially offset by net income of
$487,000 for the three month period.  At December 31, 1998, there were 2,820,154
shares of common stock outstanding.


                              Results of Operations
                              ---------------------

The  Company's  results of  operations  depend  primarily  upon the level of net
interest income,  which is the difference  between the interest income earned on
its interest-earning assets such as loans and investments,  and the costs of the
Company's  interest-bearing  liabilities,  primarily deposits and borrowing. Net
interest  income  depends  upon  the  volume  of  interest-earning   assets  and
interest-bearing  liabilities  and the  interest  rate  earned  or paid on them,
respectively.  Results of operations  are also  dependent  upon the level of the
Company's  non-interest  income,  including fee income and service charges,  and
affected by the level of its  non-interest  expenses,  including its general and
administrative expenses.


                     Comparison of Operating Results for the
                    Quarters Ended December 31, 1998 and 1997
                    -----------------------------------------

Net Income.  The  Company's  net income for the three months ended  December 31,
1998 was  $487,000  as compared  to  $459,000  for the same  period in 1997,  an
increase  of  $28,000.  This  increase  was  due  primarily  to an  increase  in
loan-related fee income of $37,000,  an increase in rental income of $29,000, an
increase in  deposit-related  fee income of $15,000, a decrease in the loan loss
provision  of  $21,000,  and a decrease  in  non-interest  expense  of  $11,000,
partially  offset by a decrease in net interest income of $9,000,  a decrease in
gains on the sale of investments  available for sale of $40,000, and an increase
in income taxes of $35,000.

Interest  Income.  Total interest income for the quarter ended December 31, 1998
decreased  $208,000  compared  to a  year  ago  due  to a  decrease  in  average
interest-earning  assets of $7.6 million to $215.1 million from $222.7  million,
as well as a decrease in the yield on average interest-earning assets from 7.44%
to 7.32%. The decrease in average  interest-earning  assets was partially due to
the utilization of $4.8 million during 1998 for the repurchase of Company stock.

                                      -10-

<PAGE>

Interest  Expense.  The Company's  interest expense  decreased  $199,000 for the
quarter  ended  December  31,  1998  compared to a year ago due to a decrease in
average interest-bearing liabilities to $176.8 million at December 31, 1998 from
$182.1 million a year ago, and the average interest rate decreased to 5.31% from
5.59%.  The decrease in average  interest  bearing  liabilities  resulted from a
decrease in the average  balance of savings  deposits of $8.2 million  partially
offset by an increase in the average balance of borrowed money of $2.9 million.

Provision for Loan Losses.  The  determination  of the allowance for loan losses
involves  material  estimates that are susceptible to significant  change in the
near  term.  The  allowance  for loan  losses is  maintained  at a level  deemed
adequate  to  provide  for losses  through  charges to  operating  expense.  The
allowance  is based  upon  past loss  experience  and other  factors  which,  in
management's  judgment,  deserve current  recognition in estimating losses. Such
other factors considered by management include the growth and composition of the
loan  portfolio,  the  relationship  of the allowance for losses to  outstanding
loans, and economic conditions.

The  Company did not record a  provision  for loan losses for the quarter  ended
December 31, 1998  compared to $21,000 for the same quarter in the prior year as
non-performing loans decreased to $459,000 from $562,000 at September 30, 1998.

The Company  will  continue to monitor  its  allowance  for loan losses and make
future  additions to the  allowance  through the  provisions  for loan losses in
light of its level of loans and as economic conditions dictate.  There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.

Non-Interest  Income.  The  Company's  non-interest  income was $217,000 for the
quarter ended December 31, 1998 compared to $176,000 for the same quarter a year
ago due to the Company's continuing efforts to increase fee income. The increase
was due  primarily  to an increase  in  loan-related  fee income of $37,000,  an
increase in rental  income of $29,000,  and an increase in  deposit-related  fee
income  of  $15,000,  partially  offset  by a  decease  in  gains on the sale of
investments available for sale of $40,000.

Non-Interest  Expense. The Company's  non-interest expense decreased $11,000 for
the quarter  ended  December 31, 1998 due primarily to a decrease of $117,000 in
advertising  costs due to the absence of special  promotions,  and a decrease of
$6,000 in  professional  fees,  partially  offset by an  increase  of $81,000 in
compensation costs and an increase in occupancy and equipment costs of $23,000.

Provision for Income Taxes.  Tax expense for the quarter ended December 31, 1998
was $132,000 compared to $97,000 for the same quarter in 1997 due to an increase
in pre-tax income.

                                      -11-

<PAGE>

                         Liquidity and Capital Resources
                         -------------------------------

The  Company's   principal   sources  of  funds  are  deposits  and  borrowings,
amortization and prepayments of loan principal and  mortgage-backed  securities,
maturities of investment securities and income from operations.  While scheduled
loan  repayments and maturing  investments are relatively  predictable,  deposit
flows and early loan repayments are more  influenced by interest  rates,  floors
and caps on loan rates, general economic conditions and competition. The Company
generally  manages the pricing of its deposits to be competitive and to increase
core deposit relationships, where practicable.

The Company's most liquid assets are cash and cash equivalents, which consist of
interest bearing deposits and short term highly liquid investments with original
maturities  of less than three  months  that are  readily  convertible  to known
amounts  of cash.  The  level of these  assets  is  dependent  on the  Company's
operating,  financing  and  investing  activities  during any given  period.  At
December 31, 1998 and September 30, 1998, cash and cash equivalents totaled $3.1
million and $1.8 million respectively.

The primary financing activities of the Company are deposits and borrowings. For
the three months ended December 31, 1998,  deposits  increased  $815,000 and the
Bank's net (proceeds less repayments) financing activity with the FHLB decreased
$4.8 million.

The Company  anticipates  that it will have  sufficient  funds available to meet
current  commitments.  At December  31, 1998 the  Company has  outstanding  loan
commitments  totaling  $6,965,000,  and unused lines of credit granted  totaling
$1,581,000.

The Bank is subject to the capital  regulations of the Office of the Comptroller
of the Currency ("OCC").  The OCC's regulations  establish two capital standards
for national banks: a leverage requirement and a risk-based capital requirement.
In addition,  the OCC may, on a case-by-case basis, establish individual minimum
capital  requirements for a national bank that vary from the requirements  which
would  otherwise  apply  under OCC  regulations.  A national  bank that fails to
satisfy the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems appropriate.

The  leverage  ratio  adopted  by the OCC  requires  a minimum  ratio of "Tier 1
capital" to adjusted  total  assets of 3% for national  banks rated  composite 1
under the CAMEL rating system for banks.  National  banks not rated  composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their  operations.  For  purposes  of the OCC's  leverage
requirement,  Tier 1 capital generally consists of common  stockholders'  equity
and retained  income and certain  non-cumulative  perpetual  preferred stock and
related  income,  except  that no  intangibles  and certain  purchased  mortgage
servicing  rights and  purchased  credit card  relationships  may be included in
capital.

The risk-based capital requirements established by the OCC's regulations require
national  banks  to  maintain  "total  capital"  equal  to at  least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital"  means Tier 1 capital  (as  described  above)  plus  "Tier 2  capital",
provided  that the amount of Tier 2 capital  may not exceed the amount of Tier 1
capital,  less certain assets.  The components of Tier 2 capital include certain
permanent and maturing  capital  instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets.

The OCC has revised its  risk-based  capital  requirements  to permit the OCC to
require  higher  levels of capital for an  institution  in light of its interest
rate risk. In addition,  the OCC has proposed  that a bank's  interest rate risk
exposure would be quantified  using either the  measurement  system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such  model  is  determined  to  be  adequate  by  the  institution's  examiner.
Management  of the  Bank has not  determined  what  effect,  if any,  the  OCC's
proposed  interest  rate  risk  component  would  have  on  the  Bank's  capital
requirement if adopted as proposed.

At December 31, 1998,  the Bank had Tier 1 capital of $38.2  million or 17.1% of
adjusted  total  assets  and Tier 2 capital  of $38.7  million or 42.0% of total
risk-weighted assets.

                                      -12-

<PAGE>

                              Non-Performing Assets
                              ---------------------

The  following  table sets forth the amounts and  categories  of  non-performing
assets in the Company's  portfolio.  Loans are placed on non-accrual status when
principal and interest is 90 days or more past due,  unless,  in the judgment of
management,  the loan is well  collaterized  and in the  process of  collection.
Loans are also reviewed monthly and any loan whose collectibility is doubtful is
placed on non-accrual status.  Interest accrued and unpaid at the time a loan is
placed on non-accrual  status is charged  against  interest  income.  Subsequent
payments are either applied to the outstanding  principal balance or recorded as
interest income,  depending on the assessment of the ultimate  collectibility of
the loan. Restructured loans include troubled debt restructuring (which involved
forgiving a portion of interest or  principal  on any loans or making loans at a
rate materially less than the market rate).

                                                    December 31,   September 30,
                                                        1998            1998
                                                    ------------   -------------
                                                       (Dollars in Thousands)
Non-accruing loans:
  One-to-four family ............................       $ 373          $ 257
  Multi-family ..................................          54            280
  Commercial real estate ........................          --             --
  Consumer ......................................          32             25
                                                        -----          -----
    Total .......................................         459            562
                                                        -----          -----
Total non-performing assets .....................       $ 459          $ 562
                                                        =====          =====
Total as a percentage of total assets ...........         .21%           .27%
                                                        =====          =====

For the three months ended December 31, 1998,  gross interest income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms amounted to $9,900.

In addition to the  non-performing  assets set forth in the table  above,  as of
December 31, 1998,  there were no loans with respect to which known  information
about the  possible  credit  problems of the  borrowers or the cash flows of the
secured  properties have caused management to have concerns as to the ability of
the borrowers to comply with present loan  repayment  terms and which may result
in the future inclusion of such items in the non-performing asset categories.

Management has considered the Company's  non-performing  and "of concern" assets
in establishing its allowance for loan losses.


                     Impact of Inflation and Changing Prices
                     ---------------------------------------

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


                               Recent Developments
                               -------------------

On January 19, 1999 the Board of Directors  approved a cash dividend of $.12 per
share to be payable  February 16, 1999 to  shareholders of record on February 1,
1999.

                                      -13-

<PAGE>

                         Year 2000 Readiness Disclosure
                         ------------------------------

Notice is hereby  given that the Year 2000  statement  set forth  below is being
designated a Year 2000 Readiness  Disclosure in accordance  with Section 7(b) of
the Year 2000  Information  and Readiness  Disclosure Act. For more than a year,
the Company has been engaged in the process of  addressing  a potential  problem
that is facing all users of automated  information  systems,  including personal
computers,  that is generally referred to as the Year 2000 Issue. The problem is
the  result of  computer  systems  processing  transactions  based upon 2 digits
representing the year of the transaction rather than 4 full digits (e.g., 98 for
1998).  These computer systems may not operate properly when the last two digits
become "00", as will occur on January 1, 2000. In some cases,  this could result
in  a  system  failure,   miscalculations  causing  disruptions  of  operations,
temporary inability to process transactions,  send invoices or engage in similar
normal business activities. The problem could affect a wide variety of automated
information  systems  such  as  main  frame  computer   applications,   personal
computers,   communication  systems,  including  telephone  systems,  and  other
information  systems  utilized not only by the Company,  but also by its vendors
and  customers.  The most  significant  of the Company's  automated  information
systems  affected by the Year 2000 issue is the data  processing  system used to
process transactions and information for loan and deposit customers. The Company
currently  purchases  the services for this system from a nationally  recognized
data processing  vendor.  Other programs and applications  used in the Company's
operations  that will be affected by the Year 2000 issue  include  building  and
security  system  equipment,  ATM  modems,  loan  document  processing  systems,
investment accounting programs, and computer software and hardware. All software
and  hardware  has been  purchased  from  outside  vendors.  The Company has not
developed any in-house computer  applications or equipment.  All data processing
is done off-site.  The Company has  maintenance  agreements  with vendors on the
majority of its equipment and systems.

The Company's  Year 2000 plan process began in the summer of 1997. At that time,
a Year 2000 plan  coordinator  was appointed and assessment of mission  critical
systems began. The Company  upgraded much of its computer  hardware and software
during 1998, in large part to meet the system  requirements when it converted to
a new data processing  company in July 1998. The Company believes that Year 2000
compliance had been achieved for substantially all mission critical applications
by the end of 1998.  Further  renovation and testing is expected to occur during
the first quarter of 1999,  with the timing  dictated by external  vendors.  The
Company's  vendors  have been  providing  updates  regarding  their  progress in
assessment,  renovation  and  testing  on a  regular  basis,  and the Year  2000
Coordinator  periodically  presents  updates  regarding  Year 2000 issues to the
Board of Directors.

The  predominant  risk associated with the Year 2000 issue for the Company rests
with the  functionality  of the data processing  system.  In order to offset the
inherent risk with its main data processing  system,  the Company is researching
sites  and  services   offered  by  vendors  which  specialize  in  establishing
operations on an emergency basis, as well as preparing other contingency  plans.
The Company has not identified any customers who present potential risk relative
to their compliance with Year 2000 within their own organizations. Loan officers
are aware of the Year 2000  issue,  and the  issue is being  addressed  with new
commercial customers. The Company has a large investment portfolio which carries
a  potential  liquidity  risk  should the  companies  handling  the  investments
experience  a Year 2000 issue.  These  companies  appear to be well  advanced in
renovating and testing their systems. The Company outsources its item processing
operations to a nationally  recognized  data  processing  company.  That Company
appears to be well advanced  with year 2000  compliance  efforts.  Other vendors
also appear to be  progressing  in their Year 2000 efforts.  The most  difficult
risks for the  Company to assess  are the risks  associated  with the  utilities
offered by gas,  electric  and  telephone  companies.  Those are risk  shared by
everyone and cannot be accurately quantified at this time.

As indicated above, the Company is researching  "hot-site"  options to establish
emergency  operations if necessary because of Year 2000 failure. The Company has
generally  identified  critical  requirements  for minimum levels of outputs and
services and  established  recovery plans to implement those  requirements.  The
Company is considering  increasing its liquidity  levels during the last quarter
of 1999 in preparation for possible extreme  customer  reaction to the Year 2000
issue.

                                      -14-

<PAGE>

The Company has planned for the Year 2000 with its officers  and staff.  It does
not intend to use outside consultants.  Because the Company relies predominantly
on outsourced vendors for its core applications,  it does not expect significant
costs  related  to Year 2000  renovation.  Expenses  incurred  to date which are
directly related to the Year 2000 issue total  approximately  $40,000.  Based on
the  Year  2000  plan  as  currently  being  executed  and  the  best  available
information,  the Company does not anticipate  that the cost to address the Year
2000  issues will have a material  adverse  impact on its  financial  condition,
results of operation or liquidity.


                           Forward-Looking Statements
                           --------------------------

The preceding  "Management's  Discussion and Analysis of Financial Condition and
Results   of   Operations"   section   of  this  Form  10-Q   contains   various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended,  which  represents  Damen Financial  Corporation's  expectations and
beliefs concerning future events including,  without limitation,  the following:
the  Company's  efforts  in  retaining  and  expanding  its  customer  base  and
differentiating   it  from  its  competition;   future  FDIC  insurance  premium
assessments;  the  impact  of  conversion  to a  National  Bank  and its plan of
restructuring  on its financial  performance  and future  growth;  the impact of
interest  rates on its net  interest  income  as a result of its  balance  sheet
structure;  the  impact  of its  policy  guidelines  and  strategies  on its net
interest  income  based on future  interest  rate  projections;  the  ability to
provide funding  sources for both the Bank and the Parent Company;  Management's
assessment of its provision and allowance for loan loss levels based upon future
changes in the composition of its loan portfolio,  loan losses, collateral value
and economic conditions;  and Management's  assessment of the impact of the Year
2000 on the  financial  condition,  results of  operations  and liquidity of the
Company.

The Company  cautions that these  statements are further  qualified by important
factors  that could cause  actual  results to differ  materially  from those set
forth in the  forward  looking  statements  due to  market,  economic  and other
business  related  risks and  uncertainties  effecting the  realization  of such
statements.  Certain of these risks and  uncertainties  included in such forward
looking statements include, without limitation,  the following:  dynamics of the
market  served  in terms of  competition  from  traditional  and  nontraditional
financial  service  providers  can effect both the funding  capabilities  of the
Company in terms of deposit garnering as well as asset generation  capabilities,
future  legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and  savings and loan  industries  and actions by the Federal
Reserve  Board may  result in the  imposition  of costs and  constraints  on the
Company  through higher FDIC insurance  premiums;  significant  fluctuations  in
market  interest  rates  and  operational   limitations;   deviations  from  the
assumptions  used to evaluate the  appropriate  level of the  allowance for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the allowance  for loan losses and thereby  affect the future levels of
provisioning;  and the steps  necessary  to address the Year 2000 Issue  include
ensuring  that not only  the  Company's  automated  systems,  but also  those of
vendors and customers, can become Year 2000 compliant.

Accordingly,  results  actually  achieved may differ  materially  from  expected
results in these statements. Damen Financial Corporation does not undertake, and
specifically disclaims,  any obligation to update any forward looking statements
to reflect events or circumstances occurring after the date of such statements.


           Quantitative and Qualitative Disclosures About Market Risk
           ----------------------------------------------------------

The  Company's  interest  rate risk  position  is  discussed  under the  heading
"Results of Operations" on page 10. Other types of market risk,  such as foreign
currency  exchange  risk and  commodity  price risk,  do not arise in the normal
course of the Company's business activities.

                                      -15-

<PAGE>

                           PART II - OTHER INFORMATION


Item 1.   LEGAL PROCEEDINGS
          -----------------

          On December  30,  1998,  a  stockholder  of the  Company,  Mr. Paul J.
          Duggan,  filed a lawsuit in the Delaware Court of Chancery against the
          Company and each of its  Directors.  The suit alleged that the meeting
          and  record  dates for this  year's  annual  meeting  were  improperly
          changed by the Board.  Mr. Duggan asked the Court to force the Company
          to hold the annual meeting on January 25, 1999 and to reset the record
          date to December 9, 1998.  On January 12, 1999,  the Court agreed with
          the Company's  position  that there was no merit to the  stockholder's
          allegations,  and denied the  stockholder's  request for a preliminary
          injunction.


Item 2.   CHANGES IN SECURITIES
          ---------------------

          None.


Item 3.   DEFAULTS UPON SENIOR SECURITIES
          -------------------------------

          None.


Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
          ---------------------------------------------------

          None.


Item 5.   OTHER INFORMATION
          -----------------

          Not applicable.


Item 6.   EXHIBITS AND REPORTS ON FORM 8-K
          --------------------------------

          (a)  Computation  of earnings  per share  (Exhibit 11 filed  herewith)
               Financial Data Schedule (Exhibit 27 filed herewith)

          (b)  The Company  filed a Form 8-K dated  December 28, 1998  attaching
               (i) its press release announcing the engagement of Keefe Bruyette
               and Woods,  Inc. to serve as its  financial  advisor to assist in
               reviewing its strategic  options including a possible sale of the
               Company  and (ii)  attaching  its press  release  announcing  the
               Company  had   changed   the  date  of  its  annual   meeting  of
               stockholders from January 25, 1999 to February 26, 1999.


                                      -16-

<PAGE>

                                   SIGNATURES


     Pursuant to the  requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                           DAMEN FINANCIAL CORPORATION
                           ---------------------------
                                   Registrant



DATE: February 12, 1999


BY: /s/ Mary Beth Poronsky Stull
    ----------------------------
    Mary Beth Poronsky Stull
    President, Chief Executive Officer and Director
    (Duly Authorized Representative)



BY: /s/ Gerald J. Gartner
    ----------------------------
    Gerald J. Gartner
    Chief Financial Officer and Treasurer
    (Principal Financial and Accounting Officer)




                                      -17-

<PAGE>

                                INDEX TO EXHIBITS


Exhibit No.                                                             Page No.
-----------                                                             --------

    11         Statement regarding Computation of Earnings Per Share       19

    27         Financial Data Schedule                                     20






                                      -18-