SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

[X] Annual report  pursuant to section 13 or 15 (d) of the  Securities  Exchange
    Act of 1934
For the fiscal year 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 No. 0-24579

                         Carnegie Financial Corporation
               --------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

Pennsylvania                                                   25-1806857    
------------------------------------------               --------------------
(State or Other Jurisdiction of Incorporation or            (I.R.S. Employer
Organization)                                                Identification No.)

17 West Mall Plaza, Carnegie, Pennsylvania                       15106     
------------------------------------------                     ----------     
(Address of Principal Executive Offices                        (Zip Code)

Issuer's Telephone Number, Including Area Code:              (412) 276-1266 
                                                             ---------------
Securities registered under to Section 12(b) of the Exchange Act:    None 
                                                                    ------   
Securities registered under to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

     Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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    .
   -----   ----

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     State issuer's revenues for its most recent fiscal year. $1,413,000

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Registrant,  based on the average  bid and asked price of the  Registrant's
Common Stock on March 22, 1999 was $1.9 million.

     As of March 1, 1999,  there were issued and  outstanding  238,050 shares of
the Registrant's Common Stock.

     Transition Small Business Disclosure Format (check one):
YES      NO  X 
   ----    ----
                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year ended
     December 31, 1998. (Part II)

2.   Portions of the Proxy Statement for the Annual Meeting of Stockholders  for
     the Fiscal Year ended December 31, 1998. (Part III)

                                        

<PAGE>



Item 1.  Business
-----------------
                                     PART I

Forward Looking Statements

     Carnegie  Financial  Corporation (the "Company") may from time to time make
written or oral "forward-looking statements",  including statements contained in
the Company's  filings with the  Securities and Exchange  Commission  (including
this Annual Report on Form 10-KSB and the exhibits  thereto),  in its reports to
stockholders and in other communications by the Company,  which are made in good
faith by the Company  pursuant to the "safe  harbor"  provisions  of the Private
Securities Litigation Reform Act of 1995.

     These forward-looking  statements involve risks and uncertainties,  such as
statements  of the  Company's  plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the Board of  Governors of the
Federal  Reserve  System,   inflation,   interest  rate,   market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes,  acquisitions;  changes in consumer spending
and  savings  habits;  and the  success  of the  Company at  managing  the risks
involved in the foregoing.

     The Company  cautions that the foregoing  list of important  factors is not
exclusive.  The  Company  does  not  undertake  to  update  any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company.

General

     The Company is a Pennsylvania corporation organized in February 1998 at the
direction  of Carnegie  Savings  Bank (the "Bank") to acquire all of the capital
stock that the Bank  issued in its  conversion  from the mutual to stock form of
ownership  (the  "Conversion").  On  July  10,  1998,  the  Bank  completed  the
Conversion and became a wholly owned subsidiary of the Company. The Company is a
unitary savings and loan holding company which,  under existing laws,  generally
is not  restricted  in the types of business  activities  in which it may engage
provided   that  the  Bank   retains  a  specified   amount  of  its  assets  in
housing-related  investments.  The Company  conducts no significant  business or
operations  of its own other than  holding all of the  outstanding  stock of the
Bank and  investing the  Company's  portion of the net proceeds  obtained in the
Conversion.


                                        2

<PAGE>


     The Bank is a federally  chartered  stock  savings  bank  headquartered  in
Carnegie,  Pennsylvania.  The Bank is subject to examination  and  comprehensive
regulation  by the Office of Thrift  Supervision  ("OTS") and its  deposits  are
federally  insured by the Bank Insurance  Fund ("BIF").  The Bank is a member of
and owns  capital  stock in the Federal Home Loan Bank of  Pittsburgh  ("FHLB"),
which is one of the 12 regional banks in the FHLB System.

     The Bank operates a traditional  savings bank business,  attracting deposit
accounts from the general public and using those  deposits,  together with other
funds,  primarily  to  originate  and invest in loans  secured by  single-family
residential real estate.

Competition

     Competition  for deposits comes from other insured  financial  institutions
such as commercial banks, thrift institutions, credit unions, finance companies,
and multi-stage regional banks in the Bank's market areas. Competition for funds
also includes a number of insurance products sold by local agents and investment
products  such as mutual funds and other  securities  sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
commercial banks, thrift institutions, credit unions and mortgage bankers.

Lending Activities

     Analysis of Loan  Portfolio.  Set forth below is selected  data relating to
the  composition  of the  Bank's  loan  portfolio  by type of loan on the  dates
indicated:

                                                December 31,
                                         1998                 1997
                                   Amount    Percent    Amount  Percent
                                   ------    -------    ------  -------
                                           (Dollars in thousands)
Type of Loans:
Real Estate Loans:
  One- to four-family........     $10,989     75.00%   $7,656    78.93%
  Commercial.................         491      3.35       343     3.54
  Home equity................         766      5.23       579     5.97
  Construction ..............       1,252      8.55       251     2.59
                                  -------   -------    ------  -------
      Total real estate......      13,498     92.13     8,829    91.03
                                  -------   -------    ------  -------

Commercial...................         304      2.07         -         -
Consumer Loans:
  Automobile loans...........         450      3.07       383     3.95
  Unsecured..................         288      1.97       368     3.79
  Share loans................         111      0.76       119     1.23
                                  -------   -------    ------  -------
     Total consumer..........         849      5.80       870     8.97
                                  -------   -------    ------  -------
Total .......................     $14,651    100.00%   $9,699   100.00%
                                  =======   =======    ======  =======



                                        3

<PAGE>


Loan Maturity Tables

     The  following  sets forth the  maturity  of the Bank's loan  portfolio  at
December 31, 1998. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled principal repayments of loans totaled $2.0
million  at  December  31,  1998.  All  loans  are  shown as  maturing  based on
contractual maturities.

                                               Due after
                                  Due within   1 through    Due after
                                     1 year     5 years      5 years     Total
                                     ------     -------      -------     -----
                                                   (In thousands)
One- to four-family real estate..     $   21     $  489     $10,479    $10,989
Commercial real estate...........          -          -         491        491
Home equity......................          -        338         428        766
Construction.....................      1,252          -           -      1,252
Consumer.........................         55        706          88        849
Commercial.......................          -          -         304        304
                                      ------     ------     -------    -------
Total............................     $1,328     $1,533     $11,790    $14,651
                                      ======     ======     =======    =======


     The  following  table  sets  forth  dollar  amount  of all  loans due after
December  31,  1999,  which  have  predetermined  interest  rates and which have
floating or adjustable interest rates.

                                                     Floating or
                                     Fixed Rates  Adjustable Rates      Total
                                     -----------  ----------------      -----
                                                   (In thousands)
One-to-four family real estate...   $10,629           $   339          $10,968
Commercial real estate...........         -               491              491
Home equity......................       341               425              766
Consumer.........................       794                 -              794
Commercial.......................         -               304              304
                                    -------            ------          -------
         Total...................   $11,764            $1,559          $13,323
                                    =======            ======          =======


     Real Estate Loans.  The Bank's  primary  lending  activity  consists of the
origination of one- to four-family fixed rate residential mortgage loans secured
by  property  located in the Bank's  primary  market  area.  The Bank  generally
originates one- to four-family fixed rate residential  mortgage loans in amounts
up to 95% of the lesser of the appraised value or purchase  price,  with private
mortgage  insurance  required on loans with a  loan-to-value  ratio in excess of
90%.  Generally,  the maximum  loan-to-value  ratio on mortgage loans secured by
non-owner  occupied  properties and commercial  buildings is limited to 70%. The
Bank  retains  all of  its  mortgage  loans  and  originates  these  loans  with
maturities of up to 30 years.  Mortgage  loans  originated  and held by the Bank
generally include due-on-sale clauses. This gives the Bank the right to deem the
loan immediately due and payable in the event the borrower  transfers  ownership
of the property securing the mortgage loan without the Bank's consent.

     The Bank  originates  home equity loans and second mortgage loans which are
secured by one to four-family  residences.  The Bank  originates  these loans on
one- to  four-family  residences  with fixed  rate terms of up to 15 years.  The
loans  are  generally  subject  to  a  80%  combined  loan-to-value  limitation,
including any other outstanding mortgages or liens.


                                        4

<PAGE>



     Commercial  real  estate  lending  entails  significant   additional  risks
compared to residential  property  lending.  These loans typically involve large
loan balances to single borrowers or groups of related borrowers.  The repayment
of these loans  typically is dependent on the  successful  operation of the real
estate project securing the loan.  These risks can be significantly  affected by
supply and demand  conditions  in the market for office and retail space and may
also be subject to adverse conditions in the economy.

     Construction  Lending.  The Bank makes construction loans primarily for the
construction  of one-to  four-family  primary  home  dwellings.  These loans are
primarily  made to persons who are  constructing  properties  for the purpose of
occupying    them.    Loans   made   to   individual    property    owners   are
"construction-permanent"  loans  which  generally  provide  for the  payment  of
principal and interest during a construction period (generally up to six months)
at fixed or  adjustable  interest  rates having  terms  similar to other one- to
four-family residential loans.

     Commercial  Business Loans. The Bank maintains a small number of commercial
lines of credit  made to local  businesses  and  professionals.  These  lines of
credit are primarily secured by real property.

     Commercial  business  loans  generally  are deemed to entail  significantly
greater risk than that which is involved with single family real estate lending.
The  repayment of  commercial  loans  typically  is dependent on the  successful
operations and income stream of the business and the borrower. Such risks can be
significantly affected by economic conditions.  In addition,  commercial lending
generally   requires   substantially   greater  oversight  efforts  compared  to
residential real estate lending.

     Consumer Loans.  The Bank offers consumer loans in order to provide a wider
range of financial services to its customers.  The Bank's consumer loans consist
of share loans,  automobile loans, and unsecured loans. The Bank makes unsecured
loans to certain creditworthy borrowers.  Loans secured by vehicles are financed
for terms up to 60 months.  Loans secured by deposits of the bank are granted in
amounts up to 95% of the deposited amount.

     Consumer loans may entail  greater risk than  residential  mortgage  loans,
particularly  in the case of  consumer  loans that are  unsecured  or secured by
assets that depreciate rapidly.  Repossessed collateral for a defaulted consumer
loan may not be  sufficient  for  repayment  of the  outstanding  loan,  and the
remaining deficiency may not be collectible.

     Loan Approval  Authority and  Underwriting.  The Bank  establishes  various
lending limits for its officers and maintains a loan committee consisting of the
board of directors.  The  president  and loan officer have  authority to approve
home equity loans up to $35,000 and $20,000,  respectively, and the Officer Loan
Committee has the authority to approve  unsecured  consumer  loans up to $5,000.
The loan committee  ratifies all  residential  mortgage loans and all other real
estate and consumer loans.

     Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered.  Income and certain other information is verified.  If
necessary,  additional financial  information may be requested.  An appraisal or
other  estimate of value of the real estate  intended to be used as security for
the proposed  loan is obtained.  Appraisals  are  processed by  independent  fee
appraisers.

     Title  insurance is generally  required on all real estate  mortgage loans.
The Bank does not  require  title  insurance  on home  equity  loans and  second
mortgages under $50,000,  but obtains a property report, which indicates whether
there are any liens or other encumbrances against the property. Borrowers also

                                        5

<PAGE>



must obtain fire and casualty  insurance.  Flood  insurance is also  required on
loans secured by property that is located in a flood zone.

     Loan Commitments. Written commitments are given to prospective borrowers on
all approved real estate loans.  Generally,  the commitment  requires acceptance
within 45 days of the date of issuance.  At December 31,  1998,  commitments  to
cover originations of mortgage loans totalled $2,580,000.

     Loans to One Borrower.  The maximum amount of loans which the Bank may make
to any one  borrower may not exceed the greater of $500,000 or 15% of the Bank's
unimpaired capital and unimpaired  surplus.  The Bank may lend an additional 10%
of its unimpaired capital and unimpaired surplus if the loan is fully secured by
readily  marketable  collateral.  At  December  31,  1998,  the  Bank's  maximum
loan-to-one borrower limit was $575,000.

Nonperforming and Problem Assets

     Loan Delinquencies. When a mortgage loan becomes 30 days past due, a notice
of nonpayment is sent to the borrower.  If such payment is not received by month
end, an additional notice of nonpayment is sent to the borrower.  After 60 days,
if payment is still delinquent, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before  foreclosure
is commenced.  If the loan continues in a delinquent status for 90 days past due
and no repayment plan is in effect, foreclosure proceedings will be initiated.

     Loans are  reviewed  and are placed on a  non-accrual  status when the loan
becomes more than 90 days delinquent or when, in our opinion,  the collection of
additional interest is doubtful.  Interest accrued and unpaid at the time a loan
is placed on nonaccrual  status is charged against interest  income.  Subsequent
interest  payments,  if any,  are either  applied to the  outstanding  principal
balance or recorded as  interest  income,  depending  on the  assessment  of the
ultimate collectibility of the loan.

     Nonperforming  Assets. The following table sets forth information regarding
nonaccrual  loans and real estate owned,  as of the dates  indicated.  As of the
dates   indicated,   the  Bank  has  no  loans   categorized  as  troubled  debt
restructurings  within the meaning of SFAS 15 and no impaired  loans  within the
meaning of SFAS 114,  as amended by SFAS 118.  Interest  income  that would have
been recorded on loans  accounted  for on a nonaccrual  basis under the original
terms of such loans was not material for the year ended December 31, 1998.

                                        6

<PAGE>

<TABLE>
<CAPTION>
                                                                        At December 31,
                                                                 --------------------------------
                                                                     1998                1997
                                                                    (Dollars in thousands)
<S>                                                                 <C>            <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
  One-to-four family......................................           $   22        $      -
  Home equity.............................................                -               -
  Commercial..............................................                -              14
  Construction............................................                -               -
Consumer..................................................               30              28
Commercial................................................                -               -
                                                                     ------        --------
Total non-accrual loans...................................               52              42
                                                                     ------        --------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
  Residential.............................................                -               -
  Commercial..............................................                -               -
  Construction............................................                -               -
Commercial................................................                -               -
Consumer..................................................                -               -
Total accruing loans which are contractually past due
90 days or more...........................................                -               -
                                                                     ------        --------
Total non-performing loans................................               52              42
                                                                     ------        --------
Real estate owned.........................................                -             480
                                                                     ------        --------
Other non-performing assets...............................                -               -
                                                                     ------        --------
Total non-performing assets...............................          $    52        $    522
                                                                    =======        ========
Total non-performing loans to total loans.................             0.36%           0.44%
                                                                    =======        ========
Total non-performing loans to total assets................             0.26%           0.25%
                                                                    =======        ========
Total non-performing assets to total assets...............             0.26%           3.12%
                                                                    =======        ========

</TABLE>


     Classified Assets. OTS regulations provide for a classification  system for
problem  assets of savings  banks which  covers all problem  assets.  Under this
classification  system,  problem  assets of  savings  banks such as the Bank are
classified  as  "substandard,"  "doubtful,"  or "loss."  An asset is  considered
substandard if it is inadequately  protected by the current net worth and paying
capacity  of the  borrower or of the  collateral  pledged,  if any.  Substandard
assets  include  those  characterized  by the  "distinct  possibility"  that the
savings bank will sustain  "some loss" if the  deficiencies  are not  corrected.
Assets  classified  as  doubtful  have all of the  weaknesses  inherent in those
classified  substandard,  with the  added  characteristic  that  the  weaknesses
present  make  "collection  or  liquidation  in full," on the basis of currently
existing facts,  conditions,  and values,  "highly questionable and improbable."
Assets  classified  as loss are  those  considered  "uncollectible"  and of such
little value that their  continuance  as assets without the  establishment  of a
specific  loss  reserve  is not  warranted.  Assets may be  designated  "special
mention"  because  of  potential   weaknesses  that  do  not  currently  warrant
classification in one of the aforementioned categories.


                                        7

<PAGE>



     When a savings bank  classifies  problem  assets as either  substandard  or
doubtful,  it may  establish  general  allowances  for loan  losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular  problem  assets.  When a savings bank  classifies  problem assets as
loss, it is required  either to establish a specific  allowance for losses equal
to 100% of that portion of the asset so classified or to charge off such amount.
A savings bank's  determination as to the  classification  of its assets and the
amount of its valuation  allowances  is subject to review by the OTS,  which may
order the  establishment of additional  general or specific loss  allowances.  A
portion of general loss allowances  established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining a
savings bank's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital.

     The following table sets forth the Bank's  classified  assets in accordance
with the Bank's classification system.

                                     At December 31, 1998
                                     --------------------
                                    (Dollars in thousands)
Special Mention..............            $   23
Substandard..................                81
Doubtful assets..............                26
Loss assets..................            ------
                                         $  130
                                         ======

     Allowances  for Loan  Losses.  A  provision  for loan  losses is charged to
operations  based on management's  evaluation of the losses that may be incurred
in the Bank's loan portfolio. The evaluation, including a review of all loans on
which full  collectibility  of  interest  and  principal  may not be  reasonably
assured,  considers:  (i) the Bank's past loan loss  experience,  (ii) known and
inherent risks in the Bank's portfolio, (iii) adverse situations that may affect
the  borrower's  ability to repay,  (iv) the estimated  value of any  underlying
collateral, and (v) current economic conditions.

     The Bank monitors its allowance for loan losses and makes  additions to the
allowance  as economic  conditions  dictate.  Although  the Bank  maintains  its
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in its loan portfolio, future losses could exceed estimated amounts
and additional  provisions for loan losses could be required.  In addition,  the
Bank's  determination  of the amount of the allowance for loan losses is subject
to review by the OTS, as part of its examination process.  After a review of the
information available,  the OTS might require the establishment of an additional
allowance.  Any  increase in the loan loss  allowance  required by the OTS would
have a negative impact on the Bank's earnings.


                                        8

<PAGE>




     The  following  table sets  forth  information  with  respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:

                                                       For the Years Ended
                                                           December 31,
                                                       -------------------
                                                     1998               1997
                                                     ----               ----
                                                      (Dollars in thousands)

Total loans outstanding.........................  $ 14,651          $   9,700
                                                  ========          =========
Average loans outstanding.......................    11,709          $   9,730
                                                  ========          =========
Allowance balance (at beginning of period)......  $    115          $      39
Provision:
  Real Estate ..................................        44                 73
  Consumer......................................        --                 --
Charge-offs:
  Real Estate Loans.............................        --                 --
  Consumer......................................       (20)                --
Recoveries:
  Real Estate...................................        --                  3
  Consumer......................................        --                 --
                                                  --------          ---------
Allowance balances (at end of period)...........  $    139          $     115
                                                  ========          =========
Allowance for loan losses as a percent of
total loans outstanding.........................       .95 %             1.19 %
Net loans charged off as percent of average
loans outstanding...............................       .17 %               -- %
Return on average assets........................     (0.21)%            (0.33)%
Return on average equity........................     (1.97)%            (4.30)%
Equity to assets at period end..................     15.12 %             7.00 %



Analysis of the Allowance for Loan Losses

     The  following  table sets forth the  allocation  of the allowance for loan
losses for each  category  of loan.  The  allocation  of the  allowance  to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the  allowance to absorb losses in other
loan categories.



                                        9

<PAGE>




                                                At December 31,
                             ------------------------------------------------
                                     1998                      1997
                             ----------------------   -----------------------
                                       Percent of                Percent of
                                      Loans in Each             Loans in Each
                                       Category to               Category to
                             Amount    Total Loans    Amount     Total Loans
                             ------    -----------    ------     -----------
                                         (Dollars in thousands)

Type of Loans:
Real Estate Loans:                                      
  Residential.............    $110        74.99%        $ 75        78.93%
  Home equity.............       8          5.23           -         5.97
  Commercial..............       5          3.35           3         3.54
  Construction............       8          8.55           -         2.59
Commercial................       9          2.08           -            -
Consumer Loans............       9          5.80          37         8.97
                              ----       -------        ----      -------
Total.....................    $149       100.00%        $115      100.00%
                              ====       =======        ====      =======



Investment Activities

     Investment  Securities.  The Bank is required under federal  regulations to
maintain a minimum  amount of liquid  assets  which may be invested in specified
short-term securities and certain other investments.  The level of liquid assets
varies depending upon several factors,  including:  (i) the yields on investment
alternatives,  (ii) the Bank's judgment as to the  attractiveness  of the yields
then available in relation to other  opportunities,  (iii) expectation of future
yield levels,  and (iv) the Bank's  projections as to the short-term  demand for
funds to be used in loan origination and other  activities.  The Bank classifies
its  investment  securities  as  "available  for sale" or "held to  maturity" in
accordance  with SFAS No. 115.  At  December  31,  1998,  the Bank's  investment
portfolio policy allowed  investments in instruments such as: (i) U.S.  Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances,  (vi) certificates of deposit,  (vii) federal funds, including FHLB
overnight and term deposits, and (viii) investment grade corporate bonds, equity
securities, commercial paper and mortgage derivative products.


     The Bank's securities available for sale and investment  securities held to
maturity  portfolios  at December  31, 1998 did not  contain  securities  of any
issues  with an  aggregate  book  value in excess of 10% of the  Bank's  equity,
excluding those issued by the United States Government or its agencies.

     Mortgage-backed  Securities. To supplement lending activities, the Bank has
invested in residential mortgage-backed  securities.  Mortgage-backed securities
can serve as collateral for borrowings and, through  repayments,  as a source of
liquidity.  Mortgage-backed  securities represent a participation  interest in a
pool of  single-family  or  other  type of  mortgages.  Principal  and  interest
payments  are  passed  from the  mortgage  originators,  through  intermediaries
(generally   quasi-governmental   agencies)   that   pool  and   repackage   the
participation  interests in the form of  securities,  to  investors  such as the
Bank.  The  quasi-governmental  agencies  guarantee the payment of principal and
interest to  investors  and include the Federal Home Loan  Mortgage  Corporation
("FHLMC"),  Government  National  Mortgage  Association  ("GNMA"),  and  Federal
National Mortgage Association ("FNMA.")

                                       10

<PAGE>


     Mortgage-backed  securities  typically  are issued  with  stated  principal
amounts.  The  securities  are backed by pools of mortgages that have loans with
interest  rates that are  within a set range and have  varying  maturities.  The
underlying  pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage  loans.  Mortgage-backed  securities are generally  referred to as
mortgage participation certificates or pass-through  certificates.  The interest
rate risk  characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable  rate) and the prepayment  risk, are passed on to the  certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying  mortgages.  Expected  maturities will differ from contractual
maturities due to scheduled  repayments and because borrowers may have the right
to  call  or  prepay   obligations   with  or  without   prepayment   penalties.
Mortgage-backed  securities  issued by FHLMC and GNMA make up a majority  of the
pass-through certificates market.

     Securities Portfolio.  The following table sets forth the carrying value of
the Bank's investment securities at the dates indicated.

                                                             At December 31,
                                                             ---------------
                                                            1998         1997
                                                          --------    ---------
                                                          (Dollars in thousands)

Securities held to maturity:
  U.S. government agency securities....................    $   --     $    300
  Obligations of state and political subdivisions......       489          614
  Mortgage-backed securities...........................     1,067        1,721
                                                           ------     --------
       Total securities held to maturity...............     1,556        2,635
                                                           ------     --------
Securities available for sale:
   U.S. government agency securities...................     1,250          810
   U.S. treasury securities............................        --          204
   Mutual funds........................................        10          503
   Mortgage-backed securities..........................     1,026          907
                                                           ------     --------
       Total securities available for sale.............     2,286        2,424
                                                           ------     --------
       Total investment and mortgage-backed securities     $3,842       $5,059
                                                           ======     ========




                                       11

<PAGE>



     The  following  table  sets  forth  information   regarding  the  scheduled
maturities,  carrying  values,  approximate  fair values,  and weighted  average
yields for the Bank's  investment and  mortgage-backed  securities  portfolio at
December 31, 1998 by  contractual  maturity.  The following  table does not take
into  consideration  the  effects  of  scheduled  repayments  or the  effects of
possible prepayments.
<TABLE>
<CAPTION>

                                                                      As of December 31, 1998
                              ------------------------------------------------------------------------------------------------------
                                                                                                               Total Investment
                                                     More than           More than                          Securities and Mortgage
                               One Year or Less  One to Five Years   Five to Ten Years  More than Ten Years   -Backed Securities
                             ------------------ ------------------  ------------------  ------------------- ------------------------
                             Carrying  Average  Carrying   Average  Carrying   Average   Carrying Average   Carrying Average  Market
                               Value    Yield     Value     Yield     Value     Yield      Value   Yield      Value   Yield    Value
                               -----    -----     -----     -----     -----     -----      -----   -----      -----   -----    -----
                                                                   (Dollars in thousands)
<S>                          <C>       <C>       <C>      <C>        <C>      <C>      <C>        <C>       <C>     <C>     <C>   
U.S. government agencies....  $    --     -- %    $  --      -- %     $ 300    6.65%    $  951     5.76%     $1,251  6.76%   $1,251
Obligations of state and
  political subdivisions....       45   4.25        245    4.44         199    5.38         --       --         489  4.80       503
Mutual funds................       10   6.06         --      --          --      --         --       --          10  6.06        10
Mortgage-backed securities..       --     --        148    7.93         110    6.80      1,835     6.62       2,093  6.72     2,109
                              -------             -----               -----             ------               ------          ------
   Total....................  $    55   4.58%     $ 393    5.75%      $ 609    6.26%    $2,786     6.33%     $3,843  6.49%   $3,873
                              =======   ====      =====    ====       =====    ====     ======     ====      ======  ====    ======

</TABLE>


                                       12

<PAGE>



Sources of Funds

     Deposits  are the Bank's  major  external  source of funds for  lending and
other investment  purposes.  Funds are also derived from the receipt of payments
on loans and  prepayment of loans and  maturities of investment  securities  and
mortgage-backed  securities  and,  to  a  much  lesser  extent,  borrowings  and
operations.  Scheduled loan principal  repayments are a relatively stable source
of  funds,   while  deposit  inflows  and  outflows  and  loan  prepayments  are
significantly influenced by general interest rates and market conditions.

     Deposits.  Consumer and commercial deposits are attracted  principally from
within the Bank's  primary  market area  through the  offering of a selection of
deposit instruments including passbook savings accounts,  money market accounts,
and term certificate  accounts.  IRA accounts and NOW accounts are also offered.
Deposit account terms vary according to the minimum balance  required,  the time
period the funds must remain on deposit,  and the interest rate. At December 31,
1998, the Bank had no brokered deposits and its deposits were represented by the
following types of savings programs.

     The  following  table  indicates the amount of the Bank's  certificates  of
deposit of $100,000 or more by time remaining  until maturity as of December 31,
1998.

                                                      Certificates
Maturity Period                                        of Deposits
---------------                                        -----------
                                                     (In thousands)
Within three months                                       $  125
Three through six months                                     628
Six through twelve months                                    300
Over twelve months                                           200
                                                          ------
                                                          $1,253
                                                          ======

     Borrowings.  The Bank may obtain  advances  from the FHLB of  Pittsburgh to
supplement  its supply of lendable  funds.  Advances from the FHLB of Pittsburgh
are typically secured by a pledge of the Bank's stock in the FHLB of Pittsburgh,
a portion of the Bank's first mortgage loans and other assets.  Each FHLB credit
program has its own interest rate,  which may be fixed or adjustable,  and range
of maturities.  If the need arises, the Bank may also access the Federal Reserve
Bank  discount  window to  supplement  its supply of lendable  funds and to meet
deposit withdrawal requirements. The Bank became a member of the FHLB on June 8,
1998.



                                       13

<PAGE>



Employees

     At December 31, 1998 the Bank had 7 full-time  and no part-time  employees.
The  employees  of the Bank perform  clerical  work for the Company from time to
time; otherwise,  the Company has no employees other than its officers.  None of
the Bank's employees are represented by a collective  bargaining group. The Bank
believes that its relationship with its employees is good.

Regulation

     Set forth below is a brief description of certain laws which related to the
regulation of the Company and the Bank. The  description  does not purport to be
complete and is qualified  in its entirety by reference to  applicable  laws and
regulations.

Company Regulation

     General.  The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary  savings  association.  This  regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.

     Qualified  Thrift  Lender  Test.  As a  unitary  savings  and loan  holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the Qualified  Thrift  Lender  ("QTL") test. If the Company
controls  more  than one  savings  institution,  it would  lose the  ability  to
diversify  its  operations  into  non-banking  related  activities,  unless such
savings institutions each also qualify as a QTL or were acquired in a supervised
acquisition. See "- Regulation of the Bank - Qualified Thrift Lender Test."

Regulation of the Bank

     General. As a federally  chartered,  BIF insured savings  association,  the
Bank is  subject  to  extensive  regulation  by the OTS  and the  FDIC.  Lending
activities and other  investments must comply with various federal statutory and
regulatory   requirements.   The  Bank  is  also  subject  to  certain   reserve
requirements promulgated by the Federal Reserve Board.

     The OTS, in  conjunction  with the FDIC,  regularly  examines  the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law,  especially in such matters as the ownership of savings  accounts
and the form and content of the Bank's mortgage documents.

     The  Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the BIF and  depositors.
The regulatory structure also gives the regulatory authorities

                                       14

<PAGE>



extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for regulatory purposes.

     Insurance of Deposit  Accounts.  The Bank's deposit accounts are insured by
the BIF to a maximum of $100,000 for each insured  member (as defined by law and
regulation).  Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations, or has violated any applicable law,
regulation,  rule, order or condition  imposed by the FDIC or the  institution's
primary regulator.

     Effective September 30, 1996, federal law was revised to mandate a one-time
special  assessment on SAIF members of  approximately  .657% of deposits held on
March 31, 1995.  Beginning January 1, 1997, the deposit insurance assessment for
most Savings Association Insurance Fund ("SAIF") members was reduced to .064% of
deposits on an annual  basis  through the end of 1999.  During this same period,
BIF  members  will be  assessed  approximately  .013% of  deposits.  After 1999,
assessments  for BIF and SAIF members  should be the same.  It is expected  that
these continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations.

     Regulatory Capital  Requirements.  OTS capital  regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based  capital  requirement equal to
8.0% of total  risk-weighted  assets.  In  addition,  the OTS prompt  corrective
action  regulation  provides  that a  savings  institution  that has a  leverage
capital  ratio  of less  than  4% (3% for  institutions  receiving  the  highest
examination rating) will be deemed to be  "undercapitalized"  and may be subject
to certain restrictions.

     Dividend  and  Other  Capital  Distribution  Limitations.  OTS  regulations
require  the  Bank  to  give  the OTS 30 days  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.

     OTS  regulations  impose  limitations  upon all  capital  distributions  by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional capital  distributions  require prior regulatory approval.  As of
December 31, 1998,  the Bank was a Tier 1  institution.  In the event the Bank's
capital fell below its fully  phased-in  requirement or the OTS notified it that
it was in need of more than  normal  supervision,  the  Bank's  ability  to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.


                                       15

<PAGE>



     Qualified Thrift Lender Test. Savings institutions must meet a QTL test. If
the  Bank  maintains  an  appropriate  level  of  Qualified  Thrift  Investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing  privileges  from the FHLB of  Pittsburgh.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus goodwill and other intangible assets,  property used by the institution in
conducting  its business  and liquid  assets in an amount not  exceeding  20% of
total assets).  Certain assets are subject to a percentage  limitation of 20% of
portfolio assets. In addition,  savings associations may include shares of stock
of the FHLBs,  FNMA and FHLMC as  qualifying  QTIs.  An  association  must be in
compliance  with the QTL  test on a  monthly  basis in nine out of every  twelve
months.  As of  December  31,  1998,  the  Bank was in  compliance  with its QTL
requirement.

     Federal  Home  Loan  Bank  System.  The  Bank is a  member  of the  FHLB of
Pittsburgh,  which  is  one of 12  regional  FHLBs  that  administers  the  home
financing credit function of savings associations. Each FHLB serves as a reserve
or  central  bank for its  members  within  its  assigned  region.  It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB  System.  It makes loans to members  (i.e.,  advances) in  accordance  with
policies and procedures established by the Board of Directors of the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of  Pittsburgh  in an amount equal to at least 1% of its  aggregate  unpaid
residential mortgage loans, home purchase contracts or similar obligations or 5%
of its  outstanding  borrowings to the FHLB of  Pittsburgh,  at the beginning of
each year.

     Federal Reserve  System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW, and Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements  that are imposed by the OTS. At December
31,  1998,  the  Bank  was  in  compliance  with  these  Federal  Reserve  Board
requirements.

Item 2. Description of Property
-------------------------------

(a)      Property. The Bank operates from its one office located at 17 West Mall
         Plaza, Carnegie, Pennsylvania. Such property was acquired in 1986.

(b)      Investment  Policies.  See  "Item  1.  Business"  above  for a  general
         description  of the Bank's  investment  policies and any  regulatory or
         Board of Directors'  percentage of assets limitations regarding certain
         investments.  The Bank's  investments are primarily acquired to produce
         income, and to a lesser extent, possible capital gain.

     (1)  Investments  in Real Estate or Interests in Real Estate.  See "Item 1.
Business  - Lending  Activities  and -  Regulation  of the  Bank,"  and "Item 2.
Description of Property."

     (2) Investments in Real Estate  Mortgages.  See "Item 1. Business - Lending
Activities and - Regulation of the Bank."


                                       16

<PAGE>



         (3)  Investments  in  Securities  of or Interests in Persons  Primarily
Engaged in Real Estate  Activities.  See "Item 1. Business - Lending  Activities
and - Regulation of the Bank."

(c)      Description of Real Estate and Operating Data.

         Not Applicable.

Item 3. Legal Proceedings
-------------------------

         There are various  claims and lawsuits in which the Company or the Bank
are  periodically  involved,  such as  claims  to  enforce  liens,  condemnation
proceedings  on properties in which the Bank holds  security  interests,  claims
involving  the making and  servicing of real  property  loans,  and other issues
incident to the Bank's business. In the opinion of management,  no material loss
is expected from any of such pending claims or lawsuits.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.

                                     PART II

Item  5.  Market for Common Equity and Related Stockholder Matters
------------------------------------------------------------------

         The  information  contained under the section  captioned  "Stock Market
Information" of the Company's  Annual Report to Stockholders for the fiscal year
ended  December  31,  1998  (the  "Annual  Report")  is  incorporated  herein by
reference.

Item  6.  Management's Discussion and Analysis or Plan of Operation
-------------------------------------------------------------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item  7.  Financial Statements
------------------------------

         The  Registrant's   financial  statements  listed  under  Item  13  are
incorporated herein by reference.

Item  8.  Changes  in and  Disagreements  with  Accountants  On  Accounting  and
--------------------------------------------------------------------------------
Financial Disclosure.
--------------------

     The  information  contained  in  the  sectioned  captioned  "Proposal  II -
Ratification  of  Appointment  of Auditors" in the  Company's  definitive  proxy
statement  for the Company's  1998 Annual  Meeting of  Stockholders  (the "Proxy
Statement") is incorporated herein by reference.


                                       17

<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
--------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
--------------------------------------

         The information  contained under the sections  captioned "Section 16(a)
Beneficial Ownership Reporting  Compliance" and "I - Information with Respect to
Nominees for Director,  Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical  Information" in the Proxy Statement
is incorporated herein by reference.

Item 10.  Executive Compensation
--------------------------------

         The  information  contained  in the  section  captioned  "Director  and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         (a)      Security Ownership of Certain Beneficial Owners

                  Information  required by this item is  incorporated  herein by
                  reference  to the first  chart in the section  captioned  "I -
                  Information  with Respect to Nominees for Director,  Directors
                  Continuing  in Office,  and  Executive  Officers" in the Proxy
                  Statement.

         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference  to the first  chart in the section  captioned  "I -
                  Information  with Respect to Nominees for Director,  Directors
                  Continuing  in Office,  and  Executive  Officers" in the Proxy
                  Statement.

         (c)      Management  of  the  Registrant   knows  of  no  arrangements,
                  including  any  pledge  by any  person  of  securities  of the
                  Registrant,  the  operation of which may at a subsequent  date
                  result in a change in control of the Registrant.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  section   captioned   "Certain   Relationships  and  Related
Transactions" in the Proxy Statement.

Item 13. Exhibits, List, and Reports on Form 8-K
------------------------------------------------

         (a) Listed below are all  financial  statements  and exhibits  filed as
part of this report.

                  1.       The consolidated balance sheets of Carnegie Financial
                           Corporation  as of December 31, 1998 and 1997 and the
                           related consolidated statements of income, changes in
                           stockholders'  equity  and cash flows for each of the
                           two years ended December 31, 1998,  together with the
                           related notes and the independent auditors' report of
                           S.R.  Snodgrass,  A.C.  independent  certified public
                           accountants for the year ended December 31, 1998. The
                           independent auditors's report of Goff

                                       18

<PAGE>



               Ellenbogen  Backa & Alfera,  LLC for the year ended  December 31,
               1997 is included as Exhibit 99 in this Report.

          2.   Schedules omitted as they are not applicable.

          3.   The   following   exhibits   are   included  in  this  Report  or
               incorporated herein by reference:

          (a)  List of Exhibits:

               3(i)  Articles of Incorporation of Carnegie Financial
                     Corporation *
               3(ii) Bylaws of Carnegie Financial Corporation *
               4     Specimen Stock Certificate *
               10.1  Employment Agreement between the Bank and Shirley Chiesa *
               10.2  Supplemental Executive Retirement Plan *
               10.3  Form of Directors Consultation  and Retirement Plan between
                     the Bank and each of the directors *
               13    1998 Annual Report to Stockholders
               21    Subsidiaries of the Registrant (See "Item 1- Business")
               27    Financial Data Schedule (electronic filing only)
               99    Auditor's Report of  Goff Ellenbogen Backa & Alfera, LLC as
                     of December 31, 1997.


---------------------
*    Incorporated  by  reference  to the  identically  numbered  exhibit  to the
     registration statement on Form SB-2 (File No. 333-24579) declared effective
     by the SEC on May 14, 1998.


         (b)      None


                                       19

<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned, thereunto duly  authorized as of March 29, 1999.

                         CARNEGIE FINANCIAL CORPORATION



                         By: /s/ Shirley Chiesa
                             ------------------------------------------     
                             Shirley Chiesa
                             President, C.E.O. and Chairman of the Board
                             (Duly Authorized Representative)


     Pursuant to the  requirement of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated as of March 29, 1999.




/s/ Shirley Chiesa                              /s/ JoAnn V. Narduzzi
------------------------------------------      --------------------------------
Shirley Chiesa                                  JoAnn V. Narduzzi
President, C.E.O. and Chairman of the Board     Director
(Principal Executive)



/s/ Joseph R. Pigoni                            /s/ Morry Miller
------------------------------------------      --------------------------------
Joseph R. Pigoni                                Morry Miller
Executive Vice President                        Director
and Chief Financial Officer
(Principal Financial Officer)


/s/ Lois  A. Wholey                             /s/ Charles Rupprecht
------------------------------------------      --------------------------------
Lois A. Wholey                                  Charles Rupprecht
Director and Secretary                          Director