FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

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

For the quarterly period ended 09/30/98

                                       OR

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

For the transition period from ________ to ___________

Commission file number: 000-20809

                                SIS BANCORP, INC.
               (Exact Name of Issuer as Specified in its Charter)

Massachusetts                                               04-3303264

(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                            Identification No.)


SIS BANCORP, INC.
1441 Main Street
Springfield, Massachusetts                                      01102
(Address of Principal Executive Offices)                      (Zip Code)

                                 (413) 748-8000
                 (Issuers Telephone Number, Including Area Code)

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

         Indicate the number of shares  outstanding of the  registrant's  common
stock, as of the latest  practicable  date:  7,188,645  shares as of November 6,
1998.
<PAGE>

                    CAUTIONARY STATEMENT FOR PURPOSES OF THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


This Report contains certain  "forward-looking  statements" including statements
concerning plans,  objectives,  future events or performance and assumptions and
other  statements  which are other  than  statements  of  historical  fact.  SIS
Bancorp,  Inc. and its  subsidiaries  (the "Company")  wishes to caution readers
that the following important factors,  among others, may have affected and could
in the future affect the Company's  actual results and could cause the Company's
actual results for subsequent  periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Company herein: (i)
the effect of  changes  in laws and  regulations,  including  federal  and state
banking  laws and  regulations,  with which the  Company  must  comply,  and the
associated  costs of compliance with such laws and regulations  either currently
or in the  future as  applicable;  (ii) the  effect  of  changes  in  accounting
policies and practices,  as may be adopted by the regulatory agencies as well as
by the Financial  Accounting  Standards Board; (iii) the effect on the Company's
competitive  position  within its market  area of the  increasing  consolidation
within the banking and financial  services  industries,  including the increased
competition from larger regional and out-of-state banking  organizations as well
as nonbank providers of various financial  services;  (iv) the effect of changes
in interest rates; (v) the effect of changes in the business cycle and downturns
in the local, regional or national economies; (vi) the effect of the "year 2000"
issue (i.e.  that  current  computer  programs use only two digits to identify a
year in the date  field  and  cannot  reflect a change  in the  century)  on the
Company's financial condition or results of operations;  and (vii) the impact of
pending  litigation  on  the  Company's   financial   condition  or  results  of
operations.

<PAGE>



                       SIS BANCORP, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                                      INDEX


                                                                        PAGE NO.

   PART I. FINANCIAL INFORMATION

   Item 1. Financial Statements (Unaudited)

   Condensed Consolidated Balance Sheet
   at September 30, 1998 and December 31, 1997...............................1

   Condensed Consolidated Statement of Operations for the
   three and nine months ended September 30, 1998 and 1997...................2

   Condensed Consolidated Statement of Cash Flows for the
   nine months ended September 30, 1998 and 1997.............................3

   Condensed Consolidated Statement of Changes in Stockholders' Equity
   for the nine months ended September 30, 1998 and 1997.....................5

   Notes to the Unaudited Financial Statements...............................6


   Item 2. Management's Discussion and Analysis of
               Financial Condition and Results of Operations.................8


   PART II. OTHER INFORMATION

   Item 1. Legal Proceedings................................................29

   Item 2. Changes in Securities............................................29

   Item 3. Default upon Senior Securities...................................29

   Item 4. Submission of Matters to a Vote of Security Holders..............29

   Item 5. Other Information................................................29

   Item 6. Exhibits and Reports on Form 8-K.................................29


   SIGNATURES...............................................................30

<PAGE>

<TABLE>
<CAPTION>
                                           SIS BANCORP, INC. AND SUBSIDIARIES
                                          CONDENSED CONSOLIDATED BALANCE SHEET
                                                 (Dollars In Thousands)


                                                                                       (Unaudited)
                                                                                      September 30,       December 31,
                                                                                          1998               1997
                                                                                      -------------      -------------
<S>                                                                                  <C>                 <C>
ASSETS

Cash and due from banks                                                               $    37,225         $    50,297 
Federal funds sold and short term investments                                              52,242              17,317
Investment securities available for sale                                                  619,420             576,108
Investment securities held to maturity (fair value: $245,202 at September 30,                           
  1998 and $193,396 at December 31, 1997)                                                 244,238             193,007
Loans receivable, net of allowance for possible losses                                                  
  ($23,924 at September 30, 1998 and $22,724 at December 31, 1997)                        875,250             828,761
Accrued interest and dividends receivable                                                  11,676              10,749
Investments in real estate and real estate partnerships                                      --                 2,903
Foreclosed real estate, net                                                                   679               1,209
Bank premises, furniture and fixtures, net                                                 36,966              35,843
Other assets                                                                               22,722              17,424
                                                                                      -----------         -----------
    Total assets                                                                      $ 1,900,418         $ 1,733,618
                                                                                      ===========         ===========
                                                                                                        
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                    
                                                                                                        
Deposits                                                                              $ 1,343,063         $ 1,267,298
Federal Home Loan Bank advances                                                           203,251             184,121
Securities sold under agreements to repurchase                                            175,065             113,299
Loans payable                                                                               2,294               2,492
Mortgage escrow deposits                                                                    6,945               5,642
Accrued expenses and other liabilities                                                     30,660              35,294
                                                                                      -----------         -----------
    Total liabilities                                                                   1,761,278           1,608,146
                                                                                      -----------         -----------
                                                                                                        
Commitments and contingent liabilities                                                       --                  --
                                                                                                        
Stockholders' equity:                                                                                   
Preferred stock ($.01 par value; 5,000,000 shares                                                       
  authorized: no shares issued and outstanding)                                              --                  --
Common stock ($.01 par value; 25,000,000 shares authorized; shares                                      
  issued: 7,170,956 at September 30, 1998 and 7,081,187 at December 31, 1997;                           
  shares outstanding: 7,170,956 at September 30, 1998 and 6,947,787 at                                  
  December 31, 1997)                                                                           72                  71
Unearned compensation                                                                      (2,807)             (3,123)
Additional paid-in capital                                                                 57,259              54,755
Retained earnings                                                                          84,850              75,153
Accumulated other comprehensive income -                                                                
  net after tax unrealized gain (loss) on investment securities available for sale           (234)              2,133
Treasury stock, at cost (0 and 133,400 shares at September 30, 1998 and                                 
  December 31, 1997, respectively)                                                           --                (3,517)
                                                                                      -----------         -----------
    Total stockholders' equity                                                            139,140             125,472
                                                                                      -----------         -----------
Total liabilities and stockholders' equity                                            $ 1,900,418         $ 1,733,618
                                                                                      ===========         ===========
                                                                                                   
                              See accompanying Notes to the Unaudited Financial Statements
</TABLE>
                                                           1
<PAGE>
<TABLE>
<CAPTION>
                                                SIS BANCORP, INC. AND SUBSIDIARIES
                                          CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                         (Dollars In Thousands Except Per Share Amounts)

                                                                  (Unaudited)                           (Unaudited)
                                                               Three Months Ended                      Nine Months Ended
                                                       ---------------------------------       ---------------------------------
                                                       September 30,       September 30,       September 30,       September 30,
                                                            1998               1997                1998                 1997
                                                       -------------       -------------       -------------       -------------
<S>                                                    <C>                 <C>                 <C>                <C>
Interest and dividend income:
    Loans                                               $    18,934         $    17,426         $    54,963         $    50,368 
    Investment securities available for sale                  9,090               8,914              26,031              26,600
    Investment securities held to maturity                    3,901               3,519              11,067              10,988
    Investment securities held for trading                     --                     3                --                     8
    Federal funds sold and short term investments               505                 378               1,596                 808
                                                        -----------         -----------         -----------         -----------
             Total interest and dividend income              32,430              30,240              93,657              88,772
                                                        -----------         -----------         -----------         -----------
Interest expense:                                                                                                 
    Deposits                                                 11,265              10,619              32,834              30,969
    Borrowings                                                5,171               4,596              14,193              12,800
                                                        -----------         -----------         -----------         -----------
             Total interest expense                          16,436              15,215              47,027              43,769
                                                        -----------         -----------         -----------         -----------
Net interest and dividend income                             15,994              15,025              46,630              45,003
Less: Provision for possible loan losses                        252                 466                 755               1,431
                                                        -----------         -----------         -----------         -----------
Net interest and dividend income after provision                                                                  
    for possible loan losses                                 15,742              14,559              45,875              43,572
                                                                                                                  
Noninterest income:                                                                                               
    Net gain on sale of loans                                   362                 136                 986                 328
    Net gain on sale of securities available for sale             1                  17                   3                  77
    Net gain on sale of securities held for trading            --                    24                --                    43
    Fees and other income                                     4,180               4,044              12,059              11,038
                                                        -----------         -----------         -----------         -----------
             Total noninterest income                         4,543               4,221              13,048              11,486
                                                        -----------         -----------         -----------         -----------
                                                                                                                  
Noninterest expense:                                                                                              
    Operating expenses:                                                                                           
        Salaries and employee benefits                        6,870               6,203              19,725              18,258
        Occupancy expense of bank premises, net               1,295               1,214               3,835               3,573
        Furniture and equipment expense                         844                 858               2,739               2,421
        Other operating expenses                              5,071               4,312              13,553              12,683
                                                        -----------         -----------         -----------         -----------
             Total operating expenses                        14,080              12,587              39,852              36,935
                                                        -----------         -----------         -----------         -----------
    Foreclosed real estate (income) expense                     (61)                100                   7                  15
    Net (income) expense of real estate operations           (1,149)                (63)             (1,740)                416
                                                        -----------         -----------         -----------         -----------
             Total noninterest expense                       12,870              12,624              38,119              37,366
                                                                                                                  
Income before income tax expense                              7,415               6,156              20,804              17,692
Income tax expense                                            2,817               2,327               7,905               6,867
                                                        -----------         -----------         -----------         -----------
             Net income                                 $     4,598         $     3,829         $    12,899         $    10,825
                                                        ===========         ===========         ===========         ===========
                                                                                                                  
Earnings per share:                                                                                               
    Basic                                               $      0.66         $      0.59         $      1.89         $      1.64
    Diluted                                             $      0.63         $      0.56         $      1.79         $      1.57
                                                                                                                  
Weighted average shares outstanding:                                                                              
     Basic                                                6,931,805           6,513,970           6,834,836           6,591,452
     Diluted                                              7,256,700           6,828,948           7,211,812           6,891,860
                                                                                                             


                                   See accompanying Notes to the Unaudited Financial Statements
</TABLE>
                                                                2

<PAGE>
<TABLE>
<CAPTION>
                                         SIS BANCORP, INC. AND SUBSIDIARIES
                                   CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                               (Dollars In Thousands)

                                                                                         (Unaudited)
                                                                                      Nine Months Ended
                                                                                        September 30,
                                                                               --------------------------------
                                                                                  1998                   1997
                                                                               ---------              ---------
<S>                                                                           <C>                    <C>
Cash Flows From Operating Activities
Net income                                                                     $  12,899              $  10,825 
Adjustments to reconcile net income to net cash provided by                                          
  operating activities                                                                               
   Provision for possible loan losses                                                755                  1,431
   Provision for foreclosed real estate                                             --                        1
   Depreciation                                                                    3,351                  3,004
   Amortization of premium on investment securities, net                           3,831                  2,222
   ESOP and restricted stock expenses                                              1,912                  1,375
   Investment security gains                                                          (3)                  (120)
   Increase in assets held for trading                                              --                      (61)
   Income from equity investment in partnerships                                    --                        6
   Gain on sale of mortgage loans held for sale                                     (986)                  (328)
   Disbursements for mortgage loans held for sale                               (122,454)               (42,571)
   Receipts from mortgage loans held for sale                                    123,440                 42,899
   Gain on sale of fixed assets and real estate                                   (1,216)                  (171)
   Changes in assets and liabilities:                                                                
     Increase in other assets, net                                                (4,652)                (2,537)
     (Decrease) increase in accrued expenses and other liabilities                (3,301)                 8,239
                                                                               ---------              ---------
        Net cash provided by operating activities                                 13,576                 24,214
                                                                               ---------              ---------
                                                                                                     
                                                                                                     
Cash Flows From Investing Activities                                                                 
                                                                                                     
   Proceeds from sale of investment securities available for sale                  2,358                 11,472
   Proceeds from maturities and principal payments received                                          
     on investment securities available for sale                                 216,362                122,509
   Purchase of investment securities available for sale                         (269,302)              (210,216)
   Proceeds from maturities and principal payments received                                          
     on investment securities held to maturity                                    64,700                 37,006
   Purchase of investment securities held to maturity                           (116,432)               (23,913)
   Net increase in loans receivable                                              (47,376)               (73,350)
   Net decrease in foreclosed real estate                                            662                    728
   Proceeds from sale of loans                                                      --                       92
   Proceeds from sale of investments in real estate                                3,592                   --
   Proceeds from sale of fixed assets                                                358                    135
   Purchase of fixed assets and other                                             (4,305)                (4,220)
                                                                               ---------              ---------
        Net cash used for investing activities                                  (149,383)              (139,757)
                                                                               ---------              ---------
                                                                                           
                            See accompanying Notes to the Unaudited Financial Statements

                                                         3
<PAGE>
<CAPTION>
                                         SIS BANCORP, INC. AND SUBSIDIARIES
                             CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
                                               (Dollars In Thousands)

                                                                                                       
                                                                                         (Unaudited)
                                                                                      Nine Months Ended
                                                                                        September 30,
                                                                               --------------------------------
                                                                                  1998                   1997
                                                                               ---------              ---------
<S>                                                                           <C>                    <C>
Cash Flows from Financing Activities

   Net increase in deposits                                                       75,765                 74,123  
   Net increase in borrowings                                                     80,698                 37,139
   Net increase in mortgagors' escrow deposits                                     1,303                  2,109
   Net proceeds from exercise of stock options                                     3,096                    168
   Repurchase/retirement of common stock                                            --                   (4,193)
   Cash dividends paid                                                            (3,202)                (2,478)
                                                                               ---------              ---------
        Net cash provided by financing activities                                157,660                106,868
                                                                               ---------              ---------
                                                                                                      
Increase in cash and cash equivalents                                             21,853                 (8,675)
                                                                                                      
Cash and cash equivalents, beginning of period                                    67,614                 68,090
                                                                               ---------              ---------
                                                                                                      
Cash and cash equivalents, end of period                                       $  89,467              $  59,415
                                                                               =========              =========
                                                                                                      
                                                                                                      
Supplemental disclosures of cash flow information:                                                    
   Cash paid during the year for interest to depositors                                               
      and interest on debt                                                     $  46,588              $  36,269
                                                                                                      
   Income taxes paid                                                           $   6,129              $     506
                                                                                                      
Non-cash investing activities:                                                                        
   Transfers to foreclosed real estate, net                                    $     132              $     917
                                                                                                      
                                                       

                            See accompanying Notes to the Unaudited Financial Statements

</TABLE>
                                                         4
<PAGE>
<TABLE>
<CAPTION>
                                                 SIS BANCORP, INC. AND SUBSIDIARIES
                                 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                        For The Nine Months Ended September 30, 1998 and 1997
                                                       (Dollars In Thousands)

                                                                                                                Accumulated other
                                                                                                              comprehensive income:
                                                                                                                 Net unrealized
                                                                                     Additional                 gain (loss) on
                                                            Common       Unearned     Paid-In     Retained   investment securities 
                                                             Stock     Compensation   Capital     Earnings     available for sale  
                                                          ----------   ------------ -----------  ----------  --------------------- 
                                     
<S>                                                       <C>         <C>          <C>          <C>                <C>         
Balance at December 31, 1997                               $      71   $  (3,123)   $  54,755    $  75,153          $   2,133   
Net income                                                      --          --           --         12,899               --     
Cash dividends declared                                         --          --           --         (3,202)              --     
Net issuance of common stock in connection with employee                                                           
  and non-employee directors benefit programs                      1        (567)       1,475         --                 --     
Decrease in unearned compensation                               --           883        1,029         --                 --     
Change in unrealized gain on investment                                                                            
  securities available for sale                                 --          --           --           --               (2,367)  
                                                           ---------   ---------    ---------    ---------          ---------   
Balance at September 30, 1998                              $      72   $  (2,807)   $  57,259    $  84,850          $    (234)  
                                                           =========   =========    =========    =========          =========   
                                                                                                                   
                                                                                                                   
Balance at December 31, 1996                               $      71   $  (3,693)   $  53,836    $  67,119          $   1,453   
Net income                                                      --          --           --         10,825               --     
Cash dividends declared                                         --          --           --         (2,478)              --     
Net issuance of common stock in connection with employee                                                           
  and non-employee directors benefit programs                   --           (98)         (68)        --                 --     
Decrease in unearned compensation                               --           755          620         --                 --     
Change in unrealized gain on investment                                                                            
  securities available for sale                                 --          --           --           --                1,165   
Treasury stock purchased                                        --          --           --           --                 --     
                                                           ---------   ---------    ---------    ---------          ---------   
Balance at September 30, 1997                              $      71   $  (3,036)   $  54,388    $  75,466          $   2,618   
                                                           =========   =========    =========    =========          =========   
                                                                                                             

<CAPTION>
                                                          Treasury Stock               
                                                             at Cost               Total   
                                                          --------------        -----------
                
<S>                                                        <C>                  <C>          
Balance at December 31, 1997                                $  (3,517)           $ 125,472    
Net income                                                       --                 12,899   
Cash dividends declared                                          --                 (3,202)  
Net issuance of common stock in connection with employee                                     
  and non-employee directors benefit programs                   3,517                4,426   
Decrease in unearned compensation                                --                  1,912   
Change in unrealized gain on investment                                                      
  securities available for sale                                  --                 (2,367)  
                                                            ---------            ---------   
Balance at September 30, 1998                               $    --              $ 139,140   
                                                            =========            =========   
                                                                                             
                                                                                             
Balance at December 31, 1996                                $    --              $ 118,786   
Net income                                                       --                 10,825   
Cash dividends declared                                          --                 (2,478)  
Net issuance of common stock in connection with employee                                     
  and non-employee directors benefit programs                     333                  167   
Decrease in unearned compensation                                --                  1,375   
Change in unrealized gain on investment                                                      
  securities available for sale                                  --                  1,165   
Treasury stock purchased                                       (4,193)              (4,193)  
                                                            ---------            ---------    
Balance at September 30, 1997                               $  (3,860)           $ 125,647   
                                                            =========            =========   
                                                                                     
                                              
                                    See accompanying Notes to the Unaudited Financial Statements
</TABLE>

                                                                 5


<PAGE>

                       SIS BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
                 (Dollars in thousands except per share amounts)

1. Condensed Consolidated Financial Statements
The Condensed  Consolidated  Financial Statements of the Company included herein
are unaudited, and in the opinion of management all adjustments, consisting only
of  normal  recurring  adjustments  necessary  for a  fair  presentation  of the
financial  condition,  results of operations  and cash flows,  as of and for the
periods  covered  herein,  have been made.  The Company's  historical  financial
statements have been restated to reflect the combination with Glastonbury Bank &
Trust Company.  Certain  information and note disclosures  normally  included in
Condensed  Consolidated  Financial  Statements  have  been  omitted  as they are
included in the most recent Securities and Exchange Commission ("SEC") Form 10-K
and  accompanying  Notes to the Financial  Statements (the "Form 10-K") filed by
the Company for the year ended December 31, 1997.  Management  believes that the
disclosures contained herein are adequate to make a fair presentation.

These unaudited condensed  consolidated  financial  statements should be read in
conjunction with the Form 10-K.

The results for the three and nine month interim  periods covered hereby are not
necessarily indicative of the operating results for a full year.

2. New Accounting Pronouncements
In June 1997,  the FASB issued SFAS 130 "Reporting  Comprehensive  Income" which
establishes  standards for  disclosure of  comprehensive  income.  Comprehensive
income  represents  net  income  for a period  plus the  change  in  equity of a
business during a period from non-shareholder sources. Excluding net income, the
Company's only source of  comprehensive  income is its unrealized gain (loss) on
investment  securities  available  for sale,  net of tax.  SFAS 130 requires the
restatement of prior periods for comparative purposes.  The Company adopted SFAS
130 on January  1,  1998.  Adoption  of this  Statement  did not have a material
impact on the  Company's  financial  position  or results of  operations.  Total
comprehensive  income for the three and nine months ended September 30, 1998 was
$4.3 million and $13.9 million,  respectively compared to $5.5 million and $13.9
million, respectively for the three and nine months ended September 30, 1997.

In June  1997,  the FASB  issued  SFAS 131  "Disclosures  about  Segments  of an
Enterprise and Related Information" which establishes standards for the way that
public business  enterprises report financial and descriptive  information about
operating  segments.  SFAS 131 defines  operating  segments as  components of an
enterprise  about which  separate  financial  information  is available  that is
evaluated by management  in deciding how to allocate  resources and in assessing
performance.  The Company adopted SFAS 131 on January 1, 1998.  Adoption of this
Statement did not have a material impact on the Company's  financial position or
results of operations.

In  February  1998,  the FASB  issued  SFAS 132  "Employers'  Disclosures  about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88 and 106" (SFAS 132) which revises  employers'  disclosures  about pension
and  other  postretirement   benefit  plans,  though  it  does  not  change  the
measurement  or  recognition  of  those  plans.  The  Company  adopted  SFAS 132
effective  January 1, 1998.  Adoption of this  Statement did not have a material
impact on the Company's financial position or results of operations.

In June 1998, the FASB issued SFAS 133,  "Accounting for Derivative  Instruments
and  Hedging  Activities,"  which  establishes  a new model for  accounting  for
derivatives  and  hedging  activities  and  supersedes  and  amends a number  of
existing standards.  SFAS 133 is effective for fiscal years beginning after June
15, 1999, but earlier application is permitted as of the beginning of any fiscal
quarter subsequent to June 1998. Upon initial  application,  all derivatives are
required to be  recognized  in the  statement  of  financial  position as either
assets or  liabilities  and  measured at fair value.  In  addition,  all hedging
relationships  must be reassessed and  documented  pursuant to the provisions of
SFAS  133.  Management  is  currently  assessing  the  impact of SFAS 133 on the
Company's financial position and results of operations.

                                       6
<PAGE>
3. Earnings Per Share
Basic and diluted net income per share and weighted  average shares  outstanding
follow (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                         (Unaudited)                             (Unaudited)
                                                      Three months ended                      Nine months ended
                                              ---------------------------------       ---------------------------------
                                              September 30,       September 30,       September 30,       September 30,
                                                  1998                1997                1998                1997
                                              ------------        -------------       -------------       -------------
<S>                                          <C>                 <C>                 <C>                 <C>       
Net income                                    $    4,598          $    3,829          $   12,899          $   10,825
Weighted average shares outstanding:                                                                     
  Basic                                        6,931,805           6,513,970           6,834,836           6,591,452
     Effect of dilutive securities:                                                                      
         Stock options                           307,085             287,156             328,388             257,093
         Restricted stock                         17,810              27,822              48,588              43,315
                                              ----------          ----------          ----------          ----------
  Diluted                                      7,256,700           6,828,948           7,211,812           6,891,860
                                              ==========          ==========          ==========          ==========
                                                                                                         
Net income per share:                                                                                    
    Basic                                     $     0.66          $     0.59          $     1.89          $     1.64
    Diluted                                   $     0.63          $     0.56          $     1.79          $     1.57
                                                                                                  
</TABLE>
4. Dividend Policy
The Company paid a cash  dividend in the amount of $0.16 per share on August 24,
1998.  On October 20,  1998 the  Company  declared a dividend of $0.16 per share
payable on or about November 23, 1998 to  shareholders of record as of the close
of business on November 2, 1998.

5. Divestment Related Charges
The  Company  had  certain  subsidiaries  that  engaged in various  real  estate
investments,  directly  or in joint  ventures  with  unaffiliated  partners.  In
accordance with the Federal  Deposit  Insurance  Corporation  Improvement Act of
1991 ("FDICIA"),  the Company terminated its real estate development  activities
and has  completed  the sale of its remaining  real estate  investments.  In the
first  quarter  of 1997,  the  Company  established  a reserve  of $1.0  million
relating  to  the  divestment  of  its  real  estate  investment  and  brokerage
subsidiaries,  Colebrook Inc. and subsidiaries  ("Colebrook").  The $1.0 million
reserve  consisted of $0.7 million in  severance  and benefit  accruals and $0.3
million for professional and other expenses.

The Company completed its divestment of Colebrook on July 21, 1998 with the sale
of its sole remaining  real estate  investment for net proceeds of $3.6 million.
The  Company  recognized  a gain of $1.1  million  related  to the sale which is
included in net income of real estate operations.

Based upon final terms of the  divestment,  related  expenses were $0.6 million,
consisting  of $0.3  million  in  severance  and  benefits  and $0.3  million in
professional and other expenses.  The remaining reserve balance of $0.4 million,
primarily  related  to  unused  severance,  was  reversed  in June  1998  and is
reflected in net income of real estate operations.

                                       7
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
                               FINANCIAL CONDITION

                             (DOLLARS IN THOUSANDS)

Overview
SIS Bancorp, Inc. (the "Company") is a Massachusetts  corporation formed in 1996
and serves as the bank holding company for  Springfield  Institution for Savings
("SIS Bank"),  and  Glastonbury  Bank & Trust Company  ("GBT").  The Company was
formed for the purpose of reorganizing SIS Bank into a holding company structure
("the Reorganization").  Upon the effectiveness of the Reorganization,  SIS Bank
became  a  wholly-owned   subsidiary  of  the  Company  and  SIS  Bank's  former
stockholders  became  stockholders of the Company.  The Company  acquired GBT on
December 17, 1997.

Established in 1827, SIS Bank is a  Massachusetts  chartered  stock savings bank
headquartered in Springfield,  Massachusetts. GBT, with its headquarters located
in Glastonbury,  Connecticut, is a Connecticut chartered commercial bank founded
in 1919. Substantially all of the Company's operations are conducted through its
subsidiary banks.

The Company provides a wide variety of financial  services through both SIS Bank
and GBT (the  "Banks"),  including  retail and commercial  banking,  residential
mortgage  origination  and  servicing,  commercial  and  consumer  lending,  and
merchant  processing.  The Banks serve the consumers and  businesses  located in
western  Massachusetts  and  central  Connecticut  through a network  of 33 full
service branches.

The Company's  revenues are derived  principally from dividend payments received
from the Banks,  which in turn derive their revenues  principally  from interest
payments  on their loan  portfolios  and  mortgage-backed  and other  investment
securities.  The Banks'  primary  sources of funds are deposits,  borrowings and
principal and interest payments on loans and mortgage-backed securities.

On July 20, 1998, the Company  entered into an Agreement and Plan of Merger with
Peoples Heritage Financial Group, Inc.  ("PHFG"),  pursuant to which the Company
would be  acquired by PHFG,  SIS Bank would be merged into PHFG's  Massachusetts
banking  subsidiary and the Company's  shareholders  would  receive,  subject to
adjustment  under  certain  circumstances,  2.25 shares of PHFG common stock for
each  outstanding  share of the Company's  common stock. The Company expects its
pending acquisition by PHFG to be completed,  subject to the parties' receipt of
all  necessary  approvals  from the Board of  Governors  of the Federal  Reserve
System ("FRB"),  the Office of Thrift  Supervision,  the Maine Bureau of Banking
("Maine  Bureau"),  the  Massachusetts  Board  of  Bank  Incorporation  and  the
Connecticut  Commissioner  of  Banks,  prior  to  December  31,  1998.  PHFG has
currently  received the required  approvals of the FRB and the Maine Bureau. The
Company's  shareholders  have  approved  the  pending  acquisition  at a special
meeting held on November 12, 1998.

Year 2000
The Year 2000 issue  exists  because  many  computer  systems  and  applications
(including those in non-information  technology equipment and systems) currently
use  two-digit  date  fields to  designate a year.  As the  century  date change
occurs,  date-sensitive  systems will recognize the Year 2000 as 1900, or not at
all.  This  inability to recognize or properly  interpret  dates beyond the year
1999 may cause business  disruptions as systems process  critical  financial and
operational information incorrectly.

During 1997, the Company formed a Year 2000 team to develop and execute the Year
2000 project and has developed an  implementation  plan to resolve its Year 2000
issues. The Company is addressing this issue in accordance with the guidance set
forth in  various  statements  that have been  issued by the  Federal  Financial
Institutions Examination Council. The Company is also monitored in its Year 2000
efforts by reports to, and  examinations by, various  regulators,  including the
Federal  Deposit  Insurance  Corporation,  the Federal  Reserve  Board,  and the
Massachusetts and Connecticut  Commissioners of Banks. The Year 2000 project has
been designated as the highest  priority  activity of the Company's  Information
Technology  Department.  Since 1997,  the Company has been reviewing its systems
and programs to identify those that contain  two-digit year codes, and is in the
process of upgrading its infrastructure and corporate facilities to achieve Year
2000  compliance.  In addition,  the Company is actively  working with its major
third-party  vendors and large  commercial  borrowers to assess their compliance
and remediation efforts.

                                       8
<PAGE>
The Company has identified the following phases of the Year 2000 project. In the
awareness phase, the Company defined the Year 2000 issue,  communicated the Year
2000 issue to all employees  and its Board of Directors  and obtained  executive
level  support and  funding.  In the  assessment  phase,  the Company  created a
comprehensive  Year 2000 plan which  includes  conducting  an  inventory  of all
systems which may be affected by the Year 2000 issue  including  facilities  and
related  non-information  technology  systems  (embedded  technology),  computer
systems,  hardware,  and services and products provided by third-party  vendors,
and  assessing  risk  of  non-compliance  for  each  identified  system.  In the
renovation  phase,  the Company  renovates or fixes certain  systems,  while all
others are replaced or retired.  In the validation  phase,  the Company conducts
testing  to ensure  all  systems,  including  renovated  systems,  are Year 2000
compliant for present and future dates.  Finally,  in the implementation  phase,
the Company places compliant systems in production.

As of  September  30,  1998,  the  Company had  completed  the  remedial  phases
associated  with  awareness and  assessment  and was  conducting  the procedures
associated  with the renovation and validation  phases.  The Company  expects to
complete  all  critical  renovations  by  December  31,  1998.  The  Company had
completed  test plans as of June 30,  1998 and  expects to  complete  testing of
internal systems by December 31, 1998 and external testing of third-party vendor
systems by March 31, 1999.  The Company's  core  processing  systems,  including
general  ledger,  home equity line,  commercial  loan,  investments  and deposit
applications,  have been upgraded to Year 2000 compliant  versions,  tested, and
implemented. The Company is also in the process of verifying that critical third
party vendors and large commercial borrowers have adequately addressed their own
systems issues. In connection with this verification, the Company will determine
whether its loan loss  reserves  are  adequate in light of any  additional  risk
associated  with the Company's loan portfolio due to commercial  borrowers' Year
2000 issues.

The primary  costs  associated  with the Year 2000 issue consist of expenses for
the  replacement or upgrade of third party systems,  the replacement of personal
computers and  professional  services costs. The Company may also incur expenses
related to the repair or  replacement  of  non-computer  equipment with embedded
technology such as elevators and bank vaults.  The Company  presently  estimates
that the Company's  total direct,  out-of-pocket  cost relating to the Year 2000
issue to be approximately  $0.7 million of which  approximately $18 thousand had
been incurred  through  September 30, 1998.  With the exception of the Year 2000
project leader,  this direct cost  does not include salary and overhead expenses
of employees from various  departments within the Company which devote a portion
of their time to the Year 2000 project. These indirect costs are included in the
Company's  normal  operating  expenses.  It is  anticipated  that a  substantial
portion of the total cost will be  incurred  over the next 15 months and will be
expensed as incurred.

There  are many  risks  associated  with  the Year  2000  issue,  including  the
possibility  of  a  failure  of  the  Company's  computer  and   non-information
technology  systems.  Such failures could have a material  adverse effect on the
Company and may cause system malfunctions,  incorrect or incomplete  transaction
processing, and the inability to reconcile accounting books and records. Even if
the Company  successfully  remediates its Year 2000 issues, it can be materially
and adversely  affected by failure of  third-party  vendors or large  commercial
loan borrowers to remediate their own Year 2000 issues.  A timely  resolution of
the Year 2000 issues  depends  largely upon the  expertise and advice of outside
vendors retained by the Company to both modify the Company's  existing  software
and develop new software to address current internal systems  deficiencies.  The
Company  is  presently  unaware  of any  situation  where  any  vendor  or large
commercial  borrower  will not be able to modify its  products  and systems in a
timely manner.  If the above mentioned  risks are not remedied,  the Company may
experience  business  interruption  or  shutdown,   financial  loss,  regulatory
actions,  damage to the Company's  franchise,  and legal liability.  The Company
intends to document  Year 2000  contingency  plans during 1999 to address  these
potential risks.

The Company is currently not aware of any Year 2000 problem for which a solution
is not  available.  In  addition,  the Company is not aware of any  obstacles or
issues that are presently  anticipated in connection with the resolution of Year
2000 issues  that are likely to cause  significant  operational  problems or are
otherwise expected to have a material adverse effect on the Company's  financial
condition or results of operations.

Results  of  Operations  for the  Three  Months  Ended  September  30,  1998 and
September 30, 1997

The Company reported net income of $4.6 million,  or $0.63 per diluted share for
the three  months  ended  September  30,  1998 as compared to net income of $3.8
million, or $0.56 per diluted share for the same period last year. These results
primarily reflect increases in net interest income,  noninterest  income and net
income of real estate  operations as well as lower  provisions for possible loan
losses, partially offset by an increase in operating expenses.


                                       9
<PAGE>
Net Interest Income

Net interest income represents the difference between income on interest-earning
assets and  expense on  interest-bearing  liabilities.  Net  interest  income is
affected by the mix and volume of assets and  liabilities,  and the movement and
level of  interest  rates.  The  Company  invests  in certain  assets  that have
preferential  tax treatment.  In order to present yields on a comparable  basis,
net  interest  income  is  presented  on a fully  taxable  equivalent  basis for
purposes of yield and margin analysis.

The following  table sets forth,  for the period  indicated,  average  balances,
interest  income  and  expense,  and  yields  earned or rates  paid on the major
categories of assets and  liabilities.  Non-accrual  loans have been included in
the  appropriate   average  balance  loan  category,   but  unpaid  interest  on
non-accrual  loans has not been  included for purposes of  determining  interest
income. In addition,  investment  securities available for sale are reflected at
amortized cost.
<TABLE>
<CAPTION>
                                                               Three Months Ended September 30,                          
                                          ------------------------------------------------------------------------------------------
                                                            1998                                          1997
                                          -------------------------------------------  ---------------------------------------------
                                            Average                      Average          Average                       Average
                                           Balance (3)   Interest (1)  Yield/Cost (1)     Balance      Interest (1)   Yield/Cost (1)
                                          ------------ --------------  --------------  ------------   ------------   ---------------
                                                                    (Dollars In Thousands)
<S>                                       <C>             <C>             <C>          <C>              <C>            <C>
Interest-earning assets:
Fed funds sold and short-term investments  $  38,968       $   505          5.07%       $   27,678       $   379         5.36%
Investment securities held to maturity       245,350         3,901          6.36%          206,573         3,519         6.81%
Investment securities available for sale     605,438         9,361          6.18%          541,837         9,053         6.68%
Investment securites held for trading           --            --             --                552             4         2.84%
Residential real estate loans                237,556         4,707          7.93%          289,915         5,820         8.03%
Commercial real estate loans                 180,191         4,142          9.19%          177,145         3,957         8.94%
Commercial loans                             272,881         6,193          8.88%          202,713         4,433         8.56%
Home equity loans                            175,847         3,638          8.21%          144,958         2,927         8.01%
Consumer loans                                12,634           306          9.69%           10,125           289        11.42%
                                          ----------       -------        ------       -----------       -------       ------
Total interest-earning assets              1,768,865        32,753          7.41%        1,601,496        30,381         7.59%
                                                                                                       
Allowance for loan losses                    (23,667)                                      (21,624)    
Non-interest-earning assets                  120,373                                       114,716     
                                          ----------                                   -----------     
Total assets                              $1,865,571       $32,753                     $ 1,694,588       $30,381
                                          ==========       =======                     ===========       =======
Interest-bearing liabilities:                                                                          
Deposits                                                                                               
  Savings accounts                        $  221,045       $ 1,109          1.99%      $   264,720       $ 1,561         2.34%
  NOW accounts (2)                            39,863           106          1.05%           49,005           158         1.28%
  Money manager accounts (2)                  44,703           122          1.08%           31,572            85          --
  Money market accounts                      257,449         2,060          3.17%          206,880         1,736         3.33%
  Time deposit accounts                      586,144         7,868          5.33%          527,828         7,079         5.32%
                                          ----------       -------        ------       -----------       -------       ------
Total interest-bearing deposits            1,149,204        11,265          3.89%        1,080,005        10,619         3.90%
                                                                                                       
Borrowed funds                               357,596         5,171          5.66%          306,245         4,596         5.87%
                                          ----------       -------        ------       -----------       -------       ------
Total interest-bearing liabilities         1,506,800        16,436          4.33%        1,386,250        15,215         4.35%
Non-interest-bearing liabilities             224,332                                       188,216     
                                          ----------                                   -----------     
Total liabilities                          1,731,132                                     1,574,466     
Total stockholders' equity                   134,439                                       120,122     
                                          ----------                                   -----------     
    Total liabilities and                                                                              
      stockholders's equity               $1,865,571       $16,436                     $ 1,694,588       $15,215
                                          ==========       =======                     ===========       =======
Net interest income/spread                                 $16,317          3.08%                        $15,166         3.24%
                                                           =======        ======                         =======       ======
Net interest margin as a % of interest-                                                                
  earning assets                                                            3.69%                                        3.79%
                                                                          ======                                       ======
Tax equivalent adjustment                                  $   323                                       $   141
                                                           -------                                       -------
Net interest income/spread per Condensed                                                               
Consolidated Statement of Operations                       $15,994                                       $15,025
                                                           =======                                       =======
<FN>                                                                                                  
(1)  On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 35% for 1998 and 34% for 1997.
(2)  During July 1997,  the Company  implemented a program which  converted  certain NOW accounts to money  manager  accounts.  This
     program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
     reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3)  A  reclassification  of some savings  accounts to money market  accounts  affecting  average  balance  outstanding  was made in
     connection with the GBT acquisition.
</FN>
</TABLE>
Net interest  income on a fully  taxable  equivalent  basis for the three months
ended  September  30, 1998 was $16.3  million  compared to $15.2 million for the
three months ended September 30, 1997, an increase of $1.1 million or 7.6%.

                                       10
<PAGE>
This increase was the result of a $167.4  million  increase in  interest-earning
assets partially offset by a 10 basis point decrease in the net interest margin.

Total interest income was $32.8 million on a fully taxable  equivalent basis for
the three months ended  September  30, 1998, an increase of $2.4 million or 7.8%
from the same period last year.  This increase is  attributable to higher levels
of interest-earning assets, partially offset by lower yields on interest-earning
assets.  Average  interest-earning  assets  totaled  $1.8  billion  in the third
quarter  of 1998  compared  to $1.6  billion in the third  quarter  of 1997,  an
increase of $167.4 million or 10.5% and were funded by higher deposit levels and
borrowed funds.  Average investments  increased $101.8 million or 13.6%. Average
loans  increased  $54.3  million  as  the  Company  continued  to  focus  on the
commercial and home equity market segments, which grew by $70.2 million or 34.6%
and $30.9 million or 21.3%,  respectively.  Average commercial real estate loans
increased  $3.0 million or 1.7%  reflecting  growth in  commercial  construction
lending. Average residential real estate loan balances declined $52.4 million or
18.1% for the three months ended September 30, 1998, reflecting amortization and
prepayments of the existing loan portfolio, partially offset by new originations
of adjustable rate mortgages.  The Company continues to actively originate loans
secured  by first  mortgages  on one to four  family  residences,  and  offers a
variety  of fixed and  adjustable  rate  mortgage  loan  products.  The  Company
originates  long-term fixed rate mortgages for sale in the secondary  market and
generally  holds  adjustable  rate  mortgages in the Company's  loan  portfolio.
Yields  on  interest-earning  assets  declined  18 basis  points  from the third
quarter of 1997  primarily  reflecting  a lower level of  interest  rates on the
Company's   investment   securities   caused   by   increased   prepayments   of
mortgage-backed  securities  which result in accelerated  premium  amortization.
Accelerated  prepayment speeds were the result of lower long-term interest rates
which significantly increased refinancing activity.

Total  interest  expense was $16.4 million for the three months ended  September
30, 1998 compared to $15.2  million  during the same period in 1997, an increase
of $1.2  million  or  8.0%.  This  increase  is  attributable  to  increases  in
interest-bearing  deposits and borrowed funds. Average interest-bearing deposits
increased $69.2 million or 6.4%. This growth occurred primarily in time deposits
which increased $58.3 million or 11.0% largely due to growth in time deposits of
local  municipalities.  Borrowed  funds  averaged  $357.6  million for the three
months ended  September 30, 1998 compared to $306.2  million for the same period
in 1997.  These  borrowings were used to match fund fixed rate assets and manage
the Company's interest rate risk position.

The  following  table  presents the changes in net  interest  income (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning  assets and  interest-bearing  liabilities during
the periods  indicated.  Changes which are  attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.

                                       11

<PAGE>

<TABLE>
<CAPTION>
                                                                 Three months ended September 30,
                                                                        1998 versus 1997
                                                      ----------------------------------------------------
                                                                   Increase (Decrease) Due to
                                                      ----------------------------------------------------
                                                        Volume                Rate                 Net
                                                      ----------            ---------            ---------
                                                                          (Dollars In Thousands)
<S>                                                   <C>                  <C>                  <C>
Interest-earning assets:
  Federal funds sold and
     interest bearing deposits                         $   150              $   (24)             $   126  
  Investment securities held to maturity                   639                 (257)                 382
  Investment securities available for sale               1,023                 (715)                 308
  Investment securities held for trading                    (2)                  (2)                  (4)
  Residential real estate loans                         (1,044)                 (69)              (1,113)
  Commercial real estate loans                              69                  116                  185
  Commercial loans                                       1,563                  197                1,760
  Home equity loans                                        631                   80                  711
  Consumer loans                                            66                  (49)                  17
                                                       -------              -------              -------
                                                                                                
Total interest-earning assets                            3,095                 (723)               2,372
                                                       -------              -------              -------
                                                                                                
Interest-bearing liabilities:                                                                   
Deposits:                                                                                       
  Savings accounts                                        (238)                (214)                (452)
  NOW accounts                                             (27)                 (25)                 (52)
  Money manager account                                     36                    1                   37
  Money market accounts                                    414                  (90)                 324
  Time deposit accounts                                    782                    7                  789
                                                       -------              -------              -------
                                                                                                
Total deposits                                             967                 (321)                 646
                                                                                                
Borrowed funds                                             757                 (182)                 575
                                                       -------              -------              -------
                                                                                                
Total interest-bearing liabilities                       1,724                 (503)               1,221
                                                       -------              -------              -------
                                                                                                
Change in net interest income                          $ 1,371              $  (220)             $ 1,151
                                                       =======              =======              =======
                                                                                      
</TABLE>


Provision for Possible Loan Losses

The Company's  provision for possible loan losses was $0.3 million for the third
quarter  of 1998  compared  to $0.5  million in the third  quarter of 1997.  The
provision  for possible loan losses is based upon  management's  judgment of the
amount  necessary to maintain the  allowance for possible loan losses at a level
which is  considered  adequate.  For  further  information  see  "Balance  Sheet
Analysis - Non-performing Assets" and "- Allowance for Possible Loan Losses".


                                       12

<PAGE>
Non-interest Income
Non-interest  income is  composed of fee income for bank  services  and gains or
losses from the sale of assets.  The components of  non-interest  income for the
periods presented are as follows:
                                                       Three months ended     
                                                          September 30,       
                                                      -------------------     
                                                       1998         1997
                                                      ------       ------
                                                     (Dollars in Thousands)

Net gain on sale of loans                             $  362       $  136
Net gain on sale of securities                             1           17
Net gain on securities held for trading                 --             24
Loan charges and fees                                    733          854
Deposit related fees                                   2,219        1,962
Merchant processing fees                                 488          449
Other charges and fees                                   740          779
                                                      ------       ------
                                                      $4,543       $4,221
                                                      ======       ======

Non-interest  income totaled $4.5 million for the third quarter of 1998 compared
to $4.2  million  for the same period in 1997,  an  increase of $0.3  million or
7.6%.  Net gain on sale of loans  increased  $0.2  million due to an increase in
mortgage  production and  corresponding  sale of loans to the secondary  market.
Deposit  service  charges and fees increased $0.3 million due to fees associated
with the Company's  larger  non-interest  bearing deposit base. Loan charges and
fees  decreased  $0.1  million  reflecting a decline in the  Company's  mortgage
servicing portfolio.

Non-interest Expense

Salaries and Benefits Expense
Salaries and benefits expense totaled $6.9 million for the third quarter of 1998
compared  to $6.2  million for the same  period in 1997.  This  increase of $0.7
million   reflects   increased   staffing   related  to  new  branch   openings,
branch-related  support as well as support needed to meet increased  residential
origination  volumes. In addition,  the Company experienced higher benefit costs
associated with  restricted  stock vesting and the Employee Stock Ownership Plan
("ESOP").

Occupancy Expense of Bank Premises
Occupancy expense totaled $1.3 million for the third quarter of 1998 compared to
$1.2 million for the same period in 1997,  an increase of $0.1 million  which is
attributed to the expense of new branch openings.

Other Operating Expense
The  components  of other  operating  expense for the periods  presented  are as
follows:
                                                       Three months ended       
                                                          September 30,       
                                                      -------------------   
                                                       1998         1997
                                                      ------       ------
                                                     (Dollars in Thousands)

Marketing                                             $  884       $  470
Insurance                                                162          173
Professional services                                    906          846
Outside processing                                     1,418        1,262
Other                                                  1,701        1,561
                                                      ------       ------
                                                      $5,071       $4,312
                                                      ======       ======

                                       13
<PAGE>
Other  operating  expenses  totaled $5.1  million for the third  quarter of 1998
compared  to $4.3  million  for the third  quarter of 1997,  an increase of $0.8
million.  Marketing  expense  increased $0.4 million due to additional radio and
print  advertisement  as well as branch displays and brochures for GBT.  Outside
processing   expenses  increased  $0.2  million  and  other  operating  expenses
increased $0.1 million from the comparable  period,  reflecting costs associated
with higher transaction and account volume resulting from the Company's consumer
strategy.  Professional  services  increased  $0.1 million due to an increase in
consulting  fees  partially  offset by lower levels of home equity  closing cost
expense.

Net Expense of Real Estate Operations
The Company's former real estate investment and brokerage subsidiary, Colebrook,
engaged in various real estate  investments,  directly or in joint ventures with
unaffiliated  partners.  In accordance with FDICIA,  the Company  terminated its
real estate  development  activities and has completed the sale of its remaining
real estate  investments.  At September 30, 1998 the divestment of Colebrook was
complete.

Net  income of real  estate  operations  for the third  quarter of 1998 was $1.1
million  compared to $0.1  million for the same period in 1997.  Results for the
third  quarter of 1998  reflect a $1.1 million gain on the sale of a real estate
investment.

Income Taxes
For the three months ended  September 30, 1998 the Company  recorded  income tax
expense of $2.8 million compared to expense of $2.3 million for the three months
ended  September 30, 1997.  This increase is attributable to a 20.5% increase in
pre-tax earnings.

Results of Operations for the Nine Months Ended September 30, 1998 and September
30, 1997

The Company reported net income of $12.9 million, or $1.79 per diluted share for
the nine  months  ended  September  30,  1998 as compared to net income of $10.8
million, or $1.57 per diluted share for the same period last year. These results
reflect increases in net interest income,  noninterest  income and net income of
real estate  operations,  as well as lower  provisions for possible loan losses,
partially offset by increases in operating expenses and income tax expense.

Net Interest Income

Net interest income represents the difference between income on interest-earning
assets and  expense on  interest-bearing  liabilities.  Net  interest  income is
affected by the mix and volume of assets and  liabilities,  and the movement and
level of  interest  rates.  The  Company  invests  in certain  assets  that have
preferential  tax treatment.  In order to present yields on a comparable  basis,
net  interest  income  is  presented  on a fully  taxable  equivalent  basis for
purposes of yield and margin analysis.

The following  table sets forth,  for the period  indicated,  average  balances,
interest  income  and  expense,  and  yields  earned or rates  paid on the major
categories of assets and  liabilities.  Non-accrual  loans have been included in
the  appropriate   average  balance  loan  category,   but  unpaid  interest  on
non-accrual  loans has not been  included for purposes of  determining  interest
income. In addition,  investment  securities available for sale are reflected at
amortized cost.

                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                                Nine Months Ended September 30,                          
                                          ------------------------------------------------------------------------------------------
                                                            1998                                          1997
                                          -------------------------------------------  ---------------------------------------------

                                            Average                      Average          Average                       Average
                                           Balance (3)   Interest (1)  Yield/Cost (1)     Balance      Interest (1)   Yield/Cost (1)
                                          ------------ --------------  --------------  ------------   ------------   ---------------
                                                                    (Dollars In Thousands)
<S>                                      <C>            <C>             <C>          <C>              <C>              <C>
Interest-earning assets:
Fed funds sold and short-term investments $    41,428    $  1,596         5.08%       $   20,198       $       808       5.28%
Investment securities held to maturity        226,026      11,067         6.53%          217,066            10,988       6.75%
Investment securities available for sale      576,993      26,750         6.18%          529,507            26,992       6.80%
Investment securities held for trading           --          --            --                505                12       3.13%
Residential real estate loans                 254,861      15,246         7.98%          290,164            17,351       7.97%
Commercial real estate loans                  183,596      12,403         9.01%          171,327            11,574       9.01%
Commercial loans                              241,922      16,037         8.74%          196,451            12,893       8.65%
Home equity loans                             167,370      10,445         8.34%          131,231             7,855       8.00%
Consumer loans                                 12,489         914         9.76%            9,504               779      10.93%
                                          -----------    --------        -----        ----------       -----------      -----
                                                                                                      
Total interest-earning assets               1,704,685      94,458         7.39%        1,565,953            89,252       7.60%
                                                                                                      
Allowance for loan losses                     (23,336)                                   (20,755)                
Non-interest-earning assets                   123,942                                    113,301                  
                                          -----------                                 ----------      
Total assets                              $ 1,805,291    $ 94,458                     $1,658,499       $    89,252
                                          ===========    ========                     ==========       ===========          
                                                                                                      
Interest-bearing liabilities:                                                                         
Deposits                                                                                              
  Savings accounts                        $   227,040    $  3,439         2.03%       $  263,041       $     4,600       2.34%
  NOW accounts (2)                             40,961         398         1.30%           69,811               623       1.19%
  Money manager accounts (2)                   47,463         406         1.14%           10,640                85        --
  Money market accounts                       249,594       6,065         3.25%          205,972             5,116       3.32%
  Time deposit accounts                       564,453      22,526         5.34%          518,460            20,545       5.30%
                                          -----------    --------        -----        ----------       -----------      -----
Total interest-bearing deposits             1,129,511      32,834         3.89%        1,067,924            30,969       3.88%
                                                                                                      
Borrowed funds                                327,595      14,193         5.71%          294,972            12,800       5.72%
                                          -----------    --------        -----        ----------       -----------      -----
                                                                                                      
Total interest-bearing liabilities          1,457,106      47,027         4.32%        1,362,896            43,769       4.29%
Non-interest-bearing liabilities              219,432                                    176,595             
                                          -----------                                 ----------      
Total liabilities                           1,676,538                                  1,539,491              
Total stockholders' equity                    128,753                                    119,008             
                                          -----------                                 ----------      
    Total liabilities and                                                                             
      stockholders' equity                $ 1,805,291    $ 47,027                     $1,658,499       $    43,769
                                          ===========    ========                     ==========       ===========
                                                                   
Net interest income/spread                               $ 47,431         3.07%                        $    45,483       3.31%
                                                         ========        =====                         ===========      =====
                                                                      
Net interest margin as a % of interest-                               
  earning assets                                                          3.71%                                          3.87%
                                                                         =====                                          =====
                                                                      
Tax equivalent adjustment                                $    801                                      $      480       
                                                         --------                                      ----------
Net interest income/spread per Condensed                              
Consolidated Statement of Operations                     $ 46,630                                      $   45,003     
                                                         ========                                      ==========
                                                                   
<FN>
(1)  On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 35% for 1998 and 34% for 1997.
(2)  During July 1997,  the Company  implemented a program which  converted  certain NOW accounts to money  manager  accounts.  This
     program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
     reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3)  A  reclassification  of some savings  accounts to money market  accounts  affecting  average  balance  outstanding  was made in
     connection with the GBT acquisition.
</FN>
</TABLE>
Net  interest  income on a fully  taxable  equivalent  basis for the nine months
ended  September  30, 1998 was $47.4  million  compared to $45.5 million for the
nine months ended  September 30, 1997, an increase of $1.9 million or 4.3%. This
increase was the result of a $138.7 million increase in interest-earning  assets
partially offset by a 16 basis point decrease in the net interest margin.

Total interest income was $94.5 million on a fully taxable  equivalent basis for
the nine months ended  September  30, 1998,  an increase of $5.2 million or 5.8%
from the same period last year.  This increase is  attributable to higher levels
of interest-earning assets, partially offset by lower yields on interest-earning
assets. Average interest-earning assets totaled $1.7 billion for the nine months
ended  September  30, 1998  compared to $1.6  billion for the nine months  ended
September  30,  1997,  an increase of $138.7  million or 8.9% and were funded by
higher deposit levels and borrowed funds.  Average  investments  increased $55.9
million or 7.5%.  Average loans increased $61.6 million as the Company continued
to focus on the commercial and home equity market segments,  which grew by $45.5
million or 23.1% and $36.1 million or 27.5%,  respectively.  Average  commercial
real  estate  loans  increased  $12.3  million  or  7.2%  reflecting  growth  in
commercial  construction lending.  Average residential real estate loan balances
declined  $35.3  million or 12.2% for the nine months ended  September 30, 1998,
reflecting   amortization  and  prepayments  of  the  existing  loan  portfolio,
partially  offset by the origination of adjustable  rate mortgages.  The Company
continues to actively  originate loans secured by first mortgages on one to four
family  residences,  and offers a variety of fixed and adjustable  rate 

                                       15
<PAGE>
mortgage loan products.  The Company  originates  long-term fixed rate mortgages
for sale in the secondary  market and generally holds  adjustable rate mortgages
in the Company's loan portfolio.  Yields on interest-earning  assets declined 21
basis points from the nine months ended September 30, 1997 primarily  reflecting
a lower level of interest rates on the Company's investment securities caused by
increased prepayments of mortgage-backed  securities which result in accelerated
premium  amortization.  Accelerated  prepayment  speeds were the result of lower
long-term interest rates which significantly increased refinancing activity.

Total interest expense was $47.0 million for the nine months ended September 30,
1998  compared to $43.8  million  during the same period in 1997, an increase of
$3.2  million  or  7.4%.   This  increase  is   attributable   to  increases  in
interest-bearing  deposits and borrowed funds. Average interest-bearing deposits
increased $61.6 million or 5.8%. This growth occurred primarily in time deposits
which increased $46.0 million or 8.9% largely due to growth in deposits of local
municipalities. Borrowed funds averaged $327.6 million for the nine months ended
September 30, 1998 compared to $295.0 million for the same period in 1997. These
borrowings  were used to match fund fixed rate  assets and manage the  Company's
interest rate risk position.

The  following  table  presents the changes in net  interest  income (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning  assets and  interest-bearing  liabilities during
the periods  indicated.  Changes which are  attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.
<TABLE>
<CAPTION>
                                                        Nine Months Ended September 30,
                                                               1998 versus 1997
                                                  ----------------------------------------
                                                        Increase (Decrease) Due to
                                                  ----------------------------------------
                                                    Volume           Rate           Net
                                                  ----------     -----------     ---------
                                                              (Dollars In Thousands)
<S>                                               <C>             <C>           <C>    
Interest-earning assets:
  Federal funds sold and
     short term investments                        $   834         $   (46)      $   788
  Investment securities held to maturity               446            (367)           79
  Investment securities available for sale           2,310          (2,552)         (242)
  Investment securities held for trading                (6)             (6)          (12)
  Residential real estate loans                     (2,111)              6        (2,105)
  Commercial real estate loans                         829            --             829
  Commercial loans                                   2,999             145         3,144
  Home equity loans                                  2,209             381         2,590
  Consumer loans                                       232             (97)          135
                                                   -------         -------       -------
Total interest-earning assets                        7,742          (2,536)        5,206
                                                   -------         -------       -------

Interest-bearing liabilities:
Deposits:
  Savings accounts                                    (587)           (574)       (1,161)
  NOW accounts                                        (269)             44          (225)
  Money manager accounts                               305              16           321
  Money market accounts                              1,072            (123)          949
  Time deposit accounts                              1,828             152         1,981
                                                   -------         -------       -------
Total deposits                                       2,349            (484)        1,865
Borrowed funds                                       1,415             (22)        1,393
                                                   -------         -------       -------
Total interest-bearing liabilities                   3,764            (506)        3,258
                                                   -------         -------       -------
Change in net interest income                      $ 3,978         $(2,030)      $ 1,948
                                                   =======         =======       =======

</TABLE>
                                       16
<PAGE>
Provision for Possible Loan Losses
The  Company's  provision for possible loan losses was $0.8 million for the nine
months ended  September 30, 1998 compared to $1.4 million for the same period in
1997. The provision for possible loan losses is based upon management's judgment
of the amount  necessary to maintain the allowance for possible loan losses at a
level which is considered  adequate.  For further information see "Balance Sheet
Analysis - Non-performing Assets" and "- Allowance for Possible Loan Losses".

Non-interest Income
Non-interest  income is  composed of fee income for bank  services  and gains or
losses from the sale of assets.  The components of  non-interest  income for the
periods presented are as follows:

                                                       Nine months ended      
                                                          September 30,      
                                                      -------------------     
                                                       1998         1997
                                                      ------       ------
                                                     (Dollars in Thousands)

Net gain on sale of loans                            $   986      $   328
Net gain on sale of securities                             3           77
Net gain on securities held for trading                 --             43
Loan charges and fees                                  2,276        2,355
Deposit related fees                                   6,293        5,564
Merchant processing fees                               1,398        1,358
Other charges and fees                                 2,092        1,761
                                                     -------      -------
                                                     $13,048      $11,486
                                                     =======      =======

Non-interest  income  totaled $13.0 million for the nine months ended  September
30, 1998  compared to $11.5  million for the same period in 1997, an increase of
$1.5 million or 13.6%.  Deposit  service charges and fees increased $0.7 million
due to fees associated with the Company's  larger  non-interest  bearing deposit
base.  Net gain on sale of loans  increased  $0.7  million due to an increase in
mortgage  production and  corresponding  sale of loans to the secondary  market.
Other  charges and fees  increased  $0.3  million due to  increases in brokerage
service fees and fees  associated  with  Business  Manager,  a  commercial  cash
management product introduced by the Company in 1997, which involves the funding
and  management  of  accounts  receivable  for  small-to-medium-sized   business
customers.  Loan charges and fees decreased $0.1 million  reflecting the decline
in the residential mortgage servicing portfolio.

Non-interest Expense

Salaries and Benefits Expense
Salaries and benefits  expense  totaled  $19.7 million for the nine months ended
September  30, 1998  compared to $18.3  million for the same period in 1997,  an
increase of $1.4 million reflecting standard wage increases,  increased staffing
related  to new  branch  openings,  branch-related  support,  as well as support
needed to meet  increased  residential  origination  volumes.  In addition,  the
Company  experienced  higher  benefit costs  associated  with  restricted  stock
vesting and the ESOP.

Occupancy Expense of Bank Premises
Occupancy  expense  totaled $3.8 million for the nine months ended September 30,
1998  compared to $3.6 million for the same period in 1997,  an increase of $0.2
million which is attributed to the expense of new branch openings.

Furniture and Equipment Expense
Furniture and equipment  expense  increased  $0.3 million  reflecting new branch
openings as well as investments in new technology.

                                       17
<PAGE>
Other Operating Expense
The  components  of other  operating  expense for the periods  presented  are as
follows:
                                                        Nine months ended  
                                                          September 30,       
                                                      -------------------       
                                                       1998         1997
                                                      ------       ------
                                                     (Dollars in Thousands)

Marketing                                            $ 2,016      $ 1,568
Insurance                                                467          547
Professional services                                  2,030        2,436
Outside processing                                     4,114        3,650
Other                                                  4,926        4,482
                                                     -------      -------
                                                     $13,553      $12,683
                                                     =======      =======

Other  operating  expenses  totaled  $13.6  million  for the nine  months  ended
September  30, 1998  compared to $12.7  million for the same period in 1997,  an
increase  of $0.9  million.  Outside  processing  and other  operating  expenses
increased $0.5 million and $0.4 million respectively, from the comparable period
reflecting  costs  associated  with  higher   transaction  and  account  volumes
resulting from the Company's consumer strategy. Marketing increased $0.4 million
due to additional  radio and print  advertisement as well as branch displays and
brochures for GBT.  Professional  services  decreased  $0.4 million due to lower
levels of legal expenses.

Net Expense of Real Estate Operations
The Company's former real estate investment and brokerage subsidiary, Colebrook,
engaged in various real estate  investments,  directly or in joint ventures with
unaffiliated  partners.  In accordance with FDICIA,  the Company  terminated its
real estate  development  activities and has completed the sale of its remaining
real estate  investments.  At September 30, 1998 the divestment of Colebrook was
complete.

Net income of real estate  operations  for the nine months ended  September  30,
1998 was $1.7  million  compared  to net  expense of $0.4  million  for the same
period in 1997. In the first quarter of 1997, the Company  established a reserve
of $1.0 million  relating to the  divestment  of Colebrook  which was  partially
offset by a $0.6 million gain on the sale of real estate  property.  Results for
the nine months ended  September 30, 1998 were influenced by a $1.1 million gain
on the sale of a real estate investment in the third quarter, the second quarter
reversal of the remaining $0.4 million Colebrook  divestment reserve, as well as
income of $0.2 million representing normal operating earnings.

Income Taxes
For the nine months ended  September  30, 1998 the Company  recorded  income tax
expense of $7.9 million  compared to expense of $6.9 million for the nine months
ended  September 30, 1997.  This increase is attributable to a 17.6% increase in
pre-tax  earnings,  partially offset by a lower overall effective rate resulting
from state tax planning strategies.

                                       18
<PAGE>
Balance Sheet Analysis - Comparison Of September 30, 1998 To December 31, 1997

Total assets increased from $1.7 billion at December 31, 1997 to $1.9 billion at
September  30, 1998.  This  increase  primarily  reflects  growth in  investment
securities  and loans  funded  through an  increase in  deposits  and  wholesale
borrowings.

Investments
The Company's  investment  portfolio increased $94.6 million from $769.1 million
at December 31, 1997 to $863.7 million at September 30, 1998.

The Company  engages in investment  activities for both investment and liquidity
purposes.  The  Company  maintains  an  investment  securities  portfolio  which
consists  primarily  of  U.S.   Government  and  Agency  securities,   corporate
obligations,  asset-backed securities, collateralized mortgage obligations, FHLB
stock, and marketable equity  securities.  Other short-term  investments held by
the Company  periodically  include  interest-bearing  deposits and federal funds
sold.  The  Company  also  maintains  a  mortgage-backed   securities  portfolio
consisting of securities  issued and guaranteed by the Federal National Mortgage
Association  ("FNMA"),  the Federal Home Loan Mortgage Corporation ("FHLMC") and
the Government  National Mortgage  Association  ("GNMA") in addition to publicly
traded  mortgage-backed  securities issued by private  financial  intermediaries
which are rated "AA" or higher by rating agencies of national prominence.

Securities  which the Company has the intent and ability to hold until  maturity
are  classified as  held-to-maturity  and are carried at amortized  cost,  while
those  securities which have been identified as assets that may be sold prior to
maturity or assets for which there is not a positive  intent to hold to maturity
are  classified  as  available-for-sale  and are  carried  at fair  value,  with
unrealized  gains and losses  excluded  from earnings and reported net of tax as
accumulated other comprehensive  income as a separate component of stockholders'
equity.

During  1997  GBT  held  trading  securities.   However,   concurrent  with  the
acquisition  of GBT,  the Company  sold its  position in these  instruments.  At
September  30,  1998  and  December  31,  1997,  the  Company  held  no  trading
securities.

The table below sets forth certain information  regarding the amortized cost and
fair value of the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                         September 30, 1998
                                                  -----------------------------------------------------------
                                                       Available for Sale                Held to Maturity
                                                  ----------------------------     --------------------------
                                                                       (Dollars In Thousands)
                                                   Amortized                        Amortized
                                                     Cost          Fair Value         Cost        Fair Value
                                                  -----------     ------------     ----------     -----------
<S>                                                <C>              <C>            <C>            <C>   
U.S. Government and Agency obligations              $ 17,017         $ 17,119       $   --         $   --
Collateralized mortgage obligations                   46,690           46,804         12,854         12,994
Mortgage-backed securities                           495,842          493,756        165,705        166,017
Asset-backed securities                                 --               --           65,349         65,861
Other bonds and short term obligations                 8,968            9,591            330            330
Other securities                                      51,294           52,150           --             --
                                                    --------         --------       --------       --------
    Total                                           $619,811         $619,420       $244,238       $245,202
                                                    ========         ========       ========       ========
<CAPTION>
                                                                      December 31, 1997
                                                  -----------------------------------------------------------
                                                       Available for Sale                Held to Maturity
                                                  ----------------------------     --------------------------
                                                                       (Dollars In Thousands)
                                                   Amortized                        Amortized
                                                     Cost          Fair Value         Cost        Fair Value
                                                  -----------     ------------     ----------     -----------
<S>                                                <C>              <C>            <C>            <C>   
U.S. Government and Agency obligations              $ 15,608         $ 15,636       $  2,400       $  2,391
Collateralized mortgage obligations                   51,273           51,415          2,934          2,953
Mortgage-backed securities                           458,659          460,478        141,282        141,563
Asset-backed securities                                 --               --           46,046         46,143
Other bonds and short term obligations                 8,966            9,355            345            346
Other securities                                      38,128           39,224           --             --
                                                    --------         --------       --------       --------
    Total                                           $572,634         $576,108       $193,007       $193,396
                                                    ========         ========       ========       ========
</TABLE>
                                       19
<PAGE>
Loan Portfolio Composition
Gross loans  comprised  $896.2  million or 47.2% of total assets as of September
30, 1998. The following  table sets forth  information  concerning the Company's
loan portfolio in dollar amounts and  percentages,  by type of loan at September
30, 1998 and at December 31, 1997.

<TABLE>
<CAPTION>
                                           September 30, 1998                   December 31, 1997
                                    --------------------------------    --------------------------------
                                                        Percent of                          Percent of
                                        Amount             Total            Amount             Total
                                    ---------------    -------------    --------------    --------------
                                                           (Dollars In Thousands)

<S>                                   <C>                <C>               <C>                <C>   
Residential real estate loans          $235,738           26.30%            $281,457           33.13%
Commercial real estate loans            188,624           21.05%             185,226           21.80%
Commercial loans                        280,551           31.31%             212,869           25.06%
Home equity loans                       179,005           19.97%             158,753           18.69%
Consumer loans                           12,270            1.37%              11,189            1.32%
                                       --------          ------             --------          ------
   Total loans receivable, gross        896,188          100.00%             849,494          100.00%
                                       --------          ------             --------          ------
Less:                                                                                 
Unearned income and fees                 (2,986)                              (1,991)
Allowance for loan losses                23,924                               22,724
                                       --------                             --------         
   Total loans receivable, net         $875,250                             $828,761
                                       ========                             ========

</TABLE>


The Company continues to actively  originate loans secured by first mortgages on
one to four family residences, and offers a variety of fixed and adjustable rate
mortgage loan products.  The Company  originates  long-term fixed rate mortgages
for sale in the secondary  market and generally holds  adjustable rate mortgages
in the  Company's  loan  portfolio.  During the nine months ended  September 30,
1998, the Company  experienced an increase in prepayments in its adjustable rate
mortgage portfolio.  These prepayments offset new originations and resulted in a
$45.7 million  decrease in residential real estate balances between December 31,
1997 and September 30, 1998.

During the nine months  ended  September  30,  1998,  commercial  loan  balances
increased  $67.7 million,  reflecting the Company's  continued  focus on lending
activities  in the local  business  market.  Home equity loans  increased  $20.3
million from December 31, 1997 to September 30, 1998 as the Company continues to
actively promote home equity products.

                                       20

<PAGE>
Non-performing Assets
Non-performing  assets  declined  from $8.1 million at December 31, 1997 to $5.0
million at  September  30,  1998.  The decline is  primarily  attributed  to the
movement of non-accrual loans to accrual status.  The following table sets forth
information  regarding the components of  non-performing  assets for the periods
presented:

                                              September 30,     December 31,
                                                  1998             1997
                                              -------------     ------------
                                                  (Dollars In Thousands)
Non-accrual loans (1):
   Residential real estate loans                   $1,132          $1,211   
   Commercial real estate loans                       675           1,542
   Commercial loans                                 1,561           2,414
   Home equity loans                                  282             181
   Consumer loans                                      27               4
                                                   ------          ------
   Total non-accrual loans                          3,677           5,352
                                                   ------          ------
                                                                 
Loans past due 90 days still accruing (2)             371             431
                                                   ------          ------
   Total non-performing loans                       4,048           5,783
Foreclosed real estate (3)                            679           1,209
Restructured loans on accrual status (4)              275           1,124
                                                   ------          ------
   Total non-performing assets                     $5,002          $8,116
                                                   ======          ======
                                                                 
Total non-performing loans to total                              
   gross loans                                       0.45%           0.68%
                                                                 
Total non-performing assets to total                             
   assets                                            0.26%           0.47%
                                                                 
Allowance for possible losses to                                 
   non-performing loans                            591.01%         392.94%
                                                           
(1) Non-accrual loans are loans that are contractually  past due in excess of 90
days, for which the Company has stopped the accrual of interest,  or loans which
are not past due but on which the  Company  has  stopped the accrual of interest
based on management's assessment of the circumstances surrounding these loans.

(2) Accruing loans past due 90 days or more are loans which have not been placed
on non-accrual status as, in management's  opinion,  the collection of the loan,
in full, is not in doubt.

(3)  Foreclosed  real estate  includes  OREO,  defined as real  estate  acquired
through foreclosure or acceptance of a deed in lieu of foreclosure.  The Company
carries  foreclosed  real estate at the lower of cost or net  realizable  value,
which approximates fair value less estimated selling costs.

(4) Restructured loans are loans for which concessions,  including  reduction of
interest rates or deferral of interest or principal payments,  have been granted
due to the borrower's  financial  condition.  Restructured  loans on non-accrual
status are reported in the  non-accrual  loan  category.  Restructured  loans on
accrual status are those loans that have complied with terms of a  restructuring
agreement for a satisfactory period (generally six months).

                                       21

<PAGE>
The  principal   amount  of   non-performing   loans  including   non-performing
restructured  loans  aggregated  $4.0  million at  September  30,  1998 and $5.8
million at December 31, 1997.  Interest  income that would have been recorded if
the loans had been performing in accordance with their original terms aggregated
$0.3 million and $0.4 million for the nine months ended  September  30, 1998 and
1997, respectively.  Interest income recorded on these loans for the nine months
ended   September  30,  1998  and  1997  was  $0.1  million  and  $0.3  million,
respectively.

The principal amount of accruing  restructured  loans aggregated $0.3 million at
September  30, 1998 compared to $1.1 million at December 31, 1997, a decrease of
$0.8  million.  Interest  income that would have been  recorded if the loans had
been  performing  within their original  terms  aggregated $18 thousand and $0.2
million  for the  periods  ended  September  30,  1998 and  1997,  respectively.
Interest  income  recorded on these  loans  amounted  to $21  thousand  and $0.1
million for the nine months ended September 30, 1998 and 1997, respectively.

Watch List Loans
The Company maintains a "watch list" of loans, which represents performing loans
that have  potential  weaknesses  that  require  management's  attention.  These
potential  weaknesses may stem from a variety of factors including,  among other
things,  economic or market  conditions,  adverse  conditions  in the  obligor's
operations  or financial  condition  weaknesses.  Watch list loans totaled $17.2
million  and  $24.1  million  at  September  30,  1998 and  December  31,  1997,
respectively.

Classified Loans
The Company's Credit Grade Policy (the "Policy") provides for the classification
of loans  considered to be of lesser quality as  "substandard",  "doubtful",  or
"loss"  loans.  A loan is  considered  substandard  under  the  Policy  if it is
inadequately  protected  by the current  sound worth and paying  capacity of the
obligor or of the collateral  pledged,  if any.  Substandard loans include those
characterized by the "distinct  possibility" that the Company will sustain "some
loss" if the  deficiencies are not corrected.  Loans classified as doubtful,  of
which  the  Company  has  none,  have all of the  weaknesses  inherent  in those
classified as  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,  "improbable."  Loans  characterized  as
loss, of which the Company has none, are those considered "uncollectible" and of
such little value that their  continuance  as bankable  assets is not warranted.
Classified loans, all of which are categorized substandard, totaled $9.5 million
and $6.2  million at September  30, 1998 and  December  31, 1997,  respectively.
Included in these  amounts are $3.7 million and $5.4 million of loans which have
been  reported as  non-performing  assets at September 30, 1998 and December 31,
1997, respectively.

Allowance for Possible Loan Losses
The allowance for possible loan losses  reflects an amount that, in management's
judgment, is adequate to provide for potential losses in the loan portfolio.  In
addition,  examinations  of the adequacy of the loan loss reserve are  conducted
periodically  by various  regulatory  agencies.  The allowance for possible loan
losses at September  30, 1998 was $23.9  million,  compared to $22.5  million at
September 30, 1997.

                                       22
<PAGE>
The activity in the allowance for possible loan losses for the nine months ended
September 30, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                       September 30,
                                                                  ----------------------
                                                                    1998          1997
                                                                  ---------    ---------
                                                                  (Dollars In Thousands)

<S>                                                              <C>          <C>     
Balance, beginning of period                                      $ 22,724     $ 19,549
Provision for loan losses                                              755        1,431
Charge-offs:
  Residential real estate loans                                       (268)        (202)
  Commercial real estate loans                                        (426)        (721)
  Commercial loans                                                    (324)        (459)
  Home equity loans                                                    (41)        (135)
  Consumer loans                                                      (184)        (200)
  Merchant processing                                                  (55)         (51)
                                                                  --------     --------
    Total charge-offs                                               (1,298)      (1,768)
Recoveries:
  Residential real estate loans                                       --              2
  Commercial real estate loans                                       1,277        2,821
  Commercial loans                                                     420          331
  Home equity loans                                                     12           80
  Consumer loans                                                        34           38
  Merchant processing                                                 --           --
                                                                  --------     --------
    Total recoveries                                                 1,743        3,272
                                                                  --------     --------
Net recoveries (charge-offs)                                           445        1,504
Balance, end of period                                            $ 23,924     $ 22,484
                                                                  ========     ========

Ratio of net loan recoveries (charge-offs) during the period to
    average loans outstanding during the period                       0.05%        0.19%
Ratio of allowance for possible loan losses to total loans
    at the end of the period                                          2.67%        2.65%
Ratio of allowance for possible loan losses to non-performing
    loans at the end of the period                                  591.01%      360.26%

</TABLE>

At September  30, 1998,  the recorded  investment  in loans that are  considered
impaired  under SFAS 114  "Accounting by Creditors for Impairment of a Loan" was
$8.5  million.  Included  in this amount is $1.4  million of impaired  loans for
which the  related  SFAS 114  allowance  is $0.5  million  and $7.2  million  of
impaired  loans for which the SFAS 114 allowance is zero.  The average  recorded
investment  in impaired  loans during the three and nine months ended  September
30, 1998 was approximately $8.2 million and $8.6 million,  respectively. For the
three and nine month periods ended  September 30, 1998,  the Company  recognized
interest  income  on these  impaired  loans of $0.1  million  and $0.4  million,
respectively.

                                       23
<PAGE>
The  following  table shows the  allocation  of the  allowance for possible loan
losses to the various types of loans as well as the  percentage of allowance for
possible loan losses in each category to total allowance for possible loan loss.

<TABLE>
<CAPTION>
                                                           September 30, 1998               December 31, 1997
                                                     ----------------------------    ---------------------------
                                                                        % of                           % of
                                                                        Total                          Total
                                                                    Allowance for                  Allowance for
                                                       Amount        Loan Losses       Amount       Loan Losses
                                                    -----------     -------------     ---------    -------------
                                                                          (Dollars In Thousands)
<S>                                                  <C>               <C>            <C>            <C>   
Residential real estate loans                         $ 2,675           11.18%         $ 3,664        16.12%
Commercial real estate loans                            7,516           31.42%           5,632        24.78%
Commercial loans                                        9,025           37.73%           8,328        36.65%
Home equity loans                                       2,518           10.52%           3,183        14.01%
Consumer loans                                          1,008            4.21%           1,274         5.61%
Merchant processing                                     1,182            4.94%             643         2.83%
                                                      -------          ------          -------       ------
Total allowance for possible loan losses              $23,924          100.00%         $22,724       100.00%
                                                      =======          ======          =======       ======
                                                                                                      
</TABLE>


Deposit Distribution
The principal  source of funds for the Company are deposits from local consumers
and  businesses.  There were no  brokered  deposits  at  September  30,  1998 or
December 31, 1997.  The Company's  deposits  consist of demand and NOW accounts,
money manager accounts,  passbook and statement  savings accounts,  money market
accounts and time  deposits.  The following  table  presents the  composition of
deposits at the dates indicated:

<TABLE>
<CAPTION>
                                      September 30, 1998           December 31, 1997
                                   -----------------------      -----------------------
                                                   Percent                     Percent
                                                      of                         of
                                      Amount        Total          Amount       Total
                                   ----------     --------      ----------    ---------
                                                  (Dollars In Thousands)
<S>                               <C>              <C>         <C>             <C>   
Demand deposits                    $  190,547       14.19%      $  171,343      13.52%
NOW accounts                           46,312        3.45%          51,412       4.06%
Money manager accounts (1)             39,398        2.93%          39,447       3.11%
Savings accounts                      217,861       16.22%         263,449      20.79%
Money market accounts                 253,066       18.84%         211,286      16.67%
Time deposits                         595,879       44.37%         530,361      41.85%
                                   ----------      ------       ----------     ------
   Total deposits                  $1,343,063      100.00%      $1,267,298     100.00%
                                   ==========      ======       ==========     ======

<FN>                                                                        
(1)  Money  manager  accounts  represent  NOW account  balances  which have been
     transferred to money market accounts to provide additional investable funds
     to the Company by substantially  reducing the reserve balances  required to
     be  maintained at the Federal  Reserve Bank of Boston.  This program has no
     effect on the Company's depositors.
</FN>
</TABLE>
Total  deposits  were $1.3 billion at both  September  30, 1998 and December 31,
1997. Deposits increased $75.8 million with growth occurring primarily in demand
deposits and time deposits.  The $45.6 million  decrease in savings  accounts is
offset by a comparable increase in money market accounts,  which is attributable
to  the  conversion  of  some  savings  accounts  in  connection  with  the  GBT
acquisition.  Demand  deposits  increased  $19.2  million  reflecting  growth in
business  deposits,  as a result of active  solicitation of these accounts,  and
consumer  deposits,  as customers  continue to take  advantage of free  checking
accounts  offered as a result of the Company's  consumer deposit  strategy.  The
$65.5 million  increase in time deposits is primarily  attributable to growth in
deposits of local municipalities.

                                       24
<PAGE>
Borrowings
Borrowings  consist  of FHLB  advances,  securities  sold  under  agreements  to
repurchase,  and loans  payable  related  to the  Company's  ESOP.  The  Company
generally  uses  borrowings  to match  fund  fixed  rate  assets  and manage the
Company's interest rate risk position.  Borrowings  increased $80.7 million from
$299.9  million at December  31, 1997 to $380.6  million at  September  30, 1998
reflecting a portion of the funding for the growth in loans and investments.

Regulatory Capital
The Company is subject to various regulatory capital  requirements  administered
by the federal banking  agencies.  Failure to meet minimum capital  requirements
can initiate certain mandatory, and possibly additional  discretionary,  actions
by regulators  that, if undertaken,  could have a direct material adverse effect
on  the  Company's  financial  statements.  Under  applicable  capital  adequacy
requirements  the Company must meet specific minimum capital  requirements  that
involve quantitative measures of the Company's assets, liabilities,  and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's  capital  amounts and  classification  are also subject to qualitative
judgments  by the  regulators  about  components,  risk  weightings,  and  other
factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  the Company to  maintain  minimum  amounts and ratios (set forth in the
table  below) of total and Tier 1 capital  to  risk-weighted  assets  and Tier 1
capital to total average assets.  Management believes, as of September 30, 1998,
that the Company meets all capital adequacy requirements to which it is subject.

Under the FDIC's  regulatory  framework for prompt corrective  action,  both SIS
Bank and GBT are  considered  well  capitalized  as of September 30, 1998. To be
categorized  as  well   capitalized  the  Banks  must  maintain   minimum  total
risk-based,  Tier 1 risk-based,  and Tier 1 leverage  ratios as set forth in the
table  below.  As of  September  30, 1998 the  Company  also  qualified  as well
capitalized under the applicable Federal Reserve Board regulations.

Capital amounts and ratios are monitored by management for the Company, SIS Bank
and  GBT to  ensure  qualification  as  well  capitalized.  In  connection  with
maintaining GBT's qualification as well capitalized the Company has discontinued
GBT dividend payments to the parent company.

                                       25
<PAGE>
The actual  capital  amounts  and ratios for the  Company,  SIS Bank and GBT are
presented  in the  table  below,  no  deductions  were  made  from  capital  for
interest-rate risk.
<TABLE>
<CAPTION>
                                                                          Minimum                  Minimum
                                                                        Requirements             Requirements
                                                                        For Capital             To Qualify As
                                                  Actual             Adequacy Purposes         Well Capitalized
                                          --------------------  ------------------------   ----------------------
                                            Amount      Ratio      Amount       Ratio       Amount         Ratio
                                          ---------    -------  -----------   ----------   ---------      -------
                                                                  (Dollars In Thousands)
<S>                                      <C>           <C>       <C>            <C>        <C>             <C>

As of September 30, 1998:

Tier I Capital (to Average Assets)
   Company                                 $139,348      7.5%     $ 74,623       4.0%          N/A
   SIS Bank                                $115,416      7.4%     $ 62,821       4.0%       $ 78,527        5.0%
   GBT                                     $ 19,097      6.5%     $ 11,805       4.0%       $ 14,756        5.0%
Tier I Capital (to Risk Weighted Assets)                                                                 
   Company                                 $139,348     11.5%     $ 48,507       4.0%       $ 72,761        6.0%
   SIS Bank                                $115,416     11.5%     $ 40,291       4.0%       $ 60,437        6.0%
   GBT                                     $ 19,097      9.3%     $  8,220       4.0%       $ 12,330        6.0%
Total Capital (to Risk Weighted Assets)                                                                  
   Company                                 $154,601     12.7%     $ 97,014       8.0%       $121,268       10.0%
   SIS Bank                                $128,095     12.7%     $ 80,583       8.0%       $100,729       10.0%
   GBT                                     $ 21,671     10.6%     $ 16,439       8.0%       $ 20,549       10.0%
                                                                                                         
As of December 31, 1997:                                                                                 
                                                                                                         
Tier I Capital (to Average Assets)                                                                       
   Company                                 $123,340      7.2%     $ 68,834       4.0%          N/A
   SIS Bank                                $103,780      7.1%     $ 58,358       4.0%       $ 72,947        5.0%
   GBT                                     $ 17,291      6.6%     $ 10,422       4.0%       $ 13,028        5.0%
Tier I Capital (to Risk Weighted Assets)                                                                 
   Company                                 $123,340     11.9%     $ 41,568       4.0%       $ 62,352        6.0%
   SIS Bank                                $103,780     11.9%     $ 35,044       4.0%       $ 52,565        6.0%
   GBT                                     $ 17,291     10.6%     $  6,507       4.0%       $  9,761        6.0%
Total Capital (to Risk Weighted Assets)                                                                  
   Company                                 $136,438     13.1%     $ 83,137       8.0%       $103,921       10.0%
   SIS Bank                                $114,825     13.1%     $ 70,087       8.0%       $ 87,609       10.0%
   GBT                                     $ 19,344     11.9%     $ 13,014       8.0%       $ 16,268       10.0%
</TABLE>
Interest Rate Risk Management
Using management's  estimates of asset prepayments and core deposit decay in its
computation, the Company estimates that its cumulative one-year gap position was
liability  sensitive by $29.3  million or 1.54% of total assets at September 30,
1998.  The  following  table  sets forth the  amounts of assets and  liabilities
outstanding  at September  30,  1998,  which are  anticipated  by the Company to
mature or  reprice  in each of the  future  time  periods  shown  using  certain
assumptions  based on its  historical  experience,  the  current  interest  rate
environment,  and other data available to management.  Management  believes that
these assumptions  approximate  actual experience and considers such assumptions
reasonable,  however,  the interest rate sensitivity of the Company's assets and
liabilities  could vary  substantially  if  different  assumptions  were used or
actual  experience  differs from the assumptions used.  Management  periodically
reviews and, when  appropriate,  changes the  assumptions  used in creating this
table.

                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                            GAP Position
                                                                        At September 30, 1998
                                                ----------------------------------------------------------------------
                                                               More than six
                                                 Less than      months less
                                                 six months    than one year   1 - 5 Years     Over 5 Yrs      TOTAL
                                                ------------  --------------   -----------    -----------   ----------
                                                                      (Dollars In Thousands)
<S>                                             <C>            <C>            <C>            <C>           <C>    
Assets:
Federal funds sold and
   interest bearing deposits                     $   52,242     $     --       $     --       $     --      $   52,242
Investment securities                               323,351        189,285        287,172         63,850       863,658
Residential real estate loans                        55,406         55,362         96,449         27,720       234,937
Commercial real estate loans                         45,817         13,147        110,009         18,928       187,901
Commercial loans                                    105,263         14,893        148,952         10,521       279,629
Home equity loans                                   112,739          7,296         32,478         28,279       180,792
Consumer loans                                        6,391          1,027          4,820           --          12,238
Other assets                                           --             --             --           89,021        89,021
                                                 ----------     ----------     ----------     ----------    ----------

Total assets                                     $  701,209     $  281,010     $  679,880     $  238,319    $1,900,418
                                                 ==========     ==========     ==========     ==========    ==========

Liabilities & stockholders' equity:
Savings accounts                                 $   32,679     $   32,679     $  152,503     $     --      $  217,861
NOW accounts                                         12,858         12,857         59,995           --          85,710
Money market accounts                                75,920         75,920        101,226           --         253,066
Time deposits                                       406,201        131,077         57,382          1,219       595,879
Borrowed funds                                      142,242         12,914        188,518         36,936       380,610
Other liabilities & stockholders' equity             38,109         38,109        114,328        176,746       367,292
                                                 ----------     ----------     ----------     ----------    ----------

Total liabilities & stockholders' equity         $  708,009     $  303,556     $  673,952     $  214,901    $1,900,418
                                                 ==========     ==========     ==========     ==========    ==========

Period GAP position                              $   (6,800)    $  (22,546)    $    5,928     $   23,418

Net period GAP as a percentage of total assets        (0.35%)        (1.19%)         0.31%         1.23%

Cumulative GAP                                   $   (6,800)    $  (29,346)    $  (23,418)           --

Cumulative GAP as a percentage of total
   assets                                             (0.35%)        (1.54%)        (1.23%)          --

Cumulative GAP as a percentage of total
   interest-earning assets                            (0.38%)        (1.62%)        (1.29%)          --

Cumulative interest-earning assets as a
   percentage of cumulative interest-bearing         104.67%        105.01%        111.18%       118.15%
   liabilities
<FN>
For purposes of the above interest sensitivity analysis:

     Residential  loans  held for sale at  September  30,  1998  totaling  $10.4  million  are in the less than six  month  interest
     sensitivity period.

     Fixed rate assets are scheduled by contractual  maturity and adjustable rate assets are scheduled by their next repricing date.
     In both cases, assets that have prepayment optionality are adjusted for the Company's estimate of prepayments.

     Loans do not include non-accrual loans of $3.7 million.

     Loans do not include the allowance for loan loss of $23.9 million.

     In certain deposit categories where there is no contractual maturity, Management assumed the sensitivity characteristics listed
     below based on the current  interest  rate  environment  and the  Company's  historical  experience.  Management  reviews these
     assumptions on a quarterly basis and may modify them as circumstances dictate.

          -    Savings accounts are assumed to decay at an annual rate of 30%.
          -    NOW accounts are assumed to decay at an annual rate of 30%.
          -    Money market accounts are assumed to decay at an annual rate of 60%.
          -    Non-interest  bearing  accounts of $190.5  million are included in other  liabilities  and are assumed to decay at an
               annual rate of 40%.
</FN>
</TABLE>

                                       27
<PAGE>
Certain  shortcomings  are  inherent in the method of analysis  presented in the
foregoing  table.  For example,  while certain assets and  liabilities  may have
similar  contractual  maturities  or  periods  to  repricing,  they may react in
different ways to changes in market interest rates.  Further,  in the event of a
change in interest rates,  prepayment and early  withdrawal  levels would likely
deviate significantly from those assumed in calculating the table. Additionally,
certain assets, such as adjustable rate mortgages,  have features which restrict
changes in interest rates on a short-term  basis and over the life of the asset.
Finally, the ability of borrowers to service their adjustable rate mortgages may
decrease in the event of an interest rate increase.

To offset these inherent  weaknesses the Company also utilizes income simulation
modeling in  measuring  its interest  rate risk and  managing its interest  rate
sensitivity.  Income simulation not only considers the impact of changing market
interest  rates  on  forecasted  net  interest  income,   but  also  takes  into
consideration  other factors such as yield curve  relationships,  the volume and
mix  of  assets  and  liabilities,   customer  preferences  and  general  market
conditions.  In addition,  the Company utilizes duration analysis and calculates
the  Company's  market value of portfolio  equity under  various  interest  rate
scenarios.

Liquidity
Liquidity  measures the ability of the Company to meet its maturing  obligations
and existing commitments,  to withstand  fluctuations in deposit levels, to fund
its operations and to provide for customer credit needs. If the Company requires
funds  beyond  its  ability  to  generate  them  internally,  it has  additional
borrowing  capacity  with  the  FHLB  and  collateral  eligible  for  repurchase
agreements.  Because the Company has a stable retail  deposit  base,  management
believes  that  significant  borrowings  will not be  necessary  to maintain its
current liquidity position. Management intends to continue seeking opportunities
for expansion and believes that the Company's  liquidity,  capital resources and
borrowing capabilities are adequate for its current and intended operations.

Market Risk
As a financial  institution,  the  Company's  chief market risk is interest rate
risk. The Company has no exposure to foreign currency or commodity  prices.  Its
exposure to equity prices is limited to marketable equity  securities  contained
within its available for sale  investment  portfolio.  At September 30, 1998 the
Company did not have a trading portfolio.

Interest rate risk is the  sensitivity of income to variations in interest rates
over defined time horizons. The primary goal of interest rate risk management is
to control  this risk within  limits and  guidelines  approved by the  Company's
Board of Directors.  These limits and guidelines reflect the Company's tolerance
for interest rate risk.

The Company  attempts to control  interest rate risk by  identifying  exposures,
quantifying them, and identifying their impact on income. The Company quantifies
its  interest  rate  risk  exposures  using  simulation  models  as  well as gap
analyses. The Company manages its interest rate exposures using a combination of
on-balance sheet instruments,  consisting principally of fixed and variable rate
securities,  deposit pricing and FHLB borrowings.  See the GAP Position analysis
under this Item 2 and the notes to the Consolidated  Financial  Statements under
Item 8 in the  Company's  Form 10-K for the year  ended  December  31,  1997 for
further information regarding market risk of these instruments.

At September  30, 1998 and December  31,  1997,  the Company had no  outstanding
exposures to off-balance sheet interest rate instruments such as swaps, forwards
or futures. GBT held derivative  financial  instruments during 1997. However, in
December,  1997  concurrent  with the  acquisition  of GBT, the Company sold its
position  in these  instruments.  At  September  30,  1998 the  Company  held no
derivative financial instruments.

                                       28
<PAGE>
Part II.  OTHER INFORMATION
Item 1.  Legal Proceedings
         Not applicable

Item 2.  Changes in Securities
         Not applicable

Item 3.  Default upon Senior Securities
         Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders
(a)      On November  12,  1998,a  Special  Meeting of the  Stockholders  of SIS
         Bancorp,  Inc. was held at the headquarters of SIS Bancorp,  Inc., 1441
         Main Street, Springfield, Massachusetts.

(b)      N/A

(c) The only proposal  presented at the meeting was to "Consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated as of July 20, 1998, as
amended (the "Merger  Agreement")  among Peoples Heritage  Financial Group, Inc.
("PHFG"),  Peoples  Heritage Merger Corp., a wholly-owned  subsidiary of Peoples
Heritage Financial Group, Inc., and SIS Bancorp,  Inc. ("SIS"),  which provides,
among other  things,  for (i) the merger of SIS with and into  Peoples  Heritage
Merger  Corp.,  and (ii)  the  conversion  of each  share  of SIS  common  stock
outstanding  immediately  prior to the merger (other than any dissenting  shares
under Massachusetts law and certain other shares) into the right to receive 2.25
shares of Peoples  Heritage  Financial  Group,  Inc.  common  stock,  subject to
possible  adjustments  under  certain  circumstances,  plus  cash in lieu of any
fractional  shares"  as more  fully  described  in the Proxy  statement  for the
meeting.
<TABLE>
<CAPTION>

    Votes For (shares)     Votes Against (shares)    Votes Abstained (shares)   Broker Non-Votes
    ------------------     ----------------------    ------------------------   ----------------
        <S>                        <C>                       <C>                       <C>

         4,991,614                  96,729                    19,030                    None

</TABLE>


Item 5.  Other Information
         Not applicable

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits: None

(b)  Reports on Form 8-K

         On July 21, 1998, the Company filed a Form 8-K reporting the signing of
         a definitive  Agreement and Plan for Merger dated July 20, 1998 between
         the Company and People's Heritage Financial Group, Inc.

                                       29
<PAGE>


                                   SIGNATURES


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


                                  SIS BANCORP, INC.
                                    (Registrant)


November 13, 1998                 /s/  F. William Marshall, Jr.              
Date                              F. William Marshall, Jr.
                                  President and Chief Executive Officer




November 13, 1998                 /s/  John F. Treanor                       
Date                              John F. Treanor
                                  Executive Vice President, Chief Operating
                                  Officer and Chief Financial Officer

                                       30