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 06/30/98

                                       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: 7,017,235 shares as of August 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 June 30, 1998 and December 31, 1997..................................  1

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

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

   Condensed Consolidated Statement of Changes in Stockholders' Equity
   for the six months ended June 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........................................... 28

   Item 2.     Changes in ecurities........................................ 28

   Item 3.     Default upon Senior ecurities............................... 28

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

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

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


SIGNATURES................................................................. 29



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

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

ASSETS

Cash and due from banks                                                     $    56,578    $    50,297
Federal funds sold and short term investments                                    42,765         17,317
Investment securities available for sale                                        566,945        576,108
Investment securities held to maturity (fair value: $234,404
  at June 30, 1998 and $193,396 at December 31, 1997)                           233,767        193,007
Loans receivable, net of allowance for possible losses
  ($23,482 at June 30, 1998 and $22,724 at December 31, 1997)                   870,145        828,761
Accrued interest and dividends receivable                                        11,220         10,749
Investments in real estate and real estate partnerships                           2,425          2,903
Foreclosed real estate, net                                                         841          1,209
Bank premises, furniture and fixtures, net                                       37,541         35,843
Other assets                                                                     19,435         17,424
                                                                            -----------    -----------
    Total assets                                                            $ 1,841,662    $ 1,733,618
                                                                            ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                    $ 1,326,895    $ 1,267,298
Federal Home Loan Bank advances                                                 202,452        184,121
Securities sold under agreements to repurchase                                  131,276        113,299
Loans payable                                                                     2,314          2,492
Mortgage escrow deposits                                                          6,501          5,642
Accrued expenses and other liabilities                                           40,687         35,294
                                                                            -----------    -----------
    Total liabilities                                                         1,710,125      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: 7,059,974 at June 30, 1998 and 7,081,187 at December 31, 1997;
   shares outstanding: 6,961,724 at June 30, 1998 and 6,947,787 at
   December 31, 1997)                                                                71             71
Unearned compensation                                                            (2,943)        (3,123)
Additional paid-in capital                                                       54,473         54,755
Retained earnings                                                                81,321         75,153
Accumulated other comprehensive income -
   net unrealized gain on investment securities available for sale                1,205          2,133
Treasury stock, at cost (98,250 and 133,400 shares at June 30, 1998 and
   December 31, 1997, respectively)                                              (2,590)        (3,517)
                                                                            -----------    -----------
    Total stockholders' equity                                                  131,537        125,472
                                                                            -----------    -----------
Total liabilities and stockholders' equity                                  $ 1,841,662    $ 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              Six Months Ended
                                                        --------------------------    --------------------------
                                                         June 30,        June 30,       June 30,       June 30,
                                                           1998            1997           1998           1997
                                                        -----------    -----------    -----------    -----------
<S>                                                    <C>            <C>            <C>            <C>
Interest and dividend income:
    Loans                                               $    18,128    $    16,694    $    36,029    $    32,942
    Investment securities available for sale                  8,424          9,184         16,941         17,686
    Investment securities held to maturity                    3,694          3,691          7,166          7,469
    Investment securities held for trading                     --                3           --                5
    Federal funds sold and short term investments               530            134          1,091            429
                                                        -----------    -----------    -----------    -----------
          Total interest and dividend income                 30,776         29,706         61,227         58,531
                                                        -----------    -----------    -----------    -----------
Interest expense:
    Deposits                                                 10,992         10,294         21,569         20,350
    Borrowings                                                4,547          4,348          9,022          8,204
                                                        -----------    -----------    -----------    -----------
          Total interest expense                             15,539         14,642         30,591         28,554
                                                        -----------    -----------    -----------    -----------
Net interest and dividend income                             15,237         15,064         30,636         29,977
Less: Provision for possible loan losses                        252            465            503            965
                                                        -----------    -----------    -----------    -----------
Net interest and dividend income after provision
    for possible loan losses                                 14,985         14,599         30,133         29,012

Noninterest income:
    Net gain on sale of loans                                   369             86            624            192
    Net gain on sale of securities available for sale             2             60              2             60
    Net gain on sale of securities held for trading            --               30           --               19
    Fees and other income                                     4,158          3,696          7,879          6,994
                                                        -----------    -----------    -----------    -----------
          Total noninterest income                            4,529          3,872          8,505          7,265
                                                        -----------    -----------    -----------    -----------

Noninterest expense:
    Operating expenses:
        Salaries and employee benefits                        6,634          6,141         12,855         12,055
        Occupancy expense of bank premises, net               1,320          1,159          2,540          2,359
        Furniture and equipment expense                         932            790          1,895          1,563
        Other operating expenses                              4,401          4,170          8,482          8,371
                                                        -----------    -----------    -----------    -----------
          Total operating expenses                           13,287         12,260         25,772         24,348
                                                        -----------    -----------    -----------    -----------
    Foreclosed real estate (income) expense                    --              (11)            68            (85)
    Net (income) expense of real estate operations             (578)            58           (591)           479
                                                        -----------    -----------    -----------    -----------
          Total noninterest expense                          12,709         12,307         25,249         24,742


Income before income tax expense                              6,805          6,164         13,389         11,535
Income tax expense                                            2,580          2,449          5,088          4,540
                                                        -----------    -----------    -----------    -----------
          Net income                                    $     4,225    $     3,715    $     8,301    $     6,995
                                                        ===========    ===========    ===========    ===========

Earnings per share:
    Basic                                               $      0.63    $      0.56    $      1.24    $      1.06
    Diluted                                             $      0.60    $      0.53    $      1.17    $      1.01

Weighted average shares outstanding:
    Basic                                                 6,691,200      6,634,841      6,676,786      6,623,541
    Diluted                                               7,096,211      6,948,283      7,082,651      6,922,180


                           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)
                                                                        Six Months Ended
                                                                            June 30,
                                                                     ----------------------
                                                                        1998         1997
                                                                     ---------    ---------
<S>                                                                 <C>          <C>
Cash Flows From Operating Activities
Net income                                                           $   8,301    $   6,995
Adjustments to reconcile net income to net cash provided by
 operating activities                                       
  Provision for possible loan losses                                       503          965
  Depreciation                                                           2,244        1,960
  Amortization of premium on investment securities, net                  2,540        1,357
  ESOP and restricted stock expenses                                     1,413          868
  Investment security gains                                                 (2)         (49)
  Increase in assets held for trading                                     --            (91)
  Income from equity investment in partnerships                           --             (2)
  Gain on sale of loans                                                   (624)        (192)
  Disbursements for mortgage loans held for sale                       (84,858)     (26,746)
  Receipts from mortgage loans held for sale                            85,482       26,938
  Gain on sale of fixed assets and real estate                             (57)        (145)
  Changes in assets and liabilities:                        
    Increase in other assets, net                                       (1,794)      (1,508)
    Decrease in accrued expenses and other liabilities                   4,505        6,601
                                                                     ---------    ---------
      Net cash provided by operating activities                         17,653       16,951
                                                                     ---------    ---------
Cash Flows From Investing Activities                       
  Proceeds from sale of investment securities available for sale         2,358        7,148
  Proceeds from maturities and principal payments received         
    on investment securities available for sale                        149,196       65,616
  Purchase of investment securities available for sale                (146,206)    (139,786)
  Proceeds from maturities and principal payments received         
    on investment securities held to maturity                           40,765       24,124
  Purchase of investment securities held to maturity                   (81,846)     (15,415)
  Net decrease in investments in real estate                               419         --
  Net increase in loans receivable                                     (42,019)     (43,932)
  Net decrease in foreclosed real estate                                   500          459
  Proceeds from sale of loans                                             --             92
  Proceeds from sale of fixed assets                                        72           89
  Purchase of fixed assets                                              (3,898)      (2,735)
                                                                     ---------    ---------
      Net cash used for investing activities                           (80,659)    (104,340)
                                                                     ---------    ---------


                 See accompanying Notes to the Unaudited Financial Statements
</TABLE>
                                              3

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

                                                               (Unaudited)
                                                            Six Months Ended
                                                                June 30,
                                                         ---------------------
                                                            1998         1997
                                                         ---------    --------
Cash Flows from Financing Activities

  Net increase in deposits                                 59,597      53,735
  Net increase in borrowings                               36,130      35,216
  Net increase in mortgagors' escrow deposits                 859         637
  Net proceeds from exercise of stock options                 282         121
  Repurchase/retirement of common stock                      --        (4,193)
  Cash dividends paid                                      (2,133)     (1,574)
                                                         --------    --------
        Net cash provided by financing activities          94,735      83,942
                                                         --------    --------
Increase in cash and cash equivalents                      31,729      (3,447)

Cash and cash equivalents, beginning of period             67,614      68,090
                                                         --------    --------
Cash and cash equivalents, end of period                 $ 99,343    $ 64,643
                                                         ========    ========

Supplemental disclosures of cash flow information:
  Cash paid during the year for interest to depositors
    and interest on debt                                 $ 30,221    $ 27,914

  Income taxes paid                                      $  5,844    $  2,699

Non-cash investing activities:
  Transfers to foreclosed real estate, net               $    132    $     28



          See accompanying Notes to the Unaudited Financial Statements


                                       4

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

                                                                                              Accumulated
                                                                                                 other
                                                                                             comprehensive
                                                                                                income:
                                                                                            Net unrealized
                                                                                             gain (loss)
                                                                                             on investment      
                                                                    Additional                securities     Treasury
                                             Common      Unearned    Paid-In     Retained   available for     Stock    
                                              Stock   Compensation   Capital     Earnings       sale         at Cost       Total
                                            --------  ------------  ---------   ----------  -------------- -----------  ----------
<S>                                         <C>       <C>          <C>          <C>          <C>          <C>          <C>      
Balance at December 31, 1997                 $    71   $  (3,123)   $  54,755    $  75,153    $   2,133    $  (3,517)   $ 125,472
Net income                                      --          --           --          8,301         --           --          8,301
Cash dividends declared
                                                --          --           --         (2,133)        --           --         (2,133)
Net issuance of common stock in connection
  with employee and non-employee directors
  benefit programs                              --          (567)        (948)        --           --            927         (588)
Decrease in unearned compensation               --           747          666         --           --           --          1,413
Change in unrealized gain on investment
  securities available for sale                 --          --           --           --           (928)        --           (928)
                                             -------   ---------    ---------    ---------    ---------    ---------    ---------
Balance at June 30, 1998                     $    71   $  (2,943)   $  54,473    $  81,321    $   1,205    $  (2,590)   $ 131,537
                                             =======   =========    =========    =========    =========    =========    =========

Balance at December 31, 1996                 $    71   $  (3,693)   $  53,836    $  67,119    $   1,453    $    --      $ 118,786
Net income                                      --          --           --          6,995         --           --          6,995
Cash dividends declared                         --          --           --         (1,573)        --           --         (1,573)
Net issuance of common stock in connection
  with employee and non-employee directors
  benefit programs                              --           (98)         (10)        --           --            228          120
Decrease in unearned compensation               --           485          383         --           --           --            868
Change in unrealized gain on investment
  securities available for sale                 --          --           --           --            233         --            233
Treasury stock purchased                        --          --           --           --           --         (4,193)      (4,193)
                                             -------   ---------    ---------    ---------    ---------    ---------    ---------
Balance at June 30, 1997                     $    71   $  (3,306)   $  54,209    $  72,541    $   1,686    $  (3,965)   $ 121,236
                                             =======   =========    =========    =========    =========    =========    =========



                                   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 six 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 other  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 six months ended June 30, 1998 was
$5.5 million and $9.7  million,  respectively  compared to $5.9 million and $8.4
million, respectively for the three and six months ended June 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 an operating  segment 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         Six months ended
                                       -----------------------   -----------------------
                                         June 30,     June 30,     June 30,     June 30,
                                           1998        1997         1998         1997
                                       ----------   ----------   ----------   ----------
<S>                                   <C>          <C>          <C>          <C>       
Net income                             $    4,225   $    3,715   $    8,301   $    6,995
Weighted average shares outstanding:
  Basic                                 6,691,200    6,634,841    6,676,786    6,623,541
    Effect of dilutive securities:
      Stock options                       350,049      251,146      340,747      241,114
      Restricted stock                     54,962       62,296       65,118       57,525
                                       ----------   ----------   ----------   ----------
  Diluted                               7,096,211    6,948,283    7,082,651    6,922,180
                                       ==========   ==========   ==========   ==========

Net income per share:
    Basic                              $     0.63   $     0.56   $     1.24   $     1.06
    Diluted                            $     0.60   $     0.53   $     1.17   $     1.01

</TABLE>

4. Dividend Policy
The  Company  paid a cash  dividend  in the amount of $0.16 per share on May 26,
1998.  On July 23,  1998 the  Company  declared  a  dividend  of $0.16 per share
payable on August 24, 1998 to shareholders of record as of the close of business
on August 3, 1998.

5. Divestment Related Charges
The  Company has certain  subsidiaries  that are 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  has  terminated  its  real  estate  development
activities and has  essentially  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.

With the exception of two real estate investments (one with a book value of $2.4
million and one with a book value of $0.1 million),  the divestment of Colebrook
was completed in June,  1998. One of the two remaining real estate  investments,
with a book value of $2.4 million was sold in the third  quarter of 1998.  Based
upon final terms of the divestment,  related  expenses were $0.6 million through
June 30, 1998  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.

6. Subsequent Events
On July 20, 1998 the Company  announced  that it had entered  into a  definitive
agreement to merge with Peoples Heritage Financial Group, Inc.  ("PHFG").  Under
the  terms  of the  agreement,  the  Company  will  merge  into a  wholly  owned
subsidiary  of PHFG and the  Company's  shareholders  will  receive,  subject to
statutory  dissenters' rights, shares in PHFG. The transaction is expected to be
accounted for as a pooling of interests and is structured as a tax-free exchange
of 2.25 shares of PHFG common stock for each outstanding  share of the Company's
common stock. The transaction is scheduled to be completed by year-end 1998, and
is subject to the approval of the Company's shareholders and various federal and
state regulatory  agencies.  PHFG is a multi-bank and financial services holding
company  headquartered in Portland,  Maine. PHFG has assets of approximately $10
billion  and  operates  194  branches  through its three  banking  subsidiaries:
Peoples Heritage Bank of Maine,  Bank of New Hampshire,  and Family Bank, FSB of
Massachusetts.

                                       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.

Year 2000
The Year 2000 issue  exists  because  many  computer  systems  and  applications
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  treat the Year 2000 issue
may cause  systems to process  critical  financial and  operational  information
incorrectly.

During 1997, the Company  conducted a review of its computer systems to identify
those  areas that  could be  affected  by the Year 2000  issue.  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  Counsel.  The Company has completed the remedial phases  associated
with  awareness  and  assessment  and is  currently in the  validation  phase of
critical systems testing.

The  Company  has  developed  an  implementation  plan to resolve  its 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.  All of the Company's  third party vendors with
non-compliant systems have also been identified and notified.  The Company is in
the process of validating and testing  critical  internal  systems and verifying
that critical third party vendors have  adequately  addressed  their own systems
issues.  Test plans have been  completed as of June 30, 1998 with the  Company's
internal  systems  testing to be  completed  by December  31, 1998 and  external
testing  of third  party  vendor  systems  to be  completed  by March 31,  1999.
Additionally,  the Company is currently  assessing the potential  impact of Year
2000 on its larger commercial borrowers. The Company is presently unaware of any
situation  where any vendor will not be able to modify its  products and systems
in a timely  manner.  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 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,  as well as 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  the total cost  relating  to the Year 2000 issue to be  

                                       8
<PAGE>
approximately $0.7 million.  It is anticipated that a substantial portion of the
total  cost will be  incurred  over the next 18 months and will be  expensed  as
incurred.

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.

While the Company is not aware of any Year 2000 problems for which a solution is
not available, other unanticipated Year 2000 issues could arise and there can be
no assurance that actual results will be comparable to expected  results.  These
unanticipated  issues may  include  the  ability to  identify  and  correct  all
relevant  computer codes, the ability of the Company's  vendors and suppliers to
adequately address the Year 2000 issue, the impact of Year 2000 on our borrowers
and other uncertainties.

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

The Company reported net income of $4.2 million,  or $0.60 per diluted share for
the three months ended June 30, 1998 as compared to net income of $3.7  million,
or $0.53 per diluted share for the same period last year.  These results reflect
an increase in  noninterest  income,  net income of real estate  operations  and
lower  provisions for possible loan losses,  partially  offset by an increase in
operating 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.

                                       9
<PAGE>
<TABLE>
<CAPTION>
                                                                          Three Months Ended June 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        $   41,749   $      530       5.02%       $   14,587     $      158       4.29%
Investment securities held to maturity              226,187        3,694       6.53%          217,249          3,692       6.80%
Investment securities available for                 574,749        8,674       6.04%          545,456          9,287       6.81%
Investment securities held for trading                 --           --          --                484              5       4.09%
Residential real estate loans                       255,233        5,125       8.03%          289,371          5,774       7.98%
Commercial real estate loans                        182,091        4,038       8.87%          168,432          3,787       8.99%
Commercial loans                                    235,000        5,200       8.75%          197,885          4,384       8.76%
Home equity loans                                   166,627        3,480       8.38%          128,525          2,555       7.97%
Consumer loans                                       12,387          315      10.17%            9,314            245      10.52%
                                                 ----------   ----------      -----        ----------     ----------      -----
Total interest-earning assets                     1,694,023       31,056       7.33%        1,571,303         29,887       7.61%
                                                                                                       
Allowance for loan losses                           (23,298)                                  (20,512)
Non-interest-earning assets                         131,266                                   114,006
                                                 ----------                                ----------
Total assets                                     $1,801,991   $   31,056                   $1,664,797     $   29,887
                                                 ==========   ==========                   ==========     ==========
                                                 
Interest-bearing liabilities:                    
Deposits                                         
  Savings accounts                               $  220,882   $    1,097       1.99%       $  267,255     $    1,561       2.34%
  NOW accounts (2)                                   42,996          140       1.31%           81,040            236       1.17%
  Money manager accounts (2)                         49,067          141       1.15%            --              --          --
  Money market accounts                             255,322        2,067       3.25%          205,782          1,703       3.32%
  Time deposit accounts                             566,645        7,547       5.34%          514,137          6,794       5.30%
                                                 ----------   ----------      -----        ----------     ----------       ----
Total interest-bearing deposits                   1,134,912       10,992       3.88%        1,068,214         10,294       3.87%
                                                 
Borrowed funds                                      314,189        4,547       5.73%          299,363          4,348       5.75%
                                                 ----------   ----------      -----        ----------     ----------       ----
                                                 
Total interest-bearing liabilities                1,449,101       15,539       4.30%        1,367,577         14,642       4.29%
Non-interest-bearing liabilities                    224,771                                   178,390
                                                 ----------                                ----------
Total liabilities                                 1,673,872                                 1,545,967
Total stockholders' equity                          128,119                                   118,830
                                                 ----------                                ----------
  Total liabilities and stockholders' equity     $1,801,991    $  15,539                   $1,664,797     $   14,642
                                                 ==========    =========                   ==========     ==========

Net interest income/spread                                     $  15,517       3.03%                      $   15,245       3.32%  
                                                               =========      =====                       ==========      =====
Net interest margin as a % of interest-
earning assets                                                                 3.66%                                       3.88%
                                                                              =====                                       =====
Tax equivalent adjustment                                      $     280                                  $      181
                                                               ---------                                  ----------
Net interest income/spread per Condensed Consolidated
Statement of Operations                                        $  15,237                                  $   15,064
                                                               =========                                  ==========
<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 June 30, 1998 was $15.5  million  compared to $15.2  million for the three
months ended June 30, 1997,  an increase of $0.3 million or 1.8%.  This increase
was the result of a $122.7 million increase in interest-earning assets partially
offset by an 22 basis point decrease in the net interest margin.

Total interest income was $31.1 million on a fully taxable  equivalent basis for
the three months  ended June 30, 1998,  an increase of $1.2 million or 3.9% 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 in the second
quarter of 1998  compared  to $1.6  billion in the  second  quarter of 1997,  an
increase of $122.7 million or 7.8%. Average investments  increased $37.7 million
or 4.9% and were funded by higher  deposit  levels and borrowed  funds.  Average
loans  increased  $57.8  million  as  the  Company  continued  to  focus  on the
commercial and home equity market segments, which grew by $37.1 million or 18.8%
and $38.1 million or 29.6%, respectively. Commercial real estate loans increased
$13.7  million or 8.1%  reflecting  growth in commercial  construction  lending.
Residential  real estate loan balances  declined  $34.1 million or 11.8% for the
three months ended June 30, 1998,

                                       10
<PAGE>
reflecting  amortization and prepayments of the existing loan portfolio.  Yields
on  interest-earning  assets declined 28 basis points from the second quarter of
1997  primarily  reflecting  a lower  level of interest  rates on the  Company's
investment  securities as well as accelerated  amortization  and  prepayments of
mortgage-backed  securities  which  result in the faster  write-off of premiums.
Accelerated  prepayment speeds were the result of lower long-term interest rates
which significantly increased refinancing activity.

Total  interest  expense was $15.5  million for the three  months ended June 30,
1998  compared to $14.6  million  during the same period in 1997, an increase of
$0.9  million  or  6.1%.   This  increase  is   attributable   to  increases  in
interest-bearing  deposits and borrowed funds. Average interest-bearing deposits
increased $66.7 million or 6.2%. This growth occurred primarily in time deposits
which  increased  $52.5  million or 10.2% largely due to growth in time deposits
with local municipalities.  Borrowed funds averaged $314.2 million for the three
months  ended June 30, 1998  compared  to $299.4  million for the same period in
1997.  These  borrowings were used to match fund fixed rate assets and to extend
the maturity of the Company's liabilities.

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>
                                                     Three months ended June 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               $   320         $    52         $   372 
  Investment securities held to maturity         149            (147)              2
  Investment securities available for sale       470          (1,083)           (613)
  Investment securities held for trading          (3)             (2)             (5)
  Residential real estate loans                 (683)             34            (649)
  Commercial real estate loans                   305             (54)            251
  Commercial loans                               822              (6)            816
  Home equity loans                              777             148             925
  Consumer loans                                  79              (9)             70
                                             -------         -------         -------
Total interest-earning assets                  2,236          (1,067)          1,169
                                             -------         -------         -------
                                                                             
Interest-bearing liabilities:                                                
Deposits:                                                                    
  Savings accounts                              (251)           (213)           (464)
  NOW accounts                                  (117)             21             (96)
  Money manager account                           70              71             141
  Money market accounts                          406             (42)            364
  Time deposit accounts                          697              56             753
                                             -------         -------         -------
Total deposits                                   805            (107)            698
                                                                             
Borrowed funds                                   215             (16)            199
                                             -------         -------         -------
Total interest-bearing liabilities             1,020            (123)            897
                                             -------         -------         -------
                                                                             
Change in net interest income                $ 1,216         $  (944)        $   272
                                             =======         =======         =======
</TABLE>
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.3 million for the second
quarter of 1998  compared  to $0.5  million in the second  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".

                                       11
<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
                                                 June 30,
                                        ------------------------
                                          1998            1997
                                        ---------      ---------
                               
Net gain on sale of loans                $  369         $   86
Net gain on sale of securities                2             60
Net loss on securities held fortrading     --               30
Loan charges and fees                       798            756
Deposit related fees                      2,186          1,839
Merchant processing fees                    472            542
Other charges and fees                      702            559
                                         ------         ------
                                         $4,529         $3,872
                                         ======         ======
                                                
Non-interest income totaled $4.5 million for the second quarter of 1998 compared
to $3.9  million  for the same period in 1997,  an  increase of $0.7  million or
17.0%.  Net gain on sale of loans  increased  $0.3 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.

Non-interest Expense

Salaries and Benefits Expense
Salaries and  benefits  expense  totaled $6.6 million for the second  quarter of
1998 compared to $6.1 million for the same period in 1997. This increase of $0.5
million   reflects   increased   staffing   related  to  new  branch   openings,
branch-related  support as well as support needed to meet increased  residential
origination   volumes,   and  higher  benefit  costs  associated  with  employee
stock-related compensation plans including ESOP.

Occupancy Expense of Bank Premises
Occupancy  expense  totaled $1.3 million for the second 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.

Furniture and Equipment Expense
Furniture and equipment  expense  increased  $0.1 million  reflecting new branch
openings as well as investments in new technology.

Other Operating Expense
The  components  of other  operating  expense for the periods  presented  are as
follows:
                                         Three months ended
                                              June 30,
                                   -----------------------------
                                      1998                 1997
                                   --------              -------

Marketing                           $  572               $  458
Insurance                              152                  186
Professional services                  454                  734
Outside processing                   1,409                1,203
Other                                1,814                1,589
                                    ------               ------
                                    $4,401               $4,170
                                    ======               ======

                                       12
<PAGE>
Other  operating  expenses  totaled $4.4 million for the second  quarter of 1998
compared  to $4.2  million for the second  quarter of 1997,  an increase of $0.2
million.  Professional  services  decreased  $0.3 million due to lower levels of
legal  and  consulting  expenses.  Both  outside  processing  charges  and other
operating expenses increased $0.2 million from the comparable period, reflecting
costs  associated with higher  transaction and account volume resulting from the
Company's consumer strategy.  Marketing increased $0.1 million due to additional
radio and print advertisement as well as branch displays and brochures for GBT.

Net Expense of Real Estate Operations
The  Company's  real estate  investment  and  brokerage  subsidiary,  Colebrook,
engages in various real estate  investments,  directly or in joint ventures with
unaffiliated partners. In accordance with FDICIA, the Company has terminated its
real estate development activities and has essentially completed the sale of its
remaining real estate  investments.  At June 30, 1998, with the exception of two
real estate  investments  (one with a book value of $2.4 million and with a book
value $0.1 million), the divestment of Colebrook has been completed.  One of the
two  remaining  real estate  investments,  with a book value of $2.4 million was
sold in the third quarter of 1998

Net income of real  estate  operations  for the second  quarter of 1998 was $0.6
million compared to expense of $0.1 million for the same period in 1997. Results
for the second quarter of 1998 were influenced by a $0.4 million reversal of the
remaining  Colebrook  divestment  reserve,  based  upon the  final  terms of the
Colebrook divestment, as well as $0.2 million of normal operating earnings.

Income Taxes
For the three months ended June 30, 1998 the Company recorded income tax expense
of $2.6  million  compared to expense of $2.4 million for the three months ended
June 30, 1997.  This  increase is  attributable  to a 10.4%  increase in pre-tax
earnings,  partially  offset by a lower overall  effective  rate  resulting from
state tax planning strategies.

Results of Operations for the Six Months Ended June 30, 1998 and June 30, 1997

The Company reported net income of $8.3 million,  or $1.17 per diluted share for
the six months ended June 30, 1998 as compared to net income of $7.0 million, or
$1.01 per diluted share for the same period last year.  These results reflect an
increase in net interest income,  noninterest  income, net income of real estate
operations and lower  provisions for possible loan losses,  partially  offset by
increases in noninterest expense 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.

                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                                          Six Months Ended June 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        $   42,678   $    1,091      5.08%        $   20,509     $      470       4.56%
Investment securities held to maturity              216,203        7,166      6.63%           220,892          7,469       6.76%
Investment securities available for sale            562,535       17,388      6.18%           520,637         17,897       6.88%
Investment securities held for trading                 --           --         --                 481              7       2.89%
Residential real estate loans                       263,657       10,540      8.00%           290,233         11,530       7.95%
Commercial real estate loans                        185,326        8,261      8.92%           168,425          7,620       9.05%
Commercial loans                                    226,186        9,843      8.66%           193,267          8,460       8.71%
Home equity loans                                   163,061        6,807      8.42%           124,254          4,928       8.00%
Consumer loans                                       12,415          608      9.79%             9,198            490      10.65%
                                                 ----------   ----------      ----         ----------     ----------      -----
Total interest-earning assets                     1,672,061       61,704      7.38%         1,547,896         58,871       7.61%
                                                                                                       
Allowance for loan losses                           (23,167)                                  (20,200)
Non-interest-earning assets                         125,880                                   112,875
                                                 ----------                               -----------
Total assets                                     $1,774,774   $   61,704                  $ 1,640,571     $   58,871
                                                 ==========   ==========                  ===========     ==========

Interest-bearing liabilities:
Deposits
  Savings accounts                               $  230,086   $    2,330      2.04%        $  262,263     $    3,040      2.34%
  NOW accounts (2)                                   41,519          291      1.41%            80,386            465      1.17%
  Money manager accounts (2)                         48,866          284      1.17%              --             --         --
  Money market accounts                             245,601        4,005      3.29%           205,511          3,381      3.32%
  Time deposit accounts                             553,427       14,659      5.34%           513,701         13,464      5.29%
                                                 ----------   ----------      ----         ----------     ----------      ----
Total interest-bearing deposits                   1,119,499       21,569      3.89%         1,061,861         20,350      3.86%
                                                                                                         
Borrowed funds                                      312,346        9,022      5.75%           289,241          8,204      5.64%
                                                 ----------   ----------      ----         ----------     ----------      ----
                                                                                                         
Total interest-bearing liabilities                1,431,845       30,591      4.31%         1,351,102         28,554      4.26%
                                                                                                         
Non-interest-bearing liabilities                    217,065                                   171,026   
                                                 ----------                                ----------  
Total liabilities                                 1,648,910                                 1,522,128   
Total stockholders' equity                          125,864                                   118,443   
                                                 ----------                                ----------  
  Total liabilities and stockholders' equity     $1,774,774   $   30,591                   $1,640,571     $   28,554
                                                 ==========   ==========                   ==========     ==========
Net interest income/spread                                    $   31,113      3.07%                       $   30,317     3.35%
                                                              ==========      ====                        ==========     =====
Net interest margin as a % of interest-
earning assets                                                                3.72%                                      3.92%
                                                                              =====                                      =====
Tax equivalent adjustment                                     $      477                                  $      340
                                                              ----------                                  ----------
Net interest income/spread per Condensed Consolidated
Statement of Operations                                       $   30,636                                  $   29,977
                                                              ==========                                  ==========
<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 six months ended
June 30, 1998 was $31.1  million  compared  to $30.3  million for the six months
ended June 30, 1997, an increase of $0.8 million or 2.6%.  This increase was the
result of a $124.2 million increase in interest-earning  assets partially offset
by an 20 basis point decrease in the net interest margin.

Total interest income was $61.7 million on a fully taxable  equivalent basis for
the six months ended June 30, 1998, an increase of $2.8 million or 4.8% 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 six months
ended June 30, 1998  compared to $1.5  billion for the six months ended June 30,
1997, an increase of $124.2 million or 8.0%. Average investments increased $36.7
million or 4.9% and were funded by higher  deposit  levels and  borrowed  funds.
Average loans increased  $65.3 million as the Company  continued to focus on the
commercial and home equity market segments, which grew by $32.9 million or 17.0%
and $38.8 million or 31.2%, respectively. Commercial real estate loans increased
$16.9 million or 10.0%  reflecting  growth in commercial  construction  lending.
Residential real estate loan balances declined $26.6 million or 9.2% for the six
months ended June 30,  1998,  reflecting  amortization  and  prepayments  of the
existing loan  portfolio.  Yields on  interest-earning  assets declined 23 basis
points from the six months ended June 30, 1997 primarily  reflecting lower level
of interest rates on the Company's investment  securities as well as accelerated
amortization and prepayments of  mortgage-backed  

                                       14
<PAGE>
securities  which  result  in  the  accelerated   write  off  of  the  premiums.
Accelerated  prepayment speeds were the result of lower long-term interest rates
which significantly increased refinancing activity.

Total interest  expense was $30.6 million for the six months ended June 30, 1998
compared to $28.6  million  during the same period in 1997,  an increase of $2.0
million or 7.1%. This increase is attributable to increases in  interest-bearing
deposits and borrowed funds. Average  interest-bearing  deposits increased $57.6
million or 5.4%. This growth occurred primarily in time deposits which increased
$39.7  million  or 7.7%  largely  due to  growth  in time  deposits  with  local
municipalities.  Borrowed funds averaged $312.3 million for the six months ended
June 30,  1998  compared to $289.2  million  for the same period in 1997.  These
borrowings  were used to match fund fixed rate assets and to extend the maturity
of the Company's liabilities.

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>
                                                              Six Months Ended June 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                          $   537            $    84            $   621 
  Investment securities held to maturity                (157)              (146)              (303)
  Investment securities available for sale             1,368             (1,877)              (509)
  Investment securities held for trading                  (4)                (3)                (7)
  Residential real estate loans                       (1,059)                69               (990)
  Commercial real estate loans                           759               (118)               641
  Commercial loans                                     1,437                (53)             1,383
  Home equity loans                                    1,580                299              1,879
  Consumer loans                                         164                (46)               118
                                                     -------            -------            -------
Total interest-earning assets                          4,625             (1,792)             2,833
                                                     -------            -------            -------
                                                                                          
Interest-bearing liabilities:                                                             
Deposits:                                                                                 
  Savings accounts                                      (349)              (361)              (710)
  NOW accounts                                          (249)                75               (174)
  Money manager accounts                                 142                142                284
  Money market accounts                                  657                (33)               624
  Time deposit accounts                                1,047                148              1,195
                                                     -------            -------            -------
Total deposits                                         1,248                (29)             1,219
Borrowed funds                                           661                157                818
                                                     -------            -------            -------
Total interest-bearing liabilities                     1,909                128              2,037
                                                     -------            -------            -------
Change in net interest income                        $ 2,716            $(1,920)           $   796
                                                     =======            =======            =======
                                                        
</TABLE>


                                       15
<PAGE>
Provision for Possible Loan Losses
The  Company's  provision  for possible loan losses was $0.5 million for the six
months ended June 30, 1998 compared to $1.0 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:
                                             Six months ended
                                                 June 30,
                                        ---------------------------
                                           1998              1997
                                        ----------        ---------
                                       (Dollars in Thousands)
Net gain on sale of loans                 $  624            $  192
Net gain on sale of securities                 2                60
Net loss on securities held for trading     --                  19
Loan charges and fees                      1,543             1,501
Deposit related fees                       4,075             3,602
Merchant processing fees                     910               909
Other charges and fees                     1,351               982
                                          ------            ------
                                          $8,505            $7,265
                                          ======            ======
                                                 
Non-interest  income totaled $8.5 million for the six months ended June 30, 1998
compared  to $7.3  million  for the same  period in 1997,  an  increase  of $1.2
million or 17.1%. Deposit service charges and fees increased $0.5 million due to
fees associated with the Company's larger non-interest bearing deposit base. Net
gain on sale of loans  increased  $0.4  million  due to an  increase in mortgage
production  and  corresponding  sale of loans  to the  secondary  market.  Other
charges and fees  increased  $0.4 million due to increases in brokerage  service
fees as well as  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.

Non-interest Expense

Salaries and Benefits Expense
Salaries and benefits  expense  totaled  $12.9  million for the six months ended
June 30, 1998 compared to $12.1 million for the same period in 1997, an increase
of $0.8 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,  and  higher  benefit  costs
associated with employee stock-related compensation plans including ESOP.

Occupancy Expense of Bank Premises
Occupancy  expense  totaled  $2.5 million for the six months ended June 30, 1998
compared  to $2.4  million  for the same  period in 1997,  and  increase of $0.1
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.

                                       16
<PAGE>
Other Operating Expense
The  components  of other  operating  expense for the periods  presented  are as
follows:

                                              Six months ended
                                                 June 30,
                                     ------------------------------
                                        1998                  1997
                                     --------               -------
                                          (Dollars in Thousands)
Marketing                             $1,132                 $1,098
Insurance                                305                    374
Professional services                  1,124                  1,590
Outside processing                     2,696                  2,388
Other                                  3,225                  2,921
                                      ------                 ------
                                      $8,482                 $8,371
                                      ======                 ======

Other operating  expenses totaled $8.5 million for the six months ended June 30,
1998  compared to $8.4 million for the same period in 1997,  an increase of $0.1
million.  Professional  services  decreased  $0.5 million due to lower levels of
legal  and  consulting  expenses.  Both  outside  processing  charges  and other
operating expenses increased $0.3 million from the comparable period, reflecting
costs associated with higher  transaction and account volumes resulting from the
Company's consumer strategy.

Foreclosed Real Estate Expense
Foreclosed real estate expense reflects gains or losses on sales, writedowns and
net operating results of foreclosed  properties.  Foreclosed real estate expense
was $0.1  million for the six months  ended June 30, 1998  compared to income of
$0.1  million for the same period in 1997.  The results  reflect $0.1 million in
gains on the sale of  foreclosed  properties  during  the first  quarter of 1997
compared to losses and  writedowns of $0.1 million in  foreclosed  properties in
the first quarter of 1998.

Net Expense of Real Estate Operations
The  Company's  real estate  investment  and  brokerage  subsidiary,  Colebrook,
engages in various real estate  investments,  directly or in joint ventures with
unaffiliated partners. In accordance with FDICIA, the Company has terminated its
real estate development activities and has essentially completed the sale of its
remaining real estate  investments.  At June 30, 1998, with the exception of two
real estate  investments  (one with a book value of $2.4  million and one with a
book value of $0.1 million), the divestment of Colebrook has been completed. One
of the two remaining real estate investments,  with a book value of $2.4 million
was sold in the third quarter of 1998.

Net income of real estate  operations for the six months ended June 30, 1998 was
$0.6 million compared to expense of $0.5 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 six months
ended June 30, 1998 were influenced by a $0.4 million  reversal of the remaining
Colebrook  divestment  reserve,  based  upon the  final  terms of the  Colebrook
divestment,  as well as income of $0.2  million  representing  normal  operating
earnings.

Income Taxes
For the six months ended June 30, 1998 the Company  recorded  income tax expense
of $5.1  million  compared to expense of $4.5  million for the six months  ended
June 30, 1997.  This  increase is  attributable  to a 16.1%  increase in pre-tax
earnings,  partially  offset by a lower overall  effective  rate  resulting from
state tax planning strategies.

                                       17
<PAGE>
Balance Sheet Analysis - Comparison Of June 30, 1998 To December 31, 1997

Total assets increased from $1.7 billion at December 31, 1997 to $1.8 billion at
June 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 $31.6 million from $769.1 million
at December 31, 1997 to $800.7 million at June 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 June 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>
                                                                          June 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           $ 14,021           $ 14,028           $   --             $   --
Collateralized mortgage obligations                49,224             49,190             14,633             14,732
Mortgage-backed securities                        447,279            447,118            154,083            154,280
Asset-backed securities                              --                 --               64,771             65,114
Other bonds and short term obligations              8,968              9,316                280                278
Other securities                                   45,574             47,293               --                 --
                                                 --------           --------           --------           --------
    Total                                        $565,066           $566,945           $233,767           $234,404
                                                 ========           ========           ========           ========
                     
<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>
                                                                               
                                       18

<PAGE>
Loan Portfolio Composition
Gross loans  comprised  $891.0  million or 48.4% of total  assets as of June 30,
1998. The following table sets forth  information  concerning the Company's loan
portfolio in dollar  amounts and  percentages,  by type of loan at June 30, 1998
and at December 31, 1997.
<TABLE>
<CAPTION>
                                             June 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           $256,591       28.80%     $281,457       33.13%
Commercial real estate loans             182,239       20.46%      185,226       21.80%
Commercial loans                         267,587       30.03%      212,869       25.06%
Home equity loans                        169,839       19.06%      158,753       18.69%
Consumer loans                            14,716        1.65%       11,189        1.32%
                                        --------      ------      --------      ------
   Total loans receivable, gross         890,972      100.00%      849,494      100.00%
                                        --------      ------      --------      ------
Less:                                                   
Unearned income and fees                  (2,655)                   (1,991)
Allowance for loan losses                 23,482                    22,724
                                        --------                  --------
   Total loans receivable, net          $870,145                  $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 six months ended June 30, 1998, the
Company  experienced an increase in prepayments in its adjustable  rate mortgage
portfolio.  These  prepayments  offset new  originations and resulted in a $24.9
million  decrease in residential  real estate balances between December 31, 1997
and June 30, 1998.

During the six months ended June 30, 1998,  commercial  loan balances  increased
$54.7 million, reflecting the Company's continued focus on lending activities in
the local  business  market.  Home equity  loans  increased  $11.1  million from
December 31, 1997 to June 30, 1998 as the Company  continues to actively promote
home equity products.

                                       19
<PAGE>
Non-performing Assets
Non-performing  assets  declined  from $8.1 million at December 31, 1997 to $5.0
million  at June  30,  1998.  The  decline  is  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:

                                              June 30,      December 31,
                                               1998            1997
                                             ---------      -----------
                                                (Dollars In Thousands)
Non-accrual loans (1):
   Residential real estate loans              $1,067          $1,211 
   Commercial real estate loans                  684           1,542
   Commercial loans                            1,599           2,414
   Home equity loans                             238             181
   Consumer loans                                 10               4
                                              ------          ------
   Total non-accrual loans                     3,598           5,352
                                              ------          ------
                                                            
Loans past due 90 days still accruing (2)        109             431
                                              ------          ------
   Total non-performing loans                  3,707           5,783
Foreclosed real estate (3)                       841           1,209
Restructured loans on accrual status (4)         433           1,124
                                              ------          ------
   Total non-performing assets                $4,981          $8,116
                                              ======          ======
                                                            
Total non-performing loans to total                         
   gross loans                                  0.42%           0.68%
                                                            
Total non-performing assets to total                        
   assets                                       0.27%           0.47%
                                                            
Allowance for possible losses to                            
   non-performing loans                       633.45%         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).

                                       20
<PAGE>
The principal amount of non-performing loans aggregated $3.7 million at June 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 $0.2 million and $0.3 million for the six months ended June 30,
1998 and 1997, respectively. Interest income recorded on these loans for the six
months  ended  June  30,  1998  and 1997  was  $0.1  million  and $0.2  million,
respectively.

The principal  amount of restructured  loans aggregated $0.4 million at June 30,
1998  compared to $1.1 million at December 31, 1997, a decrease of $0.7 million.
Interest  income that would have been recorded if the loans had been  performing
within their  original  terms  aggregated  $20 thousand and $0.1 million for the
periods ended June 30, 1998 and 1997, respectively.  Interest income recorded on
these loans  amounted to $26  thousand and $0.1 million for the six months ended
June 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 $17.7
million and $24.1 million at June 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 $9.7 million
and $6.2 million at June 30, 1998 and December 31, 1997, respectively.  Included
in these  amounts  are $3.6  million  and $5.4  million of loans which have been
reported  as  non-performing  assets at June 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 June 30, 1998 was $23.5 million, compared to $20.4 million at June 30,
1997.

                                       21
<PAGE>
The activity in the  allowance for possible loan losses for the six months ended
June 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                                         June 30,
                                                                  ----------------------
                                                                    1998          1997
                                                                  --------     ---------
                                                                  (Dollars In Thousands)

<S>                                                              <C>          <C>     
Balance, beginning of period                                      $ 22,724     $ 19,549
Provision for loan losses                                              503          965
Charge-offs:
  Residential real estate loans                                       (193)        (126)
  Commercial real estate loans                                        (194)        (300)
  Commercial loans                                                    (116)        (200)
  Home equity loans                                                    (31)         (38)
  Consumer loans                                                      (132)        (126)
  Merchant processing                                                  (51)         (50)
                                                                  --------     --------
    Total charge-offs                                                 (717)        (840)
Recoveries:
  Residential real estate loans                                       --              1
  Commercial real estate loans                                         870          542
  Commercial loans                                                      76          119
  Home equity loans                                                      4           73
  Consumer loans                                                        22           25
  Merchant processing                                                 --           --
                                                                  --------     --------
    Total recoveries                                                   972          760
                                                                  --------     --------
Net recoveries (charge-offs)                                           255          (80)
Balance, end of period                                            $ 23,482     $ 20,434
                                                                  ========     ========

Ratio of net loan recoveries (charge-offs) during the period to
    average loans outstanding during the period                       0.03%       (0.01%)
Ratio of allowance for possible loan losses to total loans
    at the end of the period                                          2.64%        2.50%
Ratio of allowance for possible loan losses to non-performing
    loans at the end of the period                                  633.45%      263.12%
</TABLE>

At June 30, 1998, the recorded  investment in loans that are considered impaired
under SFAS 114  "Accounting  by  Creditors  for  Impairment  of a Loan" was $9.1
million. Included in this amount is $1.2 million of impaired loans for which the
related SFAS 114  allowance  is $0.4 million and $7.9 million of impaired  loans
for which the SFAS 114  allowance is zero.  The average  recorded  investment in
impaired  loans  during  the  three  and six  months  ended  June  30,  1998 was
approximately $9.7 million and $8.8 million, respectively. For the three and six
month periods ended June 30, 1998,  the Company  recognized  interest  income on
these impaired loans of $0.1 million and $0.2 million, respectively.

                                       22
<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>
                                                          June 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                   $ 2,716         11.57%           $ 3,664           16.12%
Commercial real estate loans                      7,275         30.98%             5,632           24.78%
Commercial loans                                  8,781         37.40%             8,328           36.65%
Home equity loans                                 2,490         10.60%             3,183           14.01%
Consumer loans                                    1,034          4.40%             1,274            5.61%
Merchant processing                               1,186          5.05%               643            2.83%
                                                -------        ------            -------          ------
Total allowance for possible loan losses        $23,482        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 June 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:

                                  June 30, 1998             December 31, 1997
                             ------------------------   -----------------------
                                              Percent                   Percent
                                                of                        of
                                Amount        Total       Amount         Total
                             -----------     -------    ----------      -------
                                          (Dollars In Thousands)
Demand deposits              $  191,951       14.47%    $  171,343       13.52%
NOW accounts                     51,415        3.87%        51,412        4.06%
Money manager accounts (1)       36,983        2.79%        39,447        3.11%
Savings accounts                222,097       16.74%       263,449       20.79%
Money market accounts           256,387       19.32%       211,286       16.67%
Time deposits                   568,062       42.81%       530,361       41.85%
                             ----------      ------     ----------      ------
   Total deposits            $1,326,895      100.00%    $1,267,298      100.00%
                             ==========      ======     ==========      ======
                                                    
(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.

Total  deposits  were $1.3  billion at both June 30, 1998 and December 31, 1997.
Deposits  increased  $59.6  million  with growth  occurring  primarily in demand
deposits and time deposits.  The $41.4 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  $20.6  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
$37.7 million  increase in time deposits is primarily  attributable to growth in
deposits with local municipalities.

                                       23
<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 fund loan growth and to leverage a portion of its
capital  position.  Borrowings  increased  $36.1 million from $299.9  million at
December 31, 1997 to $336.0 million at June 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 June 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 June  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 June 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 order to maintain GBT's
qualification  as well  capitalized  the Company has  discontinued  GBT dividend
payments  to the  parent  company  and  has  changed  the mix of  certain  asset
categories for risk weighting purposes.

                                       24
<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 June 30, 1998:

Tier I Capital (to Average Assets)
   Company                                 $130,333      7.2%      $ 72,080     4.0%        N/A
   SIS Bank                                $110,581      7.3%      $ 60,357     4.0%      $ 75,447      5.0%
   GBT                                     $ 18,233      6.2%      $ 11,716     4.0%      $ 14,645      5.0%
Tier I Capital (to Risk Weighted Assets)                                                 
   Company                                 $130,333     11.1%      $ 46,914     4.0%      $ 70,372      6.0%
   SIS Bank                                $110,581     11.5%      $ 38,603     4.0%      $ 57,904      6.0%
   GBT                                     $ 18,233      8.8%      $  8,317     4.0%      $ 12,476      6.0%
                                                                                         
Total Capital (to Risk Weighted Assets)                                                  
   Company                                 $145,090     12.4%      $ 93,829     8.0%      $117,286     10.0%
   SIS Bank                                $122,734     12.7%      $ 77,206     8.0%      $ 96,507     10.0%
   GBT                                     $ 20,837     10.0%      $ 16,635     8.0%      $ 20,793     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 $51.4 million or 2.79% of total assets at June 30, 1998.
The following table sets forth the amounts of assets and liabilities outstanding
at June 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.

                                       25
<PAGE>
<TABLE>
<CAPTION>
                                                                           GAP Position
                                                                         At June 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               $   42,765      $     --         $     --        $     --     $   42,765
Investment securities                         304,377         159,363          269,917          67,055      800,712
Residential real estate loans                  78,483          47,228          103,050          27,011      255,772
Commercial real estate loans                   42,222          18,575          105,004          15,675      181,476
Commercial loans                              102,993          19,017          138,220           6,390      266,620
Home equity loans                             109,122           4,296           33,203          24,840      171,461
Consumer loans                                  7,816           1,568            5,061             254       14,699
Other assets                                     --              --               --           108,157      108,157
                                           ----------      ----------       ----------      ----------   ----------
Total assets                               $  687,778      $  250,047       $  654,455      $  249,382   $1,841,662
                                           ==========      ==========       ==========      ==========   ==========
Liabilities & stockholders' equity:                                                        
Savings accounts                           $   33,342      $   33,342       $  155,413      $     --     $  222,097
NOW accounts                                   13,260          13,260           61,878            --         88,398
Money market accounts                          82,880          74,322           99,185            --        256,387
Time deposits                                 384,051         122,318           60,411           1,282      568,062
Borrowed funds                                132,561          22,777          138,287          42,417      336,042
Other liabilities & stockholders' equity       38,544          38,544          115,626         177,962      370,676
                                           ----------      ----------       ----------      ----------   ----------
Total liabilities & stockholders' equity   $  684,638      $  304,563       $  630,800      $  221,661   $1,841,662
                                           ==========      ==========       ==========      ==========   ==========
                                                                                           
Period GAP position                        $    3,140      $  (54,516)      $   23,655      $   27,721
                                                                                        
Net period GAP as a percentage of total 
   assets                                        0.17%          (2.96%)           1.28%           1.51%

Cumulative GAP                             $    3,140      $  (51,376)      $  (27,721)           --

Cumulative GAP as a percentage of total
   assets                                        0.17%          (2.79%)          (1.51%)          --

Cumulative GAP as a percentage of total
   interest-earning assets                       0.18%          (2.96%)          (1.60%)          --

Cumulative interest-earning assets as a
   percentage of cumulative interest-bearing 
   liabilities                                 106.45%         102.82%          111.56%         117.85%
</TABLE>
For purposes of the above interest sensitivity analysis:

             Residential  loans held for sale at June 30,  1998  totaling  $19.6
             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 $3.6 million.

             Loans do not include the allowance for loan loss of $23.5 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 $192.0 million are included 
                  in other liabilities and are assumed to decay at an annual 
                  rate of 40%.
                                       26
<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.

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.

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 June 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
Asset/Liability Management Committee (ALCO). 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 June 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 June 30, 1998 the Company held no derivative
financial instruments.

                                       27

<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
         Not applicable

Item 5.  Other Information
         Not applicable

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit No.                Exhibit                                      Location

2.    Plan of Acquisition, Reorganization, Arrangement, Liquidation, 
      or Succession
2.1      Agreement and Plan of Merger, dated as of July 20, 1998, 
         among People's Heritage Financial Group, Inc. ("PHFG") 
         and SIS Bancorp, Inc. (the "Company").                           (1)

10.   Material Contracts
10.1     Stock Option Agreement, dated as of July 20, 1998, between 
         the Company and PHFG                                             (1)

10.2     Amendment,  dated as of July 20, 1998, to Rights Agreement, 
         dated as of January 12,  1997,  between the  Company  and  
         ChaseMellon  Shareholder Services L.L.C., as Rights Agent        (1)

10.3     Amendment to Employment Agreement with John F. Treanor dated 
         July 15, 1998.

10.4     Form of Severance Agreement for certain Vice Presidents 
         (Messrs. Prybylo, Merenda, Oleksak, Ms. Jatkevicius, 
         Ms. Bourque, Ms. Bigda Parent, Ms. Sotir Katz, Ms.Chang) 
         of SIS Bank, a wholly owned subsidiary of the Company.

10.5     Severance  Agreement for David  Glidden,  Senior Vice  
         President of SIS Bank, a wholly owned subsidiary of the Company.

Locations of Exhibits if not attached hereto:

         (1)      Incorporated by reference to PHFG's Current Report on Form 8-K
                  dated July 20, 1998, as amended.

(b)      Reports on Form 8-K
         On July 21,  1998,  the  Company  filed a  Current  Report  on Form 8-K
         reporting  the signing of an  Agreement  and Plan for Merger dated July
         20,  1998   between  the  Company  and  People's   Heritage   Financial
         Corporation.

                                       28
<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)


August 14, 1998                  /s/ F. William Marshall, Jr.
Date                             F . William Marshall, Jr.
                                 President and Chief Executive Officer




August 14, 1998                  /s/ John F. Treanor
Date                             John F. Treanor
                                 Executive Vice President, Chief Operating
                                 Officer and Chief Financial Officer

                                       29