PRESIDENT'S MESSAGE

To Our Stockholders:

         On behalf of the Board of Directors, Officers and employees of
Gouverneur Bancorp, Inc. and its subsidiary, Gouverneur Savings & Loan
Association, I am pleased to present to you this annual report, our first as a
public company.

         During the 1999 fiscal year, Gouverneur Savings & Loan Association
completed several of the most important advances in its long history. Most
significantly, on March 23, 1999, we completed the reorganization of our Bank
into a mutual holding company structure. As a result of the reorganization, the
Bank became a wholly owned subsidiary of the Company, Gouverneur Bancorp, Inc.,
which in turn sold 45% of its stock to the public and the Bank's employee stock
ownership plan, and 55% of its stock to Cambray Mutual Holding Company. The sale
of the Company's stock raised approximately $4.1 million in new investable
funds.

         As part of the reorganization process, your management team developed a
four step plan to deploy these new funds to achieve profitability and growth,
without sacrificing our long held policy of prudent and careful lending and
investment. First, recognizing that loans are the Bank's highest yielding
assets, we gradually added to our loan production staff to increase our lending
opportunities. Second, to further increase lending, in July, we opened a loan
production office in Alexandria Bay. Third, we have aggressively pursued
commercial, automobile and other consumer loans, which carry higher yields than
residential mortgage loans. These efforts produced a 31% increase in net loans
for the 1999 fiscal year, from $35.2 million to $46.2 million. Finally, to
increase our leverage, and ultimately, our profitability, we borrowed $7.4
million on favorable terms from the Federal Home Loan Bank of New York and
reinvested those funds in mortgage backed securities.

         In fiscal 2000, we will continue to pursue new loan originations for
the Bank and new markets and business diversification opportunities for both the
Bank and the Company. As we grow and meet the challenges of our changing
business, we assure you that Gouverneur Savings & Loan Association will remain
faithful to its mission as a community based institution, serving the financial
needs of the people in its North Country markets, as it has since its founding
more than a century ago. We believe that prudent growth, along with the
well-planned addition of new products and services, will position the Bank and
the Company to best serve all of our constituencies - stockholders, borrowers,
depositors and employees.

         We look forward to building our franchise in the new millennium and
welcome your support in this endeavor.


                           /s/ RICHARD F. BENNETT
                               -------------------------------------
                               Richard F. Bennett
                               President and Chief Executive Officer

<PAGE>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

SELECTED FINANCIAL CONDITION DATA:

                                                AT SEPTEMBER 30,
                                -----------------------------------------------
                                  1999      1998      1997      1996      1995
                                -------   -------   -------   -------   -------
                                                 (In thousands)
Total assets ................   $69,996   $59,337   $55,172   $54,347   $54,274
Loans receivable, net (1)  ..    46,791    35,691    35,253    33,438    33,111
Allowance for loan losses ...       620       484       403       479       602
Securities available-for-sale    12,971    10,546     7,903    10,817    10,540
Securities held-to-maturity .     6,019     7,717     8,660     5,416     4,506
Cash and cash equivalents ...     3,490     4,434     2,486     3,939     2,223
Real estate owned ...........       169        51       157       149       130
Deposits ....................    45,113    46,382    43,576    43,502    44,200
Total shareholders' equity...   $16,029   $11,468   $10,689   $ 9,993   $ 9,465

<TABLE>
<CAPTION>
SELECTED OPERATIONS DATA:
                                                             Year Ended September 30,
                                                     ------------------------------------------
                                                      1999     1998     1997     1996     1995
                                                     ------   ------   ------   ------   ------
                                 (In thousands)

<S>                                                  <C>      <C>      <C>      <C>      <C>
Interest income ..................................   $4,813   $4,336   $4,275   $4,338   $4,260
Interest expense .................................    2,019    1,907    1,896    1,980    1,823
                                                     ------   ------   ------   ------   ------
    Net interest income ..........................    2,794    2,429    2,379    2,358    2,437
Provision for loan losses ........................      162      130      250       --      190
                                                     ------   ------   ------   ------   ------
    Net interest income after
          provision for loan losses ..............    2,632    2,299    2,129    2,358    2,247

Non-interest income ..............................      151      144      113      149      141
Non-interest expenses ............................    1,711    1,443    1,370    1,774    1,378
                                                     ------   ------   ------   ------   ------

Income before income taxes and
  cumulative effect of changes in
   accounting principles .........................    1,072    1,000      749    1,010      872
Income tax expense (benefit) .....................      431      380      335      297      416
                                                     ------   ------   ------   ------   ------
Income before cumulative effect of
   changes in accounting principles ..............      641      620      537      452      594
                                                     ------   ------   ------   ------   ------
Net income .......................................   $  641   $  620   $  537   $  452   $  594
                                                     ======   ======   ======   ======   ======
</TABLE>

                                                 NOTES APPEAR ON FOLLOWING PAGE.
                                       2
<PAGE>

SELECTED FINANCIAL RATIOS AND OTHER DATA (2):
<TABLE>
<CAPTION>

                                                         At or for the Year Ended September 30,
                                                   --------------------------------------------------
                                                     1999       1998       1997       1996      1995
                                                   -------     ------     ------     ------    ------
<S>                                                  <C>        <C>        <C>        <C>       <C>
PERFORMANCE RATIOS:
Return on average assets (net income to
   average total assets) .......................     1.03%      1.12%      0.99%      0.92%     1.04%
Return on average equity (net income to
   average equity) .............................     4.84%      5.74%      5.36%      5.33%     6.13%
Average interest-earning assets to average
   interest-bearing liabilities ................   125.04%    121.99%    120.21%    119.11%   117.45%
 Net interest rate spread (3) ..................     3.81%      3.82%      3.82%      3.77%     4.21%

 Net interest margin (4) .......................     4.65%      4.61%      4.56%      4.50%     4.84%

Net interest income after provision for
   loan losses to total other expenses .........     1.54x      1.59x      1.51x      1.33x     1.63x

CAPITAL AND ASSET QUALITY RATIOS:

Average equity to average total assets..........    21.27%     19.56%     18.41%     17.22%    16.95%

Total equity to assets end of period ...........    22.90%     19.33%     19.37%     18.39%    17.44%

Non-performing assets to total assets ..........     0.56%      0.49%      1.31%      1.56%     1.25%

Non-performing loans to total loans ............     0.47%      0.67%      1.60%      2.08%     1.65%

Allowance for loan losses to total loans........     1.33%      1.35%      1.14%      1.43%     1.81%

Allowance for loan losses to
   non-performing loans ........................   280.54%    203.36%     71.33%     68.72%   109.65%

OTHER DATA:

 Number of real estate loans outstanding .......    1,383      1,338      1,386      1,424     1,476

 Number of deposit accounts ....................    6,890      6,619      6,508      6,495     6,470

 Full service offices ..........................        1          1          1          1         1
</TABLE>

(1)   Shown net of deferred fees and costs.
(2)   Asset quality and capital ratios are at end of period. All other ratios
      are based on average daily balances.
(3)   The net interest rate spread represents the difference between the
      weighted average yield on interest-earning assets and the weighted average
      cost of interest-bearing liabilities.
(4)   The net interest margin, also known as the net yield on average
      interest-earning assets, represents net interest income as a percentage of
      average interest-earning assets.

                                       3
<PAGE>

OUR FIRST YEAR AS A PUBLIC COMPANY

         The 1999 fiscal year was a year of dramatic change for Gouverneur
Bancorp, Inc. When the year began on October 1, 1998, we did not yet exist and
our Bank, Gouverneur Savings and Loan Association, was in the middle of a mutual
holding company reorganization. The depositors of the Bank had just approved the
reorganization, and a stock offering was under way. However, due to a general
decline in the market value of financial institution stock, and a decline in
market acceptance of financial institutions, the reorganization was not
completed right away. Instead, we revised the amount of stock we were offering
after a reduction in the appraised value of the stock that was to be issued, and
we finally completed the reorganization on March 23, 1999.

         We sold 1,072,818 shares of stock at $5.00 per share to the public and
our employee stock ownership plan in the reorganization, representing 45% of our
outstanding stock, and we issued an additional 1,311,222 shares, representing
the remaining 55%, to Cambray Mutual Holding Company. The stock sale gave us
approximately $4.1 million of new funds to invest, after deducting the cost of
the reorganization and the proceeds from shares sold the ESOP which were
purchased with funds we lent to the ESOP. The stock sale also increased our
capital, which is available to support future growth. OTS regulations require
that Cambray MHC own a majority of our outstanding stock. In order to dispose of
that stock, OTS regulations require, in most instances, that the depositors of
the Bank must approve the transaction in which the sale will occur, and then the
shares must first be offered to those depositors.

---------------------------------------------------------------
Our Reorganization gave us $4.1 million of new funds to invest.
---------------------------------------------------------------

         The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services. The Bank attracts deposits
from the general public and uses those deposits, together with other funds, to
make loans and other investments. Most of the loans are one to four family
residential mortgages. The Bank also makes consumer (including home equity lines
of credit), commercial, and multi-family real estate and other loans. Most of
the loans are in the Bank's primary market area, which is southern St. Lawrence
and northern Jefferson and Lewis counties in New York State. The FDIC insures
the Bank's deposit accounts, and the FDIC and the Office of Thrift Supervision
both regulate the Bank.

         Our profitability depends, to a large extent, on our net interest
income, which is the difference between the interest we receive on our interest
earning assets, such as loans and investments, and the interest we pay on
interest bearing liabilities. Other categories of expenses generally include the
provision for loan losses, salaries and employee benefits costs, net expenses on
real estate owned and various other categories of operational expenses. External
factors, such as general economic and competitive conditions, particularly
changes in interest rates, government policies and actions of regulatory
authorities, can have a substantial effect on profitability.

         We know that our additional capital brings with it the added
responsibility to a new constituency, our shareholders. We do not view our
shareholders as adversaries - as a matter of fact, every director of our company
is a substantial stockholder and some of our directors are also some of our
largest stockholders. Our efforts are concentrated in the direction of improving
our operations and increasing profitability. With that in mind, we have focused
our efforts on increasing our loan portfolio.

                                       4
<PAGE>

         Loans are our highest yielding asset category. However, banking has
changed a lot in recent years. Long gone are the days of the three - six - three
banker, pay three percent on deposits, lend the money out at six percent, and be
on the golf links by three o'clock in the afternoon. We are faced with
increasing competition from other financial institutions, loan brokers, mortgage
bankers, insurance companies, brokerage firms and other companies that are
chasing a limited number of loan opportunities. In order to meet the challenge
of competition and grow our portfolio, we have:

         o    Increased staffing in our loan department so loan officers can get
              out from behind their desks and go into the community to solicit
              new loans

         o    Opened a new loan production office in Alexandria Bay to allow us
              to expand into a nearby geographic area with additional loan
              opportunities.

         o    Aggressively sought to originate commercial and automobile loans,
              where our small market share allowed us more chance for expansion.

                             [GRAPHIC CHART OMITTED]
--------------------------------------------------------------------------------
                          Our Loan Volume is Increasing
                             Year-End Loan Balances
                                    Thousand
             1996           1997            1998            1999
             ----           ----            ----            ----

            33,438         35,253          35,691          46,791
--------------------------------------------------------------------------------

         o    Sought to maintain our yields and improve interest rate
              sensitivity by taking advantage of the higher rates and shorter
              terms to maturity of commercial and automobile loans.

                             [GRAPHIC CHART OMITTED]
--------------------------------------------------------------------------------
                          Maintain Interest Rate Spread
                              Interest Rate Spread
                                  Fiscal Year

             1996           1997            1998            1999
            ------         ------          ------          ------
             3.77%          3.82%           3.82%           3.81%
--------------------------------------------------------------------------------

         Our increase in capital cannot by itself provide sufficient funds to
improve profitability to satisfactory levels. We must also leverage that capital
by increasing other funding sources. Overall during fiscal 1999, our deposits
declined. This decline occurred entirely during the first half of the fiscal
year, and we believe it was caused by depositors who used their deposits to
purchase stock. In the past six months, total deposits have been on a slow
upward trend. We are working to try to accelerate that trend through outreach
programs to our customers, developing deposit relationships with our new loan
customers, and competitive pricing.

         With the stock markets continuing to move upwards, it is difficult for
us to increase the level of deposits. Residents often choose to invest their
discretionary funds in equity securities instead of bank deposits. Thus, we have
also decided to borrow funds in order to improve leverage and we implemented a
borrowing strategy during the year. The borrowings allow us to maintain a
satisfactory level of more liquid securities investments while we invest most of
our available funds in loans.

         Although we believe that we have moved down the path we need to follow
to remain a successful and profitable institution, we know that much more needs
to be done. We continue to exert efforts to grow our franchise, seeking to
expand our market share in our existing community and reach out into adjoining
communities. The following discussion of our financial condition and results of
operations shows the effects of the commencement of those efforts.

                                       5
<PAGE>

INTRODUCTION TO FINANCIAL INFORMATION AND COMPARISONS

         Our current financial statements combine the assets, liabilities,
income and expenses which we, Gouverneur Bancorp, Inc., own directly, as well as
those which our Bank, Gouverneur Savings and Loan Association, owns. Any
discussion below about periods or dates before March 23, 1999, when we completed
the reorganization, includes information only about the Bank. However, when we
discuss past financial information, we refer to assets, liabilities, income and
expenses prior to March 23, 1999 as our own for comparative purposes.

ANALYSIS OF NET INTEREST INCOME

         Net interest income, our primary income source, depends principally
upon (i) the amount of interest-earning assets that we can maintain based upon
our funding sources; (ii) the relative amounts of interest-earning assets versus
interest-bearing liabilities; and (iii) the difference between the yields earned
on those assets and the rates paid on those liabilities. Non-performing loans
adversely affect net interest income because they must still be funded by
interest-bearing liabilities, but they do not provide interest income.
Furthermore, when we designate an asset as non-performing, all interest that we
have already accrued but not actually received is deducted from current period
income, further reducing net interest income.


                                       6
<PAGE>

AVERAGE BALANCES, INTEREST RATES AND YIELDS

         The following table presents for the periods indicated, the average
interest-earning assets and average interest-bearing liabilities by principal
categories, the interest income or expense for each category, and the resultant
average yields earned or rates paid. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-interest-bearing checking
accounts are included in the tables as a component of non-interest-bearing
liabilities.
<TABLE>
<CAPTION>

                                                                    For the Year Ended September 30,
                                     -----------------------------------------------------------------------------------------------
                                                  1999                             1998                            1997
                                     ------------------------------  -------------------------------  ------------------------------
                                                          Average                          Average                         Average
                                       Average             Yield/     Average               Yield/      Average              Yield/
                                       Balance  Interest    Cost      Balance    Interest    Cost       Balance  Interest    Cost
                                     ---------- --------  --------    -------    --------  --------    --------  --------  --------
<S>                                    <C>        <C>        <C>       <C>         <C>        <C>       <C>        <C>        <C>
Loans (1)                            $  39,643   $ 3,645    9.19%     $ 34,891    $ 3,256    9.33%     $ 33,520   $ 3,183    9.50%
Securities (2)                          18,911     1,096    5.80%       16,215        998    6.15%       16,637       989    5.94%
Other short-term investments             1,547        72    4.65%        1,607         82    5.10%        2,028       103    5.08%
                                     ---------   -------              --------    -------              --------   -------
  Total interest-earning assets         60,101     4,813    8.01%       52,713      4,336    8.23%       52,185     4,275    8.19%
                                                 -------                          -------                         -------
Non-interest-earning assets              2,154                           2,492                            2,259
                                     ---------                        --------                         --------
  Total assets                       $  62,255                        $ 55,205                         $ 54,444
                                     =========                        ========                         ========

Savings and club accounts (3)        $  16,661       569    3.42%     $ 14,947        519    3.47%     $ 15,115       527    3.49%
Time certificates                       23,408     1,246    5.32%       22,716      1,279    5.63%       22,884     1,265    5.53%
NOW and money market accounts            6,069       116    1.91%        5,547        109    1.97%        5,411       104    1.92%
Borrowings                               1,917        88    4.59%           --         --    0.00%           --        --    0.00%
  Total interest-bearing liabilities    48,055     2,019    4.20%       43,210      1,907    4.41%       43,410     1,896    4.37%
                                     ---------   -------              --------    -------              --------   -------
Non-interest-bearing liabilities           959                           1,197                            1,013
                                     ---------                        --------                         --------
  Total liabilities                     49,014                          44,407                           44,423
Net worth                               13,241                          10,798                           10,021
                                     ---------                        --------                         --------
  Total liabilities and net worth    $  62,255                        $ 55,205                         $ 54,444
                                     =========                        ========                         ========
Net interest income/spread (4)                   $ 2,794    3.81%                 $ 2,429    3.82%                $ 2,379    3.82%
                                                 =======    ====                  =======    ====                 =======    ====
Net earning assets/net
    interest margin (5)              $  12,046              4.65%     $  9,503               4.61%     $  8,775              4.56%
                                     =========              ====      ========               ====      ========              ====

Ratio of average interest-earning assets
  to average interest-bearing liabilities                   1.25x                            1.22x                   1.20x
                                                            ====                             =====                   ====
</TABLE>
(1)   Shown net of the allowance for loan losses. Average loan balances include
      non-accrual loans. Interest is recognized on non-accrual loans only as and
      when received.
(2)   Securities are included at amortized cost, with net unrealized gains or
      losses on securities available for sale included as a component of
      non-earning assets. Securities include Federal Home Loan Bank of New York
      stock.
(3)   Includes advance payments by borrowers for taxes and insurance (mortgage
      escrow deposits).
(4)   The spread represents the difference between the weighted average yield on
      interest-earning assets and the weighted average cost of interest-bearing
      liabilities.
(5)   The net interest margin, also known as the net yield on average
      interest-earning assets, represents net interest income as a percentage of
      average interest-earning assets.

                                       7
<PAGE>

RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

         One method of analyzing net interest income is to consider how changes
in average balances and average rates from one period to the next affect net
interest income. The following table shows changes in the dollar amount of
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It shows the amount of the change in
interest income or expense caused by either changes in outstanding balances
(volume) or changes in interest rates. The effect of a change in volume is
measured by applying the average rate during the first period to the volume
change between the two periods. The effect of changes in rate is measured by
applying the change in rate between the two periods to the average volume during
the first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
                                                  Year Ended September 30,
                                 ---------------------------------------------------------
                                           1999 vs. 1998              1998 vs. 1997
                                 ----------------------------- ---------------------------
                                   Increase (Decrease) Due To: Increase (Decrease) Due To:
                                    Volume     Rate     Total   Volume     Rate     Total
                                   -------- ---------  ------- -------- ---------- -------
                                                        (In thousands)
<S>                                  <C>      <C>      <C>      <C>      <C>      <C>
INTEREST-EARNING ASSETS:
Loans ............................   $ 441    $ (52)   $ 389    $ 130    $ (57)   $  73
Securities .......................     158      (60)      98      (26)      35        9
Other short-term investments .....      (3)      (7)     (10)     (21)       0      (21)
                                     -----    -----    -----    -----    -----    -----
Total interest-earning assets ....     596     (119)     477       83      (22)      61
                                     =====    =====    =====    =====    =====    =====

INTEREST-BEARING LIABILITIES:
Savings and club accounts ........      58       (8)      50       (5)      (3)      (8)
Time certificates ................      38      (71)     (33)      (9)      23       14
NOW and money market accounts ....      10       (3)       7        2        3        5
Borrowings .......................      88        0       88        0        0        0
                                     -----    -----    -----    -----    -----    -----
Total interest-bearing liabilities     194      (82)     112      (12)      23       11
                                     =====    =====    =====    =====    =====    =====

Net change in net interest income    $ 402    $ (37)   $ 365    $  95    $ (45)   $  50
                                     =====    =====    =====    =====    =====    =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND 1998

         Our total assets were $70.0 million at       --------------------------
September 30, 1999, which was 18% higher than our          TOTAL ASSETS UP 18%
total assets of $59.3 million one year earlier.       --------------------------
The increase in total assets was a result of our
reorganization and our strategy to borrow money to
improve leverage. These two events provided us
with additional funds which we were then able to
invest in additional assets.

-------------------------     The largest increase in one single asset category
    TOTAL LOANS UP 31%        during the year was in net loans, which reached
-------------------------     $46.2 million at September 30, 1999, compared to
                              $35.2 million one year earlier. This 31.1%
                              increase was the result of adding new loan
                              origination staff and opening a new loan
                              production office in the nearby community of
                              Alexandria Bay. That office was opened in July,
                              1999, and thus it contributed to our loan growth
                              for only a part of the year. We hope that it will
                              continue to contribute additional loan growth in
                              the future.

                                        8
<PAGE>

         We funded the increase in loans with the new capital and the funds we
borrowed. Our increase in capital was $4.6 million during the year, and borrowed
funds increased from zero to $7.4 million. Our total deposits declined by $1.3
million during the year, but this represents a decline of $1.4 million in the
first half of the year, followed by a $160,000 increase during the last six
months of the year. One of the important challenges we face is the need to
increase deposits in future years to improve leverage without having to pay the
higher costs that we must pay for borrowed funds.

         We experienced a slight decline during the year in the total of other
interest-earning assets and other liquid assets, which includes cash and due
from banks, interest-bearing deposits with other banks, securities available for
sale and securities held to maturity. This decline, from $23.0 million to $22.5
million, or less than 3%, was the result of our efforts to generate new loans,
which earn more interest for us than other asset categories. We need to maintain
sufficient liquid assets to deal with contingencies that may occur and to
address normal fluctuations in deposit levels. However, in general, we prefer to
invest in higher yielding loans than in lower yielding securities if
satisfactory loans are available at the time.

         Securities available for sale increased during the year by $2.4
million, while securities held to maturity decreased by $1.7 million. We
classify all new securities purchases as available for sale, so the decline in
securities held to maturity results from normal payments on those securities.
The increase in securities available for sale resulted from the investment of
available funds which could not be invested in loans that we found acceptable.
Our new securities investments were principally mortgage-backed securities
issued by the Federal National Mortgage Association (known as Fannie Mae) and
the Federal Home Loan Mortgage Corporation (known as Freddy Mac). We invested in
these types of securities, rather than in government and corporate bonds,
because they have higher yields. {Some of our new mortgage-backed securities
also have adjustable rates, which help us manage the risk that market interest
rates will change} We also increased our level of municipal securities to take
advantage of tax benefits to reduce our income taxes.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998

------------------------      Net Income. Net income for the year ended
NET INCOME UP 3.4%            September 30, 1999 was $641,000, compared to net
------------------------      income of $620,000 the previous year. The primary
                              reason for the increase is our increase in size,
                              and the related increase in the amount of funds we
                              had available for investment. As we invested
                              available funds in loans and securities, out
                              interest income increased, while our interest
                              expense did not increase as much. This is because
                              some of the increase in assets was funded with
                              capital that has no interest cost. The remainder
                              of the increase was funded primarily with
                              borrowings, which are our highest cost source of
                              funds, but which have interest rates lower than
                              the rates on the assets we purchase with the
                              proceeds of the borrowings.

         The $365,000 increase in net interest income between the two years was
partially offset by increases in operating expenses. These expense increases
were principally the result of two factors. First, larger size requires more
staff and more expense for everything from postage to mail loan payment coupons
to computer data processing to handle a higher level of transactions. Second, we
have had expenses of operating as a public company, from professional fees to
some of the expenses of a special stockholders meeting which was held just after
the end of the fiscal year.

                                       9
<PAGE>

--------------------------    INTEREST INCOME. Interest income increased by
INTEREST INCOME UP 11%        $477,000 from $4.3 million in fiscal 1998 to $4.8
--------------------------    million in fiscal 1999. A higher level of our
                              interest-earning assets was the cause of the
                              increase in interest income. During 1999, average
                              interest-earning assets totaled $60.1 million,
                              compared to $52.7 million during fiscal 1998. Most
                              of this increase was in the average balance of
                              loans as we sought to develop and capitalize on
                              new lending opportunities. Average loans increased
                              from $34.9 million to $39.6 million between the
                              years, with the increase in loans being divided
                              between residential mortgage loans, which has
                              traditionally been our largest loan category, and
                              other loans such as commercial mortgage loans and
                              automobile loans which have represented a
                              relatively small portion of our loan portfolio in
                              past years. Overall, we estimate that the increase
                              in the average balance of interest-earning assets
                              resulted in an increase in interest income of
                              approximately $596,000.

         The positive effect of our larger size on interest income was reduced
by lower interest rates. The average yields on our two principal asset
categories, loans and securities investments, both declined from fiscal 1998 to
fiscal 1999. The average yield on our loans declined by 14 basis points, from
9.33% to 9.19%, while the average yield on our securities investments declined
by 35 basis points from 6.15% to 5.80%. In both cases, the decline in average
yields resulted from lower general market interest rate conditions. When loans
and investments which had been originated or purchased a number of years ago
were repaid, the proceeds were reinvested at lower current market rates. We
worked to reduce the effect of these declines by diversifying our loan portfolio
towards commercial mortgage loans and automobile loans which tend to have higher
interest rates than residential mortgage loans. We also concentrated our new
securities investments in mortgage-backed securities which tend to have higher
yields than federal government and federal agency securities. Overall, we
estimate that the decline in yields earned caused a $119,000 decline in interest
income.

         INTEREST EXPENSE. Interest expense increased by $112,000 from $1.9
million in fiscal 1998 to $2.0 million in fiscal 1999. The increase was caused
by factors similar to the factors which caused the increase in interest income.
However, interest expense increased more slowly than interest income principally
because our additional capital funded new investments without interest costs and
because the cost of funds is lower than the average yield on assets.

         The average volume of interest-bearing liabilities increased from $43.2
million to $48.1 million when comparing fiscal 1998 and 1999. This increase,
which included increases in the average balance of both deposits and borrowings,
resulted from our efforts to provide funding for our increase in loans and
securities investments. For the first time, we borrowed significant funds to
support additional investments during 1999. Although the borrowings occurred
towards the end of the year, and thus the average balance of borrowings was not
that large for fiscal 1999 as a whole, we anticipate that in 2000 borrowed funds
will be a more significant component of our funding sources. We estimate that
the effect of the overall increase in the average volume of interest-bearing
liabilities was an increase in interest expense of approximately $194,000.

         As in the case of interest-bearing assets, a decline in market interest
rates resulted in a decline in our average cost of funds. The average cost of
funds declined by 21 basis points, from 4.41% to 4.20%. The primary contributor
to this decline was a decline of 31 basis points in the average cost of
certificates of deposit, our largest deposit category and, with borrowed funds,
our most expensive interest-bearing liability category. The average rate paid on
certificates of deposit declined more rapidly than the rates paid on other

                                       10
<PAGE>

deposit categories because we tend to adjust our rates on new certificates of
deposit regularly as market rates change, while we tend to adjust our other
rates less frequently. Overall, we estimate that the decline in the cost of
funds resulted in a decline of approximately $82,000 in interest expense, with
the lower average rate on certificates of deposit causing $71,000 of that
decline.

--------------------------------   NET INTEREST INCOME. The net effect of our
NET INTEREST INCOME UP $365,000    increase in interest income and a lower
--------------------------------   increase in interest expense was a $365,000
                                   increase in net interest income. We estimate
                                   that this increase was composed of
                                   approximately $402,000 representing an
                                   increase in net interest income caused by the
                                   effect of changes in the volume of average
                                   assets and liabilities, partially offset by
                                   approximately $37,000 representing a decline
                                   in net interest income caused by the effect
                                   of the decline in interest rates. This
                                   $37,000 decline in net interest income is
                                   also reflected in a one basis point decline
                                   in our spread, representing the difference
                                   between the average yield on our assets and
                                   the average rate paid on our liabilities.
                                   However, out net yield on average
                                   interest-earning assets, also known as net
                                   interest margin, increased 4 basis points
                                   from 4.61% to 4.65% because of the effect of
                                   the increase in capital as a no-cost funding
                                   source.

         PROVISION FOR LOAN LOSSES. The provision for loan losses results from
our analysis of the adequacy of the allowance for loan losses. If we believe
that the allowance should be higher, then we increase it with a provision for
loan losses which is an expense on our income statement. However, our assessment
of the adequacy of the allowance is always speculative, based upon what we
expect to occur in the future with our loan portfolio, especially default rates
and the level of losses when our customers do not repay their loans. This
requires estimates of many future events, such as future interest rates, the
health of the local and national economy and the effects of government policies.
If our predictions about the future are inaccurate, then increases in the
allowance may be necessary in future periods even if the level of our loan
portfolio remains the same. Furthermore, the Office of Thrift Supervision may
disagree with our judgments regarding the potential risks in our loan portfolio
and could require us to increase the allowance in the future.

         We increased our provision for loan losses from $130,000 in 1998 to
$162,000 in 1999. During the year, we determined that an increase in our
allowance was appropriate because of the general increase in the size of our
portfolio as well as the shift in our portfolio towards more commercial mortgage
loans and automobile loans which tend to present higher risks of default. Our
allowance at the beginning of the year was $484,000 and we determined at the end
of the year that the appropriate level for the allowance was $620,000. We had
charge-offs during the year of $60,000 and recoveries of $34,000, so a $162,000
provision was necessary to reach the desired level for the allowance.

         NON-INTEREST INCOME. Our non-interest income increased from $144,000 in
fiscal year 1998 to $151,000 in fiscal 1999. Non-interest income includes many
different categories of income, varying from gains on sales of securities to
income from deposit account fees and late charges on loans. Non-interest income
fluctuated between the two years due to normal fluctuations in the different
components of non-interest income.

         NON-INTEREST EXPENSES. Our non-interest expenses increased by $268,000
from $1.4 million in fiscal 1998 to $1.7 million in fiscal 1999. Non-interest
expense includes most categories of expense other than interest we pay on
deposits and borrowings and income tax expense. The largest category of

                                       11
<PAGE>

non-interest expenses is salaries and employee benefits expense, followed by
building occupancy and equipment expense.

         The largest component of the increase in non-interest expenses was a
$136,000 growth in salaries and employee benefits expense from $647,000 to
$783,000. The additional salary and employee benefits expenses included the cost
of new employees, including a new loan officer, who were hired to assist in the
growth of our franchise; salary increases to existing employees to cover normal
merit raises and the additional responsibilities resulting from our
reorganization; and $19,000 for costs of our Employee Stock Ownership Plan. In
order to support existing growth in our operations and also to position us for
future growth, we had 21 full time equivalent employees at September 30, 1999
compared to 17 full time equivalent employees one year earlier. We believe that
the increase in our loan portfolio is one of the benefits that flows from the
increase in the level of employees, but there is always a lag between adding new
employees and realizing the benefits of them being on staff. Our existing
employee group should be able to support additional growth. We also believe that
the reorganization itself caused a temporary disruption in employee productivity
as we allocated employees to tasks necessary to complete the reorganization.

         Other categories of non-interest expenses, such as directors fees,
professional fees, postage and supplies also increased in 1999 over 1998 levels
due to the costs of operating a public company. In fiscal 1999 we held more
board meetings to address issues related to the reorganization, we incurred
professional fees related to our periodic disclosure requirements under the
securities laws, and we commenced the proxy solicitation for our special meeting
of stockholders which was held in October 1999.

         INCOME TAX EXPENSE. Our income tax expense increased from $380,000 in
fiscal 1998 to $431,000 in fiscal 1999. The principal reason for the increase
was an increase in income before taxes.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997.

         GENERAL. Our net income for the 1998 fiscal year was $620,000, an
increase of $83,000, or 15.5%, over net income of $537,000 for fiscal 1997. We
experienced normal fluctuations in income and expense categories, with an
increase in the average balance of loans being offset by a decline in average
yields earned on loans.

         INTEREST INCOME. Interest income increased by $61,000 from fiscal 1997
to fiscal 1998. This increase resulted principally from a $1.4 million, or 4.1%,
increase in the average balance of loans. We estimate that this contributed
approximately $130,000 to our interest income. However, we also had a $843,000
decline in the average balance of lower yielding securities and other short-term
investments, so overall there was a $528,000 net increase in average
interest-earning assets.

         The shift in favor of higher-yielding loans and away from lower
yielding securities investments, as a result of our efforts to increase our loan
portfolio, increased our average yield on interest-earning assets. This positive
effect was reduced because the average yield on loans declined from 9.50% for
fiscal 1997 to 9.33% for the fiscal 1998. We estimate that this reduced interest
income by $57,000. The continuation of low market interest rates for residential
one-to-four family mortgage loans caused the decline in loan yields as some
customers refinanced their loans at lower rates and we originated new loans at
lower rates. Increased competition for mortgage loans and tighter underwriting

                                       12
<PAGE>

standards we adopted also reduced the yields we could earn on new loans. We
worked to reduce the decline in average yields by increasing our portfolio of
auto loans and both mortgage and non-mortgage commercial loans. We also had a 21
basis point increase in the yield on our securities investments because during
1997 we shifted investments away from lower yielding U.S. Treasury securities in
favor of higher yielding mortgage-backed securities and government agency
securities. The positive effect of this strategy was limited because the yields
on securities investments generally declined during fiscal 1998.

         The investment of stock subscription proceeds in short-term investments
did not have a material effect on average balances because subscriptions were
received primarily during the last ten days of the fiscal year.

         INTEREST EXPENSE. Interest expense increased by $11,000 from fiscal
1997 to fiscal 1998. The slight increase represented the net effect of a decline
in the average balance of interest-bearing liabilities by $200,000, offset by an
increase in our cost of funds of 4 basis points. We believe that competitive
pressures caused the decline in the average balance because high stock market
values caused more depositors to seek non-deposit investments.. Competitive
pressures for deposits caused the increase in the average cost of funds. The
increase was almost exclusively in certificates of deposit. The stock
subscriptions we received during the last few weeks of the 1998 fiscal year
represented only a small part of our interest-bearing liabilities for the year
as a whole, and thus did not have a significant effect on interest expense for
the year.

         NET INTEREST INCOME. The combined effect of the increase in interest
income and the lesser increase in interest expense was a $50,000, or 2.1%,
increase in net interest income. Our interest rate spread remained the same at
3.82% because the change in the mix of assets and the fluctuations in yields
earned and rates paid offset each other. Our net interest margin increased by 5
basis points from 4.56% to 4.61% because we invested retained earnings without a
corresponding interest cost.

         PROVISION FOR LOAN LOSSES. The provision for loan losses was $130,000
for fiscal 1998, compared to $250,000 for fiscal 1997. The reason for the
decline in the provision for loan losses was a reduction in the level of net
charge-offs from $326,000 in fiscal 1997 to $49,000 in fiscal 1998 as loan
delinquencies improved. The decline in the provision was less than the decline
in charge-offs net of recoveries, so the allowance for loan losses increased
from $403,000 at September 30, 1997 to $484,000 at September 30, 1998. We
believe this increase was appropriate because of our strategy to increase
higher-risk auto loans and commercial non-mortgage loans.

         NON-INTEREST INCOME. Our non-interest income increased by $31,000 from
$113,000 in fiscal 1997 to $144,000 in fiscal 1998, primarily because we had
$23,000 of realized losses on the sale of securities during fiscal 1997 and no
such losses during fiscal 1998. From time to time, we sell debt securities at a
loss if we believe that we can recoup the loss by reinvesting the sale proceeds
at higher yields. Other categories of non-interest income remained constant as
we maintained consistent policies regarding service charges, safe deposit box
rentals and other categories of non-interest income. Total service charges on
deposit accounts, a significant component of non-interest income, depend on our
service charge policy, the volume of deposit accounts and economic conditions
which can affect sub-categories of service charges such as fees for bounced
checks. These factors remained relatively constant throughout fiscal 1997 and
1998, resulting in a consistent level of service charge income.

                                       13
<PAGE>

         NON-INTEREST EXPENSES. Non-interest expenses increased by $73,000, or
5.1%, from fiscal 1997 to fiscal 1998. Salaries and employee benefits expense
increased by $38,000, or 6.2%, due to normal increases in officer and employee
salaries and the addition of business development and loan officers to pursue
business development, new loan opportunities and past due account collection.
This increase was partially offset by a decline in deposit insurance premiums
from $41,000 to $27,000 because of changes in the law at the end of fiscal 1996.
Other variations in non-interest expense resulted from normal period to period
fluctuations in activity.

         INCOME TAXES. Our income tax expense increased from $335,000 for fiscal
1997 to $380,000 for fiscal 1998. The increase corresponded to the increase in
net income as our effective tax rate remained relatively constant.

LIQUIDITY AND CAPITAL RESOURCES

         Our primary sources of funds are deposits, borrowings and proceeds from
the principal and interest payments on loans and securities. Maturities and
scheduled principal payments on loans and securities are predictable sources of
funds. However, general economic conditions and interest rate conditions can
cause increases or decreases in deposit outflows and loan prepayments which can
also affect the level of funds we have available for investment. Our level of
borrowings is generally at our own discretion, based upon our need for funds and
the cost of deposits as an alternative source of funds.

         In general, we manage our liquidity by maintaining a sufficient level
of short term investments so that funds are normally available for investment in
loans when needed. During the year ended September 30, 1999, we reduced our cash
and cash equivalents by $944,000. The primary reason for the reduction was that
we invested available funds in loans and securities investments, so that our net
increases in those investments exceeded the net cash we received from our stock
offering minus a reduction in deposits. We originated $22.2 million of new loans
during fiscal 1999. However, loans, net, after payments, charge-offs and
transfers to real estate owned, increased by $11.1 million during the period.

         Deposits decreased by $1.3 million during the year. We believe the
decrease was primarily caused by the use of deposits to purchase stock and by
the cancellation of some stock subscriptions which had been carried as deposits
on September 30, 1998. In addition to factors within our control, such as our
deposit pricing strategies and our marketing efforts, deposit flows are affected
by the level of general market interest rates, the availability of alternate
investment opportunities, general economic conditions, and other factors outside
our control.

         We monitor our liquidity regularly. Excess liquidity is invested in
overnight federal funds sold and other short term investments. If we need
additional funds, we can borrow those funds, although the cost of borrowing
money is normally higher than the average cost of deposits. As a member of the
Federal Home Loan Bank of New York, the Bank can arrange to borrow in excess of
$10 million, but to do so it must provide appropriate collateral and satisfy
other requirements for Federal Home Loan Bank borrowings. We have not needed to
use borrowings to fund unanticipated deposit outflows. However, we have used
borrowings in recent months to help us leverage the capital we received from our
stock sale. In addition to borrowings, we believe that, if we need to do so, we
can attract additional deposits by increasing the rates we offer. We had $1.4
million of outstanding commitments to make loans at September 30, 1999, along
with $766,000 of unused home equity, commercial and overdraft lines of credit.
During the upcoming year, we anticipate that loan originations may exceed the
amount of cash available from the net increase, if any, in deposits and the
proceeds from the maturity, payment or disposition of securities. If that
occurs, we may obtain additional funds to increase our loan portfolio through a
variety of strategies, including reducing securities investments as a percentage
of total assets, borrowing funds, or the use of wholesale or brokered deposits.
At September 30, 1999, we had $17.3 million of certificates of deposit which are
scheduled to mature in one year. We anticipate that we can retain substantially
all of those deposits if we need to do so to fund loans and other investments as
part of our efforts to grow and leverage our new capital.

                                       14
<PAGE>

         The OTS has minimum
capital ratio requirements which             -----------------------------------
apply to the Bank, but there are no           THE BANK EXCEEDS ALL CAPITAL
comparable minimum capital                    REQUIREMENTS AND IS CONSIDERED
requirements that apply to us as a            "WELL CAPITALIZED"
savings and loan holding company.            -----------------------------------
At September 30, 1999, the Bank
substantially exceeded all
regulatory capital requirements of
the OTS applicable to it, and the
OTS minimum capital requirements
had no material adverse affect on
the Bank. The Bank was classified
as "well capitalized" at September
30, 1999 under OTS regulations.

         OTS regulations require that the Bank maintain liquid assets equal to
4% of withdrawable accounts. This ratio is measured on a monthly average basis.
The Bank had a liquidity ratio of 41.3% for September 1999.

YEAR 2000 COMPLIANCE

         As we write this annual report, we are rapidly approaching the
beginning of the next millennium. By the time this annual report is circulated
to our stockholders, we will have already passed that milestone. As we look
towards the next calendar year and the problems that we have all heard warnings
about, we believe that we have taken the steps necessary so that our computer
systems, both hardware and software, and our other equipment that includes
computer components, will operate properly despite the change to a new calendar
year. By the time you read this, you will know whether we have succeeded.

         The ripple effects of Year 2000 failures throughout the world could
possibly touch us in the future. For example, we have heard horror stories from
consultants about oil shortages throughout the coming winter if computer systems
in middle east oil producing countries break down. While we have limited ability
to address these types of serious national or international problems, we have
developed contingency plans to move to a manual system in the event of an
emergency. We know from recent experience with a severe ice storm which shut
down power that we can operate for at least five days using entirely manual
systems.

         We have also participated in customer awareness programs to avoid large
deposit withdrawals brought on by customer panic. Such panic is substantially
out of our control. Non-compliance by a local utility, for example, may not only
have an adverse direct effect on our ability to conduct business, but may also
create local panic which could affect our liquidity. We anticipate that we will
be able to satisfy customer demands for cash if necessary through the use of our
liquid assets. However, we cannot predict whether an uneventful advent of the

                                       15
<PAGE>

Year 2000 will cause our depositors to redeposit their withdrawals at our Bank
or will cause them to go on a spending spree with adverse consequences.

FORWARD-LOOKING STATEMENTS

         When we use words or phrases like "will probably result," "we expect,"
"will continue," "we anticipate," "estimate," "project," "should cause" or
similar expressions in this annual report or in any press releases, public
announcements, filings with the Securities and Exchange Commission or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we provide, such as analysis of the adequacy of our allowance for
loan losses or an analysis of the interest rate sensitivity of our assets and
liabilities, is always based on predictions of the future. From time to time, we
may also publish other forward-looking statements about anticipated financial
performance, business prospects, and similar matters.

         The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. We want you to know that a variety of
future events could cause our actual results and experience to differ materially
from what we anticipate when we make our forward-looking statements. Some of the
risks and uncertainties that may affect our operations, performance, development
and results, the interest rate sensitivity of our assets and liabilities, and
the adequacy of our allowance for loan losses, include:

o        local, regional, national or global economic conditions which could
         cause an increase in loan delinquencies, a decrease in property values,
         or a change in the housing turnover rate;

o        the failure of our customers or major suppliers to have computers and
         other systems which are Year 2000 compliant;

o        changes in market interest rates or changes in the speed at which
         market interest rates change;

o        changes in laws and regulations affecting us;

o        changes in competition; and

o        changes in consumer preferences.

         Please do not rely unduly on any forward-looking statements, which are
valid only as of the date made. Many factors, including those described above,
could affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         QUALITATIVE ANALYSIS. We try to avoid taking undue interest rate risk
while satisfying customer demand for loans. Substantially all of our residential
mortgage loans have fixed interest rates and terms of up to 25 years. Adjustable
residential mortgage loans are not in demand during the current low interest

                                       16
<PAGE>

rate conditions and they represent only a very small part of our residential
mortgage loan portfolio. Therefore, in a rising interest rate environment, we
expect that the yields on our residential mortgage loan portfolio will increase
relatively slowly, as loans are repaid and the payments are reinvested, while
our cost of funds will rise more rapidly.

         In order to reduce this risk, we have adopted a multi-part strategy.
First, we are working to originate higher levels of automobile loans, home
equity lines of credit, and commercial loans which tend to have shorter terms or
adjustable rates. Second, we have concentrated our securities investments in
short-term or adjustable-rate securities. U.S. Treasury and federal agency
securities are purchased with terms to maturity that generally do not exceed two
years. We have concentrated our recent securities purchases in mortgage-backed
securities with adjustable rates or relatively short terms with balloon
payments. We also try to cushion our operations against interest rate
fluctuations by preserving a loyal customer base through paying above market
rates on savings and club account deposits during present periods of low
interest rates. We believe this may cause our customers to be less likely to
shift their funds to high rate deposit products as interest rates rise.

         Interest rate pricing and interest rate risk strategy objectives are
implemented, in the first instance, by an internal committee which meets weekly
to review and assess deposit and loan pricing. The OTS prepares a quarterly
interest-rate sensitivity report for the Bank based upon its asset and liability
profile which seeks to estimate the effect of interest rate changes on the net
value of the Bank's assets and liabilities. This report is reviewed with the
Board of the Bank quarterly

         QUANTITATIVE ANALYSIS. The OTS report seeks to estimate how changes in
interest rates will affect the Bank's "net portfolio value." Net portfolio
value, or "NPV," akin to net worth, represents the net present value of the
Bank's cash flow from assets, liabilities and off balance sheet items. Each
calendar quarter, the OTS calculates the Bank's estimated NPV and the estimated
effect on NPV of instantaneous and permanent 1% to 3% (100 to 300 basis points)
increases and decreases in market interest rates. The calculations are based
upon the OTS's assumptions regarding loan prepayments rates, deposit turnover
and other factors affecting the repricing of assets and liabilities. The OTS
does not include in its analysis any assets held by Gouverneur Bancorp, Inc.
which are not owned by the Bank.

                                       17
<PAGE>

         The following table presents the Bank's estimated NPV at September 30,
1999, and the estimated effect on NPV of the specified interest rate changes, as
calculated by the OTS. At September 30, 1999, the portfolio value of the Bank's
assets as estimated by the OTS was $72.2 million.

<TABLE>
<CAPTION>
   Hypothetical Change in       Estimated              Estimated Change in   Estimated Percentage
        Interest Rate      Net Portfolio Value         Net Portfolio Value     Change in Npv(1)
        -------------      -------------------         -------------------     ----------------
                                        (Dollars in thousands)
<S>       <C>                        <C>                         <C>              <C>
         +3.00%                      13,022                     -3,043           -19%
         +2.00%                      14,189                     -1,876           -12%
         +1.00%                      15,251                       -814            -5%
          0.00%                      16,065                         --            --
         -1.00%                      16,565                       +500            +3%
         -2.00%                      17,322                     +1,257            +8%
         -3.00%                      18,212                     +2,147           +13%
</TABLE>

(1) Calculated as the amount of estimated change in NPV divided by the estimated
    current NPV.

         The above table indicates that in a rising interest rate environment,
the Bank's net portfolio value should decline, while net portfolio value should
increase in a declining interest rate environment. These changes in net
portfolio value should be accompanied by a decline in net income during periods
of rising interest rates and an increase in net income during periods of
declining interest rates. However, these expected changes in net income may not
occur for many reasons including, among others, the possibility that we may
decide not to reduce the rates we offer on our deposits when interest rates
decline in order to retain and increase our deposit base.

         There are shortcomings in the methodology used by the OTS to calculate
changes in NPV. In order to estimate changes in NPV, the OTS makes assumptions
about repayment and turnover rates which may not turn out to be correct. The NPV
table assumes that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remain constant over the
period being measured. So, for example, the NPV analysis assumes that the ratio
of adjustable versus fixed-rate loans or short-term loans versus long-term loans
remains the same and that interest rates will change equally for both long term
and short term assets. Therefore, although the OTS NPV analysis provides the
Board of the Bank with an indication of the Bank's interest rate risk exposure,
it does not provide a precise forecast of the effect of changes in market
interest rates on net interest income.


                                       18
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Gouverneur Bancorp, Inc.:


We have audited the accompanying  consolidated statements of financial condition
of Gouverneur  Bancorp,  Inc. and  subsidiary as of September 30, 1999 and 1998,
and the related  consolidated  statements  of income,  shareholders'  equity and
comprehensive  income  and cash  flows for each of the  years in the  three-year
period ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Gouverneur  Bancorp,  Inc. and
subsidiary  as of  September  30,  1999  and  1998,  and the  results  of  their
operations and their cash flows for each of the years in the  three-year  period
ended  September 30, 1999,  in conformity  with  generally  accepted  accounting
principles.


                                        /s/ KPMG LLP

November 12, 1999
Syracuse, New York

<PAGE>
<TABLE>
<CAPTION>
                       GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                    Consolidated Statements of Financial Condition

                             September 30, 1999 and 1998
                          (In thousands, except share data)


                                  ASSETS                         1999         1998
                                                                --------    --------
<S>                                                             <C>            <C>
Cash and due from banks                                         $  1,564       1,179
Interest-bearing deposits with other banks                         1,926       3,255
Securities available-for-sale, at fair value                      12,971      10,546
Securities held-to-maturity (fair value of $5,957 at
    September 30, 1999 and $7,787 at September 30, 1998)           6,019       7,717

Loans, net of deferred fees                                       46,791      35,691
    Less allowance for loan losses                                  (620)       (484)
                                                                --------    --------

                  Net loans                                       46,171      35,207

Premises and equipment, net                                          278         288
Federal Home Loan Bank stock, at cost                                385         379
Accrued interest receivable                                          469         346
Real estate owned                                                    169          51
Other assets                                                          44         369
                                                                --------    --------
                  Total assets                                  $ 69,996      59,337
                                                                ========    ========

                   LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
    Deposits:
       Demand accounts                                               184         210
       Savings and club accounts                                  15,423      17,302
       Time certificates                                          23,057      23,578
       NOW and money market accounts                               6,449       5,292
                                                                --------    --------
                  Total deposits                                  45,113      46,382

    Advance payments by borrowers for property
       taxes and insurance                                           151         105
    Other liabilities                                              1,303       1,382
    Securities sold under agreements to repurchase                 5,900          --
    Other borrowings                                               1,500          --
                                                                --------    --------
                  Total liabilities                               53,967      47,869
                                                                --------    --------

Commitments and contingencies (note 11)

Shareholders' Equity:
    Preferred stock, $.01 par value per share; authorized
       1,000,000 shares, issued: none
          Common stock, $.01 par value per share; authorized
            9,000,000 shares, issued 2,384,040 shares at
            September 30, 1999                                        24          --
          Additional paid-in capital                               4,553          --
          Retained earnings                                       11,470      10,929
          Accumulated other comprehensive income                     390         539
          Unallocated shares of Employee Stock Ownership Plan
            81,534 shares at September 30, 1999                     (408)         --
                                                                --------    --------
                  Total shareholders' equity                      16,029      11,468
                                                                --------    --------
                  Total liabilities and shareholders' equity    $ 69,996      59,337
                                                                ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                              2
<PAGE>
<TABLE>
<CAPTION>
                             GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                                Consolidated Statements of Income

                          Years ended September 30, 1999, 1998 and 1997
                                          (In thousands)


                                                           1999           1998           1997
                                                        -----------    -----------   -----------
<S>                                                     <C>                  <C>           <C>
Interest income:
    Loans                                               $     3,645          3,256         3,183
    Securities                                                1,096            998           989
    Other short-term investments                                 72             82           103
                                                        -----------    -----------   -----------
               Total interest income                          4,813          4,336         4,275
                                                        -----------    -----------   -----------

Interest expense:
    Deposits                                                  1,931          1,907         1,896
    Borrowings                                                   88             --            --
                                                        -----------    -----------   -----------

               Total interest expense                         2,019          1,907         1,896
                                                        -----------    -----------   -----------
               Net interest income                            2,794          2,429         2,379

Provision for loan losses                                       162            130           250
                                                        -----------    -----------   -----------
               Net interest income after
                  provision for loan losses                   2,632          2,299         2,129
                                                        -----------    -----------   -----------

Non-interest income:
    Service charges                                              67             52            52
    Net loss on sale of securities available for sale           (18)            --           (23)
    Other                                                       102             92            84
                                                        -----------    -----------   -----------
               Total non-interest income                        151            144           113
                                                        -----------    -----------   -----------

Non-interest expenses:
    Salaries and employee benefits                              783            647           609
    Directors fees                                               78             59            60
    Building, occupancy and equipment                           203            173           163
    Data processing                                              95             84            78
    Postage and supplies                                         94             77            64
    Professional fees                                            67             43            48
    Real estate owned                                            32            101           113
    Other                                                       359            259           235
                                                        -----------    -----------   -----------
               Total non-interest expenses                    1,711          1,443         1,370
                                                        -----------    -----------   -----------

               Income before income tax expense               1,072          1,000           872

Income tax expense                                              431            380           335
                                                        -----------    -----------   -----------
               Net income                               $       641            620           537
                                                        ===========    ===========   ===========

Basic earnings per share (1)                            $      0.15            N/A           N/A

Weighted average shares outstanding                       2,300,271            N/A           N/A
</TABLE>

(1)    Basic earnings per share represents the net income of the Company for the
       period from March 23, 1999 (date of reorganization) to September 30, 1999
       (see note (2) (l)).

See accompanying notes to consolidated financial statements.

                                              3
<PAGE>
<TABLE>
<CAPTION>
                                        GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                        Consolidated Statements of Shareholders' Equity and Comprehensive Income

                                     Years ended September 30, 1999, 1998 and 1997
                                           (In thousands, except share data)


                                                                                    ACCUMULATED
                                                               ADDITIONAL              OTHER
                                                      COMMON    PAID-IN    RETAINED COMPREHENSIVE  UNALLOCATED
                                                       STOCK    CAPITAL    EARNINGS    INCOME         ESOP       TOTAL
                                                      -------  ----------  -------  -------------  -----------   -----
<S>                                                   <C>       <C>          <C>          <C>      <C>           <C>
Balance at September 30, 1996                         $    --        --      9,772        221           --       9,993
Comprehensive income:
    Change in net unrealized gain (loss) on
       securities available for sale, net of tax           --        --         --        159           --         159
    Net income                                             --        --        537         --           --         537
                                                      -------   -------    -------    -------      -------     -------
            Total comprehensive income                                                                             696
                                                      -------   -------    -------    -------      -------     -------

Balance at September 30, 1997                              --        --     10,309        380           --      10,689
Comprehensive income:
    Change in net unrealized gain (loss) on
       securities available for sale, net of tax           --        --         --        159           --         159
    Net income                                             --        --        620         --           --         620
                                                      -------   -------    -------    -------      -------     -------
            Total comprehensive income                                                                             779
                                                      -------   -------    -------    -------      -------     -------

Balance at September 30, 1998                              --        --     10,929        539           --      11,468

Net proceeds from issuance of 1,072,818
    shares of common stock                                 11     4,568         --         --           --       4,579
Common stock acquired by ESOP
    (85,825 shares)                                        --        --         --         --         (429)       (429)
ESOP shares released or committed to be released
    for allocation (4,291 shares)                          --        (2)        --         --           21          19
Initial capital contribution and
    issuance of shares to Cambray MHC
    (1,311,222 shares)                                     13       (13)      (100)        --           --        (100)
Comprehensive income:
    Change in net unrealized gain (loss)
       on securities available for sale, net of tax        --        --         --       (149)          --        (149)
    Net income                                             --        --        641         --           --         641
                                                      -------   -------    -------    -------      -------     -------
            Total comprehensive income                                                                             492
                                                      -------   -------    -------    -------      -------     -------
Balance at September 30, 1999                         $    24     4,553     11,470        390         (408)     16,029
                                                      =======   =======    =======    =======      =======     =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                              4
<PAGE>
<TABLE>
<CAPTION>
                             GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                              Consolidated Statements of Cash Flows

                          Years ended September 30, 1999, 1998 and 1997
                                         (In thousands)


                                                                 1999        1998        1997
                                                               --------    --------    --------
<S>                                                            <C>              <C>         <C>
Cash flows from operating activities:
    Net income                                                 $    641         620         537
    Adjustments to reconcile net income to net
       cash provided by operating activities:
          Depreciation and amortization                              66          59          58
          Provision for loan losses                                 162         130         250
          Deferred income taxes                                     (22)        (61)        134
          Net losses on sales of securities                          18          --          23
          Net (gains) losses on sale of real estate owned           (12)         46          41
          Net (accretion) amortization of premiums/discounts        (13)          4           3
          (Increase) decrease in accrued interest receivable       (123)        (51)         18
          Increase (decrease) in other liabilities                   52         476        (104)
          Decrease (increase) in other assets                       325        (191)       (110)
                                                               --------    --------    --------

               Net cash provided by operating activities          1,094       1,032         850

Cash flows from investing activities:
    Decrease in time deposits with other banks                       --          --         500
    Net increase in loans                                       (11,277)       (601)     (2,350)
    Proceeds from sales of securities available-for-sale            504          --       3,431
    Proceeds from maturities and principle
       reductions of securities available-for-sale                8,662          --       2,500
    Purchases of securities available-for-sale                  (11,928)     (2,378)     (2,767)
    Purchases of securities held-to-maturity                       (711)     (2,318)     (4,738)
    Proceeds from maturities and principle
       reductions of securities held-to-maturity                  2,502       3,256       1,486
    Proceeds from sale of real estate owned                          45         174         160
    Additions to premises and equipment                             (56)        (79)        (32)
    Purchase of FHLB stock                                           (6)         (4)        (37)
                                                               --------    --------    --------
               Net cash used by investing activities            (12,265)     (1,950)     (1,847)
                                                               --------    --------    --------

Cash flows from financing activities:
    Net (decrease) increase in deposits                          (1,269)      2,806          73
    Net increase (decrease) in advance payments by
       borrowers for property taxes and insurance                    46          60         (29)
    Net proceeds from short-term borrowing                        7,400          --          --
    Net proceeds from issuance of common stock                    4,579          --          --
    Purchase of shares of common stock by ESOP                     (429)         --          --
    Initial capital contribution to Cambray MHC                    (100)         --          --
                                                               --------    --------    --------
               Net cash provided by financing activities         10,227       2,866          44
                                                               --------    --------    --------

Net (decrease) increase in cash and cash equivalents               (944)      1,948        (953)
Cash and cash equivalents at beginning of period                  4,434       2,486       3,439
                                                               --------    --------    --------
Cash and cash equivalents at end of period                     $  3,490       4,434       2,486
                                                               ========    ========    ========

Supplemental disclosure of cash flow information:
    Non-cash investing activities:
       Additions to real estate owned                          $    151         114         208
    Cash paid during the year for:
       Interest                                                   2,011       1,907       1,896
       Income taxes                                                 617          25         384
                                                               ========    ========    ========
</TABLE>
See accompanying notes to consolidated financial statements.

                                               5
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


(1)    BUSINESS

       Gouverneur  Bancorp,  Inc. (the "Company") operates as a savings and loan
       holding  company.  Its only  subsidiary  is  Gouverneur  Savings and Loan
       Association (the "Bank").  The consolidated  financial statements include
       the accounts of the Company and its  wholly-owned  subsidiary,  the Bank.
       All material  intercompany accounts and transactions have been eliminated
       in the consolidation.

       The Bank is organized  under the laws of New York. The Bank is subject to
       regulation  by the Office of Thrift  Supervision  (OTS) as a savings  and
       loan  association.  The Bank's lending  activity is  concentrated  in St.
       Lawrence County and surrounding areas.


(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    BASIS OF PRESENTATION

              The  consolidated  financial  statements  have  been  prepared  in
              conformity with generally accepted accounting  principles,  and to
              general  practice  within the savings bank  industry.  The Company
              utilizes the accrual method of accounting for financial  reporting
              purposes.

       (b)    USE OF ESTIMATES

              The  preparation  of  the  consolidated  financial  statements  in
              conformity with generally accepted accounting  principles requires
              management  to make  estimates  and  assumptions  that  affect the
              reported  amounts  of assets and  liabilities  and  disclosure  of
              contingent  assets and liabilities at the date of the consolidated
              financial  statements  and the  reported  amounts of revenues  and
              expenses during the reporting period.  Actual results could differ
              from those estimates.

              Material   estimates   that  are   particularly   susceptible   to
              significant change in the near term relate to the determination of
              the  allowance  for loan  losses and the  valuation  of other real
              estate  owned  acquired  in  connection  with   foreclosures.   In
              connection with the determination of the allowance for loan losses
              and the valuation of other real estate owned,  management  obtains
              appraisals for properties.

                                       6                             (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


              Management believes that the allowance for loan losses is adequate
              and that other real  estate  owned is  recorded  at its fair value
              less an  estimate  of the  costs  to sell  the  properties.  While
              management uses available information to recognize losses on loans
              and other real estate owned,  future additions to the allowance or
              write downs of other real estate owned may be  necessary  based on
              changes in economic  conditions.  In addition,  various regulatory
              agencies,  as an  integral  part  of  their  examination  process,
              periodically  review the  Company's  allowance for loan losses and
              other real estate owned.  Such agencies may require the Company to
              recognize  additions to the allowance or write downs of other real
              estate owned based on their judgments about information  available
              to  them  at the  time  of  their  examination  which  may  not be
              currently available to management.

              A substantial  portion of the Company's  loans are secured by real
              estate located  throughout St. Lawrence County.  Accordingly,  the
              ultimate  collectibility of a substantial portion of the Company's
              loan  portfolio and the recovery of a  substantial  portion of the
              carrying  amount of other  real  estate  owned is  dependent  upon
              market conditions in these market areas.

       (c)    CASH AND CASH EQUIVALENTS

              Cash and cash equivalents  include vault cash and amounts due from
              banks representing short-term highly liquid investments.

       (d)    SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY

              The   Company   classifies   its   debt   securities   as   either
              available-for-sale  or  held-to-maturity  at the time of purchase.
              The Company does not hold any securities considered to be trading.
              Held-to-maturity  securities are those debt securities the Company
              has the ability and intent to hold until maturity.  All other debt
              securities are classified as available-for-sale. Equity securities
              are classified as available for sale.

              Available-for-sale   securities   are   recorded  at  fair  value.
              Unrealized  holding  gains  and  losses,  net of the  related  tax
              effect,  on   available-for-sale   securities  are  excluded  from
              earnings and reported as a separate component of accumulated other
              comprehensive income in shareholders' equity.
              Held-to-maturity securities are recorded at amortized cost.

              A  decline  in  the  fair  value  of  an   available-for-sale   or
              held-to-maturity  security  that is  considered  to be other  than
              temporary is charged to earnings.

              Premiums and  discounts are amortized or accreted over the life of
              the related  security as an adjustment to yield using the interest
              method.  Dividend and interest  income are recognized when earned.
              Realized  gains  and  losses  on  securities  are based on the net
              proceeds and the amortized cost of the securities  sold, using the
              specific identification method.

                                       7                             (Continued)
<PAGE>
                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       (e)    LOANS

              Loans are reported at the  principal  amount  outstanding,  net of
              deferred fees. Loan fees and certain direct  origination costs are
              netted  and are  amortized  using  the  interest  method  over the
              contractual lives of the loans.

              Interest on loans is accrued and included in income at contractual
              rates  applied  to  the  principal  outstanding.  The  accrual  of
              interest  on  loans   (including   impaired  loans)  is  generally
              discontinued and previously accrued interest is reversed when loan
              payments are 90 days or more past due or when,  by the judgment of
              management,    collectibility   becomes   uncertain.    Subsequent
              recognition  of income  occurs only to the extent that  payment is
              received.  Loans  are  returned  to an  accrual  status  when both
              principal  and  interest  are  current  or when in the  opinion of
              management,  the loans are expected to be fully  collectible as to
              principal and interest.

       (f)    ALLOWANCE FOR LOAN LOSSES

              The allowance for loan losses is  established  through a provision
              charged to operations.  The allowance is an amount that management
              believes will be adequate to absorb losses on existing  loans that
              may   become   uncollectible,   based   on   evaluations   of  the
              collectibility   of  loans   and  prior   loan  loss   experience.
              Management's  evaluation of the adequacy of the allowance for loan
              losses  is   performed   on  a  periodic   basis  and  takes  into
              consideration such factors as the historical loan loss experience,
              changes in the nature  and volume of the loan  portfolio,  overall
              portfolio  quality,  review of specific  problem loans and current
              economic  conditions  that may affect  borrowers'  ability to pay.
              Loan losses and  recoveries of loans  previously  written-off  are
              charged or credited  to the  allowance  as  incurred or  realized,
              respectively.

              The  Company  estimates  losses  on  impaired  loans  based on the
              present  value of expected  future cash flows  (discounted  at the
              loan's  effective   interest  rate)  or  the  fair  value  of  the
              underlying  collateral  if the loan is  collateral  dependent.  An
              impairment  loss  exists  if  the  recorded  investment  in a loan
              exceeds the value of the loan as  measured  by the  aforementioned
              methods.  A loan is  considered  impaired when it is probable that
              the Company will be unable to collect all amounts due according to
              the  contractual  terms  of the  loan  agreement.  Generally,  all
              commercial  mortgage  loans and  commercial  loans in a delinquent
              payment  status  (90  days  or  more  delinquent)  are  considered
              impaired.  Residential mortgage loans, consumer loans, home equity
              lines of credit and  education  loans are  evaluated  collectively
              since they are homogenous and generally  carry smaller  individual
              balances.  Impairment  losses are  included as a component  of the
              allowance for loan losses. The Company recognizes  interest income
              on impaired loans using the cash basis of income recognition. Cash
              receipts on impaired loans are generally  applied according to the
              terms of the loan agreement, or as a reduction of principal, based
              upon management judgment and the related factors discussed above.

                                       8                             (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       (g)    REAL ESTATE OWNED

              Real  estate  acquired  in  settlement  of loans is carried at the
              lower of the unpaid  loan  balance  or fair  value less  estimated
              costs to sell.  Write-downs  from the unpaid loan  balance to fair
              value at the time of foreclosure  are charged to the allowance for
              loan losses. Subsequent write-downs to fair value, net of disposal
              costs, are charged to other expenses.

       (h)    PREMISES AND EQUIPMENT

              Land is  carried  at  cost  and  buildings  and  improvements  and
              furniture  and  equipment  are  carried  at cost less  accumulated
              depreciation. Depreciation is computed on the straight-line method
              over the  estimated  useful  lives of the assets  (3-39  years for
              building and improvements; 3-7 years for furniture and equipment).

       (i)    EMPLOYEE BENEFIT PLANS

              The Company has a defined contribution 401(k) Retirement Plan (the
              Plan) for all eligible salaried employees. Employees are permitted
              to  contribute  up to 15% of  base  pay  to the  Retirement  Plan,
              subject to certain limitations. The Company contributes 3% of each
              eligible  employee's salary.  Additional Company  contributions to
              the Plan are determined annually by the Board of Directors.

              The Company sponsors a  non-contributory  Employee Stock Ownership
              Plan  (ESOP)  covering   substantially  all  employees.   Employer
              contributions  are  discretionary and there is no guarantee that a
              contribution will be made during any particular year. However, the
              Company  will  make  annual  contributions   sufficient  to  cover
              principal and interest due under the contractual terms of the ESOP
              loan  agreement.  Contributions  will  be in the  form  of cash or
              Gouverneur  Bancorp,   Inc.  securities.   The  number  of  shares
              allocable to Plan  participants is based on employee  compensation
              levels.   The  Company  accounts  for  ESOP  shares  purchased  in
              accordance  with  Statement  of  Position  No.  93-6,   EMPLOYERS'
              ACCOUNTING FOR EMPLOYEE STOCK  OWNERSHIP  PLANS.  Accordingly,  as
              shares are committed to be released to  participants,  the Company
              reports  compensation expense equal to the current market price of
              the shares and the shares  become  outstanding  for  earnings  per
              share computations.  Additional Bank contributions to the Plan are
              determined annually by the Board of Directors.

       (j)    INCOME TAXES

              Deferred tax assets and  liabilities are recognized for the future
              tax consequences attributable to differences between the financial
              statement  carrying amounts of existing assets and liabilities and
              their  respective tax bases.  Deferred tax assets and  liabilities
              are measured  using enacted tax rates expected to apply to taxable
              income  in the  years in which  those  temporary  differences  are
              expected to be  recovered  or settled.  The effect on deferred tax
              assets and  liabilities  of a change in tax rates is recognized in
              the period that includes the enactment date.

                                       9                             (Continued)
<PAGE>
                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       (k)    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

              The  Company  does not engage in the use of  derivative  financial
              instruments. The Company's off-balance sheet financial instruments
              are limited to commitments to extend credit.

       (l)    EARNINGS PER SHARE

              Basic  earnings  per share is  calculated  by dividing  net income
              available to common shareholders by the weighted average number of
              shares outstanding during the period.  Prior to the mutual holding
              company  reorganization  of the Bank,  which occurred on March 23,
              1999, earnings per share are not applicable as neither the Company
              nor the Bank had shares  outstanding.  Earnings per share reflects
              earnings from March 23, 1999,  to the end of the reporting  period
              based upon the weighted  average number of shares  outstanding for
              the period.  Unallocated shares held by the Company's ESOP are not
              included in the weighted average number of shares outstanding.

       (m)    COMPREHENSIVE INCOME

              On  October  1,  1998,  the  Company  adopted  the  provisions  of
              Statement  of  Financial  Accounting  Standards  ("SFAS") No. 130,
              REPORTING   COMPREHENSIVE   INCOME.  This  statement   establishes
              standards for reporting  and display of  comprehensive  income and
              its components.  At the Company,  comprehensive  income represents
              net income plus other comprehensive  income, which consists of the
              net change in unrealized  gains or losses on securities  available
              for sale for the period.  Accumulated other  comprehensive  income
              represents  the net  unrealized  gains  or  losses  on  securities
              available  for  sale as of the  balance  sheet  dates,  net of the
              related tax effect.  Prior year consolidated  financial statements
              have been reclassified to conform to the requirements of SFAS No.
              130.

       (n)    SEGMENT REPORTING

              Effective  October 1, 1998, the Company  adopted the provisions of
              SFAS No. 131,  DISCLOSURES  ABOUT  SEGMENTS OF AN  ENTERPRISE  AND
              RELATED INFORMATION. SFAS No. 131 requires publicly-held companies
              to   report   financial   and   other    information   about   key
              revenue-producing   segments   of  the   entity   for  which  such
              information  is available  and is utilized by the chief  operation
              decision maker. Specific information to be reported for individual
              segments  includes  profit or loss,  certain  revenue  and expense
              items and total  assets.  A  reconciliation  of segment  financial
              information  to amounts  reported in the  financial  statements is
              also  provided.   The  Company  has  determined  that  it  has  no
              reportable  segments and  therefore,  the adoption of SFAS No. 131
              caused no significant change in the Company's reporting.

                                       10                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       (o)    DERIVATIVES

              In June 1998, the Financial  Accounting  Standards  Board ("FASB")
              issued SFAS No. 133,  ACCOUNTING  FOR DERIVATIVE  INSTRUMENTS  AND
              HEDGING  ACTIVITIES,  which  establishes  accounting and reporting
              standards for derivative instruments, including certain derivative
              instruments   embedded  in  other   contracts,   and  for  hedging
              activities.

              During the second  quarter of 1999,  the FASB issued SFAS No. 137,
              ACCOUNTING FOR  DERIVATIVE  INSTRUMENTS  AND HEDGING  ACTIVITIES -
              DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. SFAS No.
              137  defers  the  effective  date of SFAS No. 133 by one year from
              fiscal  years  beginning  after  June  15,  1999 to  fiscal  years
              beginning after June 15, 2000.

       (p)    RECLASSIFICATIONS

              Whenever  necessary  prior year amounts have been  reclassified to
              conform to the current year's classifications.


(3)    SECURITIES

       Securities are summarized as follows (in thousands):

                                                SEPTEMBER 30, 1999
                                    -----------------------------------------
                                                 GROSS       GROSS
                                    AMORTIZED  UNREALIZED  UNREALIZED   FAIR
                                      COST       GAINS       LOSSES    VALUE
                                    ---------  ----------  ---------- -------
       Available-for-sale:
         U.S. Government securities  $ 4,457         --       (100)     4,357
         Mortgage-backed securities:
           FHLMC                       1,318         --        (15)     1,303
           FNMA                        4,039         --        (42)     3,997
         Municipal securities          2,412         --        (53)     2,359
         Corporate equity securities      18        869         --        887
         Mutual funds                     68         --         --         68
                                     -------    -------    -------    -------
                                     $12,312        869       (210)    12,971
                                     =======    =======    =======    =======
       Held-to-maturity:
         Mortgage-backed securities:
           FHLMC                       3,473          1        (53)     3,421
           FNMA                        1,243          2         (5)     1,240
           GNMA                        1,293         --         (7)     1,286
         Other securities                 10         --         --         10
                                     -------    -------    -------    -------
                                     $ 6,019          3        (65)     5,957
                                     =======    =======    =======    =======

                                       11                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


                                                 SEPTEMBER 30, 1998
                                     -----------------------------------------
                                                  GROSS       GROSS
                                     AMORTIZED  UNREALIZED  UNREALIZED   FAIR
                                       COST       GAINS       LOSSES    VALUE
                                     ---------  ----------  ---------- -------
       Available-for-sale:
          U.S. Government securities  $ 5,499         28         --      5,527
          Mortgage-backed securities:
              FHLMC                       256          2         --        258
          Municipal securities            256          3         --        259
          Corporate equity securities      17        871         --        888
          Mutual funds                  3,619         --         (5)     3,614
                                      -------    -------    -------    -------
                                      $ 9,647        904         (5)    10,546
                                      =======    =======    =======    =======
       Held-to-maturity:
          Mortgage-backed securities:
              FHLMC                     4,030         42         (2)     4,070
              FNMA                      1,925          9         (1)     1,933
              GNMA                      1,752         12         --      1,764
          Other securities                 10         10         --         20
                                      -------    -------    -------    -------
                                      $ 7,717         73         (3)     7,787
                                      =======    =======    =======    =======

       The following  table  presents the carrying  value and fair value of debt
       securities based on the earlier of call or maturity date at September 30,
       1999 (in thousands):

                                                         AMORTIZED       FAIR
                                                           COST          VALUE
                                                         ---------     ---------
           Available-for-sale:
               Due within one year                       $     387           386
               Due after one year through five years         3,057         3,006
               Due after five years through ten years        3,128         3,024
               Due after ten years                           5,654         5,600
                                                         ---------     ---------

                                                         $  12,226        12,016
                                                         =========     =========

           Held-to-maturity:
               Due within one year                             355           356
               Due after one year through five years         3,087         3,076
               Due after five years through ten years        1,335         1,290
               Due after ten years                           1,242         1,235
                                                         ---------     ---------

                                                         $   6,019         5,957
                                                         =========     =========

       The  amortized  cost and fair  value of  mortgage-backed  securities  are
       presented  by  contractual  maturity  in the  preceding  table.  Expected
       maturities will differ from contractual  maturities because borrowers may
       have the right to prepay obligations without prepayment penalties.

                                       12                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998



       Gross gains of  approximately  $9,000 were realized on sales of available
       for sale  securities in 1999, $0 in 1998,  and $20,000 in 1997, and gross
       losses of approximately $27,000, $0 and $43,000 were realized on sales of
       available for sale securities in 1999, 1998 and 1997, respectively.


(4)    LOANS RECEIVABLE

       Loans are summarized as follows (in thousands):
                                                          1999            1998
                                                       ----------      ---------
           First mortgage loans:
               One to four family residential          $   33,320         28,834
               Commercial                                   3,222          1,578
               Construction                                   296            124

                                                           36,838         30,536
                                                       ----------      ---------
           Other loans:
               Commercial and agricultural                  1,233            477
               Automobile                                   5,306          2,166
               Home equity                                    771            835
               Passbook                                       411            323
               Other                                        2,045          1,384
                                                       ----------      ---------
                                                            9,766          5,185
                                                       ----------      ---------

                     Total loans                           46,604         35,721

           Less:
               Net deferred (costs) fees                     (187)            30
                                                       ----------      ---------
                                                       $   46,791         35,691
                                                       ==========      =========

         Changes in the allowance for loan losses are summarized as follows (in
         thousands):

                                            1999          1998           1997
                                          --------      ---------      --------
         Balance at beginning of period   $    484            403           479
         Provision charged to
             operations                        162            130           250
         Recoveries                             34             85            40
         Loans charged off                     (60)          (134)         (366)
                                          --------      ---------      --------
         Balance at end of period         $    620            484           403
                                          ========      =========      ========

                                       13                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998



       Management  believes it has no impaired  loans at September  30, 1999 and
       1998.

       The  principal  balances  of loans  not  accruing  interest  amounted  to
       approximately  $221,000  and  $259,000  at  September  30, 1999 and 1998,
       respectively.  The interest  income foregone for  non-accruing  loans was
       approximately  $11,000,  $11,000,  and  $24,000  during  the years  ended
       September 30, 1999, 1998 and 1997, respectively.

       In the  ordinary  course of  business,  the  Company  has and  expects to
       continue to have transactions,  including  borrowings,  with its officers
       and directors.  In the opinion of management,  such  transactions were on
       substantially the same terms, including interest rates and collateral, as
       those  prevailing  at the  time of  comparable  transactions  with  other
       persons and did not involve more than a normal risk of  collectibility or
       present  any other  unfavorable  features to the  Company.  Loans to such
       borrowers at  September  30, 1999 and 1998 were  $442,000  and  $290,000,
       respectively.


(5)    PREMISES AND EQUIPMENT

       Premises and equipment are summarized as follows (in thousands):

                                                            1999          1998
                                                          ---------    ---------

           Land                                           $      30           30
           Buildings and improvements                           478          472
           Furniture and equipment                              455          405
                                                          ---------    ---------

                                                                963          907
           Less accumulated depreciation and
               amortization                                     685          619
                                                          ---------    ---------
                                                          $     278          288
                                                          =========    =========

       Depreciation  and amortization  expense amounted to $66,000,  $59,000 and
       $58,000  during  the  years  ended  September  30,  1999,  1998 and 1997,
       respectively.

                                       14                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998

(6)    ACCRUED INTEREST RECEIVABLE

       Accrued interest receivable is summarized as follows (in thousands):

                              1999           1998
                            ----------   -----------
           Loans            $      276           196
           Securities              193           150
                            ----------   -----------
                            $      469           346
                            ==========   ===========

(7)    DEPOSITS

       At  September  30,  1999  and  1998,   the  aggregate   amounts  of  time
       certificates  in  denominations  of $100,000  or more were  approximately
       $3,275,000 and $2,790,000,  respectively.  Deposit  balances in excess of
       $100,000 are not insured by the FDIC.

       Contractual maturities of time certificates are summarized as follows (in
       thousands):

                                                 SEPTEMBER 30,
                                           ------------------------
                                             1999           1998
                                           ----------   -----------

           Within one year                 $   17,265        17,207
           One through two years                4,903         4,752
           Two through three years                675         1,473
           Three through four years               214           146
                                           ----------   -----------
           Total time certificates         $   23,057        23,578
                                           ==========   ===========

       Interest expense on deposits is summarized as follows (in thousands):

                                             1999         1998          1997
                                           --------     ---------     --------
         Savings and club accounts         $    569           519          527
         Time certificates                    1,246         1,279        1,265
         NOW accounts and money
             market accounts                    116           109          104
                                           --------     ---------     --------
                                           $  1,931         1,907        1,896
                                           ========     =========     ========

                                       15                            (Continued)
<PAGE>

                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998

(8)    SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS

       The  Company  is a member of the  Federal  Home Loan  Bank  (FHLB).  As a
       member,  the Company is required to own capital  stock in the FHLB and is
       authorized  to apply for  advances  from the FHLB.  The  Company has also
       entered into repurchase agreements with the FHLB.

       At  September  30, 1999 and 1998,  securities  sold under  agreements  to
       repurchase and advances from the FHLB were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      ADVANCE AMOUNT
                                                                  ----------------------
          MATURITY DATE    INTEREST RATE      FIXED OR VARIABLE       1999        1998
          -------------    -------------      -----------------   -----------  ---------
<S>          <C>               <C>             <C>                <C>           <C>
         Securities sold under agreements to repurchase:
         -----------------------------------------------
             10/21/99          5.34%           Fixed - secured    $     1,000         --
             10/25/99          5.32%           Fixed - secured          4,900         --

         FHLB advances:
         --------------
             10/25/99          5.36%           Fixed - unsecured        1,500         --
                                                                  -----------  ---------
                                                                  $     7,400         --
                                                                  ===========  =========
</TABLE>
       The collateral  underlying securities sold under agreements to repurchase
       had a  carrying  value  and fair  value  of  $6,335,000  and  $6,325,000,
       respectively,  at September  30, 1999.  At September 30, 1999 the Company
       may borrow up to an additional  $16.0 million from the FHLB.  Under terms
       of a blanket  collateral  agreement with FHLB,  outstanding  advances are
       collateralized  by  certain   qualifying  assets  not  otherwise  pledged
       (primarily first mortgage loans). The carrying value of assets pledged as
       collateral for FHLB advances at September 30, 1999 was $1,500,000.


(9)    INCOME TAXES

       The  components  of  income  tax  expense  attributable  to  income  from
operations are (in thousands):

                             1999       1998      1997
                             -----     -----     -----
         Current:
             Federal         $ 352       356       168
             State             101        85        33
                             -----     -----     -----

                               453       441       201
                             -----     -----     -----
         Deferred:
             Federal           (18)      (53)      106
             State              (4)       (8)       28
                             -----     -----     -----

                               (22)      (61)      134
                             -----     -----     -----

                             $ 431       380       335
                             =====     =====     =====

                                       16                            (Continued)
<PAGE>

                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998



       Actual tax expense  attributable  to income before income taxes  differed
       from  "expected"  tax  expense,  computed  by applying  the U.S.  Federal
       statutory  tax rate of 34% to income  before  income tax as  follows  (in
       thousands):
                                             1999          1998         1997
                                          -----------    ---------   ----------
         Computed "expected" tax expense  $       364          340          296
         Increase (decrease) in income
             taxes resulting from:
                State taxes, net of
                   Federal tax benefits            64           51           40
                Other items, net                    3          (11)          (1)
                                          -----------    ---------   ----------
                                          $       431          380          335
                                          ===========    =========   ==========

         Effective tax rate                     40.20%       38.00%       38.42%

       The tax effects of temporary  differences  that give rise to  significant
       portions of the deferred tax assets and deferred tax  liabilities are (in
       thousands):
                                                             1999       1998
                                                           --------   ---------
           Deferred tax assets:
               Allowance for loan losses                   $    248         194
               Net deferred loan fees                            --          12
               Deferred directors fees                           22           7
               Accrued expenses                                  50          68
               Other                                             27           9
                                                           --------   ---------
                         Total gross deferred tax assets        347         290
                                                           --------   ---------

           Deferred tax liabilities:
               Accumulated depreciation on premises
                  and equipment                                  13          18
               Accrued interest receivable                      101         138
               Net deferred loan costs                           67          --
               Unrealized gains on available-for-sale
                  securities                                    269         360
               Prepaid expenses                                  16           7
                                                           --------   ---------
                         Total gross deferred tax
                            liabilities                         466         523
                                                           --------   ---------

                         Net deferred tax assets
                            (liabilities)                  $   (119)       (233)
                                                           ========   =========

                                       17                            (Continued)
<PAGE>

                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       Realization  of deferred tax assets is dependent  upon the  generation of
       future  taxable  income or the  existence of  sufficient  taxable  income
       within the carryback period. A valuation allowance is provided when it is
       more likely than not that some  portion of the  deferred  tax assets will
       not be  realized.  In  assessing  the  need  for a  valuation  allowance,
       management   considers  the  scheduled   reversal  of  the  deferred  tax
       liabilities,  the level of historical taxable income and projected future
       taxable  income  over the  periods  in which  the  temporary  differences
       comprising the deferred tax assets will be deductible.
       Management believes that no valuation allowance is necessary.

       Included in  retained  earnings at  September  30, 1999 is  approximately
       $1,274,000  representing aggregate provisions for loan losses taken under
       the Internal  Revenue  Code.  Use of these  reserves to pay  dividends in
       excess of earnings and profits or to redeem stock,  or if the institution
       fails to qualify as a bank for Federal income tax purposes,  would result
       in taxable income to the Bank.


(10)   EMPLOYEE BENEFIT PLANS

       The Bank adopted a 401(k)  Retirement  Plan (the Plan)  effective July 1,
       1997. The Plan covers all employees who are at least 21 years of age with
       one or more years of service.  The Bank's basic monthly  contribution  to
       the plan is 3% of employees salary.  Additional Bank contributions to the
       plan are determined annually by the Board of Directors.  Participants may
       make voluntary contributions to the Plan up to 15% of their compensation.

       Effective  August 1, 1997,  the Board of  Directors  of the Bank voted to
       convert the existing  profit  sharing plan into the new 401(k) plan.  The
       profit sharing plan covered substantially all of the Bank's employees and
       contributions were made at the Bank's discretion.

       In connection with  establishing the Employee Stock Ownership Plan (ESOP)
       in 1999, the ESOP borrowed  $429,000 from the Company to purchase  85,825
       common  shares  of the  Company's  stock.  The loan  shall be  repaid  in
       essentially  ten equal annual  installments  through 2009. The loan bears
       interest at a fixed rate per annum equal to the lowest  prime rate quoted
       in the WALL STREET  JOURNAL on the effective  date of the  Reorganization
       which was 7.75%.  Interest  payable is computed on the basis of a year of
       365 days and actual  days  elapsed  occurring  in the period to which the
       computation relates. At September 30, 1999, 4,291 shares were released or
       committed  to be  released  and 81,534  shares  remained  as  unallocated
       shares.  The fair value of the  unallocated  shares on September 30, 1999
       was $397,000.

       Costs charged to expense for the Company's  various  retirement  plans in
       1999, 1998 and 1997 are $59,000, $40,000 and $41,000, respectively.

                                       18                            (Continued)
<PAGE>

                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


(11)   COMMITMENTS AND CONTINGENCIES

       The Company is a party to financial  instruments with  off-balance  sheet
       risk in the normal course of business to meet the financing  needs of its
       customers.  These financial  instruments consist of commitments to extend
       credit and involve,  to varying degrees,  elements of credit,  market and
       interest   rate  risk  in  excess  of  the  amounts   recognized  in  the
       consolidated  balance sheet.  Credit risk  represents the accounting loss
       that  would  be   recognized   at  the   reporting   date  if   obligated
       counterparties  failed  completely to perform as contracted.  Market risk
       represents  risk that  future  changes in market  prices  make  financial
       instruments less valuable.

       Commitments to extend credit are agreements to lend to a customer as long
       as there is no violation of any  condition  established  in the contract.
       Commitments  generally have fixed expiration  dates or other  termination
       clauses and may require  payment of a fee. Since some of the  commitments
       are expected to expire  without  being drawn upon,  the total  commitment
       amounts  do not  necessarily  represent  future  cash  requirements.  The
       Company  evaluates  each  customer's  creditworthiness  on a case-by-case
       basis.  The amount of  collateral  obtained,  if deemed  necessary by the
       Company upon extension of credit, is based on management's  evaluation of
       the  customer's  financial  position.  Collateral  held  varies,  but may
       include real estate, accounts receivable,  inventory, property, plant and
       equipment and income-producing  commercial properties.  Substantially all
       commitments to extent credit, if exercised,  will represent loans secured
       by real estate.

                                       19                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998



       Commitments to originate fixed and adjustable rate loans at September 30,
       1999 are as follows (in thousands):

                          Fixed rate
                          7.00 - 7.99%                                 $    196
                          8.00 - 8.99%                                    1,022
                          9.00 - 9.99%                                       15
                          10.00 - 10.99%                                    137
                          11.00 - 11.99%                                     --
                                                                       --------

                      Total fixed rate                                    1,370

                      Adjustable rate                                        25
                                                                       --------
                      Total commitments to originate loans             $  1,395
                                                                       ========

       Unused  lines  of  credit,  which  includes  home  equity,  consumer  and
       commercial, amounted to $766,000 at September 30, 1999.

       The Company's  exposure to credit loss in the event of  nonperformance by
       the other  party to the  financial  instrument  for loan  commitments  is
       represented by the contractual or notional  amount of these  instruments.
       The Company  uses the same credit  policies in making  commitments  as it
       does for on-balance  sheet  instruments.  The Company controls its credit
       risk through credit approvals, limits, and monitoring procedures.

       In the normal  course of business,  there are various  outstanding  legal
       proceedings.  In the opinion of management, the aggregate amount involved
       in such proceedings is not material to the financial condition or results
       of operations of the Company.


(12)   CONCENTRATIONS OF CREDIT

       A substantial  portion of the  Company's  loans are mortgages in Northern
       New York State. Accordingly, the ultimate collectibility of a substantial
       portion of the  Company's  loan  portfolio is  susceptible  to changes in
       market  conditions  in  this  area.  A  majority  of the  Company's  loan
       portfolio is secured by real estate.

       The Company's concentrations of credit risk are disclosed in the schedule
       of loan classifications. Other than general economic risks, management is
       not aware of any material  concentrations  of credit risk to any industry
       or individual borrower.

                                       20                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


(13)   REGULATORY MATTERS

       The  Company  and the Bank are  subject  to  various  regulatory  capital
       requirements  administered by Federal banking  agencies.  Failure to meet
       the  minimum  regulatory   capital   requirements  can  initiate  certain
       mandatory,  and possible additional  discretionary actions by regulators,
       that if undertaken,  could have a direct  material  affect on the Company
       and the consolidated  financial statements.  Under the regulatory capital
       adequacy  guidelines and the regulatory  framework for prompt  corrective
       action,  the Company and the Bank must meet specific  capital  guidelines
       involving  quantitative  measures  of assets,  liabilities,  and  certain
       off-balance  sheet  items  as  calculated  under  regulatory   accounting
       practices. The Bank's capital amounts and classification under the prompt
       corrective action guidelines 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 and the Bank to maintain minimum amounts and
       ratios of: total  risk-based  capital and Tier I capital to risk-weighted
       assets  (as  defined  in the  regulations),  Tier I capital  to  adjusted
       tangible assets (as defined), and tangible capital to tangible assets (as
       defined). As discussed in greater detail below, as of September 30, 1999,
       the Company and the Bank met all of the capital adequacy  requirements to
       which it is subject.

       As of September 30, 1999, the Bank was  categorized  as well  capitalized
       under the  regulatory  framework  for  prompt  corrective  action.  To be
       categorized as well  capitalized,  the Bank has to maintain minimum total
       risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
       the table below.  There are no conditions or events since the most recent
       notification  that  management  believes  have changed the Bank's  prompt
       corrective action category.

                                       21                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       The following is a summary of the Company's and the Bank's actual capital
       amounts and ratios compared to minimum capital adequacy  requirements and
       the requirements  for  classification  as a well capitalized  institution
       under prompt corrective action provisions (in thousands):
<TABLE>
<CAPTION>
                                                                      TO BE CLASSIFIED AS
                                                                     WELL-CAPITALIZED UNDER
                                                  MINIMUM CAPITAL      PROMPT CORRECTIVE
                                    ACTUAL     ADEQUACY REQUIREMENTS   ACTION PROVISIONS
                                -------------- --------------------- ----------------------
                                AMOUNT   RATIO   AMOUNT   RATIO         AMOUNT    RATIO
                                ------   -----   ------   -----         ------    -----
<S>                             <C>       <C>    <C>        <C>         <C>        <C>
September 30, 1999
------------------
Total capital (to risk
    weighted assets):
       Company                  $16,469   46.95% $2,806   =>8.0%        $3,508   =>10.0%
       Bank                      14,638   41.73   2,806   =>8.0          3,508   =>10.0
Tier 1 Capital (to risk
    weighted assets):
       Company                   15,639   44.58   1,403   =>4.0          2,105    =>6.0
       Bank                      13,808   39.36   1,403   =>4.0          2,105    =>6.0
Core Capital (to adjusted
    tangible assets):
       Company                   15,639   22.56   2,080   =>3.0          3,467    =>5.0
       Bank                      13,808   19.79   2,093   =>3.0          3,488    =>5.0
Tangible Capital (to tangible
    assets):
       Company                   15,639   22.56   1,040   =>1.5             --       NA
       Bank                      13,808   19.79   1,046   =>1.5             --       NA

September 30, 1998
------------------
Total capital (to risk
    weighted assets) Bank       $11,250    44.1% $2,040   =>8.0%        $2,550   =>10.0%
Tier 1 Capital (to risk
    weighted assets) Bank        10,929    42.9   1,020   =>4.0          1,530    =>6.0
Core Capital (to adjusted
    tangible assets) Bank        10,929    18.7   1,753   =>3.0          2,921    =>5.0
Tangible Capital (to
    tangible assets) Bank        10,929    18.7     876   =>1.5             --       NA


                                             22                                 (Continued)
</TABLE>
<PAGE>
                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


(14)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       The  following  methods  and  assumptions  were  used by the  Company  in
       estimating fair values of financial instruments:

              CASH AND CASH  EQUIVALENTS:  The fair  values  are  considered  to
              approximate the carrying values, as reported in the balance sheet.

              SECURITIES: Fair values of securities are based on exchange quoted
              market prices,  where  available.  If quoted market prices are not
              available,  fair  values  are  based on  quoted  market  prices of
              similar instruments.

              LOANS:  For variable rate loans that reprice  frequently and loans
              due on demand  with no  significant  change in credit  risk,  fair
              values are considered to  approximate  carrying  values.  The fair
              values  for  certain  mortgage  loans  (e.g.,  one-to-four  family
              residential)  and other  consumer loans are based on quoted market
              prices of similar loans sold on the secondary market, adjusted for
              differences  in loan  characteristics.  The fair  values for other
              loans (e.g.,  commercial real estate and rental property  mortgage
              loans) are estimated using  discounted  cash flow analyses,  using
              interest  rates  currently  being  offered for loans with  similar
              terms to borrowers of similar credit rating.  The carrying  amount
              of accrued interest approximates its fair value.

              FHLB  STOCK:  The  carrying  value  of this  instrument,  which is
              redeemable at par, approximates fair value.

              OFF-BALANCE-SHEET  INSTRUMENTS:  Fair  values  for  the  Company's
              off-balance-sheet  instruments (lines of credit and commitments to
              fund  loans)  are based on fees  currently  charged  to enter into
              similar agreements, taking into account the remaining terms of the
              agreements and the counterparties' credit standing. The fair value
              of these  financial  instruments  is immaterial  and has therefore
              been excluded from the table below.

              DEPOSITS: The fair values of demand,  savings, club, NOW and money
              market accounts are, by definition, equal to the amount payable on
              demand at the reporting date (i.e., their carrying amounts).  Fair
              values for  fixed-rate  time  certificates  are estimated  using a
              discounted  cash flow  calculation  that  applies  interest  rates
              currently  being  offered  on  these  products  to a  schedule  of
              aggregated expected monthly maturities on time deposits.

                                       23                            (Continued)
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


       The estimated carrying values and fair values of the Company's  financial
       instruments are as follows (in thousands):

                                                    SEPTEMBER 30,
                                      -----------------------------------------
                                            1999                    1998
                                      -----------------     -------------------
                                      CARRYING    FAIR      CARRYING      FAIR
                                       AMOUNT     VALUE      AMOUNT       VALUE
                                      --------    -----     --------      -----
         Financial assets:
             Cash, cash equivalents  $   3,490     3,490      4,434       4,434
             Securities                 18,990    18,928     18,263      18,333
             Loans, net                 46,171    46,348     35,207      35,782
             FHLB stock                    385       385        379         379

         Financial liabilities:
             Deposits:
                Demand accounts            184       184        210         210
                Savings and club
                   accounts             15,423    15,423     17,302      17,302
                Time certificates       23,057    23,090     23,578      23,600
                NOW and money
                   market accounts       6,449     6,449      5,292       5,292

       Fair  value  estimates  are made at a  specific  point in time,  based on
       relevant  market   information   and  information   about  the  financial
       instrument.   These  estimates  are  subjective  in  nature  and  involve
       uncertainties and matters of significant judgment and, therefore,  cannot
       be determined with precision.  Changes in assumptions could significantly
       affect the estimates.


(15)   COMPREHENSIVE INCOME

       A summary of unrealized gains (losses) and reclassification  adjustments,
       net  of  tax,  of  available-for-sale  securities  for  the  years  ended
       September 30, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
                                                                1999         1998          1997
                                                             ----------   ----------    ---------
<S>                                                          <C>                 <C>          <C>
         Unrealized holding gains (losses) arising
             during the period net of tax (pre-tax
             amount of ($267,000), $265,000 and
             $242,000)                                       $     (160)         159          145

                Reclassification adjustment for losses
                   (gains) realized in net income during
                   the period, net of tax (pre-tax
                   amount of $18,000, $0 and $23,000)                11           --           14
                                                             ----------   ----------    ---------

         Other comprehensive (loss) income, net
             of tax of ($91,000), $105,000 and $109,000      $     (149)         159          159
                                                             ==========    =========    =========

                                                24                                     (Continued)
</TABLE>
<PAGE>


                     GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           September 30, 1999 and 1998


(16)   CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

       Condensed financial statements for Gouverneur Bancorp, Inc. as of and for
       the year ended September 30, 1999 are presented below.
<TABLE>
<CAPTION>
                      CONDENSED STATEMENT OF FINANCIAL CONDITION (in thousands)
<S>                                                                             <C>
                      Assets
                           Cash                                                 $     1,812
                           Investment in bank subsidiary                             14,231
                                                                                -----------
                              Total assets                                      $    16,043
                                                                                ===========

                      Liabilities                                                        14

                      Shareholders' equity
                           Common stock                                                  24
                           Additional paid-in capital                                 4,553
                           Retained earnings                                         11,470
                           Accumulated other comprehensive income                       390
                           Unallocated shares of ESOP                                  (408)
                                                                                -----------

                                 Total shareholders' equity                          16,029
                              Total liabilities and shareholders' equity        $    16,043
                                                                                ===========

                      CONDENSED STATEMENT OF INCOME (in thousands)

                      Interest income                                           $        36
                      Other operating income                                              6
                                                                                -----------

                              Income before undistributed income of
                                 subsidiary                                              42

                           Applicable income taxes                                       14
                           Equity in undistributed income of bank                       613
                                                                                -----------
                                 Net income                                     $       641
                                                                                ===========

                                 25                                  (Continued)
</TABLE>
<PAGE>


                           GOUVERNEUR BANCORP, INC. AND SUBSIDIARY

                         Notes to Consolidated Financial Statements

                                 September 30, 1999 and 1998


                      CONDENSED STATEMENT OF CASH FLOWS (in thousands)

Cash flows from operating activities:
   Net income                                                  641
    Adjustments to reconcile net income to
         cash provided by operating activities:
             Equity in undistributed income of bank           (613)
             Increase in liabilities                            14
                                                           -------

             Net cash provided by operating
                activities                                      42

Cash flows from investing activities:
    Purchase of Gouverneur Savings and
         Loan Association common stock                      (2,380)
    Funding of ESOP loan receivable                           (429)
                                                           -------

             Net cash used in investing
                activities                                  (2,809)

Cash flows from financing activities:
    Proceeds from issuance of common stock                   4,579
                                                           -------

             Net cash provided by
                financing activities                         4,579
                                                           -------

Net increase in cash and cash equivalents                    1,812
Cash and cash equivalents at beginning
    of period                                                   --
                                                           -------

Cash and cash equivalents at end of period                 $ 1,812
                                                           =======

                                       26
<PAGE>

SHAREHOLDER  INFORMATION

CORPORATE OFFICES

Gouverneur Bancorp, Inc.
42 Church Street
Gouverneur, New York 13642
(315) 287-2600

ANNUAL MEETING OF SHAREHOLDERS

The annual meeting of Gouverneur Bancorp, Inc. will be held February 15, 2000
at the Clearview Restaurant, 1180A U.S. Highway 11, Gouverneur, New York

ANNUAL REPORT ON FORM 10-K

For the 1999 fiscal year, Gouverneur Bancorp., Inc. will file an Annual Report
on Form 10-K with the Securities and Exchange Commission. The Form 10-K is
available on the World Wide Web as part of the SEC EDGAR database at
www.sec.gov. Shareholders may obtain one free of charge by writing to Gouverneur
Bancorp, Inc., 42 Church Street, Gouverneur, New York 13642, Attention Corporate
Secretary.

STOCK TRANSFER AGENT & REGISTRAR

Shareholders wishing to change name, address or ownership of stock, or to report
lost certificates or to consolidate accounts should contact the Company's stock
registrar and transfer agent directly at:

         Registrar & Transfer Company
         10 Commerce Drive
         Cranford, New Jersey 07016-3572
         (800) 368-5948

COUNSEL

Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York 10601

INDEPENDENT AUDITORS

KPMG LLP
113 South Salina Street
Syracuse, New York 13202


MARKET INFORMATION FOR COMMON STOCK

The Common Stock of Gouverneur Bancorp, Inc. trades on the American Stock
Exchange under the symbol "GOV".

At December 15, 1999, there were approximately350 shareholders of record not
including the number of persons or entities holding stock in nominee or street
names through various brokers and banks.

Gouverneur Bancorp, Inc. common stock was issued at $5.00 per share in
connection with the Company's initial public offering completed on March 23,
1999. The following table shows the range of high and low sale prices for each
full quarterly period since the Company's common stock began trading on March
24,1999.

Quarter Ended                       High             Low
-------------                       ----             ---
June 30, 1999                       $5.000         $4.063
September 30, 1999                  $4.875         $4.438

DIRECTORS AND OFFICERS

GOUVERNEUR BANCORP, INC.

BOARD OF DIRECTORS

Richard F. Bennett: PRESIDENT & CHIEF EXECUTIVE OFFICER, GOUVERNEUR BANCORP,INC.

Charles E Graves: RETIRED PRESIDENT & CHIEF EXECUTIVE OFFICER, GOUVERNEUR
SAVINGS & LOAN ASSOCIATION

Richard E. Jones: PRINCIPAL, J&H FEED & FARM STORE

Frank Langevin: RETIRED CONTRACTOR

Robert J. Leader: PRINCIPAL, CASE & LEADER LLP ATTORNEYS AT LAW

Timothy J. Monroe:  VETERINARIAN, PRESIDENT, NORTHLAND VETERINARY HOSPITAL

Joseph C. Pistolesi:  OWNER, CLEARVIEW MOTEL AND RESTAURANT

Larry A. Straw:  PROJECT ENGINEER, CIVES, INC., STEEL FABRICATOR

DIRECTORS OF GOUVERNEUR BANCORP, INC. ALSO SERVE AS DIRECTORS OF GOUVERNEUR
SAVINGS & LOAN ASSOCIATION

OFFICERS

Richard F. Bennett: PRESIDENT & CHIEF EXECUTIVE OFFICER

Robert Twyman: CHIEF FINANCIAL OFFICER

                                       27