UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

[]    TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15 (D) OF THE  SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM          TO
                                                         ----------  -----------

                         COMMISSION FILE NUMBER: 0-24849

                           FIRST NILES FINANCIAL, INC.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

                   Delaware                                      34-1870418
----------------------------------------------               -------------------
 (State or other jurisdiction of incorporation                (I.R.S. Employer
              or organization)                               Identification No.)

  55 North Main Street, Niles,  Ohio                              44446-5097
--------------------------------------------------------------------------------
(Address of principal executive offices)                          (Zip Code)

   Registrant's telephone number, including area code:        (330) 652-2539
                                                      --------------------------

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      NONE
                                      ----
           Securities Registered Pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                     ---------------------------------------
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter  period that the  registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
YES  X.    NO ___.

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

State the issuer's revenues for its most recent fiscal year: $5.7 million.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant,  computed by  reference  to the average of the closing bid and asked
price of such  stock on the  Nasdaq  System  as of March  25,  1999,  was  $17.8
million. (The exclusion from such amount of the market value of the shares owned
by any  person  shall not be deemed an  admission  by the  registrant  that such
person is an affiliate of the registrant.)

As of March 25, 1999, there were issued and outstanding  1,754,411 shares of the
Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

PART II of Form 10-KSB -- Portions of the Annual Report to Shareholders  for the
fiscal year ended September 30, 1998.

PART III of Form 10-K -- Portions of the Proxy  Statement for the Annual Meeting
of Shareholders to be held during April 1999.

          Transitional Small Business Disclosure Format: Yes ____; No X


<PAGE>



                           FORWARD-LOOKING STATEMENTS

         First Niles  Financial,  Inc., and its  wholly-owned  subsidiary,  Home
Federal  Savings  and Loan  Association  of  Niles,  may from  time to time make
written or oral "forward-looking statements",  including statements contained in
its filings with the Securities and Exchange Commission.  These  forward-looking
statements may be included in this Annual Report on Form 10-KSB and the exhibits
attached  to  it,  in  First  Niles'  reports  to  stockholders   and  in  other
communications  by the  company,  which are made in good faith by us pursuant to
the "safe harbor" provisions of the Private Securities  Litigation Reform Act of
1995.

         These forward-looking  statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are  subject to  significant  risks and  uncertainties,  and are subject to
change based on various factors, some of which are beyond our control. The words
"may",  "could",  "should",   "would",  "believe",   "anticipate",   "estimate",
"expect",  "intend",  "plan" and similar  expressions  are  intended to identify
forward-looking  statements.  The following factors,  among others,  could cause
First Niles' and Home Federal's financial  performance to differ materially from
the plans, objectives,  expectations,  estimates and intentions expressed in the
forward-looking statements:

      o     the  strength  of the  United  States  economy  in  general  and the
            strength of the local economies in which we conduct operations;
      o     the effects of, and changes in, trade,  monetary and fiscal policies
            and laws,  including  interest rate policies of the Federal  Reserve
            Board;
      o     inflation, interest rate, market and monetary fluctuations;
      o     the timely  development  of and  acceptance  of our new products and
            services  and the  perceived  overall  value of these  products  and
            services  by users,  including  the  features,  pricing  and quality
            compared to competitors' products and services;
      o     the  willingness  of users to substitute  competitors'  products and
            services for our products and services;
      o     our  success in gaining  regulatory  approval  of our  products  and
            services, when required;
      o     the impact of changes in financial  services' laws and  regulations,
            including laws concerning taxes, banking, securities and insurance;
      o     technological changes;
      o     acquisitions;
      o     changes in consumer spending and saving habits; and
      o     our success at managing the risks involved in the foregoing.

         The  list of  important  factors  stated  above  is not  exclusive.  We
incorporate  by reference  those factors  included in First Niles'  Registration
Statement on Form SB-2 (Reg. No.  333-58883).  We do not undertake to update any
forward-looking  statement,  whether written or oral, that may be made from time
to time by or on behalf of First Niles or Home Federal.




                                        2

<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         First Niles Financial, Inc., a Delaware corporation, was formed in July
1998 to act as the holding company for Home Federal Savings and Loan Association
of Niles upon the completion of Home Federal's  conversion  from mutual to stock
form.  First Niles  received  approval from the Office of Thrift  Supervision to
acquire  all  of the  common  stock  of  Home  Federal  to be  outstanding  upon
completion  of the  conversion  from mutual to stock form.  The  conversion  was
completed on October 26, 1998.  All  references  to First Niles or Home Federal,
unless otherwise indicated, on or before October 26, 1998, refer to Home Federal
before its conversion from mutual to stock form.  References in this Form 10-KSB
to "we", "us", and "our" refer to First Niles and/or Home Federal as the context
requires.

         The business and management of First Niles consists of the business and
management of Home Federal. At December 31, 1998, we had $86.7 million of assets
and  stockholders'  equity of $29.9  million  (or 34.50% of total  assets).  Our
common stock is traded on The Nasdaq SmallCap Market under the symbol "FNFI".

         Home  Federal  is  a  federally  chartered  stock  savings  association
headquartered in Niles,  Ohio. Its deposits are insured up to applicable  limits
by the Federal Deposit Insurance  Corporation (the "FDIC") and are backed by the
full faith and credit of the United States.

         Our principal  business is attracting  retail deposits from the general
public and investing those funds primarily in permanent and  construction  loans
secured by first mortgages on owner-occupied, one- to four-family residences. We
also  originate,  to a  lesser  extent,  loans  secured  by first  mortgages  on
non-owner-occupied  one- to four-family  residences,  permanent and construction
commercial and multi-family real estate loans, and consumer loans.  Excess funds
are generally invested in investment  securities and mortgage-backed and related
securities.

         Our profitability  depends  primarily on net interest income,  which is
the difference between interest and dividend income on interest-earning  assets,
and interest expense on interest-bearing  liabilities.  Interest-earning  assets
include principally loans,  investment  securities,  mortgage-backed and related
securities and  interest-earning  deposits in other  institutions.  Net interest
income is  dependent  upon the level of  interest  rates and the extent to which
such  rates are  changing.  Our  profitability  is also  dependent,  to a lesser
extent,  on  the  level  of  noninterest  income,  provision  for  loan  losses,
noninterest  expense and income taxes.  Our  operations  and  profitability  are
subject to changes in interest rates,  applicable statutes and regulations,  and
general economic conditions, as well as other factors beyond our control.

         Our offices are located at 55 North Main Street, Niles, Ohio 44446-5097
and our telephone number is (330) 652-2539.


                                        3

<PAGE>



         For information  relating to our year 2000  preparedness,  costs, risks
and  contingency  plans,  see  the  discussion   contained  under  "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Issue" in the Annual Report attached as Exhibit 13 to this Annual Report on
Form 10-KSB.

MARKET AREA

         Our  primary  market area is Niles,  Ohio.  Our  primary  lending  area
consists  generally  of the area  within a 30 mile  radius of the City of Niles.
Although we may grant loans  outside of this 30 mile radius upon the approval of
our Board of Directors, we do not grant loans outside the State of Ohio.

         Trumbull County,  where Home Federal is located,  consists primarily of
suburban and rural  communities with  manufacturing  and wholesale  distribution
activities  serving as the basis of the local  economy.  Major  employers in the
area include General Motors Corp. and WCI Steel, Inc.

         Our market area has experienced a higher current unemployment rate than
Ohio  and  the  United  States.  In  December  1998,   Trumbull  County  had  an
unemployment rate of 5.4%, compared to an unemployment rate of 3.9% in Ohio, and
4.3 % in the United  States.  Furthermore,  the population of Niles has remained
relatively  stagnant  from 1990 to 1998,  and is expected  to remain  relatively
constant for the foreseeable future.

         Our market  area  comprises  a broad  range of income  and  educational
levels and employment  sectors.  In both Niles and Trumbull County, the services
and manufacturing  sectors represent  approximately equal shares of the business
and  employment  base,  followed by the  wholesale/retail  sector.  The level of
financial  competition in both Niles and Trumbull County is strong and dominated
by  commercial  banks,   with  financial   institutions  of  varying  sizes  and
characteristics  operating  in  and  around  our  market  area.  These  economic
conditions  and strong  competition  have also  resulted in reduced  loan demand
which, in turn, has resulted in a high  concentration  of investment  securities
and  mortgage-backed and related securities in our portfolio compared to typical
savings  institutions.  In the event  current  economic  and  market  conditions
persist or worsen, and loan demand remains weak, no assurances can be given that
we will be able to maintain or increase our mortgage loan portfolio, which could
adversely affect our operations and financial results.

LENDING ACTIVITIES

         GENERAL.  Our  primary  lending  activity is the  origination  of loans
secured by first  mortgages on one- to four-family  residential  properties.  We
also make  permanent  and  construction  loans on  multi-family  and  commercial
properties,  and a limited number of consumer and commercial business loans. Our
mortgage  loans carry either a fixed or an adjustable  interest  rate.  Mortgage
loans are generally long-term and amortize on a monthly basis with principal and
interest due each month.  At December 31, 1998, our net loan  portfolio  totaled
$36.1 million, which constituted 41.7% of our total assets.


                                        4

<PAGE>



         Management  originates all loans,  which are subject to ratification by
the Board of Directors.  Commercial real estate loans and multi-family loans are
generally reviewed by the Board before we extend a lending commitment. Unless we
are aware of factors that may lead to an environmental  concern, we generally do
not  require  any  environmental  study  at  the  time  a loan  is  made.  If an
environmental  problem were discovered to exist after a loan has been originated
and the loan has  become  delinquent,  we may  choose  not to  foreclose  on the
property if the  potential  environmental  liability  would  render  foreclosure
imprudent.

         Management is responsible for presenting to the Board information about
the  credit-worthiness  of a borrower  and the  estimated  value of the  subject
property.  Information  relating to  credit-worthiness  of a borrower  generally
consists of a summary of the borrower's credit history,  employment,  employment
stability,  net worth and income.  The  estimated  value of the property must be
supported by an  appraisal  report  prepared in  accordance  with our  appraisal
policy.

         At December 31, 1998,  the maximum amount which we could have loaned to
any one borrower and the  borrower's  related  entities was  approximately  $3.3
million.  At December  31,  1998,  we had no loans or groups of loans to related
borrowers with outstanding  balances in excess of this amount. At that date, our
largest  lending  relationship  to a  single  borrower  or a  group  of  related
borrowers  consisted of nine loans totaling $2.3 million of which  approximately
$29,000 was unfunded at December 31, 1998. Of the nine loans, two loans were for
the  construction  of a  residential  housing  development,  four loans were for
individual home  construction,  and three loans were secured by apartment rental
units and commercial  office space.  The second largest lending  relationship at
December 31, 1998, consisted of two purchased  participation loans totaling $1.7
million  for  the   construction  of  an  apartment   complex  and  a  completed
warehouse/office  complex  in  Columbus,  Ohio.  Approximately  $191,000  of the
$756,000  apartment  complex  participation  construction  loan was  unfunded at
December 31, 1998. The third largest lending  relationship at December 31, 1998,
consisted of seven loans totaling $1.1 million. Five of the loans are secured by
one- to  four-family  residences  and two  loans  are  for  the  development  of
residential real estate.  Each of the foregoing loans was current and performing
in accordance with its terms at December 31, 1998.

         Our next largest  lending  relationship  at December 31, 1998,  totaled
$1.1 million and consisted of four loans secured by commercial  and  residential
real estate. At December 31, 1998, the largest of the four loans, with a balance
of $648,000, was nonperforming. See "- Asset Quality Nonperforming Assets."

         We had 13  other  lending  relationships  which  exceeded  $400,000  at
December 31, 1998.  As of that date,  all of these  lending  relationships  were
current and performing  generally in accordance with their loan terms except for
one lending relationship that was approximately 80 days delinquent. This lending
relationship  consisted of 18 loans  secured  primarily by single  family rental
units totaling $557,000.





                                        5

<PAGE>



         LOAN PORTFOLIO COMPOSITION.  The following table sets forth information
concerning  the  composition  of our loan  portfolio  in dollar  amounts  and in
percentages as of the dates  indicated.  The dollar amounts and percentages were
calculated before  deductions for loans in process,  deferred fees and discounts
and allowances for losses.


                                                      December 31,
                                        ----------------------------------------
                                               1998                  1997
                                        ------------------    ------------------
                                         Amount    Percent     Amount    Percent
                                        -------    -------    -------    -------
                                                  (Dollars in Thousands)
REAL ESTATE LOANS:
------------------
 One- to four-family ...............    $25,474     66.81%    $25,634     64.29%
 Commercial ........................      5,042     13.23       4,603     11.54
 Multi-family ......................      1,298      3.40       4,143     10.39
 Construction or development .......      5,104     13.39       4,231     10.61
                                        -------    ------     -------    ------
     Total real estate loans .......     36,918     96.83      38,611     96.83
                                        -------    ------     -------    ------

OTHER LOANS:
------------
 Consumer Loans:
  Home equity ......................        915      2.40         926      2.32
  Deposit account ..................         82      0.21          84      0.21
                                        -------    ------     -------    ------
     Total consumer loans ..........        997      2.61       1,010      2.53
 Commercial business loans .........        213      0.56         255      0.64
                                        -------    ------     -------    ------
     Total other loans .............      1,210      3.17       1,265      3.17
                                        -------    ------     -------    ------
     Total loans ...................     38,128    100.00%     39,876    100.00%
                                                   ======                ======

LESS:
-----
 Loans in process...................      1,212                 2,278
 Allowance for losses...............        784                   854
                                        -------               -------
                                          1,996                 3,132
                                        -------               -------
 Total loans receivable, net........    $36,132               $36,744
                                        =======               =======



                                        6

<PAGE>



         The  following  table shows the  composition  of our loan  portfolio by
fixed- and adjustable-rate at the dates indicated.


                                                        December 31,
                                           -------------------------------------
                                                 1998                1997
                                           -----------------   -----------------
                                            Amount   Percent    Amount   Percent
                                           -------   -------   -------   -------
                                                   (Dollars in Thousands)
FIXED-RATE LOANS:
-----------------
 Real estate:
  One- to four-family ..................   $13,710    35.96%   $11,997    30.09%
  Commercial ...........................       318     0.83      1,430     3.59
  Multi-family .........................       188     0.49        289     0.72
  Construction or development ..........     3,698     9.70      1,776     4.45
                                           -------   ------    -------   ------
     Total real estate loans ...........    17,914    46.98     15,492    38.85
                                           -------   ------    -------   ------

 Consumer ..............................       997     2.61      1,010     2.53
 Commercial business ...................       213     0.56        255     0.64
                                           -------   ------    -------   ------
                                             1,210     3.17      1,265     3.17
                                           -------   ------    -------   ------
     Total fixed-rate loans ............    19,124    50.16     16,757    42.02

ADJUSTABLE-RATE LOANS:
----------------------
 Real estate:
  One- to four-family ..................    11,764    30.85     13,637    34.20
  Commercial ...........................     4,724    12.39      3,173     7.96
  Multi-family .........................     1,110     2.91      3,854     9.66
  Construction or development ..........     1,406     3.69      2,455     6.16
                                           -------   ------    -------   ------
     Total real estate loans ...........    19,004    49.84     23,119    57.98
 Consumer ..............................        --       --         --       --
                                           -------   ------    -------   ------
     Total adjustable-rate loans .......    19,004    49.84     23,119    57.98
                                           -------   ------    -------   ------
     Total loans .......................    38,128   100.00%    39,876   100.00%
                                                     ======              ======

LESS:
-----
 Loans in process.......................     1,212               2,278
 Deferred fees and discounts............        --                  --
 Allowance for loan losses..............       784                 854
                                           -------             -------
                                             1,996               3,132
                                           -------             -------
    Total loans receivable, net.........   $36,132             $36,744
                                           =======             =======



                                        7

<PAGE>



         The following schedule illustrates the contractual maturity of our real
estate construction and commercial business loan portfolios at December 31, 1998
before net items.  Mortgage loans that have adjustable or renegotiable  interest
rates are shown as maturing in the period  during which the contract is due. The
schedule does not reflect the effects of possible  prepayments or enforcement of
due-on-sale clauses.

<TABLE>
<CAPTION>

                      Real Estate Construction           Commercial
                          or Development                  Business                     Total
                      ------------------------     ---------------------       ---------------------
                                   Weighted                     Weighted                    Weighted
                                   Average                      Average                     Average
                      Amount         Rate          Amount         Rate         Amount         Rate
                      ------         ----          ------         ----         ------         ----
                                                   (Dollars in Thousands)
Due During Periods
Ending December 31,
-------------------
<S>                     <C>          <C>               <C>        <C>             <C>          <C>
1999(1) .............   734          8.50              2          7.50            736          8.50
2000 to 2003......... 2,047          8.24             38          8.35          2,085          8.24
After 2003........... 2,323          8.21            173          8.13          2,496          8.20
                      -----          ----          -----          ----          -----          ----
     Totals           5,104          8.26            213          8.17          5,317          8.26
</TABLE>
-----------------------
(1) Includes demand loans,  non-accrual  loans,  loans having no stated maturity
and overdraft loans.

         The total  amount of loans in the above  table due after  December  31,
1999 which have fixed interest rates is $3.2 million,  while the total amount of
loans due after such date which have  floating or adjustable  interest  rates is
$1.4 million.

         ONE- TO FOUR-FAMILY  RESIDENTIAL REAL ESTATE LENDING.  Residential loan
originations  are  generated  by our  marketing  efforts,  present  and  walk-in
customers,  and referrals from real estate brokers and builders. We have focused
our lending  efforts  primarily  on the  origination  of loans  secured by first
mortgages on owner-occupied,  one- to four-family residences in our market area.
At December 31, 1998,  one- to  four-family  residential  mortgage loans totaled
$25.5 million, or 66.8% of our gross loan portfolio.

         Home Federal currently originates one- to four-family mortgage loans on
either a fixed or adjustable  basis,  as consumer demand  dictates.  The pricing
strategy for fixed-rate  mortgage loans revolves  around setting  interest rates
that are competitive  with other local financial  institutions.  Adjustable-rate
mortgage loans are offered with either one-year or three-year repricing periods.
Due to their wide availability and market rate sensitivity, we currently use the
one-year and three-year U.S.  Treasury  Security  Constants plus a margin of 250
basis  points for pricing of  adjustable-rate  mortgage  loans.  During the year
ended  December  31, 1998,  we  originated  $2.0 million of one- to  four-family
adjustable-rate  mortgage  loans  and  $3.6  million  of  one-  to  four-family,
fixed-rate   mortgage  loans.   We  have  not  sold  any  mortgage  loans.   See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Asset and Liability Management;  Market Risk Analysis"in the Annual
Report attached as Exhibit 13 to this Annual Report on Form 10-KSB.


                                        8

<PAGE>



         Fixed-rate loans secured by one- to four-family residences have maximum
maturities  of 30 years,  and are fully  amortizing,  with payments due monthly.
These loans normally remain outstanding,  however,  for a substantially  shorter
period of time  because of  refinancing  and other  prepayments.  A  significant
change in the current level of interest  rates could alter the average life of a
residential loan in our portfolio  considerably.  Our one- to four-family  loans
are  not  assumable,  do not  contain  prepayment  penalties  and do not  permit
negative  amortization of principal.  Our real estate loans generally  contain a
"due on sale" clause allowing us to declare the unpaid principal balance due and
payable upon the sale of the security property.

         Our one- to four-family residential  adjustable-rate mortgage loans are
fully amortizing with contractual maturities of up to 30 years, and payments due
monthly.  Our  adjustable-rate  mortgage loans provide for specified minimum and
maximum  interest  rates.  As a consequence of using caps, the interest rates on
these  loans  may  not  be  as  rate  sensitive  as  our  cost  of  funds.   Our
adjustable-rate  mortgage loans are generally not  convertible  into  fixed-rate
loans.

         Adjustable-rate  mortgage loans  generally pose different  credit risks
than fixed-rate loans,  primarily because as interest rates rise, the borrower's
payment  rises,  and thus,  increases  the  potential  for default.  We have not
experienced  significant  delinquencies  concerning  these  loans.  See "- Asset
Quality -- Non-Performing Assets" and "-Asset Quality -- Classified Assets."

         As  mentioned  above,  we  have  primarily   concentrated  our  lending
activities on the origination of owner-occupied, one- to four-family residences.
In recent years, however, loans secured by nonowner occupied, one-to four-family
residences  have accounted for a growing share of total loan volume.  Generally,
these loans are underwritten using the same criteria as owner-occupied,  one- to
four-family  residential loans, but typically are originated at higher rates and
lower loan-to-value ratios than owner-occupied loans.

         We  generally  underwrite  our one- to  four-family  loans based on the
applicant's  employment,  credit  history,  and  appraised  value of the subject
property.  Presently,  we lend up to 90% of the lesser of the appraised value or
purchase price for one- to four-family  loans.  Properties  securing our one- to
four-family  loans are  appraised by  independent  fee  appraisers  approved and
qualified  by our Board of  Directors.  We  generally  require our  borrowers to
obtain title insurance and fire, property and flood insurance,  if necessary, in
an amount not less than the value of the security property.

         COMMERCIAL  AND  MULTI-FAMILY  REAL ESTATE  LENDING.  We are engaged in
commercial  and  multi-family  real  estate  lending.  These  loans are  secured
primarily  by small retail  establishments,  small  office  buildings  and other
non-residential  and  residential  properties  located  in our market  area.  At
December 31, 1998, commercial real estate loans totaled $5.0 million or 13.2% of
our gross loan portfolio and multi-family real estate loans totaled $1.3 million
or 3.4% of our gross loan portfolio.

         Our loans  secured  by  commercial  and  multi-family  real  estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate  loans is based on a variety  of  indices,  which are  generally
determined  upon  negotiation  with the  borrower.  Loan-to-value  ratios on our
commercial and  multi-family  loans typically do not exceed 80% of the appraised
value of the property  securing the loan. These loans typically  require monthly
payments and have maximum

                                        9

<PAGE>



maturities of 30 years.  While maximum  maturities may extend to 30 years, loans
frequently have shorter maturities that generally range from 10 to 15 years.

         Loans secured by commercial  and  multi-family  real estate are granted
based on the  income  producing  potential  of the  property  and the  financial
strength of the borrower.  The net operating income, which is the income derived
from  the  operation  of the  property  less  all  operating  expenses,  must be
sufficient to cover the payments  related to the outstanding  debt. We generally
require  personal  guaranties  of the  borrowers  in  addition  to the  security
property  as  collateral  for such  loans.  Appraisals  on  properties  securing
commercial and  multi-family  real estate loans are performed by independent fee
appraisers  approved  by our  Board  of  Directors.  See "-  Loan  Originations,
Purchases and Repayments."

         Loans secured by commercial and multi-family real estate properties are
generally  larger  and  involve  a greater  degree  of credit  risk than one- to
four-family  residential  mortgage  loans because they  typically  involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by commercial and  multi-family  real estate  properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse  conditions in the real estate market or
the  economy.  If the cash flow from the  project  is  reduced,  the  borrower's
ability  to repay  the loan may be  impaired.  For  example,  cash flow from the
project is reduced if leases are not obtained or renewed.  See "- Asset  Quality
-- Nonperforming Loans."

         CONSTRUCTION  AND  DEVELOPMENT   LENDING.   We  originate   residential
construction  loans to  individuals as well as loans secured by building lots or
raw land held for  development.  Presently,  all of these  loans are  secured by
property  located  within our market area.  At December  31,  1998,  we had $5.1
million in construction and development loans outstanding, representing 13.4% of
our gross loan  portfolio.  At December 31, 1998,  our two largest  construction
loans or lending relationships  consisted of participation  interests secured by
two  separate  apartment  complexes  located  in  Columbus,  Ohio.  One  of  the
participation  interests  totaled  $1.0  million,  with  approximately  $601,000
unfunded at December 31, 1998. The other participation interest totaled $756,000
with $191,000 unfunded at December 31, 1998.

         Construction  loans to individuals for their  residences  generally are
structured  to be converted to  permanent  loans at the end of the  construction
phase, which typically runs six months.  These construction loans have rates and
terms that match the one- to  four-family  loans then  offered by Home  Federal,
except that during the construction phase the borrower pays only interest on the
loan. Residential  construction loans are generally underwritten pursuant to the
same guidelines used for originating  permanent  residential  loans. At December
31, 1998, $350,000 of our construction loans were to borrowers intending to live
in the properties upon completion of construction.

         Loans  secured by building  lots or raw land held for  development  are
generally  granted  with terms of up to five years and are  available at a fixed
interest  rate.  Payments on loans  secured by building lots are due monthly and
amortized  on a 20-year  basis,  resulting  in a balloon  payment  at  maturity.
Payments on raw land held for  development  are due  monthly,  and are  interest
only.  Loans  secured by building lots or raw land for  development  are granted
based on both the financial strength

                                       10

<PAGE>



of the borrower and the value of the underlying property.  At December 31, 1998,
we had $1.9 million of loans secured by building lots and raw land.

         Construction loans are obtained  principally through continued business
from  builders  who have  previously  borrowed  from  Home  Federal,  as well as
referrals from existing and walk-in customers.  The application process includes
submission  of  accurate  plans,  specifications  and costs of the project to be
constructed. These items are used as a basis to determine the appraised value of
the subject  property.  Loans are based on the lesser of current appraised value
and/or the cost of construction  (land plus building).  We also conduct periodic
inspections of the construction project being financed.

         There are uncertainties  inherent in estimating  construction costs and
the  market for the  project  upon  completion.  Accordingly,  it is  relatively
difficult  to evaluate  accurately  the total loan funds  required to complete a
project,  the related  loan-to-value ratios and the likelihood of success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed  above  regarding  commercial real estate loans
and tend to be more  sensitive to general  economic  conditions  than many other
types of loans.

         OTHER  LENDING.  We also  originate a nominal  amount of  consumer  and
commercial business loans,  generally as an accommodation to our customers.  Our
consumer loan portfolio  consists  almost  entirely of personal loans secured by
first or second mortgages on real estate. These loans are offered at fixed rates
of interest with terms not exceeding ten years.

LOAN ORIGINATIONS, PURCHASES AND REPAYMENTS

         We originate loans through our marketing efforts,  existing and walk-in
customers  and  referrals  from  real  estate  brokers  and  builders.  While we
originate both  adjustable-rate  and fixed-rate  loans, our ability to originate
loans is dependent  upon the relative  customer  demand for loans in our market.
Demand is affected  by local  competition  and the  interest  rate  environment.
During  the last  several  years,  our  dollar  volume  of  fixed-rate,  one- to
four-family   loans  has  exceeded  the  dollar  volume  of  the  same  type  of
adjustable-rate  loans. Although our primary business is the origination of one-
to four-family  mortgage loans,  competition  from other financial  institutions
continues to limit the volume of loans we have been able to originate  and place
in our portfolio.  As a result, we have purchased  mortgage loans and investment
and mortgage-backed  and related securities to supplement our portfolios.  We do
not sell loans and our loans are not  originated  according to secondary  market
guidelines.  Furthermore,  during the past few years,  like many other financial
institutions,   we  have  experienced   significant  prepayments  on  loans  and
mortgage-backed  and related  securities  due to the sustained low interest rate
environment prevailing in the United States.

         In  periods  of  economic   uncertainty,   the  ability  of   financial
institutions,  including Home Federal, to originate large dollar volumes of real
estate  loans may be  substantially  reduced  or  restricted,  with a  resultant
decrease in interest income.


                                       11

<PAGE>



         The following table shows our loan origination,  purchase and repayment
activities for the periods indicated.


                                                        Year Ended December 31,
                                                    ----------------------------
                                                       1998               1997
                                                    ---------          ---------
                                                            (In Thousands)
ORIGINATIONS BY TYPE:
---------------------
 Adjustable rate:
 Real estate - one- to four-family .......          $  2,000           $  2,876
                    - commercial .........             1,188                360
                    - multi-family .......                --                 --
                                                    --------           --------
         Total adjustable-rate ...........             3,188              3,236
                                                    --------           --------
 Fixed rate:
 Real estate - one- to four-family .......             3,555              3,188
                    - commercial .........                --                 --
                    - multi-family .......               675                 --
                    - land and development               371                 95
 Non-real estate - consumer ..............               575                462
                    - commercial business                 62                 56
                                                    --------           --------
         Total fixed-rate ................             5,238              3,801
                                                    --------           --------
         Total loans originated ..........             8,426              7,037
                                                    --------           --------

PURCHASES:
----------
 Real estate - one- to four-family .......                --              1,000
                    - commercial .........                --                900
                    - multi-family .......             1,000              1,000
                    - land and development               525                 --
                                                    --------           --------
         Total loans purchased ...........             1,525              2,900
 Mortgage-backed and related securities ..             9,541              7,872
                                                    --------           --------
         Total purchased .................            11,066             10,772
                                                    --------           --------

REPAYMENTS:
-----------
 Principal repayments ....................            20,223             13,645
                                                    --------           --------
         Total reductions ................            20,223             13,645
 Increase (decrease) in other items, net .               (37)              (668)
                                                    --------           --------
         Net increase (decrease) .........          $   (540)          $  3,496
                                                    ========           ========

ASSET QUALITY

         When a  borrower  fails to make a payment  on a loan on or  before  the
default  date,  the loan is  considered  30 days  past  due.  At that  time,  we
generally send out a delinquent notice to the borrower.  All delinquent accounts
are reviewed by our collection officer, and at his or her discretion, we attempt
to cause the  delinquency  to be cured by contacting  the borrower.  If the loan
becomes  60 days  delinquent,  the  collection  officer  will  generally  send a
personal letter to the borrower  requesting  payment of the delinquent amount in
full, or the establishment of an acceptable

                                       12

<PAGE>



repayment plan to bring the loan current within 90 days. If the account  becomes
90 days delinquent,  and an acceptable  repayment plan has not been agreed upon,
the collection  officer will generally refer the account to legal counsel,  with
instructions to prepare a notice of intent to foreclose. The notice of intent to
foreclose allows the borrower up to 30 days to bring the account current. During
this 30 day period,  the collection  officer may accept a written repayment plan
from the borrower which would bring the account current within 90 days. Once the
loan becomes 120 days delinquent,  and an acceptable repayment plan has not been
agreed upon, the collection  officer,  after receiving consent from our Board of
Directors,  will turn over the account to our legal counsel with instructions to
initiate foreclosure.

         DELINQUENT LOANS. The following table sets forth our loan delinquencies
by type, number, amount and percentage of type at December 31, 1998.

<TABLE>
<CAPTION>

                                                Loans Delinquent For:
                             -----------------------------------------------------------
                                        30-89 Days                 90 Days and Over              Total Delinquent Loans
                             ---------------------------     ---------------------------      ---------------------------
                                                Percent                         Percent                          Percent
                                                of Loan                         of Loan                          of Loan
                             Number   Amount    Category     Number   Amount    Category      Number   Amount    Category
                             ------   ------    --------     ------   ------    --------      ------   ------    --------
                                                                (Dollars in Thousands)
<S>                            <C>    <C>         <C>           <C>   <C>         <C>           <C>    <C>         <C>
Real Estate:
   One- to four-family         45     $1,388      5.45%         8     $  206      0.81%         53     $1,594      6.26%
   Commercial ........          1         35      0.69         --         --        --           1         35      0.69
   Multi-family ......         --         --        --         --         --        --          --         --        --
   Construction or
     development .....          2        182      3.57          2        743     14.55           4        925     18.12
Consumer .............          1          3      0.30          1          6      0.60           2          9      0.90
Commercial ...........          2         50     23.47         --         --        --           2         50     23.47
                              ---     ------                  ---     ------                   ---     ------
     Total ...........         51     $1,658      4.35%        11     $  955      2.50%         62     $2,613      6.85%
                              ===     ======                  ===     ======                   ===     ======
</TABLE>

         NON-PERFORMING  ASSETS.  The table  below  sets forth the  amounts  and
categories of our non-performing  assets. Loans are placed on non-accrual status
when the collection of principal and/or interest becomes doubtful. For all years
presented,  we have had no foreclosed assets and no troubled debt restructurings
which  involve  forgiving  a portion of interest  or  principal  on any loans or
making loans at a rate materially less than that of market rates.

                                       13

<PAGE>





                                                                December 31,
                                                           ---------------------

                                                            1998          1997
                                                           -------       -------
                                                          (Dollars in Thousands)
Non-accruing loans:
  One- to four-family ..............................       $   --        $   --
  Construction or development ......................          648           875
                                                           ------        ------
     Total .........................................          648           875
                                                           ------        ------

Accruing loans delinquent more than 90 days:
  One- to four-family ..............................          206            95
  Multi-family .....................................           --            --
  Commercial real estate ...........................           --           653
  Construction or development ......................           95            33
  Consumer .........................................            6             6
  Commercial business ..............................           --            --
                                                           ------        ------
     Total .........................................          307           787
                                                           ------        ------

Total non-performing loans .........................       $  955        $1,662
                                                           ======        ======
Total as a percentage of gross loans receivable ....         2.59%         4.42%
                                                           ======        ======

         Except as discussed below, there were no nonperforming loans to any one
borrower or group of related  borrowers that exceeded either  individually or in
the aggregate $300,000.

         Included  in the table above is a  commercial  real estate loan with an
outstanding  balance of  $648,000  at December  31,  1998.  This loan is for the
development of 34 single-family  lots and 23 condominium  sites for the eventual
construction of 56 condominium  units. This loan was originated in June 1994 for
$1.0 million with a loan-to-value  ratio of  approximately  79%. The development
consists  of  three  phases.  The  first  phase  is for  the  development  of 34
single-family  residential  lots  and  phase  two is for the  development  of 23
condominium  sites.  Phase  three,  for which we have not granted any  financing
commitment,  is for the  development  of 37 additional  single-family  lots. The
borrower  initially  projected  that phase one would be completed in early 1995,
with sales occurring  during 1995 and 1996. As a result of construction  delays,
phases one and two were  completed  during the first quarter of 1997.  Lot sales
have been significantly slower than projected with only seven single-family lots
and six  condominium  sites having been sold as of December 31, 1998.  Lot sales
remain slow.

         For the year ended December 31, 1998, gross interest income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their  original  terms  amounted to $95,000.  The amounts that were  included in
interest income on such loans were $2,000.

         OTHER LOANS OF CONCERN.  In addition to the  non-performing  assets set
forth in the table above as of December 31, 1998, there was an aggregate of $1.0
million in net book value of loans with respect to which known information about
the possible  credit  problems of the borrowers  have caused  management to have
doubts as to the ability of the borrowers to comply with present loan

                                       14

<PAGE>



repayment  terms and which may result in the future  inclusion  of such items in
the  non-performing  asset  categories.  These  loans  have been  considered  in
management's determination of the adequacy of our allowance for loan losses.

         The largest loan of concern  consists of a $542,000  loan secured by an
individual  commercial  property.  This loan was originated in December 1994 for
$582,000 and at December 31, 1998 was current and performing in accordance  with
its loan terms.  Management is monitoring  this loan based on its  evaluation of
the  borrower's  cash  flow  and  financial  condition,  which  raises  concerns
regarding the borrower's ability to service this loan in the future.

         The other lending  relationship  of concern  consisted of 19 loans to a
single borrower  totaling $486,000 at December 31, 1998. Each loan is secured by
a  residential  rental  property.  Each of the  loans  comprising  this  lending
relationship  was  approximately  30  days  delinquent  at  December  31,  1998.
Management is  monitoring  these loans as a result of the  borrower's  cash flow
problems resulting from higher than expected vacancies on the properties.

         CLASSIFIED ASSETS.  Federal  regulations provide for the classification
of loans and other assets, such as debt and equity securities  considered by the
Office  of  Thrift  Supervision  to  be of  lesser  quality,  as  "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected.  Assets classified as "doubtful" have all
of the weaknesses  inherent in those  classified  "substandard,"  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets  classified as "loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the establishment of a specific loss reserve is unwarranted.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but unlike specific allowances, have not been allocated
to particular  problem assets.  When an insured  institution  classifies problem
assets as "loss," it is required  either to establish a specific  allowance  for
losses equal to 100% of that portion of the asset so classified or to charge off
that particular amount. An institution's  determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision and the FDIC, which may order the establishment
of additional general or specific loss allowances.

         In connection  with the filing of our periodic  reports with the Office
of  Thrift  Supervision  and in  accordance  with our  classification  of assets
policy,  we regularly  review the problem  assets in our  portfolio to determine
whether  any  assets  require   classification  in  accordance  with  applicable
regulations.  On the basis of management's review of our assets, at December 31,
1998,  we had  classified  $1.5  million  of our  assets as  substandard,  which
represents 5.0% of shareholders' equity and 1.8% of total assets. No assets were
classified as doubtful or as loss.


                                       15

<PAGE>



         ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses which is based on management's evaluation of
past loss  experience,  current  trends in the level of delinquent  and specific
problem loans, loan  concentration to single borrowers,  adverse situations that
may  affect  the  borrower's  ability  to  repay,  the  estimated  value  of any
underlying  collateral,  and current and anticipated  economic conditions in our
market area. A significant portion of our loan portfolio is concentrated in one-
to  four-family  mortgage  loans  which,  historically,   has  not  led  to  any
significant  loan  losses.  Management  prepares  quarterly  analyses  of  loans
classified as  substandard  and  non-performing,  and  evaluates  these loans in
connection with its  determination of the appropriate  provision for loan losses
to  be  recorded  for  the  period.  Management  also  analyzes  borrowers  with
significant  outstanding  balances to reevaluate credit risk, the quality of the
loan and factors that may affect the borrowers' ability to pay. Accordingly, the
allowance  represents  managements's  estimate  of losses  inherent  in our loan
portfolio as of a specified date.

         Although   management  believes  that  it  uses  the  best  information
available to determine the allowance,  unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.  Future additions to our allowance will be the result of periodic
loan,  property and collateral reviews and thus, cannot be predicted in advance.
At December 31, 1998, our total allowance for loan losses  represented  coverage
of 82.1% of non-performing loans. See Notes A and C of the Notes to Consolidated
Financial Statements.


                                       16

<PAGE>



         The  following  table sets forth an analysis of our  allowance for loan
losses.


                                                            At and For the Years
                                                             Ended December 31,
                                                            --------------------
                                                               1998       1997
                                                            --------     -------
                                                                (In Thousands)

Balance at beginning of period ...........................     $ 854      $ 301

Charge-offs: One- to four-family .........................        21        147
                                                               -----      -----
    Total charge-offs ....................................        21        147

Recoveries: ..............................................        54         --
                                                               -----      -----
   Net charge-offs .......................................       (33)       147
Additions charged (reductions credited) to operations ....      (103)       700
                                                               -----      -----
Balance at end of period .................................     $ 784      $ 854
                                                               =====      =====

Ratio of net charge-offs (recoveries) during the period to
 average loans outstanding during the period .............     (0.09)%     0.41%
                                                               =====      =====

Ratio of net charge-offs during the period to
 average non-performing loans ............................     (2.27)%    11.51%
                                                               =====      =====


                                       17

<PAGE>



         During the year ended  December 31, 1997,  we recorded a provision  for
loan losses of $700,000,  increasing  the allowance for loan losses to $854,000.
We increased the allowance to reflect the additional credit risk inherent in our
portfolio as a result of an increased amount of loans held in the portfolio,  an
increased level of  nonperforming  loans, a charge-off of $147,000  arising from
the  write-down  of a loan  to  estimated  net  realizable  value,  as  well  as
management's  continuing  reassessment  of  the  portfolio.  The  allowance  was
increased to reflect the deterioration of loans made to four separate  borrowers
where full  collection of loan principal had become  uncertain,  including three
loans  which  had  become  impaired.  The  increased  allowance  also  reflected
management's  assessment of additional  credit risk resulting from a significant
increase in loan  concentrations  to several  borrowers  for  financing  one- to
four-family rental properties that are dependent on future rent collections.

         During the year ended  December 31, 1998,  we reduced the allowance for
loan losses to $784,000. To reduce the allowance,  $103,000 was credited back to
operations  through the provision  for loan losses.  We reduced the allowance to
reflect the decreased level of nonperforming loans and management's reassessment
of the loan portfolio as of December 31, 1998.

         The  distribution  of our  allowance  for  loan  losses  at  the  dates
indicated is summarized as follows:

<TABLE>
<CAPTION>

                                                                          December 31,
                                   ----------------------------------------------------------------------------------

                                                   1998                                         1997
                                   --------------------------------------       -------------------------------------

                                                               Percent                                        Percent
                                                               of Loans                                      of Loans
                                                  Loan         in Each                          Loan          in Each
                                   Amount of     Amounts       Category         Amount of      Amounts       Category
                                   Loan Loss        by         to Total         Loan Loss        by          to Total
                                   Allowance     Category       Loans           Allowance     Category         Loans
                                   ---------     --------      ---------        ---------     ---------      --------
                                                                     (Dollars in Thousands)
<S>                                <C>            <C>             <C>           <C>            <C>             <C>
One- to four-family .......        $   154        $25,474         66.81%        $   115        $25,634         64.29%
Multi-family, commercial,
  real estate, construction
  or development                       142         11,444         30.02             592         12,977         32.54
Consumer and commercial
  business.................              1          1,210          3.17               1          1,265          3.17
Unallocated ...............            487             --            --             146             --            --
                                   -------        -------        ------         -------        -------        ------
     Total ................        $   784        $38,128        100.00%        $   854        $39,876        100.00%
                                   =======        =======        ======         =======        =======        ======
</TABLE>

INVESTMENT ACTIVITIES

         Home Federal must maintain  minimum levels of investments  that qualify
as liquid assets under Office of Thrift Supervision  regulations.  Liquidity may
increase or decrease  depending upon the  availability  of funds and comparative
yields on investments in relation to the return on loans. Historically,  we have
maintained  liquid  assets at levels above the minimum  requirements  imposed by
Office of Thrift  Supervision  regulations and above levels believed adequate to
meet  the  requirements


                                       18

<PAGE>



of  normal  operations,   including   potential  deposit  outflows.   Cash  flow
projections are regularly reviewed and updated to assure that adequate liquidity
is  maintained.  At  December  31,  1998,  our  liquidity  ratio was 22.8%.  The
liquidity  ratio  represents  liquid assets as a percentage of net  withdrawable
savings deposits and current borrowings.

         Federally  chartered savings  institutions have the authority to invest
in  various  types  of  liquid  assets,  including  U.S.  Treasury  obligations,
securities  of various  federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings  institutions may also invest their assets in investment grade
commercial  paper and corporate  debt  securities  and mutual funds whose assets
conform to the investments  that a federally  chartered  savings  institution is
otherwise  authorized  to make  directly.  We generally  invest in the foregoing
types  of  investments.   See  "Regulation  -  Federal   Regulation  of  Savings
Associations"  for a discussion of  additional  restrictions  on our  investment
activities.

         President   Stephens   and  Vice   President   Swift   have  the  basic
responsibility  for the management of our investment  portfolio,  subject to the
direction  and  guidance  of the Board of  Directors.  These  officers  consider
various factors when making decisions, including the marketability, maturity and
tax  consequences  of  the  proposed  investment.   The  maturity  structure  of
investments will be affected by various market conditions, including the current
and anticipated slope of the yield curve, the level of interest rates, the trend
of new  deposit  inflows,  and the  anticipated  demand  for funds  via  deposit
withdrawals and loans.

         The general objectives of our investment  portfolio are to: (i) provide
and maintain  liquidity  within the  guidelines  prescribed  by Office of Thrift
Supervision regulations;  (ii) provide liquidity when loan demand is high and to
assist in  maintaining  earnings  when loan  demand is low;  and (iii)  maximize
earnings while satisfactorily managing risk, including credit risk, reinvestment
risk,  liquidity risk and interest rate risk. See  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations - Asset and Liability
Management;  Market Risk Analysis"in the Annual Report attached as Exhibit 13 to
this Annual Report on Form 10-KSB.

         Our investment  securities  consist primarily of mutual funds that have
assets  that  conform to the  investments  that a  federally  chartered  savings
institution  is  authorized  to make  directly.  These funds offer  professional
management,  easy access to funds,  continuous  reinvestment  and relatively low
historical  price  volatility.  Currently,  we are  invested in three  different
mutual funds.

         Our  mortgage-backed  and  related  securities  portfolio  consists  of
securities issued under government-sponsored  agency programs. We hold primarily
collateralized  mortgage  obligations.  Collateralized  mortgage obligations are
special  types of  pass-through  debt  securities  in which  the  principal  and
interest payments on the underlying mortgages or mortgage-backed  securities are
used  to  create  classes  with  different   maturities   and,  in  some  cases,
amortization  schedules,  as well as a residual  interest,  with each such class
possessing different risk characteristics.

         Our policy is to purchase only collateralized mortgage obligations that
are in the first or second  repayment  tranche  (investment  class)  and are AAA
rated. The expected life of our collateralized mortgage obligations is typically
under  five  years  at  the  time  of   purchase.   Premiums   associated   with


                                       19

<PAGE>



collateralized  mortgage obligations  purchased are not significant;  therefore,
the risk of significant yield adjustments because of accelerated  prepayments is
limited.  Yield  adjustments  are encountered as interest rates rise or decline,
which in turn slows or increases  prepayment rates and affects the average lives
of the collateralized  mortgage  obligations.  The purpose of our collateralized
mortgage  obligation  investment  strategy is to: (i) assist in maintaining Home
Federal's  qualified  thrift lender status (see  "Regulation - Qualified  Thrift
Lender");   (ii)  generate  high  cash  flow  so  as  to  lessen  liquidity  and
reinvestment  risk; (iii) preserve asset quality;  and (iv) generate  additional
interest  income.  At  December  31,  1998,  we  held  collateralized   mortgage
obligations  totaling  $12.4  million,  all of which were secured by  underlying
collateral  issued  under  government  agency-sponsored  programs.  All  of  our
collateralized mortgage obligations and mortgage-backed securities are currently
classified  as held to  maturity.  At  December  31,  1998,  our  collateralized
mortgage  obligations  did not qualify as high risk  mortgage  securities  under
Office of Thrift Supervision regulations.

         While  mortgage-backed and related  securities,  such as collateralized
mortgage  obligations,  carry  reduced  credit risk as compared to  conventional
loans,  mortgage-backed and related securities remain subject to the risk that a
fluctuating  interest  rate  environment,  along with other  factors such as the
geographic  distribution  of  the  underlying  mortgage  loans,  may  alter  the
prepayment  rate of such  mortgage  loans and thus,  affect both the  prepayment
speed, and value, of such securities.

         The following  table sets forth the  composition  of our investment and
mortgage-backed  and related  securities  portfolio at the dates indicated.  Our
investment   securities  portfolio  at  December  31,  1998,  contained  neither
tax-exempt  securities nor securities of any issuer with an aggregate book value
in excess of 10% of our retained  earnings,  excluding  those issued by the U.S.
Government or its agencies and excluding our mutual fund investments.

                                       20

<PAGE>




<TABLE>
<CAPTION>

                                                                                  December 31,
                                                         ---------------------------------------------------------

                                                                    1998                            1997
                                                         ------------------------         ------------------------

                                                           Book             % of            Book             % of
                                                           Value           Total            Value           Total
                                                         --------          ------         ---------         ------
                                                                                (Dollars in Thousands)
<S>                                                      <C>               <C>            <C>               <C>
Investment securities:
  Mutual funds(1) ...............................        $ 15,333          76.40%         $ 15,347          86.51%
  Freddie Mac stock .............................           2,577          12.85             2,085          11.75
  Corporate debt securities .....................           1,826           9.10                --             --
  Federal Home Loan Bank stock ..................             317           1.58               294           1.66
  Other .........................................              15           0.07                15           0.08
                                                         --------         ------          --------         ------
     Total investment securities and Federal Home
       Loan Bank stock ..........................        $ 20,068         100.00%         $ 17,741         100.00%
                                                         ========         ======          ========         ======

Mortgage-backed and related securities:
  Collateralized mortgage obligations ...........        $ 12,385          99.62%         $ 12,238          99.02%
  Freddie Mac ...................................              60           0.48                93           0.75
  Government National Mortgage Association ......              27           0.22                53           0.43
                                                         --------         ------          --------         ------
                                                           12,472         100.32            12,384         100.20
Unamortized discounts, net ......................             (40)         (0.32)              (25)         (0.20)
                                                         --------         ------          --------         ------
     Total mortgage-backed securities ...........        $ 12,432         100.00%         $ 12,359         100.00%
                                                         ========         ======          ========         ======

Other interest-earning investments:
  Money market mutual fund ......................        $  5,404          33.50%         $     --             --%
  Interest-bearing deposits with banks ..........           1,500           9.30               727          17.92
  Federal funds sold ............................           9,225          57.20             3,330          82.08
                                                         --------         ------          --------         ------
     Total ......................................        $ 16,129         100.00%         $  4,057         100.00%
                                                         ========         ======          ========         ======
</TABLE>
-----------------
(1) Mutual funds invest primarily in obligations of the U.S.  Government and its
agencies.

                                       21

<PAGE>



         The  following  table  sets  forth the  contractual  maturities  of our
mortgage-backed and related securities at December 31, 1998.


<TABLE>
<CAPTION>

                                                                Due in                                        December
                             -----------------------------------------------------------------------------    31, 1998
                             6 Months  6 Months    1 to 3      3 to 5      5 to 10    10 to 20     Over 20    Balance
                             or Less   to 1 Year   Years       Years        Years       Years       Years    Outstanding
                             --------  ---------   -------     -------     -------    --------     -------   -----------
                                                                       (In Thousands)
<S>                         <C>        <C>         <C>         <C>         <C>         <C>         <C>        <C>
Collateralized mortgage
obligations ...........     $   --     $    46     $    --     $    --     $ 4,167     $ 1,836     $ 6,296     $12,345

Freddie Mac ...........         --          --          --          60          --          --          --          60

Government National
  Mortgage Association          --          --          27          --          --          --          --          27
                            ------     -------     -------     -------     -------     -------     -------     -------

   Total ..............     $   --     $    46     $    27     $    60     $ 4,167     $ 1,836     $ 6,296     $12,432
                            ======     =======     =======     =======     =======     =======     =======     =======
</TABLE>

SOURCES OF FUNDS

         GENERAL.  Our sources of funds are  deposits,  payment of principal and
interest  on  loans,  interest  earned  on or  maturation  of  other  investment
securities and short-term investments, and funds provided from operations.

         DEPOSITS. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and statement savings
accounts, money market deposit accounts, NOW accounts and certificate of deposit
accounts currently ranging in terms from 91 days to three years. We only solicit
deposits  from our market  area and do not use  brokers to obtain  deposits.  We
primarily rely on competitive pricing policies, advertising and customer service
to attract and retain these deposits.

         The flow of deposits is influenced  significantly  by general  economic
conditions, changes in market interest rates, and competition.  Deposit balances
decreased in 1998 as a result of our  customers  using their funds  deposited at
Home Federal to purchase shares of First Niles common stock in October 1998.

         The  variety  of  deposit  accounts  we  offer  has  allowed  us  to be
competitive  in obtaining  funds and to respond with  flexibility  to changes in
consumer demand.  We have become more susceptible to short-term  fluctuations in
deposit  flows,  as  customers  have become more  interest  rate  conscious.  We
endeavor   to  manage  the  pricing  of  our   deposits  in  keeping   with  our
asset/liability management, liquidity and profitability objectives. Based on our
experience,  we believe  that our savings and checking  accounts are  relatively
stable  sources of funds.  Our ability to attract and maintain  certificates  of
deposit  and the  rates  paid on  these  deposits,  however,  has  been and will
continue to be significantly affected by market conditions.


                                       22

<PAGE>



         The following table sets forth the deposit flows at Home Federal during
the periods indicated.



                                                      Years Ended December 31,
                                                   -----------------------------
                                                     1998                1997
                                                   ---------          ----------
                                                       (Dollars in Thousands)

Opening balance ..........................         $ 57,854           $ 57,673
Deposits .................................           41,048             35,880
Withdrawals ..............................          (46,223)           (37,875)
Interest credited ........................            2,158              2,176
                                                   --------           --------

Ending balance ...........................         $ 54,837           $ 57,854
                                                   ========           ========

Net increase (decrease) ..................         $ (3,017)          $    181
                                                   --------           ========

Percent increase (decrease) ..............            (5.21)%             0.31%
                                                   ========           ========

         The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered for the periods indicated.


<TABLE>
<CAPTION>
                                                                        December 31,
                                                        ------------------------------------------

                                                               1998                    1997
                                                        -------------------     ------------------
                                                                   Percent                Percent
                                                        Amount     of Total     Amount    of Total
                                                        ------     --------     ------    --------
                                                                   (Dollars in Thousands)
Transactions and Savings Deposits:
----------------------------------
<S>                                                    <C>          <C>        <C>          <C>
Passbook and statement savings accounts (2.50%)(1)     $20,763      37.86%     $22,289      38.53%
NOW accounts (2.50%)(1) ..........................       3,081       5.62        2,830       4.89
Money market accounts (2.55%)(1) .................       3,811       6.95        4,145       7.16
                                                       -------     ------      -------     ------

Total non-certificates ...........................      27,655      50.43       29,264      50.58
                                                       -------     ------      -------     ------

Certificates:
-------------

 2.00-3.99% ......................................         228       0.42           53       0.10
 4.00-5.99% ......................................      26,954      49.15       27,426      47.40
 6.00-7.99% ......................................          --         --        1,111       1.92
                                                       -------     ------      -------     ------

Total certificates ...............................      27,182      49.57       28,590      49.42
                                                       -------     ------      -------     ------
Total deposits ...................................     $54,837     100.00%     $57,854     100.00%
                                                       =======     ======      =======     ======
</TABLE>

---------------------
(1)      Interest rates stated apply to December 31, 1998.


                                       23

<PAGE>



         The  following  table  shows  rate  and  maturity  information  for our
certificates of deposit as of December 31, 1998.

<TABLE>
<CAPTION>

                                                      2.00-            4.00-          6.00-                          Percent
                                                      3.99%            5.99%          7.99%          Total           of Total
                                                     ------           ------         ------         -------          --------

                                                                            (Dollars in Thousands)
Certificate Accounts Maturing in Quarter Ending:
------------------------------------------------
<S>                                                      <C>           <C>            <C>             <C>             <C>
March 31, 1999 ...............................           28            9,017             --           9,045           33.28%
June 30, 1999 ................................           --            6,989             --           6,989           25.71
September 30, 1999 ...........................           --            3,102             --           3,102           11.41
December 31, 1999 ............................          200            3,313             --           3,513           12.92
March 31, 2000 ...............................           --            1,733             --           1,733            6.38
June 30, 2000 ................................           --            1,489             --           1,489            5.48
September 30, 2000 ...........................           --              289             --             289            1.06
December 31, 2000 ............................           --              330             --             330            1.21
March 31, 2001 ...............................           --              197             --             197            0.73
June 30, 2001 ................................           --              137             --             137            0.50
September 30, 2001 ...........................           --              212             --             212            0.78
December 31, 2001 ............................           --              146             --             146            0.54
Thereafter ...................................           --               --             --              --              --
                                                    -------          -------          -----         -------          ------
   Total .....................................      $   228          $26,954          $  --         $27,182          100.00%
                                                    =======          =======          =====         =======          ======
   Percent of total...........................         0.84%          99.166%            --%         100.00%
                                                    =======          =======          =====         =======
</TABLE>

         The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of December 31, 1998.

<TABLE>
<CAPTION>
                                                                              Maturity
                                                           ---------------------------------------------

                                                                         Over         Over
                                                           3 Months     3 to 6       6 to12      Over 12
                                                           or Less      Months       Months       Months      Total
                                                           --------     ------       -------     -------     -------

                                                                              (In Thousands)

<S>                                                         <C>         <C>           <C>         <C>        <C>
Certificates of deposit less than $100,000...........       $7,636      $6,034        $5,695      $4,533     $23,898

Certificates of deposit of $100,000 or more..........        1,409         955           920          --       3,284
                                                            ------      ------        ------      ------     -------

Total certificates of deposit........................       $9,045      $6,989        $6,615      $4,533     $27,182
                                                            ======      ======        ======      ======     =======
</TABLE>

         BORROWINGS.  Although  deposits are our primary source of funds, we may
utilize  borrowings  when they are a less  costly  source  of funds,  and can be
invested  at a  positive  interest  rate  spread  or when we  desire  additional
capacity to fund loan demand. At December 31, 1998, we had borrowings

                                       24

<PAGE>



totaling $300,000.  The average balance of our borrowings during this period was
$385,000.  Our current  borrowings  relate to a five-year term note payable to a
third party in connection with Home Federal's capital  contribution to a limited
partnership formed to construct multi-family housing units. See "-Subsidiary and
Other Activities" and Note D of Notes to Consolidated Financial Statements.

SUBSIDIARY AND OTHER ACTIVITIES

         As a federally chartered savings association, Home Federal is permitted
by  Office  of Thrift  Supervision  regulations  to invest up to 2% of its total
assets,  or $1.7  million at December  31,  1998,  in the stock of, or unsecured
loans,  to  service  corporation  subsidiaries.   Home  Federal  may  invest  an
additional 1% of its assets in service  corporations where such additional funds
are used for inner-city or community development purposes. At December 31, 1998,
Home Federal had no subsidiaries.

         In 1996, we acquired a fractional  interest of 17.5% in an Ohio limited
partnership formed to construct  multi-family  housing units. Under the terms of
the limited partnership agreement,  we will make a total capital contribution to
the partnership of $500,000 and are allocated tax losses and affordable  housing
federal  income  tax  credits.  See Note D of Notes  to  Consolidated  Financial
Statements.

REGULATION

         GENERAL. Home Federal is a federally chartered savings association, the
deposits of which are federally insured by the FDIC and backed by the full faith
and credit of the U.S. Government.  Accordingly, we are subject to broad federal
regulation and oversight extending to all our operations. We are a member of the
Federal  Home  Loan  Bank of  Cincinnati  and are  subject  to  certain  limited
regulation  by the Board of Governors of the Federal  Reserve  System  ("Federal
Reserve Board"). As the savings and loan holding company of Home Federal,  First
Niles is also subject to federal regulation and oversight.

         FEDERAL  REGULATION  OF  SAVINGS  ASSOCIATIONS.  The  Office  of Thrift
Supervision has extensive authority over the operations of savings associations.
As part of this  authority,  we are required to file  periodic  reports with the
Office of Thrift  Supervision  and are subject to periodic  examinations  by the
Office of Thrift  Supervision  and the FDIC.  The last regular  Office of Thrift
Supervision  examination  of Home  Federal was as of November  1998.  When these
examinations are conducted by the Office of Thrift Supervision and the FDIC, the
examiners  may  require us to provide for higher  general or specific  loan loss
reserves.  All savings  associations  are subject to a  semi-annual  assessment,
based upon the savings association's total assets, to fund the operations of the
Office of Thrift Supervision.

         The  Office  of  Thrift  Supervision  also  has  extensive  enforcement
authority over all savings  institutions and their holding companies,  including
Home Federal and First Niles. This enforcement  authority includes,  among other
things, the ability to assess civil money penalties,  to issue cease-and- desist
or removal orders and to initiate injunctive actions.

         Our general  permissible  lending  limit for  loans-to-one-borrower  is
equal to the greater of $500,000 or 15% of  unimpaired  capital and surplus.  If
the loans are fully  secured  by  certain  readily  marketable  collateral,  the
lending limit is increased to 25% of unimpaired capital and surplus. At

                                       25

<PAGE>



December 31, 1998, our lending limit under this restriction was $3.3 million. We
are in compliance with the loans-to-one-borrower limitation.

         INSURANCE OF ACCOUNTS AND REGULATION BY THE FEDERAL  DEPOSIT  INSURANCE
CORPORATION.  As insurer,  the FDIC imposes  deposit  insurance  premiums and is
authorized to conduct  examinations of and to require  reporting by FDIC insured
institutions. It also may prohibit any FDIC insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the Savings  Association  Insurance Fund or the Bank Insurance Fund. The FDIC
also  has  the  authority  to  initiate   enforcement  actions  against  savings
associations,  after giving the Office of Thrift  Supervision  an opportunity to
take  action,  and may  terminate  deposit  insurance if it  determines  that an
institution  has  engaged in unsafe or unsound  practices  or is in an unsafe or
unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions  is made by the FDIC  semi-annually.  At December 31, 1998, we were
classified as a well-capitalized institution.

         Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association  Insurance Fund insured institutions ranged from 0 to 27
basis points. However,  Savings Association Insurance Fund-insured  institutions
and Bank  Insurance  Fund-insured  institutions  are required to pay a Financing
Corporation assessment, in order to fund the interest on bonds issued to resolve
thrift  failures in the 1980s. In 1998, this amount was equal to about six basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund-insured  institutions paid an assessment equal
to about  1.50 basis  points for each $100 in  domestic  deposits.  The  savings
institutions  assessment  is expected to be reduced to about two basis points no
later than January 1, 2000, when Bank Insurance Fund- insured institutions fully
participate in the  assessment.  These  assessments,  which may be revised based
upon the level of Bank  Insurance  Fund and Savings  Association  Insurance Fund
deposits, will continue until the bonds mature in the year 2017.

         REGULATORY   CAPITAL   REQUIREMENTS.   All  federally  insured  savings
institutions  are required to maintain  minimum capital  standards,  including a
tangible  capital,  a leverage ratio (or core capital) and a risk-based  capital
requirement.  The capital  regulations require tangible capital of at least 1.5%
of adjusted total assets, as defined by regulation. At December 31, 1998, we had
tangible capital of $21.2 million,  or 27.0% of adjusted total assets,  which is
approximately  $20.0 million above the minimum  requirement  of 1.5% of adjusted
total assets in effect on that date.

         The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets,  depending on an institution's  supervisory rating.
Core capital generally  consists of tangible  capital.  At December 31, 1998, we
had core capital equal to $21.2 million, or 27.0% of adjusted total

                                       26

<PAGE>



assets,  which is $18.8 million above the minimum leverage ratio  requirement of
3% as in effect on that date.

          The  Office  of Thrift  Supervision  risk-based  requirement  requires
savings  associations  to have  total  capital  of at least 8% of  risk-weighted
assets.   Total  capital  consists  of  core  capital,  as  defined  above,  and
supplementary  capital.  Supplementary capital consists of certain permanent and
maturing  capital  instruments  that do not qualify as core  capital and general
valuation  loan  and  lease  loss  allowances  up  to  a  maximum  of  1.25%  of
risk-weighted  assets.   Supplementary  capital  may  be  used  to  satisfy  the
risk-based requirement only to the extent of core capital.

         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the Office of Thrift Supervision has assigned a risk weight of 50% for
prudently  underwritten  permanent one- to four-family first lien mortgage loans
not more than 90 days  delinquent and having a  loan-to-value  ratio of not more
than 80% at origination  unless insured to such ratio by an insurer  approved by
Fannie Mae or Freddie Mac.

         On December 31, 1998, we had total risk-based  capital of approximately
$22.8  million,  including  $21.2  million in core  capital and $1.6  million in
qualifying supplementary capital, and risk- weighted assets of $41.1 million, or
total capital of 55.3% of  risk-weighted  assets.  This amount was $19.5 million
above the 8% requirement in effect on that date.

         The  Office of  Thrift  Supervision  is  authorized  to impose  capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis. The Office of Thrift Supervision and the FDIC are authorized
and,  under certain  circumstances  required,  to take certain  actions  against
savings associations that fail to meet their capital requirements. These actions
may include submission of a capital  restoration plan and various limitations on
an institution's growth and operations,  depending upon an institution's capital
category.  In  certain  cases the FDIC or the Office of Thrift  Supervision  may
appoint a conservator or receiver for the institution.

         The  Office of  Thrift  Supervision  is also  generally  authorized  to
reclassify  an  institution  into  a  lower  capital  category  and  impose  the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.

         The  imposition by the Office of Thrift  Supervision or the FDIC of any
of these  measures on Home Federal may have a substantial  adverse effect on its
operations and profitability.

         LIMITATIONS  ON DIVIDENDS  AND OTHER CAPITAL  DISTRIBUTIONS.  Office of
Thrift   Supervision   regulations   impose  various   restrictions  on  savings
associations  with respect to their  ability to make  distributions  of capital,
which include dividends, stock redemptions or repurchases,  cash-out mergers and
other transactions charged to the capital account.  Office of Thrift Supervision
regulations  also prohibit a savings  association  from  declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  association  would be reduced  below the amount  required  to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.


                                       27

<PAGE>



         Office of Thrift Supervision  recently revised regulations provide that
a savings  association  may make a capital  distribution  without  notice to the
Office of Thrift  Supervision,  unless it is a subsidiary of a holding  company,
provided that it has a regulatory rating in the two top examination  categories,
is not of supervisory concern, and would remain well-capitalized,  as defined in
the Office of Thrift Supervision prompt corrective action regulations, following
the proposed  distribution,  and the distribution does not exceed its net income
for the  calendar  year-to-date  plus  retained  net income for the previous two
calendar years (less any dividends  previously paid).  Savings associations that
would remain adequately capitalized following the proposed distribution and meet
the other noted  requirements  must notify the Office of Thrift  Supervision  30
days prior to declaring a capital distribution.  All other institutions or those
seeking to exceed the noted amounts must file an  application  before making the
distribution.

         QUALIFIED THRIFT LENDER TEST. All savings  institutions are required to
meet a qualified  thrift  lender  test to avoid  certain  restrictions  on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the savings  institution  may  maintain 60% of its assets in those
assets  specified in Section  7701(a)(19)  of the Internal  Revenue Code.  Under
either test, these assets primarily consist of residential housing related loans
and  investments.  At December 31, 1998, we met the test and have always met the
test since it became effective.

         Any savings  institution that fails to meet the qualified thrift lender
test must  convert to a national  bank,  unless it  requalifies  as a  qualified
thrift lender and remains a qualified  thrift lender.  If an institution has not
yet  requalified  or  converted  to a national  bank,  its new  investments  and
activities are limited to those permissible for both a savings institution and a
national bank,  and it is limited to national bank branching  rights in its home
state. In addition, the institution is immediately ineligible to receive any new
Federal Home Loan Bank  borrowings.  If the  institution  has not requalified or
converted to a national bank within three years after the failure,  it must sell
all  investments and stop all activities not permissible for a national bank. In
addition,  it must  repay  promptly  any  outstanding  Federal  Home  Loan  Bank
borrowings,  which may result in prepayment  penalties.  If any institution that
fails the qualified thrift lender test is controlled by a holding company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

         COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act, every
FDIC insured institution has a continuing and affirmative  obligation consistent
with safe and sound  banking  practices  to help  meet the  credit  needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act requires the Office of Thrift  Supervision,  in connection with
the examination of Home Federal,  to assess the institution's  record of meeting
the credit  needs of its  community  and to take this record into account in its
evaluation of certain  applications,  such as a merger or the establishment of a
branch, by Home Federal.  An unsatisfactory  rating may be used as the basis for
the  denial of an  application  by the  Office of  Thrift  Supervision.  We were
examined for compliance  under the Community  Reinvestment Act in March 1997 and
received a rating of "satisfactory."


                                       28

<PAGE>



         HOLDING COMPANY  REGULATION.  First Niles is a unitary savings and loan
holding  company  subject  to  regulatory  oversight  by the  Office  of  Thrift
Supervision.  First  Niles is required to  register  and file  reports  with the
Office of Thrift Supervision and is subject to regulation and examination by the
Office of Thrift Supervision.  In addition, the Office of Thrift Supervision has
enforcement   authority  over  First  Niles  and  its  non-savings   association
subsidiaries  which also permits the Office of Thrift Supervision to restrict or
prohibit  activities  that are determined to be a serious risk to the subsidiary
savings association.

         As a unitary savings and loan holding company, First Niles generally is
not subject to activity restrictions. If First Niles acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of First  Niles and any of its
subsidiaries (other than Home Federal or any other Savings Association Insurance
Fund-insured  savings  association) would generally become subject to additional
restrictions.

         If we fail the  qualified  thrift  lender  test,  within one year First
Niles must  register as, and will become  subject to, the  significant  activity
restrictions applicable to bank holding companies.

         FEDERAL  SECURITIES  LAW.  The stock of First Niles will be  registered
with the SEC under the  Securities  Exchange  Act of 1934.  First  Niles will be
subject  also  to  the   information,   proxy   solicitation,   insider  trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934.

         First  Niles  stock  held  by  persons  who are  affiliates,  generally
including the executive officers, directors and 10% stockholders, of First Niles
may not be resold without registration or unless sold in accordance with certain
resale  restrictions.  If First Niles meets specified current public information
requirements,  each  affiliate  of the  company  is able  to sell in the  public
market,  without  registration,  a limited  number of shares in any  three-month
period.

         FEDERAL HOME LOAN BANK SYSTEM. We are a member of the Federal Home Loan
Bank of  Cincinnati,  which is one of 12 regional  Federal  Home Loan Banks that
administers  the home financing  credit function of savings  institutions.  Each
Federal  Home Loan Bank  serves as a reserve  or  central  bank for its  members
within  its  assigned  region.  It makes  loans to members  in  accordance  with
policies and  procedures,  established  by the board of directors of the Federal
Home Loan  Bank,  which are  subject to the  oversight  of the  Federal  Housing
Finance  Board.  All advances from the Federal Home Loan Bank are required to be
fully  secured by  sufficient  collateral as determined by the Federal Home Loan
Bank. In addition,  all long-term  advances  must be used for  residential  home
financing.

         As a member,  we are required to purchase and maintain a minimum amount
of stock in the Federal Home Loan Bank of  Cincinnati.  At December 31, 1998, we
had $317,000 in Federal Home Loan Bank stock,  which was in compliance with this
requirement.  We receive  dividends on our Federal  Home Loan Bank stock.  These
dividends averaged 7.19% for 1998.


                                       29

<PAGE>



FEDERAL AND STATE TAXATION

         FEDERAL TAXATION. In August 1996, legislation was enacted that repealed
the percentage of taxable income method used by many thrifts to calculate  their
bad debt reserve for federal  income tax  purposes.  As a result,  small thrifts
must  recapture  that  portion of the reserve that exceeds the amount that could
have been  taken  under the  experience  method  for tax years  beginning  after
December 31, 1987. Due to certain  limitations as to allowable  additions to the
bad debt reserve,  Home Federal has not made  additions to its  allowance  since
1987 and will not be subject to federal income tax recapture.

         In addition to the regular income tax, corporations,  including savings
institutions, generally are subject to a minimum tax. An alternative minimum tax
is imposed at a minimum tax rate of 20% on alternative  minimum  taxable income,
which  is the  sum of a  corporation's  regular  taxable  income  (with  certain
adjustments)  and tax  preference  items,  less  any  available  exemption.  The
alternative  minimum tax is imposed to the extent it exceeds  the  corporation's
regular  income  tax and net  operating  losses  can  offset no more than 90% of
alternative minimum taxable income.

         A portion of our  reserves  for losses on loans which are  presented on
the  statement of financial  condition as retained  earnings,  may not,  without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions   to  a  shareholder,   including   distributions  on  redemption,
dissolution or  liquidation,  or for any other purpose except to absorb bad debt
losses.  As of December  31, 1998,  the portion of our reserves  subject to this
treatment for tax purposes totaled approximately $2.54 million.

         We file  federal  income tax  returns on a fiscal  year basis using the
accrual   method  of  accounting.   First  Niles  does  not  anticipate   filing
consolidated federal income tax returns with Home Federal.

         The federal income tax returns of Home Federal for the last three years
are open to possible audit by the Internal Revenue Service. No returns are being
audited by the Internal  Revenue  Service at the current time. In the opinion of
management,  any  examination  of  still  open  returns,  including  returns  of
predecessors  or  entities  merged  into Home  Federal,  would  not  result in a
deficiency which could have a material adverse effect on the financial condition
of Home Federal.

         OHIO TAXATION. We are subject to the Ohio corporate franchise tax. As a
financial  institution,  we compute  our  franchise  tax based on our net worth.
Under  this  method,  we  will  compute  our  Ohio  corporate  franchise  tax by
multiplying our net worth, as specifically adjusted pursuant to Ohio law, by the
applicable tax rate,  which is currently 1.4%.  First Niles will also be subject
to the Ohio  corporate  franchise tax. The tax imposed is the greater of the tax
on net worth, or the tax on net income.

         DELAWARE  TAXATION.  As a  Delaware  holding  company,  First  Niles is
exempted  from Delaware  corporate  income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware.  First Niles is also
subject to an annual franchise tax imposed by the State of Delaware.


                                       30

<PAGE>



COMPETITION

         We face strong  competition in originating  real estate and other loans
and in attracting  deposits.  Competition in originating real estate loans comes
primarily from other savings  institutions,  commercial banks, credit unions and
mortgage bankers.  Other savings  institutions,  commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.

         We attract all of our  deposits  through Home  Federal's  one office in
Niles,  Ohio.  Competition for those deposits is principally  from other savings
institutions,  commercial banks and credit unions located in our market area, as
well as mutual  funds.  We compete  for these  deposits by offering a variety of
deposit accounts at competitive rates and superior service.

EXECUTIVE OFFICERS OF FIRST NILES

         WILLIAM L. STEPHENS.  Mr.  Stephens,  age 67, serves as Chairman of the
Board, President and Chief Executive Officer of Home Federal and First Niles. He
has served in such  capacities  for Home Federal  since 1969 and for First Niles
since its formation in October 1998.

         GEORGE J. SWIFT.  Mr. Swift, age 76, is Vice President and Secretary of
Home Federal and First Niles. He has served in such capacities with Home Federal
since 1969 and for First Niles since its formation in October 1998.

         LAWRENCE  SAFAREK.  Mr.  Safarek,  age  49,  currently  serves  as Vice
President and  Treasurer of Home Federal and First Niles.  He has served in such
capacities  with Home Federal since 1995 and for First Niles since its formation
in October  1998.  Mr.  Safarek has been  employed with Home Federal in numerous
other capacities since 1971.

EMPLOYEES

         At December 31, 1998,  we had a total of 14  employees,  including  one
part-time  employee.  Our  employees  are  not  represented  by  any  collective
bargaining group. Management considers its employee relations to be good.

ITEM 2.           DESCRIPTION OF PROPERTY

         We conduct our business  through Home  Federal's only office located in
Niles,  Ohio,  which is owned  by Home  Federal.  We  believe  that our  current
facilities  are  adequate  to meet the  present  and  foreseeable  needs of Home
Federal and First Niles. The total net book value of Home Federal's premises and
equipment,  including land,  building and leasehold  improvements and furniture,
fixtures and equipment,  at December 31, 1998 was $256,000.  See Note E of Notes
to Consolidated Financial Statements.

         We  maintain  an  on-line  data base with a  service  bureau  servicing
financial  institutions.  The net book value of the data processing and computer
equipment utilized by Home Federal at December 31, 1998 was $33,000.


                                       31

<PAGE>



ITEM 3.           LEGAL PROCEEDINGS

         From time to time First Niles is involved as  plaintiff or defendant in
various legal actions arising in the normal course of business. Presently, First
Niles is not  involved  in any legal  proceedings  that are  expected  to have a
material adverse impact on its consolidated financial position.


ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was  submitted  to a vote of  security  holders,  through the
solicitation  of proxies or  otherwise,  during the quarter  ended  December 31,
1998.


                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Page 45 of the 1998  Annual  Report to  Shareholders  attached  to this
document as Exhibit 13 is incorporated herein by reference.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         Pages 4 to 16 of the 1998  Annual  Report to  Shareholders  attached to
this document as Exhibit 13 is incorporated herein by reference.

ITEM 7.           FINANCIAL STATEMENTS

         The following  information appearing in First Niles' 1998 Annual Report
to  Stockholders  attached  hereto  as  Exhibit  13 is  incorporated  herein  by
reference.

Annual Report Section                                     Pages in Annual Report
---------------------                                     ----------------------

Report of Independent Auditors                                        17

Consolidated Balance Sheets as of December 31, 1998 and 1997          18

Consolidated Statements of Income for the Years                       19
  Ended December 31, 1998 and 1997

Consolidated statements of Comprehensive Income for the               20
 Years Ended December 31, 1998 and 1997

Consolidated Statements of Changes in Shareholders' Equity            21
 for the Years Ended December 31, 1998 and 1997

Consolidated Statements of Cash Flows for the Years                   22
  Ended December 31, 1998 and 1997

Notes to Consolidated Financial Statements                        23 - 44

                                       32

<PAGE>




          With the  exception of the  aforementioned  information,  First Niles'
Annual  Report to  Shareholders  for the year ended  December 31,  1998,  is not
deemed filed as part of this Annual Report on Form 10-KSB.

ITEM 8.   CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

          There has been no  Current  Report on Form 8-K filed  within 24 months
prior to the date of the most recent financial  statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.


                                    PART III

ITEM 9.   DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS

          Information concerning Directors of First Niles is incorporated herein
by reference  from the  definitive  proxy  statement  for the Annual  Meeting of
Stockholders  to be held in April 1999,  a copy of which will be filed not later
than 120 days after the close of the fiscal year.

EXECUTIVE OFFICERS

          Information  concerning Executive Officers of First Niles is contained
under the caption  "Executive  Officers  of First  Niles" in Part I of this Form
10-KSB, and is incorporated herein by this reference.

COMPLIANCE WITH SECTION 16(A)

          Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended,
requires First Niles' directors and executive officers, and persons who own more
than 10% of a registered  class of its equity  securities,  to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of First Niles. Officers, directors and greater than
10%  stockholders  are required by SEC  regulation  to furnish  First Niles with
copies of all Section 16(a) forms they file.

          To First Niles'  knowledge,  based solely on a review of the copies of
such reports furnished to the company and written  representations that no other
reports were required,  all Section 16(a) filing requirements  applicable to its
officers,  directors and greater than 10 percent beneficial owners were complied
with during the fiscal year ended December 31, 1998.


                                       33

<PAGE>



ITEM 10.       EXECUTIVE COMPENSATION

          Information  concerning executive  compensation is incorporated herein
by reference  from the  definitive  proxy  statement  for the Annual  Meeting of
Stockholders  to be held in April 1999,  a copy of which will be filed not later
than 120 days after the close of the fiscal year.

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          Information concerning security ownership of certain beneficial owners
and management is  incorporated  herein by reference  from the definitive  proxy
statement  for the Annual  Meeting of  Stockholders  to be held in April 1999, a
copy of which  will be filed  not  later  than 120 days  after  the close of the
fiscal year.

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Information  concerning certain relationships and related transactions
is incorporated  herein by reference from the definitive proxy statement for the
Annual Meeting of Stockholders to be held in April 1999, a copy of which will be
filed not later than 120 days after the close of the fiscal year.

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K

               (A)  EXHIBITS

               See Index to Exhibits

               (B)  REPORTS ON FORM 8-K

          No reports on Form 8-K were filed during the three-month  period ended
December 31, 1998.

                                       34

<PAGE>



                                   SIGNATURES

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

                                  FIRST NILES FINANCIAL, INC.



Date: March 25, 1999              By: /s/ William L.  Stephens
      --------------                  --------------------------------------
                                      William L. Stephens
                                      Chairman of the Board, President and Chief
                                      Executive Officer
                                      (DULY AUTHORIZED REPRESENTATIVE)

  Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  this
Report has been signed below by the following  persons in the  capacities and on
the dates indicated.


/s/ William L.  Stephens                            Date: March 25, 1999
---------------------------------------------------       --------------
William L. Stephens, Chairman of the Board,
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)

/s/ George J.  Swift                                Date: March 25, 1999
---------------------------------------------------       --------------
George J. Swift, Vice President and Secretary
(PRINCIPAL FINANCIAL AND OPERATING OFFICER)

/s/ P.  James Kramer                                Date: March 25, 1999
---------------------------------------------------       --------------
P. James Kramer, Director

/s/ Horace L.  Mclean                               Date: March 25, 1999
---------------------------------------------------       --------------
Horace L. McLean, Director

/s/ Ralph A.  Zuzolo                                Date: March 25, 1999
---------------------------------------------------       --------------
Ralph A. Zuzolo, Sr., Director

/s/ Thomas G.  Maley                                Date: March 25, 1999
---------------------------------------------------       --------------
Thomas G. Maley, Controller
(PRINCIPAL ACCOUNTING OFFICER)



<PAGE>



                                INDEX TO EXHIBITS


 Exhibit
 Number                                    Document
 ------            -------------------------------------------------------------

   3               The Certificate of  Incorporation  and Bylaws,  filed on July
                   10,  1998  as  Exhibits   3.1  and  3.2,   respectively,   to
                   Registrant's  Registration  Statement  on Form SB-2 (File No.
                   333-58883), are incorporated by reference.

   4               Registrant's  Specimen Stock  Certificate,  filed on July 10,
                   1998 as Exhibit 4 to Registrant's  Registration  Statement on
                   Form SB-2 (File No. 333-58883), is incorporated by reference.

   10.1            Employment Agreement between the Bank and William L. Stephens

   10.2            Employment Agreement between the Bank and George J. Swift

   10.3            Employment Agreement between the Bank and Lawrence Safarek

   13              Annual Report to Stockholders

   21              Subsidiaries of the Registrant

   27              Financial Data Schedule (electronic filing only)