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

                                    FORM 10-Q

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

                   For the quarterly period 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 0-27650

                         CATSKILL FINANCIAL CORPORATION
                         ------------------------------
             (Exact name of registrant as specified in its charter)

                DELAWARE                                       14-1788465
                --------                                       ----------
    (State or other jurisdiction of                         (I.R.S. Employer
    incorporation or organization)                        Identification No.)

              341 MAIN STREET, CATSKILL, NY                 12414
         -----------------------------------------------------------
        (Address of principal executive offices)          (Zip Code)

                                  (518)943-3600
                                  -------------
              (Registrant's telephone number, including area code)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                  Yes  [ X ]          No    [   ]

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date:

     Common Shares, $.01 par value                       4,358,334
     -----------------------------                    ---------------
            (Title of class)                   (outstanding at January 31, 1999)

<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q
                                December 31, 1998




INDEX

PART I    FINANCIAL INFORMATION     
                        
Item 1.    Consolidated Interim Financial Statements
                    
                  Consolidated  Statements of Financial Condition as of December
                  31, 1998 (Unaudited) and September 30, 1998
                    
                  Consolidated  Statements  of Income for the three months ended
                  December 31, 1998 and 1997 (Unaudited)
                    
                  Consolidated Statements of Changes in Shareholders' Equity for
                  the three months ended December 31, 1998 and 1997 (Unaudited)
                    
                  Consolidated  Statements  of Cash  Flows for the three  months
                  ended December 31, 1998 and 1997 (Unaudited)
                    
                  Notes to Unaudited Consolidated Interim Financial Statements

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

Item 3.    Quantitative and Qualitative Disclosures about Market Risk 

PART II.   OTHER INFORMATION


Item 1.    Legal Proceedings 

Item 2.    Changes in Securities 

Item 3.    Default on Senior Securities 

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

Item 5.    Other Information 

Item 6.    Exhibits and Reports on Form 8-K 

           Signatures 

<PAGE>
<TABLE>
<CAPTION>
                                 CATSKILL FINANCIAL CORPORATION
                         Consolidated Statements of Financial Condition
                                (In thousands, except share data)



                            Assets                    December 31, 1998      September 30, 1998
                            ------                    -----------------      ------------------
                                                          (Unaudited)
<S>                                                        <C>                   <C>           
Cash and due from banks ...........................        $   4,176             $   2,795     
Securities available for sale, at fair value ......          157,785               164,983  
Investment securities, at amortized cost:                                                   
     (Estimated fair value of $2,096 at December                                            
     31, 1998, and $2,106 at September 30, 1998) ..            2,064                 2,060  
Stock in Federal Home Loan Bank of NY, at cost ....            1,954                 1,954  
Loans receivable, net .............................          142,544               137,785  
Corporate owned life insurance ....................           10,002                  --    
Accrued interest receivable .......................            2,431                 2,398  
Premises and equipment, net .......................            2,561                 2,522  
Real estate owned .................................               62                    53  
Other assets ......................................              214                   202  
                                                           ---------             ---------  
          Total Assets ............................        $ 323,793             $ 314,752  
                                                           =========             =========  
                                                                                            
          Liabilities and Shareholders' Equity                                              
Liabilities:                                                                                
   Deposits:                                                                                
     Non-interest bearing .........................        $   7,315             $   6,009  
     Interest bearing .............................          207,818               203,968 
                                                           ---------             ---------  
          Total Deposits ..........................          215,133               209,977  
   Short-term borrowings ..........................            9,825                 6,840  
   Long-term borrowings ...........................           25,000                25,000  
   Advance payments by borrowers for taxes and                                              
         insurance ................................            2,020                   673  
   Accrued interest payable .......................              284                   288  
   Official bank checks ...........................            1,547                 1,986  
   Accrued expenses and other liabilities .........            1,922                 2,157  
                                                           ---------             ---------  
          Total Liabilities .......................        $ 255,731             $ 246,921  
                                                           =========             =========  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 CATSKILL FINANCIAL CORPORATION
                         Consolidated Statements of Financial Condition
                                (In thousands, except share data)
                                          (continued)



                                                       December 31, 1998      September 30, 1998
                                                       -----------------      ------------------
                                                          (Unaudited)
<S>                                                        <C>                   <C>           
Shareholders' Equity                                                                        
   Preferred stock, $.01 par value; authorized                                              
    5,000,000 shares ..............................             --                    --    
   Common stock, $.01 par value; authorized                                                 
    15,000,000 shares; 5,686,750 shares issued                                              
    at December 31, 1998 and September 30, 1998 ...               57                    57  
   Additional paid-in capital .....................           54,974                54,974  
   Retained earnings, substantially restricted ....           37,989                37,374  
   Common stock acquired by ESOP ..................           (3,981)               (3,981) 
   Unearned management recognition plan (MRP) .....           (1,317)               (1,433) 
   Treasury stock, at cost (1,328,416 shares at                                             
     December 31, 1998 and September 30, 1998) ....          (21,223)              (21,223) 
   Accumulated other comprehensive income .........            1,563                 2,063 
                                                           ---------             ---------  
         Total Shareholders' Equity ...............           68,062                67,831  
                                                           ---------             ---------  
         Total Liabilities and Shareholders' Equity        $ 323,793             $ 314,752  
                                                           =========             =========       
</TABLE>                                                               
 See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                 CATSKILL FINANCIAL CORPORATION
                                Consolidated Statements of Income
                         (In thousands, except share and per share data)


                                                                       THREE MONTHS ENDED
                                                                          December 31,
                                                                     1998              1997
                                                                 -----------        -----------
                                                                           (Unaudited)
<S>                                                              <C>                <C>        
Interest and dividend income:
     Loans ..............................................        $     2,757        $     2,551
     Securities available for sale
         Taxable ........................................              2,030              2,499
         Non-taxable ....................................                491                 60
     Investment securities held to maturity .............                 33                121
     Federal funds sold and other .......................                  1                  1
     Stock in Federal Home Loan Bank of NY ..............                 34                 31
                                                                 -----------        -----------
         Total interest and dividend income .............              5,346              5,263

Interest expense:
     Deposits ...........................................              2,226              2,241
     Short-term borrowings ..............................                 71                184
     Long-term borrowings ...............................                329               --
                                                                 -----------        -----------
         Total interest expense .........................              2,626              2,425
                                                                 -----------        -----------
Net interest income .....................................              2,720              2,838

Provision for loan losses ...............................                 45                 54
                                                                 -----------        -----------
         Net interest income after provision for
         loan losses ....................................              2,675              2,784
                                                                 -----------        -----------

Noninterest income:
     Service fees on deposit accounts ...................                 90                 68
     Net securities gains ...............................                 22                 19
     Other income .......................................                 52                 32
                                                                 -----------        -----------
         Total noninterest income .......................                164                119
                                                                 -----------        -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 CATSKILL FINANCIAL CORPORATION
                                Consolidated Statements of Income
                         (In thousands, except share and per share data)
                                          (continued)


                                                                       THREE MONTHS ENDED
                                                                          December 31,
                                                                     1998              1997
                                                                 -----------        -----------
                                                                           (Unaudited)
<S>                                                              <C>                <C>        
Noninterest expense:
     Salaries and employee benefits .....................                871                840
     Advertising and business promotion .................                 22                 50
     Net occupancy on premises ..........................                 95                 82
     Federal deposit insurance premiums .................                  6                  7
     Postage and supplies ...............................                 67                 64
     Outside data processing fees .......................                106                 95
     Equipment ..........................................                 40                 40
     Professional fees ..................................                 59                 37
     Other real estate expenses, net ....................                 14                (16)
     Other ..............................................                185                149
                                                                 -----------        -----------
         Total noninterest expense ......................              1,465              1,348
                                                                 -----------        -----------
         Income before taxes ............................              1,374              1,555
Income tax expense ......................................                393                597
                                                                 -----------        -----------
         Net income .....................................        $       981        $       958
                                                                 ===========        ===========

Basic earnings per common share .........................        $       .26        $       .23
Diluted earnings per common share .......................        $       .25        $       .22

Weighted Average Common Shares-Basic ....................          3,839,278          4,250,413

Weighted Average Common Shares-Diluted ..................          3,879,890          4,377,404
</TABLE>


 See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                                   CATSKILL FINANCIAL CORPORATION
                                     Consolidated Statements of Changes in Shareholders' Equity
                                            (In thousands, except share data) (Unaudited)

                                                                                            Retained       Common         Unearned  
                                                                            Additional      Earnings,       Stock        Management 
                                                             Common          Paid-in     Substantially    Acquired by   Recognition 
                                                              Stock          Capital       Restricted       ESOP           Plan     
                                                              ----           -------        -------       -------        -------  
<S>                                                           <C>            <C>            <C>           <C>            <C>      
Balance at September 30, 1998                                 $ 57           $54,974        $37,374       $(3,981)       $(1,433) 
Comprehensive income:
         Net income                                                                             981                               
         Other comprehensive income, net of tax:
           Unrealized net losses arising during the
              period on AFS securities (Pre-tax $811)                                                                             
           Reclassification adjustment for gains
              realized in net income (pre-tax $22)                                                                                
                                                                                                                                  
         Other comprehensive income                                                                                               
                                                                                                                                  
Comprehensive income                                                                                                              
                                                                                                                                  
Dividends paid on common stock ($.0925 per share)                                              (366)                              
Amortization of unearned MRP compensation                                                                                    116  
                                                              ----           -------        -------       -------        -------  
Balance at December 31, 1998                                  $ 57           $54,974        $37,989       $(3,981)       $(1,317) 
                                                              ====           =======        =======       =======        =======  
                                                              

Balance at September 30, 1997                                 $ 57           $54,811        $34,915       $(4,209)       $(1,856) 
Comprehensive income:
         Net income                                                                             958                               
         Other comprehensive income, net of tax:
            Unrealized net gains arising during the
               period on AFS securities (Pre-tax $506)                                                                            
            Reclassification adjustment for gains
               realized in net income (pre-tax $19)                                                                               
                                                                                                                                  
         Other comprehensive income                                                                                               
                                                                                                                                  
Comprehensive income                                                                                                              
                                                                                                                                  
Dividends paid on common stock ($.08 per share)                                                (352)                              
Purchase of common stock (67,175 shares)                                                                                          
Exercise of stock options
(4,401 shares issued, net)                                                                      (29)                              
Amortization of unearned MRP compensation                                                                                    114  
                                                              ----           -------        -------       -------        -------  
 
Balance at December 31, 1997                                  $ 57           $54,811        $35,492       $(4,209)       $(1,742) 
                                                              ====           =======        =======       =======        =======  
                                                              
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             CATSKILL FINANCIAL CORPORATION
                               Consolidated Statements of Changes in Shareholders' Equity
                                      (In thousands, except share data) (Unaudited)
                                                       (continued)



                                                                             Accumulated                               
                                                              Treasury         Other                                  
                                                               Stock,      Comprehensive     Comprehensive               
                                                              at Cost           Income           Income          Total    
                                                              -------           ------           ------          -----    
<S>                                                           <C>                <C>           <C>              <C>               
Balance at September 30, 1998                                 $(21,223)          $ 2,063                        $67,831           
Comprehensive income:                                                                                                    
         Net income                                                                            $      981           981     
         Other comprehensive income, net of tax:                                                                         
           Unrealized net losses arising during the                                                                      
              period on AFS securities (Pre-tax $811)                                                (487)                        
           Reclassification adjustment for gains                                                                         
              realized in net income (pre-tax $22)                                                    (13)                        
                                                                                               ----------                         
         Other comprehensive income                                                 (500)            (500)         (500)          
                                                                                               ----------                         
Comprehensive income                                                                           $      481                         
                                                                                               ==========                         
Dividends paid on common stock ($.0925 per share)                                                                  (366)    
Amortization of unearned MRP compensation                                                                           116     
                                                              --------           -------                        -------           
Balance at December 31, 1998                                  $(21,223)          $ 1,563                        $68,062     
                                                              ========           =======                        =======     
                                                                                                                         
                                                                                                                         
Balance at September 30, 1997                                 $(12,862)            $ 921                        $71,777     
Comprehensive income:                                                                                                    
         Net income                                                                            $      958           958     
         Other comprehensive income, net of tax:                                                                         
            Unrealized net gains arising during the                                                                      
               period on AFS securities (Pre-tax $506)                                                303                         
            Reclassification adjustment for gains                                                                        
               realized in net income (pre-tax $19)                                                   (11)                        
                                                                                               ----------                         
         Other comprehensive income                                                  292              292           292           
                                                                                               ----------                        
Comprehensive income                                                                           $    1,250                         
                                                                                               ==========                         
Dividends paid on common stock ($.08 per share)                                                                    (352)    
Purchase of common stock (67,175 shares)                        (1,162)                                          (1,162)     
Exercise of stock options                                                                                                
(4,401 shares issued, net)                                          67                                               38    
Amortization of unearned MRP compensation                                                                           114      
                                                              --------        ----------                        -------           
Balance at December 31, 1997                                  $(13,957)       $    1,213                        $71,665 
                                                              ========        ==========                        ======= 
</TABLE>    
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                   CATSKILL FINANCIAL CORPORATION
                                Consolidated Statements of Cash Flows
                                           (In Thousands)


                                                                             Three Months Ended
                                                                                 December 31,
                                                                           1998               1997
                                                                         --------          --------
<S>                                                                       <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:                                           (Unaudited)
Net Income ..........................................................     $    981      $    958
Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation ......................................................           49            51
  Net accretion on securities .......................................          (23)           (9)
  Provision for loan losses .........................................           45            54
  MRP compensation expense ..........................................          116           114
  ESOP compensation expense .........................................           77           100
  Losses (gains) on sale of other real estate owned .................           13           (24)
  Gains on sales and calls of securities ............................          (22)          (19)
  Net increase in other assets ......................................          (45)         (204)
  Net decrease in accrued expense and other liabilities .............         (424)       (3,185)
                                                                          --------      --------
 Net cash provided (used) by operating activities ...................          767        (2,164)
                                                                          --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities .......            9         3,010
Net increase in loans ...............................................       (4,836)         (895)
Capital expenditures, net ...........................................          (88)          (79)
Purchase of company owned life insurance ............................      (10,000)         --
Purchase of AFS securities ..........................................      (12,699)      (16,637)
Proceeds from sale of securities available for sale .................        5,394         2,019
Proceeds from maturity/calls/paydown of AFS securities ..............       13,702         9,689
Proceeds from sale of other real estate owned .......................           10           116
                                                                          --------      --------
Net cash used by investing activities ...............................       (8,508)       (2,777)
                                                                          --------      --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   CATSKILL FINANCIAL CORPORATION
                                Consolidated Statements of Cash Flows
                                           (In Thousands)
                                            (continued)


                                                                             Three Months Ended
                                                                                 December 31,
                                                                           1998               1997
                                                                         --------          --------
<S>                                                                       <C>           <C>     
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options .....................         --              38
Net increase in deposits ............................................        5,156         1,231
Net increase in advances from borrowers for
 taxes and insurance ................................................        1,347         1,593
Net increase in short-term borrowings ...............................        2,985         5,215
Cash dividends on common stock ......................................         (366)         (352)
Purchase of common stock for treasury ...............................         --          (1,162)
                                                                          --------      --------
Net cash provided by financing activities ...........................        9,122         6,563
                                                                          --------      --------
Net increase in cash and cash equivalents ...........................        1,381         1,622
Cash and cash equivalents at beginning of period ....................        2,795         2,274
                                                                          --------      --------
Cash and cash equivalents at end of period ..........................     $  4,176      $  3,896
                                                                          ========      ========
Supplemental  disclosures of cash flow information:
Cash paid during the period for:
   Interest .........................................................     $  2,630      $  2,423
   Taxes ............................................................          370           521
Transfer of loans to other real estate owned ........................           32            83
Change in net unrealized gain (loss) on AFS securities, net of change
in deferred tax liability (benefit) of $(333) and $195, respectively          (500)          292
</TABLE>
  See accompanying notes to unaudited consolidated interim financial statements
<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                         Notes to Unaudited Consolidated
                          Interim Financial Statements

Note 1. Basis of Presentation

The unaudited  consolidated interim financial statements include the accounts of
Catskill  Financial  Corporation  ("Company")  and its wholly owned  subsidiary,
Catskill Savings Bank ("Bank").  All intercompany accounts and transactions have
been  eliminated  in   consolidation.   Amounts  in  prior  periods'   unaudited
consolidated interim financial statements are reclassified whenever necessary to
conform to the current  period's  presentation.  In  management's  opinion,  the
unaudited consolidated interim financial statements reflect all adjustments of a
normal  recurring  nature,  and  disclosures  which  are  necessary  for a  fair
presentation of the results for the interim periods presented and should be read
in  conjunction  with the  consolidated  financial  statements and related notes
included in the  Company's  1998 Annual Report to  Stockholders.  The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the full fiscal year ended September 30, 1999.

Note 2. Earnings Per Share

Basic  earnings per share excludes  dilution and is computed by dividing  income
available to common stockholders by the weighted average number of common shares
outstanding  for  the  period.  Unvested  restricted  stock  is  not  considered
outstanding  and only included in the computation of basic earnings per share on
the date  they are  fully  vested.  Diluted  earnings  per  share  reflects  the
potential  dilution that could occur if  securities or other  contracts to issue
common stock were  exercised  or converted  into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity, such as
the Company's  stock options and unvested  restricted  stock.  Unallocated  ESOP
shares  are not  included  in the  weighted  average  number  of  common  shares
outstanding for either the basic or diluted earnings per share calculations.

The following sets forth certain information  regarding the calculation of basic
and diluted earnings per share for the three month periods ended December 31:
<TABLE>
<CAPTION>

                 (in thousands, except share and per share data)


                                                         1998              1997
                                                      ----------      ----------
<S>                                                   <C>             <C>       
Net income .....................................      $      981      $      958
                                                      ==========      ==========

Weighted average common shares .................       3,839,278       4,250,413
Dilutive effect of potential common shares
         related to stock compensation plans ...          40,612         126,991
                                                      ----------      ----------
Weighted average common shares including
         potential dilution ....................       3,879,890       4,377,404
                                                      ==========      ==========

Basic earnings per share .......................      $      .26      $      .23
Diluted earnings per share .....................      $      .25      $      .22

</TABLE>
<PAGE>
Note 3. Comprehensive Income

On October 1, 1998, the Company adopted the provisions of Statement of Financial
Accounting  Standards  (SFAS) No. 130,  "Reporting  Comprehensive  Income." This
Statement  establishes  standards  for  reporting  and display of  comprehensive
income and its components. Comprehensive income includes the reported net income
of the Company  adjusted for items that are  currently  accounted  for as direct
entries to equity, such as the mark to market adjustment on securities available
for sale, foreign currency items and minimum pension liability  adjustments.  At
the Company, comprehensive income represents net income plus other comprehensive
income,  which  consists  of the net  change  in  unrealized  gains or losses on
securities  available for sale for the period.  Accumulated other  comprehensive
income represents the net unrealized gains or losses on securities available for
sale as of the balance  sheet  dates.  Comprehensive  income for the three month
period  ended   December  31,  1998  and  1997  was  $481,000  and   $1,250,000,
respectively.

Note 4. Impact of New Accounting Standards

In June 1997,  the FASB issued  Statement of Financial  Accounting  Standard No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes  standards for reporting by public companies
about  operating  segments  of their  business.  SFAS No.  131 also  establishes
standards for related disclosures about products and services,  geographic areas
and major  customers.  This Statement is effective for periods  beginning  after
December 15, 1997.  Management  anticipates  developing the required information
for  inclusion  in the  1999  annual  consolidated  financial  statements.  This
Statement  imposes  disclosure  requirements  only and is not expected to have a
material  effect on the  financial  condition  or results of  operations  of the
Company.

In February 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS
No.  132,  "Employers'  Disclosures  about  Pensions  and  Other  Postretirement
Benefits," which amends the disclosure  requirements of SFAS No. 87, "Employers'
Accounting for Pensions,"  SFAS No. 88,  "Employers'  Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' Accounting for Postretirement  Benefits Other Than
Pensions." SFAS No. 132 standardizes the disclosure  requirements of SFAS No. 87
and No. 106 to the  extent  practicable  and  recommends  a parallel  format for
presenting  information about pensions and other postretirements  benefits.  The
Statement  does not  change any of the  measurement  or  recognition  provisions
provided for in SFAS No. 87, No. 88, or No. 106. The  Statement is effective for
fiscal years beginning after December 15, 1997. Management anticipates providing
the required  disclosures  in the  September  30, 1999,  consolidated  financial
statements.  This  Statement  imposes  disclosure  requirements  only and is not
expected  to have a material  effect on the  financial  condition  or results of
operations of the Company.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities.  This  Statement  is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q
                                December 31, 1998


                   PART I - FINANCIAL INFORMATION (continued)

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

GENERAL

Catskill  Financial  Corporation  (the  "Company" or "Catskill  Financial")  was
formed in December  1995 to acquire all of the common stock of Catskill  Savings
Bank (the  "Bank")  upon its  conversion  from a mutual  savings bank to a stock
savings bank. On April 18, 1996, the Company  completed its initial public stock
offering,  issuing 5,686,750 shares of $.01 par value common stock at $10.00 per
share.  Net proceeds to the Company were $54.9 million after  conversion  costs,
and $50.4 million excluding the shares acquired by the Company's  Employee Stock
Ownership  Plan (the "ESOP"),  which were  purchased with the proceeds of a loan
from the Company.

The consolidated  financial  condition and operating  results of the Company are
primarily  dependent  upon  its  wholly  owned  subsidiary,  the  Bank,  and all
references  to the  Company  prior to April 18,  1996,  except  where  otherwise
indicated, are to the Bank.

The Bank has been and continues to be a community oriented financial institution
offering a variety of financial  services.  The Bank attracts  deposits from the
general public and uses such deposits,  together with other funds,  to originate
one to four family  residential  mortgages,  and, to a lesser  extent,  consumer
(including  home equity  lines of credit),  commercial,  and  multi-family  real
estate and other loans in its primary  market area.  The Bank's  primary  market
area is comprised of Greene County and southern Albany County in New York, which
are serviced  through five banking  offices,  the most recent  having  opened in
April 1998. The Bank's  deposit  accounts are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and, as a federal
savings  bank,  the Bank is  subject  to  regulation  by the  Office  of  Thrift
Supervision ("OTS").

The Bank's profitability,  like many financial  institutions,  is dependent to a
large extent upon its net interest income,  which is the difference  between the
interest it receives on interest earning assets,  such as loans and investments,
and the interest it pays on interest bearing liabilities, principally deposits.

Results of operations are also affected by the Bank's provision for loan losses,
non-interest  expenses  such as salaries and employee  benefits,  occupancy  and
other  operating  expenses and to a lesser extent,  non-interest  income such as
service charges on deposit accounts.

Financial  institutions  in general,  including the Company,  are  significantly
affected  by  economic  conditions,  competition  and the  monetary  and  fiscal
policies of the federal  government.  Lending  activities  are influenced by the
demand for and supply of  housing,  competition  among  lenders,  interest  rate
conditions  and  funds  availability.  Deposit  balances  and cost of funds  are
influenced  by  prevailing  market  rates  on  competing  investments,  customer
preference  and the levels of personal  income and savings in the Bank's primary
market area.
<PAGE>
FORWARD-LOOKING STATEMENTS

         When used in this Form 10-Q or future  filings by the Company  with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive officer,  the words or phrases "will likely
result",  "are expected to",  "will  continue",  "is  anticipated",  "estimate",
"project",   "believe",   or  similar   expressions  are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigations Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and  liabilities,  are inherently based upon predictions
of future events and circumstances.  Furthermore, from time to time, the Company
may  publish  other  forward-looking  statements  relating  to such  matters  as
anticipated financial performance, business prospects, and similar matters.

         The Private  Securities  Litigation  Reform Act of 1995 provides a safe
harbor for forward-looking  statements. In order to comply with the terms of the
safe  harbor,  the  Company  notes  that a variety of  factors  could  cause the
Company's   actual  results  and  experience  to  differ   materially  from  the
anticipated   results  or  other   expectations   expressed  in  the   Company's
forward-looking  statements. Some of the risks and uncertainties that may affect
the operations, performance,  development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:

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

o        the effect of certain  customers  and  vendors of  critical  systems or
         services failing to adequately address issues relating to becoming Year
         2000 compliant;

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

o        changes  in  laws  and  regulations  affecting  the  financial  service
         industry;

o        changes in competition; and

o        changes in consumer preferences.

         The Company  wishes to caution  readers not to place undue  reliance on
any  forward-looking  statements,  which speak only as of the date made,  and to
advise readers that various  factors,  including  those described  above,  could
affect the Company's financial  performance and could cause the Company's actual
results or  circumstances  for future  periods to differ  materially  from those
anticipated or projected.

         The  Company  does  not  undertake,   and  specifically  disclaims  any
obligation, to publicly release any revisions to any forward-looking  statements
to  reflect  the   occurrence  of  anticipated   or   unanticipated   events  or
circumstances after the date of such statements.
<PAGE>
FINANCIAL CONDITION

Total  assets were  $323.8  million at December  31,  1998,  an increase of $9.0
million,  or 2.9% from the $314.8 million at September 30, 1998. The increase in
assets was primarily in corporate owned life insurance,  and to a lesser extent,
loans and was  funded  principally  by  increases  in  deposits  and  short-term
borrowings.

Cash and cash  equivalents  were $4.2 million,  an increase of $1.4 million,  or
50.0% from the $2.8 million at September  30, 1998.  The change was  principally
due to a  temporary  increase  in checks in  process of  collection,  as well as
funding, in advance, of a pending order for vault cash.

Total  securities,  which  include  securities  held  to  maturity  ("HTM")  and
securities  available for sale ("AFS"),  excluding Federal Home Loan Bank stock,
were $159.8 million, a decrease of $7.2 million, or 4.3% from the $167.0 million
as of September 30, 1998.  The decrease in  securities  was  principally  in the
Company's  mortgage-backed  securities ("MBS") portfolio,  as the lower interest
rate environment  accelerated the rate of prepayments on the Company's  existing
MBS  portfolio.  The  Company  used most of the  proceeds  to fund a $10 million
purchase of corporate owned life insurance  ("COLI") as a financing  vehicle for
pre- and post retirement  employee  benefits.  The COLI's investment returns and
death  benefits are not taxable to the Company,  and the insurance  premiums are
non-deductible. The insurance policy provides that the initial lump sum premium,
after certain deductions,  is maintained in a separate account,  which minimizes
the Company's exposure to the insurance carrier and allows the Company to select
both the investment manager and the portfolio strategy.

Loans  receivable  were $144.5  million as of December 31, 1998,  an increase of
$4.8  million or 3.4% over the $139.7  million as of  September  30,  1998.  The
following  table  shows  the loan  portfolio  composition  as of the  respective
balance sheet dates:
<TABLE>
<CAPTION>
                                                 December 31,                            September 30,
                                                     1998                                   1998
                                        -----------------------------          ------------------------------
                                        (In thousands)     % of Loans          (In thousands)      % of Loans
<S>                                       <C>                    <C>              <C>                   <C>        
Real Estate Loans
    One-to-four family ............       $ 117,073              80.9%            $ 113,423             81.0%      
    Multi-family and commercial ...           7,241               5.0                 6,389              4.6     
    Construction ..................           1,453               1.0                 1,182               .8     
                                          ---------            ------             ---------            -----     
        Total real estate loans ...         125,767              86.9               120,994             86.4     
Consumer Loans ....................          18,301              12.6                18,399             13.2     
Commercial Loans ..................             661                .5                   602               .4     
                                          ---------            ------             ---------            -----     
        Gross Loans ...............         144,729             100.0%              139,995            100.0%    
                                                               ======                                  =====     
Less:  Net deferred loan fees .....            (201)                                   (260)                     
                                          ---------                              ----------                      
        Total loans receivable ....       $ 144,528                              $  139,735                      
                                          =========                              ==========                      
</TABLE>
<PAGE>   
One-to-four  family real estate loans  increased  $3.7 million,  or 3.3%, as the
Company has  continued to promote a 15 year fixed rate  mortgage  product with a
preferred  rate for  borrowers  who have their  monthly  payments  automatically
deducted from a checking account with the Bank. The increase in multi-family and
commercial real estate loans was principally  represented by a loan to finance a
mobile home park in the Company's primary market area.

Non-performing  assets at  December  31,  1998 were  $568,000,  or .18% of total
assets, compared to the $644,000, or .20% of total assets at September 30, 1998.
The  table  below  sets  forth  the  amounts  and  categories  of the  Company's
non-performing assets.
<TABLE>
<CAPTION>
                                                        December 31,   September 30,
                                                           1998           1998
                                                            ----           ----
                                                              (In thousands)
<S>                                                         <C>            <C> 
Non-performing loans:
    One-to-four family ...........................          $408           $520
    Multi-family and commercial ..................           --             --
    Consumer .....................................            98             71
                                                            ----           ----
        Total non-performing loans ...............           506            591
                                                            ----           ----
Foreclosed assets, net:
    One-to-four family ...........................            62             53
    Multi-family and commercial ..................           --             --
                                                            ----           ----
        Total foreclosed assets, net .............            62             53
                                                            ----           ----
        Total non-performing assets ..............          $568           $644
                                                            ====           ====

        Total non-performing loans
           as a % of total loans .................           .35%           .42%

</TABLE>

The  decrease  in  non-performing  loans at  December  31,  1998 as  compared to
September  30, 1998 was  attributable  principally  to loan  repayments  and the
foreclosure  of one loan which  resulted in the Company  acquiring  title to the
mortgaged property. The net realizable value of the property,  totaling $32,000,
was  transferred  to other  real  estate,  and  since the net  realizable  value
approximated  the Company's  carrying  value,  the Company  recorded no loss. In
addition,  during the three months ended December 31, 1998, the Company sold one
parcel of other real estate  which  reduced  real estate  owned by $23,000.  The
following  table  summarizes  the  activity in other real estate for the periods
presented:
<PAGE>
<TABLE>
<CAPTION>
                                            Three Months Ended December 31,
                                            -------------------------------
                                                 1998             1997
                                                -----            -----
                                                     (In thousands)
<S>                                             <C>              <C>  
Other real estate beginning of
    period ...........................          $  53            $ 248
Transfer of loans to other real
    estate owned .....................             32               83
Sales of other real estate, net ......            (23)             (92)
                                                -----            -----
Other real estate end of period ......          $  62            $ 239
                                                =====            =====

</TABLE>
The allowance for loan losses was $2.0 million,  or 1.37% of period end loans at
December 31,  1998,  and provided  coverage of  non-performing  loans of 392.1%,
compared  to  coverage  of  330.0%  as of  September  30,  1998.  The  following
summarizes the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
                                                     Three Months Ended December 31,
                                                     -------------------------------
                                                         1998              1997
                                                       -------          -------
                                                             (In thousands)
<S>                                                    <C>              <C>    
Allowance at beginning of the period .........         $ 1,950          $ 1,889
    Charge-offs ..............................             (13)             (57)
    Recoveries ...............................               2                4
                                                       -------          -------
        Net charge-offs ......................             (11)             (53)
    Provision for loan losses ................              45               54
                                                       -------          -------
Allowance at end of the period ...............         $ 1,984          $ 1,890
                                                       =======          =======
</TABLE>

Total  deposits  were $215.1  million at December 31, 1998,  an increase of $5.1
million,  or 2.4% from the $210.0  million at September 30, 1998.  The following
table shows the deposit composition as of the respective balance sheet dates:
<TABLE>
<CAPTION>
                                        December 31, 1998                     September 30, 1998
                                ---------------------------------    ----------------------------------
                                (In thousands)      % of Deposits    (In thousands)       % of Deposits
                                --------------      -------------    --------------       -------------
<S>                                <C>                   <C>            <C>                     <C>   
Savings ......................     $ 78,864              36.7%          $ 78,075                37.2% 
Money market .................        6,096               2.8              5,949                 2.8  
NOW ..........................       14,722               6.8             12,396                 5.9  
Non-interest demand ..........        7,315               3.4              6,009                 2.9  
Certificates of deposits .....      108,136              50.3            107,548                51.2  
                                   --------             -----           --------               -----  
                                   $215,133             100.0%          $209,977               100.0% 
                                   ========             =====           ========               =====  
</TABLE>
<PAGE>  
The growth in deposits was  principally  generated by the  Company's  two newest
offices. In addition,  the Company received approximately $1.6 million of direct
deposits in December  1998,  instead of January  1999,  because  January 1st and
January 3rd were not business days.

The Company  increased its borrowings,  which are  principally  with the Federal
Home Loan Bank of New York  ("FHLB"),  to $34.8 million at December 31, 1998, an
increase of $3.0 million  from the $31.8  million at  September  30,  1998.  The
additional  borrowings  were used to partially  fund the  Company's  purchase of
company owned life  insurance,  and the temporary  increase in cash and due from
banks.  As of December  31, 1998,  the Company  still has  additional  available
credit of $4.5 million under its overnight  line and $14.3 million under its one
month advance program with the FHLB.

Shareholders'  equity at December 31, 1998 was $68.1 million, an increase of $.3
million or .4% from the $67.8  million at September  30, 1998.  The increase was
principally  caused by the  Company's $.6 million of net income  retained  after
cash dividends  offset by a $.5 million  decline in the Company's net unrealized
gain (loss) on  securities  available for sale,  net of taxes.  The Company also
recorded a $.1 million increase in shareholders'  equity due to the amortization
of restricted stock awards.

Shareholders'  equity as a percentage  of total assets was 21.0% at December 31,
1998  compared to 21.6% at September  30, 1998.  Book value per common share was
$15.62,  or $16.03 excluding  unvested shares of the Company's  restricted stock
plan ("MRP"), and was $17.68 excluding  unallocated ESOP shares and unvested MRP
shares.


COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER
31, 1998 AND 1997

General

For the three months ended December 31, 1998, the Company recorded net income of
$981,000,  an increase of $23,000,  or 2.4%,  compared to the three month period
ended  December 31, 1997.  Diluted  earnings per share were $.25, an increase of
13.6% compared to diluted  earnings per share of $.22 for the three months ended
December  31,  1997.  Basic  earnings  per share  were $.26 for the three  month
period,  an increase of 13.0% compared to $.23 for the comparable  quarter.  For
the three months ended December 31, 1998, weighted average common shares - basic
were 3,839,278,  down 411,135,  or 9.7%, due to the Company's  share  repurchase
programs.

Annualized return on average assets for the three months ended December 31, 1998
and 1997,  was 1.24% and 1.31%,  respectively,  and return on average equity was
5.79% and 5.32%, respectively.

Net Interest Income

Net interest  income on a full tax  equivalent  basis for the three months ended
December 31,  1998,  was $3.0  million,  an increase of $98,000,  or 3.4%,  when
compared  to the  three  months  ended  December  31,  1997.  The  increase  was
principally  volume related as the Company  increased its average earning assets
$24.1 million,  more than  offsetting the increase in interest  expense from the
Company's funding of its stock repurchase program.  The Company funded the share
repurchases,   along  with  its  growth  in  earning  assets,  principally  with
borrowings and, to a lesser extent, deposit growth.
<PAGE>
Interest income for the three months ended December 31, 1998 was $5.6 million on
a tax equivalent  basis,  an increase of $299,000,  or 5.7%, over the comparable
period last year.  The $24.1 million  increase in the average  volume of earning
assets had a direct  positive effect on interest income as the Company sought to
leverage its excess capital, offset somewhat by a twenty basis point drop in the
yield on its average earning assets.

Average  earning  assets  increased  principally  in  the  loan  and  securities
portfolios, which on average grew 11.9% and 5.8%, respectively.  Loan growth was
principally due to the promotion of a 15 year fixed rate mortgage product, which
increased  volume,  but had an adverse impact on the loan portfolio  yield since
the loans  were  originated  at rates  below the  average  portfolio  yield.  In
addition,  the Company,  due to lower market interest rates,  experienced higher
loan prepayments, and refinancing of its existing portfolio, which together with
the loan  promotion  caused the yield on the loan portfolio to decrease 28 basis
points to 7.79%.

Average MBS were $85.3  million for the three  months  ended  December 31, 1998,
down only 1% from the  comparable  period.  The average  yield on MBS was 6.32%,
down 71 basis  points  from  the  comparable  period,  as the  Company  has been
purchasing  one year Treasury  indexed  teaser rate  adjustable  rate  mortgages
("ARM's").  Consequently,  29.9% of the average MBS portfolio represented teaser
rate ARM's compared to only 4.2% in the comparable period. The teaser ARM's were
purchased  during the initial teaser rate period,  therefore the initial average
interest  rate and yield  will be less than the fully  indexed  rate and  yield.
Management  expects the average  yield of these ARM's to increase as they adjust
to their fully indexed rate;  however,  the actual increase will depend upon the
level of the one-year constant maturity treasury index when the rates adjust.

Average  other  securities  increased  $9.8  million,  or 14.1%,  as the Company
purchased longer call protected bank qualified municipal  securities to increase
yields and reduce  reinvestment risk if rates decline.  The average yield on the
other  securities  portfolio for the three months ended  December 31, 1998,  was
7.43%, an increase of 44 basis points from the comparable period, as the Company
replaced  securities  called  and/or  matured with higher  yielding  municipals.
Municipal  securities now represent 45.0% of average other securities,  compared
to less than 8% in the comparable period.

Interest expense for the three months ended December 31, 1998, was $2.6 million,
an increase of $201,000,  or 8.3%. The change was principally due to an increase
in the  average  volume of interest  bearing  liabilities  offset  somewhat by a
decrease in the Company's cost of funds.  Average interest  bearing  liabilities
were $237.3  million,  an increase of $26.9  million,  or 12.8%,  as the Company
borrowed in order to fund the  Company's  stock  repurchase  program and earning
asset growth. Average long-term borrowings were up $25.0 million, as the Company
converted  a portion  of its  short-term  borrowings  to  long-term  borrowings,
principally through  convertible  (callable)  advances.  There were no long-term
borrowings  in  the  comparable  period  in  fiscal  1998.   Average  short-term
borrowings  were $5.4 million for the three months ended December 31, 1998, down
$7.3  million  from the  comparable  three  month  period  due to the  change to
long-term borrowings. In addition, the Company's average certificates of deposit
("CD's") increased $8.0 million, or 8.0%, as the Company in fiscal 1998 promoted
a special 15 month CD program at a premium  rate due to  competitive  pressures.
The cost of  funds  decreased  18 basis  points  to  4.39%  as the  Company  has
generally lowered its deposit rates.
<PAGE>
The Company's net yield on average earning assets was 3.83% for the three months
ended  December  31,  1998,  down 19 basis  points  compared  to  4.02%  for the
comparable period of the prior year. The decrease was principally  caused by the
Company's stock repurchase  program,  which reduced the level of no-cost funding
sources, and consequently  increased the amount of average earning assets funded
by interest bearing  liabilities.  For the three months ended December 31, 1998,
the Company had $69.1 million of average earning assets with no funding costs, a
decrease of $2.8 million,  or 3.9%,  from the $71.9 million for the three months
ended December 31, 1997.

For more information on average balances, interest, yield and rate, please refer
to Table #1, included in this report.

Provision for Loan Losses

The Company  establishes  an  allowance  for loan losses based on an analysis of
risk factors in its loan portfolio.  This analysis  includes  concentrations  of
credit,  past loan loss  experience,  current  economic  conditions,  amount and
composition  of loan  portfolio,  estimated  fair  market  value  of  underlying
collateral, delinquencies and other factors. Accordingly, the calculation of the
adequacy of the  allowance  for loan losses is not based  solely on the level of
non-performing loans.

The  provision  for loan losses was  $45,000,  or .13% of average  loans for the
three months ended  December 31,  1998,  down from  $54,000,  or .17% of average
loans in the  comparable  period of the prior year.  The decrease is principally
attributable  to a reduction in net  charge-offs to $11,000,  or .03% of average
loans for the three months ended  December 31, 1998, as compared to $53,000,  or
 .17% of  average  loans in the  comparable  period.  Non-performing  loans  were
$506,000 as of December 31, 1998, or .35% of total loans, a decrease of $278,000
from  December  31, 1997,  when they were .62% of total  loans.  At December 31,
1998,  the  allowance  for loan  losses was  $1,984,000,  or 1.37% of period end
loans, and provided coverage of non-performing loans of 392.1% compared to 1.49%
and 241.1%, respectively, as of December 31, 1997.

Non-Interest Income

Non-interest  income was $164,000 for the three months ended  December 31, 1998,
an increase of $45,000 or 37.8% from the three months  ended  December 31, 1997.
The increase  was  principally  service fees on deposit  accounts as the Company
continues  to promote  checking  accounts  to  increase  its core  deposits  and
diversify its revenue.

Non-Interest Expense

Non-interest   expense  for  the  three  months  ended  December  31,  1998  was
$1,465,000,  an increase of $117,000,  or 8.7%, over the comparable  period last
year. The increase was principally the cost  attributable to our new supermarket
branch,  which  opened  in April  1998,  as well as  higher  other  real  estate
expenses, and other professional fees.

Salaries  and employee  benefits  for the three months ended  December 31, 1998,
were $871,000,  an increase of $31,000,  or 3.7%,  principally from staffing our
new branch which opened in April 1998. Other real estate expenses, net increased
$30,000,  principally  from sales, as the Company incurred a $13,000 loss in the
three  months  ended  December  31,  1998,  compared  to gains of $16,000 in the
comparable period.  Other professional fees were $59,000, an increase of $22,000
as the Company incurred higher costs due to higher tax, actuarial and investment
advisory services.
<PAGE>
Income Tax Expense

Income tax expense for the three months ended December 31, 1998, was $393,000, a
decrease of  $204,000,  or 34.2%,  from the  comparable  period  last year.  The
Company's  effective tax rates for the three months ended  December 31, 1998 and
1997, were 28.60% and 38.39%,  respectively.  The decrease in both the effective
tax rate and  income  tax  expense is  principally  the impact of the  Company's
purchase of tax-exempt securities, primarily bank qualified municipals.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity  is the ability to generate  cash flows to meet  present and  expected
future funding needs.  Management monitors the Company's liquidity position on a
daily basis to evaluate its ability to meet  expected and  unexpected  depositor
withdrawals and to make new loans and or investments.  The Company is seeking to
reduce its high level of liquidity, but continues to manage its balance sheet so
there has been no need for unanticipated sales of assets.

The Company's primary sources of funds for operations are deposits,  borrowings,
principal and interest  payments on loans,  mortgage backed securities and other
securities available for sale.

Net cash provided by operating  activities  was $.8 million for the three months
ended December 31, 1998, an increase of $2.9 million from the  comparable  three
month period.  The increase was principally  the change in accrued  expenses and
other  liabilities  caused by a decrease in official bank checks  outstanding in
the prior year.  Official bank checks  decreased  principally as a result of the
Company's  payment of real estate taxes for mortgage  borrowers  using  escrowed
funds earlier in September 1998 than in September 1997.

Investing  activities  used $8.5 million in the three months ended  December 31,
1998,  as the Company  increased its assets  principally  from the $10.0 million
purchase of COLI, and $4.8 million in loans,  offset  somewhat by a $6.4 million
reduction in  securities.  Financing  activities  provided $9.1 million,  as the
Company experienced increases in deposits, short-term borrowings and advances by
borrowers  for taxes,  somewhat  offset by the payment of cash  dividends on its
common  stock.  For more  details  concerning  the  Company's  cash  flows,  see
"Consolidated Statements of Cash Flows."

An  important  source  of the  Company's  funds  is the  Bank's  core  deposits.
Management  believes that a substantial  portion of the Bank's $215.1 million of
deposits   are  a  dependable   source  of  funds  due  to  long-term   customer
relationships.  The Company does not currently use brokered deposits as a source
of funds,  and as of December  31, 1998,  deposit  accounts  having  balances in
excess of $100,000 totaled $19.0 million,  or less than 8.8%, of total deposits.
The Bank is required to maintain  minimum  levels of liquid assets as defined by
the OTS regulations.  The requirement,  which may be varied by the OTS depending
upon  economic  conditions  and deposit  flows,  is based upon a  percentage  of
deposits and short-term borrowings.  The OTS required minimum liquidity ratio is
currently  4% and for the  month  of  December  1998,  the Bank  exceeded  that,
maintaining an average liquidity ratio of 46.34%.

The Company  anticipates  that it will have sufficient funds to meet its current
commitments.  At December 31,  1998,  the Company had  commitments  to originate
loans of $4.3 million. In addition,  the Company had undrawn commitments of $2.6
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at December 31, 1998,  totaled $71.9
million,  and  management  believes that a significant  portion of such deposits
will remain with the Company.
<PAGE>
Although there are no minimum capital ratio  requirements  for the Company,  the
Bank is required to maintain minimum regulatory capital ratios. The following is
a summary of the Bank's actual capital  amounts and ratios at December 31, 1998,
compared to the OTS minimum capital requirements:
<TABLE>
<CAPTION>
                                           Actual                        Minimum
                                           ------                        -------
                                  Amount           %                 Amount          %
                                 -------         -----             -------          --- 
                                                   (Dollars in Thousands)

<S>                              <C>             <C>               <C>              <C> 
Tangible Capital                 $56,229         17.65%            $ 4,779          1.5%
Core Capital                      56,229         17.65              12,743          4.0
Risk Based Capital                57,923         42.83              10,819          8.0
</TABLE>

On April 18, 1999,  it will have been three years since the Bank  converted to a
public  company,  consequently,  the Company  will no longer be subject to stock
repurchase  restrictions  of the OTS.  The  Company  expects,  subject to market
conditions,  to continue to use stock repurchase programs as part of its capital
management   strategies.   At  December  31,  1998,  the  Holding   Company  had
approximately  $6.0 million in available  resources to pursue stock repurchases.
Furthermore,  the Bank  could pay $21.7  million  of  dividends  to the  Holding
Company after notifying the OTS in writing.

Year 2000 Readiness Disclosure

The  Year  2000  ("Y2K")  issue  confronting  the  Company  and  its  suppliers,
customers,  customers'  suppliers  and  competitors  centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems  originally  were programmed with six digit dates that provided only two
digits to identify the calendar  year in the date field.  With the impending new
millennium,  these  programs and computers  will recognize "00" as the year 1900
rather than the year 2000.

Substantially,  all of the Company's  mission critical systems are outsourced or
are  purchased  software  packages.  As a result,  much of the  remediation  and
testing  process is dependent on the accuracy of work performed by, and the Year
2000 compliance of software, hardware and equipment provided by, vendors.

The  Company's  total Y2K project cost is  estimated  to be  $100,000,  of which
$50,000 is expected to be hardware  and software  upgrades.  So far, the Company
has expensed  $25,000 of the project cost,  and expects to amortize the hardware
and software upgrades over their estimated useful lives of three to five years.

The  Company's  progress on its Year 2000  readiness is continuing as scheduled.
During the quarter,  the Company tested all of its mission critical systems, and
processed  transactions  with dates up through and including  March 1, 2000. The
results of the Company's tests, as well as other customers of the Company's data
processing service provider,  disclosed no Year 2000 issues.  Dates remaining to
be tested are year-end 2000, as well as three dates within year 2001.

The Company expects its mission  critical  systems to be compliant by June 1999,
and all others by September 1999.
<PAGE>
The Company  expects that when the century  changes,  disruption in service will
come not from a failure of its systems or the systems of the providers with whom
it interfaces,  but rather from outside  agencies  (i.e.  electric and telephone
companies)  beyond its  control.  Therefore,  contingency  planning and business
resumption  planning will be based on the  Company's  formal  Disaster  Recovery
Program,  which includes using such things as spreadsheet  software or reverting
to manual systems until problems can be corrected.

The Company has written a Disaster  Recovery and Year 2000 Contingency Plan, and
management  expects to test the plan before June 30,  1999.  The Company is also
undertaking  various customer  awareness  programs,  such as posted  statements,
mailing of FDIC brochures and publishing information on its website.

                   PART I - FINANCIAL INFORMATION (continued)

Item 3.            Quantitative and Qualitative Disclosures About Market Risk

The  Company  believes  there have been no  material  changes  in the  Company's
interest rate risk  position  since  September  30, 1998.  Other types of market
risk, such as foreign  exchange rate risk and commodity price risk, do not arise
in the normal course of the Company's business activities.


               TABLE #1 AVERAGE BALANCES, INTEREST, YIELD AND RATE

The following table presents, for the periods indicated, the total dollar amount
of  interest  income  from  average  interest-earning  assets and the  resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed  both in  dollars  and rates.  Tax  equivalent  adjustments  reflected
principally on municipal  securities  totaled $235,000 and $19,000 for the three
month  periods  ended  December  31,  1998 and 1997,  respectively.  All average
balances are daily average  balances.  Non-accruing  loans have been included in
the table as loans  receivable with interest  earned  recognized on a cash basis
only.  Securities  include both the securities  available for sale portfolio and
the held to maturity portfolio,  other than mortgage backed securities which are
shown  separately.  Mortgage  backed  securities  are  primarily  classified  as
available for sale. Securities available for sale are shown at amortized cost.
<PAGE>
<TABLE>
<CAPTION>
                                                                         THREE MONTH PERIODS ENDED
                                       --------------------------------------------------------------------------------------------
                                                    December 31, 1998                                December 31, 1997
                                       ------------------------------------------        ------------------------------------------
                                        Average                                           Average
                                       Balance        Interest         Yield/Rate         Balance         Interest       Yield/Rate
                                       -------        --------         ----------         -------         --------       ----------
                                                                          (Dollars in Thousands)
<S>                                    <C>             <C>                 <C>           <C>              <C>                <C>  
Interest-Earning Assets
  Loans receivable, net                $141,515        $ 2,757             7.79%         $126,421         $ 2,551            8.07%
  Mortgage-backed securities             85,331          1,348             6.32%           86,192           1,514            7.03%
  Securities                             79,410          1,475             7.43%           69,574           1,216            6.99%
  Federal funds sold and other               62              1             6.40%               43               1            9.23%
                                       --------        -------                           --------         -------
  Total interest-earning assets         306,318          5,581             7.29%          282,230           5,282            7.49%
Allowance for loan losses               (1,965)                                           (1,876)
Other assets, net                        10,185                                             8,766
                                       --------                                          --------
  Total Assets                         $314,538                                          $289,120
                                       ========                                          ========
Interest-Bearing Liabilities
  Savings deposits                     $ 77,797           $607             3.10%         $ 78,235            $682            3.46%
  Money market                            6,106             45             2.92%            6,925              56            3.21%
  Now deposits                           13,109             64             1.94%           10,986              68            2.46%
  Certificates of deposit               107,921          1,499             5.51%           99,942           1,425            5.66%
  Short-term borrowings                   5,436             71             5.18%           12,702             184            5.75%
  Long-term borrowings                   25,000            329             5.22%              ---
  Escrow and other                        1,897             11             2.30%            1,571              10            2.53%
                                       --------        -------                           --------         -------
  Total interest-bearing
      liabilities                       237,266          2,626             4.39%          210,361           2,425            4.57%
Non-interest bearing                      6,541                                             4,574
Other liabilities                         3,558                                             2,751
Shareholders' equity                     67,173                                            71,434
                                       --------                                          --------
  Total Equity and Liabilities         $314,538                                          $289,120
                                       ========                                          ========

  Net interest income                                   $2,955                                             $2,857
                                                        ======                                             ======
  Net interest rate spread                                                 2.90%                                             2.92%
                                                                           ====                                              ==== 
  Net yield on average
       interest-earning assets                                             3.83%                                             4.02%
                                                                           ====                                              ==== 
  Average interest earning
       assets to average interest
         bearing liabilities            129.10%                                           134.16%
                                        ======                                            ====== 
  Earning Assets/Total Assets            97.39%                                            97.62%
                                        ======                                            ======
</TABLE>
<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q

                                DECEMBER 31, 1998

--------------------------------------------------------------------------------


                           PART II - OTHER INFORMATION

Item 1.           Legal Proceedings
                  -----------------

In the  ordinary  course of  business,  the  Company and the Bank are subject to
legal actions which involve  claims for monetary  relief.  Management,  based on
advice of counsel,  does not believe  that any  currently  known legal  actions,
individually or in the aggregate will have a material effect on its consolidated
financial condition or results of operation.

Item 2.           Changes in Securities
                  ---------------------

                           None

Item 3.           Defaults on Senior Securities
                  -----------------------------

                           Not Applicable

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

                           None

Item 5.           Other Information
                  -----------------

                           None

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

 (a) Exhibits
         (11)     Computation of Net Income per Common Share
         (27)     Financial Data Schedule (included only in EDGAR filing)
<PAGE>



                                   SIGNATURES


Pursuant  to the  requirements  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.


                                            CATSKILL FINANCIAL CORPORATION


Date: February 12, 1999                      /s/ Wilbur J. Cross
                                             --------------------
                                             Wilbur J. Cross
                                             Chairman of the Board, President
                                             and Chief Executive Officer
                                             (Principal Executive Officer)



Date: February 12, 1999                      /s/ David J. DeLuca
                                             --------------------
                                             David J. DeLuca
                                             Chief Financial Officer
                                             (Principal Financial and
                                             Accounting Officer)