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 MARCH 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                 4,585,615
      -----------------------------       ------------------------------
             (TITLE OF CLASS)             (OUTSTANDING AT APRIL 30, 1998

<PAGE>

                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q
                                 MARCH 31, 1998



INDEX
-----

PART I        FINANCIAL INFORMATION                                        Page
------        ---------------------

Item 1.       Consolidated Interim Financial Statements

              Consolidated Statements of Financial Condition
              as of March 31, 1998 (Unaudited) and September
              30, 1997 ................................................      1

              Consolidated  Statements  of  Income  for  the
              three  months and six months  ended  March 31,
              1998 and 1997 (Unaudited) ...............................      2

              Consolidated    Statements   of   Changes   in
              Shareholders'  Equity for the six months ended
              March 31, 1998 and 1997 (Unaudited) .....................      3

              Consolidated  Statements of Cash Flows for the
              six  months  ended  March  31,  1998  and 1997
              (Unaudited) .............................................      4

              Notes  to   Unaudited   Consolidated   Interim
              Financial Statements ....................................      5

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

Item 3.       Quantitative and Qualitative Disclosures about
              Market Risk .............................................     20

PART II.      OTHER INFORMATION


Item 1.       Legal Proceedings .......................................     23

Item 4.       Submission  of Matters  to a Vote of  Security
              Holders .................................................     23

Item 6.       Exhibits and Reports on Form 8-K ........................     23

              Signatures ..............................................     24

<PAGE>

<TABLE>
<CAPTION>
                                      CATSKILL FINANCIAL CORPORATION
                              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                    (IN THOUSANDS, EXCEPT SHARE DATA)

         Assets                                                      March 31, 1998   September 30, 1997
         ------                                                      --------------   ------------------
                                                                      (Unaudited)
                                                                      -----------
<S>                                                                     <C>               <C>     
Cash and cash equivalents                                               $  2,623          $  2,274
Securities available for sale, at fair value                             157,571           148,114
Investment securities, at amortized cost:
     (Estimated fair value of $3,109 at March 31, 
     1998, and $8,112 at September 30, 1997)                               3,062             8,055
Stock in Federal Home Loan Bank of NY, at cost                             1,954             1,762
Loans receivable, net                                                    125,644           124,337
Accrued interest receivable                                                2,253             2,303
Premises and equipment, net                                                2,405             2,367
Real estate owned, net                                                       228               248
Other assets                                                                 192               159
                                                                        --------          --------
          Total Assets                                                  $295,932          $289,619
                                                                        ========          ========

          Liabilities And Shareholders' Equity
          ------------------------------------
Liabilities:
   Deposits:
     Non-interest bearing                                               $  4,953          $  4,370
     Interest bearing                                                    198,862           196,542
                                                                        --------          --------
          Total Deposits                                                 203,815           200,912
   Short-term borrowings                                                  12,920            11,385
   Long-term borrowings                                                    5,000                --
   Advance payments by borrowers for property
          taxes and insurance                                              1,776               533
   Accrued interest payable                                                  126                59
   Official bank checks                                                    1,559             3,861
   Accrued expenses and other liabilities                                  1,419             1,092
                                                                        --------          --------
          Total Liabilities                                             $226,615          $217,842
                                                                        --------          --------
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 March 31, 1998 and September 30, 1997                                 57                57
   Additional paid-in capital                                             54,900            54,811
   Retained earnings, substantially restricted                            36,117            34,915
   Common stock acquired by ESOP                                          (4,095)           (4,209)
   Unearned management recognition plan (MRP)                             (1,628)           (1,856)
   Treasury stock, at cost (1,080,518 shares at
     March 31, 1998, and 848,244 shares at
     September 30, 1997)                                                 (17,037)          (12,862)
   Net unrealized gain (loss) on securities
   available for sale, net of taxes                                        1,003               921
                                                                        --------          --------
         Total Shareholders' Equity                                       69,317            71,777
                                                                        --------          --------
         Total Liabilities and Shareholders' Equity                     $295,932          $289,619
                                                                        ========          ========

              See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>

                                                    1
<PAGE>

<TABLE>
<CAPTION>
                                                  CATSKILL FINANCIAL CORPORATION
                                                CONSOLIDATED STATEMENTS OF INCOME
                                         (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                             THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                                  March 31,                     March 31,
                                                                             1998           1997          1998            1997
                                                                             ----           ----          ----            ----
                                                                                 (Unaudited)                    (Unaudited)
<S>                                                                      <C>            <C>            <C>            <C>       
Interest and dividend income:
     Loans                                                               $    2,534     $    2,503     $    5,085     $    5,046
     Securities available for sale                                            2,589          2,191          5,148          3,919
     Investment securities                                                       56            163            177            400
     Federal funds sold and other                                                 3             88              4            538
     Stock in Federal Home Loan Bank of NY                                       34             18             65             37
                                                                         ----------     ----------     ----------     ----------
          Total interest and dividend income                                  5,216          4,963         10,479          9,940

Interest expense:
     Deposits                                                                 2,188          2,100          4,429          4,236
     Short-term borrowings                                                      144              2            328              2
     Long-term borrowings                                                        58             --             58             --
                                                                         ----------     ----------     ----------     ----------
          Total interest expense                                              2,390          2,102          4,815          4,238
                                                                         ----------     ----------     ----------     ----------
Net interest income                                                           2,826          2,861          5,664          5,702

Provision for loan losses                                                        45             75             99            150
                                                                         ----------     ----------     ----------     ----------
     Net interest income after provision
     for loan losses                                                          2,781          2,786          5,565          5,552
                                                                         ----------     ----------     ----------     ----------

Noninterest income:
     Recovery of Nationar loss contingency                                       --             16             --            100
     Service fees on deposit accounts                                            66             56            134            115
     Net securities gains                                                        33              5             52              5
     Other income                                                                41             44             73             78
                                                                         ----------     ----------     ----------     ----------
          Total noninterest income                                              140            121            259            298
                                                                         ----------     ----------     ----------     ----------

Noninterest expense:
     Salaries and employee benefits                                             838            754          1,678          1,418
     Advertising and business promotion                                          39             45             89             84
     Net occupancy on premises                                                   89             95            171            165
     Federal deposit insurance premiums                                           7              6             14              7
     Postage and supplies                                                        82             86            146            132
     Outside data processing fees                                               102             92            197            181
     Equipment                                                                   43             55             83             91
     Professional fees                                                           67             70            104            132
     Other real estate expenses, net                                            (43)           (24)           (59)           (21)
     Other                                                                      170            162            319            323
                                                                         ----------     ----------     ----------     ----------
          Total noninterest expense                                           1,394          1,341          2,742          2,512
                                                                         ----------     ----------     ----------     ----------
          Income before taxes                                                 1,527          1,566          3,082          3,338
Income tax expense                                                              555            623          1,152          1,329
                                                                         ----------     ----------     ----------     ----------
          Net income                                                     $      972     $      943     $    1,930     $    2,009
                                                                         ==========     ==========     ==========     ==========

Basic earnings per common share                                          $      .23     $      .20     $      .46     $      .41
Diluted earnings per common share                                        $      .23     $      .20     $      .45     $      .41

Weighted Average Common Shares-Basic                                      4,165,075      4,710,177      4,208,213      4,902,587
Weighted Average Common Shares-Diluted                                    4,294,100      4,796,595      4,336,377      4,935,705

                          See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>

                                                                2
<PAGE>
<TABLE>
<CAPTION>
                                                   CATSKILL FINANCIAL CORPORATION
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                            (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)

                                                         Retained      Common       Unearned               Net Unrealized
                                           Additional    Earnings,      Stock      Management   Treasury      Gain (Loss)
                                   Common   Paid-in   Substantially  Acquired by   Recognition   Stock,    on Securities
                                   Stock    Capital     Restricted      ESOP          Plan      at Cost  AFS, Net of Taxes   Total
                                   ------  ---------- -------------  -----------   -----------  -------  -----------------   -----
<S>                                  <C>    <C>           <C>         <C>            <C>        <C>              <C>        <C>  
Balance at September 30, 1997      $  57    $54,811       $34,915     $(4,209)       $(1,856)  $(12,862)       $   921      $71,777
Net Income                                                  1,930                                                             1,930
Dividends paid on common stock                               (699)                                                             (699)
Allocation of ESOP stock 
  (11,363 shares)                                89                       114                                                   203
Purchase of common stock 
  (236,675 shares)                                                                               (4,242)                     (4,242)
Exercise of stock options
  (4,401 shares issued, net)                                  (29)                                   67                          38
Amortization of unearned 
   MRP compensation                                                                      228                                    228
Change in net unrealized gain
  (loss) on securities AFS, 
  net of taxes                                                                                                      82           82
                                   -----    -------       -------     -------        -------   --------        -------      -------
Balance at March 31, 1998          $  57    $54,900       $36,117     $(4,095)       $(1,628)  $(17,037)       $ 1,003      $69,317
                                   =====    =======       =======     =======        =======   ========        =======      =======
Balance at September 30, 1996      $  57    $54,864       $31,984     $(4,436)            --         --        $   (88)     $82,381
Net income                                                  2,009                                                             2,009
Dividends paid on common stock                               (345)                                                             (345)
Allocation of ESOP stock 
  (11,355 shares)                                48                       114                                                   162
Grant of restricted shares under
  MRP (178,732 shares)                         (167)                                  (2,234)     2,401                          --
Purchase of common stock 
  (660,000 shares)                                                                               (9,516)                     (9,516)
Amortization of unearned 
  MRP compensation                                                                       192                                    192
Change in net unrealized gain 
  (loss) on securities AFS, 
  net of taxes                                                                                                    (971)        (971)
                                   -----    -------       -------     -------        -------   --------        -------      -------
Balance at March 31, 1997          $  57    $54,745       $33,648     $(4,322)       $(2,042)  $ (7,115)       $(1,059)     $73,912
                                   =====    =======       =======     =======        =======   ========        =======      =======

                           See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>


                                                                  3

<PAGE>
<TABLE>
<CAPTION>
                                        CATSKILL FINANCIAL CORPORATION
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (IN THOUSANDS)
                                                                                           Six Months Ended
                                                                                               March 31,
                                                                                           1998        1997
                                                                                           ----        ----
CASH FLOWS FROM OPERATING ACTIVITIES:                                                         (Unaudited)
<S>                                                                                      <C>         <C>    
 Net Income                                                                              $ 1,930     $ 2,009
 Adjustments  to  reconcile  net  income  to  net  cash  provided  by
   operating activities:
  Depreciation                                                                               105          84
  Net amortization (accretion) on securities                                                 (22)       (107)
  Provision for loan losses                                                                   99         150
  MRP compensation expense                                                                   228         192
  ESOP compensation expense                                                                  203         162
  Recovery of Nationar loss contingency                                                       --        (100)
  Gains on sale of other real estate owned                                                   (68)        (69)
  Gains on sales and calls of securities                                                     (52)         (5)
  Decrease (increase) in other assets                                                         17        (531)
  Collection of deposits held at Nationar                                                     --         183
  Decrease in accrued expense and other liabilities                                       (1,963)       (849)
                                                                                         -------     -------
 Net cash provided by operating activities                                                   477       1,119
                                                                                         -------     -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities                              5,007       9,015
Net increase in loans receivable                                                          (1,658)       (940)
Capital expenditures, net                                                                   (143)       (528)
Purchase of stock in Federal Home Loan Bank                                                 (192)         --
Purchase of AFS securities                                                               (42,530)    (92,404)
Proceeds from sale of securities available for sale                                       12,160       3,041
Proceeds from maturity/calls/paydown of AFS securities                                    21,110      52,871
Proceeds from sale of other real estate owned                                                340         300
                                                                                         -------     -------
Net cash used by investing activities                                                     (5,906)    (28,645)
                                                                                         -------     -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options                                                   38          --
Net increase in deposits                                                                   2,903         402
Net increase (decrease) in advance payments by borrowers for
 property taxes and insurance                                                              1,243        (256)
Increase in short-term borrowings                                                          1,535          --
Increase in long-term borrowings                                                           5,000          --
Cash dividends on common stock                                                              (699)       (345)
Purchase of common stock for treasury                                                     (4,242)     (9,516)
                                                                                         -------     -------
Net cash provided (used) by financing activities                                           5,778      (9,715)
                                                                                         -------     -------
Net increase (decrease) in cash and cash equivalents                                         349     (37,241)
Cash and cash equivalents at beginning of period                                           2,274      39,712
                                                                                         -------     -------
Cash and cash equivalents at end of period                                               $ 2,623     $ 2,471
                                                                                         =======     =======
Supplemental  disclosures of cash flow information:
Cash paid during the period for:
   Interest                                                                              $ 4,748    $  4,235
   Taxes                                                                                     661         815
Transfer of loans to other real estate owned                                                 252         302
Change in net unrealized gain (loss) on AFS securities, net of change
in deferred tax liability (benefit) of $55 and $(647) respectively                            82        (971)

                See accompanying notes to unaudited consolidated interim financial statements
</TABLE>
                                                      4
<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 Catskill
    Financial's  1997 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, 1998.

NOTE 2. EARNINGS PER SHARE

    On December 31, 1997,  the Company  adopted the  provisions  of Statement of
    Financial  Accounting Standard ("SFAS") No. 128, "Earnings per Share," which
    establishes  standards for computing and presenting earnings per share. SFAS
    No. 128 supercedes Accounting Principles Board Opinion No. 15, "Earnings per
    Share" and related interpretations.  SFAS No. 128 requires dual presentation
    of basic and diluted  earnings per share on the face of the income statement
    for all entities with a complex capital  structure and specifies  additional
    disclosure  requirements.  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 considered  outstanding and included in the computation
    of basic  earnings per share as of 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  restricted
    stock and stock  options.  SFAS No. 128  requires  restatement  of all prior
    period  earnings per share data presented.  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 adoption of
    SFAS No. 128 did not have a material  effect on the  Company's  consolidated
    financial position or results of operations.

                                       5

<PAGE>

NOTE 2. EARNINGS PER SHARE - CONTINUED

    The following sets forth certain  information  regarding the  calculation of
    basic and  diluted  earnings  per share (EPS)  calculations  for the periods
    indicated:



<TABLE>
<CAPTION>
                                                                         Six Months Ended March 31,
                                                                         --------------------------
                                                                     1998                          1997
                                                          --------------------------     --------------------------
                                                                   Weighted    Per-               Weighted    Per-
                                                            Net     Average   Share       Net      Average   Share
                                                          Income    Shares    Amount     Income    Shares    Amount
                                                          ------    ------    ------     ------    ------    ------

                                                               (In thousands, except share and per share data)

<S>                                                       <C>      <C>         <C>       <C>      <C>         <C> 
Basic EPS                                                 $1,930   4,208,213   $.46      $2,009   4,902,587   $.41
Dilutive effect of potential common
  shares related to stock based compensation plans            --     128,164                 --      33,118
                                                          ------   ---------             ------   ---------
Diluted EPS                                               $1,930   4,336,377   $.45      $2,009   4,935,705   $.41
                                                          ======   =========             ======   =========
</TABLE>


<TABLE>
<CAPTION>
                                                                         Three Months Ended March 31,
                                                                         ----------------------------
                                                                    1998                            1997
                                                          --------------------------     --------------------------
                                                                   Weighted    Per-               Weighted    Per-
                                                            Net     Average   Share       Net      Average   Share
                                                          Income    Shares    Amount     Income    Shares    Amount
                                                          ------    ------    ------     ------    ------    ------
                                                                                                 
                                                               (In thousands, except share and per share data)

<S>                                                       <C>      <C>         <C>       <C>      <C>         <C> 
Basic EPS                                                 $972     4,165,075   $.23      $943     4,710,177   $.20
Dilutive effect of potential common
  shares related to stock based compensation plans          --       129,025               --        86,418
                                                          ----     ---------             ----     ---------
Diluted EPS                                               $972     4,294,100   $.23      $943     4,796,595   $.20
                                                          ====     =========             ====     =========
</TABLE>

                                                          6
<PAGE>

NOTE 3. LONG-TERM BORROWINGS

    On  January  8,  1998,  the Bank  borrowed  $5.0  million at a rate of 5.07%
    (actual/360 days basis) under the FHLB's  convertible  advance program.  The
    borrowing  is secured  by GNMA  mortgage-backed  securities  with a carrying
    value  of  approximately  $6.1  million.  The  borrowing  has a  contractual
    maturity of ten (10) years,  however,  it also includes an option on January
    8, 2001, and quarterly thereafter, in which the FHLB can call the debt.

NOTE 4. IMPACT OF NEW ACCOUNTING STANDARDS

    In February 1998, the Financial  Accounting  Standards Board 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 parellel format for presenting  information  about pensions
    and other  postretirements  benefits.  This  Statement is  applicable to all
    entities and addresses disclosure only. 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.

                                       7
<PAGE>

                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q
                                 MARCH 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 four banking  offices,  the most recent  having  opened in
December  1996.  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.

                                       8
<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:

         a.  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;

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

         c.  changes in laws and  regulations  affecting the  financial  service
industry;

         d.  changes in competition; and

         e.  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 the result of any revisions which may be made to
any  forward-looking  statements  to reflect the  occurrence of  anticipated  or
unanticipated events or circumstances after the date of such statements.

FINANCIAL CONDITION

Total assets were $295.9 million at March 31, 1998, an increase of $6.3 million,
or 2.2% from the $289.6  million at September  30, 1997.  The increase in assets
was  primarily  in  securities,  and to a lesser  extent,  loans and was  funded
principally by an increase in long-term borrowings and deposits.


                                       9
<PAGE>

Cash and cash  equivalents  were $2.6  million,  an increase of $.3 million,  or
13.0% from the $2.3 million at September  30, 1997.  The change was  principally
due to an increase in checks in process of collection.

Total  securities,  which  include  securities  held  to  maturity  ("HTM")  and
securities  available for sale ("AFS"),  excluding Federal Home Loan Bank stock,
were  $160.7  million,  an  increase  of $4.5  million,  or 2.9% over the $156.2
million as of September 30, 1997. The increase in securities consisted of a $9.5
million increase in AFS securities,  primarily due to the Company's  purchase of
one-year  treasury  indexed teaser rate adjustable  mortgage  backed  securities
(ARM's)  and  municipal   securities  which  provided  the  Company  higher  tax
equivalent yields and longer call protection, and a $5.0 million decrease in HTM
securities  from scheduled  maturities and calls.  Consequently  as of March 31,
1998,  98.1% of the Company's  investment  portfolio  excluding the Federal Home
Loan Bank Stock was  classified  as AFS,  compared to 94.8% as of September  30,
1997.

Loans  receivable  were $127.6 million as of March 31, 1998, an increase of $1.4
million or 1.1% over the $126.2  million as of September 30, 1997. The following
table shows the loan portfolio  composition  as of the respective  balance sheet
dates:

                                                  March 31,   September 30,
                                                    1998          1997
                                                  ---------   -------------
                                                       (In thousands)
Real Estate Loans
    One-to-four family                             $103,500     $102,232
    Multi-family and commercial                       5,488        4,691
    Construction                                        436        1,306
                                                   --------     --------
        Total real estate loans                     109,424      108,229
Consumer Loans                                       18,509       18,473
                                                   --------     --------
        Gross Loans                                 127,933      126,702
Less:  Net deferred loan fees                          (383)        (476)
                                                   --------     --------
        Total loans receivable                     $127,550     $126,226
                                                   ========     ========

The increase in multi-family and commercial loans was principally represented by
loans to refinance a stripmall and a fitness  complex in the  Company's  primary
market area, while the decrease in construction loans principally  resulted from
seasonal  differences  as  existing  construction  loans  were  reclassified  as
one-to-four  family loans once construction was completed and the loan converted
to an amortizing mortgage.

                                       10
<PAGE>

Non-performing  assets at March  31,  1998  were $.9  million,  or .29% of total
assets,  compared to the $1.2 million or .40% of total  assets at September  30,
1997.  The table below sets forth the amounts and  categories  of the  Company's
non-performing assets.

                                      March 31,  September 30,
                                         1998        1997
                                      --------   -------------
                                           (In thousands)

Non-performing loans:
    One-to-four family                   $587       $  780
    Multi-family and commercial            --           --
    Consumer                               55          137
                                         ----       ------
        Total non-performing loans        642          917
                                         ----       ------

Foreclosed assets, net:
    One-to-four family                    228          225
    Multi-family and commercial            --           23
                                         ----       ------
        Total foreclosed assets, net      228          248
                                         ----       ------

        Total non-performing assets      $870       $1,165
                                         ====       ======

        Total non-performing loans
          as a % of total loans           .50%         .73%

        Total non-performing assets
          as a % of total assets          .29%         .40%


The decrease in non-performing  loans at March 31, 1998 as compared to September
30, 1997 was attributable  principally to the foreclosure of three loans and the
resulting acquisition of title to the mortgaged property by the Company. The net
realizable value of the properties, totalling $252,000, was transferred to other
real estate,  and $56,000,  representing the excess of the carrying value of the
related loan over the net realizable value of the property,  was charged against
the  allowance for loan losses.  In addition,  during the six months ended March
31,  1998,  the Company  completed  the sale of six parcels of other real estate
which reduced real estate owned by $272,000.  The following table summarizes the
activity in other real estate for the periods presented:

                                        Six Months Ended March 31,
                                        --------------------------
                                           1998         1997
                                           ----         ----
                                             (In thousands)

Other real estate beginning of
  period                                  $ 248        $ 357
Transfer of loans to other real
  estate owned                              252          302
Sales of other real estate, net            (272)        (231)
                                          -----        -----
Other real estate end of period           $ 228        $ 428
                                          =====        =====

                                       11

<PAGE>
The allowance for loan losses was $1.9 million,  or 1.49% of period end loans at
March 31,  1998,  and  provided  coverage  of  non-performing  loans of  296.9%,
compared  to  coverage  of  206.0%  as of  September  30,  1997.  The  following
summarizes the activity in the allowance for loan losses:

                                        Six Months Ended March 31,
                                        --------------------------
                                            1998        1997
                                            ----        ----
                                             (In thousands)
Allowance at beginning of period           $1,889      $1,833
    Charge-offs                               (89)       (153)
    Recoveries                                  7           7
                                           ------      ------
        Net charge-offs                       (82)       (146)
    Provision for loan losses                  99         150
                                           ------      ------
Allowance at end of period                 $1,906      $1,837
                                           ======      ======

Total  deposits  were  $203.8  million at March 31,  1998,  an  increase of $2.9
million,  or 1.4% from the $200.9  million at September 30, 1997.  The following
table shows the deposit composition as of the respective balance sheet dates:

<TABLE>
<CAPTION>
                                                     March 31, 1998                     September 30, 1997
                                         ----------------------------------     ----------------------------------
                                         (In thousands)       % of Deposits     (In thousands)       % of Deposits
<S>                                         <C>                     <C>            <C>                    <C>  
Savings                                     $ 79,271                38.9%          $ 79,448               39.6%
Money market                                   6,066                 3.0              7,115                3.5
NOW                                           11,209                 5.5             10,438                5.2
Non-interest demand                            4,953                 2.4              4,370                2.2
Certificates of deposits                     102,316                50.2             99,541               49.5
                                            --------               -----           --------              -----
                                            $203,815               100.0%          $200,912              100.0%
                                            ========               =====           ========              =====
</TABLE>

The growth in deposits was principally related to the opening of our fourth full
service branch in late December  1996,  and deposits at other offices  decreased
$.3 million,  down  marginally  since  September 30, 1997.  Although the Company
experienced  deposit  growth,  money market  deposits  decreased $1.0 million or
14.7%, and now represent only 3.0% of deposits  compared to 3.5% as of September
30, 1997.  The  composition  of deposits  continues  to shift to higher  costing
certificates  of deposits  ("CD's") as the decrease in money market deposits was
more than offset by a $2.8 million increase in certificates of deposit which now
represent  50.2% of deposits  compared to 49.5% as of September  30,  1997.  The
increase  in CD's is  principally  from the  Company's  promotion  of a 15-month
product to retain maturing  longer-term CD's and satisfy demand in the Company's
market  for  higher  yields.  Management  believes  that  this  change in mix is
consistent with what other financial institutions are experiencing, as customers
seek to  maximize  their  returns  and the  Company  has to  compete  with other
investment products such as mutual funds.

The Company increased its borrowings from the Federal Home Loan Bank of New York
("FHLB") to $17.9  million at March 31, 1998,  an increase of $6.5  million,  or
57.0%,  from the $11.4 million at September 30, 1997. The additional  borrowings
were used to fund the Company's stock  repurchase  program and growth in earning
assets as the Company continues to leverage its capital. In January, the Company
borrowed  $5.0  million  under the  FHLB's  convertible  advance  program.  This
represents the Company's first long-term borrowing, and the rate is set at 5.07%
(actual/360  days basis) for three  years,  at which time the FHLB could  demand
immediate  repayment,  and the Company  could  either repay the  borrowings,  or
continue the borrowing for its remaining  contractual

                                       12
<PAGE>

term  of  seven  years  at the  then  prevailing  rate of  interest.  Short-term
borrowings were $12.9 million at March 31, 1998, an increase of $1.5 million, or
13.2%,  from the $11.4 million at September 30, 1997. As of March 31, 1998,  the
Company still has additional credit of $1.4 million under its overnight line and
$14.3 million under its one month advance program.

Shareholders'  equity at March 31,  1998 was $69.3  million,  a decrease of $2.5
million,  or 3.5% from the $71.8 million at September 30, 1997. The decrease was
principally  caused by the Company's  repurchase  of 236,675  common shares at a
cost of $4.2 million, somewhat offset by the $1.2 million of net income retained
after cash  dividends and a $.1 million  change in the Company's net  unrealized
gain (loss) on  securities  available for sale,  net of taxes.  The Company also
recorded a $.4 million increase in shareholders'  equity due to the amortization
of  restricted  stock awards,  exercise of stock  options and the  allocation of
shares under the Company's ESOP.

Shareholders'  equity as a percent of total  assets was 23.4% at March 31,  1998
compared to 24.8% at September 30, 1997.  Book value per common share was $15.54
excluding  unvested shares of the Company's  restricted stock plan ("MRP"),  and
was $17.11 excluding unallocated ESOP shares and unvested MRP shares.

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

GENERAL

For the three months ended March 31,  1998,  the Company  recorded net income of
$972,000,  an increase of $29,000,  or 3.1%,  compared to the three month period
ended  March 31,  1997.  Basic and  diluted  earnings  per share were  $.23,  an
increase of 15.0%  compared to basic and diluted  earnings per share of $.20 for
the three  months  ended March 31,  1997.  For the three  months ended March 31,
1998,  weighted average common shares - basic were 4,165,075,  down 545,102,  or
11.6%, due to the Company's share repurchase programs.

Annualized  return on average  assets for the three  months ended March 31, 1998
and 1997,  was 1.35% and 1.39%,  respectively,  and return on average equity was
5.57% and 5.03%, respectively.

NET INTEREST INCOME

Net interest  income on a full tax  equivalent  basis for the three months ended
March 31, 1998, was $2.9 million, an increase of $40,000, or 1.4%, when compared
to the three months ended March 31, 1997.  The increase was  principally  volume
related as the Company increased its average earning assets $15.4 million,  more
than  offsetting  the loss of net interest  income from the Company  funding its
stock  repurchase  program.  The  Company  funded  the  average  cost  of  share
repurchases  of  approximately  $9.7  million,  along with its growth in earning
assets, principally with borrowings and, to a lesser extent, deposit growth.

Interest  income for the three months ended March 31, 1998 was $5.3 million on a
tax  equivalent  basis,  an increase of $328,000,  or 6.6%,  over the comparable
period last year.  The $15.4 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.  The increase in average earning assets principally
consisted of increases in  mortgage-backed  and municipal  securities  and, to a
lesser extent, loans.

                                       13
<PAGE>

Also positively  affecting interest income was a six basis point increase in the
yield on average earning assets to 7.42% as the Company  continued to change its
asset mix by investing more of its assets in higher yielding mortgage-backed and
municipal  securities  and less in lower  yielding  federal funds sold.  Average
mortgage-backed  securities  represented 31.3% of average earning assets for the
three months ended March 31, 1998,  compared to 29.3% for the comparable quarter
the prior year,  while federal  funds sold and other  declined from 2.6% to less
than .1% of average  earning assets between the same periods.  The average yield
on mortgage-backed  securities during the three months ended March 31, 1998, was
6.86%,  down 17 basis points from the comparable  period,  but still higher than
the average  yield of 5.19%  earned on federal  funds sold and other  short-term
investments  during  the  three  months  ended  March  31,  1997.  The  yield on
mortgage-backed  securities  declined 17 basis  points,  as the Company has been
purchasing one year Treasury  indexed teaser rate ARM's,  consequently  15.7% of
the average mortgage-backed  securities portfolio are now teaser rate ARM's. The
teaser ARM's were purchased during the initial teaser rate period,  consequently
the initial average  interest rate and yield will be less than the fully indexed
rate and  yield.  The  Company  had no teaser  ARM's in the  comparable  period.
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 and
the securities prepayments. In addition, the yield on other securities increased
43 basis  points  to 7.13%,  as the  Company  has been  purchasing  longer  call
protected  municipal  securities to increase yields and reduce reinvestment risk
if rates  decline.  Municipal  securities  now represent  14.3% of average other
securities, compared to less than 1% in the comparable period.

Interest expense for the three months ended March 31, 1998, was $2.4 million, an
increase of $288,000, or 13.7%. The change was principally due to an increase in
the average volume of interest bearing liabilities. The Company also experienced
an increase of 10 basis points in its cost of funds.  Average  interest  bearing
liabilities were $214.0 million,  an increase of $21.7 million, or 11.3%, as the
Company  borrowed in order to fund the Company's  stock  repurchase  program and
earning asset growth.  Average long-term borrowings were up $4.6 million, as the
Company  borrowed  $5.0  million  in January  1998 under the FHLB's  convertible
advance program.  There were no long-term  borrowings in the comparable  period.
Average  short-term  borrowings  were $10.1  million for the three  months ended
March  31,  1998,  while  there  were  only $.1  million  of  borrowings  in the
comparable three month period. In addition, the Company's average CD's increased
$8.2 million, or 8.8%, as the Company's customers continue to move toward higher
costing CD's and away from lower costing  deposits.  The 10 basis point increase
in the cost of funds was caused by the increase in the level of  borrowings  and
CD's, which represent the Company's  highest cost funding  sources.  The average
rate paid on CD's also increased by 9 basis points due to competitive  pressures
and a special 15 month CD program which offered premium rates.

The Company's net yield on average earning assets was 4.13% for the three months
ended March 31, 1998,  compared to 4.30% for the comparable quarter 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.  In the three months  ended March 31,  1998,  the Company had $71.0
million of average  earning assets with no related  funding costs, a decrease of
$6.3 million  from the $77.3  million for the three months ended March 31, 1997.
The Company also  experienced a 4 basis point decline in its net spread,  as its
cost of funds increased more than its yield on earning assets. The cost of funds
increase was principally caused by the change in funding mix as borrowings,  one
of the Company's  highest cost funding  sources,  now represent 6.9% of interest
bearing liabilities, compared to only .1% for the comparable three month period.

                                       14
<PAGE>

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 for the three months ended March 31,
1998, a decrease of $30,000 from the  comparable  period of the prior year.  The
decrease is  principally  the result of a $35,000,  or 54.7%,  reduction  in net
charge-offs to $29,000 for the three months ended March 31, 1998 compared to the
comparable  quarter of the prior year. In addition,  the Company has reduced its
non-performing  loans $303,000,  or 32.1%, so the allowance represents 296.9% of
non-performing  loans at March 31,  1998,  as compared to 194.4% as of March 31,
1997.

NON-INTEREST INCOME

Non-interest  income was $140,000 for the three months ended March 31, 1998,  an
increase of $19,000 or 15.7% from the three  months  ended March 31,  1997.  The
increase was  principally  higher  securities  gains and service  charge income,
offset  somewhat  by a decrease  in  Nationar  recoveries.  Security  gains were
$33,000,  an increase  of $28,000,  as the  Company  sold  certain  ARM's with a
lagging  index and  replaced  them with  Treasury  indexed  ARM's which are more
market sensitive.  Service fee income was up $10,000, or 17.9%, principally from
the Company's strategy of increasing  commercial  non-interest bearing deposits.
In the three months ended March 31, 1997,  the Company  recovered  the remaining
$16,000 of its Nationar loss reserve,  consequently  there were no recoveries in
the quarter ended March 31, 1998.

NON-INTEREST EXPENSE

Non-interest  expense for the three months ended March 31, 1998 was  $1,394,000,
an  increase  of  $53,000,  or  4.0%,  over the  comparable  period  last  year,
principally from increased personnel costs,  somewhat offset by lower other real
estate expenses.

Salaries and employee  benefits for the quarter  ended March 31, 1998  increased
$84,000, or 11.1%, compared to the period ended March 31, 1997, principally from
the higher cost of stock-based compensation plans, and increased staffing costs.
ESOP compensation increased $15,000, or 17.3%, due to an increase in the average
market price of the Company's stock.  Staffing costs increased  principally from
hiring  additional  staff for our new full  service  supermarket  branch,  which
opened in April 1998, as well as additional staff for other offices,  which have
increased transaction volumes. Other real estate expenses net, were down $19,000
as the Company  benefitted  from the reduction in the number of parcels in other
real estate.

INCOME TAX EXPENSE

Income tax expense for the three months ended March 31, 1998,  was  $555,000,  a
decrease  of  $68,000,  or 10.9%,  from the  comparable  period  last year.  The
Company's  effective  tax rates for the

                                       15
<PAGE>

three  months   ended  March  31,  1998  and  1997,   were  36.35%  and  39.78%,
respectively.  The  decreases  were  principally  the  impact  of the  Company's
purchase  of tax  advantaged  securities,  primarily  bank  qualified  municipal
securities and preferred stock.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997

GENERAL

For the six months  ended March 31,  1998,  the Company  recorded  net income of
$1,930,000,  a decrease  of $79,000 or 3.9%,  compared  to the six month  period
ended  March  31,  1997.  The  decrease  was   principally   caused  by  certain
non-recurring items which increased net income in the six months ended March 31,
1997, by approximately $100,000.  Basic and diluted earnings per share were $.46
and $.45 respectively for the six months ended March 31, 1998, compared to basic
and diluted  earnings per share of $.41 for the six months ended March 31, 1997.
Weighted  average common shares - basic for the six months ended March 31, 1998,
were  4,208,213,  a decrease  of 694,374  or 14.2%  from the  4,902,587  for the
comparable   period  ended  March  31,  1997.   The  decrease  was   principally
attributable to the share repurchase  programs under which the Company,  through
March 31, 1998, had purchased  1,266,151 shares or 22.3% of the shares issued in
its  initial  public  offering.  The  aggregate  cost to the  Company  was $19.5
million, or an average of $15.44 per common share repurchased.

Annualized  return on average assets for the six months ended March 31, 1998 and
1997, was 1.33% and 1.45%, respectively,  and return on average equity was 5.44%
and 5.14%, respectively.

NET INTEREST INCOME

Net  interest  income on a full tax  equivalent  basis for the six months  ended
March 31, 1998, was $5.8 million, an increase of $56,000, or 1.0%, when compared
to the six months ended March 31, 1997.  The increase was volume  related as the
Company increased its average earning assets $11.4 million, more than offsetting
the loss of net  interest  income  due to the  Company's  funding  of its  stock
repurchase  program.  The Company funded the cost of the share repurchases which
averaged approximately $13.1 million more than the comparable period ended March
31, 1997,  along with its growth in average  earning assets with borrowings and,
to a lesser extent, deposit growth.

Interest  income on a tax  equivalent  basis for the six months  ended March 31,
1998, was $10.6 million,  an increase of $633,000,  or 6.4%, over the comparable
six month period.  The increase was  principally  the deliberate  shift of asset
mix, as the Company  substantially  reduced its average  federal funds and other
short-term  investments and increased its mortgage-backed  securities portfolio.
Average  mortgage-backed  securities represented 30.9% of average earning assets
for the six months  ended March 31, 1998,  compared to 24.2% for the  comparable
period of the prior year,  while federal funds sold and other declined from 7.4%
to less than .1% of average  earning  assets  between the  periods.  The average
yield on mortgage-backed  securities during the six months ended March 31, 1998,
was 6.94%,  down 11 basis points from the  comparable  period,  but still higher
than the yield of 5.35% earned on average  federal  funds sold in the six months
ended March 31, 1997. Mortgage-backed securities yields declined 11 basis points
principally  from the Company's  purchase of $17.1  million of Treasury  indexed
teaser  rate  ARM's,  which  yield much less than the fully  indexed  rate.

                                       16
<PAGE>

The Company's investment portfolio had no teaser ARM's in the comparable period.
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 and
the securities prepayments. In addition, the yield on other securities increased
37 basis  points  to 7.06%,  as the  Company  has been  purchasing  longer  call
protected  municipal  securities to increase yields and reduce reinvestment risk
if rates decline.

Interest  expense for the six months ended March 31, 1998, was $4.8 million,  an
increase of $577,000,  or 13.6%. The increase was principally  volume related as
the Company  increased average interest bearing  liabilities  $19.6 million,  or
10.2%.  The increases were to fund the Company's share  repurchase  program,  as
well as to fund earning asset growth.

Average long-term  borrowings were up $2.3 million, as the Company borrowed $5.0
million in January 1998, under the FHLB's  convertible  advance  program,  there
were no  long-term  borrowings  in the  comparable  six  month  period.  Average
short-term borrowings increased $11.3 million, and now represent 5.4% of average
interest bearing liabilities.  In addition, the Company's average CD's increased
$8.0 million, or 8.7%, as the Company's customers continue to move toward higher
costing  CD's and away from lower  costing  deposits,  such as savings and money
market accounts.  The Company also experienced an increase of 14 basis points in
its cost of funds,  principally caused by an increase in the level of borrowings
and CD's, which represent the Company's highest cost funding sources.

The Company's net yield on average  earning  assets was 4.07% for the six months
ended March 31, 1998,  down 13 basis points compared to 4.20% for the comparable
period of the prior year. The decrease was  principally  caused by the Company's
stock  repurchase  program,  which  substantially  reduced  the level of no-cost
funding sources, and consequently increased the amount of average earning assets
funded by interest bearing liabilities. For the six months ended March 31, 1998,
the Company had $71.4 million of average earning assets with no funding costs, a
decrease of $8.3 million,  or 10.4%,  from the comparable six month period.  The
Company did,  however,  increase its net spread 2 basis points to 2.91%,  as the
Company's  change in asset mix  increased  yields on  earning  assets  more than
offsetting the increase in the cost of funds caused by the change in funding mix
to more borrowings, its highest cost funding source.

For more information on average balances, interest, yield and rate, please refer
to Table #2 included in this report.

PROVISION FOR LOAN LOSSES

The  provision  for loan losses was  $99,000 for the six months  ended March 31,
1998, a decrease of $51,000 from the comparable  six month period.  The decrease
was primarily the result of a $64,000, or 43.8%, reduction in net charge-offs to
$82,000. In addition, the Company has reduced its non-performing loans $303,000,
or 32.1%, so that the allowance now represents 296.9% of non-performing loans at
March 31, 1998, as compared to 194.4% as of March 31, 1997.

                                       17
<PAGE>

NON-INTEREST INCOME

Non-interest  income was  $259,000  for the six months  ended March 31,  1998, a
decrease of $39,000,  or 13.1%,  from the  comparable  period.  The decrease was
principally  due to the $100,000 of Nationar  recoveries in the six months ended
March 31, 1997; there were no Nationar  recoveries in the six months ended March
31, 1998.  Offsetting the impact of the Nationar recovery was an increase in net
securities  gains of $47,000 and an increase  of $19,000,  or 16.5%,  in service
charge  income.  The increase in securities  gains was  principally  the sale of
certain ARM's with a lagging  index,  while the increase in service  charges was
primarily the impact of the Company promoting  non-interest  bearing accounts to
commercial customers, which has increased the number of accounts.

NON-INTEREST EXPENSE

Non-interest expense for the six months ended March 31, 1998, was $2,742,000, an
increase of $230,000,  or 9.2%, over the comparable six month period.  Increases
in personnel  costs and outside data  processing  fees were  somewhat  offset by
reductions in professional fees and other real estate expenses.

Salaries  and  employee  benefits  for the six  months  ended  March  31,  1998,
increased  $260,000,  or 18.3%,  principally  from staffing new branches and the
increased cost of the Company's  stock based  compensation  plans.  Furthermore,
results for the six months  ended March 31, 1997,  benefitted  from an insurance
refund, which reduced that period's medical insurance costs. During that period,
the Company changed  insurance  carriers and received a refund of $95,000 due to
favorable claims experience. There were no such refunds in the comparable period
ended March 31, 1998.  Stock based  compensation  costs  increased  $77,000,  or
21.8%. ESOP compensation  increased $41,000, or 25.3%, due to an increase in the
average  market price of the Company's  common  stock.  The cost of the MRP plan
increased  $36,000,  principally  because  the plan was only  outstanding  for a
portion of the six months  ended March 31,  1997,  as the plan was approved at a
special  meeting of shareholders  on October 24, 1996 ("special  meeting"),  and
became  effective,  immediately  thereafter.  Outside data  processing fees were
$197,000, an increase of $16,000, or 8.8%, due to the new full service branch in
Windham, which has increased transaction volumes.

Professional fees were $104,000,  a decrease of $28,000,  or 21.2%,  principally
from the costs  associated with the special meeting held in the six months ended
March 31,  1997;  there was no such  meeting in the six months  ended  March 31,
1998.

Other real estate  expenses,  net were down $38,000,  as the Company  benefitted
from the substantial reduction in the number of parcels of other real estate.

INCOME TAX EXPENSE

Income tax expense for the six months ended March 31, 1998,  was  $1,152,000,  a
decrease of  $177,000,  or 13.3%,  from the  comparable  six month  period.  The
Company's  effective tax rates for the six months ended March 31, 1998 and 1997,
were  37.38%  and  39.81%,  respectively.  The  decrease  in both the income tax
expense  and  effective  tax  rate is  directly  attributable  to the  Company's
purchase  of tax  advantaged  securities,  primarily  bank  qualified  municipal
securities and preferred stock. 

                                       18
<PAGE>

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

Net cash  provided by  operating  activities  was $.5 million for the six months
ended March 31, 1998, a decrease of $.6 million  from the  comparable  six month
period last year. The change was principally  the reduction in accrued  expenses
and other liabilities caused by a decrease in official bank checks  outstanding.
Official bank checks decreased  principally as a result of the Company's payment
of real estate taxes for mortgage  borrowers  using  escrowed funds at September
30,  1997,  and is somewhat  offset by an increase in cash flows from  financing
activities,  as the Company  experienced  a net increase in advance  payments by
borrowers  for taxes and insurance of $1.5 million due to a change in school tax
due dates.

Investing  activities  used $5.9 million in the six months ended March 31, 1998,
as the Company  continued to leverage its balance  sheet by  increasing  earning
assets,  principally  $4.2  million in  securities,  and $1.7  million in loans.
Financing activities provided $5.8 million, as the Company experienced increases
in  deposits,  long-term  borrowings,  short-term  borrowings  and  advances  by
borrowers  for taxes,  somewhat  offset by the  purchase of  treasury  stock and
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 $203.8 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 at March 31, 1998,  deposit accounts having balances in excess of
$100,000 totaled $19.6 million or less than 9.6% 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 March  1998,  the Bank  exceeded  that,  maintaining  an
average liquidity ratio of 16.92%.

The Company  anticipates  that it will have sufficient funds to meet its current
commitments.  At March 31, 1998, the Company had  commitments to originate loans
of $3.6  million.  In  addition,  the Company had  undrawn  commitments  of $2.4
million on home equity and other lines of credit. Certificates of deposits which
are  scheduled  to mature in one year or less at March 31, 1998,  totaled  $71.3
million,  and  management  believes that a significant  portion of such deposits
will remain with the Company.

                                       19
<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 March 31,  1998,
compared to the OTS minimum capital requirements:

                                       Actual                 Minimum
                                       ------                 -------
                                  Amount       %          Amount      %
                                  ------      ----        ------     ----
                                          (Dollars in Thousands)

Tangible Capital                 $61,166      20.9%      $ 4,394     1.5%
Core Capital                      61,166      20.9        11,717     4.0
Risk Based Capital                62,442      60.4         8,268     8.0

In November  1997,  the  Company  received a  regulatory  waiver from the OTS to
repurchase  up to 5% or 241,117  shares of its  common  stock  outstanding.  The
Company,  as of March 31, 1998, had repurchased 220,500 shares under the current
program, which expires April 18, 1998. The Company itself has adequate resources
to repurchase  the  remaining  20,617 shares  without  dividends  from the Bank.
Furthermore, at March 31, 1998, the Bank could pay $26.6 million of dividends to
the Company after notifying the OTS in writing.

IMPACT OF YEAR 2000

The  Company's  progress  on its Year  2000  issue is  continuing.  The  Company
received  additional  guidance from its primary  service  provider,  including a
$25,000 cost estimate to be passed along to the Company as a  "validation"  fee.
The testing program is quite extensive and will involve end-to-end  testing.  In
addition,  the Company has now  determined  that one of its modules  will not be
supported  for Year 2000  compliance  and will  require  migrating  to  upgraded
versions.  Upgraded  programs are  available,  but management has not negotiated
what these  costs will be,  however,  it does not expect  these  costs to have a
material  impact  on  its  consolidated   financial   condition  or  results  of
operations.

                   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, 1997.  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.

                                       20

<PAGE>
              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  totalled $75,000 in the three month period
ended March 31, 1998; there were no tax equivalent adjustments in the comparable
period. 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.

<TABLE>
<CAPTION>
                                                      THREE MONTH PERIODS ENDED
                                 --------------------------------------------------------------------
                                            March 31, 1998                 March 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         $126,961     $2,534      7.98%    $125,069       $2,503      8.01%
  Mortgage-backed securities      89,256      1,530      6.86%      79,091        1,390      7.03%
  Other securities                68,710      1,224      7.13%      58,652          982      6.70%
  Federal funds sold and other       129          3      9.43%       6,878           88      5.19%
                                 -------     ------               --------       ------
  Total interest-earning assets  285,056      5,291      7.42%     269,690        4,963      7.36%
Allowance for loan losses         (1,900)    ------                 (1,845)      ------
Other assets, net                  9,621                             6,983
                                --------                          --------
  Total Assets                  $292,777                          $274,828
                                ========                          ========
Interest-Bearing Liabilities
  Savings deposits              $ 78,657     $  644      3.32%    $ 80,807       $  697      3.50%
  Money market                     6,412         50      3.16%       7,454           59      3.21%
  Now deposits                    11,043         67      2.46%       9,119           55      2.45%
  Certificates of deposit        101,637      1,417      5.65%      93,428        1,282      5.56%
  Short-term borrowings           10,065        144      5.80%         122            2      6.65%
  Long-term borrowings             4,624         58      5.09%          --
  Escrow and other                 1,587         10      2.56%       1,439            7      1.97%
                                --------     ------               --------       ------
  Total interest-bearing
    liabilities                  214,025      2,390      4.53%     192,369        2,102      4.43%
Non-interest bearing               4,886     ------                  3,646       ------
Other liabilities                  3,114                             2,822
Shareholders' equity              70,752                            75,991
                                --------                          --------
  Total Equity and Liabilities  $292,777                          $274,828
                                ========                          ========

  Net interest income                        $2,901                              $2,861
                                             ======                              ======
  Net interest rate spread                               2.89%                               2.93%
                                                         ====                                ====
  Net yield on average                                   4.13%                               4.30%
    interest-earning assets                              ====                                ====

  Average interest earning
    assets to average interest
      bearing liabilities         133.19%                           140.19%
                                ========                          ========
  Earning Assets/Total Assets      97.36%                            98.13%
                                ========                          ========
</TABLE>

                                                  21
<PAGE>
               TABLE #2 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  totalled  $94,000 in the six month period
ended March 31, 1998; there were no tax equivalent adjustments in the comparable
period. 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.

<TABLE>
<CAPTION>
                                                                        SIX MONTH PERIODS ENDED
                                                -----------------------------------------------------------------------
                                                          March 31, 1998                        March 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                         $126,692    $ 5,085       8.03%       $125,346    $5,046       8.05%
  Mortgage-backed securities                      87,723      3,044       6.94%         65,860     2,321       7.05%
  Other securities                                69,143      2,440       7.06%         60,880     2,035       6.69%
  Federal funds sold and other                        86          4       9.33%         20,181       538       5.35%
                                                --------    -------                   --------    ------
  Total interest-earning assets                  283,644     10,573       7.46%        272,267     9,940       7.30%
Allowance for loan losses                         (1,888)                               (1,829)   ------
Other assets, net                                  9,196                                 6,736
                                                --------                              --------
  Total Assets                                  $290,952                              $277,174
                                                ========                              ========
Interest-Bearing Liabilities
  Savings deposits                              $ 78,446    $ 1,326       3.39%       $ 81,454    $1,420       3.50%
  Money market                                     6,669        106       3.19%          7,641       127       3.33%
  Now deposits                                    11,015        135       2.46%          9,167       112       2.45%
  Certificates of deposit                        100,789      2,841       5.65%         92,743     2,562       5.54%
  Short-term borrowings                           11,384        328       5.78%             61         2       6.58%
  Long-term borrowings                             2,312         59       5.12%             --
  Escrow and other                                 1,579         20       2.54%          1,494        15       2.01%
                                                --------    -------                   --------    ------
  Total interest-bearing                         212,194      4,815       4.55%        192,560     4,238       4.41%
    liabilities                                             -------                               ------
Non-interest bearing                               4,731                                 3,612
Other liabilities                                  2,930                                 2,600
Shareholders' equity                              71,094                                78,402
                                                --------                              --------
  Total Equity and Liabilities                  $290,949                              $277,174
                                                ========                              ========

  Net interest income                                       $ 5,758                               $5,702
                                                            =======                               ======
  Net interest rate spread                                                2.91%                                2.89%
                                                                          ====                                 ====
  Net yield on average                                                    4.07%                                4.20%
    interest-earning assets                                               ====                                 ====

  Average interest earning
    assets to average interest
      bearing liabilities                         133.67%                               141.39%
                                                ========                              ========
  Earning Assets/Total Assets                      97.49%                                98.23%
                                                ========                              ========
</TABLE>

                                                           22
<PAGE>

                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q

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

At the annual  meeting of  shareholders  held on February 17,  1998,  there were
3,139,552 voting shares present in person or by proxy,  which represented 67.81%
of the  Company's  outstanding  shares of  4,630,243.  Votes  were  taken on the
following shareholder proposals:

         Proposal #1 "Election of one  director,  to serve for a three year term
         and until his successor has been duly elected and qualified."

                                         Votes
                                          For          Withheld
                                       ---------       --------
            Richard A. Marshall        3,122,148        17,404

         The  Board  of  Directors  of the  Company  currently  consists  of six
         members. In addition to the director named above,  continuing directors
         are Wilbur J. Cross,  George P. Jones,  Allan D. Oren,  Hugh J. Quigley
         and Edward P. Stiefel.


         Proposal #2  "Ratification  of the appointment of KPMG Peat Marwick LLP
         as auditors  for the Company for the fiscal year ending  September  30,
         1998."

                        Votes          Votes
                         For          Against          Abstain
                      ---------       -------          -------
                      3,114,724        10,391           14,437

There were no broker non-votes for either proposal #1 or proposal #2.

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)

                                       23
<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: May 14, 1998                          /s/ WILBUR J. CROSS
                                            ------------------------------------
                                                Wilbur J. Cross
                                                Chairman of the Board, President
                                                and Chief Executive Officer
                                                (Principal Executive Officer)



Date: May 14, 1998                          /s/ DAVID J. DELUCA
                                            ------------------------------------
                                                David J. DeLuca
                                                Chief Financial Officer
                                                (Principal Financial and
                                                Accounting Officer)

                                       24