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 JUNE 30, 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                    4,436,115
     -----------------------------                 ---------------
           (Title of class)                 (outstanding at July 31, 1998)
<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q
                                  June 30, 1998



INDEX
-----

<TABLE>
<CAPTION>
PART I     FINANCIAL INFORMATION                                                               Page
------     ---------------------                                                               ----
<S>        <C>                                                                                 <C>
Item 1.    Consolidated Interim Financial Statements

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

           Consolidated Statements of Income for the three months and nine months ended
           June 30, 1998 and 1997 (Unaudited) ...............................................    2

           Consolidated Statements of Changes in Shareholders' Equity for the nine months
           ended June 30, 1998 and 1997 (Unaudited) .........................................    3

           Consolidated Statements of Cash Flows for the nine months ended June 30, 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 2.    Changes in Securities ............................................................   23

Item 3.    Default on Senior Securities .....................................................   23

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

Item 5.    Other Information ................................................................   23

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

           Signatures .......................................................................   24
</TABLE>
<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                 Consolidated Statements of Financial Condition
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                       Assets                       June 30, 1998    September 30, 1997
                       ------                       -------------    ------------------
                                                     (Unaudited)
<S>                                                   <C>                <C>      
Cash and cash equivalents                             $   2,485          $   2,274
Securities available for sale, at fair value            164,052            148,114
Investment securities, at amortized cost:                               
     (Estimated fair value of $3,110 at June 30,                        
     1998, and $8,112 at September 30, 1997)              3,065              8,055
Stock in Federal Home Loan Bank of NY, at cost            1,954              1,762
Loans receivable, net                                   132,358            124,337
Accrued interest receivable                               2,716              2,303
Premises and equipment, net                               2,550              2,367
Real estate owned, net                                      125                248
Other assets                                                261                159
                                                      ---------          ---------
         Total Assets                                 $ 309,566          $ 289,619
                                                      =========          =========
         Liabilities and Shareholders' Equity                          
         ------------------------------------                          

Liabilities:                                                            
   Deposits:                                                            
     Non-interest bearing                             $   8,570          $   4,370
     Interest bearing                                   200,874            196,542
                                                      ---------          ---------
         Total Deposits                                 209,444            200,912
   Short-term borrowings                                 15,880             11,385
   Long-term borrowings                                  10,000                 --
   Advance payments by borrowers for property                           
         taxes and insurance                              2,478                533
   Accrued interest payable                                 142                 59
   Official bank checks                                   1,806              3,861
   Accrued expenses and other liabilities                 1,594              1,092
                                                      ---------          ---------
         Total Liabilities                            $ 241,344          $ 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 June 30, 1998 and September 30, 1997                 57                 57
   Additional paid-in capital                            54,900             54,811
   Retained earnings, substantially restricted           36,760             34,915
   Common stock acquired by ESOP                         (4,095)            (4,209)
   Unearned management recognition plan (MRP)            (1,515)            (1,856)
   Treasury stock, at cost (1,200,635 shares at                         
     June 30, 1998, and 848,244 shares at                               
     September 30, 1997)                                (19,146)           (12,862)
   Net unrealized gain (loss) on securities                             
     available for sale, net of taxes                     1,261                921
                                                      ---------          ---------
         Total Shareholders' Equity                      68,222             71,777
                                                      ---------          ---------
         Total Liabilities and Shareholders' Equity   $ 309,566          $ 289,619
                                                      =========          =========
</TABLE>

 See accompanying notes to unaudited consolidated interim financial statements.
 
                                      1
<PAGE>

                         CATSKILL FINANCIAL CORPORATION
                        Consolidated Statements of Income
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED           NINE MONTHS ENDED
                                                           June 30,                     June 30,
                                                      1998         1997           1998           1997
                                                  -----------   -----------    -----------    -----------
                                                         (Unaudited)                   (Unaudited)
<S>                                               <C>           <C>            <C>            <C>
Interest and dividend income:                   
     Loans                                        $     2,596   $     2,496    $     7,681    $     7,542
     Securities available for sale                      2,606         2,411          7,754          6,332
     Investment securities                                 48           157            225            555
     Federal funds sold and other                           1             1              5            539
     Stock in Federal Home Loan Bank of NY                 36            27            101             64
                                                  -----------   -----------    -----------    -----------
          Total interest and dividend income            5,287         5,092         15,766         15,032
Interest expense:                               
     Deposits                                           2,213         2,172          6,642          6,408
     Short-term borrowings                                220            72            548             74
     Long-term borrowings                                  74            --            132             --
                                                  -----------   -----------    -----------    -----------
          Total interest expense                        2,507         2,244          7,322          6,482
                                                  -----------   -----------    -----------    -----------
Net interest income                                     2,780         2,848          8,444          8,550
Provision for loan losses                                  45            75            144            225
                                                  -----------   -----------    -----------    -----------
     Net interest income after provision        
     for loan losses                                    2,735         2,773          8,300          8,325
                                                  -----------   -----------    -----------    -----------
Noninterest income:                             
     Recovery of Nationar loss contingency                 --            --             --            100
     Service fees on deposit accounts                      73            62            206            177
     Net securities gains                                  37            10             90             15
     Other income                                          52            36            125            114
                                                  -----------   -----------    -----------    -----------
          Total noninterest income                        162           108            421            406
                                                  -----------   -----------    -----------    -----------
Noninterest expense:                            
     Salaries and employee benefits                       900           773          2,578          2,191
     Advertising and business promotion                    15            55            104            139
     Net occupancy on premises                             85            84            256            249
     Federal deposit insurance premiums                     6             7             20             14
     Postage and supplies                                  83            53            229            185
     Outside data processing fees                         102            89            299            270
     Equipment                                             46            49            129            140
     Professional fees                                     64            81            168            213
     Other real estate expenses, net                        1           (22)           (58)           (43)
     Other                                                167           155            486            478
                                                  -----------   -----------    -----------    -----------
          Total noninterest expense                     1,469         1,324          4,211          3,836
                                                  -----------   -----------    -----------    -----------
          Income before taxes                           1,428         1,557          4,510          4,895
Income tax expense                                        454           608          1,606          1,937
                                                  -----------   -----------    -----------    -----------
          Net income                              $       974   $       949    $     2,904    $     2,958
                                                  ===========   ===========    ===========    ===========
                                                
Basic earnings per common share                   $       .24   $       .21    $       .70    $       .62
Diluted earnings per common share                 $       .24   $       .21    $       .68    $       .62
                                                
Weighted Average Common Shares-Basic                4,002,738     4,455,098      4,139,721      4,753,424
Weighted Average Common Shares-Diluted              4,134,109     4,551,073      4,268,945      4,808,055
</TABLE>
 See accompanying notes to unaudited consolidated interim financial statements.

                                       2
<PAGE>

                         CATSKILL FINANCIAL CORPORATION
           Consolidated Statements of Changes in Shareholders' Equity
                  (In thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
                                                                                                            Net Unrealized 
                                                          Retained       Common       Unearned                Gain (Loss)
                                            Additional    Earnings,       Stock       Management  Treasury   on Securities
                                             Paid-in    Substantially  Acquired by   Recognition   Stock,     AFS, net of
                                   Common    Capital     Restricted       ESOP          Plan      at Cost     taxes Stock    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                                                  2,904                                                             2,904
                                                                                                                          
Dividends paid on common stock                             (1,030)                                                           (1,030)
                                                                                                                          
Allocation of ESOP stock                                                                                                  
(11,363 shares)                                   89                        114                                                 203
                                                                                                                          
Purchase of common stock                                                                                                  
(356,792 shares)                                                                                   (6,351)                   (6,351)
                                                                                                                          
Exercise of stock options                                                                                                 
(4,401 shares issued, net)                                    (29)                                     67                        38
                                                                                                                          
Amortization of unearned                                                                                                  
MRP compensation                                                                          341                                   341
                                                                                                                          
Change in net unrealized gain                                                                                             
(loss) on securities AFS,                                                                                                 
net of taxes                                                                                                       340          340
                                  -----      -------      -------       -------       -------    --------       ------     --------
                                                                                                                          
Balance at June 30, 1998          $  57      $54,900      $36,760       $(4,095)      $(1,515)   $(19,146)      $1,261     $ 68,222
                                  =====      =======      =======       =======       =======    ========       ======     ========
                                                                                                                          
Balance at September 30, 1996     $  57      $54,864      $31,984       $(4,436)           --          --       $  (88)    $ 82,381
                                                                                                                          
Net income                                                  2,958                                                             2,958
                                                                                                                          
Dividends paid on common stock                               (668)                                                             (668)
                                                                                                                          
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                                                                                                  
(966,976 shares)                                                                                  (14,283)                  (14,283)
                                                                                                                          
Amortization of unearned MRP                                                                                              
compensation                                                                              303                                   303
                                                                                                                          
Change in net unrealized                                                                                                  
gain (loss) on securities AFS,                                                                                            
net of taxes                                                                                                       316          316
                                  -----      -------      -------       -------       -------    --------       ------     --------
                                                                                                                          
Balance at June 30, 1997          $  57      $54,745      $34,274       $(4,322)      $(1,931)   $(11,882)      $  228     $ 71,169
                                  =====      =======      =======       =======       =======    ========       ======     ========
</TABLE>

 See accompanying notes to unaudited consolidated interim financial statements.

                                       3
<PAGE>

                         CATSKILL FINANCIAL CORPORATION
                      Consolidated Statements of Cash Flows
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended
                                                                                            June 30,
                                                                                       1998          1997
                                                                                     ---------    ---------
<S>                                                                                  <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                                                      (Unaudited)
  Net Income                                                                         $   2,904    $   2,958
  Adjustments to reconcile net income to net cash provided by operating
     activities:
  Depreciation                                                                             159          134
  Net accretion on securities                                                              (25)        (134)
  Provision for loan losses                                                                144          225
  MRP compensation expense                                                                 341          303
  ESOP compensation expense                                                                302          249
  Recovery of Nationar loss contingency                                                     --         (100)
  Gains on sale of other real estate owned                                                 (68)        (108)
  Gains on sales and calls of securities                                                   (90)         (15)
  Increase in other assets                                                                (515)        (646)
  Collection of deposits held at Nationar                                                   --          183
  Write-down on other real estate                                                           --           16
  Decrease in accrued expense and other liabilities                                     (1,796)      (1,206)
                                                                                     ---------    ---------
Net cash provided by operating activities                                                1,356        1,859
                                                                                     ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity/calls/paydown of investment securities                            5,007        9,015
Net increase in loans receivable                                                        (8,417)      (1,697)
Capital expenditures, net                                                                 (342)        (618)
Purchase of stock in Federal Home Loan Bank                                               (192)        (603)
Purchase of AFS securities                                                             (63,855)    (101,880)
Proceeds from sale of securities available for sale                                     13,431        3,041
Proceeds from maturity/calls/paydown of AFS securities                                  35,151       55,726
Proceeds from sale of other real estate owned                                              443          531
                                                                                     ---------    ---------
Net cash used by investing activities                                                  (18,774)     (36,485)
                                                                                     ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options                                             38           --
Net increase in deposits                                                                 8,532        2,503
Net increase in advance payments by borrowers for
 property taxes and insurance                                                            1,945          681
Increase in short-term borrowings                                                        4,495        9,415
Increase in long-term borrowings                                                        10,000           --
Cash dividends on common stock                                                          (1,030)        (668)
Purchase of common stock for treasury                                                   (6,351)     (14,283)
                                                                                     ---------    ---------
Net cash provided (used) by financing activities                                        17,629       (2,352)
                                                                                     ---------    ---------
Net increase (decrease) in cash and cash equivalents                                       211      (36,978)
Cash and cash equivalents at beginning of period                                         2,274       39,712
                                                                                     ---------    ---------
Cash and cash equivalents at end of period                                           $   2,485    $   2,734
                                                                                     =========    =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
   Interest                                                                          $   7,255    $   6,483
   Taxes                                                                                 1,640        2,049
Transfer of loans to other real estate owned                                               252          452
Change in net unrealized gain (loss) on AFS securities, net of change in
deferred tax liability (benefit) of $227 and $211 respectively                             340          316
</TABLE>

  See accompanying notes to unaudited consolidated interim financial statements

                                       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  stock
    options and unvested restricted stock. 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>
                                                                        Nine months ended June 30,
                                                                        --------------------------
                                                               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                                      $   2,904     4,139,721     $ .70        $   2,958        4,753,424     $ .62
Dilutive effect of potential common
  shares related to stock based
  compensation plans                                  --       129,224                         --           54,631
                                               ---------     ---------                  ---------        ---------
Diluted EPS                                    $   2,904     4,268,945     $ .68        $   2,958        4,808,055     $ .62
                                               =========     =========                  =========        =========
<CAPTION>
                                                                       Three months ended June 30,
                                                                       ---------------------------
                                                               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                                      $     974     4,002,738     $ .24        $     949        4,455,098     $ .21
Dilutive effect of potential common
  shares related to stock based
  compensation plans                                  --       131,371                         --           95,975
                                               ---------     ---------                  ---------        ---------
Diluted EPS                                    $     974     4,134,109     $ .24        $     949        4,551,073     $ .21
                                               =========     =========                  =========        =========
</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  $5.4  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. The
    securities used as collateral for this convertible advance are being held in
    safekeeping at the FHLB.

    In addition,  on June 16, 1998,  the Bank borrowed $5.0 million at a rate of
    4.95%  (actual/360  day basis)  from First  Union  Capital  Markets  under a
    callable reverse repurchase agreement. The borrowing is secured by FHLMC and
    FNMA mortgage backed  securities with a carrying value of $5.6 million.  The
    borrowing has a  contractual  maturity of ten (10) years,  however,  it also
    includes an option on June 16, 1999,  and monthly  thereafter in which First
    Union Capital  Markets can call the debt. The securities  used as collateral
    for this  repurchase  agreement are being held in safekeeping at First Union
    Capital Markets.

NOTE 4. IMPACT OF NEW ACCOUNTING STANDARDS

    In February 1998, the Financial  Accounting  Standards Board ("FASB") issued
    SFAS  No.   132,   "Employers'   Disclosures   about   Pensions   and  Other
    Postretirement  Benefits," which amends the disclosure  requirements of SFAS
    No. 87,  "Employers'  Accounting  for  Pensions,"  SFAS No. 88,  "Employers'
    Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
    and for Termination  Benefits," and SFAS No. 106, "Employers' Accounting for
    Postretirement  Benefits Other Than Pensions." SFAS No. 132 standardizes the
    disclosure requirements of SFAS No. 87 and No. 106 to the extent practicable
    and recommends a parallel format for presenting  information  about pensions
    and other  postretirements  benefits.  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.

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

                                       7
<PAGE>
                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q
                                  June 30, 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 $309.6 million at June 30, 1998, an increase of $20.0 million,
or 6.9% 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 increases in long-term and short-term borrowings and deposits.

                                       9
<PAGE>

Cash and cash equivalents were $2.5 million, an increase of $.2 million, or 8.7%
from the $2.3 million at September 30, 1997. The change was principally  from an
increase in vault cash due to the opening of a new full service branch.

Total  securities,  which  include  securities  held  to  maturity  ("HTM")  and
securities  available for sale ("AFS"),  excluding Federal Home Loan Bank stock,
were  $167.1  million,  an increase  of $10.9  million,  or 7.0% over the $156.2
million as of September  30, 1997.  The  increase in  securities  consisted of a
$15.9  million  increase  in AFS  securities,  primarily  due  to the  Company's
purchase  of  municipal   securities  which  provided  the  Company  higher  tax
equivalent  yields with longer call  protection  and one-year  treasury  indexed
teaser rate adjustable  mortgage-backed  securities  (ARM's).  In addition,  the
Company  experienced a $5.0 million  decrease in HTM  securities  from scheduled
maturities and calls. Consequently,  as of June 30, 1998, 98.2% 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 $134.3  million as of June 30, 1998, an increase of $8.1
million or 6.4% 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:


                                            June 30,   September 30,
                                              1998         1997
                                           ---------    ---------
                                               (In thousands)
   Real Estate Loans                      
       One-to-four family                  $ 109,414    $ 102,232
       Multi-family and commercial             5,562        4,691
       Construction                              912        1,306
                                           ---------    ---------
           Total real estate loans           115,888      108,229
   Consumer Loans                             18,311       18,410
   Commercial Loans                              407           63
                                           ---------    ---------
           Gross Loans                       134,606      126,702
   Less: Net deferred loan fees                 (326)        (476)
                                           ---------    ---------
           Total loans receivable          $ 134,280    $ 126,226
                                           =========    =========

One-to-four  family  loans  increased  $7.2  million,  or 7.0%,  as the  Company
aggressively  promoted a 15 year fixed rate  mortgage  product  with a preferred
rate for borrowers who have their monthly payments automatically deducted from a
checking account with the Bank.

The increase in multi-family and commercial 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 loans converted
to an amortizing mortgage.

Commercial  loans  increased as the Company began  offering  unsecured  lines of
credit to its commercial deposit customers.

                                       10
<PAGE>

Non-performing  assets  at June  30,  1998  were $.7  million,  or .22% 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.

                                            June 30,   September 30,
                                              1998         1997
                                             ------       ------
                                                (In thousands)

Non-performing loans:
    One-to-four family                       $  501       $  780
    Multi-family and commercial                  --           --
    Consumer                                     54          137
                                             ------       ------
        Total non-performing loans              555          917
                                             ------       ------
                                                        
Foreclosed assets, net:                                 
    One-to-four family                          125          225
    Multi-family and commercial                  --           23
                                             ------       ------
        Total foreclosed assets, net            125          248
                                             ------       ------
                                                        
        Total non-performing assets          $  680       $1,165
                                             ======       ======
                                                        
        Total non-performing loans
          as a % of total loans                 .41%         .73%
                                                        
        Total non-performing assets
          as a % of total assets                .22%         .40%

The decrease in  non-performing  loans at June 30, 1998 as compared to September
30, 1997 was  attributable  principally  to loan payouts and the  foreclosure of
three loans  which  resulted in the  Company  acquiring  title to the  mortgaged
property.  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 nine months  ended June 30, 1998,  the Company  sold eight  parcels of other
real estate which  reduced real estate owned by $375,000.  The  following  table
summarizes the activity in other real estate for the periods presented:

                                           Nine Months Ended June 30,
                                           --------------------------
                                               1998         1997
                                              -----        -----
                                                (In thousands)

Other real estate beginning of
  period                                      $ 248        $ 357
Transfer of loans to other real                           
  estate owned                                  252          452
Write-downs                                      --          (16)
Sales of other real estate, net                (375)        (423)
                                              -----        -----
Other real estate end of period               $ 125        $ 370
                                              =====        =====

                                       11
<PAGE>                                                    

The allowance for loan losses was $1.9 million,  or 1.43% of period end loans at
June 30, 1998, and provided coverage of non-performing loans of 346.3%, compared
to coverage of 206.0% as of September  30, 1997.  The following  summarizes  the
activity in the allowance for loan losses:

                                           Nine Months Ended June 30,
                                           --------------------------
                                               1998         1997
                                              -----        -----
                                                (In thousands)

Allowance at beginning of the period        $ 1,889       $ 1,833
    Charge-offs                                (121)         (230)
    Recoveries                                   10            34
                                            -------       -------
        Net charge-offs                        (111)         (196)
    Provision for loan losses                   144           225
                                            -------       -------
Allowance at end of the period              $ 1,922       $ 1,862
                                            =======       =======

Total  deposits  were  $209.4  million at June 30,  1998,  an  increase  of $8.5
million,  or 4.2% 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>
                                 June 30, 1998                 September 30, 1997
                         -----------------------------   ------------------------------
                         (In thousands)  % of Deposits   (In thousands)   % of Deposits
<S>                        <C>               <C>           <C>               <C>  
Savings                    $ 79,946          38.2%         $ 79,448           39.6%
Money market                  5,684           2.7             7,115            3.5
NOW                          11,783           5.6            10,438            5.2
Non-interest demand           8,570           4.1             4,370            2.2
Certificates of deposits    103,461          49.4            99,541           49.5
                           --------         -----          --------          -----
                           $209,444         100.0%         $200,912          100.0%
                           ========         =====          ========          =====
</TABLE>

The growth in deposits was principally  related to the opening of our fourth and
fifth full service  branches in December 1996 and April 1998,  respectively,  as
deposits at other offices  decreased $.2 million since  September 30, 1997.  The
Company  experienced growth in checking accounts,  and certificates of deposits,
offset  somewhat by a reduction  in its money market  accounts.  The increase in
checking accounts resulted  principally from offering  employees cash incentives
for new accounts as well as promoting  certain loan products at a preferred loan
rate if the customer's  payment is directly charged to a checking  account.  The
increase  in CD's is  principally  from the  Company's  promotion  of a 15-month
product at a premium rate, to retain  maturing  longer-term  CD's and to satisfy
demand in the Company's market for higher yields.

The Company  increased its borrowings,  which are  principally  with the Federal
Home Loan Bank of New York  ("FHLB"),  to $25.9  million  at June 30,  1998,  an
increase of $14.5  million  from the $11.4  million at September  30, 1997.  The
additional  borrowings were used to fund the Company's stock repurchase  program
and the  growth in earning  assets as the  Company  continues  to  leverage  its
capital.  In  January  1998,  the  Company  began  converting  a portion  of its
short-term  borrowings to long-term  borrowings  principally through convertible
(callable) advances.  The borrowings are secured by mortgage-backed  securities,
and have  contractual  maturities of ten years,  however,  they include options,
which  give the lender  the right to call the debt  after a  specified  lock-out
period. The Company has entered into two such borrowings,  each in the amount of
$5 million, which have lock-outs of three and one year, respectively. Short-term
borrowings were $15.9 million at June 30, 1998, an increase of $4.5 million,  or
39.5%,  from the $11.4 million at September  30, 1997. As of June 30,

                                       12
<PAGE>
1998,  the Company still has additional  available  credit of $2.4 million under
its overnight  line and $10.3  million under its one month advance  program with
the FHLB.

Shareholders'  equity at June 30,  1998 was $68.2  million,  a decrease  of $3.6
million,  or 5.0% from the $71.8 million at September 30, 1997. The decrease was
principally  caused by the Company's  repurchase of 356,792 of its common shares
at a cost of $6.4  million,  somewhat  offset by the $1.9  million of net income
retained  after cash  dividends  and a $.3 million  change in the  Company's net
unrealized  gain (loss) on  securities  available  for sale,  net of taxes.  The
Company also recorded a $.6 million increase in shareholders'  equity due to the
amortization of restricted  stock awards,  the exercise of stock options and the
allocation of shares under the Company's ESOP.

Shareholders'  equity as a percent of total  assets  was 22.0% at June 30,  1998
compared to 24.8% at September 30, 1997.  Book value per common share was $15.72
excluding  unvested shares of the Company's  restricted stock plan ("MRP"),  and
was $17.35 excluding unallocated ESOP shares and unvested MRP shares.

COMPARISON  OF  OPERATING  RESULTS FOR THE THREE  MONTHS ENDED JUNE 30, 1998 AND
1997

GENERAL

For the three  months ended June 30,  1998,  the Company  recorded net income of
$974,000,  an increase of $25,000,  or 2.6%,  compared to the three month period
ended June 30, 1997. Basic and diluted earnings per share were $.24, an increase
of 14.3% compared to basic and diluted  earnings per share of $.21 for the three
months ended June 30, 1997.  For the three months ended June 30, 1998,  weighted
average common shares - basic were 4,002,738, down 452,360, or 10.2%, due to the
Company's share repurchase programs.

Annualized return on average assets for the three months ended June 30, 1998 and
1997, was 1.29% and 1.37%, respectively,  and return on average equity was 5.73%
and 5.29%, respectively.

NET INTEREST INCOME

Net interest  income on a full tax  equivalent  basis for the three months ended
June 30, 1998, was $2.9 million,  an increase of $95,000, or 3.3%, when compared
to the three  months ended June 30, 1997.  The increase was  principally  volume
related as the Company increased its average earning assets $20.1 million,  more
than  offsetting  the loss of net interest  income from the Company  funding its
stock repurchase program.  The Company funded the share repurchases,  along with
its growth in earning  assets,  principally  with  borrowings  and,  to a lesser
extent, deposit growth.

Interest  income for the three  months ended June 30, 1998 was $5.5 million on a
tax  equivalent  basis,  an increase of $358,000,  or 7.0%,  over the comparable
period last year.  The $20.1 million  increase in the average  volume of earning
assets had a direct  positive effect on interest income as the Company sought to
leverage its excess  capital,  offset  somewhat by a two basis point drop in the
yield on average earning assets.

Average  earning assets  increased in both the  securities and loan  portfolios,
which on average grew 9.8% and 4.3%,  respectively.  Loan growth was principally
due to the promotion of a 15 year fixed rate mortgage  product,  which increased
volume,  but adversely  impacted the loan  portfolio  yield since

                                       13
<PAGE>

the loans were written at rates below the average  portfolio yield. In addition,
the Company experienced higher loan prepayments, and refinancing of its existing
portfolio,  which  caused the yield on the loan  portfolio to decrease two basis
points to 7.99%.  Average mortgage backed  securities were $90.9 million for the
three months ended June 30, 1998, an increase of $6.1 million, or 7.2%, from the
comparable period.  The average yield on  mortgage-backed  securities was 6.63%,
down 48 basis points from the comparable  period.  The average yield declined 48
basis  points,  as the Company has been  purchasing  one year  Treasury  indexed
teaser rate ARM's, consequently 24.5% of the average mortgage-backed  securities
portfolio  represent  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.  Average other  securities  increased $8.6
million, or 13.3%, as the Company purchased longer call protected bank qualified
municipal  securities to increase yields and reduce  reinvestment  risk if rates
decline.  The  average  yield on the other  securities  portfolio  for the three
months ended June 30, 1998,  was 7.31%,  an increase of 62 basis points from the
comparable period, as the Company replaced securities called and/or matured with
higher yielding municipals.  Municipal securities now represent 32.0% of average
other securities, compared to less than 1% in the comparable period.

Interest expense for the three months ended June 30, 1998, was $2.5 million,  an
increase of $263,000, or 11.7%. The change was principally due to an increase in
the  average  volume  of  interest  bearing  liabilities  as  the  Company  only
experienced an increase of 1 basis point in its cost of funds.  Average interest
bearing liabilities were $223.9 million, an increase of $23.1 million, or 11.5%,
as the Company borrowed in order to fund the Company's stock repurchase  program
and earning asset growth.  Average long-term borrowings were up $5.8 million, as
the Company began converting a portion of its short-term borrowings to long-term
borrowings,  principally through convertible (callable) advances.  There were no
long-term  borrowings in the comparable period.  Average  short-term  borrowings
were $15.5  million for the three months  ended June 30, 1998,  while there were
only $5.0 million of short-term borrowings in the comparable three month period.
In addition,  the Company's average CD's increased $6.0 million, or 6.2%, as the
Company's  customers  continue to move toward higher  costing CD's and away from
lower costing  deposits.  The one 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 Company was able to offset most of
the  increase in the change in funding  composition  by reducing its savings and
now deposit  rates.  The  average  rate paid on CD's also  increased  by 4 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 4.01% for the three months
ended June 30, 1998,  down 15 basis points  compared to 4.16% for the comparable
period of the prior year. The decrease was  principally  caused by the Company's
stock  repurchase  program,  which reduced the level of no-cost funding sources,
and  consequently  increased  the amount of  average  earning  assets  funded by
interest  bearing  liabilities.  For the three months  ended June 30, 1998,  the
Company had $70.7 million of average  earning  assets with no funding  costs,  a
decrease of $3.0 million,  or 4.1%,  from the $73.7 million for the three months
ended June 30, 1997. The Company also experienced a 3 basis point decline in its
net spread,  as its cost of funds  increased  one basis point while its yield on
earning  assets  decreased  two basis  points.  The cost of funds  increase  was
principally  caused by the change in funding mix as average  borrowings,  one of
the Company's highest cost funding sources,

                                       14
<PAGE>

represented 9.5% of interest bearing liabilities for the three months ended June
30, 1998, compared to only 2.5% for the comparable three month period.

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 June 30,
1998, a decrease of $30,000 from the  comparable  period of the prior year.  The
decrease is  principally  attributable  to a  reduction  in net  charge-offs  to
$29,000  for the three  months  ended June 30,  1998,  down  $20,000,  or 40.8%,
compared to the comparable  quarter of the prior year. In addition,  the Company
has reduced its non-performing loans $397,000,  or 41.7% since June 30, 1997, so
the allowance  represents  346.3% of  non-performing  loans at June 30, 1998, as
compared to 195.7% as of June 30, 1997.

NON-INTEREST INCOME

Non-interest  income was $162,000  for the three months ended June 30, 1998,  an
increase  of $54,000 or 50.0% from the three  months  ended June 30,  1997.  The
increase was  principally  higher  securities  gains and service  charge income.
Security  gains were $37,000,  an increase of $27,000,  as the Company  recorded
gains on  securities  called  at a  premium,  as well as net gains  realized  on
securities sold for balance sheet management purposes. Service fee income was up
$11,000,  or 17.7%,  principally  from the Company's  strategy of increasing the
number of non-interest bearing deposit accounts.

NON-INTEREST EXPENSE

Non-interest expense for the three months ended June 30, 1998 was $1,469,000, an
increase  of  $145,000,   or  11.0%,  over  the  comparable  period  last  year,
principally from increased personnel and supply costs,  somewhat offset by lower
advertising expenses.

Salaries and employee  benefits  for the quarter  ended June 30, 1998  increased
$127,000, or 16.4%, compared to the period ended June 30, 1997, principally from
higher staffing and ESOP compensation  costs as well as the implementation of an
executive supplemental  retirement plan. Staffing costs increased  approximately
$36,000  from  hiring  additional  staff  for our new full  service  supermarket
branch.  In  addition,  the Company  increased  its sales staff and  implemented
product specific sales incentive programs to target sales and reduce the cost of
its overall advertising program. ESOP compensation  increased $13,000, or 15.0%,
due to the higher  average market price of the Company's  stock.  In April 1998,
the  Company  implemented  an  Executive  Supplemental  Retirement  Plan,  which
restores retirement benefits otherwise capped by the Company's qualified pension
plan.  The  cost  of  the  new  defined   contribution   plan  increased   costs
approximately $20,000.

                                       15
<PAGE>

Postage and supplies  increased  $30,000,  or 56.6%, as the Company  experienced
start-up  costs and  other  promotional  costs  related  to its new  supermarket
branch, which opened in April 1998.  Advertising costs were down $40,000, as the
Company implemented a new sales incentive program, and substantially reduced its
print media advertising costs.

INCOME TAX EXPENSE

Income tax expense for the three  months ended June 30, 1998,  was  $454,000,  a
decrease of  $154,000,  or 25.3%,  from the  comparable  period  last year.  The
Company's effective tax rates for the three months ended June 30, 1998 and 1997,
were 31.79% and 39.05%, respectively.  The decreases were principally the impact
of the Company's  purchase of tax exempt  securities,  primarily  bank qualified
municipal securities.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997

GENERAL

For the nine months  ended June 30,  1998,  the Company  recorded  net income of
$2,904,000,  a decrease of $54,000 or 1.8%,  compared  to the nine month  period
ended  June  30,  1997.   The  decrease  was   principally   caused  by  certain
non-recurring items which increased net income in the nine months ended June 30,
1997, by approximately $117,000.  Basic and diluted earnings per share were $.70
and $.68 respectively for the nine months ended June 30, 1998, compared to basic
and diluted  earnings per share of $.62 for the nine months ended June 30, 1997.
Weighted  average common shares - basic for the nine months ended June 30, 1998,
were  4,139,721,  a decrease  of 613,703  or 12.9%  from the  4,753,424  for the
comparable period ended June 30, 1997. The decrease was principally attributable
to the share repurchase programs under which the Company, through June 30, 1998,
had  purchased  1,386,268  shares or 24.4% of the shares  issued in its  initial
public  offering.  The aggregate  cost to the Company was $21.7  million,  or an
average of $15.62 per common share repurchased.

Annualized  return on average assets for the nine months ended June 30, 1998 and
1997, was 1.32% and 1.42%, respectively,  and return on average equity was 5.54%
and 5.19%, respectively.

NET INTEREST INCOME

Net  interest  income on a full tax  equivalent  basis for the nine months ended
June 30, 1998, was $8.7 million, an increase of $151,000, or 1.8%, when compared
to the nine months  ended June 30,  1997.  The  increase  was  primarily  volume
related as the Company increased its average earning assets $14.3 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, along with its growth in earning assets principally with borrowings
and, to a lesser extent, deposit growth.

Interest  income on a tax  equivalent  basis for the nine months  ended June 30,
1998, was $16.0 million,  an increase of $991,000,  or 6.6%, over the comparable
nine month period.  The increase was principally  volume  related,  with average
earning  assets  up  $14.3  million,  or  5.2%.  In  addition,  interest  income
benefitted  from a  deliberate  shift of asset mix, as the  Company  reduced its
average

                                       16
<PAGE>

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 nine months  ended June 30,  1998,  compared to
26.4% for the comparable  period of the prior year, while federal funds sold and
other declined from 5.0% to less than .1% of average  earning assets between the
periods. The average yield on mortgage-backed  securities during the nine months
ended June 30, 1998, was 6.83%, down 24 basis points from the comparable period,
but still higher than the yield of 5.34% earned on average federal funds sold in
the nine months ended June 30, 1997.  Mortgage-backed securities yields declined
24 basis points  principally  from the  Company's  purchase of $25.4  million of
Treasury indexed teaser rate ARM's, which yield much less than the fully indexed
rate. The Company's mortgage backed securities  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.  Average  other
securities  increased $8.4 million,  or 13.5%.  In addition,  the yield on other
securities  increased  46  basis  points  to  7.15%,  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 nine months ended June 30, 1998, was $7.3 million,  an
increase of $840,000,  or 13.0%. The increase was principally  volume related as
the Company  increased average interest bearing  liabilities  $20.8 million,  or
10.6%.  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 $3.5 million,  as the Company converted a
portion of its short-term borrowings to long-term borrowings principally through
convertible  (callable)  advances,  there were no  long-term  borrowings  in the
comparable  nine month period.  Average  short-term  borrowings  increased $11.0
million,  and now represent 5.9% of average  interest  bearing  liabilities.  In
addition,  the Company's  average CD's increased  $7.4 million,  or 7.8%, 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 9 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 4.05% for the nine months
ended June 30, 1998,  down 14 basis points  compared to 4.19% for the comparable
period of the prior year. The decrease was  principally  caused by the Company's
stock  repurchase  program,  which reduced the level of no-cost funding sources,
and  consequently  increased  the amount of  average  earning  assets  funded by
interest  bearing  liabilities.  For the nine months  ended June 30,  1998,  the
Company had $71.2 million of average  earning  assets with no funding  costs,  a
decrease of $6.5 million,  or 8.4%,  from the $77.7  million for the  comparable
nine month  period.  The Company did,  however,  increase its net spread 1 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.

                                       17
<PAGE>

PROVISION FOR LOAN LOSSES

The  provision  for loan losses was  $144,000 for the nine months ended June 30,
1998, a decrease of $81,000 from the comparable nine month period.  The decrease
was primarily the result of a $85,000, or 43.4%, reduction in net charge-offs to
$111,000.  In  addition,  the  Company  has  reduced  its  non-performing  loans
$397,000,  or 41.7% since June 30, 1997, so that the  allowance  now  represents
346.3% of  non-performing  loans at June 30,  1998,  as compared to 195.7% as of
June 30, 1997.

NON-INTEREST INCOME

Non-interest  income was $421,000  for the nine months  ended June 30, 1998,  an
increase of $15,000,  or 3.7%,  from the  comparable  period.  The  increase was
principally  higher securities gains and service charge income,  offset somewhat
by the reduction in Nationar  recoveries.  The increase in securities  gains was
principally  gains on  securities  called  at a  premium  along  with net  gains
realized on  securities  sold for various  balance  sheet  management  purposes.
Service charges increased  principally from the Company  promoting  non-interest
bearing accounts,  which has substantially  increased the number of accounts. In
the nine months ended June 30, 1997,  the Company  recovered  $100,000  from its
Nationar  reserve,  there were no such  recoveries in the nine months ended June
30, 1998.

NON-INTEREST EXPENSE

Non-interest expense for the nine months ended June 30, 1998, was $4,211,000, an
increase of $375,000, or 9.8%, over the comparable nine month period.  Increases
in personnel and supply costs were somewhat offset by reductions in professional
fees.

Salaries  and  employee  benefits  for the nine  months  ended  June  30,  1998,
increased  $387,000,  or 17.7%,  principally  from staffing new branches and the
increased cost of the Company's  stock based  compensation  plans.  Furthermore,
results for the nine months  ended June 30, 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 June 30, 1998. Stock based compensation costs increased $91,000, or 16.5%.
ESOP compensation increased $53,000, or 21.3%, due to an increase in the average
market price of the Company's  common stock.  The cost of the MRP plan increased
$38,000,  principally because the plan was only outstanding for a portion of the
nine months ended June 30, 1997,  as the plan was approved at a special  meeting
of shareholders on October 24, 1996 ("special  meeting"),  and became effective,
immediately thereafter. Postage and supplies increased $44,000, or 23.8%, as the
Company  incurred  start-up  and  other  promotional  costs  related  to its new
supermarket branch.

Professional fees were $168,000,  a decrease of $45,000,  or 21.1%,  principally
from the costs associated with the special meeting held in the nine months ended
June 30, 1997; there was no such meeting in the nine months ended June 30, 1998.

INCOME TAX EXPENSE

Income tax expense for the nine months ended June 30, 1998,  was  $1,606,000,  a
decrease of $331,000,  or 17.1%,  from the  comparable  nine month  period.  The
Company's  effective tax rates for

                                       18
<PAGE>

the nine  months  ended  June  30,  1998  and  1997,  were  35.61%  and  39.57%,
respectively. The decrease in the effective tax rate and a portion of the income
tax expense is attributable to the Company's  purchase of tax exempt securities,
primarily bank qualified municipal  securities and preferred stock. In addition,
income tax expense was down due to the  $385,000,  or 7.8%,  reduction in income
before income taxes in the nine month period ended June 30, 1998.

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,  principal
and interest payments on loans,  mortgage backed securities and other securities
available for sale.

Net cash provided by operating  activities  was $1.4 million for the nine months
ended June 30, 1998, a decrease of $.5 million  from the  comparable  nine 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 $1.2 million due to a change in school tax
payment dates.

Investing  activities used $18.8 million in the nine months ended June 30, 1998,
as the Company  continued to leverage its balance  sheet by  increasing  earning
assets,  principally  $10.2  million in  securities,  and $8.4 million in loans.
Financing   activities  provided  $17.6  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 $209.4 million of
deposits   are  a  dependable   source  of  funds  due  to  long-term   customer
relationships.  The Company does not currently use brokered deposits as a source
of funds, and as of June 30, 1998, deposit accounts having balances in excess of
$100,000 totaled $22.4 million, or less than 10.7%, 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 June  1998,  the Bank  exceeded  that,  maintaining  an
average liquidity ratio of 8.96%.

The Company  anticipates  that it will have sufficient funds to meet its current
commitments. At June 30, 1998, the Company had commitments to originate loans of
$4.4 million.  In addition,  the

                                       19
<PAGE>

Company had undrawn  commitments  of $2.7 million on home equity and other lines
of credit. Certificates of deposits which are scheduled to mature in one year or
less at June 30, 1998,  totaled $74.2 million,  and  management  believes that a
significant portion of such deposits will remain with the Company.

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 June 30,  1998,
compared to the OTS minimum capital requirements:

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

Tangible Capital     $60,098     19.6%    $ 4,596     1.5%
Core Capital          60,098     19.6      12,257     4.0
Risk Based Capital    61,379     56.1       8,569     8.0
                                       
In April 1998, the Company notified the OTS of its intent to repurchase up to 5%
or 229,281 shares of its common stock outstanding.  The Company,  as of June 30,
1998, had  repurchased  99,500 shares under the current  program,  which expires
April 18, 1999.  The Company  itself has adequate  resources to  repurchase  the
remaining 129,781 shares without dividends from the Bank.  Furthermore,  at June
30, 1998,  the Bank could pay $25.5  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 to be passed  along to the  Company  as a  "validation"  fee.  The
testing program is quite extensive and will involve end-to-end testing, which is
expected to begin in November 1998. 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.  The Company  expects its mission  critical
systems to be compliant by June 1999, and all others by September 1999.

                   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  $163,000 in the three month period ended June 30, 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
                                               -----------------------------------------------------------------------------------
                                                            June 30, 1998                               June 30, 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                       $129,976      $  2,596            7.99%       $124,578        $2,496         8.01%
  Mortgage-backed securities                    90,940         1,507            6.63%         84,819         1,507         7.11%
  Other securities                              73,637         1,346            7.31%         65,004         1,088         6.69%
  Federal funds sold and other                      50             1            8.11%            112             1         3.62%
                                              --------      --------                        --------         -----
  Total interest-earning assets                294,603         5,450            7.40%        274,513         5,092         7.42%
                                                            --------                                         -----
Allowance for loan losses                      (1,912)                                        (1,854)
Other assets, net                                9,130                                         5,832
                                              --------                                      --------
  Total Assets                                $301,821                                      $278,491
                                              ========                                      ========
Interest-Bearing Liabilities
  Savings deposits                            $ 79,426          $644            3.25%       $ 79,910          $697         3.50%
  Money market                                   5,978            47            3.15%          7,202            57         3.17%
  Now deposits                                  11,951            68            2.28%          9,625            59         2.46%
  Certificates of deposit                      102,710         1,440            5.62%         96,729         1,346         5.58%
  Short-term borrowings                         15,479           220            5.70%          5,024            72         5.75%
  Long-term borrowings                           5,833            74            5.09%             --
  Escrow and other                               2,532            14            2.22%          2,290            13         2.28%
                                              --------      --------                        --------         -----
  Total interest-bearing liabilities           223,909         2,507            4.49%        200,780         2,244         4.48%
                                                            --------                                         -----
Non-interest bearing                             6,623                                         4,157
Other liabilities                                3,074                                         1,621
Shareholders' equity                            68,215                                        71,933
                                              --------                                      --------
  Total Equity and Liabilities                $301,821                                      $278,491
                                              ========                                      ========
  Net interest income                                       $  2,943                                        $2,848
                                                            ========                                        ======
  Net interest rate spread                                                      2.91%                                      2.94%
                                                                                ====                                       ====
  Net yield on average 
    interest-earning assets                                                     4.01%                                      4.16%
                                                                                ====                                       ====
  Average interest earning
    assets to average interest
    bearing liabilities                         131.57%                                       136.72%
                                              ========                                      ========
  Earning Assets/Total Assets                    97.61%                                        98.57%
                                              ========                                      ========
</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 $257,000 in the six month period ended June 30, 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>
                                                                              NINE MONTH PERIODS ENDED
                                               -----------------------------------------------------------------------------------
                                                            June 30, 1998                               June 30, 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                       $127,786      $ 7,681            8.01%       $125,090        $7,542           8.04%
  Mortgage-backed securities                    88,795        4,551            6.83%         72,180         3,828           7.07%
  Other securities                              70,641        3,786            7.15%         62,255         3,123           6.69%
  Federal funds sold and other                      74            5            9.03%         13,491           539           5.34%
                                              --------      -------                        --------        ------
  Total interest-earning assets                287,296       16,023            7.44%        273,016        15,032           7.34%
                                                            -------                                        ------
Allowance for loan losses                       (1,896)                                      (1,837)
Other assets, net                                9,174                                        6,435
                                              --------                                     --------
  Total Assets                                $294,574                                     $277,614
                                              ========                                     ========
Interest-Bearing Liabilities
  Savings deposits                            $ 78,773      $ 1,970            3.34%       $ 80,940        $2,116           3.50%
  Money market                                   6,438          153            3.18%          7,495           184           3.28%
  Now deposits                                  11,327          203            2.40%          9,320           171           2.45%
  Certificates of deposit                      101,430        4,281            5.64%         94,072         3,909           5.56%
  Short-term borrowings                         12,749          548            5.75%          1,715            74           5.77%
  Long-term borrowings                           3,486          133            5.10%             --
  Escrow and other                               1,897           34            2.40%          1,760            28           2.13%
                                              --------      -------                        --------        ------
  Total interest-bearing liabilities           216,100        7,322            4.53%        195,302         6,482           4.44%
                                                            -------                                        ------
Non-interest bearing                             5,361                                        3,794
Other liabilities                                2,979                                        2,272
Shareholders' equity                            70,134                                       76,246
                                              --------                                     --------
  Total Equity and Liabilities                $294,574                                     $277,614
                                              ========                                     ========

  Net interest income                                       $ 8,701                                        $8,550
                                                            =======                                        ======
  Net interest rate spread                                                     2.91%                                        2.90%
                                                                               ====                                         ====
  Net yield on average
    interest-earning assets                                                    4.05%                                        4.19%
                                                                               ====                                         ====
  Average interest earning
    assets to average interest
    bearing liabilities                         132.95%                                      139.79%
                                              ========                                     ========
  Earning Assets/Total Assets                    97.53%                                       98.34%
                                              ========                                     ========
</TABLE>

                                       22
<PAGE>

                         CATSKILL FINANCIAL CORPORATION
                                    FORM 10-Q

                                  JUNE 30, 1998

================================================================================

                           PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 2.   Changes in Securities

                  None

Item 3.   Defaults on Senior Securities

                  Not Applicable

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

                  None

Item 5.   Other Information

                  None

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits

      (10.1) Employment  agreement dated April 1, 1998, by and between  Catskill
             Financial Corporation and Wilbur J. Cross.

      (10.2) Employment  agreement dated April 1, 1998, by and between  Catskill
             Savings Bank and Wilbur J. Cross.

      (10.3) Catskill Financial  Corporation  Supplemental  Executive Retirement
             Plan.

      (10.4) Catskill Financial  Corporation  Supplemental  Executive Retirement
             Plan Trust.

      (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: August 14, 1998               /s/ Wilbur J. Cross
                                    ------------------------------------
                                        Wilbur J. Cross
                                        Chairman of the Board, President
                                        and Chief Executive Officer
                                        (Principal Executive Officer)


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

                                       24