<TABLE>

                                 INTERCHANGE FINANCIAL SERVICES CORPORATION
                                        CONSOLIDATED BALANCE SHEETS
                                               (in thousands)
<CAPTION>

                                                                           September 30,        December 31,
                                                                                1998               1997
                                                                           ---------------     -------------
<S>                                                                        <C>                 <C>    
 Assets

 Cash and due from banks                                                         $ 14,288          $ 19,215
 Interest bearing demand deposits                                                      24             1,968
 Federal funds sold                                                                     -            15,400
                                                                           ---------------     -------------
 Total cash and cash equivalents                                                   14,312            36,583
                                                                           ---------------     -------------

 Investment securities at amortized cost  (approximate
       market value of $60,362 and $60,834)                                        59,408            60,442
 Securities available for sale at estimated  market value
       (amortized cost of $84,291 and $73,640)                                     86,351            75,556

 Loans                                                                            475,791           438,273
 Less:  Allowance for loan losses                                                   5,493             5,231
                                                                           ---------------     -------------
 Net loans                                                                        470,298           433,042
                                                                           ---------------     -------------

 Premises and equipment, net                                                        9,954             9,548
 Accrued interest receivable and other assets                                       8,202             9,879
                                                                           ---------------     -------------
 Total assets                                                                    $648,525          $625,050
                                                                           ===============     =============

 Liabilities
 Deposits
       Noninterest bearing                                                       $ 93,318          $ 95,437
       Interest bearing                                                           470,497           445,329
                                                                           ---------------     -------------
 Total deposits                                                                   563,815           540,766

 Securities sold under agreements to repurchase                                     9,280            13,027
 Short-term borrowings                                                                650                 -
 Accrued interest payable and other liabilities                                     4,432             5,248
 Long-term borrowings                                                               9,797             9,879
                                                                           ---------------     -------------
 Total liabilities                                                                587,974           568,920
                                                                           ---------------     -------------

 Commitments and contingent liabilities                                                 -                 -

 Stockholders' equity
 Common stock                                                                       5,397             5,396
 Capital surplus                                                                   21,291            21,557
 Retained earnings                                                                 33,545            29,698
 Acumulated Other Comprehensive Income                                              1,306             1,185
                                                                           ---------------     -------------
                                                                                   61,539            57,836
  Less:  Treasury Stock (77,302 and 134,025 common shares)                            988             1,706
                                                                           ---------------     -------------
       Total stockholders' equity                                                  60,551            56,130
                                                                           ---------------     -------------
 Total liabilities and stockholders' equity                                      $648,525          $625,050
                                                                           ===============     =============

------------------------------------------------------------------------------------------------------------
 See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>

                   INTERCHANGE FINANCIAL SERVICES CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)
<CAPTION>
                                                                    Three Months Ended              Nine Months Ended
                                                                      September 30,                   September 30,
                                                                 -------------------------       -------------------------
                                                                    1998          1997              1998         1997
                                                                 ------------  -----------       -----------  ------------
<S>                                                              <C>            <C>              <C>          <C> 
Interest income
Interest and fees on loans                                           $10,028       $9,028           $29,238       $26,179
Interest on federal funds sold                                           359          170             1,162           556
Interest on interest bearing deposits                                      6           20                55            59
Interest and dividends on securities
    Taxable interest income                                            2,021        2,194             6,003         6,496
    Interest income exempt from federal income taxes                      42           36                92            60
    Dividends                                                             77           55               208           169
                                                                 ------------  -----------       -----------  ------------
Total interest income                                                 12,533       11,503            36,758        33,519
                                                                 ------------  -----------       -----------  ------------

Interest expense
Interest on deposits                                                   4,743        4,436            13,956        12,746
Interest on short-term borrowings                                        235          180               692           545
Interest on long-term borrowings                                         148          149               442           447
                                                                 ------------  -----------       -----------  ------------
Total interest expense                                                 5,126        4,765            15,090        13,738
                                                                 ------------  -----------       -----------  ------------

Net interest income                                                    7,407        6,738            21,668        19,781
Provision for loan losses                                                210          210               641         1,347
                                                                 ------------  -----------       -----------  ------------
Net interest income after provision
 for loan losses                                                       7,197        6,528            21,027        18,434
                                                                 ------------  -----------       -----------  ------------

Noninterest income
Service fees on deposit accounts                                         652          557             1,926         1,502
Net gain on sale of loans                                                  -            -                 -         1,067
Gain on sale of securities                                                94            -                94             -
Other                                                                    267          216               835         1,396
                                                                 ------------  -----------       -----------  ------------
Total noninterest income                                               1,013          773             2,855         3,965
                                                                 ------------  -----------       -----------  ------------

Noninterest expenses
Salaries and benefits                                                  2,206        2,200             6,933         6,625
Net occupancy                                                            611          527             1,747         1,607
Furniture and equipment                                                  247          239               757           650
Advertising and promotion                                                195          196               585           582
Federal Deposit Insurance Corporation assessment                          20           18                57            40
Foreclosed real estate expense, net                                        -           (5)                -             -
Acquisition                                                                3            -             1,392             -
Other                                                                  1,006        1,192             3,183         3,557
                                                                 ------------  -----------       -----------  ------------
Total noninterest expenses                                             4,288        4,367            14,654        13,061
                                                                 ------------  -----------       -----------  ------------

Income before  income taxes                                            3,922        2,934             9,228         9,338

Income taxes                                                           1,375        1,030             3,276         3,277
                                                                 ------------  -----------       -----------  ------------

Net income                                                           $ 2,547      $ 1,904           $ 5,952       $ 6,061
                                                                 ============  ===========       ===========  ============

Basic earnings per common share                                        $0.35        $0.27             $0.83         $0.85
                                                                 ============  ===========       ===========  ============

Diluted earnings per common share                                      $0.35        $0.27             $0.82         $0.84
                                                                 ============  ===========       ===========  ============

--------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
                                    INTERCHANGE FINANCIAL SERVICES CORPORATION
                            CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                                  (in thousands)
<CAPTION>
                                                                               Accumulated
                                                                                 Other
                                                     Comprehensive  Retained  Comprehensive   Common   Capital  Treasury
                                                         Income     Earnings    Income        Stock    Surplus   Stock     Total
                                                       ----------  -------- ---------------  --------  -------- -------- ----------
<S>                                                    <C>         <C>      <C>              <C>       <C>      <C>      <C>   
Balance at January 1, 1997                                         $24,157            $256    $5,285   $20,350        -    $50,048

Comprehensive income
    Net Income                                            $6,061     6,061                                                   6,061
    Other comprehensive income, net of taxes
       Unrealized gains on debt securities                   284
       Unrealized gains on equity securities                 455
                                                       ----------
    Other comprehensive income                                739                      739                                     739
                                                       ----------
Comprehensive income                                       $6,800
                                                       ==========
 
Dividends on common stock                                           (1,789)                                                 (1,789)
Fractional shares on 3 for 2 stock split                                                                    (3)                 (3)
Issued 12,822 shares of common stock in connection
    with Executive Compensation Plan (1)                                                           9       159                 168
Exercised 27,440 option shares (1)                                                                20       143                 163
Exercised 600 option shares (1)                                                                              4                   4
Purchased 12,200 shares in exchange for option shares (1)                                                          (163)      (163)
Issued 16,586 common shares under Dividend Reinvestment Plan                                      12       128                 140
Issued 229,562 shares of common stock in merger with
    Washington Interchange Corporation (1)                                                       170     2,765               2,935
Acquired 187,283 shares of common stock held by
    Washington Interchange Corporation (1)                                                                       (2,394)    (2,394)
Retired 187,283 shares of common stock held by
    Washington Interchange Corporation (1)                                                      (138)   (2,256)   2,394          -
Purchased 121,826 shares of common stock (1)                                                                     (1,543)    (1,543)
                                                       ----------  -------- ---------------  --------  -------- -------- ----------
Balance at September 30, 1997                                       28,429             995     5,358    21,290   (1,706)    54,366

Comprehensive income
    Net Income                                            $1,864     1,864                                                   1,864
    Other comprehensive income, net of taxes
       Unrealized gains on debt securities                    45
       Unrealized gains on equity securities                 145
                                                       ----------
    Other comprehensive income                               190                       190                                     190
                                                       ----------
 Comprehensive income                                      $2,054
                                                       ==========

Dividends on common stock                                             (595)                                                   (595)
Exercised 23,225 option shares (1)                                                                18        97                 115
Exercised 23,100 option shares (1)                                                                17       133                 150
Issued 11,480 common shares under Dividend Reinvestment Plan                                       3        37                  40
                                                                   -------- ---------------  --------  -------- -------- ----------
Balance at December 31, 1997                                        29,698           1,185     5,396    21,557   (1,706)    56,130

Comprehensive income
    Net Income                                            $5,952     5,952                                                   5,952
    Other comprehensive income, net of taxes
       Unrealized gains on debt securities                   467
       Unrealized losses securities transferred from held to
           maturity to available to sale - Acquisition       (22)
       Unrealized loss on equity securities                 (268)
       Less:  gains on disposition of equity securities      (56)
                                                       ----------
    Other comprehensive income                               121                       121                                     121
                                                       ----------
 Comprehensive income                                      $6,073
                                                       ==========

Dividends on common stock                                           (2,105)                                                 (2,105)
Fractional shares on 3 for 2 stock split and merger shares                                                  (6)                 (6)
Issued 12,769 shares of common stock in connection
    with Executive Compensation Plan (1)                                                                    70      162        232
Exercise of 44,680 option shares (1)                                                               1      (330)     556        227
                                                                   -------- ---------------  --------  -------- -------- ----------
Balance at September 30, 1998                                      $33,545          $1,306    $5,397   $21,291    $(988)   $60,551
                                                                   ======== ===============  ========  ======== ======== ==========

-----------------------------------------------------------------------------------------------------------------------------------
(1) Adjusted for the effects of the 3 for 2 stock split issued on April 17, 1998 to shareholders of record on March 20, 1998

See notes to consolidated financial statements.
</TABLE>

<PAGE>
<TABLE>
                           INTERCHANGE FINANCIAL SERVICES CORPORATION
                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (in thousands)
<CAPTION>
                                                                         For the nine months ended
                                                                              September 30,
                                                                         -------------------------
                                                                           1998           1997
                                                                         -------------------------
<S>                                                                      <C>              <C>    
Cash flows from operating activities
Net income                                                                 $ 5,952        $ 6,061
Non-cash items included in earnings
    Depreciation and amortization of fixed assets                            1,015            863
    Amortization of securities premiums                                        709            626
    Accretion of securities discounts                                         (131)           (89)
    Amortization of premiums in connection with acquisition                    305            333
    Provision for loan losses                                                  641          1,347
    Net gain on sale of  loans                                                   -         (1,067)
    Net gain on sale of  available for sale securities                         (94)             -
    Net gain on sale of foreclosed real estate                                   -             (6)
    Increase in carrying value of loans available for sale                       -             (7)
Decrease (increase) in operating assets
    Net repayment of loans available for sale                                    -             18
    Accrued interest receivable                                                (52)           274
    Deferred taxes                                                              (3)           (29)
    Other                                                                    1,392             50
(Decrease) increase in operating liabilities
    Accrued interest payable                                                   (83)            84
    Other                                                                     (733)          (256)
                                                                         ----------     ----------
Cash provided by operating activities                                        8,918          8,202
                                                                         ----------     ----------

Cash flows from investing activities
(Payments for) proceeds from
    Net originations of loans                                              (21,179)       (33,853)
    Purchase of loans                                                      (12,127)        (1,502)
    Purchase of term federal funds                                          (7,500)             -
    Repayment of term federal funds                                          2,500              -
    Sale of loans                                                              409          5,944
    Purchase of securities available for sale                              (14,662)       (13,320)
    Maturities of securities available for sale                             13,313          3,331
    Sale of securities available for sale                                      229              -
    Sale of foreclosed real estate                                               -            616
    Purchase of investment securities                                      (27,169)       (21,948)
    Maturities of investment securities                                     18,189         30,304
    Washington Interchange Merger                                                -             37
    Purchase of fixed assets                                                (1,414)        (3,000)
    Sale of fixed assets                                                         4             13
                                                                         ----------     ----------
Cash used in investing activities                                          (49,407)       (33,378)
                                                                         ----------     ----------

Cash flows from financing activities
Proceeds from (payments for)
    Deposits more than withdrawals                                          23,049         30,557
    Securities sold under agreements to repurchase                          16,300         14,388
    Other borrowings                                                           650         (5,200)
    Retirement of securities sold under agreement to repurchase and other
      borrowings                                                           (20,129)       (12,878)
    Dividends                                                               (2,105)        (1,789)
    Common stock issued                                                        226            312
    Treasury stock                                                               -         (1,543)
    Exercise of option shares from Treasury                                    227              -
                                                                         ----------     ----------
Cash provided by financing activities                                       18,218         23,847
                                                                         ----------     ----------

Increase in cash and cash equivalents                                      (22,271)        (1,329)
Cash and cash equivalents, beginning of year                                36,583         33,189
                                                                         ----------     ----------
Cash and cash equivalents, end of period                                   $14,312        $31,860
                                                                         ==========     ==========
Supplemental disclosure of cash flow information:
Cash paid for:
      Interest                                                             $15,172        $13,655
      Income taxes                                                           4,113          3,885

Supplemental disclosure of non-cash investing activities:
      Increase - market valuation of securities available for sale          $ (145)       $(1,210)
      Amortization of valuation allowance - securities transferred from
        available for sale to held to maturity                                   -              8
      Washington Interchange merger                                              -            504
--------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
</TABLE>
<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

1.   Basis of Presentation

     The  accompanying  unaudited  consolidated  financial  statements have been
prepared in conformity  with  generally  accepted  accounting  principles and in
accordance  with the  rules  and  regulations  of the  Securities  and  Exchange
Commission.  Pursuant  to such  rules and  regulations  certain  information  or
footnotes necessary for a complete presentation of financial condition,  results
of operations and cash flows in conformity  with generally  accepted  accounting
principles  have  been  condensed  or  omitted.   These  consolidated  financial
statements  should be read in  conjunction  with the  financial  statements  and
schedules  thereto  included  in the annual  report on Form 10-K of  Interchange
Financial  Services  Corporation (the "Company") for the year ended December 31,
1997.

     The  consolidated  financial  data for the nine months ended  September 30,
1998 and 1997,  are  unaudited  but reflect all  adjustments  consisting of only
normal recurring adjustments which are, in the opinion of management, considered
necessary  for a fair  presentation  of the  financial  condition and results of
operations  for the  interim  periods.  The  results of  operations  for interim
periods are not  necessarily  indicative of results to be expected for any other
period or the full year. 

     Effective  May 31, 1998,  the Company  acquired The Jersey Bank for Savings
("Jersey").    The    acquisition    has   been    accounted   for   under   the
pooling-of-interests method of accounting, accordingly, the financial statements
have been retroactively  restated to include the consolidated accounts of Jersey
for all periods presented.  The transaction  resulted in the issuance of 780,198
shares of the Company's common stock.

1.   Earnings Per Common Share

     Basic  earnings  per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding.  Diluted earnings
per common  share is similar to the  computation  of basic  earnings  per common
share  except  that the  denominator  is  increased  to  include  the  number of
additional  common  shares  that would  have been  outstanding  if the  dilutive
potential common shares had been issued.


<PAGE>

3.  Legal Proceedings

     The Company is a party to routine  litigation  involving various aspects of
its business, none of which, in the opinion of management and its legal counsel,
is  expected to have a material  adverse  impact on the  consolidated  financial
condition, results of operations or liquidity of the Company.

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The  following  discussion  is an  analysis of the  consolidated  financial
condition and results of operations of the Company for the three and nine months
ended  September 30, 1998 and 1997, and should be read in  conjunction  with the
consolidated financial statements and notes thereto included in Item 1 hereof.

     The Company issued a 3 for 2 stock split on April 17, 1998 to  shareholders
of  record  on  March  20,  1998.  All  per  share  and  share  data  have  been
retroactively  restated  to include  the  effects  of the split for all  periods
presented.

     Effective  May 31, 1998,  the Company  acquired The Jersey Bank for Savings
("Jersey").  The  acquisition  has been  accounted  for  under  the  pooling  of
interests method of accounting,  accordingly the financial  statements have been
retroactively  restated to include the  consolidated  accounts of Jersey for all
periods presented.

          THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997

Earnings Summary

     Net income for the three months ended  September 30, 1998, was $2.5 million
or $.35 diluted  earnings per common share,  as compared to $1.9 million or $.27
diluted  earnings per common share for the same period a year ago. Growth in net
interest  income  and  noninterest  income as well as a decline  in  noninterest
expenses was principally responsible for the improvement in earnings.

                              RESULTS OF OPERATIONS

Net Interest Income

    Net  interest  income  is the  most  significant  source  of  the  Company's
operating  income.  Net interest income on a tax equivalent basis increased $670
thousand or 9.9% to $7.4  million for the quarter  ended  September  30, 1998 as
compared to the same quarter in 1997.  The  increase in net  interest  income is
principally  due to higher levels of interest  earning assets and increased loan
production.  The loan  growth  was  funded  largely  by the  growth  in  deposit
liabilities.

     Average  earning assets  increased $71.1 million or 12.6% to $636.5 million
for the quarter  ended  September  30, 1998,  over the same period in 1997.  The
growth  was  mainly  the result of an  increase  in loan  volume,  particularly,
commercial  mortgages,  home equity loans and 1-4 family residential  mortgages.
For the third quarter of 1998,  average loans  increased  $61.7 million or 15.1%
over the same period in 1997. The average yield on loans was negatively impacted
by a decline in market rates and increased  competitive factors and decreased 33
basis points for the quarter  ended  September 30, 1998, as compared to the same
period a year ago.  However,  the increased  loan volume  contributed  to a $1.0
million  growth in loan  interest  income that offset the decline in yield.  The
growth in loan interest  income was  instrumental  to the growth in net interest
income.

     For the quarter ended September 30, 1998, average interest bearing deposits
grew $39.1 million or 8.9% and  noninterest  bearing demand  deposits grew $13.3
million  or 16.1%.  The total  growth in  average  deposits  amounted  to 10.0%.
Despite the strong growth in interest bearing deposits, the Company's annualized
cost of deposits decreased 9 basis points over the third quarter of 1997.

Noninterest Income

     For the quarter ended  September 30, 1998,  noninterest  income amounted to
$1.0  million,  an increase  of $240  thousand as compared to the same period in
1997. The increase was largely the result of a $95 thousand  increase in service
charges on  deposits.  The higher  levels of service  charges on deposits can be
attributed to a  comprehensive  review of the sources of fee income  employed by
the Company and the growth in the deposit  base. A gain of $94 thousand from the
sale of equity  securities  also  contributed  to the  increase  in  noninterest
income.

Noninterest Expenses

     For the quarter ended September 30, 1998,  noninterest expenses amounted to
$4.3 million,  a decrease of approximately  $79 thousand as compared to the same
period in 1997. The decrease was principally  due to a $186 thousand  decline in
other noninterest expenses. The decrease in other noninterest expenses, includes
but is not  limited  to, a $96,000  decline in legal  costs.  In  addition,  the
Company  exceeded  cost  savings  expectations  with  respect to the merger with
Jersey  Bank  for  Savings,   which  further  contributed  to  the  decrease  in
noninterest  expenses.  The decline in noninterest expenses was partially offset
by a $92 thousand  increase in occupancy  and  equipment  costs due mainly to an
increase  in  depreciation  expense  resulting  from the  installation  of a new
mainframe computer and the renovation of a branch during the first six months of
1998.

     One of the  Company's  goals is to control  expenses  in order to  maximize
earnings and shareholder  value.  Generally,  the efficiency ratio is one method
utilized to measure a bank's operating  expenses.  The efficiency ratio is gross
operating  expenses,  excluding  the  amortization  of  intangibles,  the merger
related  expenses and net  expenses of  foreclosed  real estate,  expressed as a
percentage  of net interest  income (on a fully  taxable  equivalent  basis) and
other noninterest income,  excluding gains. Generally,  the lower the efficiency
ratio the more  effective  the Company is in utilizing  its resources to produce
income. The Company's efficiency ratio for the quarter ended September 30, 1998,
was 50.5% as compared to 56.7% for the same period in 1997. The  improvement was
mostly  attributable to the growth in net interest income and noninterest income
and  a  decline  in  noninterest  expenses.  The  national  peer  group  average
(published by SNL Securities) for the year 1997 was 60.4%.

Income Taxes

     Income tax  expense  as a  percentage  of pre-tax  income was 35.1% for the
quarter ended September 30, 1998, the same as the third quarter of 1997.

           NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997

Earnings Summary

     Net income for the nine months ended  September 30, 1998,  was $6.0 million
or $.82 diluted  earnings per common share,  as compared to $6.1 million or $.84
diluted  earnings per common share for the same period a year ago. If the Jersey
nonrecurring  merger related charge of $898 thousand,  net of tax were excluded,
the Company would have reported net income of $6.9 million,  an increase of $789
thousand or 13.0% from the prior comparable period.  Diluted earnings per common
share, excluding the merger related charge, were $.95, an increase of 13.1% over
the prior comparable period.

                              RESULTS OF OPERATIONS

Net Interest Income

     Net interest  income on a tax  equivalent  basis  increased $1.9 million to
$21.7  million for the nine months ended  September  30, 1998 as compared to the
same period of 1997. The increase in net interest  income is principally  due to
higher levels of interest earning assets and increased loan production. The loan
growth was funded largely by the growth in deposit liabilities.

     Average  earning assets  increased $73.2 million or 13.3% to $625.0 million
for the nine months ended  September 30, 1998, over the same period in 1997. The
growth  was  mainly  the result of an  increase  in loan  volume,  particularly,
commercial  mortgage loans, home equity loans and consumer auto leases.  For the
first nine months of 1998,  average loans  increased $62.1 million or 15.7% over
the same period in 1997. The average yield on loans was negatively impacted by a
decline in market rates and increased competitive factors and decreased 30 basis
points for the nine months ended  September  30,  1998,  as compared to the same
period a year ago.  However,  the increased  loan volume  contributed  to a $3.1
million  growth in loan income  that offset the decline in yield.  The growth in
loan income was instrumental to the growth in net interest income.

     For the nine months ended  September  30, 1998,  average  interest  bearing
deposits grew $41.7 million or 9.7% and noninterest bearing demand deposits grew
$13.7 million or 17.4%. The total growth in average deposits  amounted to 10.9%.
Despite the strong growth in interest bearing deposits, the Company's annualized
cost of deposits  decreased 4 basis  points as compared to the first nine months
of 1997.

Noninterest Income

     For the nine months ended September 30, 1998,  noninterest  income amounted
to $2.9  million,  a decrease of $1.1 million from the same period in 1997.  The
decrease was  principally  due to the recognition of gains during the first half
of 1997 of $1.1 million from the sale of  commercial  loans and of $775 thousand
from the payoff of a commercial loan that was acquired at a discount.  Adjusting
for  these  significant   nonrecurring  items,  noninterest  income  effectively
increased $732 thousand.  The increase was largely the result of a $424 thousand
increase in service charges on deposits. The higher levels of service charges on
deposits can be attributed to a comprehensive review of the source of fee income
employed  by the  Company  and the  growth in the  deposit  base.  A gain of $94
thousand from the sale of equity  securities and a gain of $53 thousand from the
sale of reverse mortgage servicing also contributed to the effective increase in
noninterest income.

Noninterest Expenses

     For the nine months ended September 30, 1998, noninterest expenses amounted
to $14.7 million,  an increase of $1.6 million as compared to the same period in
1997.  The  predominant  factor for the increase was the one time merger related
charges  of $1.4  million  resulting  from the merger  with The Jersey  Bank for
Savings.  Excluding the one time merger  related  charges  noninterest  expenses
increased  $201  thousand  or 1.5% over the same  period in 1997.  Salaries  and
benefits  expense,  which increased $308 thousand or 4.6% contributed  mostly to
the  increase.  The  increase  was  mostly  due  to  normal  salary  raises  and
promotions.  At September 30, 1998 and 1997, full-time equivalent staff was 199.
Occupancy and equipment  costs that increased $247 thousand from the same period
in 1997 were also partly responsible for the increase. The increase in occupancy
and equipment costs was mostly due an increase in depreciation expense resulting
from the installation of a new mainframe computer, the addition of new equipment
and the  renovation  of a branch  during  the  first  six  months  of 1998.  The
recognition of approximately  $355 thousand from the cash surrender value of the
directors' life insurance  policies,  which reduced other noninterest  expenses,
partly  offset the  increases in salaries  and  benefits  and in  occupancy  and
equipment expenses.

     The  Company's  efficiency  ratio for the nine months ended  September  30,
1998,  was  53.04% as  compared  to  58.11%  for the same  period  in 1997.  The
improvement  was mostly  attributable  to the growth in net interest  income and
noninterest  income  in  conjunction  with  a  moderate  growth  in  noninterest
expenses.  The national peer group average (published by SNL Securities) for the
year 1997 was 60.4%.

Income Taxes

     Income tax expense as a percentage of pre-tax income was 35.5% for the nine
months  ended  September  30,  1998 as  compared to 35.1% for the same period in
1997. The increase is  attributable to an increase in the effective state income
tax rate.

                               FINANCIAL CONDITION

     At September 30, 1998, the Company's  total assets  increased $23.5 million
or 3.8% to $648.5 million from $625.1 million at December 31, 1997. At September
30,  1998,  cash and cash  equivalents  decreased  $22.3  million as compared to
December  31,  1997.  This is  principally  the result of  financing  activities
(reflecting  principally  repayments of  borrowings)  and  investing  activities
(funding  loans and  investment  growth)  utilizing  cash more  rapidly than the
operating  activities  (reflecting  net income and changes in other  assets) can
provide it. This can be seen more completely on the  accompanying  Statements of
Cash Flows.

<PAGE>
<TABLE>

Securities

     Securities held to maturity and securities available for sale consist of the following:  (in thousands)
<CAPTION>
                                                                                     September 30, 1998
                                                              -----------------------------------------------------------------
                                                                                  Gross             Gross          Estimated
                                                               Amortized        Unrealized        Unrealized         Market
                                                                  Cost            Gains             Losses           Value
                                                              -------------    -------------     -------------    -------------
<S>                                                           <C>              <C>               <C>              <C> 
Securities held to maturity
    Obligations of U.S. Treasury                                  $ 19,997            $ 237                 -         $ 20,234
    Mortgage-backed securities                                      20,681              310               $21           20,970
    Obligations of U.S. Agencies                                    10,737              370                 -           11,107
    Obligations of states & political subdivisions                   7,844               57                 -            7,901
    Other debt securities                                              149                1                 -              150
                                                              -------------    -------------     -------------    -------------
                                                                    59,408              975                21           60,362
                                                              -------------    -------------     -------------    -------------

Securities available for sale
    Obligations of U.S. Treasury                                    33,312              940                 -           34,252
    Mortgage-backed securities                                      39,806              563               141           40,228
    Obligations of U.S. Agencies                                     6,465              188                 -            6,653
    Equity securities                                                4,708              510                 -            5,218
                                                              -------------    -------------     -------------    -------------
                                                                    84,291            2,201               141           86,351
                                                              -------------    -------------     -------------    -------------
       Total securities                                           $143,699           $3,176              $162         $146,713
                                                              =============    =============     =============    =============


                                                                                     December 31, 1997
                                                              -----------------------------------------------------------------
                                                                                  Gross             Gross          Estimated
                                                               Amortized        Unrealized        Unrealized         Market
                                                                  Cost            Gains             Losses           Value
                                                              -------------    -------------     -------------    -------------

Securities held to maturity
    Obligations of U.S. Treasury                                  $ 22,134            $ 122                 -         $ 22,256
    Mortgage-backed securities                                      28,398              200              $ 96           28,502
    Obligations of U.S. Agencies                                     6,711              166                 -            6,877
    Obligations of states & political subdivisions                   3,049                -                 -            3,049
    Other debt securities                                              150                -                 -              150
                                                              -------------    -------------     -------------    -------------
                                                                    60,442              488                96           60,834
                                                              -------------    -------------     -------------    -------------
Securities available for sale
    Obligations of U.S. Treasury                                    35,452              605                74           35,983
    Mortgage-backed securities                                      26,871              308                30           27,149
    Obligations of U.S. Agencies                                     6,954               71                12            7,013
    Equity securities                                                4,363            1,048                 -            5,411
                                                              -------------    -------------     -------------    -------------
                                                                    73,640            2,032               116           75,556
                                                              -------------    -------------     -------------    -------------
       Total securities                                           $134,082           $2,520              $212         $136,390
                                                              =============    =============     =============    =============
</TABLE>

<PAGE>
<TABLE>

At September 30, 1998, the contractual maturities of securities held to maturity and securities available
for sale are as follows: (in thousands)
<CAPTION>
                                          Securities                              Securities
                                       Held to Maturity                       Available for Sale
                                  ----------------------------            ---------------------------
                                   Amortized        Market                 Amortized       Market
                                     Cost            Value                   Cost           Value
                                  ------------    ------------            ------------   ------------
<S>                               <C>             <C>                     <C>            <C>               
Within 1 year                         $14,741         $14,796                 $14,199        $14,328
After 1 but within 5 years             20,159          20,586                  29,258         30,338
After 5 but within 10 years            13,446          13,690                  11,869         12,140
After 10 years                         11,062          11,290                  24,257         24,327
Equity securities                           -               -                   4,708          5,218
                                  ------------    ------------            ------------   ------------
                        Total         $59,408         $60,362                 $84,291        $86,351
                                  ============    ============            ============   ============
</TABLE>


Loans

         At September 30, 1998,  total loans  increased $37.5 million or 8.6% to
$475.8  million from $438.3  million at December 31, 1997.  The following  table
reflects  the  composition  of the loan  portfolio  at  September  30,  1998 and
December 31, 1997:

<TABLE>
<CAPTION>
                                                   ______________       ______________
                                                    September 30,        December 31,
                                                         1998                1997
                                                   ______________       ______________
<S>                                               <C>                    <C>             
Amounts of loans by type (in thousands)
      Real estate-mortgage
         Commercial                                        $147,571            $134,972
         1-4 family residential
               First liens                                   87,351              73,275
               Junior liens                                  15,559              16,795
               Home equity                                  144,724             143,177
      Commercial and financial                               61,907              51,574
      Real estate-construction                                  695               4,229
      Installment
         Credit cards and related plans                       2,375               2,415
         Other                                                1,379               1,736
      Lease financing                                         9,230              10,101
      Term Fed Funds                                          5,000                   -
                                                   =================    ================
               Total                                       $475,791            $438,273
                                                   =================    ================

</TABLE>

<PAGE>


     At September 30, 1998,  total deposits  increased  $23.0 million or 4.3% to
$563.8  million  from  $540.8  million  at  December  31,  1997.  The growth was
principally  in money  market  deposit  accounts  and  interest  bearing  demand
deposits, which grew $17.1 million and $9.7 million, respectively. Time deposits
grew $3.1 million and represent  30.4% of all deposits at September 30, 1998, as
compared to 31.1% at December 31, 1997.

Nonperforming Assets

     Nonperforming assets are comprised of nonaccrual loans,  restructured loans
and foreclosed real estate. At September 30, 1998, nonperforming assets amounted
to $1.8  million,  a decrease of $1.0 million from $2.8 million at September 30,
1997.  The sale of $409 thousand of  nonperforming  loans  comprised part of the
decrease.  The ratio of nonperforming  assets to total loans and foreclosed real
estate  decreased  to 0.37% at September  30, 1998 from 0.67% at  September  30,
1997. At September 30, 1998,  nonperforming  assets decreased $337 thousand from
$2.1 million at December 31, 1997.  For the third quarter of 1998,  the ratio of
nonperforming  assets to total loans and  foreclosed  real estate  decreased  11
basis points from 0.48% at December 31, 1997.

Provision for Loan Losses and Loan Loss Experience

     The provision for loan losses represents management's  determination of the
amount  necessary  to bring  the  allowance  for  loan  losses  to a level  that
management  considers  adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. In its evaluation of the adequacy of the allowance
for loan losses, management considers past loan loss experience,  changes in the
composition of performing and  nonperforming  loans,  the condition of borrowers
facing  financial  pressure,  the  relationship  of  the  current  level  of the
allowance  to the  credit  portfolio  and to  nonperforming  loans and  existing
economic  conditions.  However,  the process of determining  the adequacy of the
allowance  is  necessarily   judgmental  and  subject  to  changes  in  external
conditions.  Accordingly,  there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.

     The allowance  for loan losses was $5.5 million at September 30, 1998,  and
$5.2  million  at  December  31,  1997,   representing   313.9%  and  250.7%  of
nonperforming loans at those dates, respectively.  In the third quarter of 1998,
the  Company's  provision  for loan  losses was $210  thousand,  the same as the
amount provided in the third quarter of 1997.

<PAGE>
<TABLE>

Capital Adequacy

The Company's and the Bank's capital amounts and ratios are as follows: (dollars in thousands)

<CAPTION>
                                                                                                                To Be Well
                                                                                                            Capitalized Under
                                                                                   For Capital              Prompt Corrective
                                                           Actual               Adequacy Purposes           Action Provisions
                                                -------------------------     -------------------------    ------------------------
                                                     Amount        Ratio           Amount        Ratio          Amount       Ratio
                                                ------------  -----------     ------------- -----------    ------------ -----------
<S>                                             <C>           <C>             <C>           <C>            <C>          <C>
As of September 30, 1998:
     Total Capital (to Risk Weighted Assets):
       The Company                                 $64,237        14.99 %         $34,294        8.00 %           N/A         N/A
       The Bank                                     62,288        14.60            34,139        8.00         $42,674       10.00 %
     Tier 1 Capital (to Risk Weighted Assets):
       The Company                                  58,650        13.68            17,147        4.00             N/A         N/A
       The Bank                                     56,954        13.35            17,070        4.00          25,605        6.00
     Tier 1 Capital (to Average Assets):
       The Company                                  58,650         8.83            19,932        3.00             N/A         N/A
       The Bank                                     56,954         8.60            19,864        3.00          33,107        5.00

As of December 31, 1997:
     Total Capital (to Risk Weighted Assets):
       The Company                                 $59,185        14.51 %         $32,631        8.00 %           N/A         N/A
       The Bank                                     57,335        14.12            32,485        8.00         $40,606       10.00 %
     Tier 1 Capital (to Risk Weighted Assets):
       The Company                                  54,166        13.28            16,316        4.00             N/A         N/A
       The Bank                                     52,338        12.89            16,242        4.00          24,364        6.00
     Tier 1 Capital (to Average Assets):
       The Company                                  54,166         8.79            18,482        3.00             N/A         N/A
       The Bank                                     52,338         8.53            18,403        3.00          30,672        5.00

</TABLE>

<PAGE>


Liquidity

     Liquidity  is the  ability  to  provide  sufficient  resources  to meet all
financial obligations and finance prospective business opportunities.  Liquidity
levels over any given period of time are a product of the  Company's  operating,
financing  and  investing  activities.  The extent of such  activities  is often
shaped by such  external  factors as  competition  for  deposits  and demand for
loans.

     Financing for the Company's loans and investments is derived primarily from
deposits,  along with interest and principal  payments on loans and investments.
At September 30, 1998, total deposits amounted to $563.8 million, an increase of
$23.0  million  or 4.3%  from  December  31,  1997.  In  addition,  the  Company
supplemented  the more  traditional  funding  sources with  borrowings  from the
Federal  Home Loan Bank of New York  ("FHLB")  and with  securities  sold  under
agreements to  repurchase  ("REPOS").  At September 30, 1998,  advances from the
FHLB and REPOS  amounted to $10.4  million and $9.3  million,  respectively,  as
compared to $9.9 million and $13.0 million, respectively, at December 31, 1997.

     In the third quarter of 1998, loan production continued to be the Company's
principal investing activity. Net loans at September 30, 1998 amounted to $470.3
million,  compared  to $433.0  million at the end of 1997,  an increase of $37.3
million or 8.6%.

     The Company's most liquid assets are cash and cash  equivalents and federal
funds sold.  At September 30, 1998,  the total of such assets  amounted to $14.3
million  or 2.2% of total  assets,  compared  to $36.6  million or 5.9% of total
assets at year-end 1997.

     Another  significant  liquidity source is the Company's  available-for-sale
("AFS")  securities.  At September 30, 1998,  AFS  securities  amounted to $86.4
million  or 59.2% of total  securities,  compared  to $75.6  million or 55.6% of
total securities at year-end 1997.

     In addition to the  aforementioned  sources of  liquidity,  the Company has
available various other sources of liquidity,  including federal funds purchased
from other banks and the Federal Reserve  discount  window.  The Bank also has a
$57.7  million line of credit  available  through its  membership in the Federal
Home Loan Bank of New York.

     Management  believes that the Company's  sources of funds are sufficient to
meet its funding requirements.


<PAGE>


Forward Looking Statements

     We discuss certain  matters in this report which are not historical  facts,
but which are "forward looking  statements." These "forward looking  statements"
include,  but are not limited to,  estimates of capital  expenditures,  costs of
remediation  and testing,  the timetable for  implementing  the  remediation and
testing phases of Year 2000 planning, the possible impact of third parties' Year
2000  issues  on the  Company,  management's  assessment  of  contingencies  and
possible scenarios in its Year 2000 planning.  The "forward looking  statements"
in this report  reflect what we currently  anticipate  will happen in each case.
What actually happens could differ materially from what we currently  anticipate
will happen. We are not promising to make any public  announcement when we think
"forward looking statements" in this document are no longer accurate, whether as
a result of new  information,  what  actually  happens  in the future or for any
other reason.

Preparation for the Year 2000

     The issue  surrounding  many of the world's  computers is principally  that
years are  currently  recorded in a two-digit  format.  If not  corrected,  this
problem will render such computers  incapable of  interpreting  dates beyond the
year  1999,  which  could  disrupt  business.   Hereinafter,   this  issue  will
collectively  be referred to as the "Year 2000 issue".  A company's  exposure to
uncertainties  and costs associated with the Year 2000 issue depends on a number
of factors, including software, hardware, the industry in which it operates, and
other entities with which it electronically interacts.

     The Company has adopted a Year 2000  Compliance  Plan (the  "Plan") and has
established a Year 2000 Compliance  Committee (the "Committee").  The objectives
of the Plan and the  Committee  are to address  the Year 2000 issues and prepare
the Company for the new  millennium.  As  recommended  by the Federal  Financial
Institutions  Examination  Council,  the Plan encompasses the following  phases:
Awareness, Assessment,  Renovation, Validation and Implementation.  These phases
will enable the Company to identify  risks,  develop an action plan, and perform
adequate testing and complete  certification that its processing systems will be
Year 2000 ready.  In the  Awareness  phase,  the  Company  defined the Year 2000
issues,  informed  management and staff and obtained executive level support and
funding.  In addition,  the Company compiled a comprehensive  list of items that
may be  affected  by  the  Year  2000  compliance  issues.  Such  items  include
facilities and related non-information technology systems (embedded technology),
computer systems, hardware, and services and products provided by third parties.
In the  Assessment  phase,  the Company  evaluated  the items  identified in the
Awareness  phase to assess  whether the items will  function  properly  with the
century date  change.  The items were ranked in the order that they will need to
be remediated based on their mission critical nature and the potential impact to
the Company.  The  Renovation  phase  includes an analysis of the items that are
affected by Year 2000,  the  identification  of problem  areas and the repair of
non-compliant  items.  As of September  30, 1998,  the Company has completed the
Awareness,  Assessment and Renovation  phases;  however,  more  Renovation  type
processes  may be  required  depending  upon the outcome of the  Validation  and
Implementation  phases. The Validation phase will include a thorough testing and
verification of systems, databases and utilities,  including present and forward
date testing which  includes  simulating  data  conditions in the Year 2000. The
Implementation  phase will  consist of placing all the  systems,  databases  and
utilities that have been renovated  into  production.  As of September 30, 1998,
the Company has conducted and continues to conduct  procedures  associated  with
the Renovation,  Validation and  Implementation  phases.  The Company expects to
complete the  Validation  (testing)  phase with respect to its mission  critical
applications  by March 31, 1999, and the  Implementation  phase completed by the
second quarter of 1999.

     The  Company  has  begun  and  continues  to survey  and  communicate  with
counterparties,  intermediaries  and vendors ("Third  Parties") with whom it has
important  financial and  operational  relationships  to determine the extent to
which they are  vulnerable to Year 2000 issues.  As of September  30, 1998,  the
Company has received  sufficient  information from its Third Parties to conclude
that they are in the Renovation,  Validation and Implementation  phases of their
respective  plans.  However,  as of September 30, 1998,  the Company has not yet
received   conclusive   information  from  all  Third  Parties  related  to  the
Renovation, Validation and Implementation phases to predict the outcome of their
efforts. 

     There are many risks  associated  with the Year 2000 issue,  including  the
failure of the Company's  computer and non-financial  technology  systems.  Such
failures  could  have a material  adverse  effect on the  Company  and may cause
system malfunctions, incorrect or incomplete transaction processing resulting in
the inability to reconcile  accounting books and records.  In addition,  even if
the Company  successfully  remediates its Year 2000 issues,  it can be adversely
affected by failures of Third  Parties  with which the Company has  financial or
operational  relationships to remediate their own Year 2000 issues.  The failure
of Third  Parties to remediate  their Year 2000 issues in a timely  manner could
result in a material financial risk to the Company.  Such risks include business
interruption  or  shutdown,   financial  loss,   regulatory  actions  and  legal
liability.  The Company is planning to develop a Year 2000 specific  contingency
plan as part of its overall  Year 2000 plan in an effort to  mitigate  Year 2000
risk.

     Based on current  information,  the Company  does not  anticipate  that the
overall costs related to the implementation of the Year 2000 plan to be material
in any single  year.  The  Company  estimates  that the total  external  cost of
implementing its Year 2000 plan will amount to approximately $170 thousand.  The
Year 2000 costs include all activities  undertaken on Year 2000 related matters,
including,  but not limited to, renovation,  validation  (testing),  third party
review and contingency planning. However, costs for compensation and benefits of
the Company's internal employees have not yet been determined. Through the third
quarter of 1998, the Company has expended approximately $13 thousand on the Year
2000 project. All Year 2000 costs are expensed in the period incurred.

<PAGE>



                            PART II OTHER INFORMATION

Item 1.  Legal Proceedings

         Reference  is made to Form 10-K filed for the year ended  December  31,
         1997.

Item 5.  Other Information

          The Company  hired  Nicholas G. Verdi as Sr.  Vice  President  of
          Retail  Banking  effective  October  13,  1998,  replacing  Richard N.
          Latrenta who resigned on October 23, 1998 to pursue other interests.

Item 6.  Exhibits and Reports on Form 8-K

         (a)  Exhibits

               3. (a) Certificate of  Incorporation  and Amendments  thereto are
                      incorporated herein by reference to Form S-4,
                      Registration  Statement No. 333-50065. 
                      Exhibit 3 filed April 27, 1998.

                  (b)  By-laws  are   incorporated   herein  by   reference   to
                       Registration Statement No. 33-49840, Exhibit 3(b)

               11 StatementRe: Computation of Per Share Earnings

               27 Financial Data Schedule

          (b)  Reports  on Form 8-K
               No  reports  on Form  8-K were  filed by the
               Company during the quarter ended September 30, 1998


<PAGE>


                                   SIGNATURES

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

Interchange Financial Services Corporation

By:      /s/ Anthony Labozzetta             
         ______________________________ 
         Anthony Labozzetta
         Executive Vice President & CFO