<PAGE>   1


                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

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

     For the Fiscal Year December 31, 1998 OR

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

     For the transition period from______________to___________________

                         Commission File Number: 0-25960

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

          Kentucky                                              61-1256535
-------------------------------                           ----------------------
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                           Identification Number)

                 1065 Burlington Pike, Florence, Kentucky 41042
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (606) 371-2340

      Securities registered pursuant to Section 12(b) of the Exchange Act:
                             ----------------------
                                      None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     Common Stock, $5.00 par value per share
                     ---------------------------------------
                                (Title of Class)

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

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

State the issuer's revenues for its most recent fiscal year:  $22.6 million
                                                              -------------

The issuer's Common Stock is not quoted or traded on any established trading
market. Using the most recent trade price of which management is aware of $34.00
per share, the aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 8, 1999 was $60.1 million.

At March 8, 1999, there were 3,518,224 shares of the Registrant's Common Stock
issued and outstanding.

Transitional Small Business Disclosure Format  Yes   No  X  
                                                  ---   ---






<PAGE>   2




                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         The Bank of Kentucky Financial Corporation ("BKFC") was incorporated as
a Kentucky corporation in 1993 and engaged in no business activities until April
1, 1995, when BKFC acquired, in a reorganization, all of the issued and
outstanding shares of common stock of The Bank of Kentucky, Inc. ("BKI"), a bank
incorporated under the laws of the Commonwealth of Kentucky (formerly named "The
Bank of Boone County, Inc."), and Burnett Federal Savings Bank ("Burnett"), a
federal savings bank. As a result of such acquisition, BKFC became a bank
holding company and a savings and loan holding company.

         On September 30, 1995, Burnett was merged with and into BKI (the
"Merger"), as a result of which, BKFC's status as a savings and loan holding
company terminated. As a bank holding company, BKFC, through BKI, is engaged in
the banking business in Kentucky. Since incorporation, BKFC has engaged in no
business activity other than owning the outstanding stock of BKI and Burnett.

         Formed in 1990 to engage in the commercial banking business, BKI
provides a variety of community-oriented consumer and commercial financial
services to customers throughout Northern Kentucky. The principal business
activity of BKI consists of accepting consumer and commercial deposits and using
such deposits to fund residential and non-residential real estate loans and
commercial, consumer, construction and land development loans. BKI's primary
market area for both loans and deposits includes Boone, Kenton and Campbell
counties and parts of Grant and Gallatin counties in Northern Kentucky. Service
is provided to the market area through the main office of the Bank and three
branch offices in Boone County, four branch offices in Kenton County and two
branch offices in the City of Florence.

         Interest and fees on loans and interest on securities are BKI's primary
sources of income. BKI's principal expense is interest paid on deposit accounts
and borrowings. Operating results are dependent to a significant degree on the
"net interest income" of BKI, which is the difference between interest income
from loans and securities and other interest-earning assets, and interest
expense on deposits and borrowings. Interest income and expense are
significantly affected by general economic conditions and policies of various
regulatory authorities. See Part II, Item 6.

         As a bank holding company, BKFC is subject to regulation, supervision
and examination by the Board of Governors of the Federal Reserve System (the
"FRB"). See "Regulation of BKFC" and "Regulatory Capital Requirements."

         The deposits of BKI are insured up to applicable limits by the Federal
Deposit Insurance Corporation (the "FDIC"). At December 31, 1998, approximately
92%, or $225 million, of BKI's deposits were insured in the Bank Insurance Fund
("BIF") and 8%, or $19 million, which represent deposits deemed to have been
acquired in the Merger from Burnett, were insured in the Savings Association
Insurance Fund ("SAIF"). Because of the FDIC-insured deposits, BKI is subject to
regulation, supervision and examination by the FDIC. See "Regulation of BKI's";
"Regulatory Capital Requirements" and "Dividend Restrictions."

         As a bank incorporated under the laws of the Commonwealth of Kentucky,
BKI is subject to regulation, supervision and examination by the Department of
Financial Institutions of the Commonwealth of Kentucky (the "Department"). BKI
is also a member of the Federal Home Loan Bank of Cincinnati (the "FHLB").

         Because BKFC's activities have been limited primarily to holding the
shares of common stock of BKI and Burnett, and Burnett has been merged into BKI,
the following discussion of operations focuses primarily on the business of BKI,
and information regarding the business of BKI reflects the combination of BKI
and Burnett.

FORWARD-LOOKING STATEMENTS

         In addition to the historic financial information included herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances and BKFC's operations and actual results
could differ significantly from those discussed in those forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation

                                       2
<PAGE>   3


and in BKFC's general market area. See Exhibit 99 hereto, "Safe Harbor Under the
Private Securities Litigation Reform Act of 1995", which is incorporated herein
by reference.

LENDING ACTIVITIES

         GENERAL. As a commercial bank, BKI offers a wide variety of loans.
Among BKI's lending activities are the origination of loans secured by first
mortgages on nonresidential real estate; loans secured by first mortgages on
one- to four-family residences; commercial loans secured by various assets of
the borrower; unsecured consumer loans and consumer loans secured by
automobiles, boats and recreational vehicles; and construction and land
development loans secured by mortgages on the underlying property.

         The following table sets forth the composition of BKI's loan portfolio
by type of loan at the dates indicated:


<TABLE>
<CAPTION>
                                                                        As   of   December 31,  
                                                                        ------------------------
                                                  1998                     1997                    1996             
                                           -----------------        ----------------         -----------------      
                                           Amount         %         Amount         %         Amount          %      
                                           ------         -         ------         -         ------          -      
                                                                             (In thousands)
<S>                                       <C>            <C>       <C>            <C>       <C>            <C>      
Type of Loan:
   Nonresidential real estate loans       $ 66,449       31.9%     $ 62,932       34.6%     $ 52,312       33.9%    
   One- to four-family residential
     real estate loans                      52,692       25.3        51,734       28.5        44,819       29.0     
   Commercial loans                         57,877       27.8        49,172       27.0        37,803       24.5     
   Consumer loans                            9,172        4.4         8,073        4.4         8,617        5.6     
   Construction and land development        18,634        9.0         8,482        4.7         7,432        4.8     
     loans
   Municipal obligations                     3,346        1.6         1,475         .8         3,390        2.2     
                                          --------      -----      --------      ------     --------      -----     
        Total loans                        208,170      100.0%      181,868      100.0%      154,373      100.0%    
                                                        =====                    =====                    =====     
Less:
   Deferred loan fees                          335                      374                      325                
   Allowance for loan losses                 2,193                    2,078                    1,752                
                                          --------                 --------                 --------                
     Net loans                            $205,642                 $179,416                 $152,296                
                                          ========                 ========                 ========                
</TABLE>




<TABLE>
<CAPTION>
                                                       As   of   December 31,  
                                                       ------------------------
                                                      1995                     1994
                                               -----------------        ----------------
                                               Amount         %         Amount         %
                                               ------         -         ------         -
                                                               (In thousands)
<S>                                           <C>            <C>       <C>            <C>  
Type of Loan:
   Nonresidential real estate loans           $ 42,841       35.5%     $ 35,737       32.9%
   One- to four-family residential
     real estate loans                          38,871       32.2        37,858       34.8
   Commercial loans                             24,979       20.7        22,191       20.4
   Consumer loans                                8,327        6.9         8,128        7.5
   Construction and land development             4,141        3.4         3,429        3.2
     loans
   Municipal obligations                         1,513        1.3         1,443        1.2
                                              --------      ------     --------      -----
        Total loans                            120,672      100.0%      108,786      100.0%
                                                            =====                    ===== 
Less:
   Deferred loan fees                              340                      379
   Allowance for loan losses                     1,415                    1,190
                                              --------                 --------
     Net loans                                $118,917                 $107,217
                                              ========                 ========
</TABLE>






                                       3
<PAGE>   4


        LOAN MATURITY SCHEDULE. The following table sets forth certain
information, as of December 31, 1998, regarding the dollar amount of loans
maturing in BKI's portfolio based on their contractual terms to maturity and the
dollar amount of such loans that have fixed or variable rates within certain
maturity ranges ending after 1998:


<TABLE>
<CAPTION>
                                               Due after 1
                                                year to 5  Due after 5
                      Due within one year         years       Years       Total
                      -------------------         -----       -----       -----
                                             (In thousands)
<S>                        <C>                   <C>         <C>         <C>    
Commercial loans           $34,358               $21,961     $ 1,558     $57,877
Construction and land
   development loans        18,634                    --          --      18,634
                           -------               -------     -------     -------
     Total                 $52,992               $21,961     $ 1,558     $76,511
                           =======               =======     =======     =======

Interest sensitivity:
   With fixed rates                              $10,035                 $   317
   With variable rates                            11,926       1,241
                                                 -------     -------
     Total                                       $21,961     $ 1,558
                                                 =======     =======
</TABLE>

         NONRESIDENTIAL REAL ESTATE LOANS. BKI makes loans secured by first
mortgages on nonresidential real estate, including retail stores, office
buildings, warehouses, apartment buildings and recreational facilities. Such
mortgage loans have terms to maturity of between 10 and 20 years and are made
with adjustable interest rates ("ARMs"). Interest rates on the ARMs adjust
either each year or every three years based upon the interest rates of the
applicable one- or three-year U.S. Treasury security then offered. Such loans
typically have adjustment period caps of 2% and lifetime caps of 6%.

         BKI limits the amount of each loan in relationship to the appraised
value of the real estate and improvements at the time of origination of a
nonresidential real estate loan. In accordance with regulations, the maximum
loan-to-value ratio (the "LTV") on nonresidential real estate loans made by BKI
is 80%, subject to certain exceptions.

         Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending. Such risk is due primarily to
the dependence of the borrower on the cash flow from the property to service the
loan. If the cash flow from the property is reduced due to a down-turn in the
economy for example, or due to any other reason the borrower's ability to repay
the loan may be impaired. To reduce such risk, the decision to underwrite a
nonresidential real estate loan is based primarily on the quality and
characteristics of the income stream generated by the property and/or the
business of the borrower. In addition, BKI generally obtains the personal
guarantees of one or more of the principals of the borrower and carefully
evaluates the location of the real estate, the quality of the management
operating the property, the debt service ratio and appraisals supporting the
property's valuation.

         At December 31, 1998, BKI had a total of $66 million invested in
nonresidential real estate loans, all of which were secured by property located
in the Northern Kentucky area. Such loans comprised approximately 32% of BKI's
total loans at such date. See "Delinquent Loans, Nonperforming Assets and
Classified Assets" for information regarding nonperforming loans of this type.

         ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. BKI originates
permanent conventional loans secured by first mortgages on one- to four-family
residences, primarily single-family residences, located in the Northern Kentucky
area. BKI also originates a limited amount of loans for the construction of one-
to four-family residences and home equity loans secured by second mortgages on
one- to four-family residential real estate. See "Construction and Land
Development Loans." Each of such loans is secured by a mortgage on the
underlying real estate and improvements thereon, if any. BKI does not originate
mortgage loans insured by the Federal Housing Administration or guaranteed by
the Veterans Administration.

         The residential real estate loans of BKI are either one- or three-year
ARMs. Such loans typically have adjustment period caps of 2% and lifetime caps
of 6%. The maximum amortization period of such loans is 30 years. BKI does not
engage in the practice of deeply discounting the initial rates on such loans,
nor does BKI engage in the practice of putting payment caps on loans which could
lead to negative amortization. Historically, BKI has not made fixed-rate
residential mortgage loans. In order to meet consumer demand for fixed-rate
loans, however, BKI has originated loans for other lenders willing to accept the
interest rate and credit risk.


                                       4
<PAGE>   5


         Federal regulations also limit the LTV on residential real estate loans
to 95%. BKI requires private mortgage insurance for the amount of any such loan
with an LTV in excess of 90%.

         The aggregate amount of BKI's residential real estate loans equaled
approximately $53 million at December 31, 1998, and represented 25% of total
loans at such date. See "Delinquent Loans, Nonperforming Assets and Classified
Assets" for information regarding nonperforming loans of this type.

         COMMERCIAL LOANS. BKI offers commercial loans to individuals and
businesses located throughout Northern Kentucky. The typical commercial borrower
is a small to mid-sized company with annual sales under $10 million. The
majority of commercial loans are made with adjustable rates of interest tied to
BKI's prime interest rate. Commercial loans typically have terms of five years.

         Commercial lending entails significant risks. Such loans are subject to
greater risk of default during periods of adverse economic conditions. Because
such loans are secured by equipment, inventory, accounts receivable and other
non-real estate assets, the collateral may not be sufficient to ensure full
payment of the loan in the event of a default. To reduce such risk, BKI
generally obtains the personal guarantees of one or more of the principals
backing the borrower. At December 31, 1998, BKI had $58 million, or 28% of total
loans, invested in commercial loans. See "Delinquent Loans, Nonperforming Assets
and Classified Assets" for information regarding nonperforming loans of this
type.

         CONSUMER LOANS. BKI makes a variety of consumer loans, including
automobile loans, recreational vehicle loans and personal loans. Such loans
generally have fixed rates with terms from three to five years.

         Consumer loans involve a higher risk of default than residential real
estate loans, particularly in the case of consumer loans that are unsecured or
secured by rapidly depreciating assets, such as automobiles. Repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation, and the remaining deficiency may not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections depend on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
illness or personal bankruptcy. Various federal and state laws, including
federal and state bankruptcy and insolvency laws, may also limit the amount
which can be recovered on such loans. At December 31, 1998, BKI had $9 million,
or 4% of total loans, invested in consumer loans. See "Delinquent Loans,
Nonperforming Assets and Classified Assets" for information regarding
nonperforming loans of this type.

         CONSTRUCTION AND LAND DEVELOPMENT LOANS. BKI makes loans for the
construction of residential and nonresidential real estate and land development
purposes. Most of such loans are structured with adjustable rates of interest
tied to changes in BKI's prime interest rate for the period of construction.
Many of the construction loans originated by BKI are made to owner-occupants for
the construction of single-family homes by a general contractor. Other loans are
made to builders and developers for various projects, including the construction
of homes and other buildings which have not been pre-sold and the preparation of
land for site and project development.

         Construction and land development loans involve greater underwriting
and default risks than do loans secured by mortgages on improved and developing
properties due to the effects of general economic conditions on real estate
developments, developers, managers and builders. In addition, such loans are
more difficult to evaluate and monitor. Loan funds are advanced upon the
security of the project under construction, which is more difficult to value
before the completion of construction. Moreover, because of the uncertainties
inherent in estimating construction costs, it is relatively difficult to
evaluate accurately the LTVs and the total loan funds required to complete a
project. In the event a default on a construction or land development loan
occurs and foreclosure follows, BKI must take control of the project and attempt
either to arrange for completion of construction or to dispose of the unfinished
project. At December 31, 1998, a total of $19 million, or approximately 9% of
BKI's total loans, consisted of construction and land development loans. See "
Delinquent Loans, Nonperforming Assets and Classified Assets" for information
regarding nonperforming loans of this type.

         MUNICIPAL OBLIGATIONS. BKI makes loans to various Kentucky
municipalities for various purposes, including the construction of municipal
buildings and equipment purchases. Loans made to municipalities are usually
secured by mortgages on the properties financed or by a lien on equipment
purchased and provide certain tax benefits for BKI. At December 31, 1998, BKI
had $3 million invested in municipal obligation loans. See "Delinquent Loans,
Nonperforming Assets and Classified Assets" for information regarding
nonperforming loans of this type.



                                       5
<PAGE>   6


         LOAN SOLICITATION AND PROCESSING. BKI's loan originations are developed
from a number of sources, including continuing business with depositors,
borrowers and real estate developers, periodic newspaper and radio
advertisements, solicitations by BKI's lending staff, walk-in customers,
director referrals and an officer call program. For nonresidential real estate
loans, BKI obtains information with respect to the credit and business history
of the borrower and prior projects completed by the borrower. Personal
guarantees of one or more principals of the borrower are generally obtained. An
environmental study of such real estate is normally conducted. Upon the
completion of the appraisal of the nonresidential real estate and the receipt of
information on the borrower, the loan application is submitted to the Loan
Committee for approval or rejection. If, however, the loan amount is in excess
of $1.25 million, the loan will be submitted to the Board of Directors for
approval or rejection.

         In connection with residential real estate loans, BKI obtains a credit
report, verification of employment and other documentation concerning the
creditworthiness of the borrower. An appraisal of the fair market value of the
real estate on which BKI will be granted a mortgage to secure the loan is
prepared by an independent fee appraiser approved by the Board of Directors. An
environmental study of such real estate is conducted only if the appraiser has
reason to believe that an environmental problem may exist.

         When a residential real estate loan application is approved, a lawyer's
opinion of title is obtained in respect of the real estate which will secure the
loan. When a nonresidential real estate loan application is approved, title
insurance is customarily obtained on the title to the real estate which will
secure the mortgage loan. All borrowers are required to carry satisfactory fire
and casualty insurance and flood insurance, if applicable, and to name BKI as an
insured mortgagee.

         Commercial loans are underwritten primarily on the basis of the
stability of the income generated by the business and/or property. For most
commercial loans, however, the personal guarantees of one or more principals of
the borrowers are generally obtained. Consumer loans are underwritten on the
basis of the borrower's credit history and an analysis of the borrower's income
and expenses, ability to repay the loan and the value of the collateral, if any.
The procedure for approval of construction loans is the same as for permanent
mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. BKI also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder.

        LOAN ORIGINATION AND OTHER FEES. BKI realizes loan origination fees and
other fee income from its lending activities and also realizes income from late
payment charges, application fees, and fees for other miscellaneous services.

        Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. Nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized as an adjustment to yield over the
life of the related loan.

        DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, BKI attempts to cause the
deficiency to be cured by contacting the borrower. In most cases, deficiencies
are cured promptly as a result of these collection efforts.

         When a borrower fails to make a timely payment, the borrower will
receive a delinquency notice within 10 days of the due date. When the payment is
15 days past due, an employee of BKI will call the customer. When the payment
reaches 30 days past due, a second notice will be sent and a second call will be
made. In most cases, delinquencies are paid promptly. Generally, if a real
estate loan becomes 45 days delinquent, the borrower and collateral will be
assessed to determine whether foreclosure action is required. When deemed
appropriate by management, a foreclosure action will be instituted or a deed in
lieu of foreclosure will be pursued.

         Loans that are 90 days past due and are not well secured and in the
process of collection will be placed on non-accrual status. Under-collateralized
loans which are 90 days past due will be fully or partially charged-off. The
amount charged-off will be charged against the loan loss allowance.

         BKI has developed a risk-rating system to quantify loan quality. The
system assigns a risk rating from 1 to 8 for each loan. Classified loans are
those with risk ratings of 5 or higher. Loan rating is determined by analyzing
the borrowers' management, financial ability, sales trends, operating results,
financial conditions, asset protection, contingencies, payment history,
financial flexibility, credit enhancements and other relevant factors. Loans
that fall into the classified categories are monitored on a regular basis and
proper action is taken to minimize BKI's exposure. Losses or partial losses will
be taken when they are recognized. Collection action will be pursued when deemed
appropriate.



                                       6
<PAGE>   7


        BKI's risk rating system is similar to that used by regulatory agencies.
Problem assets are classified as "substandard" (risk rating 6), "doubtful" (risk
rating 7) or "loss" (risk rating 8). "Substandard" assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. "Doubtful" assets have the same weaknesses as "substandard" assets,
with the additional characteristics that (i) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and (ii) there is a high possibility of loss. An asset
classified "loss" is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. The regulations
also contain a "special mention" category, consisting of assets which do not
currently expose an institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.

        Generally, BKI classifies as "substandard" all loans that are delinquent
more than 60 days, unless management believes the delinquency status is
short-term due to unusual circumstances. Loans delinquent fewer than 60 days may
also be classified if the loans have the characteristics described above
rendering classification appropriate.

        The aggregate amounts of BKI's classified assets at December 31, 1998,
were as follows:

<TABLE>
<CAPTION>
                                            At December 31, 1998
                                            --------------------
                                               (In thousands)
<S>                      <C>                     <C>     
Substandard (risk rating 6)                        $1,319
Doubtful (risk rating 7)                              170
Loss (risk rating 8)                                    -
                                                   ------

Total classified assets                            $1,489
                                                   ======
</TABLE>


        The following table reflects the amount of loans in delinquent status as
of December 31, 1998:

<TABLE>
<CAPTION>
<S>                                                  <C> 
Loans delinquent
  30 to 59 days                                      $497
  60 to 89 days                                       145
  90 or more days                                     190
                                                      ---
    Total delinquent loans                           $832
                                                     ====

Ratio of total delinquent loans to total
  loans                                               .40%
                                                      === 
                                                  
</TABLE>


        The following table sets forth information with respect to BKI's
nonperforming assets for the periods indicated. During the periods shown, BKI
had no restructured loans within the meaning of FAS No. 15. In addition, BKI
evaluates loans to identify those that are "impaired." Impaired loans are those
for which management has determined that it is probable that the customer will
be unable to comply with the contractual terms of the loan. Loans so identified
are reduced to the present value of expected future cash flows, or to the fair
value of the collateral securing the loan, by the allocation of a portion of the
allowance for loan losses to the loan. As of December 31, 1998 BKI had no
impaired loans. Management evaluates all loans selected for specific review
during the quarterly allowance analysis for impairment. Generally, that analysis
will not address smaller balance consumer credits.




                                       7
<PAGE>   8

<TABLE>
<CAPTION>
                                                                                   At December 31,    
                                                                      --------------------------------------------
                                                                      1998      1997     1996      1995       1994
                                                                      ----      ----     ----      ----       ----
                                                                               (Dollars in thousands)
<S>                                                                  <C>       <C>       <C>       <C>       <C> 
Loans accounted for on a non-accrual basis:(1)
   Real estate:
     Nonresidential                                                  $  0      $  0      $  0      $  0      $  0
     Residential                                                       11         0         0        62         0
     Construction                                                       0         0         0         0         0
     Commercial                                                       159        82        14         0         0
     Consumer and other                                                 0         0         0         0         0
                                                                     ----      ----      ----      ----      ----
         Total                                                        170        82        14        62         6
                                                                     ----      ----      ----      ----      ----

Accruing loans which are contractually past due 90 days or more:
   Real estate:
     Nonresidential                                                     0         0         0         0         0
     Residential                                                      112         0        37        65        88
     Construction                                                       0         0         0         0         0
     Commercial                                                        59       101         0        25         0
     Consumer and other loans                                          19        22         0         0         6
                                                                     ----      ----      ----      ----      ----
          Total                                                       190       123        37        90        94
                                                                     ----      ----      ----      ----      ----

Total of non-accrual and 90 days past due loans                      $360      $205      $ 51      $152      $100
                                                                     ====      ====      ====      ====      ====

Percentage of total loans                                             .17%      .11%      .03%      .13%      .09%
                                                                     ====      ====      ====      ====      ====

Other nonperforming assets(2)                                        $200      $  0      $  0      $  0      $  0
                                                                     ====      ====      ====      ====      ====
                                                                                                             ----
</TABLE>
---------------------------

(1)      Non-accrual status denotes loans on which, in the opinion of
         management, the collection of additional interest is unlikely, or loans
         that meet non-accrual criteria as established by regulatory
         authorities. Payments received on a non-accrual loan are either applied
         to the outstanding principal balance or recorded as interest income,
         depending on management's assessment of the collectibility of the loan.
         The amount of interest that would have been recorded on non-accrual
         loans was insignificant.

(2)      Consists of real estate acquired through foreclosure which is carried
         at the lower of cost or fair value less estimated selling expenses.


         ALLOWANCE FOR LOAN LOSSES. BKI maintains an allowance for loan losses
to provide a valuation allowance for loans that might not be repaid. Senior
management, with oversight responsibility provided by the Board of Directors,
reviews on a monthly basis the allowance for loan losses as it relates to a
number of relevant factors, including, but not limited to, historical trends in
the level of nonperforming assets and classified loans, current charge-offs and
the amount of the allowance as a percent of the total loan portfolio. Due to a
limited amount of historic experience, BKI's provisions since incorporation have
been influenced by national loan loss experience applied to the portfolio
outstanding. While management believes that it uses the best information
available to determine the allowance for loan losses, unforeseen market
conditions could result in adjustments, and net earnings could be significantly
affected if circumstances differ substantially from the assumptions used in
making the final determination. At December 31, 1998, BKI's allowance for loan
losses totaled $2.2 million.



                                       8
<PAGE>   9

         The following table sets forth an analysis of BKI's allowance for
losses for the periods indicated:

<TABLE>
<CAPTION>
                                                                        Year ended at December 31,          
                                                                        --------------------------          
                                                    1998         1997          1996           1995          1994
                                                    ----         ----          ----           ----          ----
                                                                     (Dollars in thousands)
<S>                                               <C>           <C>           <C>           <C>           <C>    
Balance of allowance at beginning of period       $ 2,078       $ 1,752       $ 1,415       $ 1,190       $   957
Recoveries of loans previously charged off:
   Commercial loans                                     8             0             8            20             0
   Consumer loans                                      19            16             2             3             4
   Mortgage loans                                       0             0             0             6             0
                                                  -------       -------       -------       -------       -------
     Total recoveries                                  27            16            10            29             4
                                                  -------       -------       -------       -------       -------
Loans charged off:
   Commercial loans                                   431            11            43            40           132
   Consumer loans                                      60            31            10            17             0
   Mortgage loans                                       6             0            19            10             0
                                                  -------       -------       -------       -------       -------
     Total charge-offs                                497            42            72            67           132
                                                  -------       -------       -------       -------       -------
     Net charge-offs                                 (470)          (26)          (62)          (38)         (128)
Provision for loan losses                             585           352           399           263           361
                                                  -------       -------       -------       -------       -------
Balance of allowance at end of period             $ 2,193       $ 2,078       $ 1,752       $ 1,415       $ 1,190
                                                  =======       =======       =======       =======       =======
Net charge-offs to average loans outstanding
   for period                                         .24%          .02%          .04%          .03%          .13%
                                                  =======       =======       =======       =======       =======
Allowance at end of period to loans at end of
   period                                            1.05%         1.14%         1.14%         1.18%         1.10%
                                                  =======       =======       =======       =======       =======
Allowance to nonperforming loans at end of
   period                                           609.2%      1,013.6%      3,435.3%        930.9%      1,190.0%
                                                  =======       =======       =======       =======       =======
</TABLE>


        The following table provides an allocation of BKI's allowance for
possible loan losses as of each of the following dates:

<TABLE>
<CAPTION>
                                                                     At December 31,
                                                                     ---------------
                                       1998                1997             1996              1995              1994
                                       ----                ----             ----              ----              ----
                                                                      (In thousands)
<S>                                     <C>               <C>              <C>               <C>               <C>    
Loan type
   Commercial                           $1,007            $1,000           $   886           $   678           $   552
   Real estate                             832               819               671               590               498
   Consumer                                354               259               195               147               140
                                       -------           -------           -------           -------           -------
     Total allowance for loan
       losses                           $2,193            $2,078            $1,752            $1,415            $1,190
                                        ======            ======            ======            ======            ======
</TABLE>


         BKI increased its allowance for loan losses from $2.1 million at
December 31, 1997, to $2.2 million at December 31, 1998, due primarily to growth
in the loan portfolio and to current and anticipated economic conditions.
Because the loan loss allowance is based on estimates, it is monitored on an
ongoing basis and adjusted as necessary to provide an adequate allowance. See
Exhibit 99 hereto, "Safe Harbor Under the Private Securities Litigation Reform
Act of 1995", which is incorporated herein by reference.

INVESTMENT ACTIVITIES

         The investment policy of BKI is both to manage the utilization of
excess funds and to provide for liquidity needs of BKI as loan demand and daily
operations dictate. BKI's federal income tax position is a consideration in its
investment decisions. Investments in tax-exempt securities with maturities of
less than 10 years are considered when the net yield exceeds that of taxable
securities and BKI's effective tax rate warrants such investments.


                                       9
<PAGE>   10


         The following table sets forth the composition of BKI's securities
portfolio, at the dates indicated:

<TABLE>
<CAPTION>
                                                                      At December 31,
                                                                      ---------------
                                                    1998                    1997                     1996       
                                            --------------------    -------------------      ------------------

                                             Amortized     Fair     Amortized      Fair      Amortized     Fair
                                               Cost       Value        Cost       Value        Cost       Value
                                             ---------    -----     ---------     -----      ---------    ------
                                                                         (In thousands)
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>    
Held-to-maturity securities:

   U.S. Government obligations               $ 1,000     $ 1,006     $ 2,500     $ 2,506     $ 5,741     $ 5,789
   U.S. Government agency obligations         20,009      19,996      19,636      19,675       9,585       9,579
   Municipal and other obligations             9,288       9,387       2,123       2,138       1,489       1,492
                                             -------     -------     -------     -------     -------     -------

     Total held-to-maturity securities       $30,297     $30,389     $24,259     $24,319     $16,815     $16,860
                                             =======     =======     =======     =======     =======     =======

Available-for-sale securities:

   U.S. Government obligations               $     0     $     0     $   998     $ 1,000     $     0     $     0
   U.S. Government agency obligations         17,985      18,028       7,333       7,315      11,564      11,530
   Municipal and other obligations                 0           0           0           0           0           0
                                             -------     -------     -------     -------     -------     -------

     Total available-for-sale securities     $17,985     $18,028     $ 8,331     $ 8,315     $11,564     $11,530
                                             =======     =======     =======     =======     =======     =======
</TABLE>


         The following table sets forth the amortized cost of BKI's securities
portfolio at December 31, 1998 by contractual or expected maturity. Securities
with call features are presented at call date if management expects that option
to be exercised.

<TABLE>
<CAPTION>
                                Maturing within     Maturing after one    Maturing after five
                                   one year         and within five years and within ten years           Total
                             ---------------------  --------------------- -------------------- ---------------------
                             Amortized     Average  Amortized    Average  Amortized    Average Amortized      Average
                                Cost        Yield     Cost        Yield     Cost        Yield    Cost          Yield
                             ---------     -------  ---------    -------  ---------    ------- ---------      -------
                                                        (Dollars in thousands)
<S>                           <C>            <C>    <C>            <C>    <C>            <C>    <C>            <C>  
Held-to-maturity:
   U.S. Government            $ 1,000        5.88%  $     0        0.00%  $     0        0.00%  $ 1,000        5.88%
   obligations
   U.S. Government agency       3,999        5.77    14,510        5.67     1,500        5.33    20,009        5.66
   obligations
   Municipal and other            150        6.56     9,138        6.25         0        0.00     9,288        6.40
   obligations (1)

Available-for-sale:
   U.S. Government                  0        0.00         0        0.00         0        0.00         0        0.00
     obligations
   U.S. Government agency     $ 2,500        5.79%  $15,485        5.74%  $     0        0.00%  $17,985        5.77%
     obligations
</TABLE>

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

(1)  Yield stated on a tax-equivalent basis using a 34% effective rate.

DEPOSITS AND BORROWINGS

         GENERAL. Deposits have traditionally been the primary source of BKI's
funds for use in lending and other investment activities. In addition to
deposits, BKI derives funds from interest payments and principal repayments on
loans 



                                       10
<PAGE>   11


and income on earning assets. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate more in response to economic
conditions and interest rates. BKI may also borrow funds from the FHLB in the
form of advances.

         BKI also uses retail repurchase agreements as a source of funds. These
agreements essentially represent borrowings by BKI from customers. Certain
securities are pledged as collateral for these agreements.

         BKI has a mortgage payable secured by a parcel of real estate owned by
BKI (the "Mortgage Loan"). The loan has an interest rate of 8.75%, monthly
payments of $3,000 and a balance of $183,000 at December 31, 1998, and $201,000
at December 31, 1997. BKI also entered into a capital lease obligation for a new
branch in 1997 with a term of 20 years and a monthly payment of $4,000.

         DEPOSITS. Deposits are attracted principally from within BKI's
designated lending area through the offering of numerous deposit instruments,
including regular passbook savings accounts, Negotiable order of withdrawal
("NOW") accounts, money market deposit accounts, term certificate accounts and
individual retirement accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by BKI's Board of Directors based on BKI's liquidity
requirements, growth goals and market trends. BKI does not use brokers to
attract deposits. The amount of deposits from outside BKI's market area is not
significant.

        The following table presents the amount of BKI's jumbo certificates of
deposit with principal balances greater than $100,000 by the time remaining
until maturity as of December 31, 1998:

<TABLE>
<CAPTION>
            Maturity                                  At December 31, 1998
            --------                                  --------------------
                                                         (In thousands)
<S>                                                        <C>    
            Three months or less                           $20,828
            Over 3 months to 6 months                        6,194
            Over 6 months to 12 months                      12,762
            Over 12 months                                   2,203
                                                           -------

                Total                                      $41,987
                                                           =======
</TABLE>


         BORROWINGS. In addition to repurchase agreements and the mortgage loan
described above, BKI has agreements with correspondent banks to purchase federal
funds on an as needed basis to meet liquidity needs. As a member in good
standing of the FHLB since 1994, BKI is authorized to apply for advances from
the FHLB, provided certain standards are met. See "Federal Home Loan Banks." BKI
does not have any advances outstanding as of December 31, 1998.

         The following table sets forth the maximum month end balance amount of
BKI's outstanding borrowings during the years ended December 31, 1998, 1997 and
1996, along with the average aggregate balances of BKI's outstanding borrowings
for such periods:


<TABLE>
<CAPTION>
                                              During year ended December 31,
                                              ------------------------------
                                              1998         1997         1996
                                              ----         ----         ----
                                                 (Dollars in thousands)
<S>                                         <C>          <C>          <C>    
Maximum balance at any month-end during
    the period                              $23,403      $18,539      $12,051

Average balance                              10,779       11,370        8,492

Weighted average interest rate of              5.84%        5.81%        5.64%
</TABLE>




                                       11
<PAGE>   12


         The following table sets forth certain information as to borrowings,
excluding the Mortgage Loan, and the capital lease obligation at the dates
indicated:
<TABLE>
<CAPTION>
                                              December 31,  
                                              ------------  
                                     1998         1997        1996
                                     ----         ----        ----
                                            (in thousands)
<S>                                <C>          <C>         <C>   
Borrowings outstanding             $10,398      $9,256      $6,618
Weighted-average interest rate        5.05%       5.56%       5.47%
</TABLE>


        ASSET/LIABILITY MANAGEMENT. BKI's earnings depend primarily upon its net
interest income, which is the difference between its interest income on its
interest-earning assets, such as mortgage loans and investment securities, and
its interest expense paid on its interest-bearing liabilities, consisting of
deposits and borrowings. As market interest rates change, asset yields and
liability costs do not change simultaneously. Due to maturity, repricing and
timing differences of interest-earning assets and interest-bearing liabilities,
earnings will be affected differently under various interest rate scenarios. BKI
has sought to limit these net income fluctuations and manage interest rate risk
by originating adjustable-rate loans and purchasing relatively short-term and
variable-rate investments and securities.

         BKI's interest rate spread is the principal determinant of BKI's net
interest income. The interest rate spread can vary considerably over time
because asset and liability repricing do not coincide. Moreover, the long-term
and cumulative effect of interest rate changes can be substantial. Interest rate
risk is defined as the sensitivity of an institution's earnings and net asset
values to changes in interest rates.

         The ability to maximize net interest income is largely dependent upon
sustaining a positive interest rate spread during fluctuations in the prevailing
level of interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period of time. The
difference, or the interest rate repricing "gap," provides an indication of the
extent to which a financial institution's interest rate spread will be affected
by changes in interest rates. A positive gap occurs when interest-earning assets
exceed interest-bearing liabilities repricing during a designated time frame.
Conversely, a negative gap occurs when interest-bearing liabilities exceed
interest-earning assets repricing within a designated time frame. Generally,
during a period of rising interest rates, a negative gap would adversely affect
net interest income, while a positive gap would result in an increase in net
interest income, and during a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a positive gap would
have the opposite effect.

         In recognition of the foregoing factors, the management and the Board
of Directors of BKI have implemented an asset and liability management strategy
directed toward maintaining a reasonable degree of interest rate sensitivity.
The principal elements of such strategy include: l) meeting the consumer
preference for fixed-rate loans over the past two years by establishing a
correspondent lending program that has enabled BKI to originate and sell
fixed-rate mortgage loans; 2) maintaining relatively short weighted-average
terms to maturity in the securities portfolio as a hedge against rising interest
rates; 3) emphasizing the origination and retention of adjustable-rate loans;
and 4) utilizing longer term certificates of deposit as funding sources when
available. While management and the Board of Directors believe the foregoing
steps have mitigated interest-rate risk to the maximum extent practicable, the
contractual terms to maturity of BKI's assets still exceed the contractual terms
to maturity of BKI's interest-bearing liabilities. As a result, a rapid or
protracted increase in the level of interest rates will likely have a negative
effect on BKI's net interest income. Management and the Board of Directors
monitor BKI's exposure to interest rate risk on a monthly basis to ensure the
interest rate risk is maintained within an acceptable range.

         The following table sets forth the amounts of BKI's interest-earning
assets and interest-bearing liabilities outstanding at December 31, 1998, which
are scheduled to reprice or mature in each of the time periods shown. The amount
of assets and liabilities shown which reprice or mature in a given period were
determined in accordance with the contractual terms of the asset or liability.
This table does not necessarily indicate the impact of general interest rate
movements on BKI's net interest income because the repricing of certain
categories of assets and liabilities is subject to the interest rate
environment, competition and other factors beyond BKI's control. As a result,
certain assets and liabilities may in fact mature or reprice at different times
and in different volumes than indicated. See Exhibit 99 hereto, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995", which is
incorporated herein by reference.



                                       12
<PAGE>   13


<TABLE>
<CAPTION>
                                          Within 3 Months    4 - 12 Months 1 through 5 years Over 5 years     Total
                                          ---------------    ------------- ----------------- ------------     -----
                                                                       (Dollars in thousands)
<S>                                           <C>             <C>             <C>            <C>            <C>      
Interest-earning assets:
   Federal funds sold                         $   4,354       $       0       $       0      $       0      $   4,354
   Interest bearing deposits with banks             422               0               0              0            422
   Securities                                     2,525           7,166          39,159          1,500         50,350
   Loans receivable(1)                           91,236          17,583          97,787          1,564        208,170
                                              ---------       ---------       ---------      ---------      ---------

     Total interest-earning assets               98,537          24,749         136,946          3,064        263,296
                                              ---------       ---------       ---------      ---------      ---------

Interest-bearing liabilities:
   Savings deposits                               8,104               0               0              0          8,104
   Money market deposit accounts                 34,911               0               0              0         34,911
   NOW accounts                                  59,964               0               0              0         59,964
   Certificates of deposit                       30,634          45,764          10,191              0         86,589
   IRA's                                          3,800           6,871           3,688             15         14,374
   Short-term borrowings                         10,398               0               0              0         10,398
   Notes payable                                      4              13             115             51            183
                                              ---------       ---------       ---------      ---------      ---------

     Total interest-bearing liabilities         147,815          52,648          13,994             66        214,523
                                              ---------       ---------       ---------      ---------      ---------

Interest-earning assets less
   Interest-bearing liabilities               ($ 49,278)      ($ 27,899)      $ 122,952      $   2,998      $  48,773
                                              =========       =========       =========      =========      =========

Cumulative interest-rate sensitivity gap      ($ 49,278)      ($ 77,177)      $  45,775      $  48,773
                                                              =========       =========      =========                   

Cumulative interest-rate gap as a
   percentage of total  interest  earning        (18.72%)        (29.31%)         17.39%         18.52%
   assets                                     =========       =========       =========      =========
         
</TABLE>


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

(1)      Virtually all of BKI's loans are monthly amortizing adjustable-rate
         installment obligations and, therefore, are not subject to rollover and
         renewal provisions.



                                       13
<PAGE>   14




         The following table sets forth certain information relating to BKI's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are daily averages for BKI and include nonaccruing loans in the loan
portfolio, net of the allowance for loan losses.

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

                                                        1998                                     1997                
                                         ------------------------------------      --------------------------------- 
                                           Average       Interest                    Average      Interest           
                                         Outstanding     earned/       Yield/      outstanding     earned/     Yield/
                                           balance         paid         rate         balance        paid        rate 
                                           -------         ----         ----         -------        ----        ---- 
                                                                    (Dollars in thousands)
<S>                                      <C>             <C>          <C>          <C>             <C>        <C>  
Interest-earning assets:
   Loans receivable (1)(2)                 $194,903      $17,948        9.21%       $167,730        $15,379     9.17%
   Securities (2)                            36,263        2,212        6.10          29,618          1,880     6.35 
   Other interest-earning assets              6,760          344        5.09           1,422             81     5.70 
                                           --------      -------                    --------        -------          
     Total interest-earning assets          237,926       20,504        8.62         198,770         17,340     8.72 
                                           --------      -------        ----        --------        -------     ---- 

Non-interest-earning assets                  13,441                                   10,350                         
                                           --------                                 --------                         
     Total assets                          $251,367                                 $209,120                         
                                           ========                                 ========                         

Interest-bearing liabilities:
   Transaction accounts                      79,250        3,000        3.79        $ 56,410          2,018     3.58 
   Time deposits                            109,246        6,283        5.76          98,250          5,638     5.74 
   Borrowings                                10,779          629        5.84          11,375            661     5.81 
                                           --------      -------                    --------        -------          
     Total interest-bearing
       liabilities                          199,175        9,912        4.98         166,035          8,317     5.01 
                                           --------      -------        ----        --------        -------     ---- 

Non-interest-bearing liabilities             30,134                                   24,706                         
                                           --------                                 --------                         
     Total liabilities                      229,309                                  190,741                         

Shareholders' equity                         22,058                                   18,379                         
                                           --------                                 --------                         

     Total liabilities and
       shareholders' equity                $251,367                                 $209,120                         
                                           ========                                 ========                         

Net interest income                                      $10,592                                    $ 9,023          
                                                         =======                                    =======          
Interest rate spread                                                    3.64%                                   3.71%
                                                                        =====                                   =====
Net interest margin (net interest
   income as a percent of average
   interest-earning assets)                                             4.45%                                   4.54%
                                                                        =====                                   =====
Average interest-earning assets to
   interest-bearing liabilities             119.46%                                  119.72%                         
                                            =======                                  =======                         
</TABLE>



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

                                                        1996
                                         -----------------------------------
                                           Average      Interest
                                         outstanding     earned/      Yield/
                                           balance        paid         rate
                                           -------        ----         ----
                                                    (in thousands)
<S>                                       <C>           <C>          <C> 
Interest-earning assets:
   Loans receivable (1)(2)                 $136,759      $12,443       9.10%
   Securities (2)                            25,703        1,649       6.41
   Other interest-earning assets              3,917          208       5.31
                                           --------      -------
     Total interest-earning assets          166,379       14,300       8.59
                                           --------      -------       ----

Non-interest-earning assets                   8,592
                                           --------
     Total assets                          $174,971
                                           ========

Interest-bearing liabilities:
   Transaction accounts                    $ 46,431        1,561       3.36
   Time deposits                             83,312        4,860       5.83
   Borrowings                                 8,492          479       5.64
                                           --------      -------
     Total interest-bearing
       liabilities                          138,235        6,900       4.99
                                           --------      -------       ----

Non-interest-bearing liabilities             20,874
                                           --------
     Total liabilities                      159,109

Shareholders' equity                         15,862
                                           --------

     Total liabilities and
       shareholders' equity                $174,971
                                           ========

Net interest income                                     $  7,400
                                                        ========
Interest rate spread                                                   3.60%
                                                                       =====
Net interest margin (net interest
   income as a percent of average
   interest-earning assets)                                            4.45%
                                                                       =====
Average interest-earning assets to
   interest-bearing liabilities             120.36%
                                            =======
</TABLE>

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

(1)      Includes non-accrual loans.

(2)      Income presented on a tax equivalent basis using a 34% tax rate. The
         tax equivalent adjustment was $201,000.



                                       14
<PAGE>   15



        The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected BKI's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been allocated proportionately to the
change due to volume and the change due to rate.

<TABLE>
<CAPTION>
                                                                      Year ended December 31,  
                                                -----------------------------------------------------------------------
                                                        1998 vs. 1997                          1997 vs. 1996
                                                --------------------------------      ---------------------------------
                                                       Increase (Decrease)                   Increase (Decrease)
                                                             due to                                due to
                                                             ------                                ------
                                                Volume        Rate         Total      Volume        Rate         Total
                                                ------        ----         -----      ------        ----         -----
                                                                           (In thousands)
<S>                                            <C>          <C>          <C>          <C>          <C>          <C>    
Interest income attributable to:
   Loans receivable                            $ 2,496      $    73      $ 2,569      $ 2,838      $    98      $ 2,936
   Securities                                      412          (80)         332          248          (17)         231
   Other interest-earning assets(1)                278          (15)         263         (142)          15         (127)
                                                            -------      -------      -------      -------      -------

     Total interest-earning assets               3,186          (22)       3,164        2,944           96        3,040
                                               -------      -------      -------      -------      -------      -------

Interest expense attributable to:
   Transactions accounts                           841          141          982          352          105          457
   Time deposits                                   626           19          645          856          (78)         778
   Borrowings                                      (35)           3          (32)         167           15          182
                                               -------      -------      -------      -------      -------      -------

     Total interest-bearing liabilities          1,432          163        1,595        1,375           42        1,417
                                               -------      -------      -------      -------      -------      -------

Increase (decrease) in net interest income     $ 1,754      $  (185)     $ 1,569      $ 1,554      $    77      $ 1,623
                                               =======      =======      =======      =======      =======      =======
                                                                                                               
</TABLE>
---------------------

(1)      Includes federal funds sold and interest-bearing deposits in other
         financial institutions.


COMPETITION

         BKI competes for deposits with other commercial banks, savings
associations and credit unions and with the issuers of commercial paper and
other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, BKI competes with other banks, saving associations,
consumer finance companies, credit unions, leasing companies and other lenders.
BKI competes for loan originations primarily through the interest rates and loan
fees it charges and through the efficiency and quality of services it provides
to borrowers. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable.

         Due to BKI's size relative to the many other financial institutions in
its market area, management believes that BKI does not have a substantial share
of the deposit and loan markets. The size of financial institutions competing
with BKI is likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate and inter-industry
branching and acquisitions. Such increased competition may have an adverse
effect upon BKI. See Exhibit 99 hereto, "Safe Harbor Under the Private
Securities Litigation Reform Act of 1995", which is incorporated herein by
reference.



                                       15
<PAGE>   16


SUBSIDIARY ACTIVITIES

        BKI has no subsidiaries.  BKFC's only subsidiary is BKI.

PERSONNEL

        As of December 31, 1998, BKI had 62 full-time employees and 31 part-time
employees. BKI believes that relations with its employees are excellent. BKI
offers health, disability, and life insurance benefits to full-time employees.
BKI has a profit sharing plan for all employees 21 years of age or older who
work at least 1,000 hours per year. None of the employees of BKI are represented
by a collective bargaining unit.

REGULATION OF BKFC

        BKFC is a bank holding company subject to regulation by the FRB under
the Bank Holding Company Act of 1956, as amended ("BHCA"). As a bank holding
company, BKFC is required to file periodic reports with, and is subject to
regulation, supervision and examination by, the FRB. Such examination by the FRB
determines whether BKFC is operating in accordance with various regulatory
requirements and in a safe and sound manner. The FRB may initiate enforcement
proceedings against BKFC for violations of laws or regulations or for engaging
in unsafe and unsound practices, particularly if such conduct could or does
adversely impact BKI.

        In general, BKFC is only permitted to engage in activities deemed by the
FRB to be closely related to banking. FRB regulations contain a list of
activities which are deemed closely related to banking. Generally, many
securities and insurance activities, most real estate development activities and
most industrial operations are deemed not to be closely related to banking. In
addition, the FRB could require that BKFC terminate any activity, if the FRB
deems the activity to constitute a serious risk to the financial soundness of
BKI. Congress is considering a number of legislative proposals which would
expand the permissible activities of BKFC or a new form of holding company for
BKFC. These proposals include an expansion of permissible securities, insurance
and other financial activities, and one of the proposals would allow, subject to
some limitation, real estate development, industrial and other commercial
activities. Many of these proposed new activities involve greater financial risk
to BKFC than the current permissible activities. No assurance can be given as to
what form, if any, final legislation in this regard may take, and BKFC has no
current plans to pursue these new activities.

         The FRB has issued regulations under the BHCA requiring a bank holding
company to serve as a source of financial and managerial strength to its
subsidiary banks and to operate in a safe and sound manner. It is the policy of
the FRB that a bank holding company be ready and able to use its resources to
provide capital to its subsidiary banks during periods of financial stress or
adversity. See "Regulatory Capital Requirements" and "Dividend Restrictions"
regarding minimum capital levels to which BKFC will be subject and regulatory
limits on BKFC's ability to pay dividends to stockholders. As a bank holding
company, BKFC must notify the FRB, if, during any one-year period, it seeks to
redeem shares of stock in an amount such that total redemptions during the year,
net of sales of shares, would be greater than 10% of BKFC's net worth. In
addition, pursuant to the FRB approval of the acquisition of BKI by BKFC, BKFC
may not incur any debt for three years after the acquisition of BKI without
receiving a non-objection letter from the FRB.

         Transactions between BKFC and its subsidiaries must comply with
Sections 23A and 23B of the FRA, which govern transactions with affiliates.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a
financial institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, (ii) limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and
(iii) require that all such transactions be on terms substantially the same, or
at least as favorable to the financial institution, as those provided in
transactions with a non-affiliate. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of a guarantee and other similar
types of transactions. In general, all such transactions must be at arms-length.
In addition, BKFC and BKI may not engage in arrangements by which any person is
required to utilize a product or service of any of them in order to obtain
another product or service from any of them.

REGULATION OF  BKI

         BKI is a Kentucky-chartered bank with FDIC deposit insurance. BKI is
subject to numerous federal and state statutes and regulations regarding the
conduct of its business, including maintenance of reserves against deposits;
capital 



                                       16
<PAGE>   17


adequacy; restrictions on the nature and amount of loans which may be made and
the interest which may be charged thereon; restrictions on the terms of loans to
officers, directors, large shareholders and their affiliates; restrictions
relating to investments and other activities; and requirements regarding mergers
and branching activities.

         BKI is subject to regulation, supervision and examination by the
Department and the FDIC. Both the Department and the FDIC have the authority to
issue cease-and-desist orders if either determines that the activities of the
Bank represent unsafe and unsound banking practices. If the grounds provided by
law exist, the Department or the FDIC may appoint a conservator or receiver for
a bank.

         State-chartered banks, like BKI, are subject to regulatory oversight
under various consumer protection and fair lending laws. These laws govern,
among other things, truth-in-lending disclosure, equal credit opportunity, fair
credit reporting and community reinvestment. Failure to abide by federal laws
and regulations governing community reinvestment could limit the ability of a
state-chartered bank to open a new branch or engage in a merger transaction.

         Kentucky law limits loans or other extensions of credit to any borrower
to 20% of BKI's paid-in capital and actual surplus. Such limit is increased to
30% if the borrower provides collateral with a cash value exceeding the amount
of the loan. Loans or extensions of credit to certain borrowers are aggregated,
and loans secured by certain government obligations are exempt from these
limits. At December 31, 1998, the maximum the Bank could lend to any one
borrower generally equaled $3.2 million and equaled $4.9 million if the borrower
provided collateral with a cash value in excess of the amount of the loan.

         Generally, BKI's permissible activities and investments are prescribed
by Kentucky law. However, state-chartered banks, including BKI, may not,
directly or through a subsidiary, engage in activities or make any investments
as principal not permitted for a national bank, a bank holding company or a
subsidiary of a nonmember bank, unless they obtain FDIC approval.

REGULATORY CAPITAL REQUIREMENTS

         The FRB has adopted risk-based capital guidelines for bank holding
companies. Such companies must maintain adequate consolidated capital to meet
the minimum ratio of total capital to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) (the "Risk-Based
Ratio") of 8%. At least half of the minimum-required total capital of 8% is to
be composed of Tier 1 Capital, which consists of common shareholders' equity,
minority interests in the equity of consolidated subsidiaries and a limited
amount of perpetual preferred stock, less goodwill and certain other intangibles
("Tier 1 Risk-Based Ratio"). The remainder of total capital may consist of
subordinated debt, other preferred stock and a limited amount of loan and lease
loss allowances.

         The FRB also has established minimum leverage ratio guidelines for bank
holding companies. The guidelines provide for a minimum ratio of Tier 1 Capital
to average total assets (excluding the loan and lease loss allowance, goodwill
and certain other intangibles) (the "Leverage Ratio") of 3% for bank holding
companies that meet specified criteria, including having the highest regulatory
rating. All other bank holding companies must maintain a Leverage Ratio of 4% to
5%. The guidelines further provide that bank holding companies making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels.

         BKI is subject to similar capital requirements, and such capital
requirements are imposed and enforced by the FDIC.


                                       17
<PAGE>   18


         The following table sets forth the Tier 1 Risk-Based Ratio, Total
Risk-Based Ratio and Leverage Ratio for BKFC and BKI at December 31, 1998:
<TABLE>
<CAPTION>
                                   At December 31, 1998
                      -----------------------------------------------
                              BKFC                       BKI
                      --------------------     ----------------------
                       Amount      Percent      Amount        Percent
                       ------      -------      ------        -------
                                   (Dollars in thousands)
<S>                   <C>          <C>         <C>            <C>   
Tier 1 risk-based     $24,420      11.74%      $24,158        11.75%
Requirement             8,324       4.00         8,227         4.00
                      -------      -----       -------        -----
Excess                $16,096       7.74%      $15,931         7.75%
                      =======      =====       =======        =====

Total risk-based      $26,613      12.79%      $26,351        12.81%
Requirement            16,647       8.00        16,455         8.00
                      -------      -----       -------        -----
Excess                $ 9,966       4.79%      $ 9,896         4.81%
                      =======      =====       =======        =====

Leverage ratio        $24,420       8.74%      $24,158         8.64%
Requirement            11,181       4.00        11,181         4.00
                      -------      -----       -------        -----
Excess                $13,239       4.74%      $12,977         4.64%
                      =======      =====       =======        =====
</TABLE>


         The FDIC may require an increase in a bank's risk-based capital
requirements on an individualized basis to address the bank's exposure to a
decline in the economic value of its capital due to a change in interest rates.

         The FDIC has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled banks under its
regulation. At each successively lower defined capital category, an institution
is subject to more restrictive and numerous mandatory or discretionary
regulatory actions or limits, and the FDIC has less flexibility in determining
how to resolve the problems of the institution. The FDIC generally can downgrade
an institution's capital category, notwithstanding its capital level, if, after
notice and opportunity for hearing, the institution is deemed to be engaging in
an unsafe or unsound practice because it has not corrected deficiencies that
resulted in it receiving a less than satisfactory examination rating on matters
other than capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized institution must submit a capital restoration plan to the FDIC
within 45 days after it becomes undercapitalized. Such institution will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. BKI's capital
levels at December 31, 1998, meet the standards for the highest level, a
"well-capitalized" institution.

         Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each holding company controlling an
undercapitalized institution must guarantee that the institution will comply
with its capital restoration plan until the institution has been adequately
capitalized on an average during each of the four preceding calendar quarters
and must provide adequate assurances of performance. The aggregate liability
pursuant to such guarantee is limited to the lesser of (a) an amount equal to 5%
of the institution's total assets at the time it became undercapitalized or (b)
the amount necessary to bring the institution into compliance with all capital
standards applicable to such institution at the time the institution fails to
comply with its capital restoration plan.

DIVIDEND RESTRICTIONS

         The ability of BKFC to pay cash dividends to its stockholders depends
on the amount of dividends which may be declared and paid by BKI. There are a
number of statutory and regulatory requirements applicable to the payment of
dividends by banks and bank holding companies.

         If the FRB or the FDIC, respectively, determines that a bank holding
company or a bank is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the entity, could
include the payment of dividends), that regulator may require, after notice and
hearing, that such bank holding company or bank cease and desist from such
practice. In addition, the FRB and the FDIC have issued policy statements which
provide that insured 



                                       18
<PAGE>   19


banks and bank holding companies should generally only pay dividends out of
current operating earnings. The FDIC prohibits the payment of any dividend by a
bank that would constitute an unsafe or unsound practice. Compliance with the
minimum capital requirements limit the amounts which BKFC and BKI can pay as
dividends.

         At December 31, 1998, BKI had capital in excess of the FDIC's most
restrictive minimum capital requirements in an amount equal to $10 million from
which dividends could be paid, subject to the FDIC's general safety and
soundness review. In 1998 BKFC paid a cash dividend of $.05 per share totaling
$175,000. The dividend was within the guidelines established by the Federal
Reserve as a condition of the reorganization.

        FDIC DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness of
the banking and thrift industries. The FDIC administers two separate insurance
funds, the BIF for commercial banks and state savings banks and the SAIF for
savings associations and SAIF deposits acquired by banks. The FDIC is required
to maintain designated levels of reserves in each fund.

        The deposits of Burnett obtained by BKI in the Merger, which at December
31, 1998 was $19 million, including the attributed growth factor, remain insured
by the SAIF. BKI is a member of the BIF, and, at December 31, 1998, it had $225
million in deposits insured in the BIF.

        The FDIC is authorized to establish separate annual assessment rates for
deposit insurance each for members of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
FDIC assessments for healthy institutions are adjusted periodically and were set
at $.012 per $100 in BIF deposits and $.059 per $100 in SAIF deposits as of
December 31, 1998. 

FRB RESERVE REQUIREMENTS

        FRB regulations currently require banks to maintain reserves of 3% of
net transaction accounts (primarily demand and NOW accounts) up to $41.6 million
of such accounts (subject to an exemption of up to $4.9 million), and of 10% of
net transaction accounts in excess of $41.6 million. At December 31, 1998, BKI
was in compliance with this reserve requirement.


ACQUISITIONS OF CONTROL

        Acquisitions of controlling interests of BKFC and BKI are subject to
limitations in federal and state laws. These limits generally require regulatory
approval of acquisitions of specified levels of stock of any of these entities.
Acquisitions of BKFC or BKI by merger also require regulatory approval.

FEDERAL HOME LOAN BANKS

        The Federal Home Loan Banks provide credit to their members in the form
of advances. BKI is a member of the FHLB and must maintain an investment in the
capital stock of the FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of BKI's residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or 5%
of its advances from the FHLB. BKI is in compliance with this requirement with
an investment in stock of the FHLB of $2,026,100 at December 31, 1998. An FHLB
member that does not meet the qualified thrift lender ("QTL") test is eligible
to receive FHLB advances if it holds FHLB stock equal to 5% of total advances
divided by the percentage of qualified assets under the QTL test. At December
31, 1998, BKI did not meet the QTL test, thus limiting its access to advances.


                                       19
<PAGE>   20


FEDERAL TAXATION

        BKFC. BKFC and BKI file a consolidated federal income tax return on a
calendar year basis. BKFC is subject to the federal tax laws and regulations
that apply to corporations generally.

        BKI. With certain exceptions, BKI is subject to the federal tax laws and
regulations which apply to corporations generally. One such exception permits a
bank (other than a bank which has assets the total average adjusted bases of
which exceed $500 million or, if the bank is a member of a consolidated group,
the total average adjusted bases of all assets of the group exceed $500 million)
to deduct a reasonable addition to the reserve for bad debts in lieu of any
deduction for bad debts allowable to other corporations. The deductible addition
that a bank may make to its reserve may be based only on the experience method
whereby generally it will be permitted to add to its bad debt reserve the amount
called for on the basis of its actual experience as shown by losses for the
current year and the five preceding tax years.

         The amount determined under the experience method for a tax year is the
amount necessary to increase the balance of the reserve for losses on loans at
the end of the tax year to the amount that bears the same ratio to loans
outstanding at the close of the tax year as (a) the total bad debts sustained
during such tax year and the five preceding tax years, adjusted for recoveries
of bad debts during such period, bear to (b) the sum of the loans outstanding at
the close of such six tax years.

KENTUCKY TAXATION

        BKI. State banks are not subject to the Kentucky corporation income tax.

        In 1996 the Kentucky legislature passed legislation to replace the "Bank
Shares Tax" with the "Local Deposits Franchise Tax" and the "Kentucky Bank
Franchise Tax". The "Kentucky Bank Franchise Tax" is an annual tax equal to 1.1%
of net capital after apportionment if applicable. The value of net capital is
calculated annually by deducting from total capital an amount equal to the same
percentage of the total as the book value of United States obligations bears to
the book value of the total assets of the financial institution. The "Local
Deposits Franchise Tax" is an annual tax of up to .025% imposed by each city and
county on bank deposits within their jurisdictions. The change in these taxes
will be tax neutral to BKI.

        The Kentucky property tax extends to bank deposits ("Deposits Tax"). The
tax is levied at a rate of 0.001% of the amount of the deposits. It is the
responsibility of the bank, not the depositor, to report and pay the Deposits
Tax.

        State banks are subject to state and local ad valorem taxes on tangible
personal property and real property which is not otherwise exempt from taxation.
The rates of taxation for tangible personal property vary depending on the
character of the property. The state rate of taxation on real property equals
$0.315 per $100 of value as of January 1 each year.

        BKFC. Kentucky corporations, such as BKFC, are subject to the Kentucky
corporation income tax and the Kentucky corporation license (franchise) tax. The
income tax is imposed based on the following rates: 4% of the first $25,000 of
taxable net income allocated or apportioned to Kentucky; 5% of the next $25,000;
6% of the next $50,000; 7% of the next $150,000; and 8.25% of taxable net income
over $250,000. All dividend income received by a corporation is excluded for
purposes of arriving at taxable net income.

        The license (franchise) tax is equal to $2.10 per $1,000 of total
capital employed in the business. A corporation with gross income of not more
than $500,000 is entitled to a credit equal to $1.40 per $1,000 of the initial
$350,000 of capital employed in the business and apportioned to Kentucky.
"Capital" means capital stock, surplus, advances by affiliated companies,
intercompany accounts, borrowed moneys or any other accounts representing
additional capital used and employed in the business. Total capital used in the
business is apportioned to Kentucky according to a uniform apportionment
formula.

         A corporation's taxable "capital" generally includes its stock holdings
in other corporations. However, a Kentucky-domiciled corporation holding
directly or indirectly stock or securities in other corporations equal to or
greater than 50% of its total assets may, at the corporation's option, be
considered as one taxpayer for purposes of determining and apportioning total
capital, or it may compute its capital by: (a) computing the total capital used
in the business; and (b) deducting the book value of its investment in the stock
and securities of any corporation in which it owns more than 50% of the
outstanding stock. The term "book value" means the value as shown on financial
statements prepared for book purposes as of the last 



                                       20
<PAGE>   21


day of the corporation's calendar or fiscal year. Thus, in calculating its
taxable "capital" for Kentucky license (franchise) tax purposes, BKFC will be
able to deduct the book value of its investments in the stock of its
wholly-owned subsidiaries, i.e., BKI.

        Domestic corporations are subject to state and local ad valorem taxes on
tangible personal property and real property which is not otherwise exempt from
taxation. The rates of taxation for tangible personal property vary depending on
the character of the property. The state rate of taxation on real property
equals $0.315 per $100 of value as of January 1 each year. Thus, BKFC is subject
to ad valorem taxation on its taxable tangible personal property and real
property.

        BKI, as a financial institution, is exempt from both the corporate
income and license taxes.



                                       21
<PAGE>   22


ITEM 2.  DESCRIPTION OF PROPERTY

         The following table sets forth certain information at December 31,
1998, regarding properties on which the offices of BKI are located:

<TABLE>
<CAPTION>
Location                            Owned or leased        Date acquired       Square footage      Net book value(1)
--------                            ---------------        -------------       --------------      -----------------
<S>                                 <C>                     <C>                 <C>                <C>        
Main Office                             Leased                   1991                12,300                    -
1065 Burlington Pike
Florence, KY

Weaver Road Operations                  Leased                   1992                 3,000                    -
Center  (2)
166 Weaver Road
Florence, KY

Independence Branch                     Leased                   1995                   750                    -
Industrial Road and Turkeyfoot
Independence, KY

Belleview Branch                        Leased                   1992                 1,000                    -
6710 McVille Road
Burlington, KY

Houston Road Branch                     Leased                   1994                 2,600                    -
4748 Houston Road
Florence, KY

Walton Branch                            Owned                   1994                 2,100             $694,293
116 Stephenson Mill Rd.               (No liens)
Walton, KY

19th and Madison Branch(3)               Owned                   1998                 2,300             $424,723
1831 Madison Ave                      (No liens)
Covington, KY

Nicholson Branch                        Leased                   1997                 1,600                    -
12020 Madison Pike
Independence, KY

Erlanger Branch                         Leased                   1997                 2,000                    -
3133 Dixie Hwy
Erlanger, KY

U S 42 Branch                           Leased                   1997                 2,800                    -
8660 Haines Drive
Florence, KY

Mt. Zion Branch (4)                      Owned                   1998                 2,800             $967,429
330 Mt. Zion Road
Florence, KY
</TABLE>

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

(1)      Net book value amounts are for land, buildings and improvements.



                                       22
<PAGE>   23


(2)      The Weaver Road branch was relocated to Mt Zion Rd and the existing
         location was coverted to an operations center.
(3)      The Covington was vacated and relocated to 19th and Madison Ave.
(4)      Relocation of the Weaver Rd Branch to Mt. Zion Rd.

         BKI leases the Main Office, Weaver Road, Belleview, Nicholson, U.S. 42,
and Houston Road branches under operating lease agreements with some of its
directors and/or their family members. See Part III, Item 12 - "Certain
Relationships and Related Transactions." Total rental expense under operating
lease agreements was $419,000 and $356,000 for the years ended December 31, 1998
and 1997, respectively. BKI believes all of its office locations are adequately
insured.


         BKI also owns furniture, fixtures and various bookkeeping and
accounting equipment. The net book value of BKI's investment in office premises
and equipment totaled $3.8 million at December 31, 1998.

ITEM 3.  LEGAL PROCEEDINGS

         Neither BKFC nor BKI is presently involved in any legal proceedings of
a material nature. From time to time, BKI is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by BKI.

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

         There were no matters submitted to a vote of stockholders of BKFC
during the last quarter of the fiscal year ended December 31, 1998.






                                       23
<PAGE>   24
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Stockholder Services

Firstar Corporation (fka Star Bank, N.A.) serves as transfer agent for The Bank
of Kentucky Financial Corporation's shares. Communications regarding change of
address, transfer of shares, lost certificates, and dividends should be sent to:

                                     Firstar
                           Corporate Trust Department
                          425 Walnut Street (6th Floor)
                              Cincinnati, OH 45202

Legal Counsel

The Bank of Kentucky Financial Corporation's legal counsel is:

                             Ziegler & Schneider,PSC
                               541 Buttermilk Pike
                               Covington, Ky 41017

Annual Meeting

The Annual Meeting of Stockholders of The Bank of Kentucky Financial Corporation
will be held on April 16, 1999, at 5:00 p.m., local time, at Triple Crown
Country Club, One Triple Crown Blvd., Union, KY 41091.

Annual Report On Form 10- KSB

A copy of The Bank of Kentucky Financial Corporation's Annual Report on Form 10
- KSB for fiscal year 1998, as filed with the Securities and Exchange
Commission, will be available at no charge to stockholders upon request to:

                              The Bank of Kentucky
                                  P.O. Box 577
                             Florence, KY 41022-0577
                        Attention: Senior Vice President

Market Price of the Company's Common Stock and Dividends Declared

There were 3,515,934 shares of common stock of the Company outstanding on
December 31, 1998, which were held of record by 520 shareholders. The Board of
Director's declared a cash dividend of $.04 per share in each of April 1996 and
March 1997, and $.05 per share in March 1998. There is presently no active
public trading market for the Company's shares, nor are the prices at which the
shares have been traded published by any national securities association or
quotation service. The Company has arranged with:

<TABLE>
<CAPTION>
<S>                            <C>                              <C>
    Gradison/McDonald          Fifth Third Securities          Robert W. Baird & Co. Incorporated
    580 Walnut Street            110 N Main Street                    201 East Fifth Street
   Cincinnati, OH 45202          Dayton, Ohio 45402                   Cincinnati, OH 45202
       Jim Williams                  Ron Cross                             John Adams
      (513) 579-5000               1-800-829-3536                        1-888-784-4856
</TABLE>

to match offers to buy and offers to sell common shares, and include common
shares in the "pink sheets" published by the National Quotation Bureau, Inc.


                                       24
<PAGE>   25
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                          AND THE RESULTS OF OPERATIONS
                                DECEMBER 31, 1998

                                     GENERAL

The business of The Bank of Kentucky Financial Corporation (BKFC or the
Corporation) consists of holding and administering its interest in The Bank of
Kentucky, Inc. (the Bank). BKFC conducts basic banking operations from locations
in Boone and Kenton Counties in Northern Kentucky. The majority of the
Corporation's revenue is derived from its loan portfolio. The loan portfolio is
diversified and the ability of debtors to repay their loans is not dependent
upon any single industry. Commercial or residential real estate or other
business and consumer assets secure the majority of BKFC's loans.

                               FINANCIAL CONDITION

Total assets at December 31, 1998 were $280,767,000 compared to $230,849,000 at
December 31, 1997, an increase of $49,918,000 (21.6%). This increase was
primarily due to a $26,341,000 (14.5%) increase in loans from $181,494,000 at
December 31, 1997 to $207,835,000 at December 31,1998 and a $15,751,000 (48.3%)
increase in securities from $32,574,000 at December 31,1997 to $48,325,000 at
December 31, 1998. All loan categories increased, but $22,374,000 (84.9%) of the
increase was in the commercial business, non-residential real estate and
construction loan categories. The asset growth was funded by an increase in
deposits of $44,651,000 (22.4%), from $199,207,000 at December 31,1997 to
$243,858,000 at December 31, 1998.

                              RESULTS OF OPERATIONS

SUMMARY

Net income was $4,066,000 for the year ended December 31,1998 compared to
$3,017,000 in 1997, an increase of $1,049,000 (34.8%). The increase in earnings
was driven by improvements in net interest and noninterest income, offset by
increased noninterest and income tax expense.


                                       25
<PAGE>   26

NET INTEREST INCOME

Net interest income grew to $10,391,000 in 1998; an increase of $1,462,000
(16.4%) over the $8,929,000 earned in 1997. The increase was driven by volume,
with average earning assets and average interest bearing liabilities growing
19.7% and 20.0% respectively. The impact of this growth was partially offset by
a decrease in the net interest margin to 4.45% for 1998 compared to 4.54% for
1997. A decrease in the average yield on earning assets to 8.62% in 1998 from
8.72% in 1997 was the primary reason for the decrease in the net interest
margin.

PROVISION FOR LOAN LOSSES

The loan loss provision was $585,000 for the year ended December 31, 1998
compared to $352,000 for 1997. The provision was increased to provide for
continued loan growth and in response to higher net charge-offs, which were
$470,000 for 1998. One loan accounted for $343,000 (73.0%) of the net
charge-offs. Total non-accrual loans and loans past due 90 days or more
increased to $360,000 (.17% of loans outstanding) at December 31, 1998 compared
to $205,000 (.11% of loans outstanding) at year end 1997.

Management evaluates the sufficiency of the Bank's allowance for loan losses on
a quarterly basis and the result of that analysis dictates the level of the
provision for loan losses recorded as expense. Management's analysis includes
the review of specific credits, which are selected based on identified
weaknesses in the performance of the credit or concern about collateral
valuation. Portions of the allowance for loan losses are allocated to those
loans, based upon historical loss experience and management's expectations about
economic trends and conditions affecting the Bank's customers. Based upon their
quarterly analysis of the loan portfolio, management is satisfied that the
allowance for loan losses is adequate at December 31, 1998.

NONINTEREST INCOME

Total noninterest income increased $989,000 (75.3%) to $2,302,000 for 1998,
compared to $1,313,000 for 1997. Service charges on deposits increased $350,000
(50.9%) to $1,038,000 for 1998, compared to $688,000 for 1997. This was due to
both an increase in the service charge assessed on deposit accounts and an
increase in the number of accounts. Low interest rates and a strong local
economy resulted in a large increase in gains on the sale of loans in the
secondary market. These gains increased $493,000 (155.0%) to $811,000 in 1998,
compared to $318,000 for 1997. The majority of this income results from the
sale, service released, of fixed rate residential real estate mortgage loans.
Gains are also realized upon the sale of government guaranteed (SBA) business
loans. BKFC retains the servicing for these loans. Other fees increased $146,000
(47.6%) to $453,000 for 1998, compared to $307,000 for 1997. Increases in debit
card and credit card interchange fees accounted for $70,000 of the increase.


                                       26
<PAGE>   27


NONINTEREST EXPENSE

Noninterest expense increased $717,000 (13.3%) to $6,095,000 for 1998, compared
to $5,378,000 in 1997. The year to year growth in noninterest expense decreased
to 13.3% for 1998 (versus 1997) compared to 19.2% for 1997 (versus 1996).
Occupancy and equipment expense, driven by additional locations and technology
investments, increased $223,000 (21.0%) to $1,283,000 for 1998, compared to
$1,060,000 in 1997. Higher rental expense associated with one new branch opening
and a branch relocation in the fourth quarter of 1997 generated $90,000 (40.4%)
of the increase The Bank continued to upgrade and replace personal computers and
software which resulted in higher equipment depreciation expense which generated
$54,000 (24.2%) of the increase. Salary and benefit expense for 1998 was
$2,919,000 compared to $2,702,000 for 1997, an increase of $217,000 (8.0%).
Staffing expenses associated with the opening of one new branch and annual merit
increases accounted for most of the increase. Other operating expenses increased
$180,000 (17.1%) to $1,232,000 for 1998, compared to $1,052,000 for 1997.

TAX EXPENSE

Federal income tax expense increased $452,000 in 1998 compared to 1997 due
primarily to higher levels of income before tax. Increased investments in tax
favored instruments resulted in a slight decline, to 32.4% in 1998 from 33.1% in
1997, in the effective tax rate.

ASSET/LIABILITY MANAGEMENT

BKFC engages in a formal process of measuring and defining the amount of
interest rate risk it assumes. Interest rate risk results from the fact the
interest sensitive assets and liabilities can adjust their rates at different
times and by different amounts. The goal of asset/liability management is to
maintain a high, yet stable, net interest margin and to manage the effect that
changes in market interest rates will have on net interest income. A common
measure of interest rate risk is interest rate "gap" measurement. The gap is the
difference, in dollars, between the amount of interest-earnings assets and
interest-bearing liabilities that will reprice within a certain time frame.
Repricing can occur when an asset or liability matures or, if an adjustable rate
instrument, when it can be adjusted. Typically, the measurement will focus on
the interest rate gap position over the next twelve months. An institution is
said to have a negative gap position when more interest-bearing liabilities
reprice within a certain period than do interest-earning assets. Interest rate
gap is considered an indicator of the effect that changing rates may have on net
interest income. Generally, an institution with a negative gap will benefit from
declining market interest rates and be negatively impacted by rising interest
rates.

At December 31, 1998, BKFC's twelve-month interest rate gap position was
negative. Over the succeeding twelve months, interest rate sensitive liabilities
exceed interest rate sensitive assets by $55,678,000 (21.4% of interest earning
assets). An assumption contributing to this result is that all interest-bearing
demand and savings accounts can change immediately if market rates change. These
instruments are not tied to specific indices and are only influenced by market
conditions and other factors. Accordingly, a general movement in interest rates
may not have any 


                                       27
<PAGE>   28


immediate effect on the rates paid on those deposit accounts. BKFC's
asset/liability management policy establishes guidelines governing the amount of
interest rate risk the Corporation wishes to assume, and management continually
monitors BKFC's gap position and other key indicators.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to the availability of funds to meet deposit withdrawals, fund
loan commitments and pay expenses. During 1998, BKFC funded its loan growth with
deposits and short-term borrowings. At December 31, 1998, BKFC's customers have
available $52,130,000 in unused lines and letters of credit, and BKFC has
further extended loan commitments totaling $525,000. Historically many such
commitments have expired without being drawn and, accordingly, do not represent
future cash commitments.

If needed, BKFC has the ability to borrow term and overnight funds from the
Federal Home Loan Bank or other financial intermediaries. Further, BKFC has
$18,028,000 of securities designated as available-for-sale and an additional
$5,149,000 of held-to-maturity securities that mature within one year that can
serve as sources of funds. Management is satisfied that BKFC's liquidity is
sufficient at December 31, 1998 to meet known and potential obligations.

Both BKFC and the Bank are required to comply with capital requirements
promulgated by their primary regulators. These regulations and other regulatory
requirements limit the amount of dividends that may be paid by the Bank to BKFC
and by BKFC to its shareholders. In 1998 BKFC paid a cash dividend of $.05 per
share totaling $175,000.

The FDIC has issued regulations that relate a bank's deposit insurance
assessment and certain aspects of its operations to specified capital levels. A
"well-capitalized" bank, one with a leverage ratio of 5% or more and a total
risk-based capital ratio of 10% or more, and no particular areas of supervisory
concern, pays the lowest premium and is subject to the fewest restrictions. At
December 31, 1998 BKFC's leverage and total risk-based capital ratios, which are
substantially the same as the Bank's, were 8.6% and 12.8%, respectively, which
exceed the well-capitalized threshold.

YEAR 2000

Pursuant to the "Year 2000 Information and Readiness Disclosure Act, the
attached discussion of Year 2000 Issues is hereby designated a "Year 2000
Readiness Disclosure" by BKFC.

It is well documented that some data processing systems may experience
processing difficulties upon encountering the millenium. This "Year 2000
Problem" is believed to be material for virtually every public company. The
following section describes the steps, which BKFC is taking to handle this
serious matter. It should be noted that this section in particular, as well as
the "Management Discussion and Analysis" area in general, contains "forward
looking statements" which represent the opinions of management. Such
forward-looking statements are 


                                       28
<PAGE>   29


subject to numerous risks and uncertainties, which obviously accompany any
discussion of future actions, performances or results. The reader of these
discussions is hereby cautioned of the uncertain nature of these discussions and
is urged to use caution in relying on such forward looking statements in forming
any opinions concerning the financial results, condition or operations of BKFC.

BKFC is conducting a formal review of its systems and system providers, due to
concerns regarding possible consequences that the year 2000 may pose to computer
and other operating systems utilized in its business activities. While a
preliminary review has resulted in the identification of certain issues which
require resolution, management believes that appropriate plans are in place to
resolve these issues in a timely manner. An ongoing review of the service bureau
supported data processing system is taking place, with the major data systems
already certified as Year 2000 compliant. The Company's major vendors have all
been contacted, with approximately 90 % reporting Year 2000 compliance for their
product or service. The customer contact group is currently in the process of
evaluating responses from major customers.

The contingency planning group has the task of working with all areas in order
to assure uninterrupted operations and to have plans available in the event that
mission critical vendors are not Year 2000 ready. BKFC's third party data
processing provider has developed a comprehensive year 2000 contingency plan
that provides for redundant systems and processes to insure business resumption
in the event of failure. BKFC has a written contingency plan, which addresses
several critical areas including data processing, data communications, voice
communications, liquidity, and environmental issues. The contingency plan
parallels our third party processor's plan to ensure a smooth transition for
business resumption in the event of a system or software failure. The plan also
provides for alternative and manual processes to address communication and
environmental issues. In addition, the plan addresses liquidity issues resulting
from year 2000 readiness with a thorough analysis of liquidity needs and
provisions made to establish lines of credit to cover anticipated liquidity
needs.

The principal expense factor in addressing the Year 2000 Issue has consisted of
employee time. Year 2000 tasks have been incorporated into the daily work
routine of the Company's employees, with only minimal interruption to work flow.
It is management's opinion that certain vendors will require additional
compensation for software upgrades that will need to be installed in certain
equipment in order to make such equipment Year 2000 compliant. It is
management's opinion that such additional expense will be nominal and will not
materially impact the Company" financial performance.

The risks for BKFC in the event that certain mission-critical systems are not
Year 2000 compliant are substantial. As a financial institution, the Company's
largest volume of transactions involve loan related matters (loan originations,
the acceptance of loan payments, escrow handling and so forth) and deposit
accounts (new account openings, additions and withdrawals from accounts,
interest crediting, checking account transactions and so forth). The inability
of the Company to process these transactions in an efficient and timely manner
would greatly impact the Company's operations. No estimate is available
concerning possible lost revenue in the event of a material Year 2000 problem.
However, such loss of revenue would 


                                       29
<PAGE>   30


likely be a material amount that could have a serious negative impact on the
Company's financial performance and operations.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues Financial Accounting
Standards (FAS) that affect the Company.

FAS NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"

EFFECTIVE JANUARY 1, 2000, FAS 133 WILL REQUIRE ALL DERIVATIVES TO BE RECORDED
AT FAIR VALUE. UNLESS DESIGNATED AS HEDGES, CHANGES IN THESE FAIR VALUES WILL BE
RECORDED IN THE INCOME STATEMENT. FAIR VALUE CHANGES INVOLVING HEDGES WILL
GENERALLY BE RECORDED BY OFFSETTING GAINS AND LOSSES ON THE HEDGE AND ON THE
HEDGED ITEM, EVEN IF THE FAIR VALUE OF THE HEDGED ITEM IS NOT OTHERWISE
RECORDED. UPON ADOPTION OF THIS STANDARD, ENTITIES MAY REDESIGNATE SECURITIES AS
EITHER AVAILABLE-FOR-SALE OR HELD-TO-MATURITY. MANAGEMENT DOES NOT EXPECT
ADOPTION OF THIS STANDARD TO HAVE A MATERIAL EFFECT BUT THE EFFECT WILL DEPEND
UPON DERIVATIVE HOLDING UPON ADOPTION.




                                       30
<PAGE>   31
ITEM 7.  FINANCIAL STATEMENTS

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
The Bank of Kentucky Financial Corporation
Florence, Kentucky


We have audited the accompanying consolidated balance sheets of The Bank of
Kentucky Financial Corporation as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Bank of Kentucky
Financial Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.





                                               Crowe, Chizek and Company LLP

Indianapolis, Indiana
January 22, 1999                                     



                                       31
<PAGE>   32


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       1998         1997
                                                                       ----         ----
<S>                                                                <C>           <C>      
ASSETS
     Cash and due from banks                                       $  13,229     $   8,428
     Federal funds sold                                                4,354         1,697
                                                                   ---------     ---------
         Total cash and cash equivalents                              17,583        10,125
     Interest-bearing deposits with banks                                422           560
     Available-for-sale securities                                    18,028         8,315
     Held-to-maturity securities
       (Fair value of $30,389 and $24,319)                            30,297        24,259
     Loans, net of allowance ($2,193 and $2,078)                     205,642       179,416
     Premises and equipment - net                                      3,756         3,519
     Federal Home Loan Bank stock, at cost                             2,026         1,887
     Accrued interest receivable and other assets                      3,013         2,768
                                                                   ---------     ---------

                                                                   $ 280,767     $ 230,849
                                                                   =========     =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
     Deposits
         Non interest-bearing deposits                             $  39,916     $  31,638
         Interest-bearing deposits                                   203,942       167,569
                                                                   ---------     ---------
              Total deposits                                         243,858       199,207
     Short-term borrowings                                            10,398         9,256
     Notes payable                                                       526           550
     Accrued expenses and other liabilities                            1,537         1,509
                                                                   ---------     ---------
                                                                     256,319       210,522

Shareholders' equity
     Common stock, $5 par value, 5,000,000 shares authorized,
       3,515,934 (1998) and 3,506,934 (1997) shares issued
                                                                       2,972         2,932
     Additional paid-in capital                                        7,674         7,523
     Retained earnings                                                13,774         9,883
     Accumulated other comprehensive income                               28           (11)
                                                                   ---------     ---------
                                                                      24,448        20,327
                                                                   ---------     ---------

                                                                   $ 280,767     $ 230,849
                                                                   =========     =========
</TABLE>



--------------------------------------------------------------------------------
                            See accompanying notes.

                                       32
<PAGE>   33


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                     Years ended December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          1998        1997
                                                          ----        ----
<S>                                                     <C>         <C>    
Interest income
     Loans, including related fees                      $17,864     $15,329
     Securities
         Taxable                                          1,730       1,660
         Tax exempt                                         225          83
     Other                                                  484         175
                                                        -------     -------
                                                         20,303      17,247
Interest expense
     Deposits                                             9,283       7,656
     Borrowings                                             629         662
                                                        -------     -------
                                                          9,912       8,318
                                                        -------     -------

NET INTEREST INCOME                                      10,391       8,929

Provision for loan losses                                   585         352
                                                        -------     -------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES       9,806       8,577

Noninterest income
     Service charges and fees                             1,038         688
     Gain on sale of loans                                  811         318
     Other                                                  453         307
                                                        -------     -------
                                                          2,302       1,313
Noninterest expense
     Salaries and employee benefits                       2,919       2,702
     Occupancy and equipment                              1,283       1,060
     Data processing                                        432         385
     Advertising                                            229         179
     Other                                                1,232       1,052
                                                        -------     -------
                                                          6,095       5,378
                                                        -------     -------

INCOME BEFORE INCOME TAXES                                6,013       4,512

Federal income taxes                                      1,947       1,495
                                                        -------     -------

NET INCOME                                              $ 4,066     $ 3,017
                                                        =======     =======

Per share data
     Earnings per share                                 $  1.16     $   .86
                                                        =======     =======

     Earnings per share, assuming dilution              $  1.16     $   .86
                                                        =======     =======
</TABLE>

--------------------------------------------------------------------------------
                             See accompanying notes.

                                       33
<PAGE>   34


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                             CONSOLIDATED STATEMENTS
                       OF CHANGES IN SHAREHOLDERS' EQUITY
                     Years ended December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                 Accumulated
                                                                       Additional                    Other
                                                            Common      Paid-in      Retained   Comprehensive
                                                            Stock       Capital      Earnings       Income        Total
                                                            -----       -------      --------       ------        -----
<S>                                                       <C>          <C>          <C>           <C>           <C>     
BALANCE JANUARY 1, 1997                                   $  2,917     $  7,478     $  7,012      $    (22)     $ 17,385


Comprehensive income
     Net income                                                 --           --        3,017            --         3,017
     Change in net unrealized gain/(loss), net of tax           --           --           --            11            11
                                                                                                                --------
         Total comprehensive income                             --           --           --            --         3,028
Cash dividends - $.0415 per share                               --           --         (146)           --          (146)
Exercise of stock options (6,000 shares)                        15           45           --            --            60
                                                          --------     --------     --------      --------      --------

BALANCE DECEMBER 31, 1997                                    2,932        7,523        9,883           (11)       20,327

Comprehensive income
     Net income                                                 --           --        4,066            --         4,066
     Change in net unrealized gain/(loss), net of tax           --           --           --            39            39
                                                                                                                --------
         Total comprehensive income                             --           --           --            --         4,105
Cash dividends - $.05 per share                                 --           --         (175)           --          (175)
Exercise of stock options (9,000 shares)                        40          151           --            --           191
                                                          --------     --------     --------      --------      --------

BALANCE DECEMBER 31, 1998                                 $  2,972     $  7,674     $ 13,774      $     28      $ 24,448
                                                          ========     ========     ========      ========      ========
</TABLE>

--------------------------------------------------------------------------------
                             See accompanying notes.

                                       34
<PAGE>   35


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1998 and 1997
                          (Dollar amounts in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        1998           1997
                                                                        ----           ----
<S>                                                                   <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                        $  4,066      $  3,017
    Adjustments to reconcile net income to net
      cash from operating activities
       Depreciation, amortization and accretion                            303           275
       Provision for loan losses                                           585           352
       Federal Home Loan Bank stock dividend                              (139)          (92)
       Change in assets and liabilities
          Accrued interest receivable and other assets                    (239)         (716)
          Accrued expenses and other liabilities                            28           277
                                                                      --------      --------
              Net cash from operating activities                         4,604         3,113

CASH FLOWS FROM INVESTING ACTIVITIES
    Net change in interest-bearing deposits with banks                     138           125
    Proceeds from maturities and principal reductions of
      held-to-maturity securities                                       19,873        16,725
    Purchase of held-to-maturity securities                            (25,816)      (24,121)
    Proceeds from maturities of available-for-sale securities            9,513         8,726
    Purchase of available-for-sale securities                          (19,168)       (5,493)
    Loans made to customers, net of principal collections thereon      (26,811)      (27,472)
    Property and equipment expenditures, net                              (635)       (1,149)
    Purchase of Federal Home Loan Bank stock                                --        (1,166)
                                                                      --------      --------
       Net cash from investing activities                              (42,906)      (33,825)

CASH FLOWS FROM FINANCING ACTIVITIES
    Net change in deposits                                              44,651        27,544
    Net change in short-term borrowings                                  1,142         2,638
    Payments on notes payable                                              (24)          (16)
    Dividends paid on common stock                                        (175)         (146)
    Proceeds from exercise of stock options                                166            55
                                                                      --------      --------
       Net cash from financing activities                               45,760        30,075
                                                                      --------      --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                  7,458          (637)

Cash and cash equivalents at beginning of year                          10,125        10,762
                                                                      --------      --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                              $ 17,583      $ 10,125
                                                                      ========      ========

Cash paid for interest                                                $  9,945      $  8,127

Cash paid for income taxes                                               2,210         1,489

Capital lease obligation                                                    --           350
</TABLE>

--------------------------------------------------------------------------------
                             See accompanying notes.

                                       35
<PAGE>   36


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The consolidated financial statements include the
accounts of The Bank of Kentucky Financial Corporation (the Company) and its
wholly owned subsidiary, The Bank of Kentucky (the Bank).
Intercompany transactions are eliminated in consolidation.

Description of Business: The Company provides financial services through its
subsidiary which conducts basic banking operations in Boone and Kenton counties
in northern Kentucky. Operations consist of generating commercial, mortgage and
consumer loans and accepting deposits from customers. The loan portfolio is
diversified and the ability of debtors to repay loans is not dependent upon any
single industry. The majority of the institution's loans are secured by specific
items of collateral including business assets, real property and consumer
assets.

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information that affect the amounts reported
in the financial statements and the disclosures provided. Actual results could
differ from those estimates. Estimates that are most susceptible to change in
the near term include the allowance for loan losses and the fair value of
financial instruments.

Securities: Securities are classified as held-to-maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Available-for-sale securities are classified as available-for-sale
when they might be sold before maturity. Available-for-sale securities are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income. Other securities such as Federal Home Loan Bank
stock are carried at cost.

Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.

Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses.

Interest income is reported on the interest method and include amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days (180 days for residential
mortgages). Payments received on such loans are reported as principal
reductions.
--------------------------------------------------------------------------------
                                   (Continued)

                                       36
<PAGE>   37
                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.

Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated collectively for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate.

In general, loans classified as doubtful or loss are considered impaired while
loans classified as substandard are individually evaluated for impairment.
Depending on the relative size of the credit relationship, late or insufficient
payments of 30 to 90 days will cause management to re-evaluate the credit under
its normal evaluation procedures.

Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.

Stock Compensation: Employee compensation expense under stock option plans is
reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method to measure expense using an option pricing model to estimate fair value.

Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and equipment are depreciated on the
straight-line and declining-balance methods over the estimated useful lives of
the assets.

Other Real Estate: Other real estate acquired through foreclosure is carried at
the lower of cost (fair value at foreclosure) or fair value less estimated
selling costs. Expenses incurred in carrying other real estate are charged to
operations as incurred.

--------------------------------------------------------------------------------
                                  (Continued)

                                       37
<PAGE>   38

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes: Income tax expense is the amount of taxes payable for the current
year plus or minus the change in deferred taxes. Deferred tax liabilities and
assets are the expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. Recognition of deferred tax assets is limited by the
establishment of a valuation allowance unless management concludes that they are
more likely than not to result in future tax benefits to the Company.

Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount of these items represents the exposure to loss,
before considering customer collateral or ability to repay.

Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.

Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.

Cash Flows: Cash and cash equivalents include cash on hand, amounts due from
banks, and federal funds sold. The Company reports net cash flows for customer
loan and deposit transactions, and interest-bearing balances with banks and
short-term borrowings with maturities of 90 days or less.

Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.

Dividend Restriction: Banking regulations require the maintenance of certain
capital levels may limit the amount of dividends which may be paid by the Bank
to the Company or by the Company to its shareholders.

--------------------------------------------------------------------------------
                                   (Continued)

                                       38
<PAGE>   39

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.

Per Share Data: During 1998, the Board approved a stock split that provided
shareholders with one additional share for each one held. Share and per share
data has been restated for the effect of this split.

Industry Segment: Internal financial information is reported and aggregated in
one line of business, banking.

New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedges item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.


NOTE 2 - SECURITIES

Securities at year-end are as follows:

<TABLE>
<CAPTION>
                                                      Gross       Gross
Available-for-Sale                      Amortized   Unrealized  Unrealized      Fair
------------------                        Cost        Gains       Losses        Value
                                          ----        -----       ------        -----
<S>                                      <C>         <C>         <C>          <C>    
1998
----
Obligations of the U.S. Treasury and
  government agencies                    $17,985     $    55     $   (12)     $18,028
                                         =======     =======     =======      =======

1997
----
Obligations of the U.S. Treasury and
  government agencies                    $ 8,331     $     4     $   (20)     $ 8,315
                                         =======     =======     =======      =======
</TABLE>

--------------------------------------------------------------------------------
                                   (Continued)

                                       39
<PAGE>   40

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 2 - SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                            Gross         Gross
Held-to-Maturity                              Amortized   Unrealized    Unrealized      Fair
----------------                                Cost        Gains         Losses        Value
                                                ----        -----         ------        -----
<S>                                           <C>          <C>           <C>           <C>     
1998
----
     Obligations of the U.S. Treasury and
       government agencies                    $ 21,009     $     37      $    (44)     $ 21,002
     Municipal and other obligations             9,288          103            (4)        9,387
                                              --------     --------      --------      --------

                                              $ 30,297     $    140      $    (48)     $ 30,389
                                              ========     ========      ========      ========
1997
----
     Obligations of the U.S. Treasury and
       government agencies                    $ 22,136     $     54      $     (9)     $ 22,181
     Municipal and other obligations             2,123           15            --         2,138
                                              --------     --------      --------      --------

                                              $ 24,259     $     69      $     (9)     $ 24,319
                                              ========     ========      ========      ========
</TABLE>

The amortized cost and fair value of securities at December 31, 1998 are shown
below by contractual maturity. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                           Available-for-Sale       Held-to-Maturity
                                           ------------------       ----------------
                                           Amortized    Fair       Amortized    Fair
                                             Cost       Value        Cost       Value
                                             ----       -----        ----       -----
<S>                                        <C>         <C>         <C>         <C>    
Due in one year or less                    $ 2,500     $ 2,516     $ 5,149     $ 5,179
Due after one year through five years       15,485      15,512      23,648      23,732
Due after five years through ten years          --          --       1,500       1,478
                                           -------     -------     -------     -------
                                           $17,985     $18,028     $30,297     $30,389
                                           =======     =======     =======     =======
</TABLE>

There were no sales of securities in 1998 or 1997.

At December 31, 1998 and 1997, securities with a carrying value of $42,498 and
$31,186 were pledged to secure public deposits and repurchase agreements.

--------------------------------------------------------------------------------
                                   (Continued)

                                       40
<PAGE>   41

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 3 - LOANS

Year-end loans are as follows:

<TABLE>
<CAPTION>
                                                 1998           1997
                                                 ----           ----
<S>                                           <C>            <C>      
     Commercial                               $  57,877      $  49,172
     Residential real estate                     52,692         51,734
     Nonresidential real estate                  66,449         62,932
     Construction                                18,634          8,482
     Consumer                                     9,172          8,073
     Municipal obligations                        3,346          1,475
                                              ---------      ---------
         Gross loans                            208,170        181,868
     Less: Deferred loan origination fees          (335)          (374)
           Allowance for loan losses             (2,193)        (2,078)
                                              ---------      ---------
         Net loans                            $ 205,642      $ 179,416
                                              =========      =========
</TABLE>

Certain of the Company's directors were loan customers of the Bank. A schedule
of the aggregate activity in these loans follows:

<TABLE>
<CAPTION>
<S>                                                <C>    
     Balance as of January 1, 1998                 $ 7,466
     Change in persons included                     (1,426)
     New loans and advances on lines of credit       5,162
     Loan reductions                                (1,477)
                                                   -------
     Balance as of December 31, 1998               $ 9,725
                                                   =======
</TABLE>


NOTE 4 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses is as follows:

<TABLE>
<CAPTION>
                                                                   1998         1997
                                                                   ----         ----
<S>                                                              <C>          <C>    
     Beginning balance                                           $ 2,078      $ 1,752
     Provision charged to operations                                 585          352
     Loans charged off                                              (497)         (42)
     Recoveries                                                       27           16
                                                                 -------      -------

     Ending balance                                              $ 2,193      $ 2,078
                                                                 =======      =======

     Nonaccrual loans at year end                                $   170      $    82
     Loans past due over 90 days, still accruing at year end         190          123
     Average of impaired loans during the year                        58           --
     Interest income recognized during impairment                     --           --
</TABLE>

There were no loans designated as impaired at December 31, 1998 or 1997.


--------------------------------------------------------------------------------
                                   (Continued)

                                       47
<PAGE>   42
                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 5 - PREMISES AND EQUIPMENT

Year-end premises and equipment are as follows:

<TABLE>
<CAPTION>
                                             1998          1997
                                             ----          ----
<S>                                        <C>          <C>    
     Land and improvements                 $   921      $   897
     Leasehold improvements                    824          781
     Buildings                               1,665        1,318
     Furniture, fixtures and equipment       2,018        1,796
                                           -------      -------
         Total                               5,428        4,792
     Accumulated depreciation               (1,672)      (1,273)
                                           -------      -------

         Net premises and equipment        $ 3,756      $ 3,519
                                           =======      =======
</TABLE>

NOTE 6 - INTEREST BEARING DEPOSITS

Time deposits of $100 or more were $41,987 and $43,704 at December 31, 1998 and
1997. Interest expense on such deposits was $2,653 and $2,316 for 1998 and 1997.

Scheduled maturities of time deposits are as follows:

<TABLE>
<CAPTION>
<S>                                                  <C>      
                     1999                            $  87,069
                     2000                               12,472
                     2001                                  851
                     2002                                  284
                     2003                                  272
                     Thereafter                             15
                                                     ---------
                                                     $ 100,963
                                                     =========
</TABLE>


NOTE 7 - SHORT-TERM BORROWINGS

At December 31, 1998 short-term borrowings consist solely of retail repurchase
agreements of $10,398. At December 31, 1997 short-term borrowings include $6,056
of retail repurchase agreements and $3,200 of federal funds purchased.
Repurchase agreements outstanding at year-end 1998 had remaining maturities
ranging from one day up to one year.


--------------------------------------------------------------------------------
                                   (Continued)

                                       42
<PAGE>   43

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 7 - SHORT-TERM BORROWINGS (Continued)

Information regarding repurchase agreements for the years ended December 31,
1998 and 1997 is presented below:

<TABLE>
<CAPTION>
                                                     1998         1997
                                                     ----         ----
<S>                                                <C>          <C>    
     Average balance during the year               $ 7,462      $ 6,777

     Maximum month end balance during the year      11,323        7,264

     Average rate paid during the year                5.49%        5.59%
</TABLE>


NOTE 8 - NOTES PAYABLE

Notes payable consist of the following at year-end:

<TABLE>
<CAPTION>
                                  1998     1997
                                  ----     ----
<S>                               <C>      <C> 
     Capital lease obligation     $343     $349
     Mortgage payable              183      201
                                  ----     ----
                                  $526     $550
                                  ====     ====
</TABLE>

The capital lease obligation relates to a branch building. The lease was
originated in 1997, has a term of 20 years and requires monthly payments of $4.
The mortgage payable is secured by a parcel of real estate owned by the Bank.
The loan requires monthly principal and interest payments of $3, bears interest
at 8.75% and matures in 2006.

NOTE 9 - EMPLOYEE BENEFITS

The Bank maintains an employee profit sharing plan covering substantially all
employees. Contributions are at the discretion of the Board of Directors. Profit
sharing expense totaled $188 and $166 for the years ended December 31, 1998 and
1997.

Options to buy stock are granted to directors, officers and employees under the
Company's stock option and incentive plan which provide for the issuance of up
to 720,000 shares. The specific terms of each option agreement are determined by
the Compensation Committee at the date of the grant.


--------------------------------------------------------------------------------
                                   (Continued)

                                       43
<PAGE>   44


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 9 - EMPLOYEE BENEFITS (Continued)

A summary of the Company's stock option activity, and related per share
information follows:

<TABLE>
<CAPTION>
                                           1 9 9 8               1 9 9 7
                                           -------               -------
                                                 Weighted-             Weighted-
                                                  Average               Average
                                                 Exercise              Exercise
                                   Options        Price    Options      Price
                                   -------        -----    -------      -----
<S>                                <C>        <C>         <C>             <C> 
Outstanding beginning of year       6,000      $    9.13       --      $     --
Granted                            45,500          14.32   12,000          9.13
Exercised                          (9,000)         18.47   (6,000)         9.13
Forfeited                              --             --       --            --
                                                           ------      --------

Outstanding at end of year         42,500      $   12.71    6,000      $   9.13
                                  =======      ========    ======      ========

Exercisable at end of year         15,500      $   13.94    6,000      $   9.13
                                  =======      =========   ======      ========

Weighted average contractual
  remaining life                  7.4 years               4.5 years

Weighted average fair value of
  options granted during the year $  5.80                 $   .86
</TABLE>

Had compensation cost for stock options been recorded using the fair value
method, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.

<TABLE>
<CAPTION>
                                                1998        1997
                                                ----        ----
<S>                                           <C>         <C>    
     Pro forma net income                     $ 3,942     $ 3,010
     Pro forma earnings per share                1.12         .86
     Pro forma diluted earnings per share        1.12         .86
</TABLE>


--------------------------------------------------------------------------------
                                   (Continued)

                                       44
<PAGE>   45

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 9 - EMPLOYEE BENEFITS (Continued)

The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.

<TABLE>
<CAPTION>
                                                               1998         1997
                                                               ----         ----
<S>                                                             <C>          <C>  
     Risk-free interest rate                                    5.55%        5.50%
     Expected option life                                   5.3 years      2 years
     Expected stock price volatility                                -            -
     Dividend yield                                              .33%         .50%
</TABLE>

Proceeds recorded upon exercise of the stock options include cash received from
the option holder and the tax benefit derived by the Company. During 1998 and
1997, proceeds from the exercise of stock options totaled $191 and $60, $25 and
$5 of which was the tax benefit.


NOTE 10 - FEDERAL INCOME TAXES

Federal income taxes consist of the following components:

<TABLE>
<CAPTION>
                                 1998         1997
                                 ----         ----
<S>                            <C>          <C>    
     Income tax/(benefit)
         Currently payable     $ 2,009      $ 1,547
         Deferred                  (62)         (52)
                               -------      -------

                               $ 1,947      $ 1,495
                               =======      =======
</TABLE>

The following is a reconciliation of income tax expense and the amount computed
by applying the effective federal income tax rate of 34% to income before income
taxes:

<TABLE>
<CAPTION>
                                                                1998         1997
                                                                ----         ----
<S>                                                           <C>          <C>    
     Statutory rate applied to income before income taxes     $ 2,044      $ 1,534
     Tax exempt income                                           (108)         (51)
     Other                                                         11           12
                                                              -------      -------

                                                              $ 1,947      $ 1,495
                                                              =======      =======
</TABLE>

--------------------------------------------------------------------------------
                                   (Continued)

                                       45
<PAGE>   46

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 10 - FEDERAL INCOME TAXES (Continued)

Year-end deferred tax assets and liabilities were due to the following factors:

<TABLE>
<CAPTION>
                                                                  1998        1997
                                                                  ----        ----
<S>                                                               <C>        <C>  
     Deferred tax assets from:
         Loan loss provisions                                     $ 683      $ 597
         Deferred loan fees                                          47         63
         Net unrealized loss on available-for-sale securities        --          5
         Other                                                        1         --
                                                                  -----      -----
                                                                    731        665
     Deferred tax liabilities for:
         Net unrealized gain on available-for-sale securities       (14)        --
         Depreciation                                               (19)       (25)
         FHLB stock dividends                                      (115)       (68)
         Other                                                      (25)       (57)
                                                                  -----      -----
                                                                   (173)      (150)
     Valuation allowance for deferred tax assets                     --         --
                                                                  -----      -----

         Net deferred tax asset                                   $ 558      $ 515
                                                                  =====      =====
</TABLE>


NOTE 11 - EARNINGS PER SHARE

Earnings per share are computed based upon the weighted average number of shares
outstanding during the period which were 3,510,846 for 1998 and 3,501,654 for
1997. Diluted earnings per share are computed assuming that the stock options
outstanding are exercised and the proceeds used entirely to reacquire shares at
the year's average price. For 1998 and 1997, this would result in there being an
additional 3,222 and 848 shares outstanding.

--------------------------------------------------------------------------------
                                   (Continued)

                                       46
<PAGE>   47

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 12 - COMMITMENTS AND OFF BALANCE SHEET ACTIVITIES

The Bank leases branch facilities and sites and is committed under various
non-cancelable lease contracts that expire at various dates through the year
2017. A majority of these leases are with members of the Bank's Board of
Directors or companies they control. Expense for leased premises was $486 and
$396 for 1998 and 1997. Minimum lease payments, excluding the capital lease
obligation, at December 31, 1998 for all non-cancelable leases are as follows:

<TABLE>
<CAPTION>
                    <S>                                 <C>    
                    1999                                $   550
                    2000                                    554
                    2001                                    545
                    2002                                    531
                    2003                                    546
                    Thereafter                            3,583
                                                        -------

                    Total minimum lease payments        $ 6,309
                                                        =======
</TABLE>

Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.

Financial instruments with off-balance-sheet risk were as follows at year end.

<TABLE>
<CAPTION>
                                          1 9 9 8                 1 9 9 7
                                          -------                 -------
                                      Fixed    Variable      Fixed      Variable
                                      Rate       Rate        Rate         Rate
                                      ----       ----        ----         ----
<S>                                  <C>      <C>          <C>         <C>  
     Commitments to make loans
       (at market rates)            $   --     $   525     $    --     $ 2,512
     Unused lines of credit and
       letters of credit                --      52,130          --      44,032
</TABLE>

The loan commitments are generally extended for terms of up to 60 days and, in
many cases, allow the customer to select from one of several financing options
offered.

The Bank maintains a $25,000 letter of credit from the Federal Home Loan Bank of
Cincinnati. The letter is pledged to secure public funds deposit accounts and is
secured by a blanket pledge of the Bank's residential real estate loans.

At December 31, 1998, the Bank was required to have $6,118 on deposit with the
Federal Reserve or as cash on hand as reserve.

--------------------------------------------------------------------------------
                                   (Continued)

                                       47
<PAGE>   48

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------
                                      
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
  EARNINGS

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. These guidelines and the regulatory
framework for prompt corrective action involve quantitative measures of capital,
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices as well as qualitative judgments by the
regulators about components, risk weightings, and other factors.

Compliance with these regulations can limit dividends paid by either entity.
Both entities must comply with regulations that establish minimum levels of
capital adequacy. The Bank must also comply with capital requirements
promulgated by the FDIC under its "prompt corrective action" rules. The Bank's
deposit insurance assessment rate is based, in part, on these measurements. At
December 31, 1998 and 1997, the Bank's capital levels result in it being
designated "well capitalized" under these guidelines.

The Bank's capital amounts and ratios, which are substantially the same as the
consolidated amounts, at December 31, 1998 are presented below:

<TABLE>
<CAPTION>
                                                                           Minimum Needed
                                                                              To Be Well
                                                    Minimum Needed           Capitalized
                                                     For Capital            Under Prompt
                                                      Adequacy           Corrective Action
                                  Actual              Purposes               Provisions
                                  ------              --------               ----------
                   Amount                       Amount                 Amount
                   ($000)          Ratio        ($000)      Ratio      ($000)        Ratio
                   ------          -----        ------      -----      ------        -----
<S>                <C>            <C>          <C>           <C>       <C>           <C>  
Total capital
  (to Risk
  Weighted
  Assets)          $26,351        12.81%       $16,455       8.0%      $20,568       10.0%

Tier I Capital
  (to Risk
  Weighted
  Assets)          $24,158        11.75%       $ 8,227       4.0%      $12,341        6.0%

Tier 1 Capital
  (to Average
  Assets)          $24,158         8.64%       $11,181       4.0%      $13,977        5.0%

--------------------------------------------------------------------------------
</TABLE>
                                   (Continued)

                                       48
<PAGE>   49

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments at year-end are as follows at December 31:

<TABLE>
<CAPTION>
                                                 1 9 9 8                      1 9 9 7
                                                 -------                      -------
                                         Carrying        Fair         Carrying         Fair
                                          Value          Value          Value          Value
                                          -----          -----          -----          -----
<S>                                    <C>            <C>            <C>            <C>      
Financial assets
     Cash, cash equivalents, and
       deposits with banks             $  18,005      $  18,005      $  10,685      $  10,685
     Available-for-sale securities        18,028         18,028          8,315          8,315
     Held-to-maturity securities          30,297         30,384         24,259         24,319
     Federal Home Loan Bank stock          2,026          2,026          1,887          1,887
     Loans (net)                         205,642        206,200        179,416        179,798
     Accrued interest receivable           1,606          1,606          1,488          1,488

Financial liabilities
     Deposits                           (243,858)      (244,762)      (199,207)      (200,401)
     Short-term borrowings               (10,398)       (10,398)        (9,256)        (9,256)
     Notes payable                          (526)          (526)          (550)          (550)
     Accrued interest payable               (997)          (997)        (1,030)        (1,030)
</TABLE>

The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities. Estimated
fair value for loans is based on the rates charged at year end for new loans
with similar maturities, applied until the loan is assumed to reprice or be
paid. Estimated fair value for time deposits is based on the rates paid at year
end for new deposits, applied until maturity. Estimated fair value for
off-balance-sheet loan commitments are considered nominal.

--------------------------------------------------------------------------------
                                   (Continued)


                                       49
<PAGE>   50

                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS

Presented below are condensed balance sheets and the related statements of
income and cash flows for the parent company:

                            CONDENSED BALANCE SHEETS
                           December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                   1998         1997
                                   ----         ----
<S>                               <C>         <C>    
ASSETS                                
     Cash                         $   190     $   260
     Investment in subsidiary      24,186      20,037
     Other assets                      72          30
                                  -------     -------

                                  $24,448     $20,327
                                  =======     =======


SHAREHOLDERS' EQUITY              $24,448     $20,327
                                  =======     =======
</TABLE>


                         CONDENSED STATEMENTS OF INCOME
                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                               1998         1997
                                                               ----         ----
<S>                                                              <C>          <C> 
Dividends from subsidiary                                    $    --      $    --
Operating expenses                                               (66)         (32)
Tax benefit                                                       22           --
                                                             -------      -------

INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF THE BANK         (44)         (32)
Equity in undistributed income of the Bank                     4,110        3,049
                                                             -------      -------


NET INCOME                                                   $ 4,066      $ 3,017
                                                             =======      =======
</TABLE>

--------------------------------------------------------------------------------
                                   (Continued)

                                       50

<PAGE>   51


                   THE BANK OF KENTUCKY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1997 and 1996
             (Dollar amounts in thousands, except per share amounts)
--------------------------------------------------------------------------------

NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

                       CONDENSED STATEMENTS OF CASH FLOWS
                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                1998         1997
                                                                ----         ----
<S>                                                           <C>          <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                               $ 4,066      $ 3,017
     Adjustments to reconcile net income to net cash from
       operating activities
         Equity in undistributed income of the Bank            (4,110)      (3,049)
         Change in other assets and other liabilities             (17)         (10)
                                                              -------      -------
              Net cash from operating activities                  (61)         (42)


CASH FLOWS FROM FINANCING ACTIVITIES
     Dividends paid                                              (175)        (146)
     Exercise of stock options                                    166           55
                                                              -------      -------
         Net cash from financing activities                        (9)         (91)
                                                              -------      -------

Net change in cash                                                (70)        (133)

Cash at beginning of year                                         260          393
                                                              -------      -------

CASH AT END OF YEAR                                           $   190      $   260
                                                              =======      =======

-----------------------------------------------------------------------------------
</TABLE>

                                       51
<PAGE>   52

<PAGE>   53
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         None

                                    PART III

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

                               BOARD OF DIRECTORS

ELECTION OF DIRECTORS

         The Amended Articles of Incorporation and By-Laws of BKFC provide for a
Board of Directors consisting of not less than nine directors and not more than
fifteen directors, divided into three classes. The Board of Directors of BKFC
currently consists of eleven directors, all of whom were elected at the 1998
Annual Meeting of BKFC Stockholders. The four directors whose terms expire in
1999 have been nominated for reelection as directors of BKFC. Each of such four
directors will be elected for a three-year term. In accordance with BKFC's
By-Laws, any vacancy on the Board of Directors may be filled by the Board of
Directors for the remainder of the full term of the directorship. Each of the
directors of BKFC is also a director of BKI.

         The Board of Directors proposes the reelection of the following
directors for terms expiring in 2002:

<TABLE>
<CAPTION>
                                                                             Director of             Director of the
Name                              Age          Position(s) Held              BKFC Since               Bank Since (1)
----                              ---          ----------------              ----------               ----------
<S>                               <C>          <C>                            <C>                      <C> 
David E. Meyer                    64               Director                     1994                       1991
John E. Miracle                   56               Director                     1994                       1991
Mary Sue Rudicill                 55               Director                     1994                       1991
William E. Snyder                 52               Director                     1995                       1995
</TABLE>

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

(1)      BKFC acquired BKI in 1995.

The following directors will continue to serve after the Annual Meeting for the
terms indicated:


<TABLE>
<CAPTION>
                                                               Term      Director of    Director of the    Became Director
            Name             Age       Position(s) Held       Expires    BKFC Since      Bank Since (1)    of Burnett (2)
            ----             ---       ----------------       -------    ----------      ----------        ----------
<S>                          <C>     <C>                      <C>        <C>             <C>              <C> 
  Harry J. Humpert           73            Director            2000         1995              1995               1946
  Robert B. Sathe            52            Director            2000         1994              1990                  -
  Herbert H. Works           70            Director            2000         1994              1992                  -
  Robert W. Zapp             47       President, CEO and       2000         1994              1990               1995
                                           Director
  Rodney S. Cain             60     Secretary and Director     2001         1994              1990                  -
  Ruth Seligman-Doering      58            Director            2001         1994              1990                  -
  R. C. Durr                 79      Chairman and Director     2001         1994              1990                  -
</TABLE>


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


(1)      BKFC acquired the Bank in 1995.

(2)      BKFC acquired Burnett Federal Savings Bank ("Burnett") and caused it to
         be merged into the Bank in 1995.


         David E. Meyer is the President of Wolfpen Associates, a commercial
real estate firm; the managing partner of two commercial real estate investment
firms, Meyer Realty and Florence Commercial; the President of Fuller Square
Corporation, which owns the property on which Florence Commercial's building is
located; and the retired President of H. Meyer Dairy Company. Mr. Meyer served
as a director of Fifth Third Bank, Northern Kentucky, from 1981 through January
1991.

         John E. Miracle, D.M.D., is a dentist and has been associated with
General Family Dentistry in Northern Kentucky for 22 years.


                                       52
<PAGE>   54


         Mary Sue Rudicill has been the Chairman of Belleview Sand and Gravel,
Inc., and Gravelview Trucking Company for fourteen years. Ms. Rudicill is a
director of Farmer's Mutual Life Insurance Company and was formerly a director
of Fifth Third Bank of Boone County.

         William E. Snyder has been the Vice President and General Manager of
Freightliner Trucks of Cincinnati Incorporated since July 1997. From December
1996 to July 1997, Mr. Snyder was the Manager of Wholesale Operations of Bob
Sumerel Tire Co. Prior to such time, Mr. Snyder was the Vice President of
Freightliner of Cincinnati, Inc., a company which operates a truck dealership
located in Northern Kentucky, for ten years. Mr. Snyder also served as the
Treasurer of Burnett from 1990 to 1995.

         Harry J. Humpert is the President of Humpert Enterprises, Inc., a
company which operates Klingenberg's Hardware and Paint in Covington, Kentucky.
Mr. Humpert became Chairman of the Board of Directors of Burnett in 1990.

         Robert B. Sathe has been a Regional Vice-President of CIGNA Financial
Advisors, Inc., for the last seventeen years.

         Herbert H. Works has been the President of Boone-Kenton Lumber for 23
years. Mr. Works served on the Board of Directors of Fifth Third Bank of Boone
County from 1980 until 1991, when he resigned in order to serve as a director of
the Bank.

         Robert W. Zapp is the President and the Chief Executive Officer of the
Bank and BKFC. He is also a member of the Board of Kirectors of Woodspoint
Nursing Home. From June 1988 until January 1990, Mr. Zapp was the President of
Fifth Third Bank of Kenton County, formerly Security Bank. Mr. Zapp resigned as
President of such institution in order to participate in the organization of the
Bank. From January 1982 until June 1988, Mr. Zapp was the Executive Vice
President and the Senior Loan Officer of Fifth Third Bank of Boone County.

         Rodney S. Cain was a director of Fifth Third Bank of Boone County,
formerly Boone State Bank, from 1977 until January 1990. Mr. Cain has served as
the Secretary of the Bank since 1990 and of BKFC since 1994. Mr. Cain is also
the Chairman and CEO of Wiseway Supply and has served in that capacity since
1972.

         Ruth M. Seligman-Doering has been the President and the CEO of Charles
Seligman Distributing Company, Inc., for the past seven years and is also a
director.

         R. C. Durr was one of the founders of Boone State Bank. From the time
Boone State Bank was organized in 1971 until Boone State Bank was acquired by
Fifth Third Bank in 1985, Mr. Durr was active in the day-to-day management of
the activities of the institution. After such acquisition, Mr. Durr served as
the Chairman of the Board of Fifth Third Bank of Boone County, the successor to
Boone State Bank, until he resigned in order to participate in the organization
of the Bank. Mr. Durr has served as the Chairman of the Board of Directors of
the Bank since 1990 and of BKFC since 1994.



             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Under the federal securities laws, BKFC's directors and executive
officers and personas holding more than ten percent of the common shares of BKFC
are required to report their ownership of common shares and changes in such
ownership to the Securities and Exchange Commission (the "SEC") and BKFC. The
SEC has established specific due dates for such reports. Based upon a review of
such reports, BKFC must disclose any failures to file such reports timely in
proxy statement used in connection with annual meetings of shareholders. Each of
Messrs. Meyer, Miracle, Snyder, Humpert, Sathe, Works, Cain and Urr and Mses.
Rudicill and Seligman-Doering filed late a Form 5 reporting stock options
received in 1998.


                                       53
<PAGE>   55


                               EXECUTIVE OFFICERS

         The following table sets forth certain information with respect to the
executive officers of BKFC:

<TABLE>
<CAPTION>
    ------------------------------------------------------------------------
    Name                      Age             Position(s) Held
    ----                      ---             ----------------

    ------------------------------------------------------------------------
<S>                           <C>      <C>                     
    R. C. Durr                79       Chairman of the Board
    Robert W. Zapp            47       President and Chief Executive Officer
    Rodney S. Cain            60       Secretary
    Robert D. Fulkerson       47       Treasurer
    ------------------------------------------------------------------------
</TABLE>

         For ages of and biographical information regarding each of these
executive officers, except Mr. Fulkerson, see "BOARD OF DIRECTORS - Election of
Directors."

         Robert D. Fulkerson was Vice President of Fifth Third Bank of Boone
County from 1985 until 1990. He served as Vice President of the Bank from 1990
until 1995 and has served as Senior Vice President of the Bank sice 1995. He has
also been the Assistant Secretary of BKFC since 1996 and its Treasurer since
1998.


ITEM 10.  EXECUTIVE COMPENSATION

         BKFC does not pay any compensation to its executive officers. Executive
officers of the Bank are compensated by the Bank for services rendered to the
Bank. Except for the President of the Bank, no director or executive officer of
BKFC received more than $100,000 in salary and bonus payments from the Bank
during the year ended December 31, 1998. The following table sets forth certain
information with respect to compensation paid to the President of the Bank.

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                          ------------------------
                                                                                Long-Term 
                                                                               Compensation
---------------------------------------------------------------------------------------------------------------------
                                               Annual Compensation (1)            Awards              All Other
                                                                          ------------------------
                                                                           Securities underlying    Compensation
Name and Principal Position        Year           Salary($)     Bonus($)      Options/SARs (#)            ($)
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>            <C>           <C>              <C>                 <C>       
Robert W. Zapp, President          1998           $139,711      $87,500          4,000/-0-            $31,005(2)
    and CEO                        1997           $132,211      $70,000              0/-0-            $31,590(3)
                                   1996           $125,000      $50,000              0/-0-            $29,559(4)
</TABLE>


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

(1)      Does not include amounts attributable to other miscellaneous benefits.
         The cost to BKFC of providing such benefits to Mr. Zapp was less than
         10% of his cash compensation.

(2)      Consists of contributions of $14,400 to the Bank's Profit Sharing Plan
         for Mr. Zapp's account, a matching contribution to Mr. Zapp's 401(k)
         plan account of $3,360 and premium payments of $13,245 for a
         split-dollar life insurance policy. Allocations to Mr. Zapp's ESOP
         account for fiscal year 1998 have not yet been determined.


(3)      Consists of contributions of $14,461 to the Bank's Profit Sharing Plan
         for Mr. Zapp's account, a matching contribution to Mr. Zapp's 401(k)
         plan account of $1,988, premium payments of $9,095 for a split-dollar
         life insurance policy and the $6,046 value at December 31, 1997, of
         allocations to Mr. Zapp's ESOP account.



                                       54
<PAGE>   56


(4)      Consists of contributions of $17,711 to the Bank's Profit Sharing Plan
         for Mr. Zapp's account, premium payments of $6,596 for a split-dollar
         life insurance policy and the $5,252 value at December 31, 1996, of
         allocations to Mr. Zapp's ESOP account.



DIRECTOR COMPENSATION

         Although BKFC and the Bank do not pay regularly established director's
fees, each director of the Bank, except Mr. Zapp, received a $500 bonus in
December 1998.

STOCK OPTION PLAN

         At the 1997 Annual Meeting of Stockholders of BKFC, the stockholders
approved The Bank of Kentucky Financial Corporation 1997 Stock Option and
Incentive Plan (the "Stock Option Plan"). The Board of Directors of BKFC
reserved 360,000 Shares for issuance by BKFC upon the exercise of options
granted to certain directors, officers and employees of BKFC and the Bank from
time to time under the Stock Option Plan. Due to a stock dividend in the nature
of a 2-for-1 stock split which occurred in April 1998 (the "Stock Split"), the
number of Shares reserved for issuance was increased to 720,000. Options to
purchase 1,000 Shares and 1,500 Shares were awarded in 1997 and 1998,
respectively, pursuant to the Stock Option Plan to each of the non-employee
directors, after adjustments for the Stock Split. Pursuant to the Stock Option
Plan, options to purchase a total of 27,000 Shares have been granted to
employees of BKFC and the Bank.

         The following table sets forth information regarding all grants of
options to purchase Shares of BKFC made to Mr. Zapp during the fiscal year ended
December 31, 1998:

<TABLE>
<CAPTION>
                                                   Option/SAR Grants in Last Fiscal Year
                                                         Individual  Grants
                          -------------------------------------------------------------------------------------------
                                                        % of Total Options/
                          Number of Securities            SARs Granted to
                          Underlying Options/           Employees in Fiscal     Exercise or Base
Name                      SARs Granted (#)(1)           Year  Ended 12/31/98    Price ($/Share)       Expiration Date
----                      ------------------            --------------------    ----------------      ---------------
<S>                       <C>                          <C>                      <C>                   <C> 
Robert W. Zapp                   4,000                         14.81%                 $12.25               1/16/08
</TABLE>

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

(1)      Options granted were ISOs, of which one-fifth are exercisable each year
         for five years beginning on January 16, 1999.



                                       55
<PAGE>   57

         The following table sets forth information regarding the number and
value of unexercised options held by Mr. Zapp at December 31, 1998:

<TABLE>
<CAPTION>

                             Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Values
                        --------------------------------------------------------------------------------------------------
                                                         Number of Securities Underlying          Value of Unexercised
                          Shares                             Unexercised Options/SARs         In-the-Money Options/SARs at
                        Acquired on        Value                     at 12/31/98                    12/31/98 ($)(1)
Name                    Exercise (#)      Realized            Exercisable/Unexercisable        Exercisable/Unexercisable
----                    ------------      --------            -------------------------        -------------------------
<S>                     <C>               <C>                 <C>                              <C>      
Robert W. Zapp              -0-             N/A                     -0-/4,000                         $-0-/$81,000
</TABLE>

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

(1)      For purposes of this table, the value of the option was determined by
         multiplying the number of Shares subject to unexercised options by the
         difference between the $12.25 exercise price and the fair market value
         of BKFC's Shares, which was $32.50 on December 31, 1998, based on a
         purchase of BKFC Shares on December 30, 1998. No established trading
         market for BKFC's Shares existed at December 31, 1998, BKFC's Shares
         are not traded on any securities exchange and the prices at which its
         Shares are traded are not quoted by a national quotation service.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information with respect to the
only persons known to BKFC to own beneficially more than five percent of the
Shares as of March 1, 1999:

<TABLE>
<CAPTION>
                                                         Amount and Nature                Percentage of
Name and Address(1)                                 of Beneficial Ownership(2)         Shares Outstanding
-------------------                                 --------------------------         ------------------
<S>                                                 <C>                                <C>   
Rodney S. Cain and                                       620,583 (3)                        17.64%
   Jacqueline M. Cain

R. C. Durr and
   R. C. Durr Company, Inc.                              626,266 (4)                        17.79%
</TABLE>

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

(1)      Mr. and Mrs. Cain, Mr. Durr and R. C. Durr Company, Inc., through Mr.
         Durr, its sole stockholder, may be contacted in care of BKFC at 1065
         Burlington Pike, Florence, Kentucky 41042.

(2)      A person is the beneficial owner of Shares if such person, directly or
         indirectly, has sole or shared voting or investment power over such
         Shares or has the right to acquire such voting or investment power
         within 60 days. All Shares are owned with sole voting and investment
         power by each person listed, unless otherwise indicated by footnote.

(3)      Includes 617,239 Shares held jointly by Mr. and Mrs. Cain and 1,500
         Shares that may be acquired upon the exercise of options.

(4)      Consists of 419,116 Shares owned by R. C. Durr Company, Inc. and 3,000
         Shares that may be acquired upon the exercise of options. Mr. Durr is
         the sole stockholder of R. C. Durr Company, Inc.




                                       56
<PAGE>   58

         The following table sets forth certain information with respect to the
number of Shares beneficially owned by each director of BKFC and by all
directors and executive officers of BKFC as a group as of March 1, 1999:

<TABLE>
<CAPTION>
                                                   Amount and Nature of                 Percent of Common
Name and Address(1)                               Beneficial Ownership(2)               Shares Outstanding
-------------------                               -----------------------               ------------------
<S>                                               <C>                                   <C>   
Rodney S. Cain                                          620,583 (3)                          17.64%
Ruth Seligman-Doering                                    70,440 (4)                           2.00
R. C. Durr                                              626,266 (5)                          17.79
Robert D Fulkerson                                       20,741 (6)                           0.59
Harry J. Humpert                                         25,326 (7)                           0.72
David E. Meyer                                           58,622 (8)                           1.67
Dr. John E. Miracle                                      54,964 (9)                           1.56
Mary Sue Rudicill                                        45,827 (10)                          1.30
Robert B. Sathe                                          70,440 (11)                          2.00
William E. Snyder                                        26,418 (12)                          0.75
Herbert H. Works                                         15,724 (13)                          0.45
Robert W. Zapp                                          114,067 (14)                          3.24

All directors and executive officers of
    BKFC as a group (12 persons)                      1,749,418                              49.47%
</TABLE>


(1)      Each of the persons listed in this table may be contacted at the
         address of BKFC, 1065 Burlington Pike, Florence,Kentucky 41042.

(2)      A person is the beneficial owner of Shares if such person, directly or
         indirectly, has sole or shared voting or investment power over such
         Shares or has the right to acquire such voting or investment power
         within 60 days. All Shares are owned with sole voting or investment
         power by each person listed, unless otherwise indicated by footnote.

(3)      Includes 617,239 Shares owned jointly by Mr. Cain and his wife, and 500
         Shares that may be acquired upon the exercise of options.

(4)      Includes 3,000 Shares that may be acquired upon the exercise of
         options.

(5)      Includes 419,116 Shares owned by R. C. Durr Company, Inc., of which Mr.
         Durr is the sole stockholder, and 3,000 Shares that may be acquired
         upon the exercise of options.

(6)      Includes 300 Shares held by Mr. Fulkerson's wife, 7,776 Shares held by
         Mr. Fulkerson's children, 472 Shares allocated to the Burnett Federal
         Savings Bank Employee Stock Ownership Plan (the "ESOP") account of Mr.
         Fulkerson, with respect to which Mr. Fulkerson has sole voting but no
         investment power and 430 Shares that may be acquired upon the exercise
         of options.

(7)      Includes 9,192 Shares owned by Mr. Humpert's wife and 2,000 Shares that
         may be acquired upon the exercise of options.

(8)      Includes 3,184 Shares held in trust, with respect to which Mr. Meyer
         shares investment power only as co-trustee, and 500 Shares that may be
         acquired upon the exercise of options.

(9)      Includes 22,000 Shares owned jointly by Dr. Miracle and his wife,
         11,400 Shares held in a trust of which Dr. Miracle is the trustee and
         with respect to which Dr. Miracle has sole voting and investment power
         and 500 Shares that may be acquired upon the exercise of options.

(10)     Includes 9,000 Shares owned by Belleview Sand and Gravel, Inc., of
         which Ms. Rudicill is Chairman and which is owned by Ms. Rudicill and
         her husband, and 3,000 Shares that may be acquired upon the exercise of
         options.

(11)     Includes 1,000 Shares that may be acquired upon the exercise of
         options.

(12)     Includes 2,000 Shares that may be acquired upon the exercise of
         options.


                                       57
<PAGE>   59



(13)     Includes 1,000 Shares that may be acquired upon the exercise of
         options.

(14)     Includes 20,060 Shares owned jointly by Mr. Zapp and his wife, 5,496
         Shares held by Mr. Zapp's wife as custodian for Mr. Zapp's three
         children, 29,056 Shares owned by his wife, 1,011 Shares allocated to
         Mr. Zapp's ESOP account, with respect to which Mr. Zapp has sole voting
         but no investment power, and 800 Shares that may be acquired upon the
         exercise of options.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Bank has extended loans to certain of its and BKFC's directors and
executive officers, their affiliates and members of their families. All such
loans were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral requirements, as those prevailing
at the time for comparable transactions with other persons and did not present
more than the normal risk of collectibility or other unfavorable features.

         The Bank has a lease agreement for office premises located at 1065
Burlington Pike with Mr. Durr, R. C. Durr Company, Inc. and Mr. Cain's sons,
John S. Cain, Rodney C. Cain and David Alfred Cain, each of whom is a lessor
under the lease agreement. The annual rental expense under this lease was
$178,170, $178,170 and $176,820 for the years ended December 31, 1998, 1997 and
1996, respectively. The lease has an initial term of 15 years expiring in 2006
and may, at the option of the Bank, be renewed for three successive five-year
periods.

         The Bank has a lease agreement for office premises located on Weaver
Road in Boone County, Kentucky, with Ms. Seligman-Doering and Mr. Sathe as
lessors under the lease agreement. Total rental expense under this lease was
$64,885, $64,885 and, $58,987 for the years ended December 31, 1998, 1997 and
1996, respectively. The lease has an initial term of 15 years expiring in 2007
and may, at theoption of the Bank, be renewed for three successive five-year
periods.


         The Bank has a lease agreement for office premises located on Kentucky
Highway 18 in Boone County, Kentucky, with William R. Rudicill, the husband of
Ms. Rudicill. Total rental expense under this lease was $10,051 for each of the
years ended December 31, 1998, 1997 and 1996. The lease has an initial term of
15 years expiring in 2008 and may, at the option of the Bank, be renewed for
three successive five-year periods.

         The Bank has a lease agreement for office premises located on Houston
Road in Boone County, Kentucky, with Dr. Miracle, Geraldine G. Miracle, Jennifer
A. Meyer, Maria A. Meyer, Leila L. Meyer, Herbert E. Works, Mark T. Wilson,
Nicolette Wilson, Bryan E. Wilson and Josephina Wilson, each of whom is a lessor
under the lease agreement. Geraldine Miracle is Dr. Miracle's spouse. Jennifer
Meyer, Maria Meyer and Leila Meyer are daughters-in-law of Mr. Meyer. Herbert E.
Works is the son of Mr. Works. Mark Wilson, Nicolette Wilson, Bryson Wilson and
Josephina Wilson are Mr. Works' wife's sons and their wives. The annual rental
expense under this lease was $73,467 for each of the years ended December 31,
1998, 1997 and 1996, respectively. The lease has an initial term of 15 years
expiring in 2009 and may, at the option of the Bank, be renewed for three
successive five-year periods.

         The Bank has a ground lease agreement for office premises located at
12020 Madison Pike in Nicholson, Kentucky, with Nicholson Properties LLC. R. C.
Durr owns 50% of Nicholson Properties LLC. The annual rental expense under this
agreement is $24,000. The lease has an initial term of five years expiring in
2001 and may, at the option of the Bank, be renewed for an additional term of
five years at an annual expense of $26,400.

         The Bank has a lease agreement for office premises located on U.S. 42
in Boone County, Kentucky, with Burnett Mortgage Company, LLC, of which Mr.
Humpert and Mr. Snyder are members. Total rental expense under this lease was
$59,663 for 1998. The lease was effective in May 1998 with an initial term of 15
years and may, at the option of the Bank, be renewed for three successive
five-year periods.




                                       58
<PAGE>   60




ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

                  (a)      Exhibits

                         Item 3       Amended Articles of Incorporation
                                      By-Laws

                         Item 10.     Material Contracts/Stock Option Plan

                         Item 13.     Annual Report to Stockholders

                         Item 21.     Subsidiaries of the Registrant

                         Item 23.     Consent of Crowe, Chizek and Company LLP

                         Item 99      Safe Harbor Under the Private Securities 
                                      Litigation Reform Act of 1995


                  (b)      No reports on Form 8-K were filed by BKFC during the
                           last quarter of the fiscal year covered by this
                           Report.


                                       59
<PAGE>   61


                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                                  THE BANK OF KENTUCKY FINANCIAL
                                                  CORPORATION


                                                  By  /s/ Robert W. Zapp       
                                                    ---------------------------
                                                      Robert W. Zapp,
                                                      President, Chief Executive
                                                      Officer and a Director

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



By /s/ Robert Fulkerson                        By /s/ Rodney S. Cain          
------------------------------                   -----------------------------
    Robert Fulkerson,                              Rodney S. Cain,
    Treasurer                                      Secretary and Director



Date:  3/20/99                                 Date:  3/20/99



By /s/ R.C. Durr                               By /s/ Harrry J. Humpert   
------------------------------                   -----------------------------
    R.C. Durr,                                     Harry J. Humpert,
    Director                                       Director

Date:  3/20/99                                 Date:  3/20/99






By /s/ David E. Meyer                          By /s/ John E. Miracle       
------------------------------                   -----------------------------
    David E. Meyer,                                John E. Miracle,
    Director                                       Director

Date:  3/20/99                                 Date:  3/20/99


                                       62
<PAGE>   62



By /s/ Mary Sue Rudicill                       By /s/ Robert B. Sathe       
------------------------------                   -----------------------------
    Mary Sue Rudicill,                            Robert B. Sathe,
    Director                                      Director

Date:  3/20/99                                 Date:  3/20/99



By /s/ William E. Snyder                       By /s/ Herbert H. Works     
------------------------------                   -----------------------------
    William E. Snyder,                            Herbert H. Works,
    Director                                      Director

Date:  3/20/99                                 Date:  3/20/99


                                       63
<PAGE>   63


                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER              DESCRIPTION
<S>             <C>                                                             <C>

   3.1          Articles of Incorporation of The Bank of Kentucky               Incorporated by reference to Form 8-A filed by
                Financial Corporation, as amended                               the Registrant on April 28, 1995 (the "8-A"),
                                                                                Exhibits 2(a), 2(b) and 2(c).

   3.2          By-Laws of The Bank of Kentucky Financial Corporation           Incorporated by reference to the 8-A, Exhibit
                                                                                2(d).

   10.1         Stock Option Agreement, executed with holders of Burnett        Incorporated by reference to Form S-8 filed on 
                Options                                                         May 24, 1995 (the "S-8"), Exhibit 4(c).
                

   10.2         The Bank of Kentucky Financial Corporation 1997 Stock           Incorporated by reference to Form S-8 filed on
                Option and Incentive Plan                                       October 2, 1997, Exhibit 4(d).

   21.          Subsidiaries of the Registrant                                  Incorporated by reference to Exhibit 21 to the Form
                                                                                10-KSB filed by the Registrant for the fiscal year 
                                                                                ended December 31, 1995.                           
                                                                             
                           

   23.          Consent of Crowe, Chizek and Company LLP

   27.1         Financial Data Schedule for 1998

   99.          Safe Harbor Under the Private Securities Litigation Reform
                Act of 1995
</TABLE>


                                       64