UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549
                           --------------------------

                                   Form 10-QSB

                Quarterly Report Pursuant of Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                           --------------------------

                         For the quarterly period ended:

                               September 30, 1998

                           Commission File No. 0-18868

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


           Virginia                                        54-1560968
-------------------------------                ---------------------------------
(State or other jurisdiction of                (IRS employer identification no.)
incorporation or organization)

       4095 VALLEY PIKE
      WINCHESTER, VIRGINIA                                     22602
      --------------------                                     -----
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code         (540) 869-6600

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

                        YES          X              NO
                              -------------              -------------

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

           Class                Number of Shares             Outstanding at
           -----                ----------------             --------------
         Common Stock              2,060,983                    11/06/98




<PAGE>
                         MARATHON FINANCIAL CORPORATION

                                      INDEX

PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements.


        a. Consolidated Statements of Condition as of
           September 30, 1998 and December 31, 1997 . . . . . . . . . . . 3

        b. Consolidated Statements of Income for the Nine Months
           Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . .4-5

        c. Consolidated Statements of Changes in
           Shareholders'  Equity for the Nine
           Months Ended September 30, 1998 and 1997 . . . . .  . . . . . .6

        d. Consolidated Statements of Cash Flows for
           the Nine Months Ended September 30, 1998 and 1997 . . . . . . .7-8

           Notes to Consolidated Financial Statements . . . . . . . . . . 9-11

Item 2.   Management's Discussion and Analysis of Financial Condition 
              and Results of Operations . . . . . . . . . . . . . . . . . 12-20

PART II.  OTHER INFORMATION

           Item 1.  Legal Proceedings . . . . . . . . . . . . . . . . . . 21

           Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . .21-23

Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24




                                       2

<PAGE>
<TABLE>


                                               PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
                                              MARATHON FINANCIAL CORPORATION
                                           CONSOLIDATED STATEMENTS OF CONDITION
                                                        (Unaudited)
                                                           as of
                                         September 30, 1998 and December 31, 1997
<CAPTION>
                             ASSETS                              September 30, 1998                    December 31, 1997
                                                                 -------------------                  -------------------

<S>                                                                      <C>                                  <C>       
Cash and due from banks                                                  $4,215,951                           $3,477,382
Securities (fair value: 1998, $8,665,577 and
   1997, $3,506,666)                                                      8,599,366                            3,490,709
Federal funds sold                                                        8,903,000                            3,570,000
Loans, net                                                               62,031,928                           50,517,071
Bank premises and equipment, net                                          2,560,673                            2,499,374
Accrued interest receivable                                                 403,905                              285,837
Other real estate                                                           442,155                              448,123
Other assets                                                                513,182                              537,546
                                                                 -------------------                  -------------------
           Total assets                                                 $87,670,160                          $64,826,042
                                                                 ===================                  ===================

               LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits:
   Non-interest bearing                                                 $11,185,889                           $7,992,135
   Interest bearing                                                      67,102,389                           48,443,086
                                                                 -------------------                  -------------------
           Total deposits                                               $78,288,278                          $56,435,221
Interest expense payable                                                    133,093                              104,753
Accounts payable and accrued expenses                                       218,980                              295,518
Capital lease payable                                                       252,846                              279,136
                                                                 -------------------                  -------------------
           Total liabilities                                            $78,893,197                          $57,114,628
                                                                 -------------------                  -------------------

STOCKHOLDERS' EQUITY
Preferred stock, Series A, 5% non-cumulative, no par
   value;  1,000,000 shares authorized and unissued                             - -                                  - -
Common stock, $1 par value;  20,000,000 shares
   authorized; 1998, 2,060,983 shares issued and
   outstanding; 1997, 2,055,983 shares issued and
   outstanding.                                                          $2,060,983                           $2,055,983
Capital surplus                                                           7,835,454                            7,815,454
Retained earnings (deficit)                                              (1,189,229)                          (2,164,825)
Accumulated other comprehensive income                                       69,755                                4,802
                                                                 -------------------                  -------------------
           Total stockholders' equity                                    $8,776,963                           $7,711,414
                                                                 -------------------                  -------------------

           Total liabilities and stockholders' equity                   $87,670,160                          $64,826,042
                                                                 ===================                  ===================

                              See Accompanying Notes to Consolidated Financial Statements


                                                             3

<PAGE>
                                              MARATHON FINANCIAL CORPORATION

                                             CONSOLIDATED STATEMENTS OF INCOME
                                                        (Unaudited)
<CAPTION>

                                                          For the Nine Months                   For the Quarter
                                                          Ended September 30,                 Ended September 30,
                                                        1998              1997              1998               1997
                                                        ----              ----              ----               ----
Interest income:
   Interest and fees on loans                         $4,493,928         $3,372,427        $1,589,055         $1,243,951
   Interest on securities held to maturity               116,786             51,320            51,810             22,867
   Interest on securities available for sale             108,677             64,699            47,783             21,450
   Interest on federal funds sold                        311,365             91,073           142,654             37,304
   Dividends on securities available for sale             16,042             12,262             3,967              4,232
                                                     -----------        -----------         ---------          ---------
           Total interest income                      $5,046,798         $3,591,781        $1,835,269         $1,329,804
                                                     -----------        -----------       -----------        -----------


Interest expense:
   Interest on deposits                               $2,107,473         $1,363,566          $784,948           $496,509
   Interest on leases                                     15,678             17,885             4,947              5,783
   Interest on fed funds purchased                          - -                 673              - -                - -
                                                            ----                                 ----               ---
                                                     -----------        -----------         ---------          ---------
           Total interest expense                     $2,123,151         $1,382,124          $789,895           $502,292
                                                     -----------        -----------         ---------          ---------


           Net interest income                        $2,923,647         $2,209,657        $1,045,374           $827,512


Provision for loan losses                                170,000            133,000            60,000             55,000
                                                     -----------        -----------         ---------          ---------
Net interest income after provision for
     loan loss                                        $2,753,647         $2,076,657          $985,374           $772,512
                                                     -----------        -----------         ---------          ---------


Other income:
   Service charges on deposit accounts                  $499,002           $274,184          $192,191           $106,781
   Commissions and fees                                   23,958             22,482             8,277              7,188
   Other                                                  67,232             22,215             9,845              5,809
                                                     -----------        -----------         ---------          ---------
           Total other income                           $590,192           $318,881          $210,313           $119,778
                                                     -----------        -----------         ---------          ---------








                                                             4

<PAGE>


                                              MARATHON FINANCIAL CORPORATION

                                             CONSOLIDATED STATEMENTS OF INCOME
                                                        (Continued)
<CAPTION>
                                                           For the Nine Months                  For the Quarter
                                                           Ended September 30,                 Ended September 30,
                                                         1998              1997              1998               1997
                                                         ----              ----              ----               ----

Other expenses:
   Salaries and employee benefits                     $1,125,779           $865,172          $381,833           $324,839
   Net occupancy expense of premises                     187,977            197,225            65,052             79,337
   Furniture and equipment                               277,734             84,402            91,695             37,234
   Legal and professional                                 63,632             37,712            13,389              4,290
   Stationary and Supplies                                74,729             54,881            28,901             23,983
   Postage                                                72,023             42,407            26,411             17,651
   Marketing                                              55,593             68,301            21,354             26,702
   Telephone                                              58,472             30,795            20,445             17,396
   Directors fees                                         62,360             52,250            19,200             17,450
   ATM expense                                            69,671             45,034            33,179              9,853
   Overdraft charge-offs                                  48,415             51,629            27,158             31,215
   Other operating expense                               278,512            240,247            89,017             84,314
                                                     -----------        -----------         ---------          ---------
           Total other expenses                       $2,374,897         $1,770,055          $817,634           $674,264
                                                     -----------        -----------         ---------          ---------


           Income before income taxes                   $968,942           $625,483          $378,053           $218,026

Provision for income taxes expense
      (Benefit)                                          ($6,654)         ($137,734)         $24,783            ($50,000)
                                                     -----------        -----------         ---------          ---------


           Net income                                   $975,596           $763,217          $353,270           $268,026
                                                     ===========        ===========         =========          =========



Earnings per share, basic                                  $0.47              $0.39             $0.17              $0.14
                                                           =====              =====             =====              =====

Earnings per share, assuming dilution                      $0.46              $0.39             $0.17              $0.14
                                                           =====              =====             =====              =====



                              See Accompanying Notes to Consolidated Financial Statements


                                                             5

<PAGE>


                                                   MARATHON FINANCIAL CORPORATION

                                            STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                                             (Unaudited)

                                        For the Nine Months Ended September 30, 1998 and 1997

<CAPTION>
                                                                     Accumulated
                                                                        Other          Retained                          Total
                                      Common           Capital      Comprehensive      Earnings      Comprehensive    Stockholders'
                                       Stock           Surplus      Income (Loss)      (Deficit)         Income          Equity
                                      ------           -------      -------------      ---------      ------------    -------------
Balance, December 31, 1996           $1,863,495       $7,045,502             $507     ($3,019,267)                      $5,890,237
Comprehensive income:
   Net income                                                                             763,217          763,217         763,217
   Other comprehensive
        income:
            Unrealized (loss) on
                securities available
                for sale                                                     (278)                            (278)           (278)
                                                                                                              -----
  Total comprehensive income                                                                              $762,939
                                                                                                          ========
Issuance of common stock/
     exercise of stock warrants
     (192,488 shares)                   192,488          769,952                                                           962,440 
                                     ----------       ----------             ----     -----------                       ----------
Balance, Sept. 30, 1997              $2,055,983       $7,815,454             $229     ($2,256,050)                      $7,615,616
                                     ==========       ==========             ====     ===========                       ==========


Balance, December 31, 1997           $2,055,983       $7,815,454           $4,802     ($2,164,825)                      $7,711,414
Comprehensive income:
    Net income                                                                            975,596          975,596         975,596
    Other comprehensive
        income:
           Unrealized gain on
               securities available
               for sale                                                    64,953                          64,953           64,953
                                                                                                          -------
Total comprehensive income                                                                              $1,040,549
                                                                                                        ==========
Issuance of common
      stock/exercise of stock
      options (5,000 shares)              5,000           20,000                                                            25,000
                                     ----------       ----------             ----     -----------                       ----------
Balance, Sept. 30, 1998              $2,060,983       $7,835,454          $69,755     ($1,189,229)                      $8,776,963
                                     ==========       ==========             ====     ===========                       ==========

           See Accompanying Notes to Consolidated Financial Statements

                                                                  6

<PAGE>


                                              MARATHON FINANCIAL CORPORATION

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        (Unaudited)

                                   For the Nine Months Ended September 30, 1998 and 1997
<CAPTION>
                                                                             1998                                 1997
                                                                             ----                                 ----

CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                              $975,596                             $763,217
   Adjustments to reconcile net income
          to net cash provided by operating
          activities:
           Amortization                                                      39,317                               30,471
           Depreciation                                                     218,147                              111,759
           Net discount accretion on securities                              (2,101)                              (8,488)
           Provision for loan loss                                          170,000                              133,000
           Deferred tax (benefit)                                           (21,159)                            (150,000)
           Changes in assets and liabilities:
              (Increase) decrease in other assets                            45,523                              (72,600)
              (Increase) in accrued
                   interest receivable                                     (118,068)                             (65,187)
              Decrease in accounts payable
                   and accrued expenses                                     (76,538)                             (16,669)
              Increase in interest expense payable                           28,340                                5,784
              Decrease in Other Real Estate                                   5,968
                                                                 -------------------                  -------------------
           Net cash provided by operating
               activities                                                $1,265,025                             $731,287
                                                                 ===================                  ===================

CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturities and principal payments
        on securities held to maturity                                     $313,325                           $1,107,993
   Proceeds from maturities and principal payments
        on securities available for sale                                    250,244                               97,308
   Purchase of securities held to maturity                               (2,780,690)                          (1,170,539)
   Purchase of securities available for sale                             (2,824,483)                            (573,323)
   Net (increase) in loans                                              (11,684,857)                          (7,291,645)
   Purchase of bank premises and equipment                                 (318,763)                            (847,792)
                                                                 -------------------                  -------------------
                                                                 -------------------                  -------------------
           Net cash (used in) investing activities                     ($17,045,224)                         ($8,677,998)
                                                                 -------------------                  -------------------







                                                             7

<PAGE>


                                              MARATHON FINANCIAL CORPORATION

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                        (Continued)
                                   For the Nine Months Ended September 30, 1998 and 1997

                                                                        1998                                 1997
                                                                        ----                                 ----
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in demand deposits, NOW
        accounts, and savings accounts                                  $10,921,997                           $4,464,954
   Net increase in certificates of deposits                              10,931,061                            3,769,201
   Principal payments on capital lease payable                              (26,290)                             (27,143)
   Cash dividends paid                                                                                          (111,810)
   Net proceeds from issuance of common stock                                25,000                              962,439
                                                                 -------------------                  -------------------
           Net cash provided by financing activities                    $21,851,768                           $9,057,641
                                                                 -------------------                  -------------------

   Increase in cash and cash equivalents                                 $6,071,569                           $1,110,930

           Beginning                                                      7,047,382                            4,052,434
                                                                 -------------------                  -------------------
           Ending                                                       $13,118,951                           $5,163,364
                                                                 ===================                  ===================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Cash payments  for:
          Interest                                                       $2,094,811                           $1,376,340
                                                                 ===================                  ===================

          Income Taxes                                                      $14,505                              $12,266
                                                                 ===================                  ===================


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
   ACTIVITIES

   Unrealized gain (loss) on securities
       available for sale                                                   $64,953                                ($278)
                                                                 ===================                  ===================


                              See Accompanying Notes to Consolidated Financial Statements
</TABLE>




                                                             8

<PAGE>
<TABLE>


                         MARATHON FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   In the  opinion of  management,  the  accompanying  unaudited  consolidated
     financial  statements  contain all  adjustments  (consisting of only normal
     recurring  accruals)  necessary to present fairly the financial position as
     of September  30, 1998 and December 31, 1997,  and the result of operations
     and cash flows for the nine months ended  September 30, 1998 and 1997.  The
     statements  should be read in  conjunction  with the Notes to  Consolidated
     Financial  Statements  included in the Company's Annual Report for the year
     ended December 31, 1997.

2.   The results of operations  for the nine months  period ended  September 30,
     1998 and 1997, are not necessarily indicative of the results to be expected
     for the full year.

3.   Securities held to maturity and available for sale as of September 30, 1998
     and December 31, 1997, are:
<CAPTION>

                                                                   September 30,                         December 31,
                                                                        1998                                 1997
                                                                     Amortized                            Amortized
Held to Maturity                                                        Cost                                Cost
                                                                 -------------------                  -------------------
<S>                                                                      <C>                                  <C>       
US treasury securities & obligations of
       US government corporations & agencies                             $4,007,687                           $1,452,899
Obligations of state and political subdivisions                             100,887                              254,033
                                                                 ===================                  ===================
                                                                         $4,108,574                           $1,706,932
                                                                 ===================                  ===================

<CAPTION>

                                                                        Fair                                 Fair
                                                                       Value                                Value
                                                                 -------------------                  -------------------

US treasury securities  & obligations of
       US government corporations & agencies                             $4,068,746                           $1,467,012
Obligations of state and political subdivisions                             106,039                              255,877
                                                                 ===================                  ===================
                                                                         $4,174,785                           $1,722,889
                                                                 ===================                  ===================





                                       9

<PAGE>
<CAPTION>

                                                                   September 30,                         December 31,
                                                                        1998                                 1997
                                                                     Amortized                            Amortized
Available for Sale                                                      Cost                                 Cost
                                                                 -------------------                  -------------------

US treasury securities & obligations
      of US government corporation & agencies                            $3,925,556                           $1,352,298
Mortgage backed securities                                                   25,430                               31,477
Other                                                                       470,050                              395,200
                                                                 -------------------                  -------------------
                                                                         $4,421,036                           $1,778,975
                                                                 ===================                  ===================

<CAPTION>
                                                                        Fair                                 Fair
                                                                        Value                                Value
                                                                 -------------------                  -------------------

US treasury securities & obligations
      of US government corporations & agencies                           $3,993,875                           $1,355,054
Mortgage backed securities                                                   26,867                               33,523
Other                                                                       470,050                              395,200
                                                                 -------------------                  -------------------
                                                                         $4,490,792                           $1,783,777
                                                                 ===================                  ===================


4. The consolidated entity's loan portfolio is composed of the following:
<CAPTION>

                                                                   September 30,                         December 31,
                                                                        1998                                 1997
                                                                 -------------------                  -------------------

Commercial                                                              $32,466,758                          $24,399,929
Real estate-mortgage                                                     11,312,735                           10,065,627
Real estate-construction                                                  7,335,339                            6,075,464
Installment loans to individuals                                         11,636,747                           10,552,548
                                                                 -------------------                  -------------------
                                                                        $62,751,579                          $51,093,568
Less:  allowance for loan losses                                            719,651                              576,497
                                                                 -------------------                  -------------------
Loans, net                                                              $62,031,928                          $50,517,071
                                                                 ===================                  ===================


  The company had  non-accrual  loans which were excluded from the impaired loan
  disclosure under FASB 114 which amounted to $391,955 on September 30, 1998 and
  $38,116 on December 31, 1997.
<CAPTION>
                                                                   September 30,                         December 31,
5.  Reserve for Loan Losses:                                            1998                                 1997
                                                                 -------------------                  -------------------

Balance, beginning                                                         $576,497                             $503,014
Provision charged to operating expense                                      170,000                              133,000
Recoveries                                                                   22,520                               27,823
Loan losses charged to the allowance                                        (49,366)                             (87,340)
                                                                 -------------------                  -------------------
Balance, ending                                                            $719,651                             $576,497
                                                                 ===================                  ===================
</TABLE>


                                       10

<PAGE>



6.  New Accounting Pronouncements

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities."  This  statement  requires   corporations  to  record
derivatives  on the balance  sheet as assets and  liabilities,  measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted  for  depending on the use of the  derivative  and whether it
qualifies  for  hedge  accounting.  This  statement  is not  expected  to have a
material impact on the  Corporation's  financial  statements.  This statement is
effective for fiscal years beginning after June 15, 1999, with earlier  adoption
encouraged.  The Corporation will adopt this accounting  standard as required by
January 1, 2000.

In March 1998, the American  Institute of Certified Public  Accountants  (AICPA)
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software  Developed or Obtained for Internal Use." This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. This SOP requires that entities  capitalize certain  internal-use  software
costs once certain  criteria are met.  This  statement is not expected to have a
material impact on the Corporation's financial statements.

In April 1998,  the AICPA issued SOP 98-5,  "Reporting  on the Costs of Start-Up
Activities,"  which requires the costs of start-up  activities and  organization
costs to be expensed as incurred.  This  statement  is effective  for the fiscal
year  1999  financial  statements.  This  statement  is not  expected  to have a
material impact on the Corporation's financial statements.

Effective  January 1, 1998,  the  Corporation  adopted  Statement  of  Financial
Accounting Standards No. 130, "Reporting  Comprehensive  Income." This statement
establishes  standards for reporting and the display of comprehensive income and
its  components  (revenues,  expenses,  gains and  losses)  in full for  general
purpose financial  statements.  Financial statements for prior periods have been
restated as required.


                                       11

<PAGE>


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

           General
           -------

                Marathon  Financial  Corporation  ("the  Corporation") is a bank
           holding  company  that  was  incorporated   under  the  laws  of  the
           Commonwealth  of Virginia in June 1989. The  Corporation  owns all of
           the outstanding stock of its sole subsidiary, The Marathon Bank ("the
           Bank"),  which was  incorporated  in August 1987 and  acquired by the
           Corporation in October 1990, in accordance  with the Plan of Exchange
           approved  by  the   shareholders  of  the  Bank  in  June  1990.  The
           Corporation  is  headquartered  in Frederick  County,  Virginia.  The
           Corporation  is a holding  company  for the Bank and is not  directly
           engaged in the operation of any other business.

                The Bank is engaged in the business of offering banking services
           to the general public. It offers checking accounts,  savings and time
           deposits, and commercial,  real estate,  personal,  home improvement,
           automobile,  and other  installment  and term  loans.  It also offers
           travelers checks, safe deposit,  collection,  notary public and other
           customary bank services (other than trust services) to its customers.
           The  three  principal  types  of  loans  made by the  Bank  are:  (1)
           commercial and industrial loans; (2) real estate loans; and (3) loans
           to   individuals   for   household,   family,   and  other   consumer
           expenditures.

           Total Assets
           ------------

           Total assets for the nine months ending September 30, 1998, increased
           $22,844,118 or 35.2% since December 31, 1997.  This increase in total
           assets resulted from a $11,514,857 increase in net loans or 22.8%, an
           increase  in federal  funds  sold of  $5,333,000  or  149.4%,  and an
           increase of

                                       12

<PAGE>


           $5,108,677  or 146.4% in  securities.  This equates to an increase in
           earning  assets of  $21,956,514  or 38.1% in the nine  months  ending
           September 30, 1998. The main components of the loan portfolio  growth
           was  reflected in an increase of  $8,066,829  or 33.1% in  commercial
           loans. Over half or 51.7% of the corporation's total loans are in the
           commercial  area.  The  remaining  portfolio  consists of real estate
           loans, 29.7% and installment loans, 18.6%.

           Over $5.5 million in securities  were purchased  which were comprised
           entirely  of  United  States  Treasury  notes  and U.  S.  government
           agencies.  These  purchases  netted  against  the  maturing  of  over
           $500,000 of securities account for the increase in total securities.

           Allowance for Loan Losses
           -------------------------

           The  allowance  for  loan  losses,  as of  September  30,  1998,  was
           $719,651. This is an increase of $143,154 or 24.8% since December 31,
           1997.  This gives the bank a 1.15% allowance for loan losses to total
           loans.  Management has completed an analysis on the reserve and feels
           the reserve is adequate.

           Liabilities
           -----------

           Total  deposits  for the  nine  months  ending  September  30,  1998,
           increased $21,853,057 or 38.7% since December 31, 1997.  Non-interest
           bearing  deposits  increased  by  $3,193,754  or 40.0%  and  interest
           bearing  deposits  increased by  $18,659,303  or 38.5%.  The ratio of
           non-interest  bearing deposits to total deposits remained constant at
           14.3% as of  September  30,  1998 as  compared  to 14.2% for the same
           period of 1997.


                                       13

<PAGE>


           Stockholders' Equity
           --------------------

           Total equity has increased by $1,065,549 or 13.8% since  December 31,
           1997.  The increase was due to a nine months profit of $975,596,  the
           exercise of stock  options of $25,000,  and an increase in unrealized
           gains on  securities  available  for  sale of  $64,953.  The  primary
           capital to assets  ratio is 9.9%.  For the year ended on December 31,
           1997,  this ratio was 11.9%.  The decline is due to the large  growth
           the bank has experienced over the nine months period.

           Interest Income
           ---------------

           Interest  income  totaled  $5,046,798  for  the  nine  months  ending
           September  30, 1998,  $1,455,017 or 40.5% higher than the nine months
           ending September 30, 1997. This is a direct result of the increase in
           our earning assets, which increased the interest and fee income.

           Interest Expense
           ----------------

           Total interest  expense for the nine months ending September 30, 1998
           was $2,123,151,  $741,027 or 53.6% higher than the nine months ending
           September  30,  1997.  Interest on deposits  increased by $743,907 or
           54.6% over the same period in 1997. This was the result of an overall
           increase in deposits.  Interest on capital leases for the quarter was
           $15,678, $2,207 or 12.3% less than the same period in 1997.

           Net Interest Income
           -------------------

           Net interest income for the nine months ending September 30, 1998 was
           $2,923,647  $713,990  or  32.3%  higher  than the six  months  ending
           September 30, 1997. This was the result of an increase in our earning
           assets  which more than  offset  the  effects of a decline in the net
           interest  margin.  For the period ending  September 30, 1998, the net
           interest margin was 5.69%,  down from 5.94% for the nine months ended
           September 30, 1997.

                                       14

<PAGE>


           Other Income
           ------------

           Total other income for the nine months ending  September 30, 1998 was
           $590,192, $271,311 or 85.1% higher than the same period in 1997. This
           partially is a result of a $45,000  recovery of a charged off deposit
           account.  In addition the bank  experienced an increase in the demand
           deposit area which has  contributed  $499,002 in service  charges for
           the first nine months of 1998. This is a 82.0% increase over the same
           period of 1997.

           Other Expenses
           --------------

           Total other  expenses for the nine months  ending  September 30, 1998
           were $2,374,897, $604,842 or 34.2% higher than the nine months ending
           September  30,  1997.  Salary  expense  increased  $260,607 or 30.1%,
           occupancy expense  decreased $9,248 or 4.7%,  furniture and equipment
           expense increased by $193,332 or 229.1%,  and stationery and supplies
           expense  increased  by $19,848 or 36.2% over the same period in 1997.
           Directors fees were $62,360,  an increase of 19.3% due to a change in
           the monthly  meeting  rates.  Legal and  professional  fees increased
           $25,920 or 68.7%,  mainly as a result of legal fees  incurred  in the
           recoveries  of  charged  off  accounts.  The net  increase  in  other
           expenses  is in part a result  of  staffing  and  furnishing  for two
           additional  branches which opened late in 1997. The  depreciation  of
           new equipment and the costs of maintenance contracts on the equipment
           associated  with the branch  openings caused an increase in furniture
           and equipment expense. The company also made a substantial investment
           in computer and proof equipment to keep pace with the bank's growth.


                                       15

<PAGE>


           Net Income
           ----------

           Net  income  for the  nine  months  ending  September  30,  1998  was
           $975,596, compared to $763,217 in the same period in 1997. This is an
           increase  of  $212,379  or 27.8%  over the same  period of 1997.  Net
           income for the third  quarter of 1998 was  $353,270,  representing  a
           gain of $85,244 or 31.8% greater than the third quarter of 1997.

           Liquidity and Capital Resources
           -------------------------------

           The liquidity  position of the Bank is less than it peer's because of
           a loan to  deposit  ratio of  80.2%.  In order  to  maximize  earning
           assets,  management  has exceeded the bank's policy by  maintaining a
           higher ratio than that of it's peers'. This policy exception has been
           approved by the Board of  Directors.  As the core  deposits of of the
           bank  continue to increase,  this ratio will become more in line with
           that of the industry, as evidenced with the comparison of the loan to
           deposit  ratio of 90.4% as of December  31, 1997 and 85.1% as of June
           30, 1998.

           Year 2000 Related Issues
           ------------------------

           Current Status:

           As was reported in the 10-K report for year-end  1997,  in accordance
           with sound management policy and Federal Reserve directives, the bank
           appointed a Year 2000 coordinator in early 1997. A review of computer
           software  and  related  hardware  was  initiated  and  completed.  In
           addition to information system issues, the Bank's plant and equipment
           including  heating and air  conditioning  systems,  vaults,  security
           equipment,  drive-in  equipment,  ATM's,  and office  equipment  were
           included in this review. Items that were not Year 2000 compliant were
           identified.  Third party  software  vendors and hardware  maintenance
           providers   were   contacted   and   submitted   estimates  to  bring
           non-compliant processes up to Year 2000 compatibility.

                                       16

<PAGE>


           Major  functions  to  conduct  business  in  a  routine  manner  were
           identified  as: the ability to process the deposits and loan payments
           made to existing  accounts (also known as the items processing and/or
           proof  function),  and the  ability  to  maintain  accurate  customer
           account information.

           Upon the  conclusion of this review it was  determined  that the most
           significant  and  costly  portion  of the Year 2000  readiness  (Y2K)
           project would be the Bank's in-house  computer system used to run the
           core banking applications that maintain customer account information.
           The Bank's core system is provided by BancTec  Financial  Systems and
           is run on an NCR computer using a UNIX operating system. All three of
           these  components  were found to be non Y2K  compliant.  The  banking
           application  software,  the hardware,  and the operating  system have
           been replaced and the Bank's files were converted to the new computer
           system  in July  of  1998.  The new  system  has  functioned  without
           problems  (other than routine  items) since that time. The Bank is in
           the  testing  phase to insure that the system  will  operate  without
           difficulty  as the date enters the year 2000 and beyond.  A test data
           base has  been  created  on the  system.  This  test  data  base is a
           duplicate of the entire actual banking system data base as it existed
           in July 1998, not just a sampling of selected accounts. The test data
           base will be  processed  through the year 2000 and  sampling  will be
           used to evaluate  individual account results.  It is anticipated that
           this testing will be completed in November  1998.  In addition,  as a
           primary  banking  application  vendor BancTec  Financial  Systems was
           subject to review by Federal  Banking  Regulators as well. The Bank's
           core system will be ready.  The Bank does not use a software  package
           to process new deposit  accounts and the software to prepare new loan
           documents has presented no difficulty in preparing loan

                                       17

<PAGE>


           documentation  for loans that  extend  into the year 2000.  The items
           processing area (proof machine) has been reviewed and was found to be
           Y2K compliant.  No physical plant or security  equipment  issues have
           been  discovered.  One of the ATM's  required  upgrading  and this is
           scheduled  to  occur  in  November  1998.  Several  PC's  need  to be
           replaced.  One will be taken out of service  when the  Bank's  credit
           card processor  converts to a Y2K platform in November 1998. A second
           computer is used to store reports on optical media.  This system will
           be upgraded in early 1999.  A third  computer is used to  communicate
           with our ATM processor,  HONOR, and our correspondent bank, Community
           Bankers Bank.  This computer will be replaced  before  year-end 1998.
           Transaction data received from other sources via  telecommunications,
           while important, is not material in that the volumes could be handled
           by a manual process if required.

           Costs:

           Thus far the Bank has incurred  approximately  $160M in costs related
           to the Y2K  project.  The  majority of this  expenditure  has been to
           replace  the  core  application  operating  system  described  above.
           Previously  the  Bank  was  leasing  this  system  at a cost  of $56M
           annually. As a capitalized item, annual expense will actually go down
           as a result of the lease  cancellation.  The operating  system on the
           LAN used for internal  communications  and other office  applications
           was upgraded as well and will be a capitalized  expenditure.  Both of
           these  systems  would  have been  upgraded  in the  normal  course of
           business  regardless  of the Y2K  project  but may have been  delayed
           until 1999.  Other directly  expensed items  attributable  to the Y2K
           project in 1998, are not material and are expected to total less than
           $25M.  The Y2K project will continue into 1999 and the overall impact
           to income is not projected to exceed $50M.

                                       18

<PAGE>


           Risks:

           Worst case risk scenarios  related to Year 2000 have been categorized
           in three areas: Technical problems related to sporadic or no electric
           power and no telephone  communications.  Liquidity problems caused by
           excessive  withdrawals  prior to the  millennium  change  based  upon
           public  perception of the Y2K problem or after the millennium  change
           based upon actual losses of individual depositors as a result of Y2K.
           Capital depletion as a result of loan losses if individual  borrowers
           are unable to repay debt as agreed as a result of Y2K.

           Contingency Plans:

           The Bank has  determined  that the  worst  case  scenarios  cannot be
           overcome without an  insurmountable  negative impact on 1999 earnings
           and will not attempt to plan for backup power generation or telephone
           service.  However,  regarding liquidity, the Bank plans to maintain a
           more liquid balance sheet than usual during the last quarter of 1999,
           specifically  including  more cash on hand,  to allow for  withdrawal
           amounts in excess of normal  volumes.  This increased  liquidity will
           have a negative impact on earnings rates that will not be significant
           based upon current estimates.  While the Bank's customer base is very
           diverse and industry concentrations are minimal, the Bank has started
           and will continue a review of large  deposit and loan  relationships.
           Selected  customers  have  and will be  polled  regarding  their  Y2K
           preparedness to help isolate potential problem relationships prior to
           the third quarter of 1999.  Due to the extensive  testing of the core
           computer system,  the Bank does not plan to have contingency plans in
           place to migrate to core software  provided by another  vendor or run
           on the  hardware  of a  different  manufacturer.  There are  however,
           computer  processes  within  the Bank  that can be  accomplished  via
           manual methods for varying amounts of time. The Bank will investigate
           the viability of accomplishing those task manually.

           Y2K Loan Maintenance:

           To date, the bank's focus  relative to determining  whether our major
           loan customers are ready for Y2K has revolved around a questionnaire.
           Each loan officer has been given a list of their  customers  who have
           been identified as potential Y2K risks. The criteria for being named

                                       19

<PAGE>


           on the list included  having a loan balance in excess of $100,000 and
           being   technologically   dependent   to  the  extent  that  any  Y2K
           noncompliance  would materially affect the normal course of business.
           The  technological  dependence  "test"  included a  determination  of
           whether the loan customer's  suppliers  and/or customers were running
           shops that were also technologically dependent.

           Loan  officers  have been  calling  on their  list of  customers  and
           completing the  questionnaire  with the customer's  assistance.  This
           procedure  has helped the customer  understand  more  completely  the
           risks to their business  associated  with Y2K and has helped the bank
           determine  which  customers pose material risks to the banks earnings
           relative to Y2K interruptions.

           Earlier,  all business  customers  were invited to attend a year 2000
           seminar sponsored by the bank. Speakers familiar with the Y2K problem
           conducted the meeting and highlighted the risks involved.


                                       20

<PAGE>


PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings.

           None

Item 2.    Change in Securities.

           None.

Item 3.  Defaults upon Senior Securities.

           None.

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

           None.

Item 5.    Other Information.

           None.

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

           (a) Exhibits
                  2.  Plan   of   acquisition,   reorganization,    arrangement,
                      liquidation or succession - N/A

                  3.  (i) Articles of  incorporation.  Incorporated by reference
                      as  Exhibit   3(i)  to  the   Corporation's   Registration
                      Statement  on Form S-1 filed on August 26,  1992 (File No.
                      33-51366).

                      (ii) By-laws.  Incorporated  by reference as Exhibit 3(ii)
                      to the  Corporation's  Registration  Statement on Form S-1
                      filed on August 26, 1992 (File No. 33-51366).

                  4.  Instruments  defining  the  rights  of  security  holders,
                      including Indentures - N/A


                                       21

<PAGE>


           10.  Material contracts

                   Exhibit 10.1   401(k) Plan of Marathon Financial Corporation,
                                  incorporated  herein by  reference  as Exhibit
                                  10.1   to   the   Corporation's   Registration
                                  Statement  on Form S-1 filed  August 26,  1992
                                  (File No. 33-51366).

                   Exhibit 10.2   Employment Agreement between The Marathon Bank
                                  and Donald L.  Unger,  incorporated  herein by
                                  reference as Exhibit 10.2 to the Corporation's
                                  Registration  Statement  on Form S-1  filed on
                                  August 26, 1992 (File No. 33-51366).

                   Exhibit 10.3   Lease  between  The  Marathon  Bank  and  Post
                                  Office  Plaza,  L. C. for the branch office at
                                  300  Warren  Avenue,  Front  Royal,  Virginia,
                                  incorporated  herein by  reference  as Exhibit
                                  10.3   to   the   Corporation's   Registration
                                  Statement  on Form S-1  filed  July  26,  1996
                                  (File No. 333-08995).

                    Exhibit 10.4  Lease   between  The  Marathon  Bank  and  the
                                  Lessors,   Rogers  M.  Fred  and   Clifton  G.
                                  Stoneburner  for  the  branch  office  at 1041
                                  Berryville   Avenue,   Winchester,   Virginia,
                                  incorporated   herein  by   reference  to  the
                                  Corporation's  Annual  Report on Form 10-K for
                                  the year  ended  December  31,  1995 (File No.
                                  0-18868).

                    Exhibit 10.5  Lease   between  The  Marathon  Bank  and  the
                                  lessor,  H. K.  Benham,  III  for  the  branch
                                  office   at   1447   North   Frederick   Pike,
                                  Winchester, Virginia.

                    Exhibit 10.6  Lease   between  the  Marathon  Bank  and  the
                                  Lessors,  Keith R. Lantz and Mary G. Lantz for
                                  land  upon   which  the  Bank  has   placed  a
                                  double-wide  modular  unit to house the branch
                                  office at 1014 South Main  Street,  Woodstock,
                                  Virginia, filed herein (File No. 0-18868).

                    Exhibit 10.7  1996  Long-Term  Incentive  Plan  incorporated
                                  herein by  reference  as to the  Corporation's
                                  Proxy  Statement  for 1997  Annual  Meeting of
                                  Stockholders filed April 7, 1997.

           11.  Statement re:Computation of Per Share Earnings - See attached

           15.  Letter re:unaudited interim financial information - N/A

           18.  Letter re:change in accounting principles - N/A

           19. Report furnished to security holders - N/A


                                       22

<PAGE>


           22.  Published report regarding matters submitted to vote of security
                holders - N/A

           23.  Consents of experts and counsel - N/A

           24.  Power of attorney - N/A

           27.  Financial Data Schedule - See attached

           99.  Additional Exhibits - None

           (b)  Reports on Form 8-K - None



                                       23

<PAGE>


SIGNATURES

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


                                     MARATHON FINANCIAL CORPORATION



DATE:  September 30, 1998            /s/ Donald L. Unger
                                     --------------------------------------
                                     DONALD L. UNGER
                                     PRINCIPAL EXECUTIVE OFFICER




DATE:  September 30, 1998            /s/ Frederick A. Board
                                     --------------------------------------
                                     FREDERICK A. BOARD
                                     PRINCIPAL FINANCIAL OFFICER








                                       24