UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   FORM 10-QSB

[Mark One]

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

For the quarterly period ended September 30, 1998

                                       OR

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

For the transition period from ____________ to ______________

Commission file number 0-13311

                             CityFed Financial Corp.
                             -----------------------
        (Exact name of small business issuer as specified in its charter)

                   Delaware                            22-2527684
                   --------                            ----------
 (State or other jurisdiction of incorporation        (IRS Employer
               or organization)                    Identification No.)

          PO Box 3126, Nantucket, MA                      02584
          --------------------------                      -----
   (Address of principal executive offices)            (Zip Code)

                                 (508) 228-2366
                                 --------------
                           (Issuer's telephone number)

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 registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of October 30, 1998, the number of
shares of outstanding common stock was 18,715,609.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>



                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

CITYFED FINANCIAL CORP.

STATEMENTS  OF  FINANCIAL  CONDITION  
September  30, 1998 and  December 31, 1997
(Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                  September 30, 1998  December 31,
                                                                  ------------------  ------------
                                                                     (Unaudited)         1997
                                                                     -----------         ----
<S>                                                                   <C>             <C>       
ASSETS

CASH                                                                   $      41      $      66
INVESTMENT SECURITIES - At amortized cost (Market Value:
    September 30, 1998, $9,354; December 31, 1997, $9,211)                 9,341          9,204
OTHER ASSETS                                                                 153            163
                                                                       ---------      ---------

TOTAL ASSETS                                                           $   9,535      $   9,433
                                                                       =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
    Contingency reserve                                                $   6,631      $   6,700
    Other liabilities                                                      4,391          4,442
                                                                       ---------      ---------

      Total liabilities                                                   11,022         11,142

STOCKHOLDERS' EQUITY:
    Preferred stock, 30,000,000 shares authorized:
       $2.10 cumulative convertible, Series B, $25.00 par value,
           issued and outstanding: 2,538,850 in 1998 and 2,539,400
           in 1997                                                        63,471         63,485
       Series C Junior, cumulative, $.01 par value, liquidation
           preference $3.00 per share, shares issued and
           outstanding: 8,257,079 in 1998 and 1997                            82             82
  Common stock, $.01 par value, 100,000,000 shares authorized,
       issued:  18,914,609 in 1998 and 18,913,646 in 1997,
       outstanding: 18,715,609 in 1998 and 18,714,646 in 1997                188            188
  Additional paid-in capital                                             108,868        108,854
  Accumulated deficit                                                   (173,096)      (173,318)
  Treasury stock (199,000 shares of common stock)                         (1,000)        (1,000)
                                                                       ---------      ---------

       Total stockholders' deficit                                        (1,487)        (1,709)
                                                                       ---------      ---------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                            $   9,535      $   9,433
                                                                       =========      =========

See notes to financial statements
</TABLE>





                                       2
<PAGE>




<TABLE>
<CAPTION>

CITYFED FINANCIAL CORP.

STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands, Except Per Share Data)
(Unaudited)

                                                  Three Months Ended            Nine Months Ended
                                                  ------------------            -----------------
                                                     September 30,                September 30,
                                                     -------------                -------------
                                                  1998           1997            1998           1997
                                                  ----           ----            ----           ----
<S>                                          <C>             <C>             <C>             <C>
INCOME:
   Interest on investments                   $        136    $        134    $        379    $        385
                                             ------------    ------------    ------------    ------------

     Total income                                     136             134             379             385
                                             ------------    ------------    ------------    ------------

EXPENSES:
   Compensation and employee benefits                  30              29              93              92
   Other operating expenses                            25              23              64              83
                                             ------------    ------------    ------------    ------------

     Total expenses                                    55              52             157             175
                                             ------------    ------------    ------------    ------------

INCOME FROM CONTINUING OPERATIONS                      81              82             222             210

LOSS FROM DISCONTINUED OPERATIONS                      --              --              --              --
                                             ------------    ------------    ------------    ------------

NET INCOME                                   $         81    $         82    $        222    $        210
                                             ============    ============    ============    ============


NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS   $     (2,078)   $     (2,077)   $     (6,254)   $     (6,267)

BASIC LOSS PER SHARE:
   From continuing operations                $      (0.11)   $      (0.11)   $      (0.33)   $      (0.33)
   From discontinued operations              $         --    $         --    $         --    $         -- 
   Net loss                                  $      (0.11)   $      (0.11)   $      (0.33)   $      (0.33)

AVERAGE SHARES OUTSTANDING                     18,715,609      18,714,646      18,715,368      18,714,646

DIVIDENDS PER COMMON SHARE                             --              --              --              -- 

See notes to financial statements 

</TABLE>



                                       3
<PAGE>




<TABLE>
<CAPTION>

CITYFED FINANCIAL CORP.

STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited)

                                                        1998           1997
                                                        ----           ----
<S>                                                     <C>           <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
     Interest received                                  $ 358         $ 271
     Operating expenses                                  (265)         (189)
                                                        -----         -----

       Net cash provided by operating activities           93            82
                                                        -----         -----

CASH FLOWS FROM INVESTING ACTIVITIES:
     Increase in investment securities                   (116)         (153)
     Other - net                                           (2)           --
                                                        -----         -----

       Net cash used in investing activities             (118)         (153)
                                                        -----         -----

NET DECREASE IN CASH                                      (25)          (71)

CASH AT BEGINNING OF PERIOD                                66            85
                                                        -----         -----

CASH AT END OF PERIOD                                   $  41         $  14
                                                        =====         =====

RECONCILIATION OF NET INCOME TO NET CASH
     PROVIDED BY OPERATING ACTIVITIES:
     Net income                                         $ 222         $ 210
     Loss from discontinued operations                     --            -- 
     Contingency reserve payments                         (70)           (5)
     Decrease (increase) in other assets                   10            (2)
     Decrease in accrued income and expense, net          (69)         (121)
                                                        -----         -----

NET CASH PROVIDED BY OPERATING ACTIVITIES               $  93         $  82
                                                        =====         =====
</TABLE>

See notes to financial statements.




                                       4
<PAGE>





CITYFED FINANCIAL CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)

1.    Until  December  8,  1989,  CityFed  Financial  Corp.  (the  "Company"  or
      "CityFed") was a unitary  savings and loan holding  company that conducted
      its business  primarily through its ownership of City Federal Savings Bank
      ("City Federal") and its subsidiaries.  On December 7, 1989, the Office of
      Thrift Supervision ("OTS") of the United States Department of the Treasury
      declared  City  Federal  insolvent,  ordered it closed and  appointed  the
      Resolution  Trust  Corporation  ("RTC") as receiver of City Federal.  As a
      result of the  receivership  of City  Federal,  the Company has  undergone
      material  changes in the nature of its business and is no longer operating
      as a  savings  and loan  holding  company.  At  September  30,  1998,  the
      Company's business activities consisted primarily of attempting to resolve
      outstanding claims against the Company and the management of investments.

      As a result of the receivership of City Federal,  the financial statements
      of  CityFed  at  December  31,  1989,  for the year  then  ended,  and for
      subsequent  periods,   reflect  CityFed's  interest  in  City  Federal  as
      discontinued  operations.  The  financial  statements  have been  prepared
      assuming the Company will continue as a going concern.  As discussed above
      and in Note 4,  substantially  all of the  operations  of the Company have
      been  discontinued  and the Company is subject to a number of  commitments
      and  contingencies  that  raise  substantial  doubt  about its  ability to
      continue as a going concern.  Except as indicated in Note 4, the financial
      statements  do not  include  any  adjustments  that might  result from the
      outcome of these  uncertainties.  Currently,  CityFed is not conducting an
      operating  business.  At the present time,  management  has invested,  and
      intends to invest, CityFed's assets on a short-term basis.

2.    The financial  statements should be read in conjunction with the financial
      statements and notes thereto included in the Company's Form 10-KSB for the
      year ended December 31, 1997 ("1997 Form 10-KSB").  The interim statements
      reflect  all  adjustments  of a normal  recurring  nature that are, in the
      opinion of management,  necessary for a fair  presentation  of the results
      and financial position for the periods presented.

3.    In July 1989,  the Company's  Board of Directors  suspended the payment of
      dividends  on all three  currently  outstanding  series  of the  Company's
      stock. These include the Company's common stock, $0.01 par value per share
      ("Common Stock"), on which the Company had been paying quarterly dividends
      of one cent per share; the Series C, Junior  Preferred Stock,  Cumulative,
      $0.01 par value per share ("Series C Stock"), with a quarterly dividend of
      ten cents per share; and the $2.10 Cumulative Convertible Preferred Stock,
      Series B, $25.00 par value per share ("Series B Stock"),  with a quarterly
      dividend of $0.525 per share.  Dividends  on both series of the  Company's
      preferred  stock are  cumulative.  At  September  30,  1998,  dividends in
      arrears were $49.3 million and $30.6 million on the Company's Series B and
      Series C Stock, respectively.

4.    COMMITMENTS AND CONTINGENCIES

                                       5
<PAGE>


      NOTICE  OF  CHARGES  AND  HEARING  FOR CEASE  AND  DESIST  ORDER TO DIRECT
      RESTITUTION AND OTHER APPROPRIATE RELIEF AND NOTICE OF ASSESSMENT OF CIVIL
      MONEY  PENALTIES - On June 2, 1994, the OTS issued a Notice of Charges and
      Hearing  for  Cease  and  Desist  Order to  Direct  Restitution  and Other
      Appropriate  Relief  and Notice of  Assessment  of Civil  Money  Penalties
      ("Notice of Charges") against CityFed and against Gordon E. Allen, John W.
      Atherton,  Jr.,  Edwin M.  Halkyard,  Alfred J. Hedden,  Peter R. Kellogg,
      William A.  Liffers  and  Gilbert  G.  Roessner  ("Respondents"),  who are
      current or former directors and, in some cases, officers of CityFed and of
      CityFed's former subsidiary, City Federal.

      In the Notice of Charges,  the OTS  alleges  that  CityFed  "engaged in an
      unsafe or unsound practice, violated a written agreement entered into with
      the agency and  violated a condition  imposed in writing by the agency" by
      "failing to cause the net worth of City  Federal to be  maintained  at the
      levels  required by the  applicable  capital  requirements."  The "written
      agreement"  and the  "condition  imposed  in  writing"  alleged by the OTS
      refer, respectively,  to the Stipulation of CityFed Financial Corp., dated
      December 4, 1984  ("Stipulation"),  that  CityFed  provided to the Federal
      Savings and Loan Insurance  Corporation  ("FSLIC") in connection  with the
      approval  by the  Federal  Home Loan Bank  Board  ("FHLBB")  of  CityFed's
      acquisition of City Federal in December 1984, and to FHLBB  Resolution No.
      84-664,  dated November 21, 1984, that approved  CityFed's  acquisition of
      City Federal on the condition  that,  among other things,  CityFed provide
      the Stipulation to the FSLIC.  The  Stipulation  provided that, as long as
      CityFed controlled City Federal, CityFed would cause the net worth of City
      Federal to be  maintained  at a level  consistent  with that  required  by
      regulations and would infuse sufficient  additional  equity capital,  in a
      form satisfactory to the regulators, to effect compliance with the capital
      requirement.  The Notice of Charges  alleges  that  CityFed  "has been and
      continues  to be unjustly  enriched  in  connection  with" the  violations
      alleged by the OTS, and that such violations "involve a reckless disregard
      for the law or any  applicable  regulations  or prior  order of either the
      FHLBB or the OTS." The Notice of Charges requests that an order be entered
      by  the  Director  of the  OTS  requiring  CityFed  to  make  restitution,
      reimburse,  indemnify or  guarantee  the OTS against loss in an amount not
      less than $118.4 million,  which the OTS alleges represents the regulatory
      capital deficiency reported by City Federal in the fall of 1989.

      In the Notice of  Charges,  the OTS also  assesses a civil  money  penalty
      against  CityFed  on  the  grounds  that  CityFed  allegedly   "knowingly"
      committed the alleged violations  described above and allegedly "knowingly
      or recklessly  caused a substantial  loss to City  Federal." The amount of
      the civil money penalty  assessed against CityFed in the Notice of Charges
      is $2,649,600.

      With respect to the  Respondents,  the Notice of Charges  alleges that the
      Respondents,  as directors of CityFed,  "had an affirmative  obligation to
      see that CityFed complied with the net worth  maintenance  obligation" and
      that, "by failing to direct CityFed to cause the net worth of City Federal
      to be  maintained  at  the  levels  required  by  the  applicable  capital
      requirements,  the [Respondents] violated a written agreement entered into
      with the agency,  violated a  condition  imposed in writing by the agency"
      and "engaged in an unsafe or unsound  act." The Notice of Charges  alleges


                                       6
<PAGE>


      that some of the Respondents (Messrs. Allen, Atherton, Hedden, Kellogg and
      Roessner)  "have been and continue to be unjustly  enriched in  connection
      with their  violations by the payment of their legal expenses with CityFed
      assets," an allegation that refers to the advancement by CityFed, pursuant
      to its obligations in its Bylaws and Restated Certificate of Incorporation
      (see  "Indemnification  Claims"  below),  of  litigation  expenses to such
      Respondents  in  connection  with  the  action  by the  RTC  against  such
      Respondents  and other  current and former  directors  and/or  officers of
      CityFed  and/or City Federal in the United States  District  Court for the
      District  of  New  Jersey  ("N.J.  Court"),   captioned  RESOLUTION  TRUST
      CORPORATION  V.   ATHERTON,   ET  AL.,  Civil  Action  No.  93-1811  (GEB)
      (consolidated  with RESOLUTION TRUST CORPORATION V. SIMMONS,  ET AL., Civ.
      Action No. 92-5261-B  (GEB)) ("Second RTC Action").  CityFed had made such
      advancement  of  litigation  expenses  in  accordance  with the  agreement
      between CityFed and the RTC entered into as of December 14, 1992 ("Expense
      Agreement"),  in connection with the action the RTC filed against CityFed,
      captioned RESOLUTION TRUST CORPORATION V. CITYFED FINANCIAL CORP., ET AL.,
      Civil Action No. 92-5261-A (GEB) ("First RTC Action"),  in the N.J. Court.
      The Notice of Charges requests that an order be entered by the Director of
      the  OTS  requiring  the  Respondents  to  make  restitution,   reimburse,
      indemnify  or  guarantee  the OTS against  loss in an amount not less than
      $400,000,  which the OTS alleges  represents  the amount of legal expenses
      CityFed  paid on their  behalf from April to December  1993 in  connection
      with the Second RTC Action.

      In the Notice of  Charges,  the OTS also  assesses a civil  money  penalty
      against the  Respondents  on the grounds  that the  Respondents  allegedly
      "violated a condition imposed in writing and/or a written  agreement." The
      amount of civil  money  penalties  assessed  against  the  Respondents  is
      $51,750 each.

      The Notice of  Charges  states  that the civil  money  penalties  assessed
      against  CityFed  and the  Respondents  must be paid to the United  States
      Department of the Treasury within 60 days of the issuance of the Notice of
      Charges.  The Notice of Charges also seeks  reimbursement for the OTS from
      CityFed and the Respondents for all costs and expenses associated with the
      investigation  and prosecution of the  administrative  enforcement  action
      commenced  by the  filing  of the  Notice  of  Charges.  CityFed  and  the
      Respondents requested a hearing on the assessment of civil money penalties
      against  them,  and such hearing will be combined  with the hearing on the
      other  matters set forth in the Notice of Charges.  During the pendency of
      such  hearing,  the civil money  penalty  assessments  will not be a final
      order  of the OTS and  will  not be  enforceable  against  CityFed  or the
      Respondents.

      The  Notice of  Charges  provides  that a hearing  will be held  before an
      administrative  law judge on the  question  of  whether a final  cease and
      desist order should be issued against CityFed and the Respondents. CityFed
      and the  Respondents  filed an answer in response to the Notice of Charges
      and have filed motions for summary disposition of the OTS' claims.

      On  November  30,  1995,  the OTS issued an Amended  Notice of Charges and
      Hearing  for  Cease  and  Desist  Order to  Direct  Restitution  and Other
      Appropriate  Relief  and Notice of  Assessment  of Civil  Money  Penalties
      ("Amended  Notice of Charges")  that is identical to the Notice of Charges
      except  that the  Amended  Notice of  Charges  includes a  reference  to a
      federal statutory  provision not referred to in the Notice of Charges that


                                       7
<PAGE>



      the OTS asserts  provides an additional  basis for the issuance of a Cease
      and Desist Order against CityFed and the Respondents.

      On February 1, 1996, the  Administrative  Law Judge ("ALJ") presiding over
      the OTS's  administrative  proceeding  against CityFed and the Respondents
      issued a Prehearing  Order  granting the OTS's Motion for Partial  Summary
      Disposition  with  respect to CityFed  and  denying  CityFed's  Motion for
      Partial  Summary  Disposition  of the  OTS's  Assessment  of  Civil  Money
      Penalties  and  CityFed's  Cross-Motion  for  Summary  Adjudication.   The
      Prehearing Order also denied the  Respondents'  Motion for Partial Summary
      Disposition.  In the  Prehearing  Order,  the ALJ concluded that CityFed's
      retention  of  dividends   and  other  funds   received  from  its  former
      subsidiary,  City  Federal,  constitutes  "unjust  enrichment"  within the
      meaning of 12 U.S.C.  Section 1818(b)(6) and that the Stipulation  CityFed
      provided to the FSLIC in December 1984  regarding  maintenance  of the net
      worth of City Federal is enforceable by the OTS against CityFed.

      On March 27, 1996, CityFed filed a motion for reconsideration of the ALJ's
      Prehearing  Order.  On April  26,  1996,  the OTS  filed a  memorandum  in
      opposition to CityFed's motion for  reconsideration.  On May 29, 1996, the
      ALJ denied CityFed's motion for reconsideration. On June 12, 1996, CityFed
      moved for  interlocutory  review by the Acting  Director of the OTS of the
      conclusions in the Prehearing Order.

      On August 20, 1997, OTS Director  Nicolas  Retsinas  issued a Decision and
      Order  granting  CityFed's  Motion  for  Interlocutory  Review.   Director
      Retsinas  concluded  that  the  ALJ  had  erred  in  recommending  summary
      disposition on the OTS net worth  maintenance  claim against CityFed.  The
      Director held that there were  disputed  issues of fact on that claim that
      precluded  summary  judgment,  and he  remanded  the  case  to the ALJ for
      further proceedings consistent with his decision. The Director agreed with
      the ALJ that the 5-year  federal  statute  of  limitations  applicable  to
      "fines,  penalties and forfeitures"  did not bar OTS' restitution  claims.
      However,  the Director reserved to a later date a decision on whether that
      statute  would bar OTS' civil money penalty  claims.  OTS has said it does
      not intend to pursue  civil money  penalty  claims  against  CityFed if it
      obtains  an award  of  restitution  in  excess  of  CityFed's  net  worth.
      Following the Director's decision, the Administrative Law Judge has lifted
      the stay of  proceedings,  and CityFed and the OTS have begun to engage in
      discovery on the net worth maintenance claim.

      For further information regarding the Stipulation,  see "First RTC Action"
      below.

      TEMPORARY ORDER TO CEASE AND DESIST - Also on June 2, 1994, the OTS issued
      a Temporary Order to Cease and Desist ("Temporary Order") against CityFed.
      The Temporary Order required CityFed to post, by 12:00 noon on the seventh
      calendar day  following  service of the  Temporary  Order,  $9,000,000  as
      security for the payment of the amount of  restitution  and  reimbursement
      sought by the OTS in its Notice of Charges. As CityFed's total assets were
      $9.1 million on June 30, 1994,  the amount  sought by the OTS  represented
      substantially all of the assets of CityFed.

      The  Temporary  Order also  requires  CityFed  to "cease  and desist  from


                                       8
<PAGE>



      directly or indirectly  causing the use, sale,  transfer or encumbrance of
      funds or other  assets of any nature  whatsoever  in which  CityFed  has a
      legal or beneficial interest, whether directly or through any other person
      or entity,  except as provided in" the Temporary Order.  However,  CityFed
      may pay ordinary and  reasonable  operating  expenses of up to $15,000 per
      month  and  may,  subject  to  certain  limitations,  pay  reasonable  and
      necessary legal fees and expenses in its own defense.  The Temporary Order
      effectively  prohibits  CityFed  from  advancing  litigation  expenses  or
      providing indemnification pursuant to its obligations under its Bylaws and
      Restated Certificate of Incorporation. See "Indemnification Claims" below.
      Although CityFed attempted to have the Temporary Order set aside in court,
      it was unsuccessful.

      On June 9, 1994,  CityFed filed a Complaint for Injunctive and Declaratory
      Relief,  an Application for a Temporary  Restraining Order and Preliminary
      Injunction and a supporting Memorandum of Points and Authorities and other
      related  papers in the United  States  District  Court for the District of
      Columbia  ("D.C.  Court") in a case captioned  CITYFED  FINANCIAL CORP. V.
      OFFICE  OF  THRIFT   SUPERVISION  AND  JONATHAN  L.  FIECHTER,   Case  No.
      1:94CV01273 (HHG) ("Injunction Action"). In the Injunction Action, CityFed
      sought  a  temporary  restraining  order  and an  injunction  against  the
      Temporary  Order that would set aside,  limit or suspend the  enforcement,
      operation and effectiveness of the Temporary Order.

      The D.C.  Court held a hearing on motions  pending before it on August 15,
      1994.  On  September  8,  1994,  the D.C.  Court  issued an Order  denying
      CityFed's and the intervening  Respondents'  motions to set aside,  or, in
      the alternative,  modify the Temporary Order.  CityFed and the intervening
      Respondents  filed  notices of appeal from the D.C.  Court's  Order to the
      United States Court of Appeals for the District of Columbia Circuit ("D.C.
      Circuit"),  and the  intervening  Respondents  filed a motion  in the D.C.
      Circuit for an expedited  appeal and an order enjoining the enforcement of
      the Temporary  Order during the pendency of the appeal.  The D.C.  Circuit
      denied the intervening  Respondents'  motion for injunction on October 21,
      1994.  The  caption of the case in the D.C.  Circuit is CITYFED  FINANCIAL
      CORP., ET AL. V. OFFICE OF THRIFT  SUPERVISION,  ET AL., Nos.  94-5254 and
      5255 ("D.C. Appeal").

      On October 26, 1994,  CityFed and the OTS entered into an Escrow Agreement
      ("Escrow Agreement") with CoreStates Bank, N.A. ("CoreStates") pursuant to
      which CityFed  transferred  substantially  all of its assets to CoreStates
      for  deposit  into an  escrow  account  to be  maintained  by  CoreStates.
      Pursuant to the Escrow Agreement,  CoreStates  executes a wire transfer of
      $15,000  from the escrow  account to CityFed on the first  business day of
      every  month.  The Escrow  Agreement  provides  that  CityFed may sell and
      purchase  securities in the escrow  account,  and that  CoreStates will be
      paid a fee of  $2,500  per  year,  plus  reimbursement  for  out-of-pocket
      expenses,  for  serving as escrow  agent.  CityFed's  assets in the escrow
      account  continue  to be  invested  in  money  market  instruments  with a
      maturity of one year or less and money market mutual funds. Withdrawals or
      disbursements  from the  escrow  account  are not  permitted  without  the
      written  authorization  of the OTS, other than for (1) the $15,000 monthly
      transfer to CityFed, (2) the disbursement of funds on account of purchases
      of  securities  by  CityFed  and (3) the  payment  of the  escrow  fee and
      expenses to CoreStates. The Escrow Agreement also provides that CoreStates



                                       9
<PAGE>



      will  restrict  the escrow  account in such a manner as to  implement  the
      terms of the  Escrow  Agreement  and to  prevent  a change  in  status  or
      function of the escrow account unless authorized by CityFed and the OTS in
      writing.  CoreStates  will  provide  to the OTS a copy  of all  statements
      regarding the escrow account provided to CityFed.

      On July 11, 1995, the D.C.  Circuit  affirmed the denial by the D.C. Court
      of the motions by CityFed and the intervening  Respondents for a temporary
      restraining order and an injunction against the Temporary Order.

      The Crime Control Act of 1990 provides  that  commitments  to maintain the
      capital  of  federally  insured  depository  institutions,  such  as  City
      Federal, are afforded a priority over other unsecured claims in a bankrupt
      corporation's  estate to the extent provided in 11 U.S.C.  Section 507(a).
      Thus,  if CityFed is held liable for the amount of capital that would have
      been  required  to  cause  City  Federal  to meet its  regulatory  capital
      requirements,  a claim based on such  liability  would have  priority over
      other  unsecured  claims  against  CityFed's  estate in  bankruptcy to the
      extent provided in such section.

      FIRST RTC  ACTION - On  December  7, 1992,  the RTC,  in its  capacity  as
      receiver for City Savings,  and the RTC, in its corporate capacity,  filed
      the First RTC Action in the N.J.  Court  against  CityFed  and against two
      former officers of City Federal. In its complaint in the First RTC Action,
      the RTC, in its corporate capacity, sought, INTER ALIA, to recover damages
      in excess of $12 million against CityFed  resulting from CityFed's alleged
      violation of the Stipulation to maintain the net worth of City Federal.

      In  connection  with the First RTC Action,  the RTC filed an Order to Show
      Cause with  Temporary  Restraints  Freezing  Assets of  Defendant  CityFed
      Financial  Corp.  ("Order to Show  Cause")  seeking an order from the N.J.
      Court  placing all assets of CityFed  under the control of the N.J.  Court
      and  related  relief  pending a hearing on a  preliminary  injunction.  On
      January 5, 1993,  CityFed and the RTC entered into the Expense  Agreement,
      effective as of December 14, 1992,  whereby the RTC agreed to refrain from
      seeking  the  relief  sought in its Order to Show  Cause.  In the  Expense
      Agreement,  the RTC further  agreed that  CityFed  could make  payments of
      ordinary   and   reasonable   business   expenses,   including   aggregate
      compensation and employee  benefits in amounts not to exceed those paid in
      1991 for John W. Atherton, Jr., as President of CityFed, and for CityFed's
      corporate secretary, directors' fees and reasonable expenses in connection
      with  attendance at meetings of CityFed's  Board of Directors,  reasonable
      and necessary fees for outside auditing  services,  taxes,  transfer fees,
      and rent and utilities for CityFed's offices in Florida and Massachusetts,
      reasonable corporate legal fees, and reasonable defense costs,  attorneys'
      fees and/or  disbursements  in  connection  with the First RTC Action and,
      relating  only to the  defense  of  CityFed,  with  respect  to the action
      originally  filed in the United  States  District  Court for the  Northern
      District of  California  captioned  RIDDER,  ET AL. V.  CITYFED  FINANCIAL
      CORP., C92-4649-BAC,  which was dismissed without prejudice and refiled in
      the N.J. Court captioned RIDDER, ET AL. V. CITYFED FINANCIAL CORP.,  (Case
      No. 93-1676) (HLS) ("Ridder  Action").  Pursuant to the Expense Agreement,
      CityFed had been giving a monthly  accounting of such  expenditures to the
      RTC, and the RTC had the right to apply to the N.J. Court in the First RTC
      Action for an appropriate Order to prohibit such expenditures.


                                       10
<PAGE>

      

      CityFed  agreed in the Expense  Agreement  to give the RTC written  notice
      prior to making any payment of extraordinary  expenses of more than $5,000
      and of any payment on behalf of CityFed  (other  than with  respect to the
      First RTC Action and the Ridder Action) and/or on behalf of any individual
      or individuals  with respect to whom CityFed is obligated under its Bylaws
      to  make  such  payment  for  defense   costs,   attorneys'   fees  and/or
      disbursements  with respect to any other  then-pending  or threatened,  or
      subsequently   initiated   or   threatened,    civil   or   administrative
      investigation,  action  or  proceeding.  The RTC had the  right to make an
      application   to  the  N.J.   Court  to  prohibit   the  payment  of  such
      extraordinary  expenses  of more  than  $5,000  and  such  defense  costs,
      attorneys' fees and/or disbursements.

      By its terms,  the  Expense  Agreement  remained  in full force and effect
      until (a) it was terminated by mutual  agreement of CityFed and the RTC in
      writing,  (b) it was  terminated by an order of the N.J.  Court or (c) the
      N.J.  Court  entered a final order with respect to the RTC's claim against
      CityFed in the First RTC Action regarding the Stipulation.

      On September  30, 1993,  CityFed was advised by OTS staff that it intended
      to  recommend  that  the  OTS  initiate  an   administrative   enforcement
      proceeding  against  CityFed.  The OTS staff  reaffirmed  its intention to
      recommend that the OTS initiate such a proceeding in meetings  between OTS
      staff and  representatives of CityFed in April 1994. In light of this, and
      at the request of the RTC and  CityFed,  the N.J.  Court  entered  several
      successive  orders  staying the First RTC Action from October 1993 through
      June  1994.  The  Orders  staying  the First RTC Action did not affect the
      Expense  Agreement,  except  that the  Orders  provided  that the  Expense
      Agreement  would  terminate upon the effective date of any order issued by
      the OTS, or of any consent order or agreement between the OTS and CityFed,
      that  addressed the subject matter of the Expense  Agreement.  In light of
      the filing by the OTS of the  Notice of  Charges on June 2, 1994,  the RTC
      and  CityFed  agreed  to (1) a Consent  Order  Dismissing  Claims  Against
      Defendant CityFed Financial Corp.  Without  Prejudice,  which provides for
      the dismissal  without prejudice of the RTC's claim against CityFed in the
      First RTC Action,  and which was entered as an Order of the N.J.  Court on
      July 19, 1994; and (2) a Tolling Agreement, effective as of July 11, 1994,
      pursuant  to which  CityFed  and the RTC  agreed  (a) to toll,  during the
      pendency  of the OTS'  proceeding  against  CityFed,  the  running  of the
      statute of  limitations  with  respect to the claims the RTC had  asserted
      against  CityFed  in the  First  RTC  Action  and (b)  that,  if the  OTS'
      proceeding against CityFed results in a determination that the Stipulation
      was void and/or  unenforceable as a matter of law, or that CityFed did not
      violate the Stipulation, the RTC would be bound by such determination.

      The RTC also sought,  in its complaint in the First RTC Action, to recover
      damages in excess of $130 million from two former officers of City Federal
      resulting  from their  alleged  negligence,  gross  negligence,  breach of
      fiduciary  duty and other duties and other  wrongful and improper  conduct
      while serving as officers of City Federal in connection with the approval,
      funding,  management,  oversight  and  workout  of two large  acquisition,
      development and  construction  loans for two projects  located in Florida,
      Grand  Harbor  ("Grand   Harbor")  and  Woodfield   Country  Club  Estates
      ("Woodfield").  On February  9, 1993,  upon motion of CityFed in the First



                                       11
<PAGE>



      RTC Action,  the N.J.  Court  entered an order  severing  the RTC's claims
      against  CityFed from the RTC's claims against the two former  officers of
      City Federal.

      SECOND  RTC  ACTION - On April  26,  1993,  the RTC,  in its  capacity  as
      receiver for City Savings,  filed the Second RTC Action in the N.J.  Court
      against John W. Atherton, Jr., Gordon E. Allen, Alfred J. Hedden, Peter R.
      Kellogg,  John Kean,  Gilbert G.  Roessner,  George E. Mikula and James P.
      McTernan,  all former  directors  and/or officers of City Federal.  In its
      initial  complaint  in the  Second RTC  Action,  the RTC sought to recover
      damages in excess of $130 million for alleged negligence, gross negligence
      and breach of fiduciary  duties by the  defendants in connection  with the
      Grand Harbor and Woodfield loans. Although the Second RTC Action was filed
      separately from the First RTC Action,  the N.J. Court consolidated the two
      actions for administrative  purposes.  As a result of such  consolidation,
      the  claims in the First and  Second  RTC  Actions  relating  to the Grand
      Harbor and Woodfield loans are proceeding and being considered together.

      On June 17, 1993, the RTC filed a First Amended  Complaint ("First Amended
      Complaint")  in the Second RTC Action that named as additional  defendants
      in the Second RTC Action  Victor A.  Pelson and  Marshall M.  Criser,  two
      former  directors of City  Federal.  With the exception of the addition of
      Messrs.  Pelson  and  Criser as  defendants,  the  substance  of the First
      Amended  Complaint is identical to the complaint filed by the RTC on April
      26, 1993.

      On November 15, 1993, the N.J. Court granted the motions of several of the
      defendants to dismiss the RTC's First  Amended  Complaint to the extent it
      alleged a cause of action for simple negligence. On December 15, 1993, the
      RTC filed a Second Amended Complaint  ("Second Amended  Complaint") in the
      Second RTC Action,  alleging  gross  negligence and breach of duty against
      the defendants named in the Second RTC Action in connection with the Grand
      Harbor and Woodfield  loans,  and also in connection with the Port Liberte
      loan ("Port Liberte"),  a large real estate development loan in New Jersey
      that had not been  mentioned  in the  First RTC  Action or in the  initial
      complaint or the First  Amended  Complaint  in the Second RTC Action.  The
      Second Amended Complaint,  with the addition of allegations regarding Port
      Liberte,  seeks  damages in excess of $200  million  (as  compared to $130
      million in the First Amended Complaint).

      The RTC filed an  interlocutory  appeal  with the United  States  Court of
      Appeals for the Third  Circuit  ("Third  Circuit")  from the N.J.  Court's
      November 15, 1993 Orders in the Second RTC Action that dismissed the RTC's
      First  Amended  Complaint  to the  extent it alleged a cause of action for
      simple  negligence.  On June 23, 1995, the Third Circuit reversed the N.J.
      Court's  November  15,  1993  Orders.  On January  14,  1997,  in the case
      captioned  ATHERTON V. FEDERAL DEPOSIT INSURANCE  CORPORATION,  117 S. Ct.
      666 (1997) ("Supreme Court Case"),  the Supreme Court of the United States
      vacated the Third Circuit's judgment and remanded the case.

      On January 29, 1994,  several of the  defendants  in the Second RTC Action
      filed a motion to dismiss the Port Liberte claims ("Port Liberte  Motion")
      contained in the Second  Amended  Complaint on the ground that such claims
      are barred by the statute of  limitations.  The N.J. Court denied the Port
      Liberte Motion by order entered May 3, 1994.


                                       12
<PAGE>



      On June 2, 1994,  several of the defendants in the Second RTC Action filed
      Answers  ("Answers")  to the RTC's Second Amended  Complaint.  The Answers
      denied  many of the  allegations  made by the  RTC in the  Second  Amended
      Complaint.  The Answers also included  several  affirmative  defenses.  On
      September 9, 1994,  the N.J.  Court granted the RTC's motion to strike the
      affirmative defenses.

      On January 2, 1996, the Federal Deposit  Insurance  Corporation  ("FDIC"),
      the  statutory  successor  to the  RTC,  filed a Third  Amended  Complaint
      ("Third  Amended  Complaint") in the Second RTC Action.  The Third Amended
      Complaint  alleges that the defendants in the Second RTC Action are liable
      for  negligence as well as gross  negligence  and breach of fiduciary duty
      under  federal  common  law.  In all other  respects,  the  Third  Amended
      Complaint is identical to the Second  Amended  Complaint.  On February 14,
      1996,  some of the  defendants  in the Second RTC Action filed a motion to
      dismiss the Third Amended  Complaint.  The hearing on that motion that had
      been set for April 15,  1996,  was  postponed  indefinitely  in light of a
      number of settlements in the Second RTC Action.

      CityFed is aware that all of the defendants in the Second RTC Action other
      than  John W.  Atherton,  Jr.  have  settled  with  the RTC or  FDIC.  The
      settlement  agreement  for Victor  Pelson  includes a waiver by him of his
      indemnification  claim against CityFed for legal fees and expenses and the
      amount of his settlement payment in the Second RTC Action, but only if the
      OTS and CityFed settle the administrative  proceeding or final judgment is
      entered against  CityFed in the  proceeding.  Mr. Pelson agreed to pay the
      RTC $650,000 to settle the Second RTC Action.  The  settlement  agreements
      for John Kean, Marshall Criser, Alfred Hedden and Gilbert Roessner include
      (1)  an  assignment  by  them  to the  RTC or  FDIC  of  their  respective
      indemnification  claims against CityFed for settlement  payments they make
      to the RTC or FDIC to settle the Second RTC Action,  and (2)  retention by
      them of their respective  indemnification claims against CityFed for legal
      fees and  expenses  incurred  in the Second  RTC  Action.  The  settlement
      payments agreed to be made by Messrs. Kean, Criser, Hedden and Roessner to
      the RTC or FDIC, and thus the amount of indemnification  claim assigned by
      them to the RTC or FDIC,  are  $1,200,000  for Mr. Kean,  $400,000 for Mr.
      Criser,  $250,000 for Mr.  Hedden and $335,000 for Mr.  Roessner.  The RTC
      agreed  to allow a  $70,000  credit  toward  the  amount to be paid by Mr.
      Roessner  ("Roessner Credit") as a means of resolving Mr. Roessner's claim
      against the RTC for lost  earnings on  deferred  compensation  amounts Mr.
      Roessner  claims were withheld  from him by the RTC. In their  settlements
      with the FDIC,  Gordon Allen and Peter  Kellogg  retained  their rights to
      seek indemnification from CityFed for settlement payments they made to the
      FDIC as well as for legal fees and expenses incurred by them in the Second
      RTC  Action.  Mr.  Allen  agreed to pay  $250,000 to settle the Second RTC
      Action, and Mr. Kellogg agreed to pay $3,000,000. CityFed understands also
      that the FDIC has settled  with George  Mikula,  James  McTernan,  Richard
      Simmons and Michael  DeFreytas for $5,000 each and they each have retained
      their rights to seek  indemnification  from  CityFed for their  settlement
      payments. On February 21, 1997, in the wake of the decision in the Supreme
      Court Case,  the N.J.  Court held a status  conference at which a possible
      settlement between the FDIC and Mr. Atherton was discussed.


                                       13
<PAGE>



      For further information regarding  indemnification claims against CityFed,
      see "Indemnification Claims" below.

      INDEMNIFICATION  CLAIMS - The  Bylaws of  CityFed,  INTER  ALIA,  obligate
      CityFed to  indemnify,  to the fullest  extent  authorized by the Delaware
      General Corporation Law, any person who is made or threatened to be made a
      party to or becomes involved in an action by reason of the fact that he or
      she is or was an  employee of CityFed or one of its  subsidiaries,  and to
      pay on his or her behalf  expenses  incurred in  defending  such an action
      prior to the final  disposition  of such action;  provided  that  expenses
      incurred  by an officer or  director  may be paid in advance  only if such
      person  delivers  an  undertaking  to CityFed to repay such  amounts if it
      ultimately is determined that the person is not entitled to be indemnified
      under CityFed's  Bylaws and the Delaware  General  Corporation  Law. These
      undertakings are generally not secured.  Consequently,  CityFed may become
      obligated  to  indemnify  such  persons  for their  expenses  incurred  in
      connection with any such action and to advance legal expenses  incurred by
      such  persons  prior  to the  final  disposition  of any such  action.  In
      addition  to any  amounts  paid on  behalf  of such  person  for  expenses
      incurred in connection with such an action,  CityFed may also have further
      indemnification  responsibilities  to  the  extent  damages  are  assessed
      against such a person.

      As described  above,  CityFed and several former directors and/or officers
      of City Federal have been named as defendants or  respondents in the First
      and Second RTC Actions and in the Notice of Charges.  Many of these former
      directors  and/or  officers  of City  Federal  have  requested  CityFed to
      indemnify  them and to advance  expenses to them in connection  with these
      matters. A special committee of CityFed's Board of Directors, comprised of
      directors who have not been named in the First or Second RTC Actions,  was
      established to consider this request for  indemnification  and advancement
      of  expenses  with  respect to the First and Second  RTC  Actions.  On the
      advice of counsel to the special  committee,  CityFed advanced  reasonable
      defense costs to such former directors and officers in such Actions.

      In  addition to the First and Second RTC  Actions,  the Notice of Charges,
      the Ridder  Action and the  "Indemnification  Claims  Relating to Deferred
      Compensation  Plans"  (described  below),  CityFed is  currently  aware of
      several  other legal  actions and matters with respect to which current or
      former  officers,   directors  or  employees  of  CityFed  or  its  former
      subsidiaries  have requested that CityFed  advance  expenses and indemnify
      them.  Except for the  indemnification  requests relating to the Notice of
      Charges  (which  CityFed's  Board of  Directors  has not yet  considered),
      CityFed had generally  agreed to advance expenses in connection with these
      requests,   except  where  certain   preconditions   to  advancement   and
      indemnification have not been met or where advancement and indemnification
      may not be warranted under applicable law.

      Because of the Temporary  Order and the Escrow  Agreement,  CityFed is not
      continuing   to  advance   expenses   in   connection   with  any  of  the
      indemnification and advancement  requests referred to above. It is not yet
      clear whether,  as a result of the Third Circuit's  decision in the Ridder
      Action  discussed  below,  CityFed will be required,  notwithstanding  the
      existence  of the  Temporary  Order and the Escrow  Agreement,  to advance
      expenses to the defendants in the Ridder Action,  and to current or former



                                       14
<PAGE>



      officers,  directors  and  employees of CityFed who are or were parties in
      other  actions  or  proceedings,  including  the Second  RTC  Action,  the
      Injunction   Action,   the  D.C.  Appeal,  the  Supreme  Court  Case,  and
      proceedings  relating to the Notice of Charges and the Temporary Order. It
      is also not yet clear whether CityFed will be required to make payments of
      legal fees and expenses to the  individuals  who have settled with the RTC
      or FDIC in the Second RTC Action or to make payments to the RTC or FDIC in
      respect of the indemnification  claims assigned to the RTC or FDIC by some
      of the  individuals  who  have  settled  with  the RTC or  FDIC.  For more
      information regarding these settlements and assignments of indemnification
      rights, see "Second RTC Action" above.

      CityFed received a letter dated June 21, 1995, from Skadden,  Arps, Slate,
      Meagher & Flom  ("Skadden"),  which is counsel for Gordon Allen,  Marshall
      Criser, Edwin Halkyard,  Peter Kellogg,  William Liffers and Victor Pelson
      ("Outside  Directors"),  who  are or  were  parties  to one or more of the
      following matters (collectively,  the "Cases"): (1) the Second RTC Action;
      (2) the Injunction Action and D.C. Appeal; (3) the Supreme Court Case; and
      (4) the administrative  enforcement  proceeding brought by the OTS against
      CityFed and the Respondents. In the letter, the Outside Directors demanded
      that,   pursuant  to  CityFed's   Bylaws  and  Restated   Certificate   of
      Incorporation,  and in light of the  Order  issued  in the  Ridder  Action
      described  below,  CityFed pay all  outstanding  invoices from Skadden for
      legal services  rendered to the Outside  Directors in connection  with the
      Cases.  The letter  states that,  if CityFed  refuses to make the payments
      demanded,  the Outside  Directors will consider taking  appropriate  legal
      action to enforce their  rights.  CityFed  received a similar  letter from
      Venable,  Baetjer,  Howard & Civiletti,  counsel for John Kean,  who was a
      party to the Second RTC Action, as well as from Alfred J. Hedden,  Gilbert
      G.  Roessner,  and  Gordon  Allen,  who were or are  parties to the Cases.
      CityFed is  considering  what action to take in response to these letters.
      CityFed  expects  that it may receive  other,  similar  letters  demanding
      payment from other  current or former  directors  and officers who were or
      are parties to one or more of the Cases.

      Through  September  30,  1998,  CityFed  received  but has not paid  bills
      totaling  $4,331,000  in the  aggregate  for legal  services  and expenses
      rendered in  connection  with the defense of current and former  directors
      and officers of CityFed in the Cases.  Although CityFed has not paid these
      bills, it accrues the amounts billed under the caption "Other Liabilities"
      on its Statement of Financial Condition as the bills are received.

      CityFed does not know whether all current or former officers, directors or
      employees of CityFed or its former  subsidiaries  who are or were involved
      in actions or  proceedings  will request  advancement  or payment of legal
      expenses  and  indemnification  or,  if  requested,  whether  they will be
      entitled to advancement of expenses or indemnification.  CityFed also does
      not  know   whether  the  RTC  or  FDIC  will   request   payment  on  the
      indemnification claims assigned to it by individuals who have settled with
      the RTC or FDIC in the Second RTC Action, as described above.  Thus, it is
      not possible for CityFed to estimate with any accuracy the probable amount
      or range of  liability  relating to current or  potential  indemnification
      claims  pursuant to CityFed's  Bylaws,  although the amount of such claims
      could be material.


                                       15
<PAGE>



      Certain   insurance   policies   may  provide   coverage  to  CityFed  for
      indemnification  payments  made by  CityFed.  These  policies,  subject to
      certain exclusions, limitations and loss participation provisions, provide
      coverage  to  CityFed  for  amounts  that  it may be  obligated  to pay to
      indemnify its current and former directors and officers, and in some cases
      also provide  coverage to the directors  and officers of CityFed  directly
      for covered losses resulting from claims made against CityFed's  directors
      and officers for certain  wrongful  acts.  Under the  insurance  policies,
      CityFed would be required,  prior to any payment by the insurers to it, to
      absorb a retention  amount  equal to the first $4 million of each  covered
      loss unless it is unable to do so by reason of insolvency.

      The insurers have denied  coverage with respect to the claims made against
      the   directors  and  officers  in  the  First  and  Second  RTC  Actions.
      Consequently,  CityFed  may  not be  reimbursed  by the  insurers  for any
      expenses advanced or indemnification payments made to these individuals in
      the First and Second RTC Actions.

      RIDDER  ACTION - On or about April 19, 1993,  Willem  Ridder,  John Hurst,
      Lyndon Merkle and Gregory DeVany,  former employees of City Collateral and
      Financial  Services,  Inc., a subsidiary  of City  Federal,  commenced the
      Ridder Action by filing a complaint  against CityFed in the N.J. Court. (A
      substantially  similar complaint was previously filed in the United States
      District Court for the Northern District of California. CityFed challenged
      jurisdiction  and the plaintiffs  voluntarily  dismissed that action.  The
      complaint  was  thereafter  refiled in New  Jersey.) The  plaintiffs  seek
      advancement and indemnification of their legal costs and expenses incurred
      in conjunction  with an action brought against them by the RTC in the N.J.
      Court,  RESOLUTION TRUST  CORPORATION V. FIDELITY AND DEPOSIT COMPANY,  ET
      AL., Civil Action No. 92-1003 (D.N.J.) ("F&D Action"),  plus damages in an
      unspecified amount for physical and emotional distress,  oppression, fraud
      and malice.  The complaint in the Ridder Action does not include a request
      for a sum  certain.  On June 7,  1993,  CityFed  filed  its  answer to the
      complaint,  denying that plaintiffs are entitled to any recovery. Although
      certain of the parties have exchanged documents,  formal discovery has not
      yet commenced in the Ridder Action. However, plaintiffs filed a motion for
      summary judgment or, in the alternative,  for a preliminary  injunction as
      to their claims for advancement of expenses and indemnification.

      The N.J.  Court denied the motion;  however,  on appeal the Third  Circuit
      overturned  the  decision  of the N.J.  Court.  Pursuant  to its order and
      judgment, which were entered February 9, 1995, the Third Circuit held that
      the plaintiffs were entitled to receive advances of their costs of defense
      under CityFed's  Bylaws as a matter of law. The Third Circuit directed the
      N.J. Court to issue an injunction requiring CityFed to advance plaintiffs'
      defense costs  incurred in connection  with the F&D Action in an amount to
      be agreed  upon by the  parties  or, if the  parties  are  unable to reach
      agreement, in an amount determined to be reasonable by the N.J. Court upon
      additional  proceedings.  On February 23, 1995,  CityFed  filed a petition
      requesting  that the Third Circuit grant  rehearing on issues  relating to
      the relief granted.  In particular,  the petition requested that the Third
      Circuit  reconsider  the grant of injunctive  relief on the basis that the
      Temporary  Order  effectively  precludes  CityFed from paying the costs of
      defense to its current and former officers and directors. In addition, the
      petition  requested  that the Third  Circuit  require  plaintiffs  to post



                                       16
<PAGE>



      security if an injunction  is issued in  plaintiffs'  favor.  On March 22,
      1995, the Third Circuit denied CityFed's  petition for rehearing.  On July
      3, 1995, the N.J.  Court entered an Order  ("Ridder  Order") in the Ridder
      Action,  directing  CityFed to remit  immediately to the plaintiffs in the
      Ridder  Action  $437,400,  which  represents  legal fees  incurred  by the
      plaintiffs  through  December  31,  1994  in  the  Ridder  Action  and  as
      defendants in the F&D Action,  plus interest in the amount of  $13,955.13.
      The Ridder Order also  provides a procedure  for the payment by CityFed of
      the legal fees incurred by the Ridder  plaintiffs in the Ridder Action and
      the F&D Action from January 1, 1995, forward.

      Because of the Temporary Order, CityFed is unable unilaterally to make the
      payment required by the Ridder Order. On July 13, 1995,  CityFed submitted
      the Ridder Order to the OTS and requested the permission of the OTS to pay
      the amounts  CityFed is directed  to pay in the Ridder  Order,  as well as
      permission  to pay to the  Ridder  plaintiffs  the sum of $601.84 in court
      costs,  which CityFed had been directed to pay to the  plaintiffs in a May
      4, 1995  Order of the N.J.  Court.  On August 18,  1995,  the OTS issued a
      Decision  and Order ("OTS  Order")  denying  this  request by CityFed.  On
      August 2, 1995,  CityFed  appealed the Ridder Order to the Third  Circuit,
      arguing that the N.J. Court had abused its discretion by ordering  CityFed
      to make a payment  CityFed could not make because of the Temporary  Order.
      On August 29,  1995,  CityFed  asked the Third  Circuit to stay the Ridder
      Order  pending the appeal  from the Ridder  Order,  but the Third  Circuit
      denied the request.  The appeal was then fully  briefed by the parties and
      argued to a panel of the Third  Circuit  on March 22,  1996.  On April 18,
      1996,  the Third  Circuit  ruled in CityFed's  favor,  vacating the Ridder
      Order and  directing  that the matter be  returned  to the N.J.  Court for
      further proceedings.  Among the options available to the N.J. Court, noted
      the Third  Circuit,  were the  possibility  of staying any  payment  order
      pending completion of the OTS  administrative  proceedings or conditioning
      any payment  obligation on CityFed's  ability to obtain OTS approval.  The
      Third Circuit also said the N.J. Court might consider reducing the payment
      obligation to judgment and permitting OTS to intervene in the proceedings.
      On May 1, 1996,  the Ridder  plaintiffs  petitioned  the Third Circuit for
      rehearing en banc, claiming that the Third Circuit panel's April 18, 1996,
      decision conflicts with the February 9, 1995, Third Circuit panel decision
      awarding  indemnification  to the  Ridder  plaintiffs.  The  petition  for
      rehearing en banc was denied.

      On May 14,  1998,  the Ridder  Plaintiffs  filed a motion  asking the N.J.
      Court to issue a writ of execution.  They  apparently  intended to use the
      writ of  execution  to try to levy on the  CityFed  assets  being  held in
      escrow.  CityFed opposed this motion, and filed a cross-motion to stay any
      further  proceeding  in  the  N.J.  Court  pending  a  resolution  of  the
      administrative  proceedings, a lifting of the Temporary Order, or approval
      by the OTS to make the  payments.  The OTS also  sought  leave of the N.J.
      Court  to file a brief  as  AMICUS  CURIAE  in  opposition  to the  Ridder
      Plaintiffs'  motion.  At a hearing on June 29, 1998, the N.J. Court denied
      the OTS motion for leave to file as AMICUS  CURIAE.  On July 28, 1998, the
      N.J.  Court denied the Ridder  Plaintiffs'  motion for a writ of execution
      but  said  they  could   refile  the  motion   upon   completion   of  the
      administrative  proceeding by the OTS against CityFed, or upon decision by
      the U.S.  Court of  Appeals  for the  District  of  Columbia  in an action
      brought by the Ridder Plaintiffs directly against OTS seeking to force OTS
      to permit  the  payments.  The U.S.  District  Court for the  District  of



                                       17
<PAGE>



      Columbia had ruled  against the Ridder  Plaintiffs  in that case,  stating
      that it lacked  jurisdiction  to grant the relief  sought,  and the Ridder
      Plaintiffs  had appealed that ruling.  On July 17, 1998, the U.S. Court of
      Appeals for the District of Columbia affirmed the District Court's holding
      that it lacked  jurisdiction  to grant the relief  sought.  Following this
      decision by the DC Circuit,  the N.J. Court denied the Ridder  Plaintiffs'
      motion for a writ of execution, holding that it too lacked jurisdiction to
      grant relief that would  interfere  with the  operation  of the  Temporary
      Order.  The N.J. Court stayed any further  proceedings in the case pending
      conclusion of the OTS administrative  action or a lifting of the Temporary
      Order. The Ridder Plaintiffs have appealed this decision of the N.J. Court
      to the U.S. Court of Appeals for the Third Circuit.

      As of September 30, 1998, CityFed included  approximately  $818,000 in its
      contingency reserve relating to the Ridder Action.

      In the event that CityFed  advances such amounts to the  plaintiffs and it
      is   ultimately   determined   that   plaintiffs   are  not   entitled  to
      indemnification,  CityFed may be  required  to look solely to  plaintiffs'
      unsecured undertakings for repayment of any advances.

      "SUPERVISORY GOODWILL" ACTION - On August 7, 1995, CityFed,  acting in its
      own right and as shareholder of City Federal,  filed a civil action in the
      United  States  Court  of  Federal  Claims  seeking  damages  for  loss of
      "supervisory  goodwill." The action is captioned  CITYFED FINANCIAL CORP.,
      IN ITS OWN RIGHT AND IN ITS CAPACITY AS SHAREHOLDER OF CITY FEDERAL SAVING
      BANK,  BEDMINSTER,  NEW JERSEY V. UNITED STATES OF AMERICA,  No.  95-508c.
      CityFed  filed this action  under the rule of the Court of Federal  Claims
      that  permits  the filing of a  "Preliminary  Complaint"  when a plaintiff
      lacks access to  information  necessary to fully state its claim.  CityFed
      believes  that,  as of December  7, 1989,  City  Federal  had  substantial
      amounts  of  supervisory  goodwill  on its  books as a result  of  various
      acquisitions by City Federal of troubled  depository  institutions  before
      that date, but without  access to the records of City Federal,  CityFed is
      unable to state in detail  the  nature  or amount of its  goodwill  claim.
      CityFed's  goodwill  suit was stayed (as were all Court of Federal  Claims
      supervisory  goodwill  cases)  pending the United States  Supreme  Court's
      review of the  decision  of the United  States  Court of  Appeals  for the
      Federal  Circuit in another  supervisory  goodwill case,  WINSTAR CORP. V.
      UNITED  STATES,  64 F. 3d 1531 (Fed.  Cir. 1995)  ("Winstar").  On July 1,
      1996, the United States Supreme Court affirmed the decision of the Federal
      Circuit in the Winstar case, holding that the loss of supervisory goodwill
      and  capital  credits as a result of the  Financial  Institutions  Reform,
      Recovery and Enforcement Act of 1989 constituted breaches of contract with
      the three  institutions  involved in that consolidated  appeal. The United
      States  Supreme Court  remanded  those cases to the United States Court of
      Federal Claims for a determination of damages.

      CityFed's case is one of over 100  supervisory  goodwill  cases  currently
      pending  in the  Court of  Federal  Claims.  The Court  has  adopted  case
      management  procedures to expedite the handling of these cases in the wake
      of the Supreme Court's ruling, and CityFed's counsel is participating with
      other plaintiffs'  counsel in coordinated  prosecution of these cases. The
      Government has indicated that it may challenge the existence of a contract
      in cases other than those involved in the Winstar appeal,  and it has said
      it will  interpose  other defenses and  counterclaims,  such as statute of
      limitations, standing, lack of proximate causation, fraudulent inducement,




                                       18
<PAGE>





      and failure to maintain net worth. The Chief Judge of the Court of Federal
      Claims has now re-assigned all of these cases to himself and is delegating
      to other judges on the court responsibility for various issues.

      The FDIC has been granted leave to intervene as a plaintiff in supervisory
      goodwill cases involving closed  institutions where there is claimed to be
      a deficit in the receivership  estate,  including CityFed's case. The FDIC
      claims that, as successor receiver (to the RTC) for these institutions, it
      is the proper party to assert these claims,  since its claim as insurer of
      accounts likely exceeds any potential recovery.

      CityFed has now received from the Government  "core documents" for each of
      the transactions thought to have generated supervisory goodwill. CityFed's
      counsel is presently analyzing these documents to determine whether it now
      has sufficient documentation to file its Amended Complaint.

      Chief Judge Loren Smith of the Court of Federal  Claims has  established a
      procedure  for  deciding   "common   issues"  which  cut  across  multiple
      supervisory goodwill cases. One such issue, currently being briefed, deals
      with the right of investors  and holding  companies to assert  claims as a
      result of supervisory goodwill on the books of depository  institutions in
      which they have as  ownership  interest.  Judge  Smith's  decision on this
      issue may  affect  the  Company's  right to assert a claim for the loss of
      supervisory goodwill on the books of City Federal.

      CLAIM OF A FORMER  DIRECTOR AND OFFICER - As a result of the  receivership
      of City Federal,  City Federal failed to pay Gilbert G. Roessner, a former
      director  and officer of CityFed,  the amounts  owed to him under  various
      deferred  compensation  arrangements  City Federal had with him. He claims
      that CityFed is responsible for this amount (approximately $1.1 million as
      of  November  1,  1989).  On  April  30,  1991,  special  counsel  to  the
      Compensation  Committee of CityFed's Board of Directors recommended to the
      full Board that no payments be made to Mr.  Roessner  currently,  but that
      the Board keep Mr. Roessner's claim under  advisement,  to be reconsidered
      in  light  of then  existing  circumstances  and any  additional  evidence
      provided  by Mr.  Roessner  in  support  of his  claim.  The full Board of
      Directors  received  the  report of special  counsel  to the  Compensation
      Committee.

      Pursuant to Mr.  Roessner's  settlement  with the RTC as  discussed  under
      "Second  RTC  Action"  above,  CityFed  believes  Mr.  Roessner's  current
      deferred  compensation  claim is in the amount of $169,365.60 plus accrued
      interest thereon, if any.

      INDEMNIFICATION  CLAIMS  RELATING  TO  DEFERRED  COMPENSATION  PLANS  - In
      September 1990, the RTC, as receiver for City Federal (and the new Federal
      mutual   savings   bank  created  to  acquire  all  of  the  deposits  and
      substantially all of the assets and indebtedness of City Federal),  caused
      an  action  to  be  filed  in  the  N.J.   Court  seeking  the  return  of
      approximately  $3.1 million  (since  reduced to $1.9  million) in deferred
      compensation  paid by City  Federal to  certain  officers,  directors  and
      employees  of  City  Federal,  some of whom  are or  were  also  officers,
      directors  or  employees  of  CityFed.  Pursuant to the  Delaware  General
      Corporation  Law and the Bylaws of CityFed,  CityFed paid the  defendants'



                                       19
<PAGE>



      legal fees in connection with their defense of the litigation.

      A settlement  agreement,  under which the defendants were to pay $790,000,
      was entered into by the parties in June 1993 (of which $114,000 was in the
      form of  promissory  notes from two  defendants  payable over four years).
      This settlement agreement concluded the case.

      Several  defendants  have  requested  that CityFed  reimburse them for the
      settlement payments made by them under the settlement  agreement.  CityFed
      has not  responded to the request.  It is likely that CityFed will receive
      similar  requests  from the other  parties  to the  settlement.  CityFed's
      liability to the individuals remains to be determined.

      TAX  LIABILITIES - CityFed's  liability  for federal  income taxes for tax
      years through 1990 was calculated on the basis of CityFed's inclusion in a
      consolidated   group  that   includes   City  Federal  and  the  successor
      institutions  created by the OTS to acquire the assets and  liabilities of
      City Federal. Under the applicable provisions of the Internal Revenue Code
      of 1986, as amended ("Code"), and the regulations thereunder,  all members
      of the consolidated  group,  including CityFed,  are jointly and severally
      liable for any income  taxes owed by the group.  CityFed has not  included
      City  Federal and the  successor  institutions  in the Federal  income tax
      returns  CityFed  filed for its tax years  1991  through  1997.  CityFed's
      position is not free from challenge,  although  CityFed  believes that its
      position is reasonable under the current tax law.

      CONTINGENCY  RESERVE - As noted above,  the Company is subject to a number
      of loss  contingencies  for which it is  currently  unable  to  reasonably
      assess the  probability  or range of loss.  At  September  30,  1998,  the
      Company has a $6.6 million  contingency  reserve  representing the current
      minimum expenses relating to pending  litigation  estimated to be incurred
      and  provision  for  negotiated   settlement  amounts  relating  to  these
      contingencies.  These costs are  difficult to project and will be affected
      by whether  these  matters are  settled or whether the actions  proceed to
      trial.  The reserve  reflects  expected costs to defend against the claims
      and negotiated settlement amounts. The reserve,  however, does not include
      provisions for trial-related  expenses or any other potential  settlements
      or adverse judgments (other than amounts relating to the Ridder Action) as
      the Company is unable to make a reasonable estimate of the amount or range
      of  potential  loss.  The  following  is  an  analysis  of  the  Company's
      contingency reserve:

             Balance - December 31, 1997                  $6,700,000

             Charges                                          69,000
             Provision                                             -
                                                          ----------

             Balance - September 30, 1998                 $6,631,000
                                                          ==========



                                       20
<PAGE>




Item 2.Management's Discussion and Analysis or Plan of Operation.

General

      On  December  7, 1989,  the  Office of Thrift  Supervision  appointed  the
      Resolution Trust Corporation  ("RTC") as receiver for City Federal Savings
      Bank ("City  Federal"),  the sole  subsidiary of CityFed  Financial  Corp.
      ("CityFed" or the  "Company").  A new federal  mutual  savings bank,  City
      Savings Bank,  F.S.B.  ("City Savings"),  was created,  which acquired all
      deposits  and  substantially  all of the  assets and  liabilities  of City
      Federal.  CityFed no longer  controls City Federal and has no control over
      City Savings.

      As a result  of this  action,  the  financial  statements  of  CityFed  at
      December 31, 1989,  for the year then ended,  and for  subsequent  periods
      reflect CityFed's interest in City Federal as discontinued operations.

      Because  City  Federal  was  placed  in  receivership,  CityFed's  current
      interest in City Federal is a claim  against the  receivership  estate for
      the  proceeds,  if any, of the  receivership  estate of City  Federal that
      remain after all creditors,  including the RTC, have been paid. Receipt of
      any  payment  for such claim is remote.  For a fuller  description  of the
      receivership, see Item 1., "Business" in CityFed's 1997 Form 10-KSB.

      Since the  receivership  of City Federal,  CityFed has been, and currently
      is,  in  the  process  of  determining  its  liabilities,   including  its
      contingent   liabilities  described  in  Note  4  to  CityFed's  financial
      statements  for the nine months ended  September 30, 1998. To maintain the
      principal  value of its  existing  assets  while this  process is ongoing,
      CityFed has  invested  substantially  all of its funds in high grade money
      market  instruments  with a maturity of one year or less and money  market
      mutual  funds.  Since the  receivership  of City  Federal,  the  operating
      expenses of CityFed have  consisted  of the  salaries of the  employees of
      CityFed,  the expenses of the two small offices  maintained by CityFed and
      the related office operating  expenses,  expenses relating to the audit of
      its financial statements by its independent auditors,  and expenses of its
      outside legal counsel.  Currently,  CityFed has one full-time employee and
      one small office.

      Due to the nature of its assets at and  subsequent  to  December  8, 1989,
      CityFed  may be deemed to fall  within the  definition  of an  "investment
      company"  under the  Investment  Company  Act of 1940,  as amended  ("1940
      Act"),  from that date to the present.  To resolve any question  regarding
      its current  status under the 1940 Act,  CityFed filed an  application  on
      October  19,  1990  with the  Division  of  Investment  Management  of the
      Securities and Exchange  Commission ("SEC") for an order exempting it from
      certain  provisions  of the 1940 Act and  certain  rules  and  regulations
      thereunder.  This  application was amended on September 23, 1993,  January
      18, 1994 and March 1, 1994.  The  application  was granted under  Sections
      6(c) and (e) of the 1940 Act on March 15, 1994.  Under the order  granting
      the application  ("1940 Act Order"),  CityFed was not required to register
      as an  investment  company.  However,  CityFed and other  persons in their
      transactions  and relations  with CityFed are, under the terms of the 1940
      Act Order,  subject to Sections 9, 17(a),  17(d), 17(e), 17(f), 36 through
      45 and 47  through  51 of the 1940 Act,  and the rules  thereunder,  as if



                                       21
<PAGE>



      CityFed were a registered investment company,  except insofar as permitted
      by the 1940 Act Order.  The 1940 Act Order exempted CityFed from having to
      register as an  investment  company until the earlier of March 15, 1995 or
      such time as  CityFed  would no  longer  be  required  to  register  as an
      investment  company.  On February 28, 1995, an Order was issued  extending
      the requested  exemption until February 28, 1996, on February 21, 1996, an
      order was issued  extending the  requested  exemption  until  February 21,
      1997,  and,  on  February  12,  1997,  an Order was issued  extending  the
      requested exemption until February 12, 1999.

Liquidity and Capital Resources

      At September  30, 1998,  CityFed had  approximately  $9,535,000 in assets,
      $11,022,000 in total liabilities and $1,487,000 in negative  stockholders'
      equity.  At December 31, 1997,  CityFed had  approximately  $9,433,000  in
      assets,  $11,142,000  in total  liabilities  and  $1,709,000  in  negative
      stockholders'  equity.  However,  as  discussed  in  Note  4 to  CityFed's
      financial  statements  for the nine months  ended  September  30, 1998 and
      under Item 1., "Business - Potential  Obligations of CityFed" in CityFed's
      1997 Form 10-KSB,  a number of claims have been asserted  against CityFed.
      If the claimants under some or all of these claims are  successful,  their
      claims   against   CityFed  could   greatly   exceed   CityFed's   assets.
      Consequently,  CityFed's  assets are currently  being invested short term,
      and  expenses  have been  reduced to a level that  management  believes is
      commensurate with CityFed's current activities pending resolution of these
      claims.

      While CityFed's  liquidity is expected to be sufficient to meet litigation
      and  administrative  expenses over the next twelve months, any substantial
      indemnification  expense,  settlement  or  judgment  (including,   without
      limitation,  any  obligation to currently  advance  legal  expenses in the
      Cases or the Ridder  Action) could reduce  liquidity to a level that would
      jeopardize the  continuation of the Company's  activities.  As a result of
      additions to the contingency reserve, CityFed currently has a negative net
      worth and it is unlikely  that  CityFed will be able to achieve a positive
      net worth in the foreseeable future.

      As  discussed  above,  since the  receivership  of City  Federal,  CityFed
      initially  marshaled  its assets and has been,  and  currently  is, in the
      process of determining its liabilities. To maintain the value of CityFed's
      existing  assets  while this  process is ongoing,  CityFed has invested in
      income  producing  instruments.  Funds  are  invested  so  that  they  are
      convertible  into cash in a reasonably  short time with  minimal,  if any,
      loss of principal.

      Since the  receivership  of City  Federal,  CityFed has  invested and will
      continue  to  invest  substantially  all its  funds in  securities  with a
      maturity of one year or less.  These consist of U.S.  government or agency
      securities,  commercial paper, bank certificates of deposit,  money market
      mutual funds and corporate  debt  obligations.  Repurchase  agreements may
      only be entered  into  using U.S.  government  securities  as  collateral.
      Non-governmental  or agency  investments  are  purchased  only if they are
      rated  in one of the  two  highest  categories  by an  established  rating
      agency. Investments in the corporate debt securities of any one issuer are
      limited to $2,500,000.  Under the terms of the Escrow  Agreement  (defined
      below),  changes in these investment  policies require the approval of the
      




                                       22
<PAGE>



      Board of Directors of CityFed and the OTS.
      
      Under  the  terms of the 1940  Act  Order,  CityFed  may not  purchase  or
      otherwise acquire any additional securities other than securities that are
      rated  investment grade or higher by a nationally  recognized  statistical
      rating  organization  or, if unrated,  deemed to be of comparable  quality
      under guidelines approved by CityFed's Board of Directors,  subject to two
      exceptions:

                  (a) CityFed may make an equity  investment in issuers that are
            not investment  companies as defined in Section 3(a) of the 1940 Act
            (including  issuers that are not investment  companies  because they
            are  covered  by  a  specific   exclusion  from  the  definition  of
            investment  company  under  Section  3(c) of the 1940 Act other than
            Section  3(c)(1)) in connection with the possible  acquisition of an
            operating  business  as  evidenced  by  a  resolution   approved  by
            CityFed's Board of Directors; and

                  (b)  CityFed  may  invest in one or more money  market  mutual
            funds that limit their investments to "Eligible  Securities"  within
            the meaning of Rule 2a-7(a)(5) promulgated under the 1940 Act.

      The  financial  statements  of CityFed at December 31, 1989,  for the year
      then ended,  and for  subsequent  periods  reflect that CityFed  maintains
      reserves for CityFed's pending  litigation  expenses,  which, at September
      30, 1998, were $6,631,000 and, at December 31, 1997, were $6,700,000.

      The litigation costs included in the reserves are difficult to project and
      will be  affected  by whether  these  matters  are  settled or whether the
      actions will  proceed to trial.  The reserves  reflect  expected  costs to
      defend the claims up to, but not including, the costs of any trial-related
      expenses (except as described below). The reserves also do not include the
      costs of any settlements (other than negotiated settlements, including the
      settlements  in the Second RTC Action) or adverse  judgments,  except that
      the contingency  reserve now also includes  amounts relating to the Ridder
      Action.  See Note 4 to the  Notes to  Financial  Statements  in this  Form
      10-QSB,  and Item 1.,  "Business  - Potential  Obligations  of CityFed" in
      CityFed's  1997 Form 10-KSB for a description of the major claims that may
      give rise to expected  future  costs.  Although  management  believes that
      CityFed's  current level of reserves are  sufficient to cover the costs of
      pending  litigation  matters  (but not any  trial-related  expenses or the
      costs of any other potential  settlements or adverse  judgments other than
      those  relating  to the  Ridder  Action and the  Second  RTC  Action),  no
      assurances  can be given that the reserves  established  will be adequate,
      that any ultimate  resolution of the claims will not result in substantial
      amounts being incurred or that further claims will not be asserted.

      On October 26, 1994,  CityFed and the OTS entered into an Escrow Agreement
      ("Escrow Agreement") with CoreStates Bank, N.A. ("CoreStates") pursuant to
      which CityFed  transferred  substantially  all of its assets to CoreStates
      for  deposit  into an  escrow  account  to be  maintained  by  CoreStates.




                                       23
<PAGE>



      Pursuant to the Escrow Agreement,  CoreStates  executes a wire transfer of
      $15,000  from the escrow  account to CityFed on the first  business day of
      every  month.  The Escrow  Agreement  provides  that  CityFed may sell and
      purchase  securities in the escrow  account,  and that  CoreStates will be
      paid a fee of  $2,500  per  year,  plus  reimbursement  for out of  pocket
      expenses,  for  serving as escrow  agent.  CityFed's  assets in the escrow
      account  continue  to be  invested  in  money  market  instruments  with a
      maturity of one year or less and money market mutual funds. Withdrawals or
      disbursements  from the  escrow  account  are not  permitted  without  the
      written  authorization  of the OTS, other than for (1) the $15,000 monthly
      transfer to CityFed, (2) the disbursement of funds on account of purchases
      of  securities  by  CityFed  and (3) the  payment  of the  escrow  fee and
      expenses to CoreStates. The Escrow Agreement also provides that CoreStates
      will  restrict  the escrow  account in such a manner as to  implement  the
      terms of the  Escrow  Agreement  and to  prevent  a change  in  status  or
      function of the escrow account unless authorized by CityFed and the OTS in
      writing.  CoreStates  will  provide  to the OTS a copy  of all  statements
      regarding the escrow account provided to CityFed.

Results of Operations

      CityFed recorded net income from continuing operations for the nine months
      ended  September  30, 1998 of $222,000.  This  compares to net income from
      continuing  operations in the amount of $210,000 for the nine months ended
      September 30, 1997. No addition to the contingency reserve was made during
      the nine months ended September 30, 1998 or 1997.

      CityFed  recorded  net income  from  continuing  operations  for the three
      months ended September 30, 1998 of $81,000.  This compares to a net income
      from  continuing  operations in the amount of $82,000 for the three months
      ended September 30, 1997.

      Interest on investments  was $379,000 for the nine months ended  September
      30, 1998  compared to $385,000  for the nine months  ended  September  30,
      1997.  Total expenses of $157,000 for the nine months ended  September 30,
      1998  were  lower  than  the  $175,000  for the  same  period  in 1997 due
      primarily to a lower level of professional service fees.

      Interest on investments  was $136,000 for the three months ended September
      30, 1998,  virtually  unchanged  from  $134,000 for the three months ended
      September  30,  1997.  Total  operating  expenses of $55,000 for the three
      months ended  September  30, 1998 were  slightly more than the $52,000 for
      the same period in 1997.

      CityFed's  contingency  reserve was established in 1989 and is intended to
      include  reserves  for  CityFed's  pending  litigation  expenses and legal
      expenses  advanced  to third  parties.  The  contingency  reserve now also
      includes $818,000  relating to the Ridder Action.  See Note 4 to the Notes
      to  Financial  Statements  in this Form 10-QSB,  and Item 1.,  "Business -
      Potential  Obligations  of  CityFed" in  CityFed's  1997 Form 10-KSB for a
      description  of the major  claims  that may give rise to  expected  future
      costs. No additional  provisions to the loss from discontinued  operations
      were made during the nine months ended September 30, 1998. The contingency
      reserve was reduced by charges of $69,000 from  $6,700,000 at December 31,



                                       24
<PAGE>



      1997 to $6,631,000 at September 30, 1998.


      The  basic  net loss per  share of $0.11  and $0.33 for the three and nine
      months ended September 30, 1998, respectively, compares to $0.11 and $0.33
      for the three and nine months ended  September  30, 1997.  In all periods,
      the basic net loss per share is after the  deduction  of unpaid  preferred
      dividends.  No  preferred  or common  dividends  have been paid  since the
      second  quarter of 1989 and none are  expected to be paid until  CityFed's
      situation changes significantly.

Year 2000 Problem

      Certain computers, software and other equipment include computer code that
      may  misinterpret  the  calendar  year  2000 for the  calendar  year  1900
      (commonly known as the "Year 2000  Problem").  CityFed has determined that
      its information  technology and non-information  technology systems do not
      pose any Year 2000 Problems. However, as a result of its limited resources
      and financial condition,  CityFed has not made and does not intend to make
      any  assessment  of the Year 2000 Problem  compliance  of its suppliers or
      other third parties with which it does business. The Year 2000 Problem may
      affect some such third parties.  CityFed cannot  guaranty that these third
      parties will resolve any or all of their Year 2000 Problems.  Accordingly,
      there is no  guarantee  that the  failure of such third  parties to timely
      resolve any Year 2000 Problems will not have a material  adverse affect on
      CityFed's financial condition and operations.  CityFed has not established
      and does not intend to  establish a  contingency  plan to address any Year
      2000 Problems of such third parties.

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

      See Note 4 to  CityFed's  financial  statements  for the nine months ended
      September 30, 1998 for a description of currently pending litigation.

Item 2. Changes in Securities and Use of Proceeds.

      During 1998,  CityFed  issued,  pursuant to Section 4(2) of the Securities
      Act of 1933, 876 shares of Common Stock,  $.01 par value, on conversion of
      500 shares of its $2.10 Cumulative Convertible Preferred Stock, Series B.

Item 3. Defaults Upon Senior Securities.

      (a) None.

      (b) CityFed's $2.10 Cumulative  Convertible Preferred Stock, Series B, par
      value $25.00 per share  ("Series B Stock"),  is required to pay  quarterly
      dividends  at a rate of $0.525 per share on March 1, June 1,  September  1
      and December 1 of each year.  CityFed's  Series C, Junior Preferred Stock,
      Cumulative,  par value $0.01 per share ("Series C Stock"),  is required to
      pay quarterly dividends at a rate of $0.10 per share on March 15, June 15,
      September  15 and  December  15 of each year.  The  dividends  on both the
      Series B and the  Series C Stock  are  cumulative.  The  Series C Stock is
      junior to the Series B Stock in the payment of dividends.

      Beginning with the payment due on September 1, 1989,  CityFed has not paid
      any quarterly dividends on the Series B Stock.  Beginning on September 15,
      1989,  CityFed also has not paid any  quarterly  dividends on the Series C
      Stock.  Because CityFed has failed to pay at least six quarterly dividends
      on the Series B Stock, the holders of such stock have the exclusive right,
      voting separately as a class, to elect, and have elected, two directors of
      CityFed.  Until the aggregate deficiency is declared and fully paid on the
      Series B Stock  and the  Series  C  Stock,  CityFed  may not  declare  any
      dividends or make any other  distributions  on or redeem the Common Stock.
      Until the aggregate  deficiency is declared and fully paid on the Series B
      Stock,   CityFed  may  not  declare  any   dividends  or  make  any  other
      distributions  on or redeem the Series C Stock.  As of September 30, 1998,
      the  aggregate  deficiency on the Series B Stock was  approximately  $49.3
      million  and  the   aggregate   deficiency  on  the  Series  C  Stock  was



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<PAGE>



      approximately $30.6 million.

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

      11.   Statement Regarding the Computation of Per Share Loss.
      27.   Financial Data Schedule

      (b)   None




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<PAGE>



                                   SIGNATURES

      In accordance  with the  requirements  of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                             CITYFED FINANCIAL CORP.

                               By: /s/ John W. Atherton, Jr.
                                  --------------------------
 
                                  John W. Atherton, Jr.                       
                                  President, Chief Executive Officer          
                                     and Treasurer (Principal Executive
                                     and Financial Officer)

Date:  November 13, 1998



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