UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

[ X ]     Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 For Period Ended June 30, 1998

                                       OR

[   ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities 
          Exchange Act of 1934

          For the Transition Period from ___________to__________

                         Commission file number 0-26850

                         First Defiance Financial Corp.
                         ------------------------------
             (Exact name of registrant as specified in its charter)

           Ohio                                              34-1803915
-------------------------------                         -----------------------
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                          Identification) Number)

601 Clinton Street, Defiance, Ohio                              43512
----------------------------------                           ----------
(Address or principal executive office)                      (Zip Code)

Registrant's telephone number, including area code:  (419) 782-5015
                                                     --------------

Indicate by check mark whether the  registrant  (1) has filed all  documents and
reports required to be filed by Sections 13 or 15(d) of the Securities  Exchange
Act of 1934  subsequent to the  preceding 12 months (or for such shorter  period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ]     No  [  ]

                Applicable Only to Issuers Involved in Bankruptcy
                   Proceedings During the Preceding Five Years

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12, 13, or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by the court. Yes  [  ]    No   [  ]

                      Applicable Only to Corporate Issuers

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practical date.  Common Stock,  $.01 Par Value --
8,157,870 shares outstanding at August 7, 1998.
<PAGE>


                         FIRST DEFIANCE FINANCIAL CORP.


                                      INDEX

                                                                          
PART I.-FINANCIAL INFORMATION

 Item 1.        Consolidated Condensed Financial Statements (Unaudited):

                Consolidated Condensed Statements of Financial
                Condition - June 30, 1998 and December 31, 1997           

                Consolidated  Condensed  Statements  of Income  Three
                months ended June 30, 1998 and 1997;
                Six months ended June 30, 1998 and 1997                   

                Consolidated Condensed Statement of Changes in
                Stockholders' Equity - Six months ended
                June 30, 1998                                             

                Consolidated Condensed Statements of Cash Flows
                - Six months ended June 30, 1998 and 1997                 


                Notes to Consolidated Condensed Financial Statements      

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

PART II.        OTHER INFORMATION:

 Item 1.        Legal Proceedings                                         

 Item 2.        Changes in Securities                                     

 Item 3.        Defaults upon Senior Securities                           

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

 Item 5.        Other Information                                         

 Item 6.        Exhibits and Reports on Form 8-K                          

                Signatures                                                


<PAGE>
PART 1-FINANCIAL INFORMATION

Item 1. Financial Statements
<TABLE>
<CAPTION>

                                 FIRST DEFIANCE FINANCIAL CORP.

                    Consolidated Condensed Statements of Financial Condition
                                          (UNAUDITED)
                         (Amounts in Thousands, except for share data)



                                                        June 30, 1998       December 31, 1997
                                                        -------------        -----------------
ASSETS
<S>                                                        <C>                   <C>       
Cash and cash equivalents:                                                                 
     Cash and amounts due from                                                             
         depository institutions .....................     $  5,666              $  8,149  
     Interest-bearing deposits .......................         --                     848  
                                                           --------              --------  
                                                              5,666                 8,997  
Securities:                                                                                
     Available-for-sale, carried at fair value .......       66,670                82,436  
     Held-to-maturity, carried at amortized cost                                           
         (approximate fair value $16,977 and $21,370                                       
         at June 30, 1998 and December 31,                                                 
         1997, respectively) .........................       16,660                20,953  
                                                           --------              --------  
                                                             83,330               103,389  
Loans held for sale (at lower of cost or fair value,                                       
     approximate  fair  value                                                              
     $3,358 and $89 at June 30,                                                            
     1998 and December 31,1997, respectively) ........        3,309                    88  
Loans receivable, net ................................      462,229               441,823  
Accrued interest receivable ..........................        3,293                 3,480  
Federal Home Loan Bank stock .........................        3,901                 3,764  
Office properties and equipment ......................       18,114                16,799  
Deferred federal income taxes ........................          234                   415  
Real estate, mobile homes and other                                                        
     assets held for sale ............................          465                   541  
Other assets .........................................        1,583                   402  
                                                           --------              --------  
                                                                                           
                                                           $582,124              $579,698  
                                                           ========              ========  
</TABLE>
                                                                                
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
                               FIRST DEFIANCE FINANCIAL CORP.

                  Consolidated Condensed Statements of Financial Condition
                                         (UNAUDITED)
                        (Amounts in Thousands, except for share data)


                                                     June 30, 1998       December 31, 1997
                                                     -------------       -----------------
<S>                                                    <C>                    <C>           
LIABILITIES AND
     STOCKHOLDERS' EQUITY
Deposits .........................................     $ 404,493              $ 395,322     
Advances from Federal Home Loan Bank .............        66,140                 71,665     
Other liabilities ................................         8,219                  5,826     
                                                       ---------              ---------     
Total liabilities ................................       478,852                472,813     
                                                                                            
STOCKHOLDERS' EQUITY                                                                        
                                                                                            
Preferred stock, no par value per share:                                                    
     5,000,000 shares authorized; no shares                                                 
     issued ......................................          --                     --       
Common stock, $.01 par value per share:                                                     
     20,000,000 shares authorized; 8,157,867 and                                            
     8,527,683 shares outstanding at June 30,                                               
     1998 and December 31, 1997, respectively ....            82                     85     
Additional paid-in capital .......................        62,536                 65,726     
Stock acquired by ESOP ...........................        (4,196)                (4,534)    
Stock acquired by Management                                                                
     Recognition Plan ............................        (1,111)                (1,387)    
Net unrealized losses on available-for-sale                                                 
     securities, net of income taxes of $7                                                  
     and $25 at June 30, 1998 and                                                           
     December 31, 1997, respectively .............           (14)                   (50)    
Retained earnings - substantially restricted .....        45,975                 47,045     
                                                       ---------              ---------     
Total stockholders' equity .......................       103,272                106,885     
                                                       ---------              ---------     
                                                                                            
Total liabilities and stockholders' equity .......     $ 582,124              $ 579,698     
                                                       =========              =========     
                                                                            
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
                               FIRST DEFIANCE FINANCIAL CORP.

                         Consolidated Condensed Statements of Income
                                         (UNAUDITED)
                        (Amounts in Thousands, except per share data)

                                                  Three Months Ended      Six Months Ended
                                                       June 30                 June 30
                                                 -------------------     -------------------
                                                   1998       1997         1998        1997
                                                 -------     -------     -------     -------
<S>                                              <C>         <C>         <C>         <C>  
Interest income:
      Mortgage and other loans .............     $ 9,894     $ 9,220     $19,647     $18,251
      Investment securities ................       1,425       1,501       3,005       3,059
      Deposits with banks ..................           3          33          12          44
                                                 -------     -------     -------     -------
Total interest income ......................      11,322      10,754      22,664      21,354

Interest expense:
     Deposits ..............................       4,625       4,487       9,180       8,833
     Federal Home Loan Bank
       advances and other borrowings .......         964         697       1,935       1,316
                                                 -------     -------     -------     -------
Total interest expense .....................       5,589       5,184      11,115      10,149
                                                 -------     -------     -------     -------

Net interest income ........................       5,733       5,570      11,549      11,205
Provision for loan losses ..................         239         282         688         646
                                                 -------     -------     -------     -------
Net interest income after provision
     for loan losses .......................       5,494       5,288      10,861      10,559

Non-interest expense .......................       3,763       3,378       7,322       6,632
Non-interest income ........................         585         357       1,069         693
                                                 -------     -------     -------     -------
Income before income taxes .................       2,316       2,267       4,608       4,620
Income taxes ...............................         771         746       1,555       1,541
                                                 -------     -------     -------     -------

Net income .................................     $ 1,545     $ 1,521     $ 3,053     $ 3,079
                                                 =======     =======     =======     =======
Earnings per share: (Note 4)
     Basic .................................     $   .21     $   .18     $   .40     $   .36
                                                 =======     =======     =======     =======
     Diluted ...............................     $   .20     $   .17     $   .39     $   .34
                                                 =======     =======     =======     =======

Dividends declared per share (Note 3) ......     $   .09     $   .08     $   .18     $   .16
                                                 =======     =======     =======     =======
Average number of shares
     Outstanding: (Note 4)
              Basic ........................       7,464       8,622       7,553       8,612
                                                 =======     =======     =======     =======
              Diluted ......................       7,814       8,937       7,917       8,926
                                                 =======     =======     =======     =======
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
                                              FIRST DEFIANCE FINANCIAL CORP.

                            Consolidated Condensed Statement of Changes in Stockholders' Equity
                                                        (UNAUDITED)
                                                  (Amounts in Thousands)



                                                                                                   Stock Acquired By
                                                                                              -----------------------------
                                                                          Additional                             Management
                                                         Common             Paid-in                             Recognition
                                                          Stock             Capital              ESOP               Plan
                                                          -----             -------              ----               ----

<S>                                                     <C>                <C>                <C>                <C>      
Balance at December 31, 1997 .................          $     85           $ 65,726           $ (4,534)          $ (1,387)

Comprehensive income:
     Net Income
     Other comprehensive income, net of tax
         ESOP shares released ................                                  261                338
         Change in unrealized gains (losses)
               net of income taxes of $18
         Amortization of deferred compensation
               of Management Recognition Plan                                                                         276
Total comprehensive income

Stock issued under Option Plan ...............                 1                392

Purchase of common stock for
    treasury .................................                (4)            (3,843)

Dividends declared (Note 3)
                                                        --------           --------           --------           --------
Balance at June 30, 1998 .....................          $     82           $ 62,536           $ (4,196)          $ (1,111)
                                                        ========           ========           ========           ========

</TABLE>

See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
                                       FIRST DEFIANCE FINANCIAL CORP.

               Consolidated Condensed Statement of Changes in Stockholders' Equity (Continued)
                                                 (UNAUDITED)
                                           (Amounts in Thousands)



                                                   Net Unrealized
                                                      losses on                                   Total
                                                   available-for-         Retained            Stockholders'
                                                   sale securities        Earnings               Equity
                                                   ---------------        --------               ------
<S>                                                  <C>                   <C>                   <C>     
Balance at December 31, 1997 ...................     $    (50)             $ 47,045              $106,885

Comprehensive income:
     Net Income ................................                              3,053                 3,053
     Other comprehensive income, net of tax:
         ESOP shares released ..................                                                      599
         Change in unrealized gains (losses)
              net of income taxes of $18 .......           36                                          36
         Amortization of deferred compensation
              of Management Recognition Plan ...                                                      276
                                                                                                 --------  
Total comprehensive income .....................                                                    3,964

Stock issued under Option Plan .................                                                      393

Purchase of common stock for
    treasury ...................................                             (2,751)               (6,598)

Dividends declared (Note 3) ....................                             (1,372)               (1,372)
                                                     --------              --------              --------

Balance at June 30, 1998 .......................     $    (14)             $ 45,975              $103,272
                                                     ========              ========              ========

</TABLE>

See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
                         FIRST DEFIANCE FINANCIAL CORP.

                 Consolidated Condensed Statements of Cash Flows
                                   (UNAUDITED)
                             (Amounts in Thousands)



                                                                     Six Months
                                                                    Ended June 30,
                                                                  1998          1997
                                                               --------      --------
<S>                                                            <C>           <C>     
Operating Activities
Net income ...............................................     $  3,053      $  3,079
Adjustments to reconcile net income to net cash
     provided by operating activities:
     Provision for loan losses ...........................          688           646
     Provision for depreciation, amortization of premiums
         and accretion of discounts on securities ........          506           366
     Gain on sale or call of available-for-sale securities         --             (12)
     Gain on sale of loans ...............................         (263)          (68)
     Amortization of Management Recognition Plan
         deferred compensation ...........................          276           376
     Release of ESOP Shares ..............................          599           488
     Gain on disposal of office properties and equipment .           (1)           (3)
     Deferred federal income tax provision (credit) ......          163          (128)
     Proceeds from sale of loans .........................       15,107         3,778
     Originations of loans held for sale .................      (18,065)       (3,280)
     Increase in interest receivable and other assets ....         (994)         (700)
     Increase in other liabilities .......................        2,425           190
                                                               --------      --------
Net cash provided by operating activities ................        3,494         4,732

Investing Activities
Proceeds from maturities of held-to-maturity securities ..        4,274         2,339
Proceeds from maturities of available-for-sale securities        22,167         4,121
Proceeds from sales of available-for-sale securities .....         --           2,350
Proceeds from sales of real estate, mobile homes, and
     other assets held for sale ..........................          943           727
Proceeds from sales of office properties and equipment ...           15             3
Purchases of available-for-sale securities ...............       (6,316)          (99)
Purchases of Federal Home Loan Bank stock ................         (137)         (164)
Purchases of office properties and equipment .............       (1,846)       (2,644)
Net increase in loans receivable .........................      (21,961)      (15,534)
                                                               --------      --------
Net cash used in investing activities ....................       (2,861)       (8,901)

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                         FIRST DEFIANCE FINANCIAL CORP.
           Consolidated Condensed Statements of Cash Flows (Continued)
                                   (UNAUDITED)
                             (Amounts in Thousands)



                                                                 Six Months Ended
                                                                    June 30,
                                                               1998          1997
                                                            --------      --------
<S>                                                            <C>             <C>  
Financing Activities
Net increase in deposits ..............................        9,171           868
Repayment of Federal Home Loan Bank long-term advances          (725)         (735)
Proceeds from Federal Home Loan Bank long-term advances       25,000          --
Net (decrease) increase in Federal Home Loan Bank
     short-term advances ..............................      (29,800)        7,314
Purchase of common stock for treasury .................       (6,598)       (1,423)
Cash dividends paid ...................................       (1,405)       (1,414)
Proceeds from exercise of stock options ...............          393            16
                                                            --------      --------
Net cash (used in) provided by financing activities ...       (3,964)        4,626
                                                            --------      --------
(Decrease) increase in cash and cash equivalents ......       (3,331)          457
Cash and cash equivalents at beginning of period ......        8,997         4,752
                                                            --------      --------

Cash and cash equivalents at end of period ............     $  5,666      $  5,209
                                                            ========      ========

Supplemental cash flow information:
Interest paid .........................................     $ 11,379      $  9,841
                                                            ========      ========
Income taxes paid .....................................     $  1,354      $  1,809
                                                            ========      ========
Transfers from loans to real estate, mobile homes
     and other assets held for sale ...................     $    867      $    726
                                                            ========      ========
Noncash operating activities:
Change in deferred tax established on net unrealized
     gain or loss on available-for-sale securities ....     $    (18)     $    (27)
                                                            ========      ========
Noncash investing activities:
Decrease in net unrealized loss on
     available-for-sale securities ....................     $     54      $     80
                                                            ========      ========
Noncash financing activities:
Cash dividends declared but not paid ..................     $    687      $    706
                                                            ========      ========
</TABLE>
See accompanying notes.
<PAGE>
                         FIRST DEFIANCE FINANCIAL CORP.

              Notes to Consolidated Condensed Financial Statements
                          (Unaudited at June 30, 1998)

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

1.   Principles of Consolidation

     The consolidated  condensed  financial  statements  include the accounts of
     First Defiance Financial Corp. ("First Defiance" or "the Company")) and its
     wholly  owned  savings and loan,  First  Federal  Savings and Loan  ("First
     Federal").  In the  opinion of  management,  all  significant  intercompany
     accounts and transactions have been eliminated in consolidation.

2.   Basis of Presentation

     The consolidated condensed statement of financial condition at December 31,
     1997 has been derived from the audited financial statements at that date.

     The accompanying consolidated condensed financial statements as of June 30,
     1998 and for the three and six month periods  ending June 30, 1998 and 1997
     have been  prepared  by First  Defiance  without  audit and do not  include
     information  or  footnotes  necessary  for  the  complete  presentation  of
     financial  condition,  results of operations,  and cash flows in conformity
     with generally accepted accounting  principles.  It is suggested that these
     consolidated condensed financial statements be read in conjunction with the
     financial  statements and notes thereto included in First Defiance's annual
     report for the year ended  December  31, 1997.  However,  in the opinion of
     management,  all  adjustments,  consisting of only normal  recurring items,
     necessary for the fair  presentation of the financial  statements have been
     made.  The results of operations  for the three and six month periods ended
     June 30, 1998 are not  necessarily  indicative  of the results  that may be
     expected for the entire year.

3.   Dividends on Common Stock

     As of June 30, 1998,  First Defiance had declared a quarterly cash dividend
     of $.09 per share for the second quarter of 1998, payable July 22, 1998.

4.   Earnings Per Share

     Basic earnings per share as disclosed under Financial  Accounting  Standard
     ("FAS") No. 128 has been  calculated by dividing net income by the weighted
     average  number of shares of common stock  outstanding  for the three month
     and six month periods ended June 30, 1998 and 1997. First Defiance accounts
     for the shares  issued to its Employee  Stock  Ownership  Plan  ("ESOP") in
     accordance  with  Statement of Position  93-6 of the American  Institute of
     Certified Public Accountants  ("AICPA").  As a result, shares controlled by
     the ESOP are not  considered  in the weighted  average  number of shares of
     common stock  outstanding  until the shares are committed for allocation to
     an employee's  individual  account.  In the calculation of diluted earnings
     per share as of June 30, 1998 and 1997, the effect of shares issuable under
     stock  option plans and unvested  shares under the  Management  Recognition
     Plan have been accounted for using the Treasury Stock method.
<PAGE>
                         FIRST DEFIANCE FINANCIAL CORP.

        Notes to Consolidated Condensed Financial Statements (continued)
                          (Unaudited at June 30, 1997)

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

4.   Earnings Per Share (cont.)

 
     The following table sets forth the computation of basic and diluted earning
     per share:
<TABLE>
<CAPTION>
                                              Three Months Ended    Six Months Ended
                                                   June 30                June 30
                                                   -------                 ------- 
                                               1998       1997       1998       1997
                                              ------     ------     ------     ------
<S>                                           <C>        <C>        <C>        <C>   
Numerator for basic and diluted
  earnings per share - net income .......     $1,545     $1,521     $3,053     $3,079
                                              ------     ------     ------     ------
Denominator:
  Denominator for basic earnings per
    share - weighted average shares .....      7,464      8,622      7,553      8,612
  Effect of dilutive securities:
    Employee stock options ..............        257        230        263        224
    Unvested Management Recognition
        Plan stock ......................         93         85        101         90
                                              ------     ------     ------     ------
  Dilutive potential common shares ......        350        315        364        314
                                              ------     ------     ------     ------

  Denominator for diluted earnings
    per share - adjusted weighted average
    shares and assumed conversions ......      7,814      8,937      7,917      8,926
                                              ------     ------     ------     ------
Basic earnings per share ................     $  .21     $  .18     $  .40     $  .36
                                              ------     ------     ------     ------
Diluted earnings per share ..............     $  .20     $  .17     $  .39     $  .34
                                              ------     ------     ------     ------

</TABLE>

5.   Stock Option Disclosures

     FASB Statement No. 123, "Accounting for Stock-Based Compensation." requires
     either:  (a) recognition of  compensation  cost in earnings for stock-based
     compensation   plans  based  upon  their  fair  value;  or  (b)  pro  forma
     disclosures  of what earnings and per share amounts would have been had the
     fair value  method been used for expense  recognition.  First  Defiance has
     elected to use the pro forma  disclosure  option.  As provided in Statement
     No.  123,  the  disclosure  provisions  for  companies  electing  pro forma
     disclosures  are not required to be applied in interim reports which do not
     include a complete set of financial statements.
<PAGE>
                         FIRST DEFIANCE FINANCIAL CORP.

        Notes to Consolidated Condensed Financial Statements (continued)
                          (Unaudited at June 30, 1997)

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

6.    New Accounting Pronouncement

     The Company has adopted FAS No. 130, "Reporting Comprehensive Income". This
     statement  establishes  standards  for the reporting  and  presentation  of
     comprehensive  income  and  its  components  in a  full  set  of  financial
     statements.  Comprehensive  income encompasses all changes in shareholders'
     equity  (except  those arising from  transactions  with  shareholders)  and
     includes net income,  net unrealized gains or losses on  available-for-sale
     securities,  and reductions in the Management  Recognition Plan ("MRP") and
     Employee  Stock  Ownership  Plan ("ESOP")  suspense  accounts.  As this new
     standard only requires additional  information in the financial statements,
     it  does  not  affect  the  Company's  financial  position  or  results  of
     operations. Comprehensive income for the three-month periods ended June 30,
     1998 and 1997 was  $1,926,000 and  $2,329,000  respectively.  Comprehensive
     income  for the  six-month  periods  ended  June  30,  1998  and  1997  was
     $3,964,000 and $3,995,000 respectively.

     The FASB has released  Statement No. 133,  "Accounting  for  Derivative and
     Similar Financial  Instruments and for Hedging Activities".  This statement
     establishes  accounting and reporting  standards for  derivative  financial
     instruments  and it requires all  derivatives  to be measured at fair value
     and to be recognized as either  assets or  liabilities  in the statement of
     financial  position.  The standard becomes effective for First Defiance for
     the first  quarter of the year 2000 and is not  expected to have a material
     impact on the Company's financial statements.

7.    Subsequent Events

     On July 1,  1998,  the  Company  completed  the  acquisition  of The Leader
     Mortgage Company ("Leader"). The total purchase price for Leader, including
     certain  non-compete  payments,  was  approximately  $39.6 million.  Leader
     specializes  in servicing  loans made under  various  first-time  homebuyer
     programs  offered  by certain  state or local  agencies.  At June 30,  1998
     Leader serviced approximately 81,000 loans with a balance of $4.7 billion.
     The acquisition will be accounted for as a purchase.

     On July 30, 1998, the Company sold the majority of loans in its mobile home
     portfolio in a private  sale.  The pre-tax gain on the sale,  net of costs,
     was slightly more than $200,000.
<PAGE>
Item 2.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations

General
First Defiance is a holding company which conducts  business  through its wholly
owned  subsidiary,  First  Federal  Savings and Loan,  Defiance  Ohio,  which is
primarily  engaged in attracting  deposits from the general  public  through its
offices and using those and other available  sources of funds to originate loans
primarily  in the  five  counties  in  which  its  offices  are  located  and in
contiguous Putnam County.  Single family residential  mortgage loans amounted to
$270.8  million or 57.0% of First  Defiance's  total loan  portfolio at June 30,
1998. To a lesser  extent,  First  Defiance  originates  other real estate loans
secured by non-residential real estate and construction loans, which amounted to
$39.3  million or 8.3% of total loans at June 30, 1998.  Approximately  34.7% or
$164.6 million of First  Defiance's loan portfolio as of June 30, 1998 consisted
of non-real estate loans including consumer finance loans,  primarily automobile
loans,  which  amounted to $74.9  million or 15.8% of the total loan  portfolio,
commercial  loans,  which  amounted  to $36.0  million or 7.6% of the total loan
portfolio  and mobile home loans which  amounted to $25.1 million or 5.3% of the
total loan portfolio. (See Note 7, Subsequent Events)

First  Defiance  is an  authorized  seller/servicer  for the  Federal  Home Loan
Mortgage  Corporation  ("Freddie  Mac").  First  Defiance  sold 100 and 27 loans
during the three  months ended June 30, 1998 and 1997  respectively  (201 and 54
for the six months ended June 30, 1998 and 1997). The Company realized a gain on
sale of those loans of approximately $144,000 and $37,000 for three months ended
June 30, 1998 and 1997 respectively ($263,000 and $68,000 for the respective six
month periods). Fixed rate loans with a maturity of at least twenty years, which
meet   the   Freddie   Mac   underwriting   guidelines,    are   classified   as
available-for-sale  loans.  First Defiance  retains the servicing  rights on all
mortgage loans sold. Mortgage servicing rights capitalized at June 30, 1998 were
approximately $305,000.

First  Defiance  also  invests in U.S.  Treasury and federal  government  agency
obligations,  money  market  mutual funds which are  comprised of U.S.  Treasury
obligations,  obligations  of the State of Ohio and its political  subdivisions,
mortgage-backed securities which are issued by federal agencies, and to a lesser
extent,  collateralized  mortgage  obligations ("CMOs") and real estate mortgage
investment   conduits   ("REMICs").   Management   determines  the   appropriate
classification of all such securities at the time of purchase in accordance with
FASB Statement No. 115,  Accounting  for Certain  Investments in Debt and Equity
Securities.

Securities  are  classified  as  held-to-maturity  when  First  Federal  has the
positive  intent and ability to hold the security to maturity.  Held-to-maturity
securities  are  stated  at  amortized  cost and had a  recorded  value of $16.7
million at June 30, 1998.  Securities  not  classified as  held-to-maturity  are
classified  as  available-for-sale,  which are  stated  at fair  value and had a
recorded  value  of  $66.7  million  at June 30,  1998.  The  available-for-sale
portfolio  consists  of  U.S.  Treasury   securities  and  obligations  of  U.S.
Government  corporations  and agencies ($40.2  million),  corporate bonds ($10.1
million), certain municipal obligations ($3.5 million), adjustable-rate mortgage
backed security mutual funds ($8.9 million), and CMOs and REMICs ($4.0 million).
In accordance with FASB Statement No. 115,  unrealized  holding gains and losses
on  available-for-sale  securities  are  reported  in a  separate  component  of
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

stockholders'  equity and are not  reported  in  earnings  until  realized.  Net
unrealized holding losses on available-for-sale  securities were $21,000 at June
30, 1998,  $14,000 after  considering the related deferred tax benefit.  For the
six months ended June 30, 1998,  unrealized losses decreased by $54,000 ($36,000
after tax).

The  profitability of First Defiance is primarily  dependent on its net interest
income,  which  is the  difference  between  interest  and  dividend  income  on
interest-earning assets,  principally loans and securities, and interest expense
on  interest-bearing  deposits  and  Federal  Home  Loan  Bank  advances.  First
Defiance's  earnings also depend,  to a lesser extent, on the provision for loan
losses, the level of its other income (including  servicing fees and other fees)
and its  non-interest  expenses,  such as employee  compensation  and  benefits,
occupancy and equipment expense,  deposit insurance premiums,  and miscellaneous
other expenses, as well as federal income tax expense.

Changes in Financial Condition
At June 30, 1998,  First  Defiance's  total assets,  deposits and  stockholders'
equity  amounted  to  $582.1   million,   $404.5  million  and  $103.3  million,
respectively,  compared to $579.7  million,  $395.3 million and $106.9  million,
respectively,  at December 31, 1997.  Net loans  receivable  have increased from
$441.8  million at December 31, 1997 to $462.2  million at June 30,  1998.  This
increase was funded primarily with maturing or redeemed  securities.  Securities
decreased  from $103.4 million at December 31, 1997 to $83.3 million at June 30,
1998 as a result of U.S.  Government  Agency  securities  being  called prior to
maturity.  Proceeds  from those calls were used to fund loan growth and pay down
advances from the Federal Home Loan Bank ("FHLB")  rather than being  reinvested
at current  rates.  As a result,  FHLB advances  decreased from $71.7 million at
December  31,  1997 to  $66.1  million  at June 30,  1998.  First  Defiance  has
completed  six 5% stock  repurchases  as of June 30, 1998.  As of June 30, 1998,
First Defiance has repurchased 426,384 shares of its own stock during 1998 for a
total cost of $6.6 million, an average of $15.47 per share.

Subsequent Events
On July 1, 1998 First Defiance  completed its acquisition of The Leader Mortgage
Company for $39.6 million, including non-compete agreements. The Cleveland-based
company  specializes in servicing mortgage loans of state and municipal agencies
under various  first-time  homebuyer  programs.  The  acquisition  of The Leader
Mortgage Company will be accounted for as a purchase.

On July 30, 1998 First Defiance completed a sale of approximately $22 million of
the mobile home loans held in its portfolio.  The sale resulted in a pretax gain
of approximately $200,000 which will be recorded in the 1998 third quarter
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following  table presents for the periods  indicated the total dollar amount
of interest from average  interest-earning  assets and the resultant  yields, as
well as the interest expense on average interest-bearing liabilities,  expressed
both in thousands of dollars and rates, and the net interest  margin.  Dividends
received are included as interest income.  The table does not reflect any effect
of income taxes. All average balances are based upon daily balances.
<TABLE>
<CAPTION>
                                                         Three Months Ended June 30,
                                      ---------------------------------------------------------------
                                                   1998                              1997
                                      -----------------------------       ---------------------------
                                       Average               Yield          Average            Yield
                                       Balance    Interest   Rate(1)        Balance  Interest  Rate(1)
                                       -------    --------   -------        -------  --------  -------
<S>                                    <C>          <C>       <C>          <C>        <C>       <C>  
Interest-earning assets:
   Loans receivable                    $458,935     $9,894    8.62%        $425,263   $9,220    8.67%
   Securities                            90,115      1,428    6.34           96,200    1,534    6.38
   Dividends on FHLB stock                3,832         69    7.20            3,106       56    7.21
                                       --------     ------                 --------   ------
   Total interest-earning assets        552,882     11,392    8.24          524,569   10,810    8.24
Non-interest-earning assets              28,922                              26,645
                                       --------                            --------
   Total assets                        $581,804                            $551,214
                                       ========                            ========

Interest-bearing liabilities:
   Deposits                            $405,870     $4,625    4.56%        $380,665   $4,487    4.71%
   FHLB advances and other               66,703        964    5.78           47,985      697    5.81
                                      ---------     ------                --------   ------
   Total interest-bearing liabilities   472,573      5,589    4.73          428,650    5,184    4.84
                                                    ------    ----                    ------    ----
Non-interest-bearing liabilities          6,030                               4,422
                                       --------                            --------
   Total liabilities                    478,603                             433,072
Stockholders' equity                    103,201                             118,142
                                       --------                           ---------
   Total liabilities and stock-
      holders' equity                  $581,804                            $551,214
                                       ========                            ========
Net interest income; interest
   rate spread                                      $5,803    3.51%                  $5,626     3.41%
                                                    ======    =====                  ======     =====
Net interest margin (2)                                       4.20%                             4.29%
                                                              =====                             =====
Average interest-earning assets
   to average interest-bearing
   liabilities                                                 117%                              122%
                                                               ====                              ====
</TABLE>
(1)  Annualized
(2)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued
<TABLE>
<CAPTION>
                                                              Six Months Ended June 30,
                                      --------------------------------------------------------------------
                                                   1998                              1997
                                      ------------------------------      --------------------------------
                                       Average               Yield          Average                Yield
                                       Balance    Interest   Rate(1)        Balance    Interest    Rate(1)
                                       -------    --------   -------        -------    --------    -------
<S>                                    <C>         <C>        <C>          <C>          <C>         <C>  
Interest-earning assets:
   Loans receivable                    $452,218    $19,647    8.69%        $422,097     $18,251     8.65%
   Securities                            94,499      3,017    6.39           98,105       3,103     6.33
   Dividends on FHLB stock                3,799        137    7.21            3,094         110     7.11
                                       --------     ------                --------      ------- 
   Total interest-earning assets        550,516     22,801    8.28          523,296      21,464     8.20
Non-interest-earning assets              28,272                              24,094
                                       --------                            --------
   Total assets                        $578,788                            $547,390
                                       ========                            ========

Interest-bearing liabilities:
   Deposits                            $401,814     $9,181    4.57%        $379,395      $8,833     4.66%
   FHLB advances and other               66,750      1,935    5.80           45,900       1,316     5.73
                                      ---------   --------                 --------     ------- 
   Total interest-bearing liabilities   468,564     11,116    4.74          425,295      10,149     4.77
                                                   -------   -----                                 -----
Non-interest-bearing liabilities          5,907                               4,229
                                       --------                            --------
   Total liabilities                    474,471                             429,524
Stockholders' equity                    104,317                             117,866
                                       --------                             -------
   Total liabilities and stock-
      holders' equity                  $578,788                            $547,390
                                       ========                            ========
Net interest income; interest
   rate spread                                     $11,685    3.54%                    $11,315      3.43%
                                                   =======    =====                    =======     =====
Net interest margin (2)                                       4.25%                                 4.32%
                                                              =====                                =====
Average interest-earning assets
   to average interest-bearing
   liabilities                                                 117%                                  123%
                                                               ====                                 ====
</TABLE>
(1)  Annualized
(2)  Net   interest   margin  is  net   interest   income   divided  by  average
     interest-earning assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

Results of Operations

Three Months Ended June  30, 1998 compared to Three Months Ended June 30, 1997
------------------------------------------------------------------------------

Net interest  income,  the difference  between  revenue  generated from interest
earning  assets  and the  interest  cost  of  funding  those  assets,  is  First
Defiance's  primary source of earnings.  For the three-month  period ending June
30, 1998, net interest  income  increased to $5,733,000  from $5,570,000 for the
same period in 1997.  First  Defiance's  interest  rate  spread (the  difference
between  yield on  average  interest  earning  assets and the  interest  rate on
average  interest-bearing  liabilities)  for the 1998 second  quarter was 3.51%,
which was 10 basis points higher than the 1997 second quarter level of 3.41%.

The  increase in net  interest  income was due  primarily to the increase in the
average  interest-earning  assets,  to $552.9 million for the quarter ended June
30, 1998 compared to $524.6  million for the same period in 1997. The growth was
in First  Defiance's  loan  portfolio,  where the average  balance  increased to
$458.9  million for the three months ended June 30, 1998  compared to $425.3 for
the same period in 1997. Interest on those loans increased to $9,894,000 for the
three months ended June 30, 1998 compared to  $9,220,000  for the same period in
1997.  Earnings  from  investment  securities  declined  during the 1998  second
quarter compared to the same period in 1997 because of a $6.1 million  reduction
in the average balance of securities outstanding. Investment security maturities
and  redemptions  were used to fund a  portion  of the  growth  in loans.  First
Defiance's yield on earning assets was 8.24% for both of the three month periods
ended June 30, 1998 and 1997 despite of the fact that the  individual  yields on
loans and investment  securities decreased for the 1998 period compared to 1997.
This resulted from the replacing of lower yielding  investment  securities  with
higher yielding loans.

The increase in interest income was substantially offset by an 7.8%, increase in
interest expense,  to $5,589,000 for the quarter ended June 30, 1998 compared to
$5,184,000 for the same period in 1997. This increase was due to a $18.7 million
increase in the average balance of FHLB advances outstanding, from $48.0 million
for the three months ended June 30, 1998 to $66.7 million for the same period in
1998. These advances,  which are used to fund loan growth, as well as other cash
needs including  stock  repurchases,  actually  decreased from the $71.7 million
ending  balance at December  31,  1997 to $66.1  million at June 30,  1998.  The
decrease in advances  between  December  31, 1997 and June 30, 1998 is primarily
due to the fact that the  proceeds  from  agency  securities  which were  called
during  the  period  were  used to pay  down  advances.  Interest  expense  also
increased  due  to an  increase  in  the  average  deposits  outstanding,  which
increased to $405.9 million for the three months ended June 30, 1998 from $380.7
million for the same period in 1997.  The  average  rate paid on those  deposits
dropped fifteen basis points,  from an average of 4.71% in 1997 to an average of
4.56% in 1998.

In addition to a slight  increase in net interest  income,  First Defiance had a
slightly  lower  provision  for  loan  losses  during  the 1998  second  quarter
($239,000)  compared to the same period in 1997 ($282,000).  Provisions for loan
losses are charged to earnings to bring the total  allowance  for loan losses to
the level deemed appropriate by management based on historical  experience,  the
volume and type of lending conducted by First Defiance,  industry standards, the
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

amount of non-performing  assets and loan charge-off activity,  general economic
conditions,  particularly  as they relate to First  Defiance's  market area, and
other factors related to the  collectibility of First Defiance's loan portfolio.
The decrease in the provision  reflects a decrease in  charge-offs in the second
quarter of 1998 compared to the relatively high levels experienced in 1997.

Non-performing  assets,  which  include  loans 90 days or more past  due,  loans
deemed impaired,  and repossessed  assets totaled $1.7 million at June 30, 1998,
which is .29% of total  assets.  The  allowance for loan losses at June 30, 1998
was $2.9 million  compared to $2.8 million at March 31, 1998 and $2.7 million at
December 31, 1997. For the quarter ended June 30, 1998,  First Defiance  charged
off $190,000 of loans against its  allowance and realized  recoveries of $59,000
from  loans  previously  charged  off.  During the same  quarter in 1997,  First
Defiance charged off $237,000 in loans and realized recoveries of $53,000.

Total non-interest expense for the quarter ended June 30, 1998 was $3.8 million,
compared to $3.4 million for the quarter ended June 30, 1997.  Compensation  and
benefits  for the  quarter  ended  June 30,  1998 were  $1,968,000  compared  to
$1,796,000  for the same period in 1997,  an increase of 9.6%.  The  increase in
compensation and benefits was due primarily to the addition of two new branches,
in Paulding Ohio,  which opened in September,  1997, and Hicksville  Ohio, which
opened in February  1998.  This increase in  compensation  for the quarter ended
June 30, 1998 as compared to the same period of 1997 was  partially  offset by a
$45,000  reduction in expense related to the Company's ESOP plan,  primarily due
to a reduction  in  contributions,  and a $59,000  reduction  in the  Management
Recognition Plan expense due to accelerated expense recognition for such awards.

Occupancy expense increased to $431,000 compared to $350,000.  This increase was
due to  increased  depreciation  brought  about by the  addition  of the two new
branches along with continued upgrades to all of the Company's computer hardware
and software to assure Year 2000 compliance.

Data  processing  expense  for the  quarter  ended  June 30,  1998 was  $247,000
compared to $175,000 for the same period in 1997.  This  increase was  primarily
due to the implementation of several new applications beginning in 1997.

Non-interest  income,  consisting  primarily  of fee income,  dividends  on FHLB
stock,  and gains on mortgage loans sold was $585,000 for the quarter ended June
30, 1998 compared to $357,000 for the same period in 1996.  The increase was due
primarily to a $106,000 increase in the gains on loans sold as well as increases
in other fees.

First Defiance has computed  federal income tax expense in accordance  with FASB
Statement  No.  109 which  resulted  in an  effective  tax rate of 33.3% for the
quarter ended June 30, 1998 compared to 32.9% for the same period in 1996.

As a result of the above factors, net income for the quarter ended June 30, 1998
was $1,545,000  compared to $1,521,000  for the comparable  period in 1997. On a
per share basis, basic and diluted earnings per share for the three months ended
June 30, 1998 was $.21 and $.20  respectively  compared to $.18 and $.17 for the
same period in 1997.  The  increase in earnings per share is  attributable  to a
decrease in the average  shares  outstanding  as a result of three five  percent
stock  buy  backs  completed  since  the  beginning  of  1997.   Average  shares
outstanding for the basic and diluted  calculations were 7,464,000 and 7,814,000
respectively  for the quarter  ended June 30, 1998  compared  to  8,612,000  and
8,926,000 respectively for the quarter ended June 30, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

First Defiance's board of directors declared a dividend of $.09 per common share
as of June 30, 1997. The dividend amounted to $734,208,  including  dividends on
unallocated ESOP shares. It was paid on July 22, 1998.  Dividends are subject to
determination  and  declaration by the board of directors,  which will take into
account First Defiance's financial condition and results of operations, economic
conditions,  industry  standards and regulatory  restrictions which affect First
Defiance's ability to pay dividends.

Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997

For the six month period ended June 30, 1998, net interest  income  increased to
$11,549,000  from  $11,205,000  for the same  period in 1997.  First  Defiance's
interest  rate spread for the  six-month  period was 3.54%,  which  exceeded the
spread for the six month period ended June 30, 1997 by 11 basis points.

The increase in net interest income was due to an increase in the loan portfolio
and a reduction in the Company's  overall cost of funds,  especially the cost of
deposit liabilities.

First  Defiance's  average  loans for the six months  ended  June 30,  1997 were
$452.2  million  compared to $422.1  million  for the same period in 1997.  As a
result of the growth in the loan  portfolio  and a four basis point  increase in
the average yield on loans,  interest earned on loans increased to $19.6 million
for the six months ended June 30, 1998  compared to $18.3  million for the first
six months of 1997. Earnings from investments decreased slightly to $3.0 million
for the six months  ended June 30,  1998  compared  to $3.1  million for the six
months  ended  June 1997  because  of a  reduction  in the  average  balance  of
investment  securities  outstanding  of $3.6 million  partially  offset by a six
basis point increase in the average yield on investment securities.  The average
balance of  securities  outstanding  was $94.5  million for the six months ended
June 30, 1998 compared to $98.1 million for the same period in 1997.  Investment
securities  were used both to fund a portion of the growth in the loan portfolio
and the repurchase of stock.

Interest expense  increased to $11.1 million for the six-month period ended June
30, 1998 from $10.1 million for the first half of 1997. This increase was due to
a $20.9 million  increase in the average  balance of FHLB advances  outstanding,
from $45.9  million  for the first half of 1997 to $66.8  million  for the first
half of  1998.  These  advances  were  used to fund the loan  growth  and  stock
repurchases  noted  above.  The cost of  First  Defiance's  deposit  liabilities
increased from $8.8 million for the six-month period ended June 30, 1997 to $9.2
million for the same period in 1998. This increase was the result of the average
outstanding  deposit  balance  increasing to $401.8  million for the  six-months
ended  June 30,  1998 from  $379.4  million  for the same  period in 1997.  This
increase in deposit interest expense was partially offset by the decrease in the
average  cost of deposits  from 4.66% for the six months  ended June 30, 1997 to
4.57% for the same period in 1998.

The provision  for loan losses  increased to $688,000 for the first half of 1998
compared to $646,000  during the first half of 1997.  The loan loss provision is
reflective  of  continued  growth in the higher  risk  consumer  and  commercial
portfolios  along with a slight  increase in the year to date net charge offs of
1998 compared to 1997.  First Defiance charged off $603,000 of loans against its
allowance for loan losses during the first half of 1998 and realized  recoveries
of $111,000 from loans  previously  charged off. During the same period in 1997,
First Defiance charged off $522,000 in loans and realized recoveries of $84,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

Total non-interest  expense for the first half of 1998 was $7.3 million compared
to $6.6  million  during  the same  period in 1997.  Compensation  and  benefits
increased  to $3.8  million for the 1998  period from $3.6  million for the same
period in 1996. Occupancy costs also increased during the first half of 1998, to
$840,000 from  $585,000 for the first half of 1997. In addition data  processing
costs  increased to $471,000 for the first half of 1998 compared to $372,000 for
the same period in 1997. In addition to the reasons  noted in the  discussion of
the results of operations  for the three month periods  above,  occupancy  costs
increased  for the  six-month  period in 1998  because  of a full six  months of
depreciation  on major  office  renovations  completed  during the first half of
1997.

Non-interest  income  was  $1,069,000  for the first  half of 1998  compared  to
$693,000 for 1997.  $195,000 of this increase was the result of increased  gains
on the sale of mortgage  loans.  The remaining  increase was due to increases in
the fees on deposit accounts and dividends on Federal Home Loan Bank stock.

The Company has  computed  federal  income tax expense in  accordance  with FASB
Statement No. 109 which resulted in an effective tax rate of 33.7% for the first
half of 1998 compared to 33.3% during the first half of 1997.

As a result of the above factors, net income for the six-month period ended June
30, 1998  decreased  slightly to $3,053,000  from  $3,079,000 for the six months
ended June 30, 1997.  However,  because of the  reduction in the average  shares
outstanding  related to the stock  repurchase  programs,  on a per share  basis,
basic and  diluted  earnings  per share for the six months  ended June 30,  1998
increased to $.40 and $.39  respectively  compared to $.36 and $.34 for the same
period  in  1997.   Average  shares   outstanding  for  the  basic  and  diluted
calculations were 7,553,000 and 7,917,000  respectively for the six-months ended
June  30,  1998  compared  to  8,622,000  and  8,937,000  respectively  for  the
six-months ended June 30, 1997.

Through June 30, 1997, First Defiance has declared  dividends  totaling $.18 per
share.

Liquidity and Capital Resources
First  Federal is required  under  applicable  federal  regulations  to maintain
specified  levels of "liquid"  investments in qualifying  types of United States
Government, federal agency and other investments having maturities of five years
or less.  Current OTS regulations  require that a savings  association  maintain
liquid  assets  of  not  less  than  4% of  its  average  daily  balance  of net
withdrawable  deposit  accounts and  borrowings  payable in one year or less, of
which  short-term  liquid  assets  must  consist  of not less than 1%.  Monetary
penalties may be imposed for failure to meet applicable liquidity  requirements.
First  Federal's   liquidity   substantially   exceeded   applicable   liquidity
requirements throughout the three-month period ended June 30, 1998.

First Defiance generated $3,494,000 of cash from operating activities during the
first six months of 1998. The Company's cash from operating  activities  results
from net income for the period,  adjusted for various non-cash items,  including
the  provision  for loan losses,  depreciation  and  amortization,  ESOP expense
related to release of shares, and changes in loans available for sale,  interest
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

receivable  and other  assets,  and other  liabilities.  The  primary  investing
activity of First  Defiance is  lending,  which is funded with cash  provided by
operations,  proceeds from the  amortization  and prepayments of existing loans,
proceeds from the sale or maturity of securities,  borrowings from the FHLB, and
customer deposits.

At June 30, 1998,  First Defiance had $8.5 million in outstanding  mortgage loan
commitments  and loans in  process  to be funded  generally  within the next six
months and an additional  $28.7 million  committed  under existing  consumer and
commercial  lines of credit and  standby  letters of credit.  At that date,  the
total amount of certificates of deposit that are scheduled to mature by June 30,
1999 is $224.7 million.  First Defiance believes that it has adequate  resources
to fund  commitments  as they  arise and that it can  adjust the rate on savings
certificates to retain deposits in changing interest rate environments. If First
Defiance requires funds beyond its internal funding capabilities,  advances from
the FHLB of Cincinnati are available as an additional source of borrowings.

Currently First Defiance invests in on-balance  sheet  derivative  securities as
part of the overall  asset and liability  management  process.  Such  derivative
securities include agency step-up,  REMIC and CMO investments.  Such investments
are not  classified  as high  risk at June  30,  1998  and do not  present  risk
significantly  different than other mortgage-backed or agency securities.  First
Defiance does not invest in off-balance sheet derivative securities.

First Federal is required to maintain  specified  amounts of capital pursuant to
regulations  promulgated by the OTS. The capital standards generally require the
maintenance  of  regulatory  capital  sufficient  to  meet  a  tangible  capital
requirement, a core capital requirement, and a risk-based capital requirement.

The  following  table sets forth  First  Federal's  compliance  with each of the
capital requirements at June 30, 1998.
<TABLE>
<CAPTION>

                                         Tangible        Core         Risk-Based
                                         Capital       Capital      Capital (1)(2)
                                        ---------      ---------      ---------
                                                  (Dollars in Thousands)

<S>                                     <C>            <C>            <C>      
Regulatory capital ................     $  84,112      $  84,112      $  86,541
Minimum required regulatory
   capital ........................         8,689         23,169         31,234
                                        ---------      ---------      ---------
Excess regulatory capital .........     $  75,423      $  60,943      $  55,307
                                        =========      =========      =========
Regulatory capital as a
   percentage of assets (3) .......          14.5%          14.5%          21.5%
Minimum capital required as
   a percentage of assets .........           1.5%           4.0%           8.0%
                                        ---------      ---------      ---------
Excess regulatory capital as a
   percentage in excess of
   requirement ....................          13.0%          10.5%          13.5%
                                        =========      =========      =========

</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and 
        Results of Operations -- Continued

(1)  Does not reflect the interest-rate risk component in the risk-based capital
     requirement, discussed above.  
(2)  Reflects fully phased-in deductions from total capital. 
(3)  Tangible and core capital are  computed as a percentage  of adjusted  total
     assets of $581.9 million. Risk-based capital is computed as a percentage of
     total risk-weighted assets of $384.7 million.

FDIC Insurance
The Deposits of First Federal are currently  insured by the Savings  Association
Insurance  Fund("SAIF")  which  is  administered  by the  FDIC.  The  FDIC  also
administers the Bank Insurance Fund ("BIF") which generally  provides  insurance
to commercial bank deposits. Both the SAIF and BIF are required by law to attain
and  maintain a reserve  ratio of 1.25% of  insured  deposits.  First  Federal's
deposit  insurance  premiums  for  1998  are  approximately  $0.064  per $100 of
deposits.

Technology Risk
In order to limit  its  technology  risk,  First  Defiance  has  outsourced  the
majority of its computer processing tasks to a variety of third-party vendors.

An ongoing  assessment of technology  risk includes an assessment of third party
vendors  readiness for processing in the year 2000.  Management is  coordinating
with its primary data processing provider, BISYS, Inc. to perform testing of all
mission  critical  applications  during the third and fourth  quarters  of 1998.
Management  also  has  reviewed  all  existing  hardware  and  software  that it
maintains in house.  Certain older  personal  computers  which are not Year 2000
compliant are being replaced and certain software  applications require upgrades
which are readily  available.  The Company has  implemented a  contingency  plan
which includes the replacement of its principal data processing  provider should
mission  critical  applications  not be fully  tested and verified as being Year
2000 compliant by specified dates.  Management believes that all vendors will be
compliant and that mission  critical  applications  will be tested by the end of
1998.

Management  does not believe that the cost of being Year 2000  compliant will be
material to the financial statements of First Defiance.
<PAGE>
                         FIRST FEDERAL SAVINGS AND LOAN
                                 DEFIANCE, OHIO

PART II-OTHER INFORMATION

Item 1.   Legal Proceedings

          First  Defiance is not engaged in any legal  proceedings of a material
          nature.

Item 2.   Changes in Securities

          Not applicable.

Item 3.   Defaults upon Senior Securities

          Not applicable.

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

          Not applicable

Item 5.   Other Information

          Not applicable.

Item 6.   Exhibits and Reports on Form 8-K

          a.   Reports  on form 8-K.  On July 16,  1998 First  Defiance  filed a
               current  report  on Form 8-K,  dated  July 16,  1998,  reporting,
               pursuant to Item 5 of such form,  that First  Defiance  completed
               the acquisition of The Leader Mortgage Company  effective July 1,
               1998.



<PAGE>


                         FIRST DEFIANCE FINANCIAL CORP.

                                   SIGNATURES


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

                                           First Defiance Financial Corp.
                                                    (Registrant)


            
Date:  August 13, 1998                     By:   /s/ Don C. Van Brackel
       ---------------                           ----------------------
                                                 Don C. Van Brackel
                                                 Chairman, President and
                                                 Chief Executive Officer


Date:  August 13, 1998                     By:   /s/ John C. Wahl
       --------------                            -------------------
                                                 John C. Wahl
                                                 Senior Vice President, Chief
                                                 Financial Officer and
                                                 Treasurer