To Our Stockholders

     On  behalf  of the  Directors,  Officers  and  Employees  of GSB  Financial
Corporation  and its  subsidiaries,  Goshen  Savings  Bank  and  GSB  Investment
Services,  Inc.,  I am pleased to bring you this 1998 Annual  Report,  our first
full year as a public  company.  Your Board of Directors and Management Team are
working  diligently  to put your  company in a position to move forward into the
next millennium as a strong and vibrant  institution serving the financial needs
of our communities.

     It is the  mission  of our  Company  to offer core  financial  services  to
individuals  and  businesses  in strategic  locations  within the Hudson  Valley
Region of New York  State.  During the past year we have made great  progress in
pursuit of this goal. In April we added key staff to begin a commercial  lending
and business  deposit  presence in our market area. This new line of business is
off to a strong start in its first year of  operation,  and in December we added
more depth to our staff in this area,  to support  greater  growth.  In July, we
formed GSB  Investment  Services,  Inc. as a wholly owned  subsidiary to provide
investment  and financial  planning  services to our customer  base. In July, we
offered a voluntary early termination  program to all employees with more than 5
years of service,  and restructured our post-retirement  employee benefits.  The
program  was very well  received  by our  employees,  therefore  allowing  us to
restructure  and  significantly  reduce  our  costs in  delivering  banking  and
financial  services.  Furthermore  it  provides  an  opportunity  to attract new
employees  with the skill sets that will  complement  our present staff and will
enable us to gain a competitive advantage in our market place. In September,  we
successfully  opened a full  service  bank branch in  Harriman,  New York.  This
strategically  located  branch office will make it easier to deliver our banking
and financial services in southern Orange County, which continues to show strong
growth  characteristics.  We also  overhauled  our computer  delivery  system to
increase effectiveness and become Y2K compliant.  In June, we declared our first
dividend as a public company to our stockholders.

     As you can see we have  begun the  process  of  investing  the new  capital
raised  during  our  public  offering.   We  are  also  exploring  a  number  of
possibilities  for expansion of our franchise and the related  leveraging of the
new capital. In preparation for potential expansion, your Board of Directors and
Management Team is investigating opportunities to improve and expand

<PAGE>


the  services  available  to our  customers  to further  satisfy the banking and
financial service needs of the communities we serve.

     We are a community-based  bank, and we intend to remain one. Throughout our
market area, a number of banks have consolidated or have been acquired by out of
area  institutions.   We  believe  that  this  gives  us  additional   marketing
opportunities to expand our customer base in Orange County.

     Net income in 1998 was  $600,000,  a decline from net income of $756,000 in
1997.  However,  the  principal  reason  for this  decline  was the  accrual  of
$699,000,  a  non-recurring  expense  in  connection  with the  voluntary  early
termination program for existing employees,  which has allowed us to restructure
our management team and move forward into the future. Without this expense and a
related benefit from revising our post-retirement  benefits program,  net income
would have been approximately $939,000, an increase of 24.2% over 1997.

     I want to take this  opportunity  to thank our  retiring  President,  Cliff
Kelsey,  who has been with us for more than 30 years.  He has been an  important
component of our success as a leader of our bank and community. We will continue
to value his good  counsel,  as he  remains a member of our Board of  Directors.
Likewise,  we want to thank our other officers and employees who will be leaving
us on December 31, for their dedication and faithful service.

     We must never forget that a profitable  business is always a partnership of
many interested  persons.  We are pleased that you, our stockholders have joined
us in that  partnership.  We invite you to become our  customers,  bring us your
business,  send us business and help us grow even  stronger and more  profitable
than we have been during the 1998 fiscal  year. I look forward to our journey to
become the premier community bank in our region.


                                        Sincerely,


                                        Thomas V. Guarino
                                        Chairman of the Board
                                        GSB Financial Corporation


<PAGE>


                         SELECTED FINANCIAL INFORMATION

     Set forth below are selected  consolidated  financial and other data of GSB
Financial  Corporation (the  "Company").  This financial data is derived in part
from, and should be read in conjunction with, the Financial Statements and Notes
to Consolidated  Financial Statements of the Company presented elsewhere in this
Annual  Report.  In the opinion of management of the Company,  all  adjustments,
consisting only of normal recurring adjustments,  necessary for a fair statement
of results for or as of the periods indicated have been included.

Selected Financial Condition Data:

<TABLE>
<CAPTION>
                                                     At September 30,
                                   ----------------------------------------------------
                                     1998       1997        1996      1995       1994
                                   --------   --------    -------   --------   --------
                                                      (In Thousands)
<S>                                <C>        <C>         <C>       <C>        <C>     
Total assets ...................   $131,935   $117,046    $96,323   $101,041   $100,222
Loans receivable, net (1) ......     78,713     65,738     58,727     57,919     57,171
Mortgage-backed securities (2) .      9,685     12,643      6,474      4,404      2,226
Investment securities (2) ......     31,474     26,638     23,081     27,844     34,714
Cash and cash equivalents ......      7,618      8,318      4,684      7,195      2,370
Deposits .......................     88,310     82,983     83,442     88,093     86,396
Borrowings .....................     10,000         --         --      1,000      2,000
Total equity ...................     31,495     32,633     11,747     11,097     11,508
</TABLE>


Selected Operations Data:
<TABLE>
<CAPTION>
                                                                Year Ended September 30,
                                                    ------------------------------------------------
                                                      1998      1997      1996      1995       1994
                                                    -------   -------   -------   -------    -------
                                                                     (In Thousands)
<S>                                                 <C>       <C>       <C>       <C>        <C>    
Interest income .................................   $ 8,220   $ 7,078   $ 6,235   $ 5,715    $ 5,747
Interest expense ................................     3,424     3,226     3,448     3,289      2,689
                                                    -------   -------   -------   -------    -------
  Net interest income ...........................     4,796     3,852     2,787     2,426      3,058
Provision for loan losses .......................        70        20        24        29         25
                                                    -------   -------   -------   -------    -------
  Net interest income after
    Provision for loan losses ...................     4,726     3,832     2,763     2,397      3,033

Non-interest income .............................       450       343       721       450        377
Non-interest expense ............................     4,175     2,979     2,575     2,931      2,798
                                                    -------   -------   -------   -------    -------
Income (loss) before income taxes and cumulative
  effect of changes in accounting principles ....     1,001     1,196       909       (84)       612
Income tax expense (benefit) ....................       401       440       351       (16)       301
                                                    -------   -------   -------   -------    -------
Income (loss) before cumulative effect of changes
  in accounting principles ......................       600       756       558       (68)       311
Cumulative effect of changes
  in accounting principles (3) ..................        --        --        --      (394)        --
                                                    -------   -------   -------   -------    -------
      Net income (loss) .........................   $   600   $   756   $   558   $  (462)   $   311
                                                    =======   =======   =======   =======    =======
</TABLE>

                         Notes appear on following page.


<PAGE>


Selected Financial Ratios and Other Data (4):

<TABLE>
<CAPTION>
                                                         At or for the Year Ended September 30,
                                               -----------------------------------------------------------
                                                1998         1997         1996         1995          1994
                                               ------       ------       ------       ------        ------
<S>                                            <C>          <C>          <C>          <C>           <C>   
Performance Ratios:
Return on average assets (net income
  to average total assets) ..............       0.49%        0.71%        0.56%       (0.46)%        0.31%
Return on average equity (net income
  to average equity) ....................        1.85         4.54         4.88        (4.04)         2.72
Average interest-earnings assets to
  average interest-bearing liabilities ..      139.56       119.66       109.57       109.91        112.69
Net interest rate spread (5) ............        2.97         3.25         2.71         2.27          2.85
Net interest margin (6) .................        4.14         3.89         3.08         2.62          3.21
Net interest income after provision
  for loan losses to total other expenses       1.13x        1.29x        1.07x        0.82x         1.08x
Capital and Asset Quality Ratios:
Average equity to average total assets ..       26.75        15.61        11.53        11.40         11.34
Total equity to assets end of period ....       23.87        27.88        12.20        10.98         11.48
Non-performing assets to total assets ...        0.07           --         0.02         0.22          0.26
Non-performing loans to total loans .....        0.01           --         0.03         0.39          0.45
Allowance for loan losses to total loans         0.21         0.21         0.21         0.20          0.19
Allowance for loan losses to
  non-performing loans ..................      41.75x        NM(7)        7.69x        0.51x         0.41x
Other Data:
  Number of real estate loans outstanding       1,064          983          876          913           951
  Number of deposit accounts ............      10,865       11,047       11,695       12,556        12,106
  Full service offices ..................           3            2            1            1             1
</TABLE>

(1) Shown net of deferred fees and the allowance for loan losses.

(2) At  September  30,  1998,  $3.9  million  of the  Company's  mortgage-backed
securities are classified as held to maturity and $5.8 million are classified as
available for sale.  All  investment  securities are classified as available for
sale.  See  Notes 3, 4, 5 and 6 of  Notes to  Financial  Statements.  For  1994,
investment securities include $2.2 million of trading securities.

(3) Reflects the recognition,  in one lump sum, of the transition obligation for
post-retirement  pension  benefits  recognized in accordance  with  Statement of
Financial  Accounting  Standards ("SFAS") 106. See Note 14 of Notes to Financial
Statements.

(4) Asset  quality and  capital  ratios are at end of period.  Other  ratios are
based upon month end average balances.

(5) The net interest rate spread represents the difference  between the weighted
average  yield on  interest-earning  assets  and the  weighted  average  cost of
interest-bearing liabilities.

(6)  The  net  interest  margin,   also  known  as  the  net  yield  on  average
interest-earning  assets,  represents  net interest  income as a  percentage  of
average interest-earning assets.

(7) Not Meaningful. The denominator (non-performing loans) is zero.


                                     - 2 -
<PAGE>


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

General

     On July 9, 1997,  Goshen  Savings Bank  converted  from a mutual to a stock
form savings bank. As part of the  Conversion,  we sold 2,248,250  shares of our
common stock at $10.00 per share. Net proceeds from the sale were $21.4 million,
including  proceeds from the sale of stock to our Employee Stock  Ownership Plan
which we  financed  with a loan from us.  From the net  proceeds,  we paid $10.7
million to the Bank in exchange for all of its common stock

     Our profitability  depends principally on net interest income, which is the
difference  between the income earned on loans and  investments  and our cost of
funds,  principally  interest paid on deposits.  Results of operations  are also
affected by our  provision  for loan  losses.  Other  sources of income  include
deposit  account  fees,  loan  and  loan  servicing  fees,  gains on the sale of
securities,  capital gain distributions on mutual fund investments, and fees for
banking   services  such  as  safe  deposit  boxes.   The  largest  category  of
non-interest  expense is  compensation  and benefits  expense.  Other  principal
categories of non-interest  expense include occupancy  expense,  data processing
costs, advertising and marketing expenses, and insurance costs.

     General economic and competitive conditions, particularly changes in market
interest rates,  government  policies and actions of regulatory  authorities can
also have a significant effect on our profitability. For example, an increase in
interest  rates may  increase the rates we must pay to keep our  deposits,  thus
increasing our cost of operations.  An economic recession in our community could
make it harder for our  customers  to repay their loans and cause an increase in
defaults. Although we now face substantial competition throughout Orange County,
an increase in competition could drive down our interest rate spread by lowering
loan rates while increasing deposit rates.

     Goshen Savings Bank is a federal savings bank with deposits  insured by the
FDIC.  The Bank's  primary  federal  banking  regulator  is the Office of Thrift
Supervision  ("OTS").  In  this  annual  report,   references  to  the  business
activities,  financial  condition and operations prior to July 9, 1997, refer to
the Bank,  while references to the periods after that date refer to both the GSB
Financial  Corporation and the Bank as  consolidated,  except to the extent that
the context otherwise indicates.

Management Restructuring

     During  the  summer  of 1998,  we  offered  a  voluntary  early  employment
termination  program  to those of our  employees  who had at least five years of
service under our pension plan. Employees had until September 30, 1998 to decide
whether to  participate  in the  program,  and if they  elected to do so,  their
employment  would  terminate on or before  December 31,  1998.  Those  employees
electing to participate in the program were entitled to receive certain enhanced
pension benefits,  severance payments and other related benefits.  Eleven of our
employees,  including  four  executive  officers,  elected to participate in the
program and filed their  election by  September  30. We then  accrued the entire
estimated  $699,000 cost of the program  during the quarter ended  September 30,
1998.

     Although  we  recognize  that this  program  will cause us to lose over 100
years of valuable  executive  officer  experience,  we believe that, in the long
run, we can reduce salary expense by combining the responsibilities of executive
officers and redistributing  those  responsibilities in a more efficient manner.
Beginning  in January  1999,  our senior  management  team will consist of three
executive  officers.  Rolly Peacock will be  responsible  for retail banking and
commercial lending;  Steve Dederick will be responsible for internal operations,
finance and  investments,  and Barbara Carr will be responsible  for residential
mortgage  lending  and human  resources.  They have  already  begun to take over
responsibility for these areas and control the day to day operations of the Bank
as a three member management team. For technical regulatory reasons, Chairman of
the Board Thomas  Guarino has been  designated as President of the Bank,  but he
continues  his other  business  activities  on a full time basis and will not be
involved in the day to day management of the Bank.


                                     - 3 -
<PAGE>


Management Strategy

     Our strategy is to continue to operate the Bank as a  community-based  bank
in  strategic   locations  offering  core  financial  services  while  exploring
appropriate  opportunities  to leverage the additional  capital  obtained in the
Conversion.  The Bank obtains  deposits from its local  communities  and invests
those deposits principally in one-to-four family residential mortgage loans and,
to a lesser degree, in consumer, commercial and other loans. Management seeks to
maintain a high  quality loan  portfolio  with low levels of  delinquencies  and
non-performing  assets by concentrating on residential mortgage loans. In fiscal
1998, we started a wholly-owned  subsidiary (GSB Investment  Services,  Inc.) to
make available,  through an independent  provider,  investment advisory and full
brokerage  services.  The Bank also opened a new branch office in Harriman,  New
York in September  1998, to expand its customer base. We have also increased our
commercial  lending  activities to augment the other  services we offer.  We are
also working to improve our customer service delivery capability to both provide
better  services to existing  customers  and  facilitate  expanding our customer
base.

     At September  30, 1998,  91.3% of our loan  portfolio  were first  mortgage
loans on owner-occupied  one-to-four family  residential real estate,  3.0% were
junior  mortgage home equity loans  (including  lines of credit),  and 2.3% were
first mortgage loans secured on one-to-four  family rental  properties.  We also
invest in debt securities. We focus on callable government agency securities and
mortgage-backed securities to increase yields, and we control risks by investing
in  securities  rated in the three  highest  grades by a  nationally  recognized
rating agency.

Analysis of Net Interest Income

     Net interest  income,  our principal  source of income,  is the  difference
between   the   income  on   interest-earning   assets   and  the   expense   of
interest-bearing liabilities. Net interest income depends principally on (i) the
dollar amount of interest-earning assets that we can maintain; (ii) the relative
amounts of  interest-earning  assets versus  interest-bearing  liabilities;  and
(iii) the  difference  between the yields  earned on those  assets and the rates
paid on those  liabilities.  Non-performing  loans  affect net  interest  income
because  they do not  provide  interest  income  but still  must be funded  with
deposits or borrowings.  Furthermore,  when a loan becomes  non-performing,  all
accrued but unpaid  interest is deducted  from current  period  income,  further
reducing net interest income.

     Our efforts and strategies to leverage our new capital have a direct effect
on  net  interest  income.   The  following  is  a  general  discussion  of  the
relationship  between strategic  actions taken and net interest income.  Further
specific information is provided below in the discussion comparing our financial
condition and results of operations in fiscal 1998, when we were a stock company
for the entire  year,  versus  1997 when we were a stock  company  for less than
three months.

     Cost of Funds Management. During fiscal 1996, the Bank worked to reduce its
cost of funds and adopted a number of deposit  pricing  programs to do so. Since
the Conversion,  in order to assist in the leveraging of the additional  capital
raised in the  Conversion,  we have adjusted our deposit  pricing  strategies to
make deposit  products  more  attractive.  This has been done to increase  funds
available for investment  and improve the leveraging of our capital.  Management
does not seek to lead the  market in  pricing  deposits,  but  instead  seeks to
combine above average but not extreme  pricing with local  community  service to
attract deposit customers.  However,  we continue not to offer premium rates for
certificates  of deposit of $100,000 or more,  resulting  in a low level of such
deposits.  Certificates  of deposit of  $100,000 or more  represented  only $2.4
million, or 2.7% of total deposits, at September 30, 1998.

     Investing the Additional Capital from the Conversion. After the Conversion,
we had approximately  $19.6 million of additional funds to invest,  equal to the
amount raised in the  Conversion  minus expenses and minus our loan to the ESOP.
These funds were first invested principally in government, agency, corporate and
mortgage-backed  bonds and federal  funds sold.  Since the new capital  provides
funds for investment  without any interest cost, such  investments  increase net
interest  income.  Those  investments  in securities and federal funds sold have
reduced  reported spread because they tend to have lower yields than loans,  our
highest  yielding asset  category.  However,  net interest  margin has increased
because the capital  generates  interest income without  corresponding  interest
expense.


                                     - 4 -
<PAGE>


     Increasing  the  Deposit  Base.  We continue  to explore  opportunities  to
leverage our capital through expansion of our deposit-taking  network.  The Bank
opened a new branch in Harriman,  New York in September  1998. This location was
already  outfitted  as a bank branch,  which  reduced  costs,  and allowed us to
expand to an adjoining community.  Further expansion through additional branches
is under consideration, but there is no present agreement to do so. New branches
may require  that we  temporarily  offer  higher  than  market rate  deposits to
capture  market  share.  At the same  time,  we will  incur the costs of the new
branch before that branch has become profitable.  Other growth strategies,  such
as borrowing money to increase funds available for investment,  tend to increase
the average cost of funds because  borrowed money generally has a higher rate of
interest  than  deposits.  We  cannot  assure  you  that  we  will  be  able  to
satisfactorily  leverage  our  capital,  and even if we can do so, we may not be
able to maintain our current asset mix or average asset yields.

     We have  aggressively  sought to increase  our deposits  through  increased
advertising  and  changing  the terms of our  money  market  accounts.  Deposits
increased  by $5.3  million or 6.4%,  during  fiscal 1998 from $83.0  million to
$88.3 million.  Money market accounts  increased by $2.1 million during the year
as we changed the  pricing of such  accounts  to make them more  attractive  for
large  balance  depositors.  We also believe that the customers of another local
savings bank,  which has recently merged,  are disenchanted  with the results of
the  merger,  giving us  opportunities  to  increase  our  customers  within our
existing and nearby markets.

     Expanding the Loan Portfolio.  Obtaining  additional funds through deposits
and  borrowings  is only half of the  equation.  We must  also find  appropriate
investment  opportunities that provide satisfactory  spreads. In order to do so,
we have increased  advertising for loans while also increasing our staff of loan
originators.  In addition, in order to increase average loan yields at a time of
low  residential  mortgage  rates,  we have begun to develop a  commercial  loan
portfolio. The portfolio is small but increasing, and provides opportunities not
only for higher  yields  and  better  interest  rate  sensitivity,  but also the
potential for  commercial  demand  deposits,  which provide  low-cost  funds for
investment.


                                     - 5 -
<PAGE>


Average Balances, Interest Rates and Yield

     The following  table presents for the periods  indicated,  the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.  No tax equivalent  adjustments  were made.
All average balances are monthly average balances. Non-interest-bearing checking
accounts  are  included  in the tables as a  component  of  non-interest-bearing
liabilities.

<TABLE>
<CAPTION>
                                                                         For the Year Ended September 30,
                                              -------------------------------------------------------------------------------------
                                                          1998                          1997                        1996
                                              --------------------------    --------------------------    -------------------------
                                                                 Average                       Average                      Average
                                               Average            Yield/     Average            Yield/    Average            Yield/
                                               Balance  Interest   Cost      Balance  Interest   Cost     Balance  Interest   Cost
                                              --------  -------- -------    --------  -------- -------    -------  -------- -------
                                                                             (Dollars in Thousands)
<S>                                           <C>        <C>       <C>      <C>        <C>       <C>      <C>       <C>       <C>  
Interest-earnings assets:
Loans receivable (1)........................  $ 71,803   $5,544    7.72%    $ 62,520   $4,833    7.73%    $57,794   $4,328    7.49%
Mortgage-backed securities .................    11,158      720    6.45        7,045      474    6.73       6,334      396    6.25
Investment securities.......................    25,342    1,575    6.21       21,626    1,332    6.16      24,136    1,388    5.75
Federal funds sold .........................     7,522      381    5.07        7,868      439    5.58       2,310      123    5.32
                                              --------   ------             --------   ------             -------   ------
  Total interest-earning assets ............   115,825    8,220    7.10       99,059    7,078    7.15      90,574    6,235    6.88
                                                         ------                        ------                       ------
Non-interest-earning assets ................     5,722                         7,566                       8,505
                                              --------                      --------                      -------
  Total assets .............................  $121,547                      $106,625                      $99,079
                                              ========                      ========                      =======
Interest-bearing liabilities:
Savings accounts ...........................  $ 26,798   $  803    3.00      $27,976      825    2.95     $27,154      814    3.00
Certificates of deposit ....................    38,162    1,948    5.10       38,084    1,907    5.01      40,284    2,130    5.29
Money market ...............................     9,327      334    3.58        9,856      295    2.99      10,800      333    3.08
Now accounts................................     4,398      114    2.59        3,931      101    2.57       3,376       88    2.61
Other ......................................     4,307      225    5.22        2,938       98    3.34       1,051       83    7.90
                                              --------   ------             --------   ------             -------   ------
  Total interest-bearing liabilities........    82,992    3,424    4.13       82,785    3,226    3.90      82,665    3,448    4.17
                                                         ------                        ------                       ------
Non-interest-bearing liabilities. ..........     6,044                         7,198                        4,987
                                              --------                      --------                      -------
  Total liabilities.........................    89,036                        89,983                       87,652
Equity .....................................    32,511                        16,642                       11,427
  Total liabilities and equity .............  $121,547                      $106,625                      $99,079
                                              ========                      ========                      =======

Net interest income/spread (2).(3)..........             $4,796    2.97%               $3,852    3.25%              $2,787    2.71%
                                                         ======    ====                ======    ====               ======    ==== 
Net earning assets/net interest margin (4)..  $ 32,833             4.14%    $ 16,274             3.89%    $ 7,909             3.08%
                                              ========             ====     ========             ====     =======             ==== 
Ratio of average interest-earning assets
  to average interest-bearing liabilities...              1.40x                         1.20x                       1.10x
                                                          ====                          ====                        ==== 
</TABLE>

(1)  Average  balances  include  non-accrual  loans.  Interest  on such loans is
     recognized as and when received.

(2)  Includes interest-bearing deposit in other financial institution.

(3)  Interest-rate  spread  represents the difference  between  average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.

(4)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.


                                     - 6 -
<PAGE>


Rate/Volume Analysis of Net Interest Income

     One method of analyzing  changes in net interest  income is to consider how
changes in average  balance  and  changes in average  rate earned or paid affect
interest  income or expense.  The  following  table  shows the dollar  amount of
changes  in  interest  income  and  interest  expense  for major  components  of
interest-earning  assets  and  interest-bearing  liabilities.  It  distinguishes
between the changes  caused by increases  or  decreases in average  balances and
changes caused by increases or decreases in average  interest rates.  The effect
of an increase  or decrease in volume is measured by changes in average  balance
between two periods  multiplied  by rate earned or paid during the first period.
The effect of an increase or decrease in rate between two periods is measured by
changes in rate  between the two periods  multiplied  by average  volume for the
first  period.  Changes  attributable  to both rate and volume,  which cannot be
segregated,  have been allocated proportionately to the change due to volume and
the change due to rate.

<TABLE>
<CAPTION>
                                                                          Year Ended September 30,
                                                   ----------------------------------------------------------------------
                                                           1998 vs. 1997                              1997 vs. 1996
                                                   Increase (Decrease) Due to:                Increase (Decrease) Due to:
                                                   ---------------------------                ---------------------------
                                                        Rate         Volume        Total          Rate         Volume        Total
                                                      -------       -------       -------       -------       -------       -------
                                                                                      (In Thousands)
<S>                                                   <C>           <C>           <C>           <C>           <C>           <C>    
Interest-earning assets:

Loans receivable ...............................      $    (6)          717       $   711       $   143       $   362       $   505
Mortgage-backed securities .....................          (20)          266           246            32            46            78
Investment securities ..........................           12           231           243            94          (150)          (56)
Federal funds ..................................          (39)          (19)          (58)            6           310           316
                                                      -------       -------       -------       -------       -------       -------
    Total interest-earning assets ..............          (53)        1,195         1,142           275           568           843
                                                      -------       -------       -------       -------       -------       -------

Interest-bearing liabilities:

Savings accounts ...............................           13           (35)          (22)          (13)           24            11
Certificates of deposit ........................           37             4            41          (110)         (113)         (223)
Money market ...................................           56           (17)           39           (10)          (28)          (38)
NOW accounts ...................................            1            12            13            (1)           14            13
Other ..........................................           70            57           127           (69)           84            15
                                                      -------       -------       -------       -------       -------       -------
    Total interest-bearing liabilities .........          177            21           198          (203)          (19)         (222)
                                                      -------       -------       -------       -------       -------       -------
Net change in net interest income ..............      $  (230)      $ 1,174       $   944       $   478       $   587       $ 1,065
                                                      =======       =======       =======       =======       =======       =======
</TABLE>

     Management of Interest Rate Risk

     Our interest  rate risk policy is to avoid taking undue  interest rate risk
while  continuing  to satisfy  customer  demand for loans.  Management  seeks to
limit, but not eliminate,  interest rate risk by offering adjustable rate loans.
However,  during periods of low interest rates when customers prefer  fixed-rate
loan products,  such as during the past few years,  originating  adjustable rate
residential mortgage loans has been very difficult. Instead, we have been making
fixed-rate  loans,  often at  interest  rates  higher  than those  which must be
offered to attract borrowers willing to accept adjustable rate loans. To balance
against the interest rate risk,  which  accompanies the making of such loans, we
market other loan  products  with shorter  terms or  adjustable  rates,  such as
variable rate based home equity loan products, commercial non-mortgage loans and
consumer loans.


                                     - 7 -
<PAGE>


     Interest rate pricing and policy are implemented, in the first instance, by
the Bank's Asset/Liability Committee, consisting of Bank officers. The committee
meets weekly to review the pricing of the Bank's loan and deposit products.  The
Board of  Directors  of the Bank  receives  and  reviews a report on the  Bank's
estimated interest rate sensitivity every quarter. When appropriate,  based upon
our need to manage  interest  rate risk,  we may shift our  investment  emphasis
between different types of loans and securities,  or we may seek to lengthen the
maturities  of our  liabilities.  We also  seek  to  cushion  ourselves  against
interest  rate  fluctuations  by  preserving  a loyal  customer  base  with core
deposits  that are less prone to  gravitate  to high rate  deposit  products  as
interest rates rise. For example,  at September 30, 1995,  1996, 1997, and 1998,
the Bank had passbook and statement  savings  deposits of $27.2  million,  $26.8
million, $26.8 million, and $28.1 million respectively, reflecting a significant
level of deposits with interest  rates that did not change  materially  for more
than four years.

     Gap  Analysis.  The matching of assets and  liabilities  may be analyzed by
examining  the  extent  to which  such  assets  and  liabilities  are  "interest
sensitive" and by monitoring our estimated interest  sensitivity "gap." An asset
or liability is said to be interest  sensitive  within a specific time period if
it will  mature or its  interest  rate will  adjust  based on market  conditions
(known as repricing)  within that time period.  The interest  sensitivity gap is
defined  as  the  difference  between  the  amount  of  interest-earning  assets
estimated to mature or reprice  within a specific  time period and the amount of
interest-bearing  liabilities  estimated  to mature or reprice  within that same
time period.  At September 30, 1998,  our one year gap position,  the difference
between the estimated  amount of  interest-earning  assets maturing or repricing
within one year and  interest-bearing  liabilities  maturing or repricing within
one year, as a percentage of total assets, was estimated to be a positive 10.5%,
as shown on the table below.

     A  gap  is   considered   positive  for  any  period  when  the  amount  of
interest-sensitive  assets exceeds the amount of interest sensitive  liabilities
estimated to reprice within such period.  A gap is considered  negative when the
amount  of  interest  sensitive  liabilities  exceeds  the  amount  of  interest
sensitive  assets  estimated  to  reprice  within a given  period.  When  market
interest  rates  increase,  the net  interest  income of an  institution  with a
positive  gap for the period of the  increase  would  expect an  increase in net
interest  income as its cost of funds  rises more  slowly than the yields on its
assets.  Net  interest  income of such an  institution  would be  expected to be
negatively  affected during a period of falling interest rates. The effect would
be expected to be the reverse for an institution  with a negative gap.  However,
the repricing of most assets and liabilities is  discretionary  and depends,  in
part,  on customer  preference.  Thus,  for  example,  during  periods of rising
interest rates, loan customers may delay the sales of their homes,  resulting in
reduced  loan  turnover.  At the same  time,  deposit  customers  with  low-rate
savings,  demand and NOW  accounts may switch  those  deposits  into higher rate
accounts as the higher rate accounts become more attractive.

     The  following  table  shows the  amounts  of  interest-earning  assets and
interest-bearing  liabilities  outstanding  at  September  30,  1998,  which  we
estimate,  based upon certain assumptions,  will reprice within the time periods
shown.  Except as stated below, the amount of assets and liabilities shown which
reprice  or mature  during a  particular  period  were  determined  based on the
earlier of the scheduled  maturity or next scheduled interest rate adjustment of
the asset or  liability.  Fixed-rate  mortgage  loans are  included in the table
without regard to scheduled principal payments or assumed voluntary prepayments.
Although   such  assets  are  normally   repaid  more  quickly  due  to  regular
amortization  payments and  voluntary  prepayment,  these  assumptions  are used
during this period of low interest rates as a conservative approach to analyzing
our  ability  to  reprice  our  assets.  Federal  funds  sold are  assumed to be
immediately interest sensitive.

     We have assumed that 70% of savings accounts, money market accounts and NOW
accounts are core  deposits and  therefore  are expected to reprice  beyond five
years.  We have assumed that the remainder of such deposits will reprice  evenly
over the first five years. Certificates of deposit are included based upon their
contractual maturities.

     Estimates of loan  prepayment  rates and deposit  turnover rates can have a
significant  impact on our estimated gap. While we believe that the  assumptions
used to prepare the following  table are  reasonable,  there can be no assurance
that such  estimates will  approximate  actual future loan repayment and deposit
withdrawal activity.


                                     - 8 -
<PAGE>


<TABLE>
<CAPTION>
                                                                            At September 30, 1998
                                             ---------------------------------------------------------------------------------------
                                              Less       Three
                                              Than       Months       Over One     Over Three    Over Five      More
                                              Three     Through       Through       Through       Through       Than
                                             Months     One Year    Three Years    Five Years    Ten Years    Ten Years      Total
                                             -------    -------       -------       -------      ---------     -------     --------
                                                                            (Dollars in Thousands)
<S>                                          <C>        <C>           <C>           <C>          <C>           <C>         <C>     
Interest-earnings assets:
Loans receivable..........................   $ 2,546    $26,577       $ 3,091       $ 1,742      $   1,784     $43,137     $ 78,877
Mortgage backed securities................     1,061      1,774         2,125         1,875          1,588       1,255        9,678
Federal funds sold........................     5,929         --            --            --             --          --        5,929
Investment securities ....................     6,316     14,907         9,206            --             --          --       30,429
                                             -------    -------       -------       -------      ---------     -------     --------
Total interest-earning assets ............    15,852     43,258        14,422         3,617          3,372      44,392      124,913
                                             =======    =======       =======       =======      =========     =======     ========
Interest-bearing liabilities:
NOW accounts..............................        74        222           592           592          3,452          --        4,932
Savings accounts .........................       421      1,264         3,371         3,371         19,662          --       28,089
Money market accounts....................        164        493         1,315         1,315          7,671          --       10,958
Certificates of deposits..................    13,422     19,858         6,022            48             --          --       39,350
Borrowings................................        --     10,000            -             --             --          --       10,000
                                             -------    -------       -------       -------      ---------     -------     --------
Total interest-bearing liabilities........    14,081     31,837        11,300         5,326         30,785          --       93,329
                                             -------    -------       -------       -------      ---------     -------     --------
Interest-earning assets less
Interest-bearing liabilities  ..........     $ 1,771    $11,421       $ 3,122       $(1,709)     $ (27,413)    $44,392     $ 31,584
                                             =======    =======       =======       =======      =========     =======     ========
Cumulative interest sensitivity gap...       $ 1,771    $13,192       $16,314       $14,605      $(12,808)     $31,584
                                             =======    =======       =======       =======      =========     =======
Cumulative gap to total assets........         1.34%     10.00%        12.37%        11.07%        (9.91)%      23.94%
                                             =======    =======       =======       =======      =========     =======
Cumulative gap to interest-earning assets.     1.41%     10.50%        12.98%        11.62%       (10.19)%      25.28%
                                             =======    =======       =======       =======      =========     =======
Cumulative interest-earning assets to
cumulative interest-bearing liabilities...   112.58%    128.73%       128.51%       123.35%         86.28%     133.84%
                                             =======    =======       =======       =======      =========     =======
</TABLE>

     Analysis of Market  Risk.  In addition to the gap analysis set forth above,
we have prepared the following table which shows the expected maturity, weighted
average  interest  rate  and  fair  value  of our  on  balance  sheet  financial
instruments at September 30, 1998. Asset and liability maturities are based upon
the same  assumptions set forth above with respect to the gap analysis table and
fair  values  are  based  upon  the  assumptions  set  forth  in  Note 19 of the
accompanying  Notes to Financial  Statements.  In any rapidly changing  interest
rate scenario, consumer preferences often shift dramatically, and unpredictably.
For example, in an increasing interest rate environment, some borrowers may seek
to  refinance  adjustable  rate loans into fixed rates in order to lock in fixed
rates before  interest rates go even higher,  while new home purchasers may seek
adjustable  rate  loans in the  belief  that  interest  rates will go back down.
Consumer   preferences  can  have  a  substantial  affect  on  the  accuracy  of
projections of changes in future income or value when such projections are based
upon  interest  rate  sensitivity  analysis.  Therefore,  although  we  consider
interest  rate  sensitivity  to be an  important  component  of our  analysis of
product offerings and pricing, other factors, such as maintaining a satisfactory
spread, are also important.  Please do not place undue emphasis on interest rate
sensitivity analysis.


                                     - 9 -
<PAGE>


<TABLE>
<CAPTION>
                                                                                 At September 30, 1998
                                                       --------------------------------------------------------------------------
                                                                        One to        Two to     More than     Total
                                                         To One           Two          Three       Three        Book        Fair
                                                          Year           Years         Years       Years       Value       Value
                                                       ----------     ----------    ----------    -------     -------     -------
Financial Assets                                                               (Dollars in Thousands)

<S>                                                    <C>            <C>           <C>           <C>         <C>         <C>    
Cash and cash equivalents .........................    $    5,929     $       --    $       --    $ 1,689     $ 7,618     $ 7,618
  Weighted average interest rate ..................          5.50%                          --         --          --        4.28%
Investment securities available for sale ..........         3,204          5,640         1,495     17,274      27,613      27,936
  Weighted average interest rate ..................          6.17%          6.49%         6.75%                  7.04%       6.81%
Mortgage-backed securities available for sale .....            --             --            --      5,797       5,797       5,804
  Weighted average interest rate ..................                           --            --         --        6.54%       6.54%
Mortgage-backed securities held to maturity .......           345            579           676      2,281       3,881       3,965
  Weighted average interest rate ..................          5.00%          6.99%         5.89%                  7.50%       6.94%
Federal Home Loan Bank stock ......................            .-             --            --        704         704         704
  Weighted average interest rate ..................                           .-            --         --        7.21%       7.21%
Equity securities .................................            --             --            --      2,112       2,112       2,834
  Weighted average interest rate ..................                           .-            --         --        6.87%       6.87%
Real estate loans - fixed-rate ....................         1,856            594         1,035     44,346      47,831      47,831
  Weighted average interest rate ..................          7.30%          7.36%         9.80%                  7.59%       7.62%
Real estate loans - adjustable-rate ...............        26,928            481           793      1,954      30,156      30,156
  Weighted average interest rate ..................          7.41%          7.51%         6.40%                  7.64%       7.40%
Consumer loans ....................................           339             69           119        363         890         890
  Weighted average interest rate ..................         10.38%         11.53%        10.84%                 10.45%      10.56%
Deposits:
Savings accounts ..................................         1,685          1,685         1,686     23,033      28,089      28,089
  Weighted average interest rate ..................          3.00%          3.00%         3.00%                  3.00%       3.00%
Certificates of deposit ...........................        33,280          5,396           626         48      39,350      39,350
  Weighted average interest rate ..................          4.98%          5.22%         5.10%                  5.10%       5.01%
Money market accounts .............................           657            657           658      8,986      10,958      10,958
  Weighted average interest rate ..................          4.07%          4.07%         4.07%                  4.07%       4.07%
Now accounts ......................................           296            296           296      4,044       4,932       4,932
  Weighted average interest rate ..................          2.25%          2.25%         2.25%                  2.25%       2.25%
Demand accounts ...................................            --             --            --      4,981       4,981       4,981
  Weighted average interest rate ..................                           --            --         --          --          --
</TABLE>


                                     - 10 -
<PAGE>


Comparison of Financial Condition at September 30, 1998 and September 30, 1997

Total  assets  increased  by $14.9  million,  or  12.7%,  to $131.9  million  at
September  30, 1998 from $117.0  million at September  30, 1997.  The  principal
components of the increase were:

     o    an increase in loans,  net by $13.0 million,  or 19.7%,  from $65.7 at
          September 30, 1997 to $78.7 million at September 30, 1998; and

     o    an increase in investment  securities  available for sale increased by
          $4.8 million, or 18.2% to $31.5 million at September 30, 1998.

The asset increases were a consequence of management's plan to increase leverage
and continue the process of deploying  our capital.  In order to implement  this
plan, we:

     o    increased   advertising  to  attract  both  additional   deposits  and
          additional loans;

     o    added an additional  employee to  concentrate  on the  origination  of
          residential  mortgage  loans through direct  contacts with  borrowers,
          real estate agents, builders and other potential loan sources;

     o    borrowed   funds  to  increase  the  level  of  funds   available  for
          investment;

     o    restructured  deposit  pricing  for money  market  accounts to attract
          large balance accounts by offering higher rates on such accounts; and

     o    generally  repriced deposit offerings to bring rates to slightly above
          average rates offered in the local market.

We funded the increase in assets primarily with:

     o    a $3.0 million decrease in mortgage-backed  securities to $9.7 million
          at September 30, 1998 from $12.6 million at September 30, 1997;

     o    a $5.3  million,  or 6.4%,  increase in  deposits to $88.3  million at
          September 30, 1998 as compared to $83.0 million at September 30, 1997,
          all of which occurred  during the third and fourth  quarters of fiscal
          1998; and
 
     o    an increase in borrowings from zero to $10 million.

Total equity  decreased by $1.1 million to $31.5  million at September  30, 1998
from $32.6 million at September  30, 1997.  The primary cause of the decrease in
equity was the  repurchase  of 126,230  shares of common stock for $2.0 million,
combined with dividends of $135,000.  These  reductions in equity were partially
offset by net income of $600,000,  a $287,000 increased in equity resulting from
the  release of ESOP stock for  allocation,  and a $73,000  increase  in the net
unrealized gain on securities  available for sale. At September 30, 1998, we had
the  right,  pursuant  to a notice  previously  filed  with the Office of Thrift
Supervision,  to  repurchase  an  additional  76,112  shares of our common stock
without further regulatory approval or notice being required.

Comparison of Operating Results for the Years Ended September 30, 1998 and
September 30, 1997

     General. Net income for the year ended September 30, 1998 was $600,000,  as
compared to $756,000 for the year ended  September 30, 1997. The decrease in net
income resulted  principally from the accrual of $699,000 of expenses  ($419,000
after tax) related to the implementation of a voluntary  employment  termination
program that was  partially  offset by the  termination  of the  post-retirement
health care and life insurance plan of $134,000.

     Interest Income. For the year ended September 30, 1998, interest income was
$8.2  million as compared to $7.1 million for 1997,  a $1.1  million,  or 16.1%,
increase.  The increase was primarily volume related as we invested the proceeds
of our public  offering,  increased  deposits  and  borrowed  funds to  increase
leverage.  Interest  earned on loans  increased  primarily due to an increase of
approximately  $9.3 million in the average volume of loans. We estimate that the
increase in the  average  balance of loans  resulted  in a $717,000  increase in
interest  income.  The  average  yield on loans  remained  relatively  constant,
declining by only one basis point from fiscal 1997 to fiscal 1998.  The yield on
adjustable  rate  mortgages  decreased due to a decline in the one year Treasury
bill index during this  period.  The  decrease in the yield on  adjustable  rate
mortgage loans was partially offset by fixed rate


                                     - 11 -
<PAGE>


mortgage  loans,  which were  originated at rates slightly higher than the fully
indexed rates on adjustable rate loans.  Efforts to increase the levels of other
loan types with higher yields,  such as commercial  loans and home equity junior
mortgage loans, had not yet yielded material  increases in these loan categories
by the end of fiscal 1998.

     Interest earned on investment  securities increased by $243,000 from fiscal
1997 to fiscal 1998, because of an increase in the average balance of investment
securities  by $3.7 million.  This increase was primarily due to our  leveraging
program  discussed above. We also  concentrated our new security  investments in
callable  government agency  securities and  mortgage-backed  securities,  which
generally  have higher yields than treasury  securities.  This was the principal
reason that our average  yield on  investment  securities  increased  by 5 basis
points from fiscal 1997 to 1998.

     Interest Expense.  Interest expense increased $198,000 from $3.2 million in
fiscal 1997 to $3.4 million in fiscal 1998. The principal  cause of the increase
was $225,000 of interest on  borrowings  in fiscal 1998,  compared to $24,000 of
interest on borrowings in fiscal 1997. However, in fiscal 1997 we had $74,000 of
interest  expense on stock  subscriptions  pending the  completion  of our stock
offering, compared to no similar expense in 1998.

     The average cost of funds  increased by 23 basis points from fiscal 1997 to
fiscal 1998,  primarily due to the combined effect of the borrowings,  which had
higher rates than deposits,  and the pricing  strategies  discussed  above which
increased  the rates on certain  deposit  categories.  In addition,  there was a
$207,000  increase in the average balance of  interest-bearing  liabilities from
fiscal 1997 to fiscal 1998.  For fiscal 1998,  interest  expense on deposits was
$3.2  million as compared to $3.1 million for 1997.  The primary  reason for the
increase  was an  increase  in the average  rates paid on money  market  deposit
accounts of 59 basis points and on  certificates  of deposit of 9 basis  points.
The average balance of  interest-bearing  deposits declined by $1.2 million from
fiscal 1997 to fiscal 1998,  although this decline was entirely during the first
two  quarters of fiscal  1998.  By the end of fiscal  1998,  total  deposits had
increased by $5.3 million  during the year as the increase in rates  offered and
more advertising began to be reflected in increased deposit volume.

     Net Interest  Income.  Net interest  income  before the  provision for loan
losses  increased by $944,000 from fiscal 1997 to fiscal 1998,  representing the
net effect of the $1.1  million  increase  in interest  income and the  $198,000
increase in interest  expense.  The overall  increase in net interest income was
reflected in an increase in net average  earning assets of $16.6  million,  from
$16.3  million at September  30, 1997 to $32.8  million at  September  30, 1998,
partially offset by decrease in spread of 28 basis points.  Spread decreased due
to a  number  of  factors,  including  the  investment  of  available  funds  in
securities  and federal funds sold pending  reinvestment  in loans,  the need to
improve  deposit  pricing,  the generally  higher rates paid on borrowings  when
compared to deposits,  and pressures  exerted by generally lower market interest
rate conditions.  However, net interest margin increased from 3.89% to 4.14% due
to a $15.9 million increase in average equity as a non-interest-bearing  funding
source from an average of $16.6 million in 1997 to $32.5 million in 1998.

     During both fiscal 1998 and 1997,  non-performing assets were at low levels
and  changes in the level of average  non-performing  assets from fiscal 1997 to
fiscal 1998 did not have a material effect on the change in net interest income.

     Provision  for Loan Losses.  We increased our provision for loan losses for
the year ended  September  30, 1998 to $70,000  from  $20,000 for the year ended
September 30, 1997, due to increases in the loan portfolio and the charge-off of
a portion  of a  residential  mortgage  loan that was  foreclosed  during  1998.
Non-performing  loans at September 30, 1998, totaled $4,000,  represented by one
consumer loan. We also had $94,000 of real estate owned at fiscal year end 1998,
represented by one residential  real estate parcel which was then being marketed
and which was sold  during the  quarter  ended  December  31, 1998 at no further
loss.

     We  periodically  review  our  loan  portfolio,  level of  charge-offs  and
recoveries,  general economic  conditions and other factors to determine whether
the  allowance  for loan  losses  is at a level  which  management  believes  is
adequate.  Any determination of the adequacy of the allowance for loan losses is
necessarily  speculative  based upon estimates of the future  performance of the
loan portfolio.  Although we maintain the allowance at a level which we consider
to be adequate to provide for potential  losses,  there can be no assurance that
such losses will not exceed


                                     - 12 -
<PAGE>


the current estimated  amounts.  As a result,  higher provisions for loan losses
may be necessary  in future  periods,  which would  adversely  affect  operating
results.

     Non-interest  income.  For the year ended September 30, 1998,  non-interest
income amounted to $450,000 as compared to $343,000 for the same period in 1997.
The  increase of $107,000 was  principally  caused by an increase of $129,000 in
securities  gains,  partially  offset by a reduction of $11,000 in capital gains
distributions  on our  mutual  fund  investment.  The mutual  fund pays  regular
dividends and traditionally  pays a capital gain dividend each year in December.
The amount of the capital  gain  dividend  depends  upon the market value of the
securities  owned  by  the  fund  and  the  timing  of  its  securities  trading
activities,  which,  depending upon market conditions,  result in realized gains
which are distributed each December.

     Non-interest  expense. For the year ended September 30, 1998,  non-interest
expense  totaled $4.2 million as compared to $3.0 million for the same period in
1997.  The  increase of $1.2  million is  principally  caused by the $699,000 of
expense for the voluntary early employment  termination  program and $344,000 of
compensation expense in connection with our ESOP and Incentive Stock Award Plan.
The  voluntary  early  employment  termination  program  was  offered to certain
qualifying  employees permitting them to receive severance payments and enhanced
post-termination  benefits if they  terminated  employment by December 31, 1998.
Eleven  employees of the Bank,  including  four executive  officers,  elected to
terminate  employment  under the program and filed their  elections prior to the
end of fiscal  1998.  We recorded the entire  expense of the program  during the
fourth quarter of fiscal 1998. In connection  with the program,  we also revised
our  employee  benefits  programs to curtail  post-retirement  health  insurance
benefits,  although employees electing to participate in the termination program
retained   certain   post-retirement   health   benefits.   The   reduction   in
post-retirement  health  benefits  allowed  us to  recover  $134,000  previously
accrued for anticipated post-retirement health benefit costs.

     The $344,000 of ESOP and ISAP expense includes $180,000 of contributions by
the Bank to the  ESOP to pay  principal  on our  loan to the  ESOP and  $107,000
representing  the amount required to be recorded as an expense under  accounting
rules because the market value of the stock on the date it was released from the
lien of the ESOP loan was higher than its cost,  which was 100%  financed by the
ESOP loan.  The  principal  payments on the ESOP loan are  $45,000 per  calendar
quarter.  Interest  on the  ESOP  loan  payable  to us is  eliminated  when  the
financial  statements of Goshen Savings Bank and GSB Financial  Corporation  are
consolidated.  ISAP  expense of $57,000  represented  expense  accruals  for the
gradual  vesting of ISAP shares,  which were  awarded to officers and  directors
during  fiscal  1998.  We also  operated as a publicly  traded  savings and loan
holding company  incorporated in Delaware throughout 1998, compared to less than
three months during 1997. As a result, expenses related to operating as a public
company  were  $241,000  higher in 1998 than in 1997,  and were  represented  by
expenses such as fees for additional  board and committee  meetings,  legal fees
related to securities matters and stockholder  meetings,  additional  accounting
fees associated with public reporting requirements under the Securities Exchange
Act of  1934,  proxy  solicitation  expense,  and  other  items.  Marketing  and
advertising  expense also  increased by $28,000 due to the  implementation  of a
more aggressive advertising campaign to solicit deposits and loans.

     Income Tax Expense.  Income tax expense  decreased  from $440,000 in fiscal
1997 to $401,000 in fiscal 1998.  The decrease was  primarily  the result of the
decline in net income  before  taxes by  195,000.  Most of our income is taxable
under both  federal  and New York State  income tax laws.  Tax-exempt  municipal
bonds are not a material income-producing factor.

Comparison of Financial Condition at September 30, 1997 and September 30, 1996

     Total assets at September  30, 1997 were $117.0  million  compared to $96.3
million at  September  30, 1996,  an increase of $20.7  million,  or 21.5%.  The
increase resulted principally from the net proceeds from the Conversion of $19.6
million,  excluding  the  ESOP  loan.  Due to  the  active  solicitation  of new
residential  mortgage loans, we increased loans, net by $7.0 million,  or 11.9%,
from $58.7 million at September 30, 1996 to $65.7 million at September 30, 1997.
We invested the remainder of the net proceeds of the  Conversion  principally in
investment and  mortgage-backed  securities  available for sale, which increased
$3.6 million and $7.0 million,  respectively,  at September 30, 1997 compared to
September 30, 1996.  Total deposits  decreased by $459,000 from $83.4 million at
September  30,  1996 to $83.0  million  as of  September  30,  1997.  Management
believes the decrease in deposits


                                     - 13 -
<PAGE>


resulted  principally  from the use of  deposits by some  customers  to purchase
stock in the Conversion.  The Bank opened a new branch in March 1997,  which had
total  deposits of $2.1 million at September 30, 1997.  Such deposits  partially
offset the decline from deposits used to purchase stock.

     Total equity  increased to $32.6 million at September 30, 1997,  from $11.7
million at September  30,  1996.  Included in the equity is an increase of $19.7
million  representing  the net proceeds from the initial  public  offering after
deducting  unallocated  ESOP  stock,  and an  increase  of  $416,000  in the net
unrealized gain on securities available for sale.

Comparison of Operating Results for the Years Ended September 30, 1997 and
September 30, 1996

     General.  Net income in fiscal 1997 was  $756,000,  compared to $558,000 in
fiscal  1996.  The  improvement  resulted  principally  from an  increase in net
interest  income  of  $1.1  million,  caused  by an  increase  in the  yield  on
interest-earning  assets, an increase in the volume of  interest-earning  assets
and a decrease in the cost of funds.  This  improvement was offset by a decrease
in non-interest income of $378,000 and an increase in both non-interest expenses
of $404,000 and income tax expense of $89,000.

     Interest Income. Interest income increased by $843,000, or 13.5%, from $6.2
million in fiscal 1996 to $7.1  million in fiscal 1997.  The average  balance of
interest-earning  assets during the fiscal 1997  increased by $8.5  million,  or
9.4%,  compared to fiscal  1996.  This  increase was caused  principally  by the
effect of investing (a) in excess of $50 million of stock subscriptions received
by the  Bank  pending  consummation  of the  Conversion  and (b) the  additional
capital received when our stock was sold. The Bank invested stock  subscriptions
in federal  funds sold,  which was the  principal  reason for an increase in the
average  balance of federal  funds sold from $2.3 million in fiscal 1996 to $7.9
million in fiscal 1997. The average  balance of loans increased by $4.7 million,
or 8.2%, in fiscal 1997 compared to fiscal 1996, as management  actively pursued
an increase in loan originations.  The average balance of investment  securities
declined by $2.5 million from fiscal 1996 to 1997 as the proceeds  from maturing
investment  securities were redeployed into  higher-yielding  loans in the early
part of the year, to be replenished  after the  Conversion.  Accompanying  these
increases in average volume was an overall increase in average yield of 27 basis
points,  including  an increase in the average  rate earned on loans of 24 basis
points to 7.73% from 7.49% as  adjustable  mortgage  loans reached fully indexed
rates and new mortgage loans tended to be fixed-rate  loans with slightly higher
interest  rates.  Yields on other asset  categories also increased due to higher
market rates on federal funds sold and security investments.

     Interest Expense.  Interest expense decreased $222,000 from $3.4 million in
fiscal 1996 to $3.2 in fiscal 1997.  The principal  cause for the decrease was a
decrease  of 27 basis  points  in the  average  cost of funds  in  fiscal  1997,
represented principally by a decline in the rate paid on certificates of deposit
as low market  interest  rates  combined  with our efforts to reduce our cost of
funds.  The  average  balances  of  interest-bearing  liabilities  increased  by
$120,000 due to the stock subscriptions received in the Conversion. Subscription
funds earned interest at the rates paid on the accounts into which the depositor
deposited the funds, or 3% if not held in a customer deposit account.  Thus, the
increase in deposits  was  represented  by  increases  in the volume of low cost
deposit  categories  while the average volume of  certificates  of deposit,  our
highest costing deposits, declined by $2.2 million, and the average rate paid on
such deposits  declined by 28 basis points.  Interest expense during fiscal 1997
included  $74,000 of  interest  paid at the 3% rate on stock  subscriptions  not
deposited into customer accounts.

     Net Interest  Income.  Net interest  income  before the  provision for loan
losses  increased by $1.1 million from fiscal 1996 to fiscal 1997,  representing
the net effect of the  $843,000  increase  in interest  income and the  $222,000
decrease in interest expense.  The increase in net interest income was reflected
in an increase in our spread by 54 basis point from 2.71% to 3.25%.

     During both fiscal 1997 and 1996,  non-performing assets were at low levels
and  changes in the level of average  non-performing  assets from fiscal 1996 to
fiscal 1997 did not have a material effect on the change in net interest income.


                                     - 14 -
<PAGE>


     Provision for Loan Losses.  From fiscal 1996 to fiscal 1997,  the provision
for loan  losses was reduced by $3,500 from  $23,500 to  $20,000.  The  decrease
resulted from management's  assessment of the adequacy of the allowance for loan
losses,  the level of  non-performing,  delinquent and classified loans, and our
historical  experience.   Throughout  1996  and  1997,  we  had  low  levels  of
non-performing, delinquent and classified loans, and net charge-offs amounted to
only $15,000 in fiscal 1996 and $4,000 in fiscal 1997.  All  charge-offs  during
both periods were on non-real estate secured  consumer  loans.  More than 85% of
our  loans  in  fiscal  1996  and  1997  were  secured  by  first  mortgages  on
owner-occupied  one-to-four  family  residences.  These loans,  when compared to
unsecured loans or commercial  mortgage loans,  tend to have lower default rates
and, even after default,  tend to result in lower charge-offs as a percentage of
total  loan  amount.  Therefore,  the  provision  for loan  losses in both years
represented  principally  the  replenishment  of  amounts  charged  against  the
allowance.

     Non-Interest Income.  Non-interest income was $343,000 in 1997, compared to
$721,000 in 1996. The $378,000  decrease was  principally  because during fiscal
1996, we recovered  $232,000 of the reserve  created in fiscal 1995 for possible
losses related to the closing of our correspondent bank, Nationar, compared to a
$9,000  additional  recovery in 1997. The net realized gains on securities  sold
declined by $114,000  between the periods because we did not sell any investment
securities  during 1997. We also  experienced a $26,000  decline in capital gain
distributions on our mutual fund investments from fiscal 1996 to 1997.

     Non-Interest Expense.  Non-interest expense increased by $404,000 from $2.6
million in 1996 to $3.0  million in fiscal 1997.  Salaries and benefits  expense
increased by $150,000 due to $83,000 of benefits  expense in connection with our
ESOP and $67,000  representing  the combined effect of normal salary  increases,
promotions and an increase in staff by  approximately  two full time  equivalent
employees.  The $83,000 of ESOP expense  corresponded to $45,000  contributed to
the ESOP in the form of  principal  payments  on the ESOP  loan,  an  additional
$22,000  representing  the amount  required to be  recorded as an expense  under
accounting  rules due to an increase in the market  value of the stock  released
from the lien of the ESOP loan, and $16,000 in administrative expense related to
the ESOP.  Fiscal 1997 also included a $50,000  expense for costs related to the
removal of  environmental  contamination  on property  adjoining the Bank's main
office. Furthermore,  from the completion of the Conversion to the end of fiscal
1997, we incurred or accrued  $79,000 of expenses  related to operating a public
company and holding the first annual meeting of stockholders.

     Income Tax Expense.  Income tax expense  increased  from $351,000 in fiscal
1996 to $440,000 in fiscal 1997. The increase was  principally the result of the
increase in our income before taxes from $909,000 in fiscal 1996 to $1.2 million
in fiscal 1997.  Our  effective  tax rate  declined from 38.6% in fiscal 1996 to
36.8% in fiscal 1997  principally due to a reduction in deferred tax liabilities
caused by changes in New York State law regarding the tax bad debt deduction.

Liquidity and Capital

     Our primary sources of funds are deposits,  proceeds from the principal and
interest payments on loans, mortgage-backed and debt securities and capital gain
distributions  on our mutual fund  investment.  While  maturities  and scheduled
amortization of loans and securities are predictable  sources of funds,  deposit
outflows,  mortgage  prepayments  and  mortgage  loan and  securities  sales are
greatly   influenced  by  general  interest  rates,   economic   conditions  and
competition.

     Our  primary   investing   activity  is  the   origination  of  residential
one-to-four family mortgage loans and the purchase of  mortgage-backed  and debt
securities.  In 1998, 1997 and 1996, we originated $20.8 million,  $13.3 million
and $10.2  million  of loans,  respectively.  Loans,  net,  after  payments  and
charge-offs, increased by $13.0 million, $7.0 million, and $808,000 during those
same three years, respectively, while investment and mortgage-backed securities,
excluding the effect of unrealized gains and losses,  increased by $1.8 million,
$9.0 million and decreased by $2.9 million,  respectively.  In general, if funds
are available at times when they are not needed to make loans, they are invested
on a short term basis in securities  or federal  funds sold,  and then when loan
opportunities arise, funds are gradually shifted into loans.  However, a portion
of our assets are always invested in liquid assets such as federal funds


                                     - 15 -
<PAGE>


sold,  bank  deposits and short term  securities so that funds will be available
when needed for unanticipated loan demand,  deposit outflows, or other cash flow
needs.

     Deposits  and  borrowings  increased  by  $15.3  million,  or  18.5%,  from
September  30, 1997 to  September  30, 1998.  The increase had two  components -
$10.0 million in new borrowings and a $5.3 million  increase in deposits.  These
increases were caused by  implementation of our capital  leveraging  strategies.
Deposits  declined by $459,000  from  September  30, 1996 to September 30, 1997.
Deposits  decreased from 1996 to 1997 principally  because interest  credited on
deposits  was more than offset by  withdrawals  to purchase  our stock.  Deposit
flows are also affected by the level of interest  rates,  the interest rates and
products offered by the local competitors, and other factors.

     We regularly monitor our liquidity. Excess short-term liquidity is invested
in  overnight  federal  funds sold.  If we need more funds than we can  generate
internally,  we can borrow those  funds.  At  September  30, 1998,  the Bank had
unused  lines of  credit  with the  Federal  Home Loan Bank of New York of $15.5
million.  The Bank also had  outstanding  Federal Home Loan Bank  borrowings  of
$10.0 million at the end of fiscal year 1998, which were not against the line of
credit.  The Bank undertook these borrowings to provide an appropriate method of
leveraging the additional capital obtained in the Conversion.

     At September 30, 1998, we had $4.4 million of  outstanding  commitments  to
make loans and our  customers  had $2.3  million of unused lines of credit which
they could borrow from us.  Management  anticipates that we will have sufficient
funds  available to meet our  obligations to fund these loans.  Certificates  of
deposit scheduled to mature in one year or less from September 30, 1998, totaled
$33.3  million.   Management   anticipates  that  we  will  be  able  to  retain
substantially all of such deposits if we decide to do so to fund loans and other
investments.

     At  September  30,  1998,   the  Bank  exceeded  all   regulatory   capital
requirements  of the OTS  applicable  to it, with  tangible  and core capital of
$22.1 million, or 17.8% of adjusted assets and total risk-based capital of $22.3
million,  or 37.4% of  risk-weighted  assets.  The Bank was  classified as "well
capitalized" at September 30, 1998 under OTS regulations.

     The Bank must  satisfy  minimum  liquidity  regulations  of the OTS,  which
require  liquid  assets equal to at least 5% of net  withdrawable  accounts plus
short term  borrowings,  measured on a monthly  basis.  The Bank  satisfies this
requirement, and at September 30, 1998 had a liquidity ratio of 17.9%.

Year 2000 Compliance

     As is now  well  known  due to  extensive  media  coverage,  many  computer
hardware and software systems as well as computerized components of non-computer
systems  may be  unable to  process  information  and  perform  their  functions
properly  beginning January 1, 2000. In order to avoid business  disruption as a
result of  non-compliant  systems,  we have adopted a multi-faceted  approach to
protecting our business operations.  We have appointed an officer of the Bank to
spearhead  the Year 2000  compliance  effort and our Board of Directors  reviews
that effort on a monthly basis.

     We have identified four principal areas in which Year 2000 risks may exist,
requiring checking,  testing and verification.  First, there are general utility
systems,  such as the  electric  and  telephone  utilities,  which must  operate
satisfactorily  so we,  as well as  other  businesses,  can  function  properly.
Although we have verified that these systems claim to be preparing for Year 2000
compliance,  we can't test them because  they are  independent  businesses  with
which we have no special contractual relationship. It is worthy to note that our
main office has back-up generator power, which will allow us to continue on-site
operation if electric  service is  interrupted.  However,  any  interruption  in
electrical,  telephone,  mail or other  similar  service  would  make  long-term
operations  difficult because of the need for  communications  lines to our data
processing centers,  telephone lines to service our customers,  and mail service
to receive loan payments. Back-up manual transmission of data by disks and tapes
will be  possible  on an interim  basis if local  outages  prevent  normal  data
transmission.

     The second area for  consideration is  non-information  technology  systems
within our offices,  such as vaults,  security systems,  heating systems and the
like. Most of these systems have already been tested and have been found to


                                     - 16 -
<PAGE>


not have Year 2000 compliance problems, generally either because the systems are
manual or are mechanical without material  computerized  parts. Final testing of
these systems is expected to be complete by March 1999.

     The  third,  and  perhaps  most  difficult  area of  compliance,  is in our
computerized  data processing,  record keeping,  accounting and service delivery
software  and  hardware.  During the past few  years,  we have been aware of the
problem of Year 2000 compliance and as systems have been gradually replaced,  we
have taken  appropriate  steps to assure that new  software  and  hardware  will
operate  properly.  We recently  worked with NCR  Corporation,  our primary data
processing servicer,  to convert to a new data processing system developed to be
Year 2000 compliant.  Working in conjunction with other users of the system,  we
have tested  various  dates and scenarios to assure that the system will operate
properly,  including  actually  changing  system  dates  and  processing  actual
transactions  and  reports.  All the  tests  were  satisfactory.  NCR  has  also
undergone  Year 2000  compliance  testing by bank  regulators and the results of
that testing have been reviewed by the Board of Directors.

     All data  processing  terminals were replaced during fiscal 1998 as part of
our process of updating obsolete and fully  depreciated  equipment and improving
our system for delivering  services to customers.  The new computers and related
software  are all Year 2000  compliant.  Our  mortgage  origination  software is
scheduled  to be  upgraded  as part of the normal  upgrading  process to improve
functionality in early 1999. The designer has represented that the new system is
Year 2000 compliant and other existing users have confirmed this.  Likewise,  we
are scheduled to change our ATM servicer  during March 1999,  which will provide
Year 2000  compliance  as well as  improved  customer  service.  Other  software
systems have been tested and are already  Year 200  compliant,  with  additional
normal upgrades scheduled for 1999.

     Fourth,  Year 2000  compliance  problems  of other  businesses  may have an
adverse effect on their financial condition,  which could have ripple effects on
our  business.  Loans to  businesses  are a  relatively  small  part of our loan
portfolio,  so we do not believe that  business  interruptions  of customers are
likely to have direct  material  effects on our  operations.  However,  if local
businesses  are adversely  affected by Year 2000  compliance,  this could affect
their  employees,  making it more  difficult  for them to repay their loans,  or
requiring  them to  reduce  savings  in  order  to have  funds  to live  pending
resumption of satisfactory employment. There is little that we can do to address
these risks because they are primarily out of our control.

     The costs of Year 2000 compliance have not been significant because we have
endeavored to integrate the need for  compliance  with our normal  upgrading and
improvement of hardware and software to prepare to meet the business  challenges
of the new millennium.  Compliance costs are thus far insubstantial, and involve
predominately  the additional  staffing costs associated with running  necessary
after-hours testing. We recognize,  however,  that Year 2000 compliance requires
the co-operation of many vendors,  some of which are not within our control. The
most  reasonably  likely worst case scenario  seems to be that either one of our
local utility companies, or a company servicing the NCR data center, will not be
able to perform and we, or NCR, will not be able to be up and running  normally.
If this occurs,  we will be required to operate using manual systems until other
service providers are operating  satisfactorily.  On a short term basis,  manual
systems may be  satisfactory,  but if outages extend for longer periods of time,
customer service may be adversely affected,  loan payments to us may be delayed,
and additional staffing or overtime is likely to be required.

Impact of Inflation and Changing Prices

     Our  Financial  Statements  have been  prepared  using  Generally  Accepted
Accounting Principals,  which require that we measure our financial position and
operating results in historical  dollars without  considering the changes in the
purchasing  power of money over time due to inflation.  Inflation  increases our
operating costs, such as salaries, building and equipment expense, insurance and
most other  categories of  non-interest  expenses.  However,  unlike  industrial
companies,  most of our assets and  liabilities  are  monetary  in nature.  As a
result,  changes in interest rates have a greater impact on our performance than
inflation.  Interest rates do not  necessarily  move in the same direction or to
the same  extent as the price of goods and  services,  although  interest  rates
generally  increase  during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation.


                                     - 17 -
<PAGE>


Impact of New Accounting Standards

     Stock-Based  Compensation.  In  November  1995,  the  Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 123,
"Accounting for Stock Based  Compensation"  ("SFAS 123"). SFAS 123 permits us to
choose either a new fair value method or the current  intrinsic  value method of
accounting for stock-based compensation plans, such as our stock option plan and
our incentive  stock award plan, but not our ESOP. If the intrinsic value method
is used, we must disclose net earnings and earnings per share  computed as if we
had used the fair value  method.  We have  decided to account  for  compensation
expenses  of our stock  option  plan and  incentive  stock  award plan using the
intrinsic  value  method and have used that  method  for all  awards  under both
plans.

     Pensions and Other  Post-Retirement  Benefits.  In February  1998, the FASB
issued   SFAS   132,   "Employers'   Disclosures   About   Pensions   and  Other
Post-Retirement  Benefits," which  standardizes the disclosure rules for pension
and other post-retirement benefits for fiscal years beginning after December 15,
1997.  Disclosures  regarding  pensions  and other  non-pension  post-retirement
benefits have been combined.  SFAS 132 addresses disclosure issues only and does
not  require  any  substantive  change  in the  measurement  or  recognition  of
liabilities arising out of the benefits covered by it. Hence, the implementation
of SFAS 132 will  have no  effect  on our  financial  condition  or  results  of
operations.

     In June  1998,  the  FASB  issued  SFAS  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities"  which  establishes  requirements  for the
proper accounting,  reporting and financial statement presentation of derivative
instruments and hedging activities.  Derivative instruments must be reflected in
a  company's   financial   statements  separate  from  any  hedging  or  similar
transaction designed to reduce the risks of owning the derivative instrument. We
do not  invest in  derivative  instruments  and we have no plans to do so in the
foreseeable  future.  Therefore,  SFAS 133 is not expected to have any effect on
the  financial  disclosures  or our financial  condition.  SFAS 133 also permits
certain  reclassifications  of securities among the trading,  available for sale
and  held to  maturity  classifications.  We do not  intend  to  reclassify  any
securities pursuant to SFAS 133.

Forward-Looking Statements

     When used in this Annual Report,  in our future filings with the Securities
and Exchange  Commission,  in our press  releases or other public or stockholder
communications,  or in oral  statements  made with the approval of an authorized
officer,  words and phrases  such as " will likely  result" "are  expected  to,"
"will  continue,"  "are   estimated,"   "are   anticipated"  and  other  similar
expressions,  are intended to identify  "forward-looking  statements"  under the
Private  Securities  Litigation Reform Act. In particular,  certain  information
customarily disclosed by financial  institutions,  such as estimates of interest
rate  sensitivity  and the adequacy of the loan loss  allowance,  are inherently
forward-looking  statements because, by their nature, they represent attempts to
estimate what will occur in the future.

     A wide variety of factors could cause our actual results and experiences to
differ materially from the anticipated  results or other expectations  expressed
in our forward-looking  statements. Some of the risks and uncertainties that may
affect our  financial  condition  or results of  operations  include but are not
limited to: (i)  deterioration in local,  regional,  national or global economic
conditions  which  could  result,  among  other  things,  in an increase in loan
delinquencies,  a  decrease  in  property  values,  or a change  in the  housing
turnover rate;  (ii) changes in market interest rates or changes in the speed at
which  market  interest  rates  change;  (iii)  changes in laws and  regulations
affecting the financial services industry; (iv) changes in competition;  and (v)
changes  in  consumer  preferences.  Year 2000  non-compliance  by any  business
providing  services to us could have a negative effect on our ability to operate
profitably.

     Furthermore,  changes in the economic circumstances of individual borrowers
could have a material  adverse  effect on their  ability  to repay  their  loans
regardless  of  general  economic  conditions.   Likewise,  financial  adversity
experienced  by  any  one  major  business  in  our  market  area  could  have a
significant  adverse  effect on those of our customers who are employees of that
business or otherwise  rely upon it for their  economic  well being.  This could
affect  their  ability to honor  their  loan  obligations  and their  ability to
maintain deposit balances.


                                     - 18 -
<PAGE>


     For these reasons,  we caution readers not to place undue reliance upon any
forward-looking statements. Forward-looking statements speak only as of the date
made and we assume no  obligation to update or revise any such  statements  upon
any change in applicable circumstances.


                                     - 19 -
<PAGE>


                            GSB FINANCIAL CORPORATION
                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                                 <C>
Independent Auditors' Report ........................................................................21

Consolidated Statements of Condition at September 30, 1998 and 1997..................................22

Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996..........23

Consolidated Statements of Equity for the Years Ended September 30, 1998, 1997 and 1996..............24

Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996.......25-26

Notes to Consolidated Financial Statements .......................................................27-53
</TABLE>


                                     - 20 -
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
GSB Financial Corporation
1 South Church Street
Goshen, New York 10924

     We have  audited the  accompanying  consolidated  statements  of  financial
condition of GSB Financial  Corporation and  Subsidiaries  (the "Company") as of
September  30,  1998  and  1997,  and the  related  consolidated  statements  of
operations, changes in stockholders' equity and cash flows for each of the years
in the three year period ended September 30, 1998. These consolidated  financial
statements   are  the   responsibility   of  the   company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in  all  material  respects,  the  financial  position  of GSB
Financial  Corporation and  Subsidiaries at September 30, 1998 and 1997, and the
results  of their  operations,  changes in  stockholders'  equity and their cash
flows for each of the years in the three year period ended  September  30, 1998,
in conformity with generally accepted accounting principles.


Respectfully submitted,


---------------------------
NUGENT & HAEUSSLER, P.C.
October 27, 1998
Montgomery, New York


                                     - 21 -
<PAGE>


GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands except shares and per share amounts)

<TABLE>
<CAPTION>
                                                                           September 30,
                                                                      ----------------------
                                                                         1998         1997
                                                                      ---------    ---------
<S>                                                                   <C>          <C>      
ASSETS
  Cash and due from banks .........................................   $   2,818    $   3,218
  Federal funds sold ..............................................       4,800        5,100
                                                                      ---------    ---------
  Cash and cash equivalents .......................................       7,618        8,318

  Investment securities available for sale (Note 3 and 4) .........      31,474       26,638
  Mortgage-backed securities:
    Held to maturity (estimated market values of $3,965 and
      $5,766 at September 30, 1998 and 1997, respectively) (Note 5)       3,881        5,653
    Available for sale (Note 6) ...................................       5,804        6,990
  Loans receivable, net (Note 7 and 8) ............................      78,713       65,738
  Banking house and equipment (Note 9) ............................       2,800        2,299
  Accrued interest receivable (Note 10) ...........................         949          788
  Other real estate owned, net ....................................          94           --
  Prepaid expenses and other assets ...............................         602          622
                                                                      ---------    ---------
      Total assets ................................................   $ 131,935    $ 117,046
                                                                      =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
  Liabilities
    Deposits (Note 11) ............................................   $  88,310    $  82,983
    Mortgagors' escrow deposits ...................................         126           62
    Borrowings (Note 12) ..........................................      10,000           --
    Accrued expenses and other liabilities ........................       2,004        1,368
                                                                      ---------    ---------
      Total liabilities ...........................................   $ 100,440    $  84,413
                                                                      ---------    ---------

  Commitments and contingent liabilities (Note 17)

  Stockholders'  Equity
    Preferred stock ($0.01 par value; 500,000 shares
      authorized; none issued) ....................................          --           --
    Common stock ($0.01 par value; 4,500,000 shares
      authorized; 2,248,250 issued at September 30, 1998) .........          22           22
    Additional paid-in capital ....................................      21,510       21,446
    Retained earnings, substantially restricted ...................      12,825       12,360
    Net unrealized gain on securities available
      for sale, net of taxes ......................................         632          559
    Unallocated ESOP stock (Note 14) ..............................      (1,574)      (1,754)
    Unearned ISAP stock (Note 14) .................................        (391)          --
    Treasury stock ................................................      (1,529)          --
                                                                      ---------    ---------
      Total stockholders' equity ..................................   $  31,495    $  32,633
                                                                      ---------    ---------
      Total liabilities and stockholders' equity ..................   $ 131,935    $ 117,046
                                                                      =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                     - 22 -
<PAGE>


GSB Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                For the Years Ended September 30,
                                                            ----------------------------------------
                                                                1998           1997         1996
                                                            -----------    -----------   -----------
                                                        (In thousands except shares and per share amounts)
<S>                                                         <C>            <C>           <C>        
INTEREST INCOME
   Loans ................................................   $     5,544    $     4,833   $     4,328
   Federal funds sold ...................................           381            439           123
   Investment securities ................................         1,575          1,332         1,388
   Mortgage-backed securities ...........................           720            474           396
                                                            -----------    -----------   -----------
     Total interest income ..............................         8,220          7,078         6,235

INTEREST EXPENSE
   Deposit accounts (Note 11) ...........................         3,199          3,128         3,365
   Other borrowings (Note 12) ...........................           225             24            83
   Stock subscription interest expense ..................            --             74            -- 
                                                            -----------    -----------   -----------
     Total interest expense .............................         3,424          3,226         3,448
   Net interest income ..................................         4,796          3,852         2,787
   Provision for loan losses (Note 8) ...................            70             20            24
                                                            -----------    -----------   -----------
   Net interest income after provision for loan losses ..         4,726          3,832         2,763

NON-INTEREST INCOME
   Service charges on deposit accounts ..................           139            139           147
   Other income .........................................            99            101           108
   Net realized gains on securities .....................           130              1           115
   Capital gains distributions ..........................            82             93           119
   Nationar recovery ....................................            --              9           232
                                                            -----------    -----------   -----------
     Total non-interest income ..........................           450            343           721

NON-INTEREST EXPENSE
   Salaries and employee benefits .......................         1,931          1,657         1,507
   Occupancy and equipment ..............................           319            361           333
   Data processing expenses .............................           236            246           223
   Early termination expense (Note 13) ..................           699             --            --
   Recovery of post-retirement FASB 106 expense (Note 14)          (134)            --            --
   Other non-interest expense ...........................         1,124            715           512
                                                            -----------    -----------   -----------
     Total non-interest expense .........................         4,175          2,979         2,575
                                                            -----------    -----------   -----------
   Income before income taxes ...........................         1,001          1,196           909
   Income tax expense (Note 15) .........................           401            440           351
                                                            -----------    -----------   -----------
   Net income ...........................................   $       600    $       756   $       558
                                                            ===========    ===========   ===========

   Basic earnings per share .............................   $      0.29    $      0.37           N/A
   Weighted average shares outstanding - basic ..........     2,043,484      2,068,444           N/A
   Diluted earnings per share ...........................   $      0.29    $      0.37           N/A
   Weighted average shares outstanding - diluted ........     2,059,981      2,068,444           N/A
</TABLE>

          See accompanying notes to consolidated financial statements.


                                     - 23 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               (In thousands, except shares and per share amounts)

<TABLE>
<CAPTION>
                                                                                       Unearned              
                                                                  Retained     Common  Incentive             Unrealized
                                     Shares           Additional  Earnings     Stock     Stock    Treasury     Gain on
                                  Outstanding  Common  Paid-In  Substantially Acquired   Award      Stock,   Securities,
                                     Common    Stock   Capital   Restricted   by ESOP     Plan     at Cost   net of tax   Total
                                 ------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>    <C>        <C>        <C>         <C>       <C>          <C>      <C>    
Balance at September 30, 1995 ...          --     --        --    $11,046         --        --          --      $ 51     $11,097
                                 ------------------------------------------------------------------------------------------------

Net Income ......................          --     --        --        558         --        --          --        --         558

Change in net unrealized gain on
  Investment securities available
  for sale, net of income taxes .          --     --        --         --         --        --          --        92          92
                                 ------------------------------------------------------------------------------------------------
Balance at September 30, 1996 ...          --     --        --     11,604         --        --          --       143      11,747
                                 ------------------------------------------------------------------------------------------------

Net Income ......................          --     --        --        756         --        --          --        --         756
Sale of common stock ............   2,248,250     22    21,424         --         --        --          --        --      21,446
Acquisition of ESOP Stock .......          --     --        --         --     (1,799)       --          --        --      (1,799)
ESOP Shares committed to be
  Released ......................          --     --        22         --         45        --          --        --          67
Change in net unrealized gain on
  investment securities available
  for sale, net of income taxes .          --     --        --         --         --        --          --       416         416
                                 ------------------------------------------------------------------------------------------------
Balance at September 30, 1997 ...   2,248,250     22    21,446     12,360     (1,754)       --          --       559      32,633
                                 ------------------------------------------------------------------------------------------------

Net Income ......................          --     --        --        600         --        --          --        --         600
Dividends Paid ..................          --     --        --       (135)        --        --          --        --        (135)
Acquisition of Treasury Stock ...          --     --        --         --         --        --      (2,020)       --      (2,020)
ESOP Shares committed to be
  Released ......................          --     --       107         --        180        --          --        --         287
Change in net unrealized gain on
  Investment securities available
  for sale, net of income taxes .          --     --        --         --         --        --          --        73          73
Grant of Restricted Stock under
  ISAP ..........................          --     --       (43)        --         --      (448)        491        --          --
Amortization of unearned
  ISAP compensation .............          --     --        --         --         --        57          --        --          57
                                 ------------------------------------------------------------------------------------------------
Balance at September 30, 1998 ...   2,248,250   $ 22   $21,510    $12,825    $(1,574)    $(391)    $(1,529)     $632     $31,495
                                 ================================================================================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                     - 24 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Years Ended September 30,
                                                                                --------------------------------
                                                                                  1998        1997        1996
                                                                                --------    --------    --------
                                                                                          (In Thousands)
<S>                                                                             <C>         <C>         <C>     
Cash flows from operating activities:
Net income (loss) ...........................................................   $    600    $    756    $    558
Adjustments to reconcile net income to net cash provided by
  operating activities:
Depreciation ................................................................        143         157         142
Provision for loan losses ...................................................         70          20          24
Fair value provision of ESOP & ISAP shares committed to be
  Released ..................................................................        343          67          --
Provision for Nationar loss contingency .....................................         --          --        (232)
Net loss on sale of other real estate owned .................................         --          --          (5)
Gain on maturity/redemption of investment securities -
  available for sale ........................................................       (130)         (1)       (115)
Net (increase) decrease in other assets .....................................       (234)       (314)        256
Net amortization on investment securities -  available for sale .............         55          72         222
Net amortization (accretion) on mortgage - backed
  securities - held to maturity .............................................          5           1           2
Net amortization (accretion) on mortgage - backed
  securities - available for sale ...........................................         17           2          --
Increase (decrease) in accrued expenses and other  liabilities ..............        589          18         262
                                                                                --------    --------    --------
Net cash provided by operating activities ...................................      1,458         778       1,114
                                                                                --------    --------    --------

Cash flows from investing activities:

Purchases of mortgage - backed securities
  held to maturity ..........................................................         --        (405)     (3,653)
Purchases of mortgage - backed securities
  available for sale ........................................................     (1,928)     (7,108)         --
Proceeds from principal paydowns of mortgage - backed
  securities -  held to maturity ............................................      1,765       1,225       1,581
Proceeds from principal paydowns of mortgage - backed
  securities - available for sale ...........................................      3,106         111          --
Proceeds from maturity and redemption of investment
  securities - available for sale ...........................................     11,486       9,173      11,511
Purchase of investment securities - held to maturity ........................         --          --
Purchase of investment securities - avail for sale ..........................    (16,316)    (12,111)     (7,401)
Proceeds from sale of investment securities
  available for sale ........................................................        183          --         702
Net (increase)  decrease  in loans ..........................................    (13,045)     (7,032)       (988)
Capital expenditures ........................................................       (644)       (194)        (78)
Proceeds from sale of other real estate owned ...............................         --          --         165
                                                                                --------    --------    --------
Net cash provided (used) by investing activities ............................    (15,393)    (16,341)      1,839
                                                                                --------    --------    --------
</TABLE>


                                     - 25 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<S>                                                                             <C>         <C>         <C>     
Cash flow from financing activities:
Net increase (decrease) in demand, statement passbook, money
  market and NOW deposit accounts ...........................................      5,326        (459)     (4,651)
Proceeds from borrowings ....................................................     10,000       2,000          --
Repayments of borrowings ....................................................         --      (2,000)     (1,000)
Proceeds from issuance of common stock ......................................         --      22,483          --
Conversion costs ............................................................         --      (1,036)         --
Purchase of ESOP stock ......................................................         --      (1,799)         --
Purchase of treasury stock ..................................................     (2,020)         --          --
Dividends ...................................................................       (135)         --          --
Increase (decrease) in advances from borrowers for taxes
  and insurance .............................................................         64           8         (45)
                                                                                --------    --------    --------
Net cash provided by ( used in) financing activities ........................     13,235      19,197      (5,696)
                                                                                --------    --------    --------

Net increase (decrease) in cash and cash equivalents ........................       (700)      3,634      (2,743)
Cash and cash equivalents at beginning of year ..............................      8,318       4,684       7,427
                                                                                --------    --------    --------
Cash and cash equivalents at end of year ....................................   $  7,618    $  8,318    $  4,684
                                                                                ========    ========    ========

Additional Disclosures:

Supplemental disclosures of cash flows information-cash paid during year for:
  Interest on other borrowings ..............................................   $    158    $     24    $     83
  Income taxes ..............................................................        579         935         120

Supplemental schedule of non-cash investing activities:

Reduction in loans receivable resulting from the  transfer
  to real estate owned ......................................................        115          --         157

Transfers of investment securities - held to maturity to
  investment  securities - available for sale ...............................         --          --      20,913

Change in unrealized gains in investment securities -
  available for sale ........................................................         73         416          92
</TABLE>


                                     - 26 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

     A. Organization

     GSB Financial Corporation ("GSB Financial") was incorporated under Delaware
law in March 1997 as a holding  company to purchase  100% of the common stock of
Goshen Savings Bank (the "Bank").  On July 9, 1997, GSB Financial  completed its
initial public  offering of 2,248,250  shares of common stock in connection with
the  conversion  of the Bank from a mutual form  institution  to a stock savings
bank  (the  "Conversion").  Concurrently  with  the  Conversion,  GSB  Financial
acquired all of the Bank's common stock.  In July 1998, GSB Financial  started a
wholly-owned  subsidiary  (GSB  Investment  Services,  Inc.) to make  available,
through  an  independent  provider,   investment  advisory  and  full  brokerage
services.  To date, the principal  operations of GSB Financial  Corporation  and
subsidiaries (the "Company") have been those of the Bank.

     The Bank provides banking  services to individual and corporate  customers,
with its business activities concentrated in Orange County, New York.

     During fiscal 1998,  GSB Financial  announced its  intentions to repurchase
5%, or 112,412  shares,  of its  outstanding  common  stock.  GSB  Financial has
repurchased  36,300  shares of its common stock  through  September 30, 1998. In
addition,  the Company  purchased 4%, or 89,930 shares, to fund its ISAP Plan as
approved  at the  annual  meeting on  February  25,  1998.  Total  common  stock
purchases  amounted  to  $2.0  million,   as  illustrated  in  the  accompanying
Consolidated Statement of Changes in Stockholders' Equity.

     A  substantial  portion of the  Bank's  loans are  secured  by real  estate
located  in  Orange  County  in  New  York  State.  Accordingly,   the  ultimate
collectability  of a  substantial  portion  of  the  Bank's  loan  portfolio  is
dependent  upon market  conditions in that market area. In addition,  other real
estate  owned,  if any is also  generally  located in Orange  County in New York
State.

     The following is a description of the more significant policies the Company
follows in preparing and presenting its consolidated financial statements:

     B. Basis of Financial Statement Presentation

     The accompanying  consolidated financial statement includes the accounts of
GSB Financial  and its wholly owned  subsidiaries,  Goshen  Savings Bank and GSB
Investment  Services,  Inc.  The  consolidated  financial  statements  have been
prepared  in  conformity   with  generally   accepted   accounting   principles.
Significant intercompany transactions and amounts have been eliminated.

     C. Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

     Material estimates that are particularly  susceptible to significant change
relate  to the  determination  of the  allowance  for  losses  on loans  and the
valuation  of  real  estate  acquired  in  connection  with  foreclosures  or in
satisfaction of loans. In connection  with the  determination  of the allowances
for losses on loans and foreclosed real estate,  management obtains  independent
appraisals for significant properties.


                                     - 27 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     While  management uses available  information to recognize  losses on loans
and foreclosed real estate,  future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance  for losses on loans and  foreclosed  real estate.  Such  agencies may
require  the  Bank to  recognize  additions  to the  allowances  based  on their
judgments about information  available to them at the time of their examination.
Because of these  factors,  it is  reasonably  possible  that the  allowance for
losses on loans and  foreclosed  real estate may change  materially  in the near
term.

     D. Cash and Cash Equivalents.

     For purposes of the  statements  of cash flows,  cash and cash  equivalents
include cash on hand and in banks,  interest-earning  deposits and Federal funds
sold with original maturities of ninety days or less.

     E. Investment and Mortgage-Backed Securities.

Securities Held to Maturity

     Government,  federal agency,  and corporate debt securities that management
has the positive intent and ability to "hold until maturity" are stated at cost,
adjusted  for  premium  amortization  and  discount  accretion,  computed  on  a
straight-line  basis  over the  life of the note to  maturity.  This  method  of
amortization  differs  from  the  interest  method  and  results  in  immaterial
differences for reporting purposes.

     Mortgage-backed  securities represent  participating  interests in pools of
long-term  first  mortgage  loans  originated  and  serviced  by  issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized on a  straight-line  basis over the life of the pools to maturity.
This method of  amortization  differs  from the  interest  method and results in
immaterial differences for reporting purposes.

Securities Available for Sale

     Securities to be held for indefinite  periods of time including  securities
that management intends to use as part of its asset-liability  strategy, or that
may be sold in  response  to changes in interest  rates,  changes in  prepayment
risk, or other similar  factors are  classified as "available  for sale" and are
recorded at fair value with the unrealized appreciation or depreciation,  net of
taxes reported separately as a component of equity.

Trading Securities

     The third  classification  are  "trading  securities"  which  include  debt
securities and equity securities purchased in connection with the Bank's trading
activities  and as such are  expected to be sold in the near term.  There are no
investments in trading securities on the books of the Bank at September 30, 1998
and 1997.

     Gains  and  losses  on the sale of  securities  are  determined  using  the
specific identification method.


     F. Reclassification of Investment Securities.

     In November 1995,  the Financial  Accounting  Standards  Board released its
special report,  "A Guide to  Implementation  of Statement 115 on Accounting for
Certain  Investments  in  Debt  and  Equity  Securities".  This  special  report
contained a provision that allowed  entities to, as of November 15, 1995, but no
later  than  December  31,  1995,  to  reassess  the   appropriateness   of  the
classifications  of all  securities  held at that time. At the Board of Trustees
meeting  December 14, 1995,  approval was granted to  management  to  reclassify
"all" investment  securities as available for sale and such reclassification was
recorded effective December 29, 1995.


                                     - 28 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     G. Loans Receivable and Allowance for Loan Losses

     Loans  receivable  are stated at the amount of unpaid  principal,  less net
deferred  loan fees and the  allowance  for loan losses.  The allowance for loan
losses is  established  through a provision for loan losses  charged to expense.
Loans are charged against the allowance for loan losses when management believes
that the collectability of the principal is unlikely. The allowance is an amount
that  management  believes will be adequate to absorb  losses on existing  loans
that may become  uncollectable,  based on evaluations of the  collectability  of
loans and prior loan loss experience.  The evaluations  take into  consideration
such factors as changes in the nature and volume of the loan portfolio,  overall
portfolio  quality,  review  of  specific  problem  loans and  current  economic
conditions that may affect the borrowers' ability to pay.

     Accrual of interest is discontinued on a loan when management believes that
the  borrowers'  financial  condition  is such that  collection  of  interest is
doubtful.  This  generally  occurs when payment of principal or interest is past
due three months or more and there is no insurance or guaranty as to payment.

     Effective  January 1, 1995,  the Bank adopted SFAS No. 114,  "Accounting by
Creditors for Impairment of a Loan. "Under the provision of SFAS No. 114, a loan
is  considered  impaired  when based on current  information  and events,  it is
probable  that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.  SFAS No. 114 requires creditors to
measure  impairment of a loan based on the present value of expected future cash
flows  discounted  at the  loan's  effective  interest  rate  or at  the  loan's
observable  market  price or the fair  value  of the  collateral  if the loan is
collateral  dependent.  If the  measure  of the  impaired  loan is less than the
recorded  investment  in the loan, a creditor  shall  recognize an impairment by
recording a valuation allowance with a corresponding charge to bad debt expense.
This statement also applies to restructured loans and eliminates the requirement
to classify loans that are in-substance foreclosures as foreclosed assets except
for  loans  where  the  creditor  has  physical  possession  of  the  underlying
collateral,  but not legal  title.  Effective  January  1,  1996,  the Bank also
adopted SFAS No. 118,  "Accounting  by Creditors for Impairment of a Loan-Income
Recognition and  Disclosures,"  which amends SFAS No. 114 to allow a creditor to
use existing methods for recognizing interest income on impaired loans. SFAS No.
114 is applicable to all loans that are identified for evaluation of impairment,
except for, among other, large groups of smaller-balance  homogenous loans, such
as  residential   mortgage  loans  and  consumer  installment  loans,  that  are
collectively  evaluated for impairment and loans that are measured at fair value
or the lower of cost or fair value.

     An  insignificant  payment delay,  which is defined by the Bank as up to 90
days, will not cause a loan to be classified as impaired. In addition, a loan is
not  considered  impaired  when  payments  are delayed  but the Bank  expects to
collect all amounts due, including accrued interest for the period of delay. All
loans identified as impaired are evaluated independently.

The Bank does not aggregate  impaired  loans for evaluation  purposes.  Payments
received on impaired  loans are applied first to accrued  interest,  if any, and
then to principal.

     H. Banking House and Equipment.

     Land is carried at cost. Banking house,  furniture,  fixtures and equipment
are stated at cost,  less  depreciation.  Depreciation  is calculated  using the
straight-line  method  based  upon the  estimated  useful  lives of the  related
assets.  Maintenance  and repairs are expensed as incurred while major additions
and improvements are capitalized.  Gains and losses on dispositions are included
in current operations.


                                     - 29 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     I. Real Estate Owned.

     Real  estate  owned  includes   assets   received  from   foreclosure   and
in-substance foreclosures. In accordance with SFAS No. 114, a loan is classified
as an  in-substance  foreclosure  when the Company has taken  possession  of the
collateral  regardless  of whether  formal  foreclosure  proceedings  have taken
place.  Prior to the  adoption  of SFAS No. 114 and SFAS No.  118,  in-substance
foreclosed properties included those properties where the borrower had little or
no remaining equity in the property  considering its fair value; where repayment
was only expected to come from the operation of sale of the property;  and where
the  borrower  had  effectively  abandoned  control  of the  property  or it was
doubtful that the borrower would be able to rebuild equity in the property.

     Foreclosed assets, including in-substance foreclosures,  are recorded on an
individual  asset basis at net realizable value which is the lower of fair value
minus  estimated  costs to sell or "cost"  (defined as the fair value at initial
foreclosure).  When  a  property  is  acquired  or  identified  as  in-substance
foreclosure,  the excess of the loan  balance  over fair value is charged to the
allowance for loan losses.  Subsequent write-downs to carry the property at fair
value less costs to sell are included in non-interest expense. Costs incurred to
develop or improve  properties are capitalized,  while holding costs are charged
to expense.

     The Company  had one real estate  owned from  foreclosure  or  in-substance
foreclosure at September 30, 1998 and none in 1997.

     J. Income Taxes

     In February 1992, the Financial  Accounting Standards Board issued SFAS No.
109, "Accounting for Income Taxes." Under the asset and liability method of SFAS
No. 109,  deferred tax assets and  liabilities are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
basis.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences  are expected to be  recovered  or settled.  Under SFAS No. 109, the
effect  of  deferred  tax  assets  and  liabilities  of a change in tax rates is
recognized as income or expense in the period that includes the enactment date.

     K. Off-Balance-Sheet Risk

     In the normal course of business,  the Bank is a party to certain financial
instruments with off-balance-sheet risk such as commitments to extend credit and
unused lines of credit.  The Bank's  policy is to record such  instruments  when
funded.

     L. Earnings Per Share.

     Earnings per share is calculated  based upon the weighted average number of
shares  outstanding from the date of conversion,  July 9, 1997 through September
30, 1998 adjusted for common stock  equivalents  that have a dilutive  effect on
the per share data. The weighted  average number of shares  outstanding  for the
period  ending   September  30,  1998  and1997  were  2,043,484  and  2,068,444,
respectively.


                                     - 30 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     M. Advertising.

     Advertising costs are generally charged to operations in the year incurred.
Advertising  expense  was  $99,936,  $72,101  and  $60,412  for the years  ended
September 30, 1998, 1997 and 1996, respectively.

     N. Accounting Pronouncements

     In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131  "Disclosures  About  Segments  of an  Enterprise  and  Related
Information". Both of these statements are effective for periods beginning after
December 15, 1997 and  restatement of financial  statements or  information  for
earlier periods provided for comparative purposes is required. The provisions of
these  statements  will not  affect  the  Company's  results  of  operations  of
financial condition.

     In February  1998,  the FASB issued  SFAS No. 132  "Employees'  Disclosures
about Pensions and Other Post-Retirement  Benefits".  This statement revises and
supersedes the disclosure  requirements  for pensions and other post  retirement
benefit plans  originally  issued within SFAS No. 87 "Employers  Accounting  for
Pensions",  SFAS No. 88 "Employers'  Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination  Benefits" and SFAS No. 106
"Employers' Accounting for Post-retirement  Benefits Other than Pensions".  SFAS
No. 132 does not  address  measurement  or  recognition  for  pension  and other
post-retirement  benefit  plans.  The  statement is  effective  for fiscal years
beginning  after  December  15, 1997.  Restatement  of  disclosures  for earlier
periods provided for comparative  purposes is required unless the information is
not  readily  available,  in which  case the notes to the  financial  statements
should  include  all  information  and  description  of the  information  is not
available. The provision of this statement will not affect the Company's results
of operations or financial condition.

     O. Year 2000 Readiness - Summary of Significant

     The Company has a year 2000 project plan as part of its overall  Safety and
Soundness  Plan.  The  Company  is  complying  with  all  assessment,   testing,
remeditions  and  contingency  plans,  as well as adhering to the critical  date
time-line established to enable the Bank to become year 2000 ready.

     P. Reclassification.

     Amounts  in  the  prior  periods'  financial  statements  are  reclassified
whenever necessary to conform to current period presentations.


NOTE 2. Conversion to Stock Ownership.

     On July 9, 1997,  GSB Financial  sold  2,248,250  shares of common stock at
$10.00 per share to  depositors  and  employees of the Bank and to the Company's
Employee Stock Ownership Plan (the "ESOP").  Net proceeds from the sale of stock
of GSB Financial,  after deducting  conversion  expenses of  approximately  $1.0
million,  were $21.4  million and are  reflected as common stock and  additional
paid-in-capital in the accompanying September 30, 1998 consolidated statement of
financial conditions.  The Company utilized $10.7 million of the net proceeds to
acquire all of the capital stock of the Bank.


                                     - 31 -
<PAGE>


                   GSB Financial Corporation and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     As part of the conversion,  the Bank established a liquidation  account for
the benefit of eligible  depositors  who  continue  to  maintain  their  deposit
accounts  in the Bank  after  conversion.  In the  unlikely  event of a complete
liquidation of the Bank,  each eligible  depositor will be entitled to receive a
liquidation  distribution  from the  liquidation  account  in the  proportionate
amount of the then current  adjusted  balance for deposit  accounts  held before
distribution  may be made with respect to the Bank's capital stock. The Bank may
not declare or pay a cash dividend to GSB Financial on, or repurchase any of its
capital  stock if the effect  thereof  would cause the retained  earnings of the
Bank to be reduced below the amount required for the liquidation account. Except
for  such  restrictions,  the  existence  of the  liquidation  account  does not
restrict the use or application of retained earnings.

     The Bank's capital  exceeds all of the fully phased-in  capital  regulatory
requirements.  The Office of Thrift Supervision ("OTS") regulations provide that
an institution that exceeds all fully phased-in capital  requirements before and
after a proposed capital  distribution could, after prior notice but without the
approval by the OTS, make capital  distributions  during the calendar year of up
to 100% of its net income to date during the calendar  year plus the amount that
would reduce by one-half its "surplus  capital  ratio" (the excess  capital over
its fully phased-in capital requirements) at the beginning of the calendar year.

     Unlike  the  Bank,  GSB  Financial  is  not  subject  to  these  regulatory
restrictions on the payment of dividends to its stockholders.


NOTE 3. INVESTMENT SECURITIES - AVAILABLE FOR SALE.

     A summary  comparison of securities  available for sale as of September 30,
1998 and 1997 is as follows:

                                                 September 30, 1998
                                     ------------------------------------------
                                                   Gross      Gross   Estimated
                                     Amortized  Unrealized Unrealized   Fair
                                        Cost       Gains     Losses     Value
                                     ---------  ---------- ---------- ---------
                                                   (In Thousands)
United States Treasury..............  $ 1,001     $    5      $ --      $ 1,006
United States Government Agencies ..   18,274        188        --       18,462
Corporate Debt Obligations .........    8,338        130        --        8,468
Foreign Debt Obligations ...........       --         --        --           --
Equity Securities...................    2,816        722        --        3,538
                                      -------     ------      ----     --------
                                      $30,429     $1,045      $ --      $31,474
                                      =======     ======      ====     ========

                                                 September 30, 1997
                                     ------------------------------------------
                                                   Gross      Gross   Estimated
                                     Amortized  Unrealized Unrealized   Fair
                                        Cost       Gains     Losses     Value
                                     ---------  ---------- ---------- ---------
                                                   (In Thousands)
United States Treasury .............  $ 3,497     $    8      $ --     $ 3,505
United States Government Agencies ..    7,123         44         4       7,163
Corporate Debt Obligations .........   11,879         74        11      11,942
Municipal Debt Obligations .........      400         --        --         400
Foreign Debt Obligations ...........    2,803        825        --       3,628
                                      -------     ------      ----     -------
Equity Securities.... ..............  $25,702     $  951      $ 15     $26,638
                                      =======     ======      ====     =======


                                     - 32 -
<PAGE>


     The amortized cost and approximate  fair value of securities  available for
sale at September 30, 1998 and 1997, by contractual  maturity,  are shown below.
Expected  maturities  will differ from  contractual  maturities  because certain
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.

                                                          September 30, 1998
                                                       -------------------------
                                                       Amortized      Estimated
                                                          Cost        Fair Value
                                                       ---------      ----------
                                                            (In Thousands)
Due within one year..................................   $ 3,204        $ 3,211
Due one year to five years ..........................     7,135          7,281
Due five years to ten years .........................     6,978          7,023
Due over ten years...................................    13,112         13,959
                                                        -------        -------
Total................................................   $30,429        $31,474
                                                        =======        =======

                                                          September 30, 1997
                                                       -------------------------
                                                       Amortized      Estimated
                                                          Cost        Fair Value
                                                       ---------      ----------
                                                            (In Thousands)
Due within one year..................................   $ 7,793        $ 7,812
Due one year to five years ..........................    12,475         12,552
Due over five years..................................     5,434          6,274
                                                        -------        -------
Total................................................   $25,702        $26,638
                                                        =======        =======

     Proceeds from the sale of securities  available for sale were approximately
$183,000 and $0 during the years ended September 30, 1998 and 1997 respectively,
which  resulted  in gross  realized  gains  of  approximately  $130,000  and $0,
respectively,   and  gross  realized   losses  of   approximately   $0  and  $0,
respectively.  There were no sales of  securities  available for sale during the
year ended September 30, 1997.


NOTE 4. FEDERAL HOME LOAN BANK STOCK.

     As a member of the  Federal  Home Loan Bank  ("FHLB")  system,  the Bank is
required to maintain a minimum  investment in FHLB stock. The current investment
exceeds the required  level at September 30, 1998. Any excess may be redeemed by
the Bank or called by the FHLB at par. At its  discretion,  the FHLB may declare
dividends  on this  stock.  The  Bank has  $704,000  invested  in FHLB  stock at
September  30,  1998,  which is included in Equity  Securities  in Note 3 and is
carried  at cost  due to the  fact  that it is  classified  as a  non-marketable
restricted investment.


NOTE 5. MORTGAGE BACKED SECURITIES - HELD TO MATURITY.

     Mortgage backed securities held to maturity at September 30, 1998 and 1997,
consists of Federal National Mortgage  Association  ("FNMA"),  Federal Home Loan
Mortgage  Corporation  ("FHLMC") and Government  National  Mortgage  Association
("GNMA") securities and are summarized as follows:

                                              September 30, 1998
                              --------------------------------------------------
                                             Gross        Gross       Estimated 
                              Amortized    Unrealized   Unrealized   Fair Market
                                Cost         Gains        Losses        Value
                              ---------    ----------   ----------   -----------
                                               (In Thousands)
Mortgage Backed Securities ..   $3,881        $ 91          $ 7         $3,965
                                ======        ====          ===         ======


                                     - 33 -
<PAGE>


                                              September 30, 1997
                              --------------------------------------------------
                                             Gross        Gross       Estimated 
                              Amortized    Unrealized   Unrealized   Fair Market
                                Cost         Gains        Losses        Value
                              ---------    ----------   ----------   -----------
                                               (In Thousands)
Mortgage Backed Securities ..   $5,653        $115          $ 2         $5,766
                                ======        ====          ===         ======

     The amortized  cost and  approximate  fair market value of mortgage  backed
securities  held to maturity at September  30, 1998,  and 1997,  by  contractual
maturity,  are shown below.  Expected  maturities  will differ from  contractual
maturities  because  certain  issuers  may  have  the  right  to call or  prepay
obligations with or without call or prepayment penalties.

                                                    September 30, 1998
                                          --------------------------------------
                                          Amortized Cost    Estimated Fair Value
                                          --------------    --------------------
                                                      (In Thousands)
Due within one year ...................       $  345              $  344
Due one year to five years ............        1,868               1,914
Due five to ten years .................          318                 328
Due after ten years ...................        1,350               1,379
                                              ------              ------
Total .................................       $3,881              $3,965
                                              ======              ======

                                                    September 30, 1997
                                          --------------------------------------
                                          Amortized Cost    Estimated Fair Value
                                          --------------    --------------------
                                                      (In Thousands)
Due within one year ...................       $  212              $  212
Due one year to five years ............        2,623               2,648
Due five to ten years .................          688                 700
Due after ten years ...................        2,130               2,206
                                              ------              ------
Total .................................       $5,653              $5,766
                                              ======              ======


NOTE 6. MORTGAGE BACKED SECURITIES - AVAILABLE FOR SALE.

     Mortgage  backed  securities  available for sale at September 30, 1998, and
1997 consists of FNMA, FHLMC and GNMA securities and are summarized as follows:


                                             September 30, 1998
                              --------------------------------------------------
                                             Gross        Gross       Estimated 
                              Amortized    Unrealized   Unrealized   Fair Market
                                Cost         Gains        Losses        Value
                              ---------    ----------   ----------   -----------
                                               (In Thousands)
Mortgage Backed Securities ..   $5,797        $ 29          $22         $5,804
                                ======        ====          ===         ======


                                     - 34 -
<PAGE>


                                             September 30, 1997
                              --------------------------------------------------
                                             Gross        Gross       Estimated 
                              Amortized    Unrealized   Unrealized   Fair Market
                                Cost         Gains        Losses        Value
                              ---------    ----------   ----------   -----------
                                               (In Thousands)
Mortgage Backed Securities ..   $6,994        $  5          $ 9         $6,990
                                ======        ====          ===         ======

     The amortized  cost and  approximate  fair market value of mortgage  backed
securities  available  for sale at September 30, 1998,  and 1997 by  contractual
maturity,  are shown below.  Expected  maturities  will differ from  contractual
maturities  because  certain  issuers  may  have  the  right  to call or  prepay
obligations with or without call or prepayment penalties.

                                                    September 30, 1998
                                          --------------------------------------
                                          Amortized Cost    Estimated Fair Value
                                          --------------    --------------------
                                                      (In Thousands)
Due within one year ...................       $   --              $   --
Due one year to five years ............        1,534               1,536
Due five to ten years .................          999               1,010
Due after ten years....................        3,264               3,258
                                              ------              ------
Total .................................       $5,797              $5,804
                                              ======              ======

                                                    September 30, 1997
                                          --------------------------------------
                                          Amortized Cost    Estimated Fair Value
                                          --------------    --------------------
                                                      (In Thousands)
Due within one year ...................       $   --              $   --
Due one year to five years ............        1,486               1,482
Due five to ten years .................        3,008               3,008
Due after ten years ...................        2,500               2,500
                                              ------              ------
Total .................................       $6,994              $6,990
                                              ======              ======


NOTE 7. LOANS RECEIVABLE, NET.

     Loans receivable are summarized as follows:

                                                             September 30,
                                                        ------------------------
                                                          1998            1997
                                                        --------        --------
                                                             (In Thousands)
Loans Secured by Real Estate
One to four family residential ..................       $ 72,038        $ 58,742
One to four family rental property ..............          1,764           1,936
Commercial real estate ..........................          1,820           2,073


                                     - 35 -
<PAGE>


Home equity line of credit loans ................          2,365           2,314
                                                        --------        --------
     Total Loans Secured by Real Estate .........         77,987          65,065
                                                        --------        --------
Other Loans
Loans on savings accounts .......................            115             174
Property improvement loans ......................            103             104
Commercial loan .................................            170              36
Consumer and other loans ........................            502             526
                                                        --------        --------
     Total Other loans ..........................            890             840
                                                        --------        --------
     Total Loans Receivable .....................         78,877          65,905
Less:
     Deferred loan fees .........................             (3)             28
     Allowance for losses-loans .................            167             139
                                                        --------        --------
     Loans Receivable, Net ......................       $ 78,713        $ 65,738
                                                        ========        ========

     The Bank  entered  into an  agreement  with the Federal  National  Mortgage
Association  to sell on a  loan-by-loan  basis,  with  the  Bank  retaining  the
servicing for such loans. The Bank sold no loans during the year ended September
30, 1998 and 1997. As a result of sales in prior years, loans which are serviced
by the Bank,  which are not included in the  statement of  condition,  were $6.0
million,  $6.8  million and $7.4  million at September  30,  1998,  1997,  1996,
respectively.


NOTE 8. ALLOWANCE FOR LOAN LOSSES.

     Activity in the allowance for loan losses for the years ended September 30,
1998, 1997 and 1996 is summarized as follows:

                                                    Years Ended September 30,
                                                  -----------------------------
                                                   1998        1997        1996
                                                  -----       -----       -----
                                                         (In Thousands)
Balance at Beginning of Year ...............      $ 139       $ 123       $ 114
Provision charged to operations ............         70          20          24
Loans charged off
    Real Estate ............................        (43)         --          --
    Other loans ............................         --         (14)        (18)
Recoveries
    Real Estate ............................         --          --          --
    Other loans ............................          1          10           3
                                                  -----       -----       -----
Balance at End of Year .....................      $ 167       $ 139       $ 123
                                                  =====       =====       =====

     The  following  table sets forth  information  with  regard to  non-accrual
loans:

                                                             September 30,
                                                         ---------------------
                                                         1998             1997
                                                         ----             ----
                                                            (In Thousands)
Loans in non-accrual status ..........................   $ --             $ --
                                                         ====             ====


     There were no troubled debt restructuring at September 30, 1998, and 1997.


                                     - 36 -
<PAGE>


     Accumulated  interest on non-accrual  loans, as shown above,  collected and
recognized as interest  income for the years ended September 30, 1998, and 1997,
was not material to equity or total interest income.


NOTE 9. BANKING HOUSE AND EQUIPMENT.

     Banking House and  equipment at September 30, 1998 and 1997 are  summarized
by major classification as follows: 

                                                              September 30,
                                                           1998         1997
                                                         -------      -------
                                                             (In Thousands)

Land.................................................    $ 1,187      $ 1,112
Buildings and improvements ..........................      1,274          948
Furniture, fixtures and equipment ...................        339          239
                                                         -------      -------
     Banking House and Equipment, Net................    $ 2,800      $ 2,299
                                                         =======      =======

     The Bank  records  depreciation  expense  directly  against the cost of the
related asset and does not utilize an accumulated  depreciation account. Amounts
charged to depreciation  expense were $ 143,184 and $156,874 for the years ended
September 30, 1998 and 1997, respectively.


NOTE 10. ACCRUED INTEREST RECEIVABLE.

     A summary of accrued interest  receivable as of September 30, 1998 and 1997
is as follows:

                                                                 September 30,
                                                               1998         1997
                                                               ----         ----
                                                                 (In Thousands)
Securities available for sale ........................         $517         $421
Investment securities held to maturity ...............           21           16
Loans receivable .....................................          411          351
                                                               ----         ----
Total Accrued Interest Receivable ....................         $949         $788
                                                               ====         ====


NOTE 11. DEPOSITS.

     Deposits are summarized as follows:

                                                   September 30,
                                     -------------------------------------------
                                             1998                   1997
                                     -------------------     -------------------
                                      No. of                  No. of
                                     Accounts    Amount      Accounts    Amount
                                     -------     -------     -------     -------
                                                   (In Thousands)
TYPE OF ACCOUNTS
Savings Accounts ...............       4,741     $28,089       4,846     $26,839
Certificates of deposit ........       2,334      39,350       2,369      38,247
Money market accounts ..........         410      10,958         403       8,892
Now accounts....................         760       4,932         679       4,136
Demand accounts ................       2,620       4,981       2,750       4,869
                                     -------     -------     -------     -------
                                      10,865     $88,310      11,047     $82,983
                                     =======     =======     =======     =======


                                     - 37 -
<PAGE>


     The approximate  contractual maturities of certificates of deposit accounts
for the twelve month periods subsequent to September 30, 1998, are as follows:

                           Twelve month periods ended
                                  September 30,
                                  -------------
                                  (In Thousands)
1999 ..............................................................     $33,280
2000 ..............................................................       5,396
2001 ..............................................................         626
2002 ..............................................................          48
2003 ..............................................................          --
                                                                        -------
                                                                        $39,350
                                                                        =======

     The approximate  contractual  maturities of certificate of deposit accounts
for the twelve month periods subsequent to September 30, 1997, are as follows:

                    Twelve month periods ended September 30,
                    ----------------------------------------
                                 (In Thousands)
1998 .............................................................      $34,719
1999 .............................................................        2,684
2000 .............................................................          780
2001 .............................................................           41
2002 .............................................................           23
                                                                        -------
                                                                        $38,247
                                                                        =======

     At September 30, 1998 and 1997, the aggregate of time deposit accounts with
balances  equal to or in excess of $100,000 was  approximately  $2.4 million and
$1.8 million. Deposits in excess of $100,000 are not Federally insured.

     Interest  expense on deposits for the years ended September 30, 1998, 1997,
and 1996 is summarized as follows:

                                                     Years Ended September 30,
                                                    --------------------------
                                                     1998      1997      1996
                                                    ------    ------    ------
                                                         (In Thousands)

Savings ........................................    $  803    $  822    $  811
Certificates of deposit ........................     1,948     1,907     2,130
Money market accounts ..........................       334       295       333
Now accounts ...................................       114       101        88
Escrow .........................................         0         3         3
                                                    ------    ------    ------
                                                    $3,199    $3,128    $3,365
                                                    ======    ======    ======


                                     - 38 -
<PAGE>


NOTE 12. REPURCHASE AGREEMENTS AND BORROWED FUNDS.

     Securities sold to Federal Home Loan Bank under agreements to repurchase at
September 30, 1998 are as follows:

         AMOUNT                        RATE                   MATURITY
         ------                        ----                   --------
      $ 2,000,000                      5.07%                 03/12/2008
      $ 2,000,000                      5.12%                 04/03/2008
      $ 2,000,000                      5.29%                 04/28/2008
      $ 2,000,000                      5.23%                 05/13/2008
      $ 2,000,000                      5.08%                 06/18/2008
      -----------
      $10,000,000
      ===========

     Information   relating  to  borrowings  under   repurchase   agreements  is
summarized as follows:

Average balance during the year .............................       $ 4,307,000
  Average Interest Rates During the Year ....................              5.22%
  Maximum Month-End Balance During the Year .................       $10,000,000
  Securities Underlying Agreement at Year-End:
     Amortized cost .........................................       $11,247,727
     Estimated Market Value .................................       $11,360,553

     Total interest expense on the borrowings  under  repurchase  agreements for
the year ended September 30, 1998 amounted to $225,000.

     The Bank has a line of credit  available with the Federal Home Loan Bank of
New  York and as of  September  30,  1998,  the Bank  could  borrow  up to $15.5
million.  There  were no  amounts  outstanding  under  this  line of  credit  at
September 30, 1998.

     There  were no  borrowings  during the year ended  September  30,1997,  and
maximum  borrowings during the year ended September 30, 1997, was $2 million and
interest related to these borrowings amounted to $24,160.


NOTE 13. EARLY RETIREMENT AND EMPLOYEE TERMINATION BENEFITS

     On July 15,  1998 the Board of  Directors  adopted  and offered to eighteen
eligible  employees  a  voluntary  early  retirement  and  employee  termination
program.  The eligible  employees were required to notify the Bank in writing by
September  30,  1998  their  acceptance  or  rejection  of the  program.  Eleven
employees  accepted  the program,  of which four were  executive  officers.  The
voluntary program expense consists of enhanced retirement benefits and severance
pay, which amounted to $699,000.00.  This amount has been recorded as an expense
in the Statement of Operations for the year ended  September 30, 1998, and as an
accrued liability within the Statement of Condition of September 30, 1998.


                                     - 39 -
<PAGE>


NOTE 14. EMPLOYEE BENEFITS.

     Retirement Plans:

     A. Pension Plan

     The Bank has a  non-contributory  defined  benefit  pension  plan  covering
substantially  all of its employees.  Current and past service pension costs are
funded as  accrued.  The Bank has  recorded  pension  expense for this period in
accordance with SFAS #87.

     The following table sets forth the plan's funded status as of September 30,
1998 and 1997:

<TABLE>
<CAPTION>
                                                                        September 30,
                                                                     -------    -------
                                                                       1998       1997
                                                                     -------    -------
                                                                       (In Thousands)
<S>                                                                  <C>        <C>    
Actuarial present value of benefit obligations:
Accumulated benefit obligation ...................................   $ 3,615    $ 2,317
                                                                     =======    =======
Projected benefit obligation for service rendered to date ........   $(3,732)   $(2,874)
Plan assets at fair value ........................................     3,495      3,557
                                                                     -------    -------
Plan assets in excess of projected benefit .......................      (237)       683

Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes in
assumptions
                                                                          --       (397)

Prior service cost not yet recognized in net periodic pension cost         7         16

Unrecognized net asset being recognized over 11.81
years
                                                                          --        (53)
                                                                     -------    -------
(Accrued) prepaid pension cost ...................................   $  (230)   $   249
                                                                     =======    =======
</TABLE>

     Net  pension  cost for 1998 and 1997  included  the  following  components:

                                                                September 30,
                                                               1998        1997
                                                               ----        ----
                                                                (In Thousands)

Service Costs - Benefits
Earned during the period ...............................      $  87       $ 103
Interest cost on projected benefit obligation ..........        209         194
Return on plan assets ..................................       (282)       (233)
Amortization of unrecognized transition asset ..........        (17)        (17)
Amortization of unrecognized loss ......................         --          --
Amortization of past service liability .................          4           4
Curtailment credit .....................................       (186)         --
Termination benefits ...................................        665          --
                                                              -----       -----
Total Pension Expense ..................................      $ 480       $  51
                                                              =====       =====

     The  weighted  average  discount  rate  and  rate  of  increase  in  future
compensation  levels used in  determining  the  actuarial  present  value of the
projected  benefits  obligation for both years were 5.0% and 5.5%  respectively.
The expected long-term rate of return on assets was 8.0%.


                                     - 40 -
<PAGE>


     B. Profit Sharing Plan

     The Bank  maintains  a profit  sharing  trust  retirement  plan (a  defined
contribution   plan)  which  covers  all  eligible  employees  and  includes  an
employees'  thrift  savings plan  established  under the  provisions of Internal
Revenue Code Section  401(k).  Profit  sharing  contributions  will be made as a
matching of the employee's voluntary before-tax contributions up to a maximum of
three percent of the individual  employees'  salary. The employer may, from time
to time,  change  the plan to provide  for a  different  matching  contribution.
Employees will be notified of any change made. The Bank's  contributions  to the
profit sharing retirement plan amounted to $30,227,  $26,569 and $28,295 for the
fiscal years ended September 30, 1998, 1997 and 1996, respectively.

     The  Bank has  every  intention  of  continuing  to  offer  the plan to all
eligible  employees.  However,  the Bank  reserves  the right to change,  amend,
modify,  or even  terminate the plan, if necessary.  Termination  of the plan is
unlikely,  but should it happen,  the eligible  employees  will receive the full
value of their plan accounts.

     C. Other Retirement Benefits

     In addition to pension benefits,  the Bank provides certain health care and
life  insurance   benefits  for  retired   employees  and  their  spouses.   The
post-retirement health care and life insurance benefits plan is being terminated
on December 31,  1998.  Eligible  employees  retired on or before that date will
have benefits paid through the plan under the agreed upon terms  existing at the
employees  retirement  date.  Beginning  January 1, 1999 there will be no health
care or life  insurance  payments  made for  employees  retiring  from that date
forward.  In  terminating  this  plan the Bank  recovered  $134,000  of  accrued
Post-Retirement Benefit costs.

     SFAS  No.  106,  issued  in  December  1990,  requires  that  the  cost  of
postretirement benefits other than pensions be recognized on an accrual basis as
employees  perform services to earn the benefits.  This is a significant  change
from the  prevalent  current  practice  of  accounting  for these  benefits on a
pay-as-you-go  (cash) basis. The cumulative  postretirement  benefit  obligation
(APBO) at the date of adoption (the  "transition  obligation") may be recognized
in income as the  cumulative  effect of an  accounting  change in the  period of
adoption or over future  periods as a component  of the  postretirement  benefit
cost. During the year ended September 30, 1995, the Bank adopted SFAS No. 106.


     The  following  is a  reconciliation  of the  funded  status of the plan at
September 30, 1998 and 1997:

                                                              September 30,
                                                         ----------------------
                                                           1998           1997
                                                         -------        -------
                                                             (In Thousands)
Accumulated Postretirement Benefit
Obligation

Retirees ........................................        $   769        $   308
Active employees fully eligible for
  benefits ......................................             --            418
Other active employees ..........................             --            358
                                                         -------        -------
Total ...........................................            769          1,084

Unrecognized gain (loss) ........................             --           (236)
                                                         -------        -------
Accrued postretirement benefits .................        $   769        $   848
                                                         =======        =======


                                     - 41 -
<PAGE>


     The  components  of the net periodic  postretirement  benefit  costs are as
follows:

                                                       Years ended September 30,
                                                       -------------------------
                                                           1998         1997
                                                          -----        -----
                                                             (In Thousands)
Service cost ..........................................   $  20        $  19
Interest cost .........................................      70           73
Amortization of unrecognized gain (loss) ..............       2            7
Curtailment credit ....................................    (147)          --
                                                          -----        -----
Total net periodic benefit (credit)/cost ..............   $ (55)       $  99
                                                          =====        =====

     A discount rate of 7.25%, an annual rate of salary  increases of 5.0% and a
7.5% increase in the assumed  health care costs  reducing  linearly to 5% in the
year 2005,  were used to determine the APBO at September 30, 1998 and a discount
rate of 7.75%, an annual rate of salary increases of 5.5% and a 7.5% increase in
the assumed health care costs reducing  linearly to 5.0% in the year 2005,  were
used to determine the APBO at September 30, 1997.


                                     - 42 -
<PAGE>


     D. Employee Stock Ownership Plan

     Concurrently  with the  conversion,  the Company  adopted an Employee Stock
Ownership Plan (the "ESOP") for substantially all employees.  The ESOP purchased
179,860 shares for the Company's stock in the conversion at a cost of $1,798,600
using the proceeds of a loan provided by the Company. The terms of the loan call
for level principal payments in 40 quarterly  installments  commencing September
30, 1997, with interest at 7.75% per annum.

     Shares  purchased by the ESOP will  initially be pledged as collateral  for
the  ESOP  loan  and  will  be  allocated  among  participants   annually  based
proportionately on the repayment of the ESOP loan and the relative  compensation
of the participants. The cost of unallocated shares held in the suspense account
is reflected as a reduction of stockholders' equity.

     The Company accounts for the ESOP in accordance with the American Institute
of Certified  Public  Accountant's  Statement  of Position No. 93-6  "Employees'
Accounting  For Stock  Ownership  Plans"  (SOP  93-6).  Accordingly,  the shares
pledged as collateral are reported as unallocated  ESOP shares in  shareholders'
equity. As shares are released from collateral, the Company reports compensation
expense equal to the average  market price of the shares  (during the applicable
service  period),  and the shares  become  outstanding  for  earnings  per share
computations. Unallocated ESOP shares are not included in the earnings per share
computations.  The  Company  recorded  approximately  $287,000  of  compensation
expense under the ESOP during the year ended September 30, 1998. The ESOP shares
as of September 30, 1998 were as follows:

Allocated Shares ...........................................               8,993
      Shares released for allocation .......................              13,490
      Unallocated share ....................................             157,377
                                                                       ---------
                                                                         179,860
                                                                       ---------
       Market Value of unallocated
       Shares at September 30, 1998 ........................           1,957,376
                                                                       =========

     E. Stock Option Plan

     The  Company's  Stock  Option  Plan for  Outside  Directors,  Officers  and
Employees  (Stock  Option Plan) was approved by the  shareholders  at the annual
meeting held on February  25,  1998.  The purpose of the Stock Option Plan is to
promote  the growth and  profitability  of the  Company  by  providing  eligible
directors, certain key officers and employees of the Company, and its affiliates
with an incentive to achieve corporate  objectives,  and by allowing the Company
to attract and retain  individuals  of  outstanding  competence by offering such
individuals and equity interest in the Company.

     The Stock Option Plan may grant options not to exceed 224,825  shares,  the
shares necessary to fund the Stock Option Plan with Treasury Stock acquisitions.
An option will  entitle the holder to purchase  one share of common  stock at an
exercise  price equal to the fair market value on the date of grant,  and expire
on the last  day of the  ten-year  period  commencing  on the date on which  the
option  was  granted.  Options  under the plan will be  designated  as either an
Incentive Stock Option or a Non-Qualified Stock Option.

     On February 25, 1998,  67,446  shares were awarded at an exercise  price of
$15.88  per  share,  and on April 9,  1998,  10,500  shares  were  awarded at an
exercise  price of $16.75 per share.  These shares have a ten-year term and vest
at a rate of 20% per year from their respective grant dates.

     The Company  applies APB  Opinion  No. 25 and  related  Interpretations  in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plans. SFAS No. 123 requires Companies not using
a fair value based method of  accounting  for employee  stock options or similar
plans,  to provide pro forma  disclosure of net income and earnings per share as
if that method of accounting had been applied.  The fair value of each option is
estimated on the date of grant using the Black-Scholes option-pricing


                                     - 43 -
<PAGE>
 

model with the following weighted-average  assumptions used for grants in fiscal
1998:  expected  volatility  of 37.0%;  risk free interest rate of 5.17% for the
February 25, 1998 grant and 4.93% for the April 9,1998 grant; and expected lives
of 7 years. Pro forma  disclosures for the Company for the year ending September
30, 1998 is as follows:

                      (In thousands, except per share data)

Net Income
  As Reported ..............................................           $600
  Pro Forma ................................................            551
Earnings Per Share:
  As Reported ..............................................           $.29
  Pro Forma ................................................             27

Because the Company's employee stock options have characteristics  significantly
different  from those of traded  options for which the  Black-Scholes  model was
developed,   and  because  changes  in  the  subjective  input  assumptions  can
materially affect the fair value estimate,  the existing models, in management's
opinion,  do not necessarily provide a reliable single measure of the fair value
of its employee stock options.

A summary of the status of the Company's  stock option plans as of September 30,
1998 and changes during the year on that date is presented below:

                                                           Weighted Average
                                                       Shares    Exercise Price
                                                       ------    --------------
Options
  Outstanding October 1 ..........................         -- 
  Granted ........................................     77,946        $15.99
  Exercised ......................................         -- 
  Cancelled
Outstanding at Year-End ..........................     77,946
Exercisable at Year-End ..........................         --
Estimated weighted average of fair value of
options granted on February 25, 1998 .............                     9.54
Estimated weighted average of fair value of
options granted on April 9, 1998 .................                     9.52

     F. Incentive Stock Award Plan

     On February 25, 1998, the Company's stockholders approved the GSB Financial
Corporation  Incentive Stock Award Plan ("ISAP").  The purpose of the plan is to
promote the long-term interests of the company and its stockholders by providing
a stock based compensation program to attract and retain officers and directors.
Under ISAP,  89,930  shares of  authorized  shares are reserved for the issuance
under the plan.

     On February 25, 1998 and April 9, 1998,  22,480  shares and 13,000  shares,
respectively,  were awarded under the ISAP. In connection with the acceptance of
the  voluntary  early  termination  program by four  executive  officers,  which
resulted in the forfeiture of ISAP awards made to them totaling 7,304 shares. At
September 30, 1998, there were 28,176 ISAP awards  outstanding.  The shares vest
in five equal installments  commencing one year from the date of grant. The fair
market  value of the shares  awarded  under the plan was  $448,000  at the grant
dates, and is being amortized to compensation  expense on a straight-line  basis
over the five year vesting periods. Compensation expense of $57,000 was recorded
in fiscal 1998, with the remaining unearned  compensation cost of $391,000 shown
as a reduction of shareholders' equity at September 30, 1998.


                                     - 44 -
<PAGE>


NOTE 15. INCOME TAXES.

     The components of income tax expense are as follows:

                                                Years Ended September 30,
                                          -------------------------------------
                                           1998            1997            1996
                                          -----           -----           -----
                                                     (In Thousands)
Current tax:
Expense ........................          $ 532           $ 922           $ 395
Deferred tax :
Expense (benefit) ..............           (131)           (482)            (44)
                                          -----           -----           -----
Income tax expense .............          $ 401           $ 440           $ 351
                                          =====           =====           =====

     Income tax expense for financial reporting purposes is less than the amount
computed  by applying  the  statutory  federal  income tax rate of 34% to income
taxes for the reasons noted in the table below:

                                                 Years Ended September 30,
                                             -------------------------------
                                              1998         1997         1996
                                             -----        -----        -----
                                                    (In Thousands)
Expense at statutory federal tax rate .      $ 340        $ 407        $ 309
Tax-exempt income .....................         --           (2)          (2)
State income taxes, net of federal tax
  benefit .............................         69           83           60
Other, net ............................         (8)         (48)         (16)
                                             -----        -----        -----
Income tax expense ....................      $ 401        $ 440        $ 351
                                             =====        =====        =====
Effective tax rate ....................       40.1%        36.8%        38.6%

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and  liabilities at September 30, 1998, 1997
and 1996 are as follows:

                                                          September 30,
                                                   ---------------------------
                                                    1998       1997       1996
                                                   -----      -----      -----
                                                         (In Thousands)
Deferred tax assets:
Post retirement employees benefits ............    $ 308      $ 340      $ 314
Allowance for loan losses .....................       67         55         51
Mark to market securities tax .................      289        330         83
Accrued pension costs .........................       92         --         --
Other .........................................       25         56         24
                                                   -----      -----      -----
Total deferred tax assets .....................      781        781        472
                                                   -----      -----      -----

Deferred tax liabilities:
Depreciation ..................................       25         32         88
Prepaid pension costs .........................       --        104        121
Tax bad debt reserves over the base year ......       35         55        155
                                                   -----      -----      -----
Total deferred tax liabilities ................       60        191        364

Net deferred tax asset at the end of year .....      721        590        108

Net deferred tax asset at the beginning of year      590        108         64
                                                   -----      -----      -----
Deferred tax benefit for the year .............    $(131)     $(482)     $ (44)
                                                   =====      =====      =====


                                     - 45 -
<PAGE>


     In addition to the deferred tax amounts  described above, the Bank also had
a deferred tax  liability of  approximately  $420,000,  $372,000 and $103,000 at
September 30, 1998, 1997 and 1996,  respectfully,  related to the net unrealized
gain on securities available for sale.

     The Bank, as a qualifying  thrift  institution  under IRS  guidelines,  was
entitled to a special  deduction for additions to a tax bad debt reserve made on
or before December 31, 1987. The Bank's  aggregate  reserve at December 31, 1987
was $921,000. This reserve is not required to be recaptured,  despite subsequent
changes  in the tax  laws,  so long  as the  Bank  remains  a  qualified  thrift
institution for IRS purposes. Hence, no deferred tax liability has been recorded
under SFAS No. 109 for potential recapture of this reserve.


NOTE 16. NATIONAR LIQUIDATION.

     On February 6, 1995, the  Superintendent  of Banks of the State of New York
took possession of, and closed,  Nationar,  which was then the Bank's  principal
correspondent  bank.  Nationar was  wholly-owned  by various  savings  banks and
provided commercial banking and other services, principally to savings banks and
savings and loan associations.

     When  Nationar  was  closed,   the  Bank  had  various  deposits  with  and
investments  in Nationar.  During the year ended  September  30, 1995,  the Bank
recorded a  provision  for losses on  Nationar  matters of  $278,623  based upon
management's  judgment  of the losses,  which would be suffered as Nationar  was
liquidated. Of the provision, $232,223 was allocated to a demand deposit balance
of the Bank at Nationar  and $46,400 was  allocated to Nationar  debentures  and
stock owned by the Bank. Losses in the actual  liquidation of Nationar were less
than  anticipated,  and by virtue of  payments  actually  received,  $10,969 and
$9,375 of the reserves were reversed  during the years ended  September 30, 1998
and 1997 respectively.


NOTE 17. COMMITMENTS AND CONTINGENCIES.

     A. Legal Proceedings

     The Company may,  from time to time,  be a defendant  in legal  proceedings
relating to the conduct of its business. In the best judgment of management, the
consolidated  financial position of the Company will not be affected  materially
by the outcome of any pending legal proceedings.

     B. Lease Commitments

     The Company leases  approximately 105 square feet in an elder care facility
in  Goshen,  New  York,  as a  branch  office  at an  annual  rental  of  $2,400
terminating on September 30, 1999.

     In addition, the Bank has an agreement for data processing services through
February  of  2001.   Approximate  annual  payments  associated  with  the  data
processing agreement are estimated to be $225,000.


                                     - 46 -
<PAGE>


     C. Off-Balance Sheet Financing

     The Bank is a party to certain financial instruments with off-balance sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers.  These financial  instruments  include  commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the statement of financial  condition.  The contract
amounts of those  instruments  reflect the extent of involvement the Bank has in
particular classes of financial instruments.

     The Bank's  exposure to credit loss in the event of  nonperformance  by the
other  party  to  the  commitments  to  extend  credit  is  represented  by  the
contractual notional amount of those instruments.  The Bank uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.

     Unless  otherwise  noted,  the Bank does not  require  collateral  or other
security to support off-balance-sheet financial instruments with credit risk.

     D. Commitments Pending

     Contract amounts of financial instruments that represent credit risk are as
follows:

                                            (Unaudited)        (Unaudited)
                                        September 30, 1998  September 30, 1997
                                        ------------------  ------------------
                                                   (In Thousands)
Commitments Pending
Mortgage Loans .......................        $2,990              $2,991
Equity Line of Credit:
  Available Draw .....................         1,545               1,071
  Commitments ........................           190                  95
  Commercial Loans ...................         1,222                  --
  Available Draw .....................           529                  --
Overdraft Checking ...................           206                 192
                                              ------              ------
                                              $6,682              $4,349
                                              ======              ======

     The breakdown of fixed rate loan commitments and the corresponding interest
rate range for the periods of September 30, 1998 and 1997 are as follows:

                                           (Unaudited)         (Unaudited)
                                        September 30, 1998  September 30, 1997
                                        ------------------  ------------------
                                                   (In Thousands)
First Mortgage Loans..................        $2,990              $2,991
Home Equity Loans.....................           120                  45
                                              ------              ------
Total Fixed Rate Loan Commitments.....        $3,110              $3,036
                                              ======              ======
Fixed Rate Commitment Interest Rate...     6.75% to 8.25%     7.50% to 9.00%

     Commitments  to extend credit are  agreements to lend to a customer as long
as  there  is no  violation  of  any  condition  established  in  the  contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire  without  being  fully drawn upon,  the total  commitment  amounts do not
necessarily  represent  future  cash  requirements.   The  Bank  evaluates  each
customer's credit  worthiness on a case-by-case  basis. The amount of collateral
if any  required  by  the  Bank  upon  the  extension  of  credit  is  based  on
management's  credit evaluation of the customer.  Mortgage and construction loan
commitments are secured by a first lien on real estate. Collateral on extensions
of credit for  commercial  loans  varies but may  include  accounts  receivable,
inventory,  property,  plant  and  equipment  and  income  producing  commercial
property.


                                     - 47 -
<PAGE>


     E. Environmental Contingency

     Subsequent  to the audit date of September  30, 1996,  the Bank  determined
that there were underground oil tanks on the Village of Goshen property that had
contaminated  the soil on the Bank's  property.  This resulted in the Bank, with
the  assistance  of the  Village,  to properly  plan for the removal of both the
tanks and the contaminated soil to correct this  environmental  problem.  During
the year ended  September 30, 1997, the tanks were removed and the  contaminated
soil  was  properly  disposed  of  under  the  direction  of the  Department  of
Environmental Conservation at a cost of approximately $50,000.


NOTE 18. REGULATORY CAPITAL REQUIREMENTS.

     OTS capital  regulations  require savings  institutions to maintain minimum
levels of regulatory  capital.  Under the regulations in effect at September 30,
1998,  the Bank was required to maintain a minimum ratio of tangible  capital to
total assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total
adjusted  tangible  assets of 3.0%;  and a minimum  ratio of total capital (core
capital and supplementary  capital) to risk-weighted assets of 8%, of which 4.0%
must be core (Tier 1) capital.

     The prompt corrective action regulations define specific capital categories
based on institutions  capital ratios. The capital categories in declining order
are   "well   capitalized",   "adequately   capitalized",    "undercapitalized",
"significantly undercapitalized",  and "critically undercapitalized". The OTS is
required to take certain supervisory actions with respect to an undercapitalized
institution.   Such  actions  could  have  a  direct   material   effect  on  an
institution's financial statements.  Generally an institution is considered well
capitalized  if it has a core (Tier 1) capital  ratio of at least 5.0% (based on
average total assets; a core (Tier 1) risk-based capital ratio of at least 6.0%;
and a total risk-based capital of at least 10.0%.

     Management  believes  that,  as at September  30, 1998,  the Bank meets all
capital adequacy requirements to which it is subject.

     The Bank's  actual  capital  amounts and ratios as of  September  30, 1998,
compared  to  the  OTS  minimum  capital  adequacy   requirements  and  the  OTS
requirements for classification as a well capitalized institution are summarized
below. OTS capital regulations apply to the Bank only.

<TABLE>
<CAPTION>
                                                                          For Classification 
                                    Actual           Minimum Capital      as Well Capitalized
                               ---------------       ---------------      -------------------
Bank                            Amount   Ratio       Amount   Ratio         Amount   Ratio
                               -------   -----       ------   -----         ------   -----
                                                 (Dollars in Thousands)
<S>                            <C>       <C>          <C>      <C>          <C>       <C>
Tangible Capital.............  $22,140   17.79%       1,867    1.50%            --      --
Tier 1 (Core) Capital........   22,140   17.79%       3,733    3.00%        $6,222     5.0%
Risk Based Capital:
Tier 1.......................   22,140   37.15%          --       --         3,576     6.0%
Total........................   22,307   37.43%       4,768    8.00%         5,959    10.0%
</TABLE>


NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS.

     SFAS No.  107,  "Disclosures  about Fair Value of  Financial  Instruments",
requires  the  Bank  to  disclose   estimated  fair  values  for  its  financial
instruments.  Whenever  possible,  quoted market prices are used to estimate the
fair value of a financial instrument.  An active market does not exist, however,
for many financial  instruments.  As a result, fair value estimates are made, as
of a specific date,  based on judgments  regarding  future  expected cash flows,
current  economic  conditions,  risk  factors and other  characteristics  of the
financial  instrument.  These  estimates  are  subjective  in nature and involve
uncertainties.  Changes in these  judgments  often have a material impact on the
fair value  estimates.  In  addition,  since  these  estimates  are made as of a


                                     - 48 -
<PAGE>


specific date, they are susceptible to material changes in the near future.  The
information  presented is based on pertinent information available to management
as of each period  presented.  Although  management is not aware of any factors,
other than  changes in  interest  rates,  that  would  significantly  affect the
estimated fair values, the current estimated value of these instruments may have
changed significantly since that point in time.

     While  these  estimated  fair  value  amounts  are  designed  to  represent
estimates  of the amounts at which these  instruments  could be  exchanged  in a
current  transaction  between willing  parties  (excluding the value of customer
relationships),  many of the  Bank's  financial  instruments  lack an  available
trading  market as  characterized  by willing  parties  engaged  in an  exchange
transaction.  In addition, it is the Bank's intent to hold most of its financial
instruments  to maturity,  therefore,  it is not  probable  that the fair values
shown will be  realized  in a current  transaction.  The  estimated  fair values
disclosed  do not  reflect  the value of  assets  and  liabilities  that are not
considered  financial   instruments.   In  addition,   the  value  of  long-term
relationships with depositors (core deposit intangibles) and other customers are
not reflected. The value of these items is significant.

     The following  describes the methodology  and assumptions  used to estimate
fair value of financial instruments required by SFAS 107.

     Cash and short-term  investments.  Cash and short-term  investments  are by
definition  short-term  and do not  present  any  unanticipated  credit  issues.
Therefore, the carrying amount is a reasonable estimate of fair value.

     Securities. The estimated fair values of securities by type are provided in
Note 3 to the financial  statements.  These are based on quoted  market  prices,
when  available.  If a quoted  market  price  is not  available,  fair  value is
estimated using quoted market prices for similar securities.

     Mortgage-backed  securities The fair value of mortgage-backed securities is
estimated  based  on  bid  prices  published  in  financial  newspapers  or  bid
quotations received from securities dealers.

     Loans. The Bank's management has determined that the carrying amount of the
loan portfolio  approximates the estimated fair value.  Quoted market prices are
not available for the loan portfolio. The cost of determining the fair values of
the loan portfolio would be excessive.

     Deposits.  Under  SFAS  107,  the fair  value of  deposits  with no  stated
maturity  is equal to the amount  payable on demand.  Therefore,  the fair value
estimates for these  products do not reflect the benefits that the Bank receives
from  the  low-cost,   long-term  funding  they  provide.   These  benefits  are
significant.  Quoted  market  prices  are not  available  for  fixed  rate  time
deposits.  The estimated fair value of these financial  instruments has not been
determined  through an independent  valuation because the cost to do so would be
excessive.  Management feels that the carrying amount of fixed rate deposits are
reasonable estimates of the fair values of these financial instruments.

     Off-Balance Sheet  Instruments.  The estimated fair value of commitments to
extend credit is estimated using fees currently charged for similar arrangements
adjusted  for  changes  in  interest  rates and  credit  risk that has  occurred
subsequent  to  origination.  Because  the Bank  believes  that the credit  risk
associated with available but undisbursed  commitments would essentially  offset
the fees that could be recognized  under similar  arrangements,  and because the
commitments  are either short term in nature or subject to immediate  repricing,
no fair value has been assigned to these off-balance sheet commitments.


                                     - 49 -
<PAGE>


     The following is a summary of the carrying values and estimated fair values
of the Company's  financial  instruments at September 30, 1998 and September 30,
1997:

<TABLE>
<CAPTION>
                                         September 30, 1998                September 30, 1997
                                      -------------------------         --------------------------
                                      Carrying       Estimated          Carrying        Estimated 
                                       Amount        Fair Value          Amount         Fair Value
                                      --------       ----------         --------        ----------
                                                           (In Thousands)
<S>                                   <C>              <C>              <C>              <C>    
Financial Assets:
Cash and Cash Equivalents .........   $ 7,618          $ 7,618          $ 8,318          $ 8,318
Securities Available for Sale......    31,474           31,474           26,638           26,638
Mortgage Backed Securities-
Held to Maturity ..................     3,881            3,965            5,653            5,766
Available for Sale ................     5,804            5,804            6,990            6,990
Loans Receivable ..................    78,713           78,713           65,738           65,738
Financial Liabilities:
Deposits ..........................    88,310           88,310           82,983           82,983
</TABLE>


                                     - 50 -
<PAGE>


NOTE 20. PARENT COMPANY FINANCIAL INFORMATION.

     GSB Financial  began  operations on July 9, 1997, in  conjunction  with the
Bank's mutual-to-stock conversion and GSB Financial's initial public offering of
its common  stock.  GSB  Financial's  statement  of  financial  condition  as of
September 30, 1998 and 1997, and related statements of operations and cash flows
for September 30, 1998,  and the period July 9, 1997 to September 30, 1997,  are
as follows:

              Statement of Financial Condition as of September 30,
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                         1998         1997
                                                                       --------     --------
<S>                                                                    <C>          <C>     
Assets:
  Cash and due from banks .........................................    $  1,255     $  1,729
  Investment securities available for sale ........................       5,547        5,146
  Mortgage-backed securities available for sale ...................         766        2,009
  Loans, net ......................................................       1,574        1,754
  Accrued interest receivable .....................................         132          178
  Equity in net assets of subsidiaries ............................      22,667       21,905
  Other Assets ....................................................          18            6
                                                                       --------     --------
    Total Assets ..................................................    $ 31,959     $ 32,727
                                                                       ========     ========
Liabilities and Stockholders' Equity

Liabilities:
  Accrued expenses and other liabilities ..........................    $    606     $     94
                                                                       --------     --------
  Stockholders' Equity
  Preferred stock, $.01 par value; authorized 500,000 shares ......    $      0     $      0
  Common stock, $.01 par value; authorized 4,500,000:          
    2,248,250 shares issued at September 30, 1997 .................          22           22
  Additional paid-in capital ......................................      21,424       21,424
  Retained earnings ...............................................      11,858       11,196
  Net unrealized loss on securities available for sale (net of tax)          12           (9)
  Treasury stock ..................................................      (1,963)          --
                                                                       --------     --------
    Total Stockholders' Equity ....................................      31,353       32,633
                                                                       --------     --------
    Total Liabilities and Stockholders' Equity ....................    $ 31,959     $ 32,727
                                                                       ========     ========
</TABLE>


                                     - 51 -
<PAGE>


          Statement of Operations for the Year Ended September 30,1998
   and for the Period from Inception (July 9, 1997) Through September 30, 1997
   ---------------------------------------------------------------------------
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                                     1998    1997
                                                                                     ----    ----
<S>                                                                                  <C>     <C> 
Interest Income .................................................................    $520    $102
Non-interest expense ............................................................     378      79
                                                                                     ----    ----
  Income before income taxes and equity in undistributed earnings of subsidiaries     142      23
Income tax expense ..............................................................      58       9
                                                                                     ----    ----
  Income before equity in undistributed earnings of subsidiaries ................      84      14
Equity in undistributed earnings of subsidiaries ................................     516     742
                                                                                     ----    ----
     Net Income .................................................................    $600    $756
                                                                                     ----    ----
</TABLE>

          Statement of Cash Flows for the Year Ended September 30, 1998
  And for the Period from Inception (July 9, 1997) through September 30, 1997.
  ----------------------------------------------------------------------------
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                       1998         1997
                                                                     --------     --------
<S>                                                                  <C>          <C>     
Cash flows from operating activities:
Net income ......................................................    $    600     $    756
Adjustments to reconcile net income to net cash provided by
  operating activities
Equity in undistributed earnings of subsidiaries ................        (516)        (742)
Fair value provision of ISAP shares committed to be released ....          57
Increase (decrease) in accrued interest receivable ..............          47         (179)
Increase in other assets ........................................         (24)          --
Net amortization on investment securities-available for sale ....          34            9
Net amortization on mortgage-backed securities available for sale           8            1
Increase in accrued expenses and other liabilities ..............         510           94
                                                                     --------     --------
     Net cash provided (used) by operating activities ...........         716          (61)
                                                                     --------     --------

Cash flows from investing activities:
Purchase of investment securities-available for sale ............    $ (2,000)    $ (5,169)
Purchase of mortgage-backed securities-available for sale .......          --       (2,011)
Investment in common stock subsidiaries .........................         (50)     (10,723)
Proceeds from principal paydowns of mortgage-backed securities--
  available for sale ............................................       1,235           --
Proceeds from maturity and redemption of investment securities --
  available for sale ............................................       1,600           --
Net (increase) decrease in loans to ESOP ........................         180       (1,754)
                                                                     --------     --------
     Net cash provided (used) by investing activities ...........         965      (19,657)
                                                                     --------     --------

Cash flows from financing activities:
Proceeds from issuance of common stock ..........................          --       21,447
Purchase of treasury stock ......................................      (2,020)          --
Dividends .......................................................        (135)          --
                                                                     --------     --------
     Net cash provided by (used in) financing activities ........      (2,155)      21,447
                                                                     --------     --------

Net increase (decrease) in cash and cash equivalents ............        (474)       1,729
Cash and cash equivalents at beginning of year ..................       1,729           --
                                                                     --------     --------
Cash and cash equivalents at end of year ........................    $  1,255     $  1,729
                                                                     ========     ========
</TABLE>


                                     - 52 -
<PAGE>


NOTE 21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                    First     Second      Third     Fourth
Year Ended September 30, 1998                      Quarter    Quarter    Quarter    Quarter
-----------------------------                      -------    -------    -------    -------
                                                                (In Thousands)
<S>                                                <C>        <C>        <C>        <C>    
Quarterly Operating Data
Interest income ...............................    $ 1,996    $ 1,945    $ 2,087    $ 2,192
Interest expense ..............................        778        771        893        982
                                                   -------    -------    -------    -------
Net interest income ...........................      1,218      1,174      1,194      1,210
Provision for loan losses .....................         20         10         10         30
Other non-interest income .....................        147         57         57        189
Non-interest expense ..........................        852        856        945      1,522
                                                   -------    -------    -------    -------
Income before taxes ...........................        493        365        296       (153)
Income tax expense ............................        198        144        121        (62)
                                                   -------    -------    -------    -------
Net income ....................................    $   295    $   221    $   175    $   (91)
                                                   =======    =======    =======    =======
</TABLE>


                                     - 53 -
<PAGE>


                            STOCKHOLDERS' INFORMATION


CORPORATE OFFICE                        TRANSFER AGENT AND REGISTRAR

GSB Financial Corporation               Registrar and Transfer Company
1 South Church Street                   10 Commerce Drive
Goshen, New York 10924                  Cranford, NJ  07016-3572
(914) 294-6151
                                        SPECIAL COUNSEL

COMMON STOCK                            Serchuk & Zelermyer, LLP
                                        81 Main Street
The common stock of GSB                 White Plains, NY 10601
Financial Corporation is
traded on the NASDAQ                    INDEPENDENT AUDITORS
Stock Market under the
symbol "GOSB"                           Nugent and Haeussler, P.C.
                                        101 Bracken Road
                                        Montgomery, NY 12549
The approximate number of
stockholders of record was
471 at December 14, 1998.


GSB Financial Corporation common stock was
issued at $10.00 per share in connection with the
Company's initial public offering on July 9, 1997.
The following table shows the range of high and
low sale prices for each quarterly period since
the Company began trading in July.

    1998                        High             Low            Dividend
    ----                        ----             ---            --------
First Quarter                  $18.94           $14.50               --
Second Quarter                 $17.50           $15.25               --
Third Quarter                  $17.75           $16.50           $ 0.03
Fourth Quarter                 $17.00           $ 8.31           $ 0.03

    1997
    ----
Fourth Quarter                 $17.13           $14.00               --


                  FORM 10K

GSB Financial Corporation will file an Annual
Report on Form 10K for fiscal year 1998.
Stockholders may obtain a copy free of charge by
Writing to:

Barbara A. Carr
GSB Financial Corporation
1 South Church Street
Goshen, NY  10924


                                     - 54 -
<PAGE>


GSB FINANCIAL CORPORATION and
GOSHEN SAVINGS BANK
DIRECTORS

THOMAS V. GUARINO
Chairman of the Board
GSB Financial Corp. and
President, Hudson Valley
Investment Advisors, Inc.

CLIFFORD E. KELSEY, JR.
President and Chief Executive Officer,
GSB Financial Corp. and
Goshen Savings Bank

RICHARD C. DURLAND
Executive Vice President and Treasurer,
GSB Financial Corp. and
Goshen Savings Bank

HERBERT C. MUELLER
Retired Veterinarian

ROY L. LIPPINCOTT
Retired President Lippincott Funeral
Home Inc. and Lippincott Funeral Chapel

STEPHEN O. HOPKINS
Representative R.D. Murray Fire
Apparatus and S.V.I. Trucks

GENE J. GENGEL
Executive Director,
Orange County Cerebral Palsy Assoc.
Rehabilitation Center


GSB FINANCIAL CORPORATION
     OFFICERS

CLIFFORD E. KELSEY *
President and Chief Executive Officer

RICHARD C. DURLAND *
Executive Vice President and Treasurer

STEPHEN W. DEDERICK
Chief Financial Officer and Treasurer

ROLLAND B. PEACOCK, III
Vice President

BARBARA A. CARR
Secretary

DIANE D. KING *
Senior Vice President and Assistant Treasurer

JENNY M. FORD *
Vice President and Secretary


GOSHEN SAVINGS BANK -- OFFICERS

CLIFFORD E. KELSEY, JR. *
President and Chief Executive Officer

RICHARD C. DURLAND *
Executive Vice President and Treasurer

STEPHEN W. DEDERICK
Senior Vice President and Chief Financial Officer

ROLLAND B. PEACOCK, III
Senior Vice President and Senior Lending Officer

DIANE D. KING *
Senior Vice President and Assistant Treasurer

JENNY M. FORD *
Vice President and Secretary

BARBARA A. CARR
Assistant Vice President and Senior Mortgage Officer

JENNIFER A. TERPSTRA
Operating Officer and Senior Marketing Officer

SUZANNE WATTERS
Assistant Vice President and Security Officer

CHRISTOPHER P. CURCIO
Assistant Vice President

FRANCES COUGHLIN
Branch Manager - Harriman



* Officers retiring as of
December 31, 1998.

                                     - 55 -