FORM 10-QSB
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


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

                For the quarterly period ended December 31, 1998

                                       or

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

For the transition period from ______  to _______  

                         Commission file number 1-13691

                             Bay State Bancorp, Inc.
        (Exact name of small business issuer as specified in its charter)

         Delaware                                              04-3398630
 (State or other jurisdiction of                            (I.R.S. Employer
    Incorporation or organization)                          Identification No.)

1299 Beacon Street, Brookline, Massachusetts                      02446
(Address of principal executive offices)                        (Zip Code)

         Issuer's telephone number, including area code: (617) 739-9500

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

The number of shares of common stock outstanding of each of the issuer's classes
of common stock, as of February 8, 1999 was 2,408,470.

Transitional Small Business Disclosure Format                    |_| Yes |X| No


<PAGE>


                    BAY STATE BANCORP, INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>
<S>                                                                                                              <C>
  PART I - FINANCIAL INFORMATION..................................................................................1
    Item 1 - Financial Statements.................................................................................1
      Consolidated Balance Sheets - December 31, 1998 and March 31, 1998 .........................................1
      Consolidated Income Statements - Three and nine months ended December 31, 1998 and 1997.....................2
      Consolidated Statements of Cash Flows - nine months ended December 31, 1998 and 1997........................3
      Consolidated Statements of Changes in Stockholders' Equity - nine months ended
      December 31, 1998...........................................................................................4
      Notes to Consolidated Financial Statements for the Period Ended December 31, 1998...........................5
    Item 2 - Management's Discussion and Analysis or Plan of Operation............................................6

  PART II - OTHER INFORMATION....................................................................................20
    Item 1 - Legal Proceedings...................................................................................20
    Item 2 - Changes in Securities and use of proceeds...........................................................20
    Item 3 - Defaults Upon Senior Securities.....................................................................20
    Item 4 - Submission of Matters to a Vote of Security Holders.................................................20
    Item 5 - Other Information...................................................................................20
    Item 6 - Exhibits and Reports on Form 8-K....................................................................20

    SIGNATURES...................................................................................................21
    EXHIBITS.....................................................................................................22
</TABLE>


<PAGE>

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

                    Bay State Bancorp, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                      December 31,   March 31,
                                                                         1998          1998
                                                                      -----------    --------
                                                                      (Unaudited)
<S>                                                                   <C>           <C>     
ASSETS                                                                
Cash and due from banks                                               $  5,975      $  3,513
Short-term investments                                                  12,007        46,000
Investment and mortgage-backed securities
         Available-for-sale (amortized cost of $25,564 and $5,391)      26,063         6,523
         Held to maturity (market value of $1,298 and $4,274)            1,299         4,272
Mortgage loans held for sale                                                --           822
Loans receivable, net                                                  283,300       224,928
Stock in Federal Home Loan Bank of Boston                                3,240         1,873
Accrued interest receivable                                              1,714         1,260
Premises and equipment, net                                              2,607         2,581
Deferred tax asset, net                                                  2,260         2,065
Other assets                                                             5,655         1,454
                                                                      --------      --------
                Total assets                                          $344,120      $295,291
                                                                      ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
         Deposits                                                     $213,167      $207,780
         Federal Home Loan Bank Advances                                64,449        20,000
         Other borrowed funds                                            4,640         2,176
         Accrued expenses and other liabilities                          2,437         1,761
                                                                      --------      --------
                 Total liabilities                                     284,693       231,717
                                                                      --------      --------
Stockholders' equity:
         Common stock, par value $.01 per share, issued
                 and outstanding 2,535,232 shares                           25            25
         Additional paid-in capital                                     49,194        49,194
         Retained earnings                                              19,007        17,340
         Accumulated other comprehensive income                            228           666
            Less: Unearned ESOP shares                                  (3,651)       (3,651)
                  Unearned 1998 Stock-Based Incentive Plan              (2,269)           --
                  Treasury stock, 126,762 shares                        (3,107)           --
                                                                      --------      --------
                 Total stockholders' equity                             59,427        63,574
                                                                      --------      --------
                 Total liabilities and stockholders' equity           $344,120      $295,291
                                                                      ========      ========

Equity-to-asset ratio                                                    17.27%        21.53%
Book value per share                                                    $26.74        $27.02
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                     Page 1


<PAGE>

                    Bay State Bancorp, Inc. and Subsidiaries
                         Consolidated Income Statements
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            Three months ended                Nine months ended
                                                                               December 31,                     December 31,
                                                                          1998             1997             1998             1997
                                                                          ----             ----             ----             ----
                                                                                 Unaudited                        Unaudited   
<S>                                                                    <C>              <C>              <C>              <C>       
Interest income:  
   Loans                                                               $    5,551       $    4,564       $   15,201       $   13,250
   Investments                                                                405              263            1,010              814
   Other interest                                                              95               20              799               58
                                                                       ----------       ----------       ----------       ----------
      Total interest income                                                 6,051            4,847           17,010           14,122
                                                                       ----------       ----------       ----------       ----------
Interest expense:
   Deposits                                                                 2,199            2,255            6,689            6,621
   Borrowed funds                                                             580              355            1,042              899
                                                                       ----------       ----------       ----------       ----------
      Total interest expense                                                2,779            2,610            7,731            7,520
                                                                       ----------       ----------       ----------       ----------
      Net interest income before provision for loan losses                  3,272            2,237            9,279            6,602
Provision for loan losses                                                     260               30              410              474
                                                                       ----------       ----------       ----------       ----------
      Net interest income after provision for loan losses                   3,012            2,207            8,869            6,128
                                                                       ----------       ----------       ----------       ----------
Non-interest income:
   Service charges on deposit accounts                                         70               72              202              207
   Gain on sale of loans                                                       17                1               46                6
   Gain on sale of other real estate owned                                     --               --               --               19
                                                                       ----------       ----------       ----------       ----------
      Total non-interest income                                                87               73              248              232
                                                                       ----------       ----------       ----------       ----------
      Income before non-interest expense and income taxes                   3,099            2,280            9,117            6,360
                                                                       ----------       ----------       ----------       ----------
Non-interest expense:
   Salaries and employee benefits                                           1,448            1,041            3,780            2,759
   Equipment  and occupancy                                                   253              229              750              669
   Federal deposit insurance premiums                                          32               30               95               93
   Advertising                                                                 62               40              162              128
   Data processing                                                             63               56              185              166
   Other                                                                      316              205            1,275              677
                                                                       ----------       ----------       ----------       ----------
      Total non-interest expense                                            2,174            1,601            6,247            4,492
                                                                       ----------       ----------       ----------       ----------
      Income before income taxes                                              925              679            2,870            1,868
Income tax expense                                                            378              284            1,203              775
                                                                       ----------       ----------       ----------       ----------
      Net income                                                       $      547       $      395       $    1,667       $    1,093
                                                                       ==========       ==========       ==========       ==========
Comprehensive net income                                               $      714       $      451       $    1,229       $    1,315
                                                                       ==========       ==========       ==========       ==========

Weighted average common and common equivalent shares                    2,317,682              n/a        2,340,982              n/a
outstanding                                                            ==========                        =========
Basic earnings per share                                               $     0.24              n/a       $     0.71              n/a
                                                                       ==========                        ==========
Diluted earnings per share                                             $     0.23              n/a       $     0.71              n/a
                                                                       ==========                        ==========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                     Page 2
<PAGE>


                    Bay State Bancorp, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                 (In thousands)


<TABLE>
<CAPTION>
                                                         Nine months ended December  31,
                                                         ------------------------------
                                                               1998         1997
                                                               ----         ----
                                                                   Unaudited
                                                                   ---------
<S>                                                          <C>         <C>     
Net cash flows from operating activities:                         
 Net income                                                  $  1,667    $  1,093
 Adjustments  to  reconcile  net  income  to  net  cash
 provided  by  operating activities:
 Provision for loan losses                                        410         474
 Net decrease in mortgage loans held-for-sale                    (822)         --
 Gain on sale of mortgage loans                                   (46)         (6)
 Depreciation and amortization                                    232         170
 Increase (decrease) in deferred loan origination fees           (235)        (23)
 Amortization of securities, net of accretion                       6           6
 Gain on sale of other real estate owned                           --         (19)
 Increase in accrued interest receivable                         (454)       (119)
 Decrease in deferred income tax asset                             --        (169)
 (Increase) decrease in prepaid expenses and other assets      (3,801)       (832)
 Increase (decrease) in other liabilities                         676         658
                                                             --------    --------
   Net cash provided by (used in) operating  activities        (2,367)      1,233
                                                             --------    --------

 Cash flows from investing activities:
 Proceeds from sales of other real estate owned                    --         322
 Proceeds from maturities of held-to-maturity securities        2,969       4,316
 Proceeds from maturities of available-for-sale securities      5,217          --
 Purchases of available-for-sale securities                   (25,391)       (103)
 Purchases of Federal Home Loan Bank Stock                     (1,367)         --
 Distribution to Rabbi Trust                                     (400)       (697)
 Net increase in loans                                        (56,858)    (17,744)
 Capital expenditures                                            (258)       (696)
                                                             --------    --------
 Net cash used in investing activities                        (76,088)    (14,602)
                                                             --------    --------

 Cash flows from financing activities:
 Net increase in deposits                                       5,387       6,711
 Repayment of advances from the Federal Home Loan Bank         (5,516)    (54,000)
 Advances from the Federal Home Loan Bank                      49,965      62,000
 Net increase in other borrowed funds                           2,464         102
 Purchase of stock for stock-based incentive plans             (2,269)         --
 Purchase of treasury stock                                    (3,107)         --
                                                             --------    --------
 Net cash provided by financing activities                     46,924      14,813
                                                             --------    --------
 Net increase (decrease) in cash and cash equivalents         (31,531)      1,444
 Cash and cash equivalents at beginning of period              49,513       3,617
                                                             --------    --------
 Cash and cash equivalents at end of period                  $ 17,982    $  5,061
                                                             ========    ========

Supplemental  disclosure of cash flow  information:
Cash paid during the period for:
                  Interest                                   $  7,730    $  7,520
                  Taxes                                         1,089         746
</TABLE>



              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                     Page 3
<PAGE>


                    Bay State Bancorp, Inc. and Subsidiaries
           Consolidated Statements of Changes in Stockholders' Equity
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         Accumulated                        Unearned
                                                  Additional             Other Comp-                       Stock-based    Total
                                        Common     Paid-in    Retained    rehensive  Unearned   Treasury    Incentive  Stockholders'
                                        Stock      Capital    Earnings     Income   ESOP Shares   Stock     Plan Shares    Equity
                                       ---------------------------------------------------------------------------------------------
<S>                                    <C>        <C>        <C>         <C>         <C>         <C>         <C>         <C>     
Balance at March 31, 1997              $   --     $   --     $ 19,091    $    383    $   --      $   --      $   --      $ 19,474
  Net Loss                                 --         --       (1,751)       --          --          --          --        (1,751)
  Stock issued pursuant to
  initial common
    stock offering                         23       45,245       --          --          --          --          --        45,268
  Issuance of 187,795 shares of
    common stock  to The Bay
    State Federal Savings
    Charitable Foundation                   2        3,754       --          --          --          --          --         3,756

  Common Stock acquired by ESOP            --         --         --          --        (4,056)       --          --        (4,056)
  Reduction in unearned ESOP
    shares charged to expense              --         --         --          --           405        --          --           405
  Appreciation in fair value of
  unearned ESOP
    shares charged to expense              --          195       --          --          --          --          --           195
  Net Change in unrealized gain
    on available for sale
    securities                             --         --         --           283        --          --          --           283
                                       ---------------------------------------------------------------------------------------------
Balance at March 31, 1998                  25       49,194     17,340         666      (3,651)       --          --        63,574
  Net Income                               --         --        1,667        --          --          --          --         1,667
  Purchase of treasury stock               --         --         --          --          --        (3,107)       --        (3,107)
  Common stock acquired for
    stock-based incentive plans            --         --         --          --          --          --        (2,269)     (2,269)
  Net change in unrealized gain
    on available for sale
    securities                             --         --         --          (438)       --          --          --          (438)
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1998
   (Unaudited)                         $   25     $ 49,194   $ 19,007    $    228    $ (3,651)   $ (3,107)   $ (2,269)   $ 59,427
                                       =============================================================================================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                     Page 4
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE PERIOD ENDED DECEMBER 31, 1998

(1)  Organization

     Bay State Bancorp,  Inc.  ("Company" or "Bay State") was incorporated under
the laws of Delaware  in October  1997 for the purpose of serving as the holding
company  of Bay  State  Federal  Savings  Bank  ("Bank")  as part of the  Bank's
conversion  from a mutual form of  organization  to a stock form of organization
(the  "Conversion").  The Company is a savings and loan  holding  company and is
subject to regulation by the Office of Thrift Supervision  ("OTS"),  the Federal
Deposit  Insurance   Corporation   ("FDIC")  and  the  Securities  and  Exchange
Commission ("SEC"). The Conversion, completed on March 29, 1998, resulted in the
Company  issuing an aggregate  2,535,232  shares of its common stock,  par value
$.01 per share,  at a price of $20 per share,  of which  2,347,437  shares  were
issued in a  subscription  offering  and  187,795  shares were issued to The Bay
State Federal Savings Charitable  Foundation (the  "Foundation),  established by
the Bank.  Prior to the  Conversion,  Bay State had not engaged in any  material
operations.

(2)  Accounting Principles

     The accompanying  unaudited  consolidated financial statements of Bay State
Bancorp,   Inc.  have  been  prepared  in  accordance  with  generally  accepted
accounting   principles  for  interim   financial   information   and  with  the
instructions  to Form 10-QSB and of Regulation S-B.  Accordingly,  the financial
statements  do not  include all of the  information  and  footnotes  required by
generally accepted accounting principles for complete financial  statements.  In
the opinion of management,  all  adjustments  (consisting of a normal  recurring
nature)  considered  necessary  for a  fair  presentation  have  been  included.
Operating  results for the three and nine months ended December 31, 1998 are not
necessarily  indicative  of the  results  that may be  expected  for the current
fiscal year.

     For further  information,  refer to the consolidated  financial  statements
included in the  Company's  annual  report and Form 10-KSB for the period  ended
March  31,  1998,  and form  10-QSB  for the  periods  ended  June 30,  1998 and
September 30, 1998, filed with the Securities and Exchange Commission.

(3)  Stock Based Incentive Plan

     The Company has  established a trust to purchase  101,409  shares of common
stock for the purpose of funding the 1998 Stock Based  Incentive  Plan ("Plan").
The Plan was approved by shareholders' at the September 29, 1998 Annual Meeting.
The trust has purchased  101,409 shares at a cost of  $2,269,000,  or $22.38 per
share.

(4)  Stock Repurchase Program

     On October 30, 1998 the Company announced it had received approval from the
OTS to repurchase up to 5% of the Company's outstanding common stock, or 126,762
shares.  During the quarter the Company completed the 



                                     Page 5
<PAGE>

purchase of the stock at a total cost of $3,107,000, or $24.51 per share.

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

General

     Bay  State  Bancorp,   Inc.,  a  savings  and  loan  holding  company,  was
incorporated  under the laws of  Delaware  in  October  1997 for the  purpose of
serving as the holding  company of Bay State Federal Savings Bank as part of the
Bank's conversion from a mutual to stock form of organization. Bay State Federal
Savings Bank is a federally  chartered savings bank and is subject to regulation
by the Office of Thrift Supervision.

     The Bank has five full service  retail banking  offices  located in Norfolk
and Suffolk counties,  Massachusetts.  Through these offices,  the Bank offers a
full range of retail and commercial  banking  products and services and conducts
other business as allowable for federally  chartered  banks.  The Banks' lending
operations focus on, residential first mortgages,  commercial real estate loans,
residential construction loans, home equity lines of credit, and consumer loans.

     The Bank's business  activities are concentrated in Eastern  Massachusetts.
All retail banking activity is conducted  through the banking  offices.  Lending
operations,  particularly  loan  originations,  are  conducted  from the  retail
offices  and at the point of sale.  Neither  the Company and the Bank nor any of
their subsidiaries conduct business on a national or international basis.

     The operating  results of the Company depend  primarily on its net interest
and dividend income,  which is the difference  between (i) interest and dividend
income on earnings  assets,  primarily loans and investment  securities and (ii)
interest expense on interest bearing liabilities,  which consist of deposits and
borrowings.  Results of  operations  are also affected by the provision for loan
losses, the level of non-interest income, including deposit and loan fees, gains
on sales of assets, operating expenses and income taxes.

Comparison of Financial Condition at December 31, 1998 and March 31, 1998

     Total assets at December 31, 1998 were $344.1  million,  compared to $295.3
million at March 31,  1998,  an increase of 16.5%.  Loans  receivable  increased
$58.4 million,  or 26.0%,  primarily in multi-family  residential and commercial
real estate loans and to a lesser  extent an increase in 1-4 family  residential
mortgages, which were originated and purchased. The increase in loans was funded
from a net reduction of $17.4 million,  or 30.6%, in short-term  investments and
investment securities,  an increase in deposits of $5.4 million, or 2.6%, and an
increase of $44.5 million, or 222.3%, in Federal Home Loan Bank borrowings.

     Total equity was $59.4  million,  or 17.27% of total assets at December 31,
1998, a net  decrease of $4.2  million,  or 6.52%,  from the $63.6  million,  or
21.53% of total assets at March 31, 1998.  The net  decrease was  primarily  the
result of net income for the period and the Company  completing  the purchase of
$2.3 million of its common stock for the 1998 Stock Based  Incentive  Plan,  and
the purchase of $3.1  million of its common stock to be held as treasury  stock.
The Company's book value per share at December 31, 1998 was $26.74.


                                     Page 6
<PAGE>

Investments

     Short-term  investments of $12.0 million at December 31, 1998, consisted of
overnight  deposits  in the  Federal  Home  Loan  Bank of  Boston  and the  Bank
Investment Fund, a decrease of $34.0 million,  or 73.9%,  from the $46.0 million
at March 31, 1998.  Investment  securities  increased $16.6 million,  or 153.5%,
primarily  in short term  agencies,  mortgage-backed  securities  and common and
trust preferred equities. The net decrease in total investments of $17.4 million
was used to fund loan growth.

     As a result of the  volatility of the financial  markets during the period,
and the corresponding  impact on the market value of the investments  classified
as  available-for-sale,  a $228,000 net  unrealized  gain was  recognized  as an
increase to equity at December 31, 1998,  compared to a net  unrealized  gain of
$666,000 at March 31, 1998.

     The tables below show the investment  securities portfolios for the periods
presented:

     The   amortized   cost  and   estimated   market   values  of   investments
available-for-sale were:
     
<TABLE>
<CAPTION>
                                             December 31, 1998              March 31, 1998
                                         ------------------------      ------------------------
                                                        Estimated                     Estimated
                                         Amortized        market       Amortized        market
                                           cost           value          cost           value
                                         ---------      ---------      ---------      ---------
                                                            (In thousands)
<S>                                       <C>            <C>            <C>            <C>    
Investment securities                                      
 Marketable equity securities             $ 9,451        $ 9,924        $ 5,391        $ 6,523
 Mortgage-backed securities                 5,857          5,864           --             --
 Trust preferred equity securities          2,507          2,526           --             --
 Corporate bonds and notes                  1,249          1,226           --             --
 Preferred stocks                           1,500          1,506           --             --
 Government agency securities               5,000          5,017           --             --
                                          -------        -------        -------        -------
                                          $25,564        $26,063        $ 5,391        $ 6,523
                                          =======        =======        =======        =======
</TABLE>

     The   amortized   cost  and   estimated   market   values  of   investments
held-to-maturity were:

<TABLE>
<CAPTION>
                                            December 31, 1998              March 31, 1998
                                        ------------------------      ------------------------
                                                       Estimated                     Estimated
                                        Amortized        market       Amortized        market
                                          cost           value          cost           value
                                        ---------      ---------      ---------      ---------
                                                           (In thousands)
<S>                                      <C>            <C>            <C>            <C>    
Investment securities        
 Government agency securities            $ --           $ --            $2,001        $1,999
 Mortgage-backed securities               1,299          1,298           2,271         2,275
                                         ------         ------          ------        ------
                                         $1,299         $1,298          $4,272        $4,274
                                         ======         ======          ======        ======
</TABLE>


                                     Page 7
<PAGE>


Loans

     During the first nine months of the fiscal year, loans receivable increased
by $58.4 million, or 26.07%, as detailed below:

<TABLE>
<CAPTION>

                                         December 31,    % of  total    March 31,      % of  total
                                            1998            loans         1998             loans
                                            ----            -----         ----             -----
                                                          (Dollars in thousands)
<S>                                       <C>               <C>         <C>             <C>   
Mortgage loans:     
         Residential 1 - 4 family         $172,818           60.35%     $157,240           68.99%
         Equity lines                        5,029            1.76         4,028            1.77
         Residential multi-family           37,871           13.22        22,411            9.83
         Commercial real estate             60,219           21.03        35,468           15.56
         Construction and development        5,615            1.96         5,287            2.32
                                           -------          ------       -------          ------
              Total mortgage loans         281,552           98.32       224,434           98.47
Commercial loans                               445            0.16            43            0.02
Other loans                                  4,371            1.52         3,434            1.51
                                           -------          ------       -------          ------
              Total loans                  286,368          100.00%      227,911          100.00%
                                                            ======                        ======
Deduct:
         Allowance for loan losses           2,833                         2,513
         Deferred loan fees                    235                           470
                                          --------                      --------
              Net loans receivable        $283,300                      $224,928
                                          ========                      ========
</TABLE>


     The Banks' primary  lending focus is real estate  lending.  At December 31,
1998, residential, commercial real estate and construction and development loans
represented 98.3% of total loans, compared to 98.5% at March 31, 1998.

     At  December  31,  1998 loans  serviced  for  investors  was $20.3  million
compared to $15.6 million at March 31, 1998.

Asset Quality

     At December 31, 1998 non-performing assets totaled $1.9 million, a decrease
of  $381,000,  or 16.7%,  from $2.3  million at March 31,  1998.  Non-performing
assets consist of all loans that are delinquent 90 days or more. The Bank had no
other real estate owned at December 31, 1998 or March 31, 1998.  At December 31,
1998, non-performing assets represented 0.55% of total assets and 0.66% of loans
receivable,  compared to 0.77% and 1.00%,  respectively,  at March 31, 1998. The
decrease  in  non-performing  assets was  primarily  in  one-to-four  family and
multi-family residential mortgages as the result of the payoff of certain loans.


                                     Page 8
<PAGE>


     The  composition  of  non-performing   assets,   which  consist  solely  of
non-performing loans for the periods presented was:

                                                      December 31,    March  31,
                                                   1998         1997    1998
                                                  ------------------  ----------
                                                       (Dollars in thousands)
Non-accrual loans:
         One-to-four-family                        $  862     $1,258     $1,258
         Multi-family                                 280       --          254
         Commercial real estate                       742        735        739
         Construction and development                --         --         --   
         Equity lines                                --         --         --   
         Other                                         14         15         28
                                                   ------     ------     ------
                                                   $1,898     $2,008     $2,279
                                                   ======     ======     ======
Non-performing assets as a percentage of:
         Loans receivable                            0.66%      0.89%      1.00%
         Total assets                                0.55       0.80       0.77


     The following  represents the activity in the allowance for loan losses for
the nine months ended December 31, 1998:


                                                                (In thousands)
         Balance at March 31, 1998                                  $ 2,513
         Provision for loan losses                                      410
         Losses charged to allowance                                    (90)
         Recoveries                                                      --
                                                                    -------
         Balance at December 31, 1998                               $ 2,833
                                                                    =======


     The Bank  continually  reviews its delinquency  position,  underwriting and
appraisal  procedures,  charge-off  experience  and current  real estate  market
conditions with respect to its entire loan portfolio.  While management uses the
best information available in establishing the allowance, future adjustments may
be necessary if economic  conditions  differ from the assumptions used in making
the current evaluation.




                                     Page 9
<PAGE>


Deposits and Borrowed Funds

     Deposits increased slightly during the nine month period as detailed below:

<TABLE>
<CAPTION>
                                     December 31,      % of total         March 31,      % of total
                                         1998           deposits            1998          deposits
                                     ------------      ----------        ---------       ----------
                                                          (Dollars in thousands)
<S>                                    <C>               <C>              <C>               <C>    
Regular savings accounts               $ 25,912           12.16%          $ 32,216           15.51%
NOW accounts                             24,413           11.45             22,989           11.06
Money market accounts                    52,102           24.44             42,440           20.43
Non-interest bearing deposits             2,062            0.97                485            0.23
                                       --------          ------           --------          ------
                                        104,489           49.02             98,130           47.23

Term deposits                           108,678           50.98            109,650           52.77
                                       --------          ------           --------          ------
         Total deposits                $213,167          100.00%          $207,780          100.00%
                                       ========          ======           ========          ======
</TABLE>

     During the period, FHLB advances increased $44.5 million, or 222.3%, as the
Bank took advantage of attractive pricing to fund asset growth.

Comparison of Operating Results for the three months ended December 31, 1998 and
1997

Results of Operations

     Consolidated  net income  for the three  months  ended  December  31,  1998
totaled $547,000,  or $0.24 per share,  compared to $395,000 for the same period
last year. This  represents an increase of 38.5% in earnings.  Due to the recent
Conversion,  the  earnings  per  share  numbers  for the  prior  period  are not
applicable. The increase in earnings was directly attributable to an increase in
net  interest  income  after the loan loss  provision  offset by an  increase in
operating   expenses.   The  increase  in  net  interest   income  was  directly
attributable  to the increased  level of  interest-earning  assets funded by the
Conversion  proceeds an increased  level of borrowed  funds,  and an increase in
deposits.

Interest Income

     Interest income for the three months ended December 31, 1998 increased $1.2
million, or 24.8%, to $6.1 million, compared to $4.8 million for the same period
last year.  The increase in interest  income was primarily due to an increase in
the average balance of interest-earning  assets,  partially offset by a decrease
in the yield on interest-earning assets. The average balance of interest-earning
assets  increased from $236.6 million for the quarter ended December 31, 1997 to
$316.3  million for the quarter  ended  December 31, 1998,  an increase of $79.7
million,  or 33.7%.  The  increase  in the average  balance of  interest-earning
assets was  primarily  a net result of an  increase  in the  average  balance of
short-term  investments and investment securities of $15.5 million, or 97.2%, an
increase in loans,  net, and  mortgage-loans  held for sale of $61.5  million or
28.2% and an increase in mortgage-backed and mortgage related securities of $2.7
million,  or 100.0%.  The yield on  interest-earning  assets  decreased 57 basis
points to 7.65%.

Interest Expense

     Interest  expense for the three  months ended  December 31, 1998  increased
$169,000,  or 6.5%, to  $2,779,000,  compared to $2,610,000  for the same period
last  year.  The  increase  in  interest  expense  was the net result of a $29.7
million,  or  13.1%,   increase  in  the  average  balance  of  interest-bearing
liabilities  which  increased 


                                    Page 10
<PAGE>

from  $226.3  million for the three  months  ended  December  31, 1997 to $256.0
million for the three months ended December 31, 1998, offset by a decrease of 27
basis points in the cost of funds to 4.34%.  The increase in the average balance
of  interest-bearing  liabilities  was  primarily a result of an increase in the
average balance of deposits of $4.9 million,  or 2.4% and the average balance of
FHLB advances of $24.8 million, or 102.8%.

Net interest income

     The table below shows the average  balance sheet,  the interest  earned and
paid  on  interest-earning  assets  and  interest-bearing  liabilities  and  the
resulting net interest spread and margin for the periods presented.


<TABLE>
<CAPTION>
For the three months ended December 31,                      1998                                  1997
                                               --------------------------------     --------------------------------
                                                           Interest                              Interest
                                               Average      income/      Yield/     Average       income/     Yield/
                                               balance      expense       rate      balance       expense      rate
                                               --------     -------      ------     --------      -------     ------
<S>                                            <C>          <C>           <C>       <C>           <C>          <C>  
Assets                                                             (Dollars in thousands)
Interest-earning assets:
 Short-term investments                        $  9,718     $   102       4.20%     $  1,466      $    20      5.46%
 Investment securities                           21,813         321       5.89        14,526          217      5.98
 Mortgage-backed and mortgage
   related securities                             5,426          77       5.68         2,713           45      6.63
Loans and mortgage loans held-for-sale          279,309       5,551       7.95       217,863        4,565      8.38
                                               --------     -------                 --------      -------     
Total interest-earning assets                   316,266       6,051       7.65       236,568        4,847      8.22
                                                            -------                               -------     
Non interest-earning assets                       7,278                               13,002
                                               --------                             --------
  Total                                        $323,544                             $249,570
                                               ========                             ========

Liabilities and Equity
Interest-bearing liabilities:
  NOW accounts                                 $ 22,451          76       1.35      $ 21,746          100      1.84
  Regular savings accounts                       26,664         137       2.06        28,519          176      2.47
  Money market accounts                          49,561         483       3.90        42,997          435      4.05
  Certificate accounts                          108,474       1,503       5.54       108,992        1,544      5.67
                                               --------     -------                 --------      -------     
Total interest-bearing deposits                 207,150       2,199       4.25       202,254        2,255      4.46
  FHLB advances                                  48,830         580       4.75        24,074          355      5.90
                                               --------     -------                 --------      -------     
Total interest-bearing liabilities              255,980       2,779       4.34       226,328        2,610      4.61
                                                            -------                               -------     
  Demand deposits                                   715                                  262
  Other liabilities                               4,878                                2,798
  Equity                                         61,971                               20,182
                                               --------                             --------
  Total                                        $323,544                             $249,570
                                               ========                             ========
Net interest income                                         $ 3,272                               $ 2,237
                                                            =======                               =======
Interest rate spread                                                      3.31%                                3.60%
                                                                         =====                                =====
Net interest margin                                                       4.14%                                3.91%
                                                                         =====                                =====
</TABLE>



                                    Page 11
<PAGE>

     The increase of $1,035,000 in net interest income is analyzed as follows:


                                             Quarters ended December 31,
                                                   1998 vs. 1997
                                     ------------------------------------------
                                          Change due to Increase (Decrease)
                                     ------------------------------------------
                                     Volume            Rate                Net
                                     -------          -------           -------
                                                  (In thousands)
Interest income:
         Loans                       $ 1,206          $  (220)          $   986
         Investments                     230              (12)              218
                                     -------          -------           -------
              Total                    1,436             (232)            1,204
                                     -------          -------           -------

Interest expense:

         Deposits                         48             (104)              (56)
         Borrowings                      284              (59)              225
                                     -------          -------           -------
              Total                      332             (163)              169
                                     -------          -------           -------
Net interest income                  $ 1,104          $   (69)          $ 1,035
                                     =======          =======           =======

Provision for Loan Losses

     The  provision  for loan losses  totaled  $260,000  for the  quarter  ended
December  31,  1998,  compared to $30,000  for the same  period  last year.  The
increased  provision is directly  related to the increase in the loan  portfolio
for the period and reflects the risks associated with the Banks' primary lending
objective to increase the overall loan portfolio.  The allowance for loan losses
is  maintained at an amount  management  considers  adequate to cover  estimated
losses on loans  receivable  which are deemed  probable and  estimable  based on
information currently known to management.  While management believes the Bank's
allowance  for loan losses is  sufficient  to cover losses  inherent in its loan
portfolio  at this time,  no  assurances  can be given that the Bank's  level of
allowance for loan losses will be sufficient to cover future losses  incurred by
the Bank, or that future  adjustments  to the allowance for loan losses will not
be necessary  if economic and other  conditions  differ  substantially  from the
economic and other  conditions  analyzed by  management to determine the current
level of the allowance for loan losses.

Non-interest income

     Total non-interest  income increased $14,000,  or 19.2%, to $87,000.  Other
fees and charges  decreased  $2,000 from fees on transaction  accounts.  Gain on
sale of loans  increased  $16,000,  due to the increased level of sales over the
same period last year.

Non-interest expense

     Salaries and benefits increased $407,000,  or 39.1%, the result of $340,000
in compensation expense associated with the Company's stock-based benefit plans,
and a general  increase  in salaries  and  benefits  due to the  increase in the
number of  employees  over the same  period  last  fiscal  year.  Occupancy  and
equipment  expenses  increased  $24,000,  or  10.5%,  primarily  a result of the
increased level of depreciation  on building and leasehold  improvements.  Other
expenses increased $111,000,  or 54.2%,  primarily as a result of an increase in
general expenses  associated with the development and  implementation of certain
products and programs as part of the strategic planning for the future.



                                    Page 12
<PAGE>

Income Taxes

     Income taxes for the three months ended  December 31, 1998 were $378,000 on
pretax income of $925,000, for an effective rate of 40.86%, compared to $284,000
on pretax  income of  $679,000,  for an  effective  rate of 41.83%  for the same
period last year. The effective tax rate is different than the prior year due to
the  non-deductibility  of certain  expenses and the  reduction in the state tax
rate for banks.

Comparison of Operating  Results for the nine months ended December 31, 1998 and
1997

Results of Operations

     Consolidated net income for the nine months ended December 31, 1998 totaled
$1,667,000,  or $0.71 per share, compared to $1,093,000 for the same period last
year.  This  represents  an  increase of 52.52% in  earnings.  Due to the recent
Conversion,  the  earnings  per  share  numbers  for the  prior  period  are not
applicable. The increase in earnings was directly attributable to an increase in
net  interest  income  after the loan loss  provision  offset by an  increase in
operating expenses. The increase in net interest income is directly attributable
to the  increased  level of  interest-earning  assets  funded by the  Conversion
proceeds and an increased level of deposits and borrowed funds.

Interest Income

     Interest  income for the nine months ended December 31, 1998 increased $2.9
or 20.5%,  to $17.0 million,  compared to $14.1 million for the same period last
year.  The increase in interest  income was  primarily due to an increase in the
average balance of  interest-earning  assets,  partially offset by a decrease in
the yield on  interest-earning  assets. The average balance of  interest-earning
assets increased from $231.2 million for the nine months ended December 31, 1997
to $291.5  million for the nine months ended  December 31, 1998,  an increase of
$60.3 million, or 26.1%. The increase in the average balance of interest-earning
assets was  primarily  the net result of an increase  in the average  balance of
short-term investments and investment securities of $23.8 million, or 152.7%, an
increase in loans,  net and mortgage  loans held for sale,  of $36.3  million or
17.1% and an increase in mortgage-backed and mortgage related securities of $0.2
million, or 6.5%. The yield on interest-earning assets decreased 37 basis points
to 7.78%.

Interest Expense

     Interest  expense for the nine months  ended  December  31, 1998  increased
$211,000, or 2.8%, to $7.7 million, compared to $7.5 million for the same period
last year.  The  increase  in  interest  expense  was  primarily  due to a $17.1
million,   or  7.9%,   increase  in  the  average  balance  of  interest-bearing
liabilities  which  increased  from $216.3  million  for the nine  months  ended
December 31, 1997 to $233.4 million for the nine months ended December 31, 1998,
offset  by a  decrease  of 20  basis  points  in the  cost  of  interest-bearing
liabilities to 4.42%.  The increase in the average  balance of  interest-bearing
liabilities  was  primarily a result of an  increase  in the average  balance of
deposits of $9.0 million, or 4.6% and an increase in the average balance of FHLB
advances of $8.2 million, or 40.1%.


                                    Page 13
<PAGE>

Net interest income

     The table below shows the average  balance sheet,  the interest  earned and
paid  on  interest-earning  assets  and  interest-bearing  liabilities  and  the
resulting net interest spread and margin for the periods presented.

<TABLE>
<CAPTION>
For the nine months ended December 31,                       1998                                  1997
                                               --------------------------------     --------------------------------
                                                           Interest                              Interest
                                               Average      income/      Yield/     Average       income/     Yield/
                                               balance      expense       rate      balance       expense      rate
                                               --------     -------      ------     --------      -------     ------
<S>                                            <C>          <C>           <C>       <C>           <C>          <C>  
                                                                   (Dollars in thousands)
Assets
Interest-earning assets:
 Short-term investments                        $ 19,514     $   806       5.51%     $  1,394      $    57      5.45%
 Investment securities                           19,885         860       5.77        14,199          669      6.28
 Mortgage-backed and mortgage related             
   securities                                     3,100         143       6.15         2,912          146      6.68
 Loans, net and mortgage loan held-
   for-sale                                     248,997      15,201       8.14       212,662       13,250      8.31
                                               --------     -------                 --------      -------
Total interest-earning assets                   291,496      17,010       7.78       231,167       14,122      8.15
                                                            -------                               -------
Non interest-earning assets                      10,292                                7,549
                                               --------                             --------
  Total                                        $301,788                             $238,716
                                               ========                             ========
Liabilities and Equity
Interest-bearing liabilities:
  NOW accounts                                 $ 21,848         264       1.61      $ 20,839          291      1.85
  Regular savings accounts                       27,481         477       2.31        28,902          545      2.50
  Money market accounts                          44,993       1,404       4.16        40,329        1,238      4.07
  Certificate accounts                          110,514       4,544       5.48       105,805        4,547      5.70
                                               --------     -------                 --------      -------
Total interest-bearing deposits                 204,836       6,689       4.35       195,875        6,621      4.49
  FHLB advances                                  28,555       1,042       4.87        20,382          899      5.77
                                               --------     -------                 --------      -------
Total interest-bearing liabilities              233,391       7,731       4.42       216,257        7,520      4.62
                                                            -------                               -------
  Demand deposits                                   608                                  147
  Other liabilities                               4,495                                2,603
  Equity                                         63,294                               19,709
                                               --------                             --------
  Total                                        $301,788                             $238,716
                                               ========                             ========
Net interest income                                         $ 9,279                               $ 6,602
                                                            =======                               =======
Interest rate spread                                                      3.36%                                3.53%
                                                                         =====                                =====
Net interest margin                                                       4.15%                                3.83%
                                                                         =====                                =====
</TABLE>


                                    Page 14
<PAGE>

     The increase of $2,677,000 in net interest income is analyzed as follows:

                                             Nine months ended December 31,
                                                      1998 vs. 1997
                                         ---------------------------------------
                                            Change due to Increase (Decrease)
                                         ---------------------------------------
                                         Volume           Rate              Net
                                         ------          ------           ------
                                                      (In thousands)

Interest income:
         Loans                           $2,212          $ (261)          $1,951
         Investment securities            1,001             (64)             937
                                         ------          ------           ------
              Total                       3,213            (325)           2,888
                                         ------          ------           ------

Interest expense:
         Deposits                           106             (38)              68
         Borrowings                         251            (108)             143
                                         ------          ------           ------
              Total                         357            (146)             211
                                         ------          ------           ------
Net interest income                      $2,856          $ (179)          $2,677
                                         ======          ======           ======

Provision for Loan Losses

     The  provision for loan losses  totaled  $410,000 for the nine months ended
December 31, 1998, compared to $474,000 for the same period last year. While the
asset quality of the Company has improved  since March 31, 1998, the addition to
loan loss is directly  attributable  to the increase in the total loan portfolio
during the current  fiscal year.  The level of the provision for loan losses for
the  previous  fiscal year was  attributable  to the  classification  of certain
purchased  loans that had been  acquired  in the merger with  another  financial
institution. These loans were identified and classified accordingly, as a result
an increase in the level of reserves  was  recognized  in  conjunction  with the
classification of the loans.

Non-interest income

     Total  non-interest  income totaled  $248,000  compared to $232,000 for the
same period last year. Other fees and charges  decreased $5,000 from the reduced
level of fees collected on transaction accounts. Gain on sale of loans increased
$40,000 due to the increased level of loans sold over the same period last year.
During the nine months ended December 31, 1997, the company recognized income of
$19,000 from the sale of other real estate  owned;  there was no such income for
the same period this year.

Non-interest expense

     Salaries  and  benefits  increased  $1,021,000,  or  37.0%,  the  result of
$609,000 in  compensation  expense  associated  with the  Company's  stock-based
benefit  plans,  and a general  increase in  salaries  and  benefits  due to the
increase in the number of  employees  over the same  period  last  fiscal  year.
Occupancy and equipment expenses increased $81,000, or 12.1%, primarily a result
of the increased level of  depreciation on building and leasehold  improvements.
Other expenses increased $598,000,  or 88.3%,  primarily as a result of $305,000
in  non-recurring   expenses  associated  with  the  implementation  of  certain
developmental  strategies  as part of the  strategic  planning  for the  future,
approximately   $35,000   associated  with  software   upgrades  for  year  2000
compliance, and an increase in other general expenses.



                                    Page 15
<PAGE>

Income Taxes

     Income taxes for the nine months ended December 31, 1998 were $1,203,000 on
pretax  income of  $2,870,000,  for an  effective  rate of 41.92%,  compared  to
$775,000 on pretax income of $1,868,000, for an effective rate of 41.49% for the
same period last year.  The effective tax rate is different  than the prior year
due to the  non-deductibility of certain expenses and the reduction in the state
tax rate for banks.

Capital Adequacy

     The  Company  and the  Bank  are  subject  to  various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory - and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct  material  effect on the Company's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Company and the Bank must meet  specific  capital  guidelines  that  involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification  are also subject to qualitative  judgments by the regulators
about components, risk weighting and other factors.

     At  December  31,  1998 the  Company's  capital  ratio was  17.27% of total
assets. The Bank at December 31, 1998 had total capital of 12.34% and risk based
capital of 21.40%  (unaudited),  as compared to 13.54% and 24.74% (unaudited) at
September 30, 1998.

     The  FDIC  sets  minimum  leverage  ratios  for  each  insured  institution
depending upon its CAMELS rating. Banks with the highest ratings are required to
carry a 3.0% leverage  ratio,  with less highly rated  institutions  required to
have minimum  ratios at least 1.0% to 2.0% greater.  Additionally,  the FDIC has
risk-based  capital  regulations.  Under these  requirements,  banks must have a
minimum risk-based capital rate of 8.00%.

     At December 31, 1998 the Company and the Bank met all the capital  adequacy
requirements to which they are subject. As of December 31, 1998, the most recent
notification from the Office of Thrift Supervision categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.


Asset/Liability Management

     The  principal  objective  of the  Bank's  interest  rate  risk  management
function is to evaluate the interest rate risk included in certain balance sheet
accounts,  determine  the  appropriate  level of risk given the Bank's  business
strategy,   operating  environment,   capital  and  liquidity  requirements  and
performance  objectives  and  manage  the  risk  consistent  with  the  Board of
Directors'  approved  guidelines.  Through  such  management,  the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates.

     The Bank  monitors  its  interest  rate  risk as such risk  relates  to its
operating  strategies.   The  Bank's  Board  of  Directors  has  established  an
Asset/Liability   Committee,   responsible  for  reviewing  its  asset/liability
policies and interest  rate risk  position,  which meets on a monthly  basis and
reports  trends and interest  rate risk  position to the Board of Directors on a
quarterly  basis. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Bank.



                                    Page 16
<PAGE>

     In recent years, the Bank has primarily  utilized the following  strategies
to manage  interest rate risk: (i)  emphasizing  the origination and purchase of
adjustable-rate  loans; (ii) investing  primarily in short-term U.S.  Government
securities  or  mortgage-backed  and  mortgage-related  securities  with shorter
estimated  maturities;  (iii)  utilizing  FHLB advances to better  structure the
maturities  of  its  interest  rate  sensitive   liabilities;   and  (iv)  to  a
substantially  lesser  extent,  selling  in  the  secondary  market  longer-term
fixed-rate  mortgage loans  originated  while generally  retaining the servicing
rights on such loans.

     As part of its interest rate risk analysis,  the Bank uses an interest rate
sensitivity  model  which  generates  estimates  of the change in the Bank's net
portfolio  value  ("NPV") over a range of interest  rate  scenarios and which is
prepared by the OTS on a quarterly  basis.  NPV is the present value of expected
cash flows from assets,  liabilities and off-balance  sheet  contracts.  The NPV
ratio, under any interest rate scenario,  is defined as the NPV in that scenario
divided by the market  value of assets in the same  scenario.  The OTS  produces
such  analysis  using its own  model,  based upon data  submitted  on the Bank's
quarterly Thrift Financial Reports,  including  estimated loan prepayment rates,
reinvestment  rates and deposit decay rates.  The following table sets forth the
Bank's NPV as of  September  30, 1998 (the latest NPV  analysis  prepared by the
OTS), as calculated by the OTS.


<TABLE>
<CAPTION>
   Change in
Interest Rates
      in                       Net Portfolio Value                       NPV as % of Portfolio
 Basis Points                                                              Value of Assets
 (Rate Shock)
                                                                         NPV
                   Amount          $ Change           % Change          Ratio          Change(1)
                --------------------------------------------------------------------------------
                                                (Dollars in thousands)
                                                                                          
<S>               <C>              <C>                   <C>            <C>                <C>  
    400           $30,374          $(8,385)              (22)%          10.70%             (241)
    300            33,275           (5,484)              (14)           11.57              (154)
    200            35,737           (3,022)               (8)           12.29               (82)
    100            37,467           (1,291)               (3)           12.77               (34)
 Static            38,759               --                --            13.11                --
   (100)           39,893            1,135                 3            13.40                29
   (200)           41,505            2,746                 7            13.82                71
   (300)           44,062            5,303                14            14.51               140
   (400)           46,392            8,173                21            15.26               215
</TABLE>

(1)  Expressed in basis points.

Liquidity

     The Bank's  primary  sources of funds are deposits,  principal and interest
payments on loans,  mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled  amortization of loans are predictable sources of
funds,  deposit flows and mortgage prepayments are greatly influenced by general
interest rates,  economic conditions and competition.  The Bank has continued to
maintain the  required  levels of liquid  assets as defined by OTS  regulations.
This  requirement  of the OTS,  which may be varied at the  direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term  borrowings.  The Bank's currently required liquidity
ratio is 4%.  At  December  31,  1998 the  Bank's  liquidity  ratio  was  9.72%.
Management's  strategy  is to  maintain  liquidity  as close as  possible to the
minimum  regulatory  requirement  and to invest any excess  liquidity  in higher
yielding  interest-earning  assets.  The Bank manages its liquidity position and

                                    Page 17
<PAGE>

demands  for  funding   primarily  by  investing   excess  funds  in  short-term
investments  and utilizing  FHLB advances in periods when the Bank's demands for
liquidity exceed funding from deposit inflows.

     The Bank's most liquid assets are cash and cash equivalents and securities.
The levels of these  assets are  dependent on the Bank's  operating,  financing,
lending and investing  activities during any given period. At December 31, 1998,
cash and cash equivalents and short-term  investments  totaled $18.0 million, or
5.2% of total assets.

     The Bank has other  sources of  liquidity  if a need for  additional  funds
arises,  including  FHLB  advances.  At December  31,  1998,  the Bank had $64.5
million in advances  outstanding from the FHLB, and at December 31, 1998, had an
additional overall borrowing capacity from the FHLB of $92.8 million.  Depending
on market  conditions,  the pricing of deposit  products and FHLB advances,  the
Bank may continue to rely on FHLB borrowings to fund asset growth.

Year 2000 Compliance

     As the year 2000  approaches,  an  important  business  issue  has  emerged
regarding how existing  application  software programs and operating systems can
accommodate  this date value. In addressing the year 2000 the Company has broken
down the process into four steps:  assessment,  correction/replacement,  testing
and implementation.

     The Company  has  completed  the  assessment  phase.  During this phase the
Company  identified  all  potential  programs  and  applications  that  could be
effected  which were date  sensitive.  The Company has also included the various
utility  companies  that it uses for  assessment as to their  readiness for year
2000. This assessment included all hardware and software applications as well as
vendor identification. The various applications identified were then prioritized
in   consideration   of  their  overall   importance  of  use  to  the  Company.
Correspondence  was sent to all vendors  inquiring into their  applications year
2000 compliance. For a number of applications the correction, testing and vendor
certification and implementation has been completed.

     The most critical  applications  to the Company are the software to process
all loan and deposit accounts and transactions,  the internal  accounting system
and utility  companies for the various facility  locations.  The Bank utilizes a
third-party vendor for processing the primary banking  applications and does not
have any proprietary or self developed software. In addition, the Bank also uses
third-party vendor application software for all ancillary computer applications,
specifically  general ledger and accounting systems.  The third-party vendor for
the Bank's banking applications is in the process of modifying and upgrading its
computer applications to ensure Year 2000 compliance. The Bank has completed the
second phase of testing.  At the current time it is anticipated  that the system
will be  compliant  and  implemented  by June 30,  1999.  During the quarter the
Company completed the conversion to a new accounting software  application which
is year 2000 compliant.

     For all other  applications the Company is continuing to ensure  compliance
by  continuing  to follow up with vendors for year 2000  certification.  At this
point in time the  Company  remains in the  correction/replacement,  testing and
implementation phases of the process.




                                    Page 18
<PAGE>

     During the  quarter the Company  also  completed  the process of creating a
preliminary contingency plan to deal with any unforeseen events that could occur
which would have a negative  impact on the day to day operations of the Company.
The plan is expected to be finalized  by March 31,  1999.  The plan will address
how to deal with the lack of utilities and support systems.

     The  Company  has  expensed  approximately  $35,000 to replace  and upgrade
existing software for year 2000 compliance.  In addition the company purchased a
new accounting system which is year 2000 compliant;  the cost of this system was
approximately  $75,000  and will be  depreciated  over a period  of five  years.
Additional  expenses  will be  incurred  over the next  year to meet  year  2000
compliance, however, at this time these expenses are not expected to be material
in nature.

     In the  event  that  the  Bank's  third  party  vendor  or its  significant
suppliers  or  customers  do not  successfully  and  timely  achieve  year  2000
compliance,  the Bank's  business or  operations  could be  adversely  affected.
However,  management believes that the Bank's own internal system,  networks and
resources would allow the Bank to effectively  operate and service its customers
in the event its  significant  vendors  do not  achieve  satisfactory  year 2000
compliance.  In  addition,  if  significant  vendors  failed  to meet  year 2000
operating  requirements,  the Bank  intends to engage  alternative  vendors  and
suppliers. While the Bank cannot estimate the costs and expenses associated with
hiring new vendors and suppliers,  management believes that such costs would not
have a material impact on the Bank's earnings or results of operations.

     Statements contained in this document,  which are not historical facts, are
forward-looking  statements  as that term is defined in the  Private  Securities
Litigation  Reform Act of 1995. Such  forward-looking  statements are subject to
risk and  uncertainties,  which could cause actual results to differ  materially
from those currently anticipated due to a number of factors,  which include, but
are not limited to, factors discussed in documents filed by the Company with the
Securities and Exchange Commission from time to time.


                                    Page 19
<PAGE>

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

     Neither  the Company  nor any of its  subsidiaries  is party to any pending
legal proceedings which are material other than routine litigation incidental to
their business activities.

Item 2 - Changes in Securities and Use of Proceeds

     Not applicable.

Item 3 - Defaults Upon Senior Securities

     Not applicable.

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

     Not applicable

Item 5 - Other Information

     Not applicable.

Item 6 - Exhibits and Reports on Form 8-K

     (a)  Exhibits

          3.1  Certificate of Incorporation of Bay State Bancorp, Inc. *

          3.2  Amended and Restated Bylaws of Bay State Bancorp, Inc.
               (filed herewith)

          4.0  Stock Certificate of Bay State Bancorp, Inc. *

          11.0 Computation of per share earnings 

          27.0 Financial data schedule (filed herewith)

*    Incorporated   herein  by   reference   from  the  exhibits  to  Form  SB-2
     registration as amended, Registration No. 333-40115

     (b)  Reports on Form 8-K

          (i)  None


                                    Page 20
<PAGE>

                                   SIGNATURES


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


                                   Bay State Bancorp, Inc.


February 10, 1999                  \s\ John F. Murphy                         
---------------------              ---------------------------------------------
Date                               John F. Murphy
                                   Chairman, President, and
                                   Chief Executive Officer
                                   (Principal Executive Officer)


February 10, 1999                  \s\ Michael O. Gilles                       
---------------------              ---------------------------------------------
Date                               Michael O. Gilles
                                   Senior Vice President and
                                   Chief Financial Officer
                                   (Principal Accounting and Financial Officer)


                                    Page 21