<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 1998
                                               ------------------

                         Commission File Number 0-18513
                                                -------

                            SKANEATELES BANCORP, INC.
                            -------------------------
             (Exact name of registrant as specified in its charter)


                Delaware                                 16-1368745
                --------                                 ----------
     (State or other jurisdiction of                  (I.R.S. Employer 
     incorporation or organization)                  Identification No.)


                 33 E. Genesee St., Skaneateles, New York, 13152
                 -----------------------------------------------
                (Address of principal executive offices-Zip code)


         Registrant's telephone number, including area code 315-685-2265
                                                            -------------

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


Yes  X     No
    ---       ---


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


                Class            Outstanding at November 11, 1998
                -------------------------------------------------
            Common Stock (par value $.01 per share) 1,449,607 Shares








<PAGE>   2


PART I. FINANCIAL INFORMATION                                            Page
-----------------------------                                            ----

         Item 1.  Consolidated Financial Statements
         -------

                  Consolidated Balance Sheets                             3

                  Consolidated Statements of Income                       4

                  Consolidated Statements of  Stockholders' Equity        5

                  Consolidated Statements of Cash Flows                   6

                  Notes to Consolidated Financial Statements              7

         Item 2.  Management's Discussion and Analysis of Financial 
         -------  Condition and Results of Operations                     11

         Item 3.  Quantitative and Qualitative Disclosures About 
         -------  Market Risk                                             18

PART II. OTHER INFORMATION

         Item 1.  Legal Proceedings                                       19
         -------

         Item 2.  Changes in Securities and Use of Proceeds               19
         -------

         Item 3.  Defaults Upon Senior Securities                         19
         -------

         Item 4.  Submission of Matters to a Vote of Security Holders     19
         -------

         Item 5.  Other Information                                       19
         -------

         Item 6.  Exhibits and Reports on Form 8-K                        19
         -------


SIGNATURES                                                                20
----------















                                       2
<PAGE>   3



SKANEATELES BANCORP, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 (Unaudited)
                                                               September 30,             December 31,
ASSETS                                                                  1998                     1997
--------------------------------------------------------------------------------------------------------------------
                                                                      (In Thousands, Except Share Data)

<S>                                                                  <C>                        <C>    
Cash and due from banks                                                 10,108                    9,658

Federal funds sold                                                      19,700                    6,700

Securities available for sale, at fair value                            11,055                    8,416

Securities held to maturity, fair value of
 ($6,235 in 1998 and $7,935 in 1997)                                     5,874                    7,705
Federal Home Loan Bank stock, at cost                                    1,561                    1,561
Mortgage loans                                                         138,247                  153,312
Other loans and leases                                                  77,392                   61,243
-------------------------------------------------------------------------------------------------------
                                                                       215,639                  214,555
         Net deferred costs                                                725                      467
         Allowance for loan losses                                      (2,782)                  (2,560)
-------------------------------------------------------------------------------------------------------
         Loans, net                                                    213,582                  212,462
Premises and equipment, net                                              5,934                    6,155
Real estate owned, net                                                     844                      951
Accrued interest receivable                                              1,344                    1,372
Other assets                                                             1,525                    1,121
-------------------------------------------------------------------------------------------------------
                                                                     $ 271,527                  256,101
-------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------
Liabilities:
   Interest bearing deposits                                         $ 205,788                  197,782
   Demand deposits                                                      22,419                   20,236
-------------------------------------------------------------------------------------------------------
       Total deposits                                                  228,207                  218,018

   Borrowings                                                           17,957                   18,057
   Accrued expenses and other liabilities                                6,608                    2,355
-------------------------------------------------------------------------------------------------------
            Total liabilities                                          252,772                  238,430
-------------------------------------------------------------------------------------------------------

Stockholders' equity:
   Preferred stock, par value $.01 per share,
      authorized 500,000 shares, none issued                                 0                        0

   Common stock, par value $.01 per share, authorized
      2,500,000 shares, 1,446,992 and 1,435,992 shares
     issued in 1998 and 1997, respectively                                  14                       14

   Additional paid-in capital                                            9,264                    9,119
   Retained earnings                                                     9,456                    8,573
   Accumulated other comprehensive income                                   21                      (35)
-------------------------------------------------------------------------------------------------------
            Total stockholders' equity                                  18,755                   17,671
-------------------------------------------------------------------------------------------------------
                                                                     $ 271,527                  256,101
-------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.




                                       3
<PAGE>   4







SKANEATELES BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

<TABLE>
<CAPTION>

                                              Three months ended September 30,  Nine months ended September 30,

                                                          1998            1997            1998            1997
---------------------------------------------------------------------------------------------------------------
                                                      (In Thousands, Except Per Share Data)
<S>                                                      <C>              <C>             <C>             <C>  
Interest income:
   Mortgage loans                                        $2,779           3,166           8,748           9,597
   Other loans                                            1,739           1,311           4,814           3,478
   Securities                                               289             312             833             909
   Federal funds sold                                       276              64             637             151
--------------------------------------------------------------------------------------------------------------- 
           Total interest income                          5,083           4,853          15,032          14,135
--------------------------------------------------------------------------------------------------------------- 

Interest expense:
   Deposits                                               2,135           2,080           6,330           6,152
   Borrowings                                               290             301             862             889
--------------------------------------------------------------------------------------------------------------- 
            Total interest expense                        2,425           2,381           7,192           7,041
--------------------------------------------------------------------------------------------------------------- 

            Net interest income                           2,658           2,472           7,840           7,094
Provision for loan losses                                   200             200             450             400
--------------------------------------------------------------------------------------------------------------- 
            Net interest income after provision
               for loan losses                            2,458           2,272           7,390           6,694
--------------------------------------------------------------------------------------------------------------- 

Other operating income :
   Net gain on sale of loans                                122               8             166              73
   Service charges                                          450             374           1,236             998
   Other                                                    104              83             292             264
--------------------------------------------------------------------------------------------------------------- 
          Total other operating income                      676             465           1,694           1,335
--------------------------------------------------------------------------------------------------------------- 
                                                          3,134           2,737           9,084           8,029
--------------------------------------------------------------------------------------------------------------- 
Other operating expenses:
   Salaries and employee benefits                         1,083             874           3,016           2,699
   Building, occupancy and equipment                        370             321           1,127             933
   Data processing                                          253             123             552             300
   Correspondent bank fees                                  152             111             424             300
   Advertising and promotions                                45              61             182             167
   Postage and delivery                                     111             135             376             411
   Stationery and supplies                                   63              62             182             153
   Deposit insurance                                          3               3              18              16
   Real estate owned, net                                    33              21             107              36
   Other                                                    367             365           1,258           1,035
--------------------------------------------------------------------------------------------------------------- 
            Total other operating expenses                2,480           2,076           7,242           6,050
--------------------------------------------------------------------------------------------------------------- 

            Income before income taxes                      654             661           1,842           1,979
   Income tax                                               233             231             656             700
--------------------------------------------------------------------------------------------------------------- 
            Net income                                   $  421             430           1,186           1,279
--------------------------------------------------------------------------------------------------------------- 

Net income per common share - basic                      $ 0.29            0.30            0.82            0.89
Net income per common share - diluted                    $ 0.28            0.29            0.79            0.87
--------------------------------------------------------------------------------------------------------------- 
</TABLE>

See accompanying notes to consolidated financial statements.



                                       4
<PAGE>   5



SKANEATELES BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

<TABLE>
<CAPTION>
                                                                                              Accumulated
                                                                Additional                       other
                                                      Common     paid-in-      Retained      comprehensive
                                                      stock      capital       earnings          income          Total
-----------------------------------------------------------------------------------------------------------------------
                                                                        (In Thousands)
-----------------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>            <C>               <C>          <C>   
Balance at December 31, 1996                      $     9          8,978          7,300             (57)         16,230

Comprehensive income:
  Net income                                            0              0          1,279               0           1,279

  Change in net unrealized gain on securities,
    net of tax effect of $5                             0              0              0              15              15
-----------------------------------------------------------------------------------------------------------------------
     Total comprehensive income                         0              0          1,279              15           1,294

Sale of 4,950 shares under option                       1             28              0               0              29

Issuance of 2,887 shares of stock under
 1995 Non-employee Director's Stock Plan                0             36              0               0              36

Issuance of 2,201 shares of stock under
 Dividend Reinvestment Plan                             0             27              0               0              27

Issuance of 424 shares of stock under
 1997 Employee Stock Purchase Plan                      0              7              0               0               7

Cash dividend declared on
 Common stock ($.20 per share)                          0              0           (286)              0            (286)
-----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997                     $    10          9,076          8,293             (42)         17,337
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                      $    14          9,119          8,573             (35)         17,671

Comprehensive income:
  Net income                                            0              0          1,186               0           1,186

  Change in net unrealized gain on securities,
    net of tax effect of $37                            0              0              0              56              56
-----------------------------------------------------------------------------------------------------------------------
     Total comprehensive income                         0              0          1,186              56           1,242

Sale of 4,680 shares under option                       0             36              0               0              36

Issuance of 2,604 shares of stock under
 1995 Non-employee Director's Stock Plan                0             52              0               0              52

Issuance of 1,500 shares of stock under
 1995 Non-employee Director's Warrant Plan              0             19              0               0              19

Issuance of 1,579 shares of stock under
 Dividend Reinvestment Plan                             0             27              0               0              27

Issuance of 637 shares of stock under                               
 1997 Employee Stock Purchase Plan                      0             11              0               0               11

Cash dividend declared on
 Common stock ($.21 per share)                          0              0           (303)              0            (303)
-----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998                     $    14          9,264          9,456              21          18,755
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.



                                       5
<PAGE>   6


SKANEATELES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
                                                                                            Nine months ended
                                                                                              September 30,
                                                                                         1998               1997
------------------------------------------------------------------------------------------------------------------------
                                                                                                  (In Thousands)
<S>                                                                                     <C>                 <C>  
Operating activities
Net Income                                                                              $  1,186            1,279
Adjustments to reconcile net income to net cash provided by operating activities
  Provision for loan losses                                                                  450              400
  Provision for losses on real estate owned                                                   75                0
  Depreciation and amortization                                                              597              561
  Mortgage loans originated for sale                                                     (10,668)          (2,686)
  Proceeds from sale of loans originated for sale                                         10,591            3,368
  Net (increase) decrease in interest receivable                                              28             (130)
  Net increase in other liabilities                                                        4,215              368
  Loss on disposal of computer equipment                                                      38                0
  Other, net                                                                                (714)            (300)
------------------------------------------------------------------------------------------------------------------------
        Total adjustments                                                                  4,612            1,581
------------------------------------------------------------------------------------------------------------------------
        Net cash provided by operating activities                                          5,798            2,860
Investing activities
  Proceeds from maturities of securities available for sale                                2,000            1,008
  Proceeds from maturities of securities held to maturity                                  1,255            1,445
  Principal collected on asset-backed securities                                           1,117              820
  Purchase of Federal Home Loan Bank stock                                                     0             (151)
  Purchase of securities held to maturity                                                    (70)             (60)
  Purchase of securities available for sale                                               (4,999)          (3,825)
  Net increase in loans made to customers                                                 (1,477)          (7,167)
  Proceeds from sale of real estate owned                                                    240              135
  Purchase of property and equipment, net                                                   (345)            (462)
------------------------------------------------------------------------------------------------------------------------
        Net cash used in investing activities                                             (2,279)          (8,257)
Financing activities:
  Net decrease in time certificates                                                         (965)          (4,088)
  Net increase in other deposits                                                          11,154            7,865
  Decrease in overnight borrowings                                                           (39)             (25)
  Increase in long-term borrowings                                                             0              500
  Repayment of long-term borrowings                                                          (62)            (278)
  Proceeds from issuance of stock pursuant to stock plans                                    146               98
  Dividends paid                                                                            (303)            (286)
------------------------------------------------------------------------------------------------------------------------
       Net cash provided by financing activities                                           9,931            3,786
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                      13,450           (1,611)
Cash and cash equivalents at beginning of period                                          16,358            9,526
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                29,808            7,915
------------------------------------------------------------------------------------------------------------------------
Interest paid                                                                              7,190            7,064
Income taxes paid                                                                            492              756
Supplemental schedule of noncash investing activities:
   Mortgage loans foreclosed and transferred to real estate owned                            243              408
------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.




                                       6
<PAGE>   7



                            SKANEATELES BANCORP, INC.
                   Notes to Consolidated Financial Statements

1.   Summary of Significant Accounting Policies

Business
Skaneateles Bancorp, Inc. (the Company) is a bank holding company registered
under the Bank Holding Company Act of 1956. The results of the Company are
largely dependent upon the results of Skaneateles Savings Bank (the Bank), its
sole subsidiary. Skaneateles Savings Bank is a full service retail bank.

The preparation of the consolidated 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 consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.

The data in the consolidated balance sheet for December 31, 1997 was derived
from the Company's 1997 Annual Report to Stockholders. That data, along with the
other interim financial information presented in the consolidated balance
sheets, statements of income, statements of stockholders' equity and cash flows
should be read in conjunction with the consolidated financial statements,
including the notes thereto, contained in the 1997 Annual Report to
Stockholders.

Opinion of Management
The interim financial statements of the Company included in this Report reflect
all adjustments which are, in the opinion of management, necessary to present a
fair statement of the financial condition of the Company. All adjustments made
to the interim financial statements were of a normal recurring nature.

The following summarizes the significant accounting policies of the Company:

a)   Basis of Presentation
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany balances and transactions are eliminated
in consolidation.

b)   Securities
The Company classifies its debt securities as either available-for-sale or
held-to-maturity. Equity securities are classified as available-for-sale.
Held-to-maturity securities are those debt securities that the Company has the
ability and intent to hold until maturity. All other securities not included as
held-to-maturity are classified as available-for-sale.

Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized gains or losses associated with transfers of
securities from held-to-maturity to available-for-sale are recorded as a
separate component of stockholders' equity. The unrealized gains or losses
included in the separate component of equity for securities transferred from
available-for-sale to held-for-maturity are maintained and amortized into
earnings over the remaining life of the security as an adjustment to yield in a
manner consistent with the amortization or accretion of premium or discount on
the associated security.

A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.

Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment of yield using the effective interest method. Interest
income is recognized when earned. Purchases and sales are recorded on a trade
date basis with settlement occurring shortly thereafter. Realized gains and
losses on securities sold are derived using the specific identification method
for determining the cost of securities sold.




                                       7
<PAGE>   8


1.   Summary of Significant Accounting Policies, cont.

c)   Loans
Loans are reported at the principal amount outstanding, net of deferred fees and
costs. Accrual of interest on a loan, including impaired loans, is discontinued
when management believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition precludes accrual.
Generally, interest income is not recognized on loans which are delinquent over
90 days, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in which case
the loan is returned to accrual status.

Net loan fees and costs are deferred as an adjustment of loan principal and
amortized over the life of the related loan as an adjustment of yield using the
interest method.

The Bank originates some mortgage loans with the intent to sell. These loans are
carried at the lower of aggregate cost or fair value. Gains or losses on sales
of mortgages are recorded equal to the difference between sales proceeds and the
carrying value of the loans. The Bank typically retains the servicing rights to
mortgages sold.

d)   Allowance for Loan Losses
The allowance for loan losses consists of the provision charged to operations
based upon past loan loss experience, management's evaluation of the loan
portfolio under current economic conditions and such other factors that require
current recognition in estimating loan losses. Loan losses and recoveries of
loans previously written-off are charged or credited to the allowance as
incurred or realized, respectively.

Management believes that the allowance for loan losses is adequate. Management
uses presently available information to recognize losses on loans; however,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses and may require the Company to recognize additions to the allowance based
on their judgment of information available to them at the time of their
examination.

The Company estimates losses on impaired loans based on the present value of
expected future cash flows (discounted at the loan's effective interest rate) or
the fair value of the underlying collateral if the loan is collateral dependent.
An impairment loss exists if the recorded investment in a loan exceeds the value
of the loan as measured by the aforementioned methods. A loan is considered
impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Generally,
all commercial mortgage loans and commercial loans in a delinquent payment
status (90 days or more delinquent) are considered impaired. Residential
mortgage loans, consumer loans, home equity lines of credit and education loans
are evaluated collectively since they are homogenous and generally carry smaller
individual balances. Impairment losses are included as a component of the
allowance for loan losses. The Company recognizes interest income on impaired
loans using the cash basis of income recognition. Cash receipts on impaired
loans are generally applied according to the terms of the loan agreement, or as
a reduction of principal, based upon management judgment and the related factors
discussed above.





                                       8
<PAGE>   9


1.   Summary of Significant Accounting Policies, cont.

e)   Per Common Share Data
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
statement supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and specifies the computation, presentation, and disclosure requirements
for earnings per share (EPS) for entities with publicly held common stock. It
requires dual presentation of "Basic EPS" and "Diluted EPS" on the face of the
income statement for all entities with complex capital structures. All prior
period EPS data has been restated to conform to the provisions of this
statement.

Basic earnings per share is calculated by dividing net income available to
common shareholders by the weighted average number of shares outstanding during
the year. Diluted earnings per share includes the maximum dilutive effect of
stock issuable upon conversion of stock options and warrants.

In October, 1997, the Company declared a three-for-two stock split, effected by
means of a stock dividend paid November 28, 1997. All share and per share data
included in the consolidated financial statements and in the related notes
thereto have been retroactively adjusted to reflect the stock split.

The following table presents a reconciliation of the numerator and denominator
of the earnings per share computations (in thousands except share and per-share
amounts):

<TABLE>
<CAPTION>
                                    Quarter ended September 30, 1998           Nine months ended September 30, 1998
                                    --------------------------------           ------------------------------------
                                  Income          Shares        Per-share      Income           Shares       Per-share
                               (Numerator)     (Denominator)     Amount      (Numerator)    (Denominator)      Amount
                               -----------     -------------     ------      -----------    -------------      ------
<S>                               <C>               <C>           <C>          <C>                <C>          <C>  
Basic earnings per share:
Net income                        $ 421             1,446,400     $ .29        $ 1,186            1,442,435    $ .82

Effect of assumed exercise
of stock options and                                   40,020                                        52,256
warrants

Diluted earnings per share:
Income available to common
shareholders and assumed
exercise of stock options     --------------- ---------------- ------------ -------------- ----------------- -----------
and warrants                      $ 421             1,486,420     $ .28        $ 1,186            1,494,691    $ .79
                              --------------- ---------------- ------------ -------------- ----------------- -----------

<CAPTION>

                                    Quarter ended September 30, 1997           Nine months ended September 30, 1997
                                    --------------------------------           ------------------------------------
                                  Income          Shares        Per-share      Income           Shares       Per-share
                               (Numerator)     (Denominator)     Amount      (Numerator)    (Denominator)      Amount
                               -----------     -------------     ------      -----------    -------------      ------
<S>                               <C>               <C>           <C>          <C>                <C>          <C>  
Basic earnings per share:
Net income                        $ 430             1,431,776     $ .30        $ 1,279            1,432,601    $ .89

Effect of assumed exercise
of stock options                                       32,848                                        30,831

Diluted earnings per share:
Income available to common
shareholders and assumed      --------------- ---------------- ------------ -------------- ----------------- -----------
exercise of stock options         $ 430             1,464,624     $ .29        $ 1,279            1,463,432    $ .87
                              --------------- ---------------- ------------ -------------- ----------------- -----------
</TABLE>

f)   Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
amounts due from banks and federal funds sold.

g)   Reclassifications
Certain reclassifications have been made to prior period amounts for consistency
in reporting.




                                       9
<PAGE>   10


1.   Summary of Significant Accounting Policies, cont.

h)   New Accounting Pronouncements
In September, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes comprehensive
accounting and reporting requirements for derivative instruments and hedging
activities. The statement requires companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at fair value. The
accounting for gains and losses resulting from changes in fair value of the
derivative instrument depends on the intended use of the derivative and the type
of risk being hedged. This statement is effective for all fiscal quarters
beginning January 1, 2000 for calendar year companies. Earlier adoption,
however, is permitted. At the present time, the Company has not fully analyzed
the effect or timing of the adoption of SFAS 133 on the Company's consolidated
financial statements.

Effective January 1, 1998, the Company adopted the remaining provisions of SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which relate to the accounting for securities
lending, repurchase agreements, and other secured financing activities. These
provisions, which were delayed for implementation by SFAS No. 127, are not
expected to have a material impact on the Company.

<TABLE>
<CAPTION>

                                                       Three months ended        Nine months ended
                                                          September 30,            September 30,
                                                     --------------------     --------------------
                                                        1998        1997         1998        1997
                                                        ----        ----         ----        ----
<S>                                                   <C>            <C>        <C>         <C>  
Net income                                            $  421         430        1,186       1,279
                                                         

Other comprehensive income:
  Unrealized holding gain on securities, before tax       94          11           93          20
  Income tax expense                                     (37)         (3)         (37)         (5)
--------------------------------------------------------------------------------------------------
 Other comprehensive income, net of tax                   57           8           56          15
--------------------------------------------------------------------------------------------------
Comprehensive Income                                  $  478         438        1,242       1,294
--------------------------------------------------------------------------------------------------
</TABLE>

On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income includes the reported net income of a company adjusted for items that are
currently accounted for as direct entries to equity, such as the mark to market
adjustment on securities available for sale, foreign currency items and minimum
pension liability adjustments. At the Company, comprehensive income represents
net income plus other comprehensive income, which consists of the net change in
unrealized gains or losses on securities available for sale for the period.
Accumulated other comprehensive income represents the net unrealized gains or
losses on securities available for sale as of the balance sheet dates.
Comprehensive income for the three-months and nine months ended September 30,
1998 and 1997 is summarized as follows:


In June 1997, the FASB issued Statement No. 131 entitled "Disclosures about
Segments of an Enterprise and Related Information." The statement requires
publicly-held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is available
and is utilized by the chief operating decision maker. Specific information to
be reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
Statement 131 is effective for financial statements for periods beginning after
December 15, 1997. The new standard is not expected to result in significant
changes in the Company's reporting.





                                       10
<PAGE>   11


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

General
-------
Skaneateles Bancorp, Inc. (the "Company") is a bank holding company, with
Skaneateles Savings Bank (the "Bank") being its sole subsidiary. The financial
condition and operating results of the Company are largely dependent on the
Bank, its primary investment.

Certain statements in this discussion are forward-looking. These may be
identified by the use of forward-looking words or phrases, such as "believe,"
"expect," "anticipate," "should," "planned," "estimated," and "potential." These
forward-looking statements are based on the Company's current expectations. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
such statements. To comply with the terms of the safe harbor, the Company notes
that a variety of factors could cause actual results and experience to differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements. Among the risks and uncertainties that may affect
the operations, performance and results of the business of the Company and the
Bank are prevailing market rates of interest for both loans and deposits, loan
prepayments by, and the financial health of, the Bank's borrowers, general
economic conditions in the Bank's designated lending area, competition from
banks and other financial institutions with greater resources operating in the
Bank's marketplace and unforeseen costs or business interruptions caused by the
Year 2000 issue.

                                 YEAR 2000 ISSUE

The Year 2000 issue stems from date coding practices in both software and
hardware. Specifically, hardware and software developers have often used
two-digit numbers rather than four-digit numbers to represent years. This was
done in a conscious effort to provide cost-effective and efficient business
solutions, given resource constraints and requirements in the past.
Consequently, when the year turns to 2000, the software may calculate the date
as 1900 because the century has not been properly defined.

The Company has initiated an enterprise-wide program to prepare its information
technology (IT) systems for the year 2000. A senior management committee
continues to direct the Company's Year 2000 activities under the framework of
the Federal Financial Institutions Examination Council's Five Step Program: 1)
Awareness; 2) Assessment; 3) Renovation; 4) Validation; and 5) Implementation.
The Company is expending significant resources to assure that its IT systems are
remediated in time to effectively deal with transactions in the year 2000 and
beyond. The total cost of the Company's year 2000 project is expected to be
approximately $400,000, of which approximately $310,000 has been incurred as of
September 30, 1998. This amount includes the costs of additional hardware,
software and technology consultants necessary to achieve Year 2000 compliance
for the Company's systems.

The Company has postponed some other non-Year 2000 IT expenditures and
initiatives until after 2000 in order to concentrate resources on the Year 2000
issue. The Company does not expect that this will have a material effect on the
Company's financial condition or results of operations.

The Year 2000 problem creates risk for the Company from both unforeseen problems
in its own IT systems and from problems in the IT systems of third parties
(including vendors and service providers) with whom the Company deals on
financial transactions. Failures of the Company's and/or third parties' IT
systems could have a material adverse impact on the Company's ability to conduct
its business. The Company has been actively communicating with third parties
concerning the status of their Year 2000 readiness by, among other things,
sending written Year 2000 inquiries, and has undertaken to evaluate the Year
2000 readiness of its commercial borrowers. The Company believes that its
reasonably likely worst case Year 2000 scenario is (i) a material increase in
the Company's credit losses due to Year 2000 problems for the Company's
borrowers and obligors, and (ii) disruption in financial markets causing
liquidity stress to the Company. The magnitude of these potential credit losses
or disruption cannot be determined at this time.

The Company's non-IT systems used to conduct business at its facilities consist
primarily of office equipment (other than computer and communications equipment)
and other equipment at the Company's leased office facilities. The Company has
inventoried its non-IT systems and has sent Year 2000 questionnaires to its
office equipment vendors and landlords to determine the status of their Year
2000 readiness.


                                       11
<PAGE>   12

For the remainder of 1998 and through March 1999, the Company will continue with
the remediation and testing of its computer systems. The Company will continue
to develop contingency plans and to evaluate third party Year 2000 risks, and,
to the extent the Company deems it warranted, will take further steps designed
to reduce its exposure to these risks.

The Company expects its Year 2000 date conversion project to be completed on a
timely basis and within budgeted expense. However, there can be no assurance
that the systems of other companies on which the Company's systems rely also
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's systems.

The Company is currently formulating a contingency plan for business
continuation in the event of Year 2000 systems failures. This contingency plan
will be based upon the Company's existing disaster recovery plan with
modifications for Year 2000 risks. The Company expects to complete its IT
systems contingency plan by March 1999.

                       Changes in Financial Condition from
                       -----------------------------------
                     December 31, 1997 to September 30, 1998
                     ---------------------------------------

Assets
------

Consolidated assets of the Company were $271.6 million at September 30, 1998, a
$15.4 million or 6.0% increase from December 31, 1997.

Loans
-----

Gross loans were $215.7 million at September 30, 1998, a modest increase of $1.1
million from December 31, 1997. Residential mortgages outstanding decreased
$14.5 million, while commercial loans and mortgages increased $2.9 million and
consumer loans increased $12.1 million.

Total loan closings (including undisbursed funds) were $54.5 million in the
first nine months of 1998, compared with $39.1 million in the year ago period,
an increase of 39.3%. Commercial loan originations increased 39.9%, to $19.2
million in the first nine months of 1998 compared with the year ago period.
Residential mortgage originations increased $4.9 million or 63.2%, due in large
part to an increase in refinancings. Consumer loan originations increased $5.0
million or 28.2% to $22.6 million due in large part to an increase in indirect
consumer loan originations and to the success of direct marketing and cross-
selling efforts. The growth in the indirect program, now in its second full
year, was generated largely from the Bank's existing boat and recreational
vehicle dealer relationships.

The low interest rate environment has prompted a wave of mortgage refinancings
that is affecting Skaneateles and many other financial institutions.
Skaneateles' residential mortgage portfolio decreased 12.1% in the first nine
months of 1998, despite an increase in originations. Approximately 92% of these
originations were fixed rate loans, most of which were sold on the secondary
market. The Bank in most cases retains the servicing on sold loans.

The increase in commercial loan activity is a direct result of the Bank's
efforts to expand its commercial portfolio within its market niche of small to
mid sized businesses in central New York, including corporations, partnerships
and sole proprietorships.

The results of the first nine months are indicative of what may occur throughout
1998 if interest rates remain low. The increase in mortgage prepayments and
refinancings, coupled with the overwhelming demand for fixed rate mortgages over
adjustable rates, is likely to continue absent an increase in rates. As a
result, the accelerated runoff in the Bank's residential mortgage portfolio will
hamper overall portfolio growth.




                                       12
<PAGE>   13


The following table sets forth the composition of Skaneateles' loan portfolio by
loan type as of the dates indicated.

<TABLE>
<CAPTION>

                                                   September 30,                                 December 31,
                                  ---------------------   --------------------    --------------------  -------------------
                                             1998                   1997                  1997                  1996
                                  ---------------------   --------------------    --------------------  -------------------
                                     Amount        %        Amount         %        Amount       %        Amount       %
                                  ---------------------   --------------------    --------------------  -------------------
                                                             (Dollars in Thousands)
<S>                                 <C>           <C>       <C>          <C>       <C>         <C>       <C>         <C>   
Loans secured by first mortgages 
  on real estate:

   Residential                      $104,869      48.63%    121,337      57.11%    119,350     55.63%    129,651     62.74%

   Commercial                         33,378      15.48%     32,849      15.46%     33,962     15.83%     31,728     15.35%

Other loans:

   Commercial loans & leases          26,559      12.32%     21,008       9.89%     22,995     10.72%     18,861      9.13%

   Home equity and improvement        20,340       9.43%     19,844       9.34%     20,624      9.61%     17,599      8.52%

   Guaranteed student                    953       0.44%        955       0.45%      1,059      0.49%        882      0.43%

   Other consumer                     29,540      13.70%     16,476       7.75%     16,565      7.72%      7,924      3.83%
----------------------------------------------------------------------------------------------------------------------------
     Total                          $215,639     100.00%    212,469     100.00%    214,555    100.00%    206,645    100.00%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The allowance for loan losses was $2.8 million at September 30, 1998. Loan loss
provisions of $450,000 in the first nine months of 1998 were partially offset by
net charge-offs totaling $228,000.



                                       13
<PAGE>   14


The following table sets forth the activity in the allowance for loan losses for
the periods indicated:

<TABLE>
<CAPTION>

                                       Nine Months Ended
                                         September 30,                  Year Ended December 31,
                                 -----------------------------  --------------------------------------------
                                      1998           1997             1997           1996         1995
                                 --------------  -------------  -------------- -------------- --------------
                                                                   (In Thousands)

<S>                                 <C>              <C>            <C>            <C>            <C>  
Beginning Balance                   $ 2,560          2,114          2,114          2,667          3,040

Provision                               450            400            500            175            235

Charge-offs
-----------
     Residential mortgages              (28)           (66)           (92)           (74)             0
     Commercial mortgages                 0           (237)          (237)          (168)          (569)
     Business                          (126)           (76)          (137)          (999)          (153)
     Other consumer                    (121)          (115)          (107)           (60)           (10)
-------------------------------------------------------------------------------------------------------
                                       (275)          (494)          (573)        (1,301)          (732)
-------------------------------------------------------------------------------------------------------

Recoveries
----------
     Residential mortgages                0              0              2              0              0
     Commercial mortgages                 0              5              5              0              0
     Business                            27             46            496            118            118
     Other consumer                      20             14             16              8              6
-------------------------------------------------------------------------------------------------------

                                         47             65            519            126            124
-------------------------------------------------------------------------------------------------------
Net Charge-offs                        (228)          (429)           (54)        (1,175)          (608)
-------------------------------------------------------------------------------------------------------

Allowance of Cicero Bank
at time of acquisition                    0              0              0            447              0

-------------------------------------------------------------------------------------------------------
Ending Balance                      $ 2,782          2,085          2,560          2,114          2,667
-------------------------------------------------------------------------------------------------------

Ratio of net charge-offs
  to average loans outstanding         0.11%          0.21%          0.03%          0.62%          0.36%
-------------------------------------------------------------------------------------------------------
</TABLE>



                                       14
<PAGE>   15


The following table sets forth information with respect to loans delinquent 90
days or more, nonaccrual loans, restructured loans, and real estate owned as of
the dates indicated.

<TABLE>
<CAPTION>

                                                                  September 30,                       December 31,
                                                         ----------------------------------------------------------------
                                                              1998         1997         1997        1996         1995
                                                         ------------  -----------  -----------  -----------  -----------
                                                                          (In Thousands)
<S>                                                           <C>             <C>        <C>          <C>            <C>
Nonaccruing loans
     Residential real estate mortgages                        $  987          999        1,091        1,359          271
     Commercial (1)                                            2,355        2,217        2,573        1,626        1,757
     Consumer                                                    117          228          253          186          110
------------------------------------------------------------------------------------------------------------------------
Total                                                         $3,459        3,444        3,917        3,171        2,138
------------------------------------------------------------------------------------------------------------------------

Other loans past due 90 days or more 
and still accruing:
     Residential real estate mortgages                             0           76            0            0            0
     Consumer (2)                                                  0            0            0           29            1
     Commercial (1)                                                0            0            0          370            0
------------------------------------------------------------------------------------------------------------------------
Total                                                         $    0           76            0          399            1
------------------------------------------------------------------------------------------------------------------------

Restructured loans, not included above                             0            0            0            0        1,125
------------------------------------------------------------------------------------------------------------------------

Real estate owned                                                844          975          951          717          397
------------------------------------------------------------------------------------------------------------------------

Total assets containing specific risk elements                $4,303        4,495        4,868        4,287        3,661
------------------------------------------------------------------------------------------------------------------------

Ratio of total loans past due
90 days or more to gross loans                                  1.60%        1.66%        1.83%        1.73%        1.25%
------------------------------------------------------------------------------------------------------------------------

Ratio of assets containing specific
risk elements to total assets                                   1.58%        1.82%        1.90%        1.77%        1.74%
------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes commercial real estate loans 
(2) Consists primarily of Guaranteed Student Loans.

Nonperforming assets (nonaccrual loans and real estate owned) totaled $4.3
million, or 1.6% of total assets at September 30, 1998, compared with $4.9
million, or 1.9% of total assets at December 31, 1997, and $4.5 million, or 1.7%
at September 30, 1997. Included in nonperforming assets at September 30, 1998
were nonaccrual loans of $3.5 million or 1.6% of gross loans, compared with $3.9
million or 1.8% at December 31, 1997 and $3.4 million or 1.7% at September 30,
1997.

At September 30, 1998, nonaccrual loans were comprised of 29% residential
mortgages, 68% commercial loans and mortgages and 3% consumer loans.
Approximately $2.1 million of the commercial nonaccrual loans, representing 91%
of such balances, are secured by real estate. In October 1998, the Company
accepted $450,000 in full settlement of a nonaccrual commercial mortgage with a
balance of $542,000. The $92,000 shortfall was charged against the allowance for
loan losses. The Company had previously allocated an allowance sufficient to
absorb the loss.

The allowance for loan losses covered 80% of nonaccrual loans at September 30,
1998, compared with coverage of 65% at December 31, 1997 and 61% at September
30, 1997.

Impaired loans, which included troubled debt restructured loans, were $2.0
million and $1.5 million at September 30, 1998 and 1997, respectively. Included
in these amounts are $1.1 million and $649,000 of impaired loans for which the
related allowance for loan losses is $298,000 and $127,000, respectively. In
addition, included in the total impaired loans at September 30, 1998 and 1997
are $932,000 and $823,000, respectively, of impaired loans for which no
allowance is recorded due to the adequacy of collateral values in accordance
with SFAS 114. The average 


                                       15
<PAGE>   16

recorded investment in impaired loans during the first nine months of 1998 and
1997 was approximately $2.2 million and $1.3 million, respectively.

The amount of interest income recognized on impaired loans for the three months
ended September 30, 1998 and 1997 was approximately $71,000 and $59,000,
respectively. The amount of interest income recognized on impaired loans for the
nine months ended September 30, 1998 and 1997 was approximately $100,000 and
$66,000 respectively. The Bank is not committed to lend additional funds to
these borrowers.

Potential problem loans at September 30, 1998 amounted to $1.5 million.
"Potential problem loans" are defined as loans which are not included with past
due and non-accrual loans discussed above, but about which management, through
normal internal credit review procedures, has information about possible credit
problems which may result in the borrower's inability to comply with the present
loan repayment terms. There have been no loans classified for regulatory
purposes as loss, doubtful, or substandard that are not included above or which
caused management to have serious doubts as to the ability of the borrower to
comply with repayment terms. In addition, there were no material commitments to
lend additional funds to borrowers whose loans were classified as
non-performing.

Deposits
--------
Total deposits (including advance payments by borrowers for property taxes and
insurance) were $228.2 million at September 30, 1998, compared with $218.0
million at December 31, 1997 and $208.8 million at September 30, 1997.

The Bank's deposit strategy has focused on growing its low cost transaction
account base (savings, checking and NOW accounts), while reducing its reliance
on higher cost time certificates. In addition to reducing the Bank's cost of
funds, transaction accounts provide a more stable funding source than time
accounts and the Bank earns service fee income on most transaction accounts. An
ongoing direct mail marketing program supports this strategy. Transaction
accounts (including escrow) comprised 43.2% of total deposits at September 30,
1998, up from 40.7% at December 31, 1997 and 39.3% at September 30, 1997.

The following table sets forth deposits by type of account as of the dates
indicated.

<TABLE>
<CAPTION>

                                            SEPTEMBER 30,                               DECEMBER 31,
                             -------------------------------------------- ------------------------------------------
                                       1998                   1997                  1997                  1996
                             ---------------------- --------------------- --------------------- --------------------
                                           Percent              Percent               Percent               Percent
                                          of total              of total              of total             of total
                                Amount    deposits    Amount    deposits    Amount    deposits    Amount   deposits
                             ---------------------- --------------------- --------------------- --------------------
                                                              (Dollars in Thousands)

<S>                            <C>         <C>        <C>         <C>        <C>        <C>        <C>       <C>    
Savings and club accounts      $ 47,431     20.79%     41,185      19.73%     42,451     19.47%     38,690    18.87%
Time certificates               104,107     45.62%    103,341      49.49%    105,072     48.19%    107,429    52.39%
Money market accounts            25,549     11.20%     23,445      11.23%     24,234     11.12%     21,991    10.73%
NOW accounts                     28,078     12.30%     22,874      10.95%     24,456     11.22%     20,314     9.91%
Demand accounts                  22,419      9.82%     17,311       8.29%     20,236      9.28%     14,861     7.25%
Escrow accounts                     623      0.27%        650       0.31%      1,569      0.72%      1,744     0.85%
--------------------------------------------------------------------------------------------------------------------
     Total                     $228,207    100.00%    208,806     100.00%    218,018    100.00%    205,029   100.00%
--------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Stockholders' equity at September 30, 1998 was $18.8 million, or $12.96 per
share, compared with $17.7 million or $12.31 per share at December 31, 1997 and
$17.3 million or $12.10 at September 30, 1997. At September 30, 1998, the Bank's
leverage capital ratio was 6.88% and its risk-based capital ratio was 11.32%.
Both capital measurements were in excess of regulatory requirements.

In October 1998 the Company declared a dividend of $.07 per share payable on
November 18, 1998 to shareholders of record on November 3.




                                       16
<PAGE>   17



                     Comparison of the Results of Operations
                     ---------------------------------------

General
-------

Net income was $421,000 or $.28 per diluted share for the third quarter of 1998,
compared with $430,000 or $.29 per diluted share for the same period in 1997. A
$186,000 increase in net interest income and a $211,000 increase in other
operating income was offset by increases in other operating expenses of
$404,000.

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

Net interest income is affected by the difference between the yield earned on
interest earning assets and rates paid on interest bearing deposits and
borrowings. The relative amounts of interest earning assets, interest bearing
deposits, and borrowings also impact net interest income levels.

The following table sets forth, for the three months ended September 30,
information regarding (i) the total dollar amount of interest income from
interest-earning assets and the resulting average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; (v) net
interest-earning assets; (vi) net yield on interest-earning assets; and (vii)
ratio of interest-earning assets to interest-bearing liabilities. Nonaccruing
loans, which are immaterial, have been included in interest earning-assets. No
tax equivalent adjustments were made.

<TABLE>
<CAPTION>

                                                       1998                               1997
                                        -------------------------------       -----------------------------
                                         Average                 Yield/        Average             Yield/
                                         Balance     Interest     Rate         Balance   Interest   Rate
                                        -------------------------------       -----------------------------
                                                               (Dollars In Thousands)
<S>                                     <C>            <C>        <C>         <C>         <C>       <C>  
Interest-earning assets:
  Mortgage loans                        $139,695       2,779      7.96%       155,583     3,167     8.14%
  Other loans                             75,799       1,739      9.10%        56,407     1,311     9.22%
-----------------------------------------------------------------------------------------------------------
Total loans                              215,494       4,518      8.36%       211,990     4,478     8.43%
-----------------------------------------------------------------------------------------------------------
  Securities                              18,736         289      6.12%        18,775       310     6.55%
  Federal funds sold                      19,950         276      5.49%         4,632        66     5.65%
-----------------------------------------------------------------------------------------------------------
Total interest-earning assets            254,180       5,083      7.97%       235,397     4,854     8.22%
-----------------------------------------------------------------------------------------------------------
Non-interest earning assets               13,670           0                   13,878         0
-----------------------------------------------------------------------------------------------------------
Total assets                            $267,850       5,083                  249,275     4,854
-----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:                                                
  Deposits:                                                                  
     Savings and club accounts          $ 47,375         340      2.85%        42,178       302     2.84%
     Time certificates                   103,831       1,408      5.38%       102,944     1,433     5.52%
     Money market accounts                22,482         237      4.18%        23,479       219     3.70%
     Now and escrow accounts              29,017         150      2.05%        24,110       127     2.09%
-----------------------------------------------------------------------------------------------------------
  Total interest-bearing deposits        202,705       2,135      4.18%       192,711     2,081     4.28%
-----------------------------------------------------------------------------------------------------------
  Borrowings                              17,896         290      6.43%        18,531       301     6.44%
-----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities       220,601       2,425      4.36%       211,242     2,382     4.47%
Non-interest-bearing deposits             25,491           0                   18,195         0
Non-interest-bearing liabilities           3,055           0                    2,420         0
-----------------------------------------------------------------------------------------------------------
Total liabilities                        249,147       2,425                  231,857     2,382
Stockholders' equity                      18,703           0                   17,418         0
-----------------------------------------------------------------------------------------------------------
Total liabilities and                                                        
  stockholders' equity                  $267,850       2,425                  249,275     2,382
-----------------------------------------------------------------------------------------------------------
Net interest income/                                                         
  interest rate spread                                 2,658      3.61%                   2,472     3.75%
-----------------------------------------------------------------------------------------------------------
Net interest-earning assets/                                                 
  net yield on interest-earning                                              
  assets                                $ 33,579                  4.18%        24,155               4.20%
-----------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets                                             
  to interest-bearing liabilities                                 1.15                              1.11
-----------------------------------------------------------------------------------------------------------
</TABLE>


                                       17
<PAGE>   18

Net interest income was $2.7 million for the three months ended September 30,
1998 compared with $2.5 million for the same period in 1997. The increase is
attributable to a $18.8 million increase in average earning assets.

Average loans outstanding in the third quarter were $215.5 million, compared
with $212.0 million in the year ago quarter. All of this growth was in the
Bank's consumer and commercial loan portfolios, which increased a combined $18.5
million to offset a $14.9 million decline in the Bank's residential mortgage
portfolio due primarily to refinancings.

The Company's earning-asset yield was 7.97% in the third quarter of 1998,
compared with 8.22% in the year ago quarter. The lower yield is the result of
generally lower interest rates and a proportionately larger amount of total
earning assets invested in federal funds sold, due mainly to the increased
residential refinance activity in the first nine months of 1998.

The average cost of interest-bearing liabilities decreased 11 basis points due
mainly to a change in the mix of interest bearing deposits, and to a lower cost
of time certificates. Savings and NOW accounts, which are the Company's lowest
costing source of interest-bearing funds, grew to 37.7% of average interest
bearing deposits in the third quarter of 1998, from 31.4% in the year ago
quarter. The cost of time certificates decreased 14 basis points because of
generally lower interest rates and continued customer preference for short-term
maturities.

The net interest margin, which is equal to net interest income divided by
average interest-earning assets, was 4.18% for the third quarter of 1998, down
from 4.20% in the year ago quarter.

The goal of asset/liability management is to reduce the volatility of net
interest income during periods of changing market interest rates (interest rate
risk). The Company uses three methods to measure its interest rate risk: i) gap;
ii) income simulation; and iii) market value of equity analysis. Gap analysis
measures the difference between assets and liabilities which reprice and/or
mature within a given time frame, typically the cumulative one-year horizon. An
asset-sensitive gap position could lead to an increase in net interest income in
a rising rate environment, and a decrease in net interest income in a falling
rate environment, as assets reprice or mature quicker than liabilities.
Conversely, a liability-sensitive gap position could lead to a decrease in net
interest income in a rising rate environment and an increase in net interest
income in a falling rate environment. Income simulation measures the potential
impact on net interest income of hypothetical changes in interest rates. Market
value of equity analysis measures the potential impact on stockholders' equity
of hypothetical changes in interest rates.

In February 1996, the Bank purchased an interest rate floor with a notional
amount of $18 million, to hedge a portion of its prime-based loan portfolio.
Under the agreement, which expires in February 1999, the Bank will receive
payments on a quarterly basis if the prime rate drops below 8.25% (the "strike
rate"). Payments are equal to the amount by which the prime rate falls below the
strike rate multiplied by the notional amount of the floor. The fee paid for the
floor is included in other assets and is being amortized to interest income
using the interest method over the life of the floor.

The Company's cumulative one-year ratio of rate sensitive assets to rate
sensitive liabilities (one-year gap) was 1.04 at September 30, 1998.

Other Operating Income
----------------------

Total other operating income was $676,000 in the third quarter of 1998, an
increase of $211,000 or 45.4% from the third quarter of 1997. Gains on loan
sales increased $114,000 or due to an increase in sales of fixed rate
residential mortgages. Service charges and other operating income increased
$97,000 or 21.2% due mainly to fee income generated by the growth in the
Company's checking and savings accounts.

Other Operating Expenses
------------------------

Total other operating expenses were $2.5 million for the quarter ended September
30, 1998, compared with $2.1 million for the same period in 1997. Operating
expenses were virtually unchanged compared with the second quarter of 1998.

Salaries and benefits expense increased by $209,000 due primarily to the
staffing of a new branch opened in the North Medical Plaza in Liverpool in
September 1997, higher benefits expense due to greater employee participation in
the Company's benefit plans and normal salary increases.


                                       18
<PAGE>   19

Building, occupancy and equipment increased $49,000 or 15.3 percent due to the
cost of operating the new branch, and to depreciation on computer equipment
purchased in early 1998.

Data processing expense increased $128,000 or 104% due primarily to Year 2000
remediation costs and other related technology improvements.

Management has made expense control a high priority, and to that end, plans to
begin a Company wide operational review in the fourth quarter in an effort to
streamline operations and reduce operating expenses. The potential cost savings
of such a review are not known at this time.



PART II.  OTHER INFORMATION
---------------------------

         Item 1.  Legal Proceedings
         -------  Not applicable

         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
         -------  On October 13, 1998, the Company declared a cash dividend of
                  $.07 per share, payable on November 18, 1998 to shareholders
                  of record on November 3.

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

                      No.      Exhibit
                      ---      -------

                      27       Financial Data Schedule


                                       19




<PAGE>   20



                                   SIGNATURES

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

                            SKANEATELES BANCORP, INC.
                            -------------------------
                                  (Registrant)





By:  /s/ John P. Driscoll                             Date: November 13, 1998
     ------------------------------                         -----------------
        John P. Driscoll
        Chairman, President and Chief
        Executive Officer


By:  /s/ J. Daniel Mohr                               Date: November 13, 1998
     ------------------------------                         -----------------
        J. Daniel Mohr
        Chief Financial Officer
        and Treasurer















                                       20