SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


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


                                    FORM 10-Q



(Mark One)

[X]  QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF  THE  SECURITIES
     EXCHANGE ACT OF 1934.
FOR the quarter ended March 31, 1998
                                       or

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


                         COMMISSION FILE NUMBER 0-27014


                       AFFILIATED COMMUNITY BANCORP, INC.
             (Exact name of registrant as specified in its charter)

               Massachusetts                                    04-3277217
        (State of other jurisdiction of                      (I.R.S. Employer
         incorporation or organization)                   Identification Number)

 716 Main Street, Waltham, Massachusetts                        02254-9035
 (Address of principal executive offices)                       (Zip Code)

                                 (781) 894-6810
              (Registrant's telephone number, including area code)



Indicated  by check  mark  whether  the  registrant  (1) has filed  all  reports
required to be filed by Section 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
                          ------         ------




     At April 30, 1997 there were  6,612,524  shares of common  stock, par value
$.01 per share, outstanding.


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




                                        1

<PAGE>




                       AFFILIATED COMMUNITY BANCORP, INC.
                                      INDEX

                                                                    Page No.
                                                                    --------
PART I - FINANCIAL INFORMATION

Item 1.
-------
Consolidated Statements of Financial Condition at
 March 31, 1998 and December 31, 1997..................................3

Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997..........................................4

Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997.............................5

Consolidated Statements of Stockholders' Equity for
 the Three Months Ended March 31, 1998 and 1997........................6

Consolidated Statements of Cash Flows for the Three Months
 Ended March 31, 1998 and 1997.........................................7

Notes to Consolidated Financial Statements.............................8

Item 2.
-------

Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three Months Ended
March 31, 1998 and 1997................................................11

Item 3.
-------
Qualitative and Quantitative Disclosures About Market Risk.............20





PART II - OTHER INFORMATION

Item 1.
-------

Legal Proceedings......................................................21

Item 2.
-------

Changes in Securities and Use of Proceeds..............................21

Item 3.
-------

Defaults Upon Senior Securities........................................21

Item 4.
-------

Submission of Matters to a Vote of Security Holders....................21

Item 5.
-------

Other Information......................................................21

Item 6.
-------

Exhibits and Reports on Form 8-K.......................................21

SIGNATURES.............................................................22

EXHIBITS:

Stock Purchase Agreement (Shares of Middlesex
Bank & Trust Company...................................................23

Computation of Basic and Diluted Earnings Per Share
For Three Months Ended March 31, 1998 and 1997.........................52

Financial data schedule................................................53

Financial data schedule Restated.......................................54

                                        2

<PAGE>
<TABLE>

              AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                    (Dollars in thousands, except share data)
<CAPTION>


                                                                                                       March 31,        December 31,
                                                                                                          1998              1997
                                                                                                          ----              ----
                                                                                                      (Unaudited)
<S>                                                                                                   <C>               <C> 

                              ASSETS

Cash and due from banks                                                                               $   16,023        $   16,911
Federal funds sold and overnight deposits                                                                  7,868            10,344
Investment securities - held to maturity (fair value $154,944 and $174,000
    at March 31, 1998 and December 31, 1997, respectively)                                               152,973           172,623
Investment securities - available for sale (amortized cost $220,035 and $203,133
    at March 31, 1998 and December 31, 1997, respectively)                                               221,503           204,846
Loans held for sale                                                                                        9,694             3,955
Loans receivable - net of allowance for possible loan losses of $8,783 and $8,641
    at March 31, 1998 and December 31, 1997, respectively                                                690,498           703,061
Federal Home Loan Bank stock - at cost                                                                    16,443            16,426
Other real estate owned, net                                                                                   1                 1
Accrued interest receivable                                                                                7,898             8,727
Office properties and equipment, net                                                                       8,662             8,747
Deferred tax asset, net                                                                                    2,770             2,671
Other assets                                                                                               6,429             6,736
                                                                                                           -----             -----

         Total assets                                                                                 $1,140,762        $1,155,048
                                                                                                      ==========        ==========

            LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Deposits                                                                                        $   727,703       $   729,096
     Federal Home Loan Bank advances                                                                     279,871           297,358
     ESOP debt                                                                                               947             1,037
     Mortgagors' escrow payments                                                                           2,538             2,343
     Securities sold under agreements to repurchase                                                        6,199             3,804
     Other                                                                                                 7,529             8,357
                                                                                                           -----             -----

         Total liabilities                                                                             1,024,787         1,041,995
                                                                                                       ---------         ---------
Stockholders' Equity (note 4):
     Preferred stock, $0.01 Par Value; 2,000,000 shares authorized, none issued                                -                 -
     Common stock, $0.01 Par Value; 18,000,000 shares authorized; shares
       issued 6,828,070 in 1998 and 6,751,146 in 1997                                                         68                67
     Additional paid-in capital                                                                           51,032            50,360
     Retained earnings - restricted                                                                       68,375            66,128
     Treasury stock at cost, 247,500 shares                                                               (3,402)           (3,402)


     Unearned compensation - ESOP                                                                           (929)           (1,019)
     Unrealized gain on investment securities, net of tax effects                                            831               919
                                                                                                             ---               ---

         Total stockholders' equity                                                                      115,975           113,053
                                                                                                         -------           -------
         Total liabilities and stockholders' equity                                                  $ 1,140,762       $ 1,155,048
                                                                                                     ===========       ===========


</TABLE>


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






                                       3

<PAGE>
<TABLE>

               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                    (Dollars in thousands, except share data)
<CAPTION>


                                                                  Three Months Ended
                                                                      March 31,
                                                                  ------------------
                                                                  1998        1997
                                                                    (Unaudited)
<S>                                                            <C>         <C>
Interest and dividend income:
   Interest and fees on loans                                  $ 14,686    $ 13,581
   Interest and dividend income on investment securities          6,469       5,934
   Interest on federal funds sold and overnight deposits            130          45
                                                                    ---          --
     Total interest and dividend income                          21,285      19,560
                                                                 ------      ------
Interest expense:
   Interest on deposits                                           7,600       6,795
   Interest on borrowed funds                                     4,318       4,088
                                                                  -----       -----
     Total interest expense                                      11,918      10,883
                                                                 ------      ------
Net interest income                                               9,367       8,677
Provision for possible loan losses                                  126         200
                                                                    ---         ---
Net interest income after provision for possible loan losses      9,241       8,477
                                                                  -----       -----
Noninterest income:
   Mortgage loan servicing fees                                      58          67
   Customer service fees and other                                  437         361
   Gain (loss) on sales of securities, net                          118          (2)
   Gain on sales of loans, net                                      145           1
                                                                    ---         ---
     Total noninterest income                                       758         427
                                                                    ---         ---
Noninterest expenses:
   Compensation and employee benefits                             2,943       2,508
   Occupancy and equipment                                          618         537
   Data processing                                                  308         234
   Professional services                                            141         166
   Federal Deposit Insurance premiums                                69          65


   Other real estate owned (income) expenses, net                    (8)        (22)
   Marketing and promotion                                          190         156
   Other                                                            721         563
                                                                    ---         ---
     Total noninterest expenses                                   4,982       4,207
                                                                  -----       -----
Income before provision for income taxes                          5,017       4,697
Provision for income taxes                                        1,805       1,760
                                                                  -----       -----
         Net Income                                            $  3,212    $  2,937
                                                               ========    ========
Earnings per share:
     Basic                                                     $   0.50    $   0.46
                                                               ========    ========
     Diluted                                                   $   0.47    $   0.45
                                                               ========    ========
Weighted average shares outstanding:
     Basic                                                        6,437       6,333
                                                                  =====       =====
     Diluted                                                      6,792       6,571
                                                                  =====       =====
</TABLE>

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



                                       4

<PAGE>
<TABLE>

               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)
<CAPTION>



                                                                                  Three Months Ended
                                                                                       March 31,
                                                                                  ------------------
                                                                                   1998        1997
                                                                                   ----        ----
                                                                                      (Unaudited)
<S>                                                                              <C>        <C>
Net Income                                                                       $ 3,212    $ 2,937

Other comprehensive income:

      Unrealized losses on investment securities arising during
      the period, net of tax benefits of $127,000 in 1998 and
        $648,000 in 1997                                                             (88)      (851)

            Less: Reclassification adjustment for gains included in net income       (43)         -
                                                                                    ----        ---

Other comprehensive income                                                          (131)       851
                                                                                    ----        ---

Comprehensive income                                                             $ 3,081    $ 2,086
                                                                                 =======    =======

</TABLE>





























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

                                       5

<PAGE>
<TABLE>
               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               For the Three Months Ended March 31, 1998 and 1997
                     (In thousands, except per share data)
                     (Restated for May 30, 1997 stock split)
                                   (Unaudited)
<CAPTION>
                                                                                                             Net Unrealized
                                                              Additional                         Unearned    Gain (Loss) on
                                                      Common    Paid-in   Treasury   Retained  Compensation-   Investment
                                                       Stock    Capital     Stock    Earnings       ESOP       Securities     Total
                                                       -----    -------     -----    --------       ----       ----------     -----
<S>                                                    <C>     <C>        <C>        <C>         <C>            <C>        <C>
Balance at December 31, 1996                            $ 66   $ 49,146   ($ 3,402)  $ 57,518    ($ 1,394)       ($ 532)  $ 101,402
   Net income                                              -          -          -      2,937           -             -       2,937
   ESOP transactions                                       -         58          -         13         107             -         178
   Issuance of common stock under stock
     option plan                                           1        156          -          -           -             -         157
   Cash dividends declared ($.12 per share)                -          -          -       (774)          -             -        (774)
   Changes in net unrealized gain (loss) on
     securities available for sale, net of tax effect      -          -          -          -           -          (851)       (851)
                                                       -----    -------     -----    --------       ----       ----------     -----
Balance at March 31, 1997                               $ 67   $ 49,360   ($ 3,402)  $ 59,694    ($ 1,287)      ($1,383)  $ 103,049
                                                        ====   ========   ========   ========    ========       =======   =========
</TABLE>


<TABLE>
<CAPTION>


                                                                                                             Net Unrealized
                                                              Additional                         Unearned    Gain (Loss) on
                                                      Common    Paid-in   Treasury   Retained  Compensation-   Investment
                                                       Stock    Capital     Stock    Earnings       ESOP       Securities     Total
                                                       -----    -------     -----    --------       ----       ----------     -----
<S>                                                     <C>    <C>        <C>        <C>         <C>              <C>     <C>
Balance at December 31, 1997                            $ 67   $ 50,360   ($ 3,402)  $ 66,128    ($ 1,019)        $ 919   $ 113,053
   Net income                                              -          -          -      3,212           -             -       3,212
   ESOP transactions                                       -        167          -         11          90             -         268
   Issuance of common stock under stock
     option plan                                           1        328          -          -           -             -         329
   Tax benefit from stock options exercised                -        177          -          -           -             -         177
   Cash dividends declared ($.15 per share)                -          -          -       (976)          -             -        (976)
   Changes in net unrealized gain (loss) on
     securities available for sale, net of tax effect      -          -          -          -           -           (88)       (851)
                                                        -----    -------     -----    --------       ----       ----------     -----

Balance at March 31, 1998                               $  68   $ 51,032  ($ 3,402)   $ 68,375    ($  929)        $ 831   $ 115,975
                                                        =====   ========  ========    ========    =======         =====   =========
</TABLE>





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

                                       6


<PAGE>
<TABLE>
               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<CAPTION>
                                                                                            Three Months Ended
                                                                                                 March 31,
                                                                                                 ---------
                                                                                             1998        1997
                                                                                             ----------------
                                                                                               (Unaudited)
<S>                                                                                      <C>          <C>

Cash flows from operating activities:
    Net Income
                                                                                         $  3,212    $  2,937
   Adjustments  to  reconcile  net  income  to net cash  provided  by  operating
activities:
     Provision for possible loan losses                                                       126         200
     Provision for losses on other real estate owned                                            -           -
     Depreciation and amortization                                                            238         203
     Gain on sales of loans                                                                  (145)         (1)
     (Gain) loss on sales of securities                                                      (118)          2
     Net gain on sales of other real estate owned                                               -         (44)
     Net amortization of premiums and discounts on investment securities                       49          90
     Provision for deferred income taxes                                                        -        (200)
       ESOP transactions                                                                      268         178
     Increase in Federal Home Loan Bank stock                                                 (17)          -
     Originations of loans held for sale                                                  (20,981)          -
     Proceeds from sales of loans originated for resale                                    15,387           -
     (Increase) decrease  in accrued interest receivable                                      829        (412)
     Other, net                                                                               (48)        869
                                                                                              ---        ----
         Net cash provided by (used in) operating activities                               (1,200)      3,822
                                                                                           ------       -----

Cash flows from investing activities:
   Proceeds from sales of investment securities available for sale                          1,518       2,501
   Proceeds from maturities of investment securities held to maturity                      29,750       5,419
   Proceeds from maturities of investment securities available for sale                    37,826       4,700
   Purchase of investment securities available for sale                                   (60,315)     (8,409)
   Purchase of investment securities held to maturity                                     (17,869)    (20,239)
   Principal payments received on investment securities available for sale                  4,065       2,306
   Principal payments received on investment securities held to maturity                    7,788       5,318
   Loan originations, net of repayments                                                    12,437     (14,610)
   Purchases of office properties and equipment                                              (153)       (261)
   Organizational Costs - USTB                                                               (184)          -
   Capitalized costs associated with other real estate owned, net of payments received          -           -
   Proceeds from sales of other real estate owned                                               -         339
                                                                                           ------     -------
         Net cash provided by (used in) investing activities                               14,863     (22,936)
                                                                                           ------     -------
Cash flows from financing activities:
   Net increase (decrease)  in deposits                                                    (1,393)     12,637
Additions (reductions) to Federal Home Loan Bank advances                                 (17,487)      5,600
   Increase in mortgagors' escrow payments                                                    195         249
   Increase in repurchase agreements                                                        2,395       2,616
   Proceeds from issuance of common stock                                                     329         157
   ESOP transactions                                                                          (90)        (89)
   Cash dividends paid on common stock                                                       (976)       (774)
                                                                                             ----        ----
Net cash provided by (used in) financing activities                                       (17,027)     20,396
                                                                                          -------      ------
Net increase (decrease) in cash and cash equivalents                                       (3,364)      1,282
Cash and cash equivalents at beginning of period                                           27,255      15,795
                                                                                           ------      ------
Cash and cash equivalents at end of period                                               $ 23,891    $ 17,077
                                                                                         ========    ========
Supplemental disclosures of cash flow information:
   Interest paid on deposits                                                             $  7,291    $  6,627
   Interest paid on borrowed funds                                                          4,468       4,087
   Income taxes paid, net of refunds                                                          299         364
Supplemental disclosures of non-cash transactions:
   Transfers to foreclosed real estate                                                          -         172
   Loans granted on sale of foreclosed real estate                                              -           -

</TABLE>


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

                                        7

<PAGE>
              AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 March 31, 1998


1) Basis of Presentation

     The accompanying  consolidated financial statements include the accounts of
Affiliated Community Bancorp, Inc. (the "Company" or "Affiliated") and its three
wholly-owned subsidiaries, Lexington Savings Bank ("Lexington"), a Massachusetts
chartered  savings  bank,  The Federal  Savings  Bank  ("Federal"),  a federally
chartered  savings bank,  and Middlesex  Bank & Trust  Company  ("Middlesex")  a
Massachusetts  chartered trust company,  which are  headquartered  in Lexington,
Massachusetts, Waltham, Massachusetts, and Newton, Massachusetts, respectively.

     Affiliated  Community Bancorp,  Inc. was incorporated on April 13, 1995 for
the purpose of effecting the affiliation  (the  "Affiliation")  of Lexington and
Main Street  Community  Bancorp,  Inc. ("Main  Street")  including Main Street's
wholly-owned subsidiary, Federal, pursuant to the Affiliation Agreement and Plan
of Reorganization  dated March 14, 1995 between  Lexington and Main Street.  The
Affiliation  was consummated on October 18, 1995 and was treated as a pooling of
interests for  accounting  purposes.  On May 20, 1997,  Affiliated  provided the
initial  capital to  Middlesex in exchange  for all of  Middlesex's  outstanding
stock,  making  Middlesex a wholly owned  subsidiary  of  Affiliated.  Middlesex
opened  on  June  2,  1997  as a de  novo,  full-service  commercial  bank.  The
operations  of  Affiliated  consist  of those of its  three  bank  subsidiaries,
Lexington,  Federal and Middlesex. The information presented herein for 1998 and
1997 represents the financial condition and the operating results of the Company
and its wholly-owned bank subsidiaries on a consolidated basis.

     Lexington and Middlesex are insured by the Bank  Insurance Fund ("BIF") and
Federal is insured by the Savings  Association  Insurance  Fund  ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").  

     Certain reclassifications have been made to the 1997 consolidated financial
statements   to   conform   with  the  March   31,   1998   presentation.   Such
reclassifications had no effect on previously reported consolidated net income.

     In  the  opinion  of  management,   the  unaudited  consolidated  financial
statements  presented herein reflect all adjustments  (consisting only of normal
recurring  adjustments)  necessary for a fair presentation.  Interim results are
not necessarily indicative of results to be expected for the entire year.

     On December 15, 1997,  Affiliated Community Bancorp, Inc. announced that it
had signed an Affiliation  Agreement and Plan of  Reorganization  under which it
would be acquired by UST Corp.  The  transaction is expected to close during the
second or third  quarter of 1998,  and is  structured to qualify as a pooling of
interests for accounting  purposes and as a tax-free  exchange of 1.41 shares of
UST common stock for each share of Affiliated  common stock. UST Corp. is a $3.8
billion  Boston-based bank holding company which serves as the parent company to
USTrust and United States Trust  Company.  Through its  subsidiaries,  UST Corp.
operates a total of 66 banking  offices  throughout  eastern  Massachusetts  and
provides a broad range of financial  services,  principally to  individuals  and
small-and  medium-sized  companies in New England. The transaction is subject to
the necessary shareholder and regulatory approvals.


2) Earnings and Dividends Declared Per Share

     The Company  adopted SFAS No. 128 "Earnings Per Share (EPS)"  effective for
annual periods  ending after December 15, 1997. In accordance  with SFAS No. 128
earnings per share are calculated in two ways:

     -Basic  earnings  per share is computed by dividing  reported net income by
     the weighted average number of common stock shares  outstanding  during the
     year. 
     -Diluted  earnings  per share is  computed  by  dividing  net income by the
     weighted average number of common stock shares outstanding during the year,
     plus the common stock  equivalents  of stock options  calculated  using the
     average share price during the reporting period.

Prior year earnings per share amounts have been restated accordingly.





                                       8
<PAGE>

3) Allowance for Possible Loan Losses

     The  following is a summary of the  allowance  for possible loan losses for
the three month period ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                      Three Months Ended
                                                           March 31,                                                        
                                                           ---------                                                        
                                                        1998     1997
                                                        ----     ----
                                                        (In thousands)
<S>                                                    <C>      <C>

Balance at beginning of period                         $8,641   $7,759
Provision for possible loan losses                        126      200
Recoveries                                                 16       43
                                                        -----    -----
                                                        8,783    8,002

Loans charged-off                                           -       40
                                                        -----    -----
Balance at end of period                               $8,783   $7,962
                                                       ======   ======
</TABLE>

     The  Company's  allowance  for  possible  loan  losses is  established  and
maintained  through  a  provision  for  possible  loan  losses.  Charges  to the
provision  for  possible  loan losses are based on  management's  evaluation  of
numerous  factors,  including the risk  characteristics  of the  Company's  loan
portfolio,  the  portfolio's  historical  experience,  the level of non-accruing
loans,  current  economic  conditions,  collateral  values,  and  trends in loan
delinquencies  and  charge-offs.  Although  management  attempts to use the best
information  available  to make  determinations  with  respect to the  Company's
allowance  for  possible   loan  losses,   loan  losses  may   ultimately   vary
significantly  from current estimates and future adjustments may be necessary if
economic  conditions differ  substantially from the assumed economic  conditions
used in making the initial determination or if other circumstances change.

     Loans are considered impaired when it is probable that the Company will not
be able to collect all amounts due  according  to the  contractual  terms of the
loan  agreement.  Management  does not set any  minimum  delay of  payments as a
factor  in  reviewing  for  impaired  classification.  The  amount  judged to be
impaired is the difference  between the present value of the expected cash flows
using as a discount rate the original  contractual  effective  interest rate and
the recorded  investment of the loan. If foreclosure on a collateralized loan is
probable,  impairment  is  measured  based on the fair  value of the  collateral
compared to the recorded  investment.  If  appropriate,  a valuation  reserve is
established to recognize the difference between the recorded  investment and the
present value.  Impaired loans are charged off when management believes that the
collectibility  of the  loan's  principal  is  remote.  All  impaired  loans are
classified as nonaccrual.

     For the three  months ended March 31, 1998 and 1997,  the average  recorded
investment in impaired loans was $3,893,000 and  $3,567,000,  respectively,  and
the income  recognized  on  related  impaired  loans was  $69,000  and  $56,000,
respectively.  At March 31, 1998 and December 31, 1997,  the Company  classified
$4,142,000  and  $3,897,000,   respectively,  of  its  loans  as  impaired.  The
$4,142,000 in impaired  loans at March 31, 1998 has been measured under the fair
value of collateral method. At March 31, 1998 impaired loans totaling $3,204,000
had a related valuation reserve of $587,000. The $3,897,000 in impaired loans at
December 31, 1997 has been measured  under the fair value of collateral  method.
At December 31, 1997, impaired loans totaling $2,989,000 had a related valuation
reserve of $578,000.

4) Stock Split

     On May 30, 1997 the Company  effected a 25% stock split paid in the form of
a stock dividend.  All common stock share and per share information prior to the
stock split,  except for shares authorized,  has been retroactively  restated to
reflect this stock split.

5) Impact of New Accounting Standards

     The  Company  adopted  SFAS  No.  130,  "Reporting   Comprehensive  Income"
effective  for fiscal years  beginning  after  December  15, 1997.  SFAS No. 130
established  standards for reporting and display of comprehensive income and its
components.  Comprehensive  income for the three months ended March 31, 1998 and
1997 is  presented  within a  separate  financial  statement  contained  in this
report.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
reporting information about segments in annual and interim financial statements.
SFAS 131 introduces a new model for segment  reporting,  called the  "management
approach."  The  management  approach  is based on the way the  chief  operating
decision-maker   organizes  segments  within  a  company  for  making  operating
decisions and assessing  performance.  Reportable segments are based on products
and services, geography, legal structure, management structure -- any

                                       9
<PAGE>

manner in which management disaggregates a company. This statement is effective
and will be adopted for the Company's  financial  statements for the fiscal year
ending  December 31, 1998 and requires the  restatement  of previously  reported
segment information for all periods presented.

     In February  1998,  the FASB issued  SFAS No. 131  "Employers'  Disclosures
about Pensions and Other  Postretirement  Benefits" which is to become effective
for fiscal years  beginning  after  December 15, 1997.  This  Statement  revises
employers' disclosures about pension and other postretirement benefits plans. It
does not change the  measurement or  recognition of those plans.  Restatement of
disclosures  for earlier periods  provided for comparative  purposes is required
unless the information is not readily available.

     In April 1998, the AICPA issued Statement of Position No. 98-5,  "Reporting
on the Costs of  Start-Up  Activities",  which is  effective  for  fiscal  years
beginning after December 31, 1998. This statement  establishes  standards on the
financial  reporting of start-up and organization  costs. It requires that costs
of  start-up   activities  and  organization  costs  be  expensed  as  incurred.
Management  does not anticipate  that the adoption of this statement will have a
material impact on the Company or its results of operations.

                                       10
<PAGE>

     ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
   RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997.

General
-------

     The  Company  is a holding  company  that  conducts  substantially  all its
activities  through its bank  subsidiaries.  The Company's results of operations
are dependent primarily on net interest income,  which is the difference between
(i) the interest  income earned on loans and investment  securities and (ii) the
cost of funds,  which consists of the interest paid on deposits and  borrowings.
Net  interest  income can be  adversely  affected by changes in interest  rates,
interest  rate caps in effect on  adjustable  rate  securities  and loans in the
portfolio, and loan and mortgage-backed security prepayments.

     The Company's net income is also affected by  noninterest  income,  such as
service  charges  and fees and  gains or losses on asset  sales,  and  operating
expenses,  which consist  primarily of compensation and benefits,  occupancy and
equipment expenses,  federal deposit insurance premiums, other real estate owned
("OREO") operations and other general  administrative  expenses. The earnings of
the Company are also significantly  affected by general economic and competitive
conditions,  particularly changes in market interest rates,  government policies
and actions of regulatory authorities.

     During the third  quarter of 1997,  the  Company  conducted a review of its
operations  and systems to identify the impact of the so-called  Year 2000 issue
on it. An assessment  and a plan were  developed to resolve the issue.  The Year
2000 issue,  which is common to most  corporations  and  especially  most banks,
concerns the inability of information  systems,  primarily computer hardware and
computer software  programs,  to properly  recognize and process  date-sensitive
information as the year 2000 approaches. Since the Company's information systems
functions are either  outsourced to service bureaus or processed  in-house using
programs  developed by third party  vendors,  the direct  effort to correct Year
2000 issues will largely be undertaken  by third parties and will  therefore not
be within the Company's direct control.  The Company currently is not aware of a
situation  where either a vendor will not be able to modify their product or the
Company  will  not be able to  replace  any  affected  system  in time to  avoid
material adverse effects on operations.

     The Company's  plan to resolve the Year 2000 issue was developed  along the
five phase (awareness;  assessment;  renovation;  validation and implementation)
project  management  process  outlined  in the  Federal  Financial  Institutions
Examination  Council  (FFIEC) Year 2000  statement of May 5, 1997. The awareness
phase has been completed, a Year 2000 assessment was completed and monitoring is
ongoing. Renovation of third party systems that were identified as non-compliant
is being  undertaken  by those third parties and is scheduled to be completed by
December 31, 1998.  Testing and  implementation  will occur during 1998 and into
1999.

     The chief  components  of the  Company's  expense  related to the Year 2000
issue  are  currently  believed  to be  the  replacement  of  personal  computer
equipment,  the purchase or upgrade of third party software and costs related to
testing.  External  costs and  internal  modification  costs will be expensed as
incurred;  costs of new hardware and software will be capitalized  and amortized
in  accordance  with the  Company's  policies.  While cost  estimates  have been
prepared,  final costs have not been determined.  The Company  anticipates that,
while such costs may impact the  Company's  results of operations in one or more
fiscal  quarters,  they will not have a material adverse impact on the long term
results of operations or consolidated financial position of the Company.

     This Form 10-Q  contains  certain  forward-looking  statements  within  the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Actual  events could differ  materially  from
those  anticipated in the  forward-looking  statements.  Important  factors that
might cause such a difference include general economic conditions,  particularly
the  real  estate  market,  in the  Company's  primary  market  area,  potential
increases in the  Company's  non-performing  assets (as well as increases in the
allowance for possible loan losses that might be necessary),  concentrations  of
loans in a particular  geographic area or with certain large borrowers,  changes
in government regulation and supervision,  including increased deposit insurance
premiums  or capital or reserve  requirements,  the  so-called  Year 2000 issue,
changes in interest rates, and increased  competition and bank consolidations in
the Company's market area.

     The results  for the first  quarter of 1998  included  the  operations  for
Middlesex  which  opened  for  business  on  June  2,  1997.  The  expenses  and
consolidated net income of Affiliated were, and will be, negatively  impacted by
the start-up of Middlesex.

Changes in Financial Condition from December 31, 1997
-----------------------------------------------------

     Total  assets at March 31, 1998  amounted to $1.141  billion as compared to
$1.155  billion at December  31,  1997,  reflecting a decrease of $14 million or
1.2%.  The  decrease in the  Company's  assets is  primarily  attributable  to a
decline in investment securities held to maturity and loans.

                                       11
<PAGE>

     Investments:  Investment securities designated as held to maturity amounted
     ------------
to $153.0  million at March 31, 1998 versus $172.6 million at December 31, 1997.
At March 31, 1998  investment  securities  available for sale amounted to $221.5
million versus $204.8 million at December 31,1997.

     The decline in investment  securities held to maturity reflects maturities,
amortization of mortgaged  backed  investments  and agency  securities that were
called. Proceeds from such were reinvested into mortgage-backed certificates and
mortgage-backed derivatives within the available for sale portfolio.

     The carrying values of investment securities at March 31, 1998 and December
31, 1997 is presented in the following table:

                                    March 31, 1998      December 31, 1997
                                    --------------      ------------------
                                 Available    Held to  Available    Held to
                                  for Sale    Maturity  for Sale   Maturity
                                  --------    --------  --------   --------
                                                 (In thousands)

   Government securities          $ 80,121   $ 24,207   $107,180   $ 52,687
   Corporate and other bonds        17,408     20,386     16,014     22,846
   Mortgage-backed securities       54,791     95,254     33,989     86,138
   Mortgage-backed derivatives      32,827     13,126     11,034     10,952
   Marketable equity securities     36,356          -     36,629          -
                                    ------     ------     ------     ------
                                  $221,503   $152,973   $204,846   $172,623
                                  ========   ========   ========   ========

     The mortgage-backed derivatives portfolio consisted of planned amortization
classes  (PAC's),  targeted  amortization  classes (TAC's),  sequential  payment
classes (SEQ's),  scheduled  amortization classes (SCH's) and accretion directed
classes  (AD's).  The balance at March 31, 1998 had an average life of 2.7 years
with 20% in monthly  adjusting  securities  and the  remaining 80% in fixed rate
securities.

     Loans: Gross loans outstanding, excluding loans held for sale, at March 31,
     ------
1998 amounted to $699.3  million versus $711.7 million at December 31, 1997. The
decrease of $12.4 million or 1.75% was primarily  attributed to the  refinancing
and/or payoff of adjustable  rate  residential  loans and commercial real estate
loans  during the first  quarter of 1998.  There were no sales of loans into the
secondary  market during year first  quarter of 1997;  $15 million of fixed rate
residential  originations  were sold into the secondary  market during the first
quarter of 1998.  Loans held for sale  totaled $9.7 million as of March 31, 1998
versus  $4.0  million  on  December  31,  1997.  The  gross  balances  of  loans
outstanding  at March 31, 1998 and December 31, 1997 are shown in the  following
table:
<TABLE>
<CAPTION>

                                                                  March 31,   December 31,
                                                                    1998        1997
                                                                  --------     --------
                                                                      (In thousands)
<S>                                                              <C>          <C>

Real estate:
      1-4 family                                                 $ 459,802    $ 469,453
      Commercial and construction                                  175,729      180,398
Commercial                                                          43,355       41,414
Equity lines of credit and other                                    21,610       21,710
Less: net deferred loan fees                                        (1,215)      (1,273)
                                                                    ------       ------
                                                                 $ 699,281    $ 711,702
                                                                 =========    =========
</TABLE>

     At March 31, 1998 loans delinquent 60 days or more amounted to $2.6 million
and  represented  0.4% of total loans  outstanding.  The  comparable  amounts at
December 31, 1997 were $1.9 million or 0.3%.

                                       12
<PAGE>

     The following table sets forth  information  regarding  non-accrual  loans,
troubled debt restructurings, OREO and other assets:

                                        March 31,  December 31,
                                           1998       1997
                                           ----       ----
                                       (Dollars in thousands)

Non-accrual loans                         $4,547    $4,336
Troubled debt restructurings                 162       162
                                             ---       ---
      Total non-performing loans           4,709     4,498
Other real estate owned, net                   1         1
                                             ---       ---
      Total non-performing assets         $4,710    $4,499
                                          ======    ======
Loans past due 90 days or more and
      still accruing                    $      -  $      -
                                          ======    ======
Non-performing loans as a percent of
      total loans                            .66%      .63%
Non-performing assets as a percent of
      total assets                           .41%      .39%
Allowance for possible loan losses as
      a percent of non-performing loans   186.52%   192.11%
Allowance for possible loan losses as
      a percent of total loans              1.26%     1.21%
                                            ====      ====

     Liabilities:  The Company's deposit products include passbook and statement
     ------------
savings  accounts,  NOW  accounts,  demand  (checking)  accounts,  money  market
accounts and certificate of deposit accounts.  The certificate  accounts consist
of regular and retirement funds and are either fixed or variable in nature.

     The following table summarizes the Company's  deposit  liabilities at March
31, 1998 and December 31, 1997:

                                        March 31,  December 31,
                                           1998       1997
                                           ----       ----
                                       (Dollars in thousands)

Demand                                 $ 51,600   $ 48,120
NOW                                      62,939     60,781
Regular savings                         123,879    120,921
Money market                             69,804     72,571
                                         ------     ------
      Total non-certificate accounts    308,222    302,393
                                        -------    -------
Certificates less than $100,000         314,316    315,075
Certificates of $100,000 and over       105,165    111,628
                --------                -------    -------
      Total certificate accounts        419,481    426,703
                                        -------    -------
      Total deposits                   $727,703   $729,096
                                       ========   ========



     At March 31, 1998 and December 31, 1997,  brokered  certificates of deposit
amounted to $49.1 million and $57.1 million, respectively. Brokered certificates
of deposit  include $30.0 million and $36.4 million in Depository  Trust Company
("DTC") certificates at March 31, 1998 and December 31, 1997, respectively.

     Borrowings  from the  Federal  Home Loan Bank  ("FHLB")  amounted to $279.9
million at March 31,  1998  versus  $297.4  million at December  31,  1997.  The
decrease  reflects  matured fixed rate advances that were not renewed due to the
decrease in real estate loans and the held to maturity investment portfolio.

Liquidity and Capital Resources
-------------------------------

     The Company's primary sources of liquidity are dividends from subsidiaries,
and maturities,  repayments and interest on investments. The Company may use its
liquidity to pay cash dividends to stockholders, fund operating expenses and pay
taxes. On

                                       13
<PAGE>

April 16, 1998 the Company  declared a regular  quarterly  dividend of $0.15 per
share payable on May 15, 1998 to  stockholders of record on April 30, 1998. This
first quarter dividend is the same amount as that announced last quarter and 25%
higher than a year ago.

     The  primary  sources  of funds for the  Company's  bank  subsidiaries  are
deposits,   FHLB   borrowings,   principal  and  interest   payments  on  loans,
mortgage-backed and mortgaged-backed  derivative  securities,  and maturities of
investment securities.  While maturities and scheduled amortization of loans and
investment  securities are  predictable  sources of funds,  deposit  inflows and
mortgage  prepayments are greatly  influenced by economic  conditions,  interest
rate levels,  and  regulatory  changes.  The decrease in earning assets of $12.1
million for the three month  period  ended March 31, 1998 was  primarily  due to
loan refinancing or prepayments and a moderation in investing  activities.  As a
result of these trends, the Company reduced its FHLB borrowings by $17.5 million
in the first quarter.

     The Company's  bank  subsidiaries,  as members of the FHLB,  have overnight
lines of credit of approximately $26 million and an overall  borrowing  capacity
of  approximately  $643.7  million from the FHLB. At March 31, 1998  outstanding
borrowings  were $279.9 million under these  facilities.  Any borrowings must be
collateralized  by a  combination  of  investment  securities  and certain first
mortgage loans. The subsidiaries  also have the ability to enter into repurchase
agreements, with an aggregate credit line of $150 million, with various brokers.

     At March 31,  1998,  the  Company  had  outstanding  commitments  of $112.2
million to originate  loans and advance funds.  As of that date, the Company had
commitments  to sell loans of $9.7  million.  The Company  believes that it will
have  sufficient  funds  available to meet all of its commitments as a result of
the  liquidity  inherent  in its  balance  sheet,  combined  with its  available
borrowing capacity through the FHLB.

     On April 23,  1997 the  Company  announced  a 25% stock split of its common
stock to be effected in the form of a stock dividend. This split was implemented
on May 30,  1997 in the form of one  additional  share for each  four  shares of
common stock held by  stockholders  of record as of the close of business on May
15, 1997.  Per share  numbers in this report have been  restated to reflect this
split.

     On December 15, 1997,  Affiliated and UST Corp. jointly announced that they
had signed an Affiliation  Agreement and Plan of Reorganization  under which UST
Corp.  would acquire  Affiliated.  This  transaction is expected to close in the
second or third  quarter  of 1998 and is  structured  to qualify as a pooling of
interests for accounting  purposes and as a tax-free  exchange of 1.41 shares of
UST Corp. common stock for each share of Affiliated common stock.

     On  May  1,  1998,   Affiliated  and  William  R.  Berkley,  of  Greenwich,
Connecticut jointly announced that they had signed a definitive  agreement under
which Mr.  Berkley  will  acquire  100% of the stock of  Middlesex  Bank & Trust
Company,  a wholly  owned  subsidiary  of  Affiliated  for $8.24  million.  This
transaction is subject to the UST transaction closing.

     The Company's bank  subsidiaries  are subject to certain capital  standards
prescribed by  regulations.  While the  regulations are the same for Affiliated,
Lexington,  and Middlesex,  the method of calculation differs slightly for banks
regulated by the Office of Thrift  Supervision  such as Federal.  The  following
tables show the subsidiaries'  regulatory  capital ratios as they compare to the
minimum  guidelines  at March 31,  1998.  The high  capital  ratios of Middlesex
reflect its status as a start-up bank.
<TABLE>
<CAPTION>

                                                                                   Affiliated
                                The Federal     Lexington        Middlesex         Community        Minimum
                                Savings Bank  Savings Bank    Bank & Trust Co.    Bancorp, Inc.   Requirements
                                ------------  ------------    ----------------    -------------   ------------
<S>                                <C>            <C>             <C>                <C>             <C>

Risk-based ratios:
     Tier 1 capital .........      18.71%         14.66%          52.23%             18.08%          4.00%
     Total capital ..........      19.96          15.72           52.55              19.34           8.00
Tangible equity ratio .......       9.52            N/A            N/A                N/A            2.00
Tier 1 leverage capital ratio       9.52           8.86           35.85              10.00           4.00

</TABLE>

Market Risk
-----------

     As a financial  institution,  the  Company's  chief market risk is interest
rate risk. The Company has no material exposure to foreign currency or commodity
prices. Its exposure to equity prices is limited to marketable equity securities
contained within its available for sale investment  portfolio.  The Company does
not have a trading portfolio.


     Interest rate risk is the  sensitivity  of income to variations in interest
rates over defined time horizons. The primary goal of

                                       14
<PAGE>

interest  rate risk  management  is to  control  this  risk  within  limits  and
guidelines  approved by the Company's  Asset/Liability  Committee (ALCO).  These
limits and guidelines reflect the Company's tolerance for interest rate risk.

     The  Company   attempts  to  control  interest  rate  risk  by  identifying
exposures, quantifying them, and identifying their impact on income. The Company
quantifies its interest rate risk exposures using  simulation  models as well as
simpler gap analyses.  The Company  manages its interest rate exposures  using a
combination of on-balance sheet instruments, consisting principally of fixed and
variable rate securities, deposit pricing and FHLB borrowings.

     As  of  March  31,  1998,  the  Company  had  no  outstanding  exposure  to
off-balance sheet interest rate instruments such as swaps,  forwards or futures.
However, it has had limited exposure to such instruments in the past in order to
hedge its interest rate risk position and may do so in the future.

     Asset/Liability  Management. The Company's ALCO, under the authority of the
Board of Directors,  has established guidelines within which management operates
to meet liquidity needs and manage interest rate risk. These liquidity needs are
defined  by the  needs of the  depositors  and  borrowers  of the  Company.  The
Company's  primary  source of funds is its  deposit  base.  Management  uses the
investment portfolio and borrowing capabilities to manage the liquidity position
and interest  rate risk  position,  in its efforts to maximize  interest  income
within the ALCO's guidelines.

     The ALCO  consists  of members of the Board of  Directors  and  management.
Meetings are held on a quarterly basis and topics of discussion include, but are
not limited to,  levels and direction of interest  rates,  deposit  flows,  loan
demand,  investment  portfolio  and  borrowed  funds  positions,  interest  rate
sensitivity  or "gap"  position and other  variables  which impact the Company's
interest rate sensitivity position.

     Interest Rate Sensitivity Analysis.  The matching of assets and liabilities
are analyzed by examining  the extent to which such assets and  liabilities  are
"interest  rate  sensitive"  and by  monitoring an  institution's  interest rate
sensitivity  "gap." An asset or  liability  is  considered  to be interest  rate
sensitive within a specific time period if it will mature or reprice within that
time period.  The interest  rate  sensitivity  gap is defined as the  difference
between the amount of interest-earning  assets  anticipated,  based upon certain
assumptions,  to mature or reprice  within a specific time period and the amount
of interest-bearing liabilities anticipated,  based upon certain assumptions, to
mature or reprice within that time period. A gap is considered positive when the
amount of interest rate sensitive  assets maturing or repricing  within a period
exceeds the amount of interest rate sensitive  liabilities maturing or repricing
within that period;  a gap is  considered  negative  when the  converse  occurs.
During a  decreasing  interest  rate  environment,  a negative gap would tend to
result in an increase in net interest  income while a positive gap would tend to
adversely affect net interest income. In a rising interest rate environment,  an
institution  with a  positive  gap would  generally  expect an  increase  in net
interest  income,  whereas an institution with a negative gap would generally be
expected to experience the opposite result.

                                       15
<PAGE>

     The following  table  represents  management's  anticipated  cash flows and
repricings of Affiliated's March 31, 1998 consolidated  balance sheet based upon
assumptions  derived from historical  experience,  the current interest rate and
economic outlook, standardized mortgage prepayment models and various other data
input  sources.  Management  monitors  these  assumptions on a regular basis and
revises them when  necessary.  Management  believes that these  assumptions  are
accurate  but  understands  that  actual  cash  flows  and  repricings  will  be
determined  by changes in interest  rates and customer  behavior  which may vary
from these projections. 
<TABLE> 
<CAPTION>

                                                                      At March 31, 1998
                                               ------------------------------------------------------------------
                                                            More Than      More Than
                                                            ---------      ---------
                                              Less than    Six Months to One Year to      More Than
                                                           ------------- -----------      ---------
                                              Six Months     One Year     Five Years     Five Years        Total
                                              ----------     --------     ----------     ----------        -----
                                                                   (Dollars in thousands)
<S>                                          <C>             <C>           <C>            <C>          <C>

Interest sensitive assets:
         Federal  funds  sold and interest
          bearing deposits ...............   $    7,868      $      -       $     -          $   -     $    7,868
         Investment securities ...........      161,912        69,490       122,300         37,217        390,919
         Mortgage loans ..................      163,141       117,565       228,987        124,623        634,316
         Commercial loans ................       43,355            --             -             --         43,355
         Home equity loans ...............       18,680            --            --             --         18,680
         Consumer loans ..................          524           495         1,788            123          2,930
         Other Assets ....................        9,694            --            --         33,000         42,694
                                                  -----        ------        ------         ------         ------
              Total Assets ...............   $  405,174    $  187,550    $  353,075     $  194,963     $1,140,762
                                             ==========    ==========    ==========     ==========     ==========

Liabilities & Stockholders' Equity
         Savings accounts ................   $   10,530    $    9,635    $   68,448     $   35,266     $  123,879
         NOW/DDA accounts ................        9,738         8,910        63,258         32,633        114,539
         Money Market accounts ...........       12,886        10,506        45,483            929         69,804
         Time Deposits ...................      161,622       128,070       126,841          2,948        419,481
         Borrowed Funds ..................      195,969        28,715        64,871             --        289,555
         Other Liabilities ...............           --            --            --          7,529          7,529
         Stockholders' equity ............           --            --            --        115,975        115,975
                                                  -----        ------        ------         ------         ------
Total Liabilities &  Stockholders' Equity    $  390,745    $  185,836    $  368,901     $  195,280     $1,140,762
                                             ==========    ==========    ==========     ==========     ==========

         Period GAP ......................   $   14,429    $    1,714    $  (15,826)    $     (317)
         Cumulative GAP ..................   $   14,429    $   16,143    $      317              -
         Period  GAP  as a  Percentage
          of total assets ................         1.26%         0.15%        (1.39)%        (0.03)%
         Cumulative GAP as a percentage of
          total assets....................         1.26%         1.42%         0.03%            --
        
</TABLE>

     The following list outlines some of the  significant  assumptions  utilized
for the above analysis:

  -  Fixed rate assets are displayed using contractual maturity.
  -  Adjustable rate assets are displayed using repricing dates.
  -  Assets with prepayment options (fixed and adjustable) are modeled utilizing
     an industry standard  financial modeling system to project asset cash flows
     based upon current interest rates.
  -  Loans held for sale are classified as "Less than Six Months".
  -  Fixed rate deposits and borrowings are displayed using repricing dates.
  -  Deposits that do not possess contractual maturity dates or are not directly
     linked to an interest rate index are modeled  utilizing deposit decay rates
     provided  by  one  of  the  federal  banking  regulatory  agencies.   These
     categories  include  Savings  accounts,  NOW/DDA  accounts and money market
     accounts.  Although DDA accounts do not pay interest,  management  believes
     that DDA cash  flows are  impacted  by  changes  in  interest  rates.  When
     comparing  the decay rates to internal  management  analysis of its deposit
     cash flows, it was determined  that the decay rates  represent  faster cash
     flow patterns than those displayed by the past customer practice.  However,
     to be  conservative,  the  regulatory  decay  rates are  utilized  for this
     presentation.

     Interest Rate Risk.  Interest  rate gap analysis  provides a static view of
the  maturity and  repricing  characteristics  of the  Company's  balance  sheet
positions.  The Company's internal guidelines on interest rate risk specify that
the cumulative  one year gap should be less than 10% of assets.  As of March 31,
1998, the gap was approximately 1% of assets.

                                       16
<PAGE>

     The  Company  uses  simulation  analysis  to measure  the  exposure  of net
interest  income to changes in  interest  rates  over a two-year  time  horizon.
Simulation analysis involves projecting future interest income and expenses from
the Company's assets and liabilities under various rate scenarios.

     The  Company's  internal  guidelines  on interest rate risk specify that if
interest rates were to shift immediately up or down 200 basis points,  estimated
net interest  income for each of the next twelve and  twenty-four  months should
decline by less than 12%. As of March 31, 1998, the Company's estimated exposure
as a percentage of estimated net interest  income for the next twelve and twenty
four month periods, respectively, are as follows:

     a.  200 basis point increase in rates:  -4.3%; -3.1%
     b.  200 basis point decrease in rates:  -1.1%; -2.3%

Comparison  of Results of  Operations  for the Three Months Ended March 31, 1998
--------------------------------------------------------------------------------
and 1997
--------

     General Operating Results.  Net income for the three months ended March 31,
1998  was  $3.2  million   compared  to  net  income  of  $2.9  million  in  the
corresponding  quarter of 1997,  an increase of $275,000 or 9.4%.  The  earnings
increase was  attributed  to a higher level of net interest  income and gains on
sales of  assets,  partially  offset  by  increased  operating  expenses.  Basic
earnings per share  ("EPS") was $0.50 per share for the three months ended March
31, 1998 versus  $0.46 for the three months ended March 31, 1997, a 9% increase.
Diluted EPS was $0.47 for the 1998 period  versus $0.45 for 1997, a 4% increase.
The  increase  in diluted  earnings  per share was  reduced by the impact of the
increase  in  Affiliated's  stock  price from 1997 to 1998 on the  common  stock
equivalents used to calculate diluted earnings per share.

     Net interest  income for the three months ended March 31, 1998  amounted to
$9.4 million as compared to $8.7 million for the corresponding period in 1997.

                                       17
<PAGE>

     The  following  table sets forth the  Company's  average  balances  and net
interest  income  components for the three months ended March 31, 1998 and 1997.
It includes (i) the average balance sheet for the period, based on daily average
balances;  (ii) the total  amount  of  interest  earned  or paid on the  various
categories of  interest-earning  assets and  interest-bearing  liabilities;  and
(iii) the resulting weighted average yields and costs. Such yields and costs are
derived  by  dividing  income or  expense  by the  average  balance of assets or
liabilities,  respectively,  for the periods shown except where noted otherwise.
In addition,  the table  reflects the  Company's  interest  rate spreads and net
yields on earning assets. The average balance of loans receivable includes loans
on which the Company has discontinued  accruing  interest.  The yields and costs
include fees which are considered "adjustments to yield."

<TABLE>
<CAPTION>


                                                                            Three Months Ended March 31,
                                                  --------------------------------------------------------------------------------
                                                                    1998                                  1997
                                                  ------------------------------------    ----------------------------------------
                                                                               (Dollars in thousands)
                                                                  Interest      Average                 Interest          Average
                                                  Average          Income/       Yield/   Average        Income/           Yield/
                                                  Balance          Expense        Rate    Balance        Expense            Rate
                                                  -------          -------        ----    -------        -------            ----
<S>                                            <C>             <C>                <C>   <C>           <C>                   <C>

  Assets

Interest-earning assets:
    Loans                                      $   713,915     $    14,686        8.23% $  659,003   $    13,581            8.24%
                                                 ---------          ------        ----   ---------        ------            ----
    Investments:

     Investment and mortgage-backed
        securities held-to-maturity                162,595           2,738        6.74%    182,416         3,040            6.67%
     Investment and mortgage-backed
        securities available-for-sale              206,428           3,468        6.72%    160,956         2,663            6.62%
     Federal Home Loan Bank stock                   16,427             263        6.40%     14,638           231            6.31%
     Federal funds sold and
        overnight deposits                          10,011             130        5.19%      4,488            45            4.01%
                                                 ---------          ------        ----   ---------        ------            ----
             Total investments                     395,461           6,599        6.67%    362,498         5.979            6.60%
                                                 ---------          ------        ----   ---------        ------            ----
          Total interest-earning assets          1,109,376          21,285        7.67%  1,021,501        19,560            7.66%
                                                 ---------          ------        ----   ---------        ------            ----
Noninterest-earning assets                          41,938                                  33,175
Allowance for possible loan losses                  (8,696)                                 (7,823)
                                                 ---------                                 -------
         Total assets                          $ 1,142,618                              $ 1,046,853
                                               ===========                              ===========

Liabilities and Stockholders' Equity

Interest-bearing liabilities:
 Regular savings, NOW and money
      market accounts                          $   254,054     $     1,582        2.49%$   236,363   $     1,496            2.53%
 Certificate accounts                              423,419           6,018        5.69%    377,513         5,299            5.61%
      Borrowings                                   294,999           4,318        5.85%    284,239         4,088            5.75%
                                                 ---------          ------        ----   ---------        ------            ----
          Total interest-bearing liabilities       972,472          11,918        4.90%    898,115        10,883            4.85%
                                                 ---------          ------        ----   ---------        ------            ----
Noninterest-bearing liabilities:
      Demand deposits                               47,925                                  39,469
      Other                                          7,996                                   7,119
                                                 ---------                                 -------
         Total liabilities                       1,028,393                                 944,703
                                                 ---------                                 -------

Stockholders' equity                               114,225                                 102,150
                                                 ---------                                 -------

         Total liabilities and
             stockholders' equity              $ 1,142,618                             $ 1,046,853
                                               ===========                             ===========
Net interest income                                            $     9,367                           $     8,677
                                                               ===========                           ===========
Interest rate spread                                                              2.77%                                     2.81%
                                                                                  ====                                      ====
Net yield on earning assets                                                       3.38%                                     3.40%
                                                                                  ====                                      ====

</TABLE>

     Interest  Income.  Total interest and dividend income  increased from $19.6
million  in the first  quarter of 1997 to $21.3  million  in the same  period of
1998, an increase of 8.8%.  The  additional  income was due mostly to the higher
volume of loans and mortgage-backed  securities available for sale. The yield on
average  earning  assets was  essentially  flat at 7.67% in the first quarter of
1998 compared to 7.66% in the same period of 1997.  Average loans outstanding in
the current quarter  amounted to $713.9 million and produced an average yield of
8.23%,  as compared to a 1997 average  volume of $659.0  million with an average
yield of 8.24%.  The average  balance of all investment  categories  amounted to
$395.5  million  in the first  quarter  of 1998 with an  average  yield of 6.67%
compared to $362.5 million and 6.60%, respectively, in the comparable quarter of
1997.

                                       18
<PAGE>


     Interest Expense. Interest expense in the first quarter of 1998 amounted to
$11.9 million, up $1.0 million or 9.5% from $10.9 million in the same quarter of
1997.  The main factors  contributing  to this  increase  were higher  volume in
certificates  of  deposit  and  borrowings.  The  average  rate  paid  on  total
interest-bearing  deposits  increased from 4.85% in the first quarter of 1997 to
4.90% in the comparable period of 1998. Average  interest-bearing deposit volume
increased  from $613.9 million in the 1997 period to $677.5 million in the first
quarter of 1998, up $63.6 million or 10.4%. Average certificates increased $45.9
million or 12.2% in 1998 from the  comparable  1997  quarter.  The  Company  had
average  borrowings of $295.0 million for the three months ended March 31, 1998,
with a related interest expense of $4.3 million,  compared to $284.2 million and
$4.1 million, respectively, for the first quarter of 1997. The average rate paid
on borrowings increased from 5.75% in 1997 to 5.85% for 1998.

     The  following  table  illustrates  the extent to which changes in interest
rates and changes in the volumes of interest-earning assets and interest-bearing
liabilities  affected  the  components  of the  Company's  interest  income  and
interest  expense  during  the  period.  For each  interest  related  asset  and
liability  category,  information  is  provided  with  respect  to  (i)  changes
attributable to changes in volume (changes in volume  multiplied by prior rate),
(ii)  changes  attributable  to  changes  in  interest  rates  (changes  in rate
multiplied  by  prior  volume),   and  (iii)  the  total  change.   The  changes
attributable to the combined impact of both volume and rates have been allocated
proportionately to the change due to volume and the change due to rates.

                          Three Months Ended March 31,
                          ----------------------------
                             1998 Compared with 1997
                             -----------------------
                               Increase (Decrease)
                                Due to Change in:
                                -----------------

                                         Average       Average
                                          Volume        Rate     Total
                                          ------        ----     -----
                                                   (In thousands)
Interest Income:

    Loans ............................   $ 1,130    ($   25)   $ 1,105
    Investments:
       Investment and mortgage-backed
         securities held-to-maturity .      (334)        32       (302)
       Investment and mortgage-backed
         securities available-for-sale       763         42        805
       Federal Home Loan Bank stock ..        29          3         32
       Federal funds sold ............        69         16         85
                                              --         --         --

       Total interest income .........     1,657         68      1,725
                                           -----         --      -----

Interest Expense:

    Regular savings, NOW and money
       market accounts ...............       110        (24)        86
    Certificate accounts .............       652         67        719
                                             ---         --        ---
       Total deposits ................       762         43        805

    Borrowed funds ...................       157         73        230
                                             ---         --        ---

       Total interest expense ........       919        116      1,035
                                             ---        ---      -----

Change in net interest income ........   $   738    ($   48)   $   690
                                         =======    =======    =======

     The  increase  in 1998 first  quarter  net  interest  income was  primarily
attributable  to a volume  increase  in  loans  and  mortgage-backed  securities
available-for-sale.  Volume  increases in  certificates of deposits and borrowed
funds partially  offset the favorable  benefit of the volume increase in earning
assets.

     Provision for Possible Loan Losses.  The provision for possible loan losses
for the first quarter of 1998 amounted to $126,000 versus $200,000 for the first
quarter of 1997. The decreased provision is attributable to the current level of
non-performing  loans,  the level of the  Company's  allowance  for  losses  and
favorable  charge  off  experience  in  recent  years.  At March 31,  1998,  the
Company's  allowance  for possible  loan losses  amounted to $8.8 million  which
represented  186% of  non-performing  loans at that date.  The provision and the
level of the allowance  are  evaluated on a regular basis by management  and are
based upon management's  periodic review of the  collectibility of the loans, in
light of  historical  experience,  known and  inherent  risks in the  nature and
volume of the loan portfolio,  adverse situations that may affect the borrower's
ability to repay,  estimated  value of any underlying  collateral and prevailing
economic  conditions.  The allowance is a forward-looking  estimate and ultimate
losses may vary from current estimates and future

                                       19
<PAGE>

additions to the allowance may be necessary.  As adjustments  become  necessary,
they are  reported  in the results of  operations  for the periods in which they
become  known.  Loan losses are charged  against the allowance  when  management
believes the collectibility of the loan balance is unlikely. Management believes
that the March 31, 1998 level of the allowance was adequate to provide for known
and reasonably anticipated loan losses inherent in the portfolio at that date.

     Noninterest Income. For the first quarter of 1998, total noninterest income
amounted to  $758,000,  an  increase  of $331,000 or 77.5% from  $427,000 in the
first  quarter of 1997.  Loan  servicing  fees,  which  amounted to $58,000 this
quarter compared to $67,000 in the first quarter of 1997, reflect a reduction in
the volume of loans serviced.  Customer  service fees and other income increased
by  $76,000 or 21.1% in the first  quarter  from the same  period in 1997,  as a
result of non-recurring escrow income and an increase in cash surrender value of
life insurance  policies.  The Company had gains on securities sales of $118,000
in the first  quarter of 1998 compared to a loss for the quarter ended March 31,
1997 of $2,000.  The gain on sales of loans was $145,000 in the first quarter of
1998,  compared  to $1,000 for the same  period in 1997  reflecting  the sale of
current residential mortgage production into the secondary market.

     Noninterest  Expenses.  Total noninterest expenses increased by $775,000 or
18.4% in the first quarter of 1998 to $5.0 million,  compared to $4.2 million in
the  corresponding  quarter of 1997.  Major components of the change in expenses
included a $435,000 or 17.3% increase in  compensation  and benefits,  a $74,000
increase  in data  processing  expense,  an  increase  in  marketing  expense of
$34,000, and a $158,000 increase in other expenses.

     The first  quarter of 1998 included  expenses for Middlesex  Bank and Trust
which opened for business in June 1997.  Middlesex accounted for $342,000 or 44%
of the total increase in non-interest  expenses.  Approximately  $100,000 of the
increase in compensation and benefits was related to ESOP compensation caused by
the  significant  year  to year  increase  in the  Company's  stock  price.  The
remaining  increase in compensation  and benefits costs was due to normal salary
increases,  commissions,  payroll taxes, and increased costs associated with the
401(k) plans at subsidiary  banks.  Apart from Middlesex,  data processing costs
increased due to new technology options and expanded banking  facilities.  Other
expenses increased as a result of a non-recurring  legal settlement in the first
quarter of 1997, and increased miscellaneous recurring costs in 1998.

     Provision for Income Taxes.  The provision for income taxes was  $1,805,000
million  for  the  first  quarter  of  1998,  compared  to  $1,760,000  for  the
corresponding  quarter in 1997.  The combined  effective  tax rate for the three
months  ended March 31, 1998 was 36.0% versus 37.5% for the same period in 1997.
The lower  effective  rate in 1998 reflects the tax benefit  resulting  from the
lower state tax rate in the Company's  investment  subsidiaries  and certain tax
exemptions on preferred  stocks.  At March 31, 1998, the net deferred income tax
asset amounted to $2.8 million.  The primary sources of recovery of the deferred
income tax asset are taxes paid,  which are available for carry back, from 1997,
1996, and 1995, and the expectation  that the deductible  temporary  differences
will reverse during periods when the Company generates taxable income.

      ITEM 3. Qualitative and Quantitative Disclosures About Market Risk.

     See the discussion set forth in ITEM 2 above.

                                       20

<PAGE>

                           PART II. OTHER INFORMATION


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

          The Company and its subsidiaries are not involved in any pending legal
          proceedings  other than those  arising in the  ordinary  course of the
          Company's  business.  Management believes that the resolution of these
          matters  will not  materially  affect the  Company's  business  or the
          consolidated financial condition of the Company.

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.
          ------------------

          At a meeting of the Board of  Directors  held on April 16,  1998,  the
          payment of a cash  dividend  was  declared,  providing  for payment of
          $0.15  per  share on May 15,  1998 to  holders  of record on April 30,
          1998.

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

          a.  Exhibits:  10.0 -- Stock Purchase  Agreement  (Shares of Middlesex
                                   Bank & Trust Company)
                         11.0 -- Computation of per share earnings.
                         27.0 -- Financial Data Schedule.
                         27.2 -- Financial Data Schedule Restated.

          b.  Reports on Form 8-K: No reports on Form 8-K were filed  during the
          quarter ended March 31, 1998.

                                       21
<PAGE>
                                   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.

                             Affiliated Community Bancorp, Inc.
                             ----------------------------------
                                       (Registrant)




                             /S/ Timothy J. Hansberry
Date: May 11, 1988  By       -------------------------------------
                             Timothy J. Hansberry
                             President and Chief Executive Officer


                             /S/ John G. Fallon
                    By       -------------------------------------
                             John G. Fallon
                             Executive Vice President and
                             Chief Financial Officer




                                       22