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 September 30, 1997
                                       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 October 31, 1997 there were 6,498,184  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
September 30, 1997 and December 31, 1996...............................3

Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1997 and 1996......................4

Consolidated Statements of Stockholders' Equity for
the Nine Months Ended September 30, 1997 and 1996......................5

Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996......................................6

Notes to Consolidated Financial Statements.............................7

Item 2.

Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Nine Month Periods
Ended September 30, 1997 and 1996......................................9

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings......................................................19

Item 2.

Changes in Securities..................................................19

Item 3.

Defaults Upon Senior Securities........................................19

Item 4.

Submission of Matters to a Vote of Security Holders....................19

Item 5.

Other Information......................................................19

Item 6.

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

SIGNATURES.............................................................20

EXHIBITS:

Computation of Primary and Fully Diluted Earnings Per
Share for the Three and Nine Month Periods Ended
September 30, 1997 and September 30, 1996..............................21

Financial Data Schedule................................................22

                                        2
<PAGE>
<TABLE>
               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                    (Dollars in thousands, except share data)
<CAPTION>

                                                                                    September 30,   December 31,
                                                                                       1997            1996
                                                                                     ------------    -----------
                                                                                     (Unaudited)
<S>                                                                                  <C>             <C>
                              ASSETS

Cash and due from banks                                                              $    15,979     $    11,331
Federal funds sold and overnight deposits                                                  4,584           4,464
Investment securities - held to maturity (market value $190,230 and $173,372
    at September 30, 1997 and December 31, 1996, respectively)                           188,115         173,510
Investment securities - available for sale (amortized cost $176,151 and $160,395
    at September 30, 1997 and December 31, 1996, respectively)                           177,168         159,844
Loans held for sale                                                                          944            --
Loans receivable - net of allowance for possible loan losses of $8,381 and $7,759
    at September 30, 1997 and December 31, 1996, respectively                            699,554         645,797
Federal Home Loan Bank stock - at cost                                                    16,162          14,638
Other real estate owned, net                                                                   1             133
Accrued interest receivable                                                                7,968           7,124
Office properties and equipment, net                                                       8,790           8,428
Deferred tax asset, net                                                                    2,924           3,405
Other assets                                                                               6,390           3,539
                                                                                           -----           -----
         Total assets                                                                $ 1,128,579     $ 1,032,213
                                                                                     ===========     ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Deposits                                                                        $   702,994     $   652,509
     Federal Home Loan Bank advances                                                     301,971         267,171
     ESOP debt                                                                             1,127           1,394
     Mortgagors' escrow payments                                                           2,440           2,087
     Securities sold under agreements to repurchase                                        3,032             727
     Other                                                                                 6,857           6,923
                                                                                           -----           -----

         Total liabilities                                                             1,018,421         930,811
                                                                                       ---------         -------

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 6,740,109 in 1997 and 6,683,957 in 1996                                         67              66
     Additional paid-in capital                                                           50,040          49,146
     Retained earnings - restricted                                                       64,055          57,518
     Treasury stock at cost, 247,500 shares                                               (3,402)         (3,402)
     Unearned compensation - ESOP                                                         (1,108)         (1,394)
     Unrealized gain (loss) on investment securities, net of tax effects                     506            (532)
                                                                                             ---            ----

         Total stockholders' equity                                                      110,158         101,402
                                                                                         -------         -------

         Total liabilities and stockholders' equity                                  $ 1,128,579     $ 1,032,213
                                                                                     ===========     ===========
</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   Nine Months Ended
                                                                   September 30,       September 30,
                                                               ------------------   -----------------

                                                                  1997      1996      1997      1996
                                                                  ----      ----      ----      ----
                                                                   (Unaudited)          (Unaudited)
<S>                                                            <C>       <C>       <C>       <C>

Interest and dividend income:
   Interest and fees on loans                                  $14,370   $12,498   $41,879   $35,586
   Interest and dividend income on investment securities         6,300     5,704    18,242    16,617
   Interest on federal funds sold and overnight deposits            70        78       162       200
                                                                    --        --       ---       ---
     Total interest and dividend income                         20,740    18,280    60,283    52,403
                                                                ------    ------    ------    ------
Interest expense:
   Interest on deposits                                          7,114     6,577    20,847    18,988
   Interest on borrowed funds                                    4,710     3,724    13,067    10,389
                                                                 -----     -----    ------    ------
     Total interest expense                                     11,824    10,301    33,914    29,377
                                                                ------    ------    ------    ------
Net interest income                                              8,916     7,979    26,369    23,026

Provision for possible loan losses                                 250       135       700       405
                                                                   ---       ---       ---       ---
Net interest income after provision for possible loan losses     8,666     7,844    25,669    22,621
                                                                 -----     -----    ------    ------
Noninterest income:
   Mortgage loan servicing fees                                     64        63       198       225
   Customer service fees and other                                 346       312     1,078       948
   Gain on sales of securities, net                                 90      --          97      --
   Gain on sales of loans, net                                      62        29        85        86
                                                                    --        --        --        --
     Total noninterest income                                      562       404     1,458     1,259
                                                                   ---       ---     -----     -----
Noninterest expenses:
   Compensation and employee benefits                            2,714     2,308     7,783     6,863
   Occupancy and equipment                                         618       552     1,708     1,562
   Data processing                                                 275       205       764       619
   Professional services                                           159       169       439       538
   Federal Deposit Insurance premiums                               66     2,318       198     2,707
   Other real estate owned (income) expenses, net                  (17)       25      (141)      164
   Marketing and promotion                                         210       132       541       435
   Other                                                           515       658     1,754     1,902
                                                                   ---       ---     -----     -----
     Total noninterest expenses                                  4,540     6,367    13,046    14,790
                                                                 -----     -----    ------    ------
Income before provision for income taxes                         4,688     1,881    14,081     9,090

Provision for income taxes                                       1,739       579     5,253     3,266
                                                                 -----       ---     -----     -----
         Net Income                                            $ 2,949   $ 1,302   $ 8,828   $ 5,824
                                                               =======   =======   =======   =======
Earnings per share (Note 4):
     Primary                                                   $  0.44   $  0.20   $  1.33   $  0.90
                                                               =======   =======   =======   =======
     Fully diluted                                             $  0.43   $  0.20   $  1.32   $  0.90
                                                               =======   =======   =======   =======
Weighted average shares outstanding:
     Primary                                                     6,682     6,460     6,623     6,450
                                                                 =====     =====     =====     =====
     Fully diluted                                               6,706     6,482     6,679     6,496
                                                                 =====     =====     =====     =====
</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 STOCKHOLDERS' EQUITY (NOTE 4)
            For the Nine Months Ended September 30, 1997 and 1996 
                     (In thousands, except per share data)
                                   (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, 1995       $66      $48,250        $--          $51,563       ($679)           $90         $99,290
 Net income                         --         --           --            5,824         --             --            5,824
 ESOP transactions                  --         86           --             --           108            --              194
 Issuance of common stock
  under stock option plan           --        287           --             --           --             --              287
 Purchase of treasury stock         --         --         (4,081)          --           --             --           (4,081)
 Cash dividends declared
  ($0.29 per share)                 --         --           --           (1,837)        --             --           (1,837)
 Changes in net unrealized
  gain (loss) on securities
  available for sale, net
  of tax effect                     --         --           --             --           --          (1,615)         (1,615)
                                   ---      -------      -------       -------        -----         -------         -------

Balance at September 30, 1996      $66      $48,623      ($4,081)       $55,550       ($571)       ($1,525)         $98,062
                                   ===      =======      ========      ========       ======       ========         =======


                                                                                                Net Unrealized
                                          Additional                                Unearned    Gain (Loss) on
                                 Common     Paid-in      Treasury      Retained   Compensation-   Investment
                                  Stock     Capital       Stock        Earnings       ESOP        Securities        Total
                                   ---      -------      -------       -------        -----         -------        -------
Balance at December 31, 1996       $66      $49,146      ($3,402)      $57,518       ($1,394)       ($532)        $101,402
 Net income                         --         --           --           8,828          --            --             8,828
 ESOP transactions                  --          225         --              32          286           --               543
 Issuance of common stock
  under stock option plan            1          418         --            --            --            --               419
 Tax benefit from stock option 
  exercise                          --          251         --            --            --            --               251
 Purchase of treasury stock         --         --           --            --            --            --              --   
 Cash dividends declared
  ($0.36 per share)                 --         --           --          (2,323)         --            --            (2,323)
 Changes in net unrealized
  gain (loss) on securities
  available for sale, net
  of tax effect                     --         --           --            --            --          1,038            1,038
                                   ---      -------       -------      -------        -------       -------        -------

Balance at September 30, 1997      $67      $50,040       ($3,402)     $64,055       ($1,108)        $506         $110,158
                                   ===      =======        =======     =======        =======        =====        ========

</TABLE>
The  accompanying  notes  are  integral  part of  these  consolidated  financial
statements.

                                        5
<PAGE>
<TABLE>

               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<CAPTION>

                                                                                         Nine Months Ended
                                                                                           September 30,
                                                                                       --------------------
                                                                                          1997         1996
                                                                                          ----         ----
                                                                                             (Unaudited)
<S>                                                                                   <C>         <C>

Cash flows from operating activities:
Net Income                                                                            $  8,828    $   5,824
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses                                                         700          405
Provision for losses on other real estate owned                                             --          180
Depreciation and amortization                                                              655          568
Gain on sales of loans                                                                     (85)         (86)
Gain on sales of securities                                                                (97)          --
Net gain on sales of other real estate owned                                               (44)        (177)
Net amortization of premiums and discounts on investment securities                        159          603
Provision for deferred income taxes                                                        197          421
ESOP transactions                                                                          543          194
Increase in Federal Home Loan Bank stock                                                (1,524)      (3,137)
(Increase) decrease in loans held for sale                                                (944)         595
Increase in accrued interest receivable                                                   (844)      (1,149)
Other, net                                                                              (1,651)       1,452
                                                                                        ------        -----
Net cash provided by operating activities                                                5,893        5,693
                                                                                         -----        -----
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale                         21,411           --
Proceeds from sales of investment securities held to maturity which were called          3,956           --
Proceeds from maturities of investment securities available for sale                    12,428       16,510
Proceeds from maturities of investment securities held to maturity                      19,197        3,251
Purchase of investment securities available for sale                                   (58,922)     (68,076)
Purchase of investment securities held to maturity                                     (58,900)     (22,949)
Principal payments received on investment securities available for sale                  7,966        6,558
Principal payments received on investment securities held to maturity                   21,180       21,559
Loan originations, net of repayments                                                   (54,544)     (77,748)
Proceeds from sale of office properties and equipment                                       --           --
Purchases of office properties and equipment                                            (1,017)        (519)
Capitalized costs associated with other real estate owned, net of payments received         --          (42)
Proceeds from sales of other real estate owned                                             348        1,267
                                                                                           ---        -----
Net cash used by investing activities                                                  (86,897)    (120,189)
                                                                                       -------     --------
Cash flows from financing activities:
Net increase in deposits                                                                50,485       53,197
Additions to Federal Home Loan Bank advances                                            34,800       71,006
Increase in mortgagors' escrow payments                                                    353          147
Increase in repurchase agreements                                                        2,305          972
Purchase of treasury stock                                                                  --       (4,081)
Proceeds from issuance of common stock                                                     419          287
ESOP transactions                                                                         (267)        (108)
Cash dividends paid on common stock                                                     (2,323)      (1,837)
                                                                                        ------       ------
Net cash provided by financing activities                                               85,772      119,583
                                                                                        ------      -------
Net increase in cash and cash equivalents                                                4,768        5,087

Cash and cash equivalents at beginning of period                                        15,795       18,162
                                                                                        ------       ------
Cash and cash equivalents at end of period                                            $ 20,563    $  23,249
                                                                                      ========    =========
Supplemental disclosures of cash flow information:
Interest paid on deposits                                                             $ 20,682    $  19,590
Interest paid on borrowed funds                                                         13,335       10,766
Income taxes paid, net of refunds                                                        5,019        3,432

Supplemental disclosures of non-cash transactions:
Transfers to foreclosed real estate                                                        172        1,006
Loans granted on sale of foreclosed real estate                                            162          857
Securitization of loans to mortgage-backed investments                                      --        2,326

</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                        6

<PAGE>

               AFFILIATED COMMUNITY BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1997


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 1997 and
1996 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 1996 consolidated financial
statements  to  conform  with  the  September   30,  1997   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.

2) Earnings and Dividends Declared Per Share

     Primary  earnings  per  share  computations  include  common  stock  issued
(excluding  treasury  shares and  unallocated  ESOP shares) and dilutive  common
stock  equivalents  attributable  to outstanding  stock  options.  Fully diluted
earnings per share computations reflect the higher market price of the Company's
common  stock at period end, if  applicable,  and the assumed  further  dilution
applicable to outstanding stock options.

3) Allowance for Possible Loan Losses

     The  following is a summary of the  allowance  for possible loan losses for
the three and nine month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>


                                    Three Months Ended    Nine Months Ended
                                    ------------------    -----------------
                                       September 30,         September 30,
                                    ------------------    -----------------
                                       1997     1996         1997     1996
                                       ----     ----         ----     ----
                                                  (In thousands)
<S>                                  <C>      <C>          <C>      <C>

Balance at beginning of period       $8,228   $7,240       $7,759   $7,127
Provision for possible loan losses      250      135          700      405
Recoveries                               19       14           78      147
                                         --       --           --      ---
                                      8,497    7,389        8,537    7,679

Loans charged-off                       116        3          156      293
                                        ---        -          ---      ---
Balance at end of period             $8,381   $7,386       $8,381   $7,386
                                     ======   ======       ======   ======
</TABLE>


                                        7

<PAGE>

     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  generally,  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  considers the paying status, net worth and earnings
potential  of a  borrower,  and the value and cash  flow of the  collateral,  as
factors to determine if a loan will be paid in accordance  with its  contractual
terms.  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 nine months ended September 30, 1997 and 1996, the average recorded
investment in impaired loans was $3,665,000 and $3,536,000 respectively, and the
income   recognized  on  related  impaired  loans  was  $140,000  and  $134,000,
respectively.  At  September  30,  1997  and  December  31,  1996,  the  Company
classified $3,535,000 and $3,798,000, respectively, of its loans as impaired. Of
the  $3,535,000  in impaired  loans at September 30, 1997,  $3,435,000  has been
measured  under  the fair  value of  collateral  method  and  $100,000  has been
measured under the present value of the expected cash flows method. At September
30, 1997 impaired loans totaling $2,845,000,  had a related valuation reserve of
$607,000.  Of the $3,798,000 in impaired loans at December 31, 1996,  $3,691,000
has been  measured  under the fair value of  collateral  method and $107,000 has
been measured  under the present  value of the expected  cash flows  method.  At
December 31, 1996,  impaired loans totaling  $3,555,000 had a related  valuation
reserve of $667,000.

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

     In September 1996, the FASB issued SFAS No. 125,  "Accounting for Transfers
and Servicing of Financial Assets and  Extinguishments of Liabilities," which is
generally  effective  for  transfers  and  servicing  of  financial  assets  and
extinguishments  of liabilities,  as defined,  after December 31, 1996. SFAS No.
125, as amended,  requires an entity to recognize  upon a transfer the financial
and  servicing   assets  it  controls  and  the  liabilities  it  has  incurred,
derecognize financial assets when control has been surrendered,  and derecognize
liabilities  when  extinguished.  SFAS No.  125  supersedes  SFAS No.  122.  For
servicing contracts in existence before January 1, 1997,  previously  recognized
servicing  rights  and  "excess  servicing"   receivables  that  do  not  exceed
contractually  specified  servicing  fees are  combined,  net of any  previously
recognized  servicing  obligations,  as a  servicing  asset or  liability,  with
previously recognized servicing receivables that exceed contractually  specified
servicing  fees being  reclassified  as  interest-only  strips  receivable.  The
adoption  of this  statement  did not have a  material  impact on its  financial
condition or results of operations.

     In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which is
to become  effective for fiscal years ending after  December 15, 1997.  The more
significant changes are the replacement of primary earnings per share (EPS) with
basic EPS.  Basic EPS is computed by dividing  reported  earnings  available  to
common stockholders by weighted average shares issued (excluding treasury shares
and  unallocated  ESOP  shares).  No  dilution  for  any  potentially   dilutive
securities  is included.  Fully  diluted  EPS, now called  diluted EPS, is still
required.  The Company's management  anticipates that the application of the new
statement will not have a significant  impact on the Company's  reported results
when adopted.

     If SFAS No.  128 were in  effect,  basic EPS for the third  quarter of 1997
would have been $0.46 versus  $0.21 for the third  quarter of 1996 and basic EPS
for nine months ended  September 30, 1997 would have been $1.39 versus $0.93 for
the nine months  ended  September  1996.  The 1996 third  quarter and nine month
basic EPS excluding the one time SAIF recapitalization charge of $2,121,000 that
was  assessed  in the third  quarter of 1996 would have been $0.40 for the third
quarter of 1996 and $1.12 for the nine months ended September 30, 1996.

     In July  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income",  which is to become 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 is the total of
net income and all other nonowner  changes in equity.  The Company's  management
anticipates  that the applications of this statement will not have a significant
impact on the Company's reported results when adopted.



                                        8
<PAGE>

                              ITEM 2. MANAGEMENT'S
                             DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996.

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.

     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.  The  Company's  actual  results  could differ
materially  from those set forth 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 increased capital or reserve requirements, changes
in interest  rates and increased  competition,  and bank  consolidations  in the
Company's market area.

     The results for the third  quarter of 1997  included the first full quarter
of  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, 1996
-----------------------------------------------------

     Total assets at September 30, 1997 amounted to $1.13 billion as compared to
$1.03  billion at December 31, 1996,  reflecting  an increase of $100 million or
9.7%. The increase in the Company's  assets is primarily  attributable to growth
in loans and additional purchases of investment securities.

     Investments:  Investment securities designated as held to maturity amounted
     -----------
to $188.1  million at September 30, 1997 versus  $173.5  million at December 31,
1996. At September 30, 1997 investment securities available for sale amounted to
$177.2  million versus $159.8  million at December  31,1996.  During the current
nine month  period ended  September  30, 1997,  sales of  investment  securities
amounted to $25.4 million and resulted in a net gain of $97,000.  The $4 million
in sales of investment  securities  held to maturity  represent  issues that had
been called by the  issuers,  and as a result  would have  matured  within three
months. There were no sales during the comparable 1996 period.
     The carrying  values of  investment  securities  at September  30, 1997 and
December 31, 1996 is presented in the following table:
<TABLE>
<CAPTION>



                                                    September 30, 1997     December 31, 1996
                                                    ------------------     -----------------
                                                   Available    Held to  Available    Held to
                                                    for Sale   Maturity   for Sale   Maturity
                                                    --------   --------   --------   --------
                                                                 (In thousands)
<S>                                                 <C>        <C>        <C>        <C>
Government securities                               $ 95,916   $ 60,544   $ 85,882   $ 39,304
Corporate and other bonds                              1,052      1,005      6,362     22,469
Mortgage-backed and asset-backed securities           49,365    114,675     37,510     98,243
Mortgage-backed derivatives                            4,866     11,891      7,596     13,494
Marketable equity securities                          25,969          -     22,494          -
                                                      ------     ------     ------     ------
                                                    $177,168   $188,115   $159,844   $173,510
                                                    ========   ========   ========   ========
</TABLE>

     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  September  30, 1997 had an average life of 1.4
years with 28.5% in monthly  adjusting  securities  and the  remaining  71.5% in
fixed rate securities.

     Loans: Gross loans outstanding, excluding loans held for sale, at September
     -----
30, 1997 amounted to $707.9  million versus $653.6 million at December 31, 1996.
The  increase of $54.3  million or 8.3% was  primarily  attributed  to growth in
residential real estate loans. The gross

                                        9

<PAGE>




balances of loans  outstanding  at September  30, 1997 and December 31, 1996 are
shown in the following table:
<TABLE>
<CAPTION>

                                      September 30,    December 31,
                                           1997            1996
                                      -------------   ------------
                                              (In thousands)
<S>                                   <C>              <C>
Real estate:
     1-4 family                       $ 470,203        $ 428,308
     Commercial and construction        177,700          171,990
Commercial                               39,570           35,338
Equity lines of credit and other         21,887           19,749
Less: net deferred loan fees             (1,425)          (1,829)
                                         ------           ------
                                      $ 707,935        $ 653,556
                                      =========        =========
</TABLE>

     At September  30, 1997 loans  delinquent  60 days or more  amounted to $2.3
million and represented 0.3% of total loans outstanding.  The comparable amounts
at December 31, 1996 were $4.2 million or 0.6%.

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

                                      September 30,   December 31,
                                           1997           1996
                                      -------------   ------------
                                         (Dollars in thousands)
<S>                                       <C>           <C>
Non-accrual loans                         $3,321        $4,886

Troubled debt restructurings                 511             -
                                             ---           ---
Total non-performing loans                 3,832         4,886
Other real estate owned, net                   1           133
                                             ---           ---
Total non-performing assets               $3,833        $5,019
                                          ======        ======
Loans past due 90 days or more and
still accruing                           $     -           136
                                          ======           ===
Non-performing loans as a percent of
total loans                                  .54%          .75%

Non-performing assets as a percent of
total assets                                 .34%          .49%

Allowance for possible loan losses as
a percent of non-performing loans         218.71%       158.80%

Allowance for possible loan losses as
a percent of total loans                    1.18%         1.19%
                                            ====          ====

</TABLE>

     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
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>

                                      September 30,   December 31,
                                           1997           1996
                                      -------------   ------------
                                         (Dollars in thousands)
<S>                                    <C>            <C>
Demand                                 $ 46,682       $ 41,557
NOW                                      56,513         51,347
Regular savings                         121,035        122,739
Money market                             74,877         66,492
                                         ------         ------
Total non-certificate accounts          299,107        282,135
                                        -------        -------
Certificates less than $100,000         308,827        297,990
Certificates of $100,000 and over        95,060         72,384
                                         ------         ------
Total certificate accounts              403,887        370,374
                                        -------        -------
Total deposits                         $702,994       $652,509
                                       ========       ========
</TABLE>

                                        10

<PAGE>

     At  September  30, 1997 and December 31,  1996,  brokered  certificates  of
deposit  amounted to $38.8  million and $29.1  million,  respectively.  Brokered
certificates  of deposit  include $24.2 and $14.9  million in  Depository  Trust
Company  ("DTC")  certificates  at  September  30, 1997 and  December  31, 1996,
respectively.

     Borrowings  from the  Federal  Home Loan Bank  ("FHLB")  amounted to $302.0
million at September  30, 1997 versus  $267.2  million at December 31, 1996 as a
result of continued  leveraging of the Company's  strong capital  position.  The
additional  borrowings funded  residential loans and investments that were added
to the balance sheet.

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 October 16, 1997 the Company declared a regular quarterly  dividend of
$0.15 per share  payable  on  November  14,  1997 to  stockholders  of record on
October 30, 1997.  This third quarter  dividend  represented a 25% increase over
the $0.12 per share declared in the second quarter of 1997.

     On October 16, 1997  Affiliated  also  announced  Board approval of a stock
repurchase  program effective on November 1, 1997. This program will run through
October 31, 1998 and authorizes the purchase of up to 300,000 shares, roughly 5%
of  Affiliated's  outstanding  common stock,  in open market  transactions,  the
amount and timing of such purchases, if any, to be subject to market conditions.
The  stock  purchased  will be placed in  Treasury  and may be used for  general
corporate purposes, including existing options and employee benefit programs.

     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 earning asset growth of $88.9 million
for the nine month period ended September 30, 1997 was primarily funded by a net
gain in core deposits of $17 million,  term  certificates of $30.5 million,  and
additional advances from the FHLB and repurchase  agreements  amounting to $37.1
million.

     The Company's  bank  subsidiaries,  as members of the FHLB,  have overnight
lines of credit of approximately $25 million and an overall  borrowing  capacity
of approximately $645.1 million from the FHLB. At September 30, 1997 outstanding
borrowings  were $302.0 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 September 30, 1997,  the Company had  outstanding  commitments  of $98.6
million to originate  loans and advance funds.  As of that date, the Company had
commitments  to sell loans of $0.9  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.

     On May 20,  1997  Affiliated  completed  the  transaction  entered  into on
December 18, 1996 by providing the initial  capitalization  for Middlesex Bank &
Trust Company located in Newton, Massachusetts. Middlesex opened for business on
June 2, 1997.

     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 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 September 30, 1997. 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 ......     18.33%               14.08%              91.69%           17.52%         4.00%
     Total capital .......     19.58                15.07               91.90            18.77          8.00
Tangible capital .........      9.15                 N/A                 N/A              N/A           1.50
Core capital .............      9.15                 N/A                 N/A              N/A           3.00
Tier 1 leverage capital...      N/A                  8.42               54.18             9.87          3.00

</TABLE>


                                        11
<PAGE>

Comparison  of Results of  Operations  for the Three Months Ended  September 30,
--------------------------------------------------------------------------------
1997 and 1996
-------------

     General Operating Results.  Net income for the three months ended September
30,  1997 was $2.9  million or $0.43 per share,  compared  to net income of $1.3
million or $0.20 per share in the corresponding  quarter of 1996, an increase of
$1.6 million or 126%.  The results of the third quarter of 1996 were  negatively
impacted by a charge for  recapitalization of the Savings Association  Insurance
Fund  (SAIF)  of the FDIC.  The SAIF  recapitalization  was a pre-tax  charge of
$2,121,000  or  $1,236,000   ($0.19  per  share  fully   diluted)  after  taxes.
Affiliated's  third  quarter  1997 net income of $2.9 million is 16% higher than
the third  quarter  1996 net income of $2.5 million  excluding  the cost of SAIF
recapitalization.  The 1997  fully  diluted  earnings  per share of $0.43 is 10%
higher than the 1996 earnings per share, excluding the SAIF recapitalization, of
$0.39. The increase in earnings per share was partially reduced by the impact of
the increase in  Affiliated's  stock price from 1996 to 1997 on the common stock
equivalents used to calculate fully diluted earnings per share.

     Net interest  income for the three months ended September 30, 1997 amounted
to $8.9  million as compared to $8.0  million  for the  corresponding  period in
1996.

     The  following  table sets forth the  Company's  average  balances  and net
interest  income  components  for the three months ended  September 30, 1997 and
1996. 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."


                                        12
<PAGE>
<TABLE>
<CAPTION>

                                                                     Three Months Ended September 30,
                                      ----------------------------------------------------------------------------------------------
                                                          1997                                               1996
                                      ---------------------------------------------    ---------------------------------------------
                                                                            (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                              $  696,679    $   14,370           8.25%        $  604,714       $    12,498            8.27%
                                       ----------    ----------           ----         ----------       -----------            ----

    Investments:
      Investment and mortgage-backed
        securities held-to-maturity       186,834         3,158           6.76%           178,308             2,861            6.42%
      Investment and mortgage-backed
        securities available-for-sale     170,567         2,885           6.77%           156,885             2,622            6.69%
      Federal Home Loan Bank stock         15,665           257           6.56%            13,492               221            6.55%
      Federal funds sold and
        overnight deposits                  6,041            70           4.63%             6,132                78            5.09%
                                       ----------    ----------           ----         ----------       -----------            ----

        Total investments                 379,107         6,370           6.72%           354,817             5,782            6.52%
                                       ----------    ----------           ----         ----------       -----------            ----

        Total interest-earning assets   1,075,786        20,740           7.71%           959,531            18,280            7.62%
                                       ----------    ----------           ----         ----------       -----------            ----


Noninterest-earning assets                 37,855                                          32,249
Allowance for possible loan losses         (8,311)                                         (7,288)
                                       ----------                                      ----------

        Total assets                   $1,105,330                                      $  984,492
                                       ==========                                      ==========

Liabilities and Stockholders' Equity

Interest-bearing liabilities:
      Regular savings, NOW and money
        market accounts                $  248,845    $    1,625           2.61%        $  236,024        $    1,547            2.62%
      Certificate accounts                379,888         5,489           5.78%           349,341             5,030            5.76%
      Borrowings                          315,805         4,710           5.97%           255,213             3,724            5.84%
                                       ----------    ----------           ----         ----------       -----------            ----

        Total interest-bearing 
          liabilities                     944,538        11,824           5.01%           840,578            10,301            4.90%
                                       ----------    ----------           ----         ----------       -----------            ----

Noninterest-bearing liabilities:
      Demand deposits                      45,906                                          37,771
      Other                                 6,883                                           8,352
                                       ----------                                      ----------

        Total liabilities                 997,327                                         886,701
                                       ----------                                      ----------

Stockholders' equity                      108,003                                          97,791
                                       ----------                                      ----------

        Total liabilities and
          stockholders' equity         $1,105,330                                      $  984,492
                                       ==========                                      ==========
Net interest income                                 $    8,916                                          $    7,979
                                                    ==========                                          ==========
Interest rate spread                                                      2.70%                                                2.72%
                                                                          ====                                                 ====
Net yield on earning assets                                               3.32%                                                3.33%
                                                                          ====                                                 ====
</TABLE>

     Interest  Income.  Total interest and dividend income  increased from $18.3
million  in the third  quarter of 1996 to $20.7  million  in the same  period of
1997, an increase of 13.1%.  The additional  income was due mostly to the higher
volume of loans and  investments.  The yield on average earning assets increased
from 7.62% in the third  quarter of 1996 to 7.71% in the same period of 1997 due
to higher  yields on  investments,  and an increase in loans as a percentage  of
earning assets.  Average loans  outstanding in the current  quarter  amounted to
$696.7  million and  produced an average  yield of 8.25%,  as compared to a 1996
average  volume of $604.7  million with an average  yield of 8.27%.  The average
balance of all  investment  categories  amounted to $379.1  million in the third
quarter of 1997 with an average  yield of 6.72%  compared to $354.8  million and
6.52%, respectively, in the comparable quarter of 1996.


     Interest Expense. Interest expense in the third quarter of 1997 amounted to
$11.8  million,  up $1.5 million or 14.6% from $10.3 million in the same quarter
of 1996.  The main factors  contributing  to this increase were higher volume in
certificates  of deposit  and  higher  volume and cost of  borrowed  funds.  The
average rate paid on total interest-bearing deposits increased fractionally from
4.49% in the third  quarter of 1996 to 4.53% in the  comparable  period of 1997.
Average  interest-bearing  deposit  volume  increased from $585.4 million in the
1996 period to $628.7  million in the third quarter of 1997, up $43.3 million or
7.4%.  Average  certificates  increased  $30.5  million or 8.7% in 1997 from the
comparable  1996 quarter.  The Company had average  borrowings of $315.8 million
for the three months ended September 30, 1997, with a related  interest  expense
of $4.7 million, compared to $255.2 million and $3.7 million,  respectively, for
the third quarter of 1996.  The average rate paid on borrowings  increased  from
5.84% to 5.97%.

     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


                                        13

<PAGE>
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.
<TABLE>
<CAPTION>

                         Three Months Ended September 30,
                         --------------------------------
                             1997 Compared with 1996
                             -----------------------
                               Increase (Decrease)
                                Due to Change in:
                                -----------------

                                         Average    Average
                                         Volume      Rate      Total
                                         ------      ----      -----
                                                (In thousands)
<S>                                    <C>           <C>    <C>
Interest Income:

     Loans                             $  1,897      ($25)  $  1,872
     Investments:
        Investment and mortgage-backed
          securities held-to-maturity       140       157        297
        Investment and mortgage-backed
          securities available-for-sale     231        32        263
        Federal Home Loan Bank stock         36         -         36
        Federal funds sold                   (1)       (7)        (8)
                                             --        --         --

        Total interest income             2,303       157      2,460
                                          -----       ---      -----

Interest Expense:

     Regular savings, NOW and money
       market accounts                       84        (6)        78
     Certificate accounts                   441        18        459
                                            ---        --        ---
       Total deposits                       525        12        537

     Borrowed funds                         902        84        986
                                            ---        --        ---
       Total interest expense             1,427        96      1,523
                                          -----        --      -----

Change in net interest income           $   876    $   61    $   937
                                        =======    ======    =======
</TABLE>


     The  increase  in 1997 third  quarter  net  interest  income was  primarily
attributable to a volume increase in loans.  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 third quarter of 1997 amounted to $250,000 versus $135,000 for the third
quarter of 1996. The increased  provision is  attributable to the ongoing growth
of the Company's loan portfolio.  At September 30, 1997, the Company's allowance
for possible  loan losses  amounted to $8.4 million  which  represented  219% 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  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.  Although no  assurance  can be given,  management  believes  that the
September  30, 1997 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 third quarter of 1997, total noninterest income
amounted to  $562,000,  an  increase  of $158,000 or 39.1% from  $404,000 in the
third  quarter of 1996.  Customer  service  fees and other  income  increased by
$34,000 or 10.9% in the third  quarter from the same period in 1996, as a result
of business  checking  fees,  and an increase  in cash  surrender  value of life
insurance policies.  The Company had gains on securities sales of $90,000 in the
third  quarter  of  1997  compared  to no gain or  loss  for the  quarter  ended
September 30, 1996.  The gain on sales of loans was $62,000 in the third quarter
of 1997, compared to $29,000 for the same period in 1996.

     Noninterest Expenses.  Total noninterest expenses decreased by $1.8 million
or 28.7% in the third quarter of 1997 to $4.5 million,  compared to $6.4 million
in the  corresponding  quarter of 1996. The most significant  change in expenses
was the decrease in federal deposit  insurance  premiums of $2.3 million,  which
included  $2.1  million for the SAIF  recapitalization  in the third  quarter of
1996.  Other  components of the change in expenses  included a $406,000 or 17.6%
increase in  compensation  and benefits,  a $70,000  increase in data processing
expense,  a decrease  in OREO  expense of  $42,000,  and a $65,000  decrease  in
marketing and other expenses.

                                        14
<PAGE>

     The  increase  in  compensation  and  benefits  costs  was  caused by staff
additions,   normal  salary  increases,   payroll  taxes,  and  increased  costs
associated with the 401(k) and ESOP plans at subsidiary  banks.  The increase in
ESOP costs is related to the year to year increase in the Company's  stock price
used for the fair value  adjustment to  compensation  expense.  Data  processing
costs increased due to new technology  options and expanded banking  facilities.
OREO expenses,  which tend to be volatile and are not tied to the Company's core
business,  decreased as a result of minimal foreclosure activity, and repayments
of carrying  cost.  Other expenses  declined as a result of a legal  settlement,
offset by increased marketing costs for new banking services and locations,  and
Middlesex's first quarter of operations.

     Provision for Income Taxes. The provision for income taxes was $1.7 million
for the third  quarter  of 1997,  compared  to  $579,000  for the  corresponding
quarter in 1996.  The  combined  effective  tax rate for the three  months ended
September 30, 1997 was 37.1% versus 30.8% for the same period in 1996. The lower
effective  rate in 1996  reflects  the  tax  benefit  resulting  from  the  SAIF
recapitalization.  At  September  30, 1997,  the net  deferred  income tax asset
amounted to $2.9 million. The primary sources of recovery of the deferred income
tax asset are taxes paid,  which are available for carry back, from 1996,  1995,
and 1994, and the expectation  that the deductible  temporary  differences  will
reverse during periods when the Company generates taxable income.

Comparison of Results of Operations for the Nine Months Ended September 30, 1997
--------------------------------------------------------------------------------
and 1996
--------

     General Operating  Results.  Net income for the nine months ended September
30,  1997 was $8.8  million or $1.32 per share,  compared  to net income of $5.8
million or $0.90 per share in the  corresponding  period of 1996.  The 1997 nine
month fully diluted earnings per share of $1.32 was 21% higher than the pre-SAIF
1996 level of $1.09. Net income for the first nine months of 1997 was 25% higher
than the $7.1  million nine month 1996 net income  before SAIF.  The increase in
earnings  per share was  reduced by the impact of higher  stock  prices on fully
diluted per share calculations. The current period results are attributable to a
higher level of net interest  income,  with only a modest  increase in operating
expenses.  As a result of  increased  levels of  interest  earning  assets,  net
interest  income  increased by $3.4 million or 14.5% in the first nine months of
1997 to $26.4  million  compared  to $23.0  million in the same  period of 1996.
Noninterest  expense  increased  by $377,000 or 3.0% in the first nine months of
1997  compared to the same period of 1996,  not  including the $2.1 million SAIF
recapitalization charge.

     The  following  table sets forth the  Company's  average  balances  and net
interest  income  components  for the nine months ended  September  30, 1997 and
1996. 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."


                                        15

<PAGE>
<TABLE>
<CAPTION>
                                                                      Nine Months Ended September 30,
                                      ----------------------------------------------------------------------------------------------
                                                          1997                                               1996
                                      --------------------------------------------     ---------------------------------------------
                                                                            (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                                $676,975       $41,879           8.25%          $577,091           $35,586            8.22%
                                         --------       -------           ----           --------           -------            ----

    Investments:
      Investment and mortgage-backed
        securities held-to-maturity       184,849         9,289           6.70%           177,638             8,623            6.47%
      Investment and mortgage-backed
        securities available-for-sale     164,006         8,225           6.69%           150,014             7,400            6.58%
      Federal Home Loan Bank stock         15,038           728           6.45%            12,373               594            6.40%
      Federal funds sold and
          overnight deposits                4,922           162           4.39%             5,811               200            4.59%
                                         --------       -------           ----           --------           -------            ----
           Total investments              368,815        18,404           6.65%           345,836            16,817            6.48%
                                         --------       -------           ----           --------           -------            ----
         Total interest-earning assets  1,045,790        60,283           7.69%           922,927            52,403            7.57%
                                         --------       -------           ----           --------           -------            ----

Noninterest-earning assets                 34,998                                          32,840
Allowance for possible loan losses         (8,066)                                         (7,211)
                                           ------                                          ------
         Total assets                  $1,072,722                                        $948,556
                                       ==========                                        ========

Liabilities and Stockholders' Equity

Interest-bearing liabilities:
      Regular savings, NOW and money
        market accounts                  $243,249        $4,692           2.57%          $235,064            $4,600            2.61%
      Certificate accounts                378,385        16,155           5.69%           332,766            14,388            5.77%
      Borrowings                          296,187        13,067           5.88%           239,961            10,389            5.77%
                                         --------       -------           ----           --------           -------            ----
         Total interest-bearing
          liabilities                     917,821        33,914           4.93%           807,791            29,377            4.85%
                                         --------       -------           ----           --------           -------            ----

Noninterest-bearing liabilities:
      Demand deposits                      42,954                                          34,255
      Other                                 7,049                                           9,432
                                          -------                                         -------
         Total liabilities                967,824                                         851,478
                                          -------                                         -------

Stockholders' equity                      104,898                                          97,078
                                          -------                                         -------

         Total liabilities and
             stockholders' equity      $1,072,722                                        $948,556
                                       ==========                                        ========
Net interest income                                     $26,369                                             $23,026
                                                        =======                                             =======
Interest rate spread                                                      2.76%                                                2.72%
                                                                          ====                                                 ====
Net yield on earning assets                                               3.36%                                                3.33%
                                                                          ====                                                 ====
</TABLE>

     Interest Income.  Total interest income increased from $52.4 million in the
first  nine  months of 1996 to $60.3  million  in the same  period  of 1997,  an
increase of 15.0%.  The higher  level of  interest  income was chiefly due to an
increased volume of loans and  investments.  The yield on average earning assets
was 7.57% in the first nine months of 1996 and 7.69% in the same period of 1997.
Average loans  outstanding in the current period  amounted to $677.0 million and
produced an average  yield of 8.25%,  as compared  to a 1996  average  volume of
$577.1  million  with an  average  yield of 8.22%.  The  average  balance of all
investment  categories  amounted  to $368.8  million in the first nine months of
1997 with an  average  yield of 6.65%  compared  to $345.8  million  and  6.48%,
respectively, in the comparable period of 1996.

     Interest  Expense.  Interest expense in the nine months of 1997 amounted to
$33.9  million,  up $4.5  million  or 15.4%  from  $29.4  million  in 1996.  The
contributing  factors to this increase were higher interest rates on borrowings,
and higher volumes in certificate  accounts and borrowed funds. The average rate
paid on deposits remained relatively level at 4.46% for the first nine months of
1996  compared  to 4.47% in the same  period of 1997.  Average  interest-bearing
deposits  increased  from $567.8 million in the 1996 period to $621.6 million in
the first nine months of 1997,  up $53.8 million or 9.5%.  Average  certificates
increased  $45.6 million or 13.7% in 1997 from the comparable  1996 period.  The
Company  had average  borrowings  of $296.2  million  for the nine months  ended
September 30, 1997, with a related interest  expense of $13.1 million,  compared
to $240.0 million and $10.4 million,  respectively, for the first nine months of
1996. The average rate paid on borrowings increased from 5.77% to 5.88%.


     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 periods indicated.  For each interest  related-asset
and  liability  category,  information  is provided  with respect to (i) changes
attributable to changes in volume (changes in volume

                                        16
<PAGE>
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.
<TABLE>
                        Nine Months Ended September 30,
                            1997 Compared with 1996
                              Increase (Decrease)
                               Due to Change in:
                               -----------------

<CAPTION>
                                          Average    Average
                                           Volume     Rate     Total
                                           ------     ----     -----
                                                 (In thousands)
<S>                                        <C>        <C>      <C>
Interest Income:
     Loans                                 $6,179     $114     $6,293
     Investments:
        Investment and mortgage-backed
          securities held-to-maturity         357      309        666
        Investment and mortgage-backed
          securities available-for-sale       700      125        825
        Federal Home Loan Bank stock          129        5        134
        Federal funds sold                    (30)      (8)       (38)
                                            -----      ---      -----

       Total interest income                7,335      545      7,880
                                            -----      ---      -----

Interest Expense:
     Regular savings, NOW and money
        market accounts                       156      (64)        92
     Certificate accounts                   1,945     (178)     1,767
                                            -----     ----      -----
        Total deposits                      2,101     (242)     1,859
     Borrowed funds                         2,477      201      2,678
                                            -----      ---      -----

        Total interest expense              4,578      (41)     4,537
                                            -----      ---      -----

Change in net interest income              $2,757     $586     $3,343
                                           ======     ====     ======
</TABLE>

     The  increase  in  the  year-to-date  net  interest  income  was  primarily
attributable to volume increases in loans and  investments.  Volume increases in
certificates of deposit and borrowed funds tended to offset the volume increases
in earning assets.

     Provision for Possible Loan Losses.  The provision for possible loan losses
for the first nine months of 1997 amounted to $700,000  compared to $405,000 for
the first nine months of 1996. The increased  provision was  attributable to the
ongoing growth of the Company's loan portfolio.

     Noninterest  Income.  For the first nine months of 1997, total  noninterest
income  amounted  to $1.5  million,  an  increase of $199,000 or 15.8% from $1.3
million  in the same  period of 1996.  Customer  service  fees and other  income
increased  by  $130,000  or 13.7% in the first nine  months of the year from the
same period in 1996 due to increases in checking  account fees,  and an increase
in cash surrender value of life insurance  policies.  Loan servicing fees, which
amounted to $198,000  this period  compared to $225,000 in the first nine months
of 1996,  reflect a reduction in the volume of loans  serviced.  The Company had
gains on loan  sales of $85,000 in the first  nine  months of 1997  compared  to
similar  gains of  $86,000  in the same  period  of 1996.  Sales of  investments
produced  gains of $97,000 in the first nine months of 1997  compared to no gain
or loss during the 1996 period.


     Noninterest  Expenses.  Total noninterest expense decreased by $1.8 million
or 11.8% in the first nine  months of 1997 to $13.0  million,  compared to $14.8
million in the corresponding  period of 1996. The significant  components of the
change in expense included a $2.1 million decrease for the SAIF recapitalization
as  previously  mentioned,  a $920,000  or 13.4%  increase in  compensation  and
benefits, a decrease in professional services of $99,000 or 18.4%, a $388,000 or
66.2% decrease in normal federal deposit insurance premiums, an increase in data
processing  costs of $145,000 or 23.4%,  and an increase in  marketing  costs of
$106,000 or 24.4%.  The  Company  benefited  from a decrease in OREO  expense of
$305,000 and a decrease in other expenses of $148,000.


     The  increase  in  compensation  and  benefits  costs were  caused by staff
additions,  normal salary  increases,  and increased  costs  associated with the
medical  insurance and 401(k) and ESOP plans at subsidiary  banks.  Professional
fees  declined  as a result of a  recovery  of prior  period  legal  costs.  The
decrease  in  federal  deposit  insurance  premiums  for the first  nine  months
reflects the new rate restructuring of the FDIC. Data processing costs increased
due to new technology enhancements and expanded banking facilities.  OREO income
of $141,000 for the first nine

                                        17
<PAGE>
months of 1997 reflected gains on sales of foreclosed property,  deferred income
recognized, and recoveries of carrying cost. This compared to a net OREO expense
of  $164,000  in the same  period  of 1996 as a result of  foreclosure  activity
during  such  period.  Marketing  costs  increased  as a  result  of  aggressive
promotional  efforts for new banking  services and  facilities.  Other  expenses
declined as a result of a legal settlement.


     Provision for Income Taxes. The provision for income taxes was $5.3 million
for  the  first  nine  months  of  1997,   compared  to  $3.3  million  for  the
corresponding  period  in 1996.  The  combined  effective  tax rate for the nine
months  ended  September  30, 1997 was 37.3% versus 35.9% for the same period in
1996.



                                        18

<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.
           ----------------------

           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 October 16, 1997, the
           payment of a cash  dividend was  declared,  providing  for payment of
           $0.15 per share on November  14, 1997 to holders of record on October
           30,  1997.  

           At a meeting of the Board of Directors held October 16, 1997, a stock
           repurchase  program of up to 300,000 shares was authorized  effective
           November 1, 1997.  This program will run through October 31, 1998 and
           authorizes  the  purchase  of  up  to  300,00  shares, roughly  5% of
           Affiliated's outstanding  common stock, in open market  transactions,
           the  amount  and timing of such  puchases,  if any,  to be subject to
           market conditions. The stock purchased will be placed in Treasury and
           may be used for general corporate purposes.


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

           a.  Exhibits:       11.0 -- Computation of per share earnings.
                               27.0 -- Financial Data Schedule.

           b.  Reports on Form 8-K: No reports on Form 8-K were filed during the
               quarter ended September 30, 1997.


                                        19

<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)





Date: November 17, 1997

                  By         /s/ Timothy J. Hansberry
                             ----------------------------------

                             Timothy J. Hansberry
                             President and Chief Executive Officer



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

                                       20