U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549

                                  FORM 10-KSB

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended September 30, 1997

                         Commission File No.: 01-13465


                             FALMOUTH BANCORP, INC.
-------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)


                                                  04-3337685
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    (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)               Identification No.)


                20 Davis Straits, Falmouth, Massachusetts 02540
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                    (Address of principal executive offices)


                                 (508) 548-3500
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                          (Issuer's Telephone Number)


Securities registered pursuant to section 12(b) of the Exchange Act:

          Title of each class              Name of Exchange on which registered:
---------------------------------------    -------------------------------------

Common Stock, par value $0.01 per share           American Stock Exchange


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

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.  [X]

      The revenues for the issuer's fiscal year ended September 30, 1997 are
$6,503,977.

      State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, as of a specified date within the last 60 days. On
November 13, 1997: $23,841,895.

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. The Company had 1,454,750
shares outstanding as of December 19, 1997.


                      DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive proxy statement pursuant to Regulation 14A,
which was delivered to the Commission for filing on December 23, 1997, and the
1997 Annual Report to Stockholders for the fiscal year ended September 30,
1997, which has not previously been mailed to the Commission, are incorporated
by reference into Part II and III of this report.

      Transitional Small Business Disclosure Format (check one):

                             Yes  [ ]    No  [X]



                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                   Page
                                                                                   ----

<S>                                                                                 <C>
PART I

    Item 1.   Description of Business.............................................   3
    Item 2.   Description of Property.............................................  30
    Item 3.   Legal Proceedings...................................................  30
    Item 4.   Submission of Matters to a Vote of Security Holders.................  30

PART II

    Item 5.   Market for Common Equity and Related Stockholder Matters............  31
    Item 6.   Management's Discussion and Analysis................................  31
    Item 7.   Financial Statements................................................  36
    Item 8.   Changes in and Disagreements with Accountants on Accounting and
               Financial Disclosure...............................................  37

PART III

    Item 9.   Directors, Executive Officers, Promoters and Control Persons; 
               Compliance with Section 16(a) of the Exchange Act..................  37
    Item 10.  Executive Compensation..............................................  37
    Item 11.  Security Ownership of Certain Beneficial Owners and Management......  37
    Item 12.  Certain Relationships and Related Transactions......................  37
    Item 13.  Exhibits............................................................  38

SIGNATURES........................................................................
</TABLE>


                                     PART I

ITEM 1.  BUSINESS

General

      Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank (the
"Bank"), a Massachusetts-chartered stock co-operative bank. The Bank converted
to stock form on March 28, 1996, and issued 1,454,750 shares of common stock at
$10.00 per share (the "Conversion"). On October 14, 1997, the Company acquired
all of the capital stock of the Bank and stockholders of the Bank became
stockholders of the Company in a share for share exchange pursuant to a plan of
reorganization approved by the Bank's stockholders on January 21, 1997 (the
"Reorganization") whereby the Bank became the wholly-owned subsidiary of the
Company. At September 30, 1997, there were 1,454,750 shares outstanding. The
Company's sole business activity is ownership of the Bank. The Company also
makes investments in long and short-term marketable securities and other liquid
investments. The Company's Common Stock trades on the American Stock Exchange
under the symbol "FCB." Unless otherwise disclosed, the information presented
in this Report on Form 10-KSB represents the activities of the Bank for the
fiscal year 1997, which ended September 30, 1997.

      The Bank had total assets of $96.4 million as of September 30, 1997. The
Bank conducts its business through an office located in Falmouth,
Massachusetts, where it was originally founded in 1925 as a Massachusetts
chartered mutual co-operative Bank, and two branches located in East Falmouth
and North Falmouth, Massachusetts. The Bank's deposits are currently insured up
to applicable limits by the Bank Insurance Fund of the Federal Deposit
Insurance Corporation ("FDIC") and the Share Insurance Fund of the Co-operative
Central Bank of Massachusetts.

      The Bank's principal business consists of attracting deposits from the
general public and using these funds to originate mortgage loans secured by
one- to four-family residences located primarily in Falmouth, Massachusetts and
surrounding areas and to invest in United States Government and Agency
securities.

Business Strategy

      The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank dedicated to financing home ownership
and consumer needs in its market area and to provide quality service to its
customers. The Bank has implemented this strategy by: (i) closely monitoring
the needs of customers and providing quality service; (ii) emphasizing
consumer-oriented banking by originating residential mortgage loans and
consumer loans, and by offering checking accounts and other financial services
and products; (iii) focusing on expanding lending activities to produce
moderate increases in loan originations; (iv) maintaining asset quality; (v)
maintaining capital in excess of regulatory requirements; and (vi) producing
stable earnings.

      The Bank serves its primary market area, the Massachusetts communities of
Falmouth and Mashpee located in the Cape Cod region of Massachusetts, through
its office in Falmouth, Massachusetts. In February, 1997, the Bank opened a new
branch located in East Falmouth and in August, 1997, the Bank opened a branch
in North Falmouth. The Bank competes with fifteen branches of financial
institutions (including national banks, savings banks, savings and loans and
credit unions) which are headquartered outside its market area. The Bank is the
only independent financial institution headquartered in Falmouth.

      To a lesser extent, Falmouth also makes commercial real estate loans and
consumer loans, including passbook loans, automobile, home equity and other
consumer loans. Falmouth originates both fixed-rate and adjustable-rate loans
and emphasizes the origination of residential real estate mortgage loans with
adjustable interest rates, and makes other investments which allow Falmouth to
more closely match the interest rate and maturities of its assets and
liabilities.

Market Area

      The Bank considers its primary market area to be the communities of
Falmouth and Mashpee in Barnstable County, which is located in the Cape Cod
region of Massachusetts, approximately 72 miles south of Boston. The year-round
population of Barnstable County is 186,605 (based on 1990 Census data). The
majority of the Bank's lending has been in Falmouth and Mashpee. The Cape Cod
region is a major recreational resort/retirement community, with seasonal
tourism being the most significant economic activity. Falmouth's year-round
population of approximately 27,000 increases to a summer population of
approximately 68,000. Visitors find accommodations in the many motels, hotels
and inns in the area. Falmouth has approximately 44 miles of ocean and lake
shoreline. There are nine harbors and inlets, some with docking and most with
mooring facilities. Two major harbors offer access, via ferry, to the island of
Martha's Vineyard with service to the island of Nantucket during the summer
months from Woods Hole. In addition to swimming, boating, fishing and other
forms of water recreation, Falmouth also has four public and two private golf
courses.

      The major employers in the Falmouth area are the Woods Hole Oceanographic
Institute, with approximately 800 employees, Falmouth Hospital, with 750
employees and Woods Hole, Martha's Vineyard and Nantucket Steamship Authority,
with 500 employees. Other major employers include Marine Biological
Laboratories and ORE International, Inc. The housing vacancy rate in Falmouth,
which is where a majority of the Bank's loans are located, was approximately
3.8% at December 31, 1994.

Employees

      At September 30, 1997, the Bank employed 26 full-time and 6 part-time
employees.

Lending Activities

      General. The principal lending activity of the Bank is the origination of
conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties in its designated
community reinvestment area of the Massachusetts towns of Falmouth and Mashpee.
To a lesser extent, the Bank also originates consumer loans including home
equity and passbook loans and commercial loans. The Bank also originates and
retains in its loan portfolio adjustable-rate loans and fixed-rate loans with
maturities of up to 15 years. Historically, fixed-rate loans with terms in
excess of 15 years were sold in the secondary market. Beginning in March 1995,
the Bank began to retain its fixed-rate loans with terms in excess of 15 years
in the portfolio. The Bank is a qualified seller/servicer for Federal National
Mortgage Corporation ("FNMA") and was servicing $432,000 in loans for FNMA at
September 30, 1997. The Bank's five largest loans to one borrower, outstanding
as of September 30, 1997, ranged from $384,000 to $1.17 million.

      Loan Portfolio. The following table presents selected data relating to
the composition of Falmouth's loan portfolio by type of loan on the dates
indicated.

<TABLE>
<CAPTION>
                                                                           At September 30,
                                    ---------------------------------------------------------------------------------------------
                                          1997                1996               1995               1994               1993
                                    -----------------   ----------------   ----------------   ----------------   ----------------
                                    Amount    Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent
                                    -------   -------   -------  -------   -------  -------   -------  -------   -------  -------
                                                                       (Dollars in thousands)
<S>                                 <C>       <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
Residential mortgage loans.......   $48,367    87.14%   $33,993   82.57%   $26,094   78.67%   $22,029   78.33%   $22,923   78.05%
Commercial real estate loans.....     2,425     4.37%     4,347   10.67%     3,538   10.67%     3,111   11.06%     2,886    9.83%
Consumer loans...................       877     1.58%       771    1.87%       819    2.47%       832    2.96%     1,104    3.76%
Home equity loans................     2,756     4.96%     1,683    4.09%     1,890    5.70%     2,150    7.65%     2,456    8.36%
Commercial loans.................     1,079     1.95%       373    1.91%       830    2.49%        --      --%        --      --%
                                    -------   -----------------------------------------------------------------------------------
      Total loans................    55,504   100.00%    41,167  100.00%    33,171  100.00%    28,122  100.00%    29,369  100.00%
                                    -------   =======   -------  =======   -------  =======   -------  =======   -------  =======

Less:
  Unearned income................        97                 143                121                101                 96
  Unadvanced principal...........     1,025                 289                102                127                 40
  Allowance for possible loan 
   losses........................       501                 498                445                310                277
                                    -------             -------            -------            -------            -------
  Loans, net.....................   $53,881             $40,237            $32,503            $27,584            $28,956
                                    =======             =======            =======            =======            =======
</TABLE>

      One- to Four-Family Residential Real Estate Lending. The primary emphasis
of the Bank's lending activity is the origination of conventional mortgage
loans secured by one- to four-family residential dwellings located in the
Bank's primary market area. As of September 30, 1997, loans on one- to
four-family residential properties accounted for 87.14% of the loan portfolio.

      The Bank's mortgage loan originations are for terms of up to 30 years,
amortized on a monthly basis with interest and principal due each month.
Residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms as borrowers may refinance or
prepay loans at their option, without penalty. Conventional residential
mortgage loans granted by the Bank customarily contain "due-on-sale" clauses
which permit Falmouth to accelerate the indebtedness of the loan upon transfer
of ownership of the mortgaged property.

      The Bank makes conventional mortgage loans and Falmouth uses standard
FNMA documents to allow for the sale of loans in the secondary mortgage market.
The Bank's lending policies generally limit the maximum loan-to-value ratio on
mortgage loans secured by owner-occupied properties to 95% of the lesser of the
appraised value or purchase price of the property, with the condition that
private mortgage insurance is required on loans with a loan-to-value ratio in
excess of 80%.

      The Bank, since the early 1980s, has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by the Bank
include loans which reprice every one, three and five years and provide for an
interest rate which is based on the interest rate paid on United States
Treasury securities of a corresponding term, plus a margin of 2.75%. The Bank
currently offers adjustable-rate loans with initial rates below those which
would prevail under the foregoing computations, based upon the Bank's
determination of market factors and competitive rates for adjustable-rate loans
in its market area. For adjustable-rate loans, borrowers are qualified at the
initial rate plus an anticipated upward adjustment of 200 basis points.

      The Bank retains all adjustable-rate mortgages it originates. The Bank's
adjustable-rate mortgages include caps on increases or decreases of 2% per
year, and 6% over the life of the loan (3% per adjustment, and 5% over the life
of the loan for three-year adjustable-rate loans). The retention of
adjustable-rate mortgage loans in the Bank's loan portfolio helps reduce the
Bank's exposure to increases in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower.

      During the year ended September 30, 1997, the Bank originated $9.1
million in adjustable-rate mortgage loans and $9.6 million in fixed-rate
mortgage loans. Approximately 6.07% of all loan originations during fiscal 1997
were refinancings of loans already in the Bank's loan portfolio. At September
30, 1997, the Bank's loan portfolio included $26.5 million in adjustable-rate
one- to four-family residential mortgage loans or 47.75% of the Bank's total
loan portfolio, and $ 21.9 million in fixed-rate one- to four-family
residential mortgage loans, or 39.46% of the Bank's total loan portfolio.

      The Bank engages in a limited amount of construction lending usually for
the construction of single family residences. Most are construction/permanent
loans structured to become permanent loans upon the completion of construction.
All construction loans are secured by first liens on the property. Loan
proceeds are disbursed as construction progresses and inspections warrant.
Loans involving construction financing present a greater risk than loans for
the purchase of existing homes, since collateral values and construction costs
can only be estimated at the time the loan is approved. Due to the small amount
of construction loans in the Bank's portfolio, the risk in this area is
limited.

      Commercial Real Estate Loans. At September 30, 1997, the Bank's
commercial real estate loan portfolio totaled $2.4 million, or 4.37% of total
loans. The Bank's largest loan is a commercial loan with an outstanding balance
of $762,000 at September 30, 1997 secured by an office complex located in
Falmouth, Massachusetts.

      Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. For example, commercial real estate
loans typically involve large loan balances to single borrowers or groups of
related borrowers and the payment experience on such loans is typically
dependent on the successful operation of a real estate project and/or the
collateral value of the commercial real estate securing the loan. At September
30, 1997, all of the Bank's commercial real estate loans were performing.

      Home Equity Loans. Falmouth also originates home equity loans which are
loans secured by available equity based on the appraised value of one- to
four-family residential property. If the Bank currently holds the first
mortgage on the property securing the loan, home equity loans will be made for
up to 80% of the tax assessed or appraised value of the property (less the
amount of the first mortgage). If the Bank does not hold the first mortgage,
home equity loans are limited to 70% of the appraised value of the property
(less the amount of the first mortgage). Home equity loans have an adjustable
interest rate which ranges from 0% to 1% above the prime rate as reported in
The Wall Street Journal and have terms of ten years or less. At September 30,
1997, the Bank had $2.6 million in home equity loans with unused credit
available to existing borrowers of $ 3.8 million.

      Consumer Loans. The Bank's consumer loans consist of passbook loans, and
other consumer loans, including automobile loans. At September 30, 1997, the
consumer loan portfolio totaled $877,000 or 1.58% of total loans. Consumer
loans generally are offered for terms of up to five years at fixed interest
rates. Consumer loans do not exceed $15,000 individually. Management expects to
continue to promote consumer loans as part of its strategy to provide a wide
range of personal financial services to its customers and as a means to
increase the yield on the Bank's diversified loan portfolio.

      The Bank makes loans up to 90% of the amount of the depositor's savings
account balance. The interest rate on the loan is 4.0% higher than the rate
being paid on regular savings accounts and 3% higher than the rate being paid
on certificates of deposit. The Bank also makes other consumer loans, which may
or may not be secured. The terms of such loans usually depend on the
collateral. At September 30, 1997, the total amount of passbook and other
consumer loans was $557,000.

      The Bank makes loans for automobiles, both new and used, directly to the
borrowers. The loans are generally limited to 80% of the purchase price or the
retail value listed by the National Automobile Dealers Book. The terms of the
loans are determined by the age and condition of the collateral. Collision
insurance policies are required on all these loans. At September 30, 1997, the
total amount of automobile loans was $85,000.

      Consumer loans generally are originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite these risks, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however, that
the Bank's delinquency rate on consumer loans will continue to remain low in
the future, or that the Bank will not incur future losses on these activities.

      Commercial Loans. In August 1994, the Bank hired a commercial loan
officer with over 18 years of experience in commercial lending in the Falmouth
market for the purpose of establishing a commercial lending program for the
Bank. The Bank is pursuing on a selective basis the origination of commercial
loans to meet the working capital and short-term financing needs of established
local businesses. Unless otherwise structured as a mortgage on commercial real
estate, such loans are generally be limited to terms of five years or less.
Substantially all such commercial loans have variable interest rates tied to
the prime rate as reported in The Wall Street Journal. Whenever possible, the
Bank collateralizes these loans with a lien on commercial real estate, or
alternatively, with a lien on business assets and equipment and the personal
guarantees from principals of the borrower. Commercial loans do not presently
comprise a significant portion of the Bank's loan portfolio. At September 30,
1997 the Bank's commercial loan portfolio totaled $1.1 million.

      Commercial business loans generally are considered to involve a higher
degree of risk than residential mortgage loans because the collateral may be in
the form of intangible assets and/or inventory subject to market obsolescence.
Commercial loans also may involve relatively large loan balances to single
borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the
borrower. Such risks can be affected significantly by economic conditions. In
addition, commercial business lending generally requires substantially greater
oversight efforts compared to residential real estate lending.

      Loan Commitments. The Bank makes a 60-day loan commitment to borrowers.
At September 30,1997, the Bank had $1.4 million in loan commitments
outstanding, all for the origination of one- to four-family residential real
estate loans.

      Loan Solicitation Origination and Loan Fees. Falmouth originates loans
through its main office located in Falmouth, Massachusetts and two branch
offices located in East and North Falmouth. Loan originations are derived from
a number of sources, including the Bank's existing customers, referrals,
realtors, advertising and "walk-in" customers at the Bank's offices.

      The Bank has two full-time residential loan originators who are
compensated by salary and commission. The originators meet with applicants at
their convenience and location and are in regular contact with real estate
brokers, attorneys, accountants, building contractors, developers and others in
the Bank's local market area. The Bank increased its advertising in locally
distributed newspapers and has utilized local radio advertising to increase
market share of residential loan originations.

      Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing. For all mortgage
loans, an appraisal of real estate intended to secure the proposed loan is
obtained from an independent fee appraiser who has been approved by the Bank's
Board of Directors. Fire and casualty insurance are required on all loans
secured by improved real estate.

      Insurance on other collateral is required unless waived by the loan
committee. The Board of Directors of the Bank has the responsibility and
authority for the general supervision over the loan policies of the Bank. The
Board has established written lending policies for the Bank. All applications
for residential and commercial real estate mortgages and commercial business
loans must be ratified by the Bank's Board of Directors. In addition, certain
designated officers of the Bank have limited authority to approve consumer
loans.

      Interest rates charged by the Bank on all loans are primarily determined
by competitive loan rates offered in its market area and the Bank generally
charges an origination fee on new mortgage loans. The origination fees, net of
direct origination costs, are deferred and amortized into income over the life
of the loan. At September 30, 1997, the amount of deferred loan origination
fees was $97,000.

      Loan Maturities. The following table sets forth certain information at
September 30, 1997 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.

<TABLE>
<CAPTION>
                                                               At September 30, 1997(1)
                                                            -------------------------------
                                                              Real     Consumer     Total
                                                             Estate    and Other    Loans
                                                            --------   ---------   --------
                                                                     (In thousands)

<S>                                                         <C>         <C>        <C>
Total loans scheduled to mature:
  In one year or less....................................   $  3,339    $ 2,889    $  6,288
  After one year through five years......................        799        380       1,179
  Beyond five years......................................     46,756        159      46,915
                                                            -------------------------------
      Total..............................................   $ 50,954    $ 3,428    $ 54,382
                                                            ===============================
Loan balance by type scheduled to mature after one year:
  Fixed..................................................   $ 21,827    $   405    $ 22,232
  Adjustable.............................................     25,728        134      25,862

<FN>
-------------------
<F1>   Net of deferred loan origination fees and unadvanced principal.
</FN>
</TABLE>

      Originations and Sales of Loans. The following table sets forth
information with respect to originations and sales of loans during the periods
indicated.

      Originations for the year ended September 30, 1997 have increased due to
the addition of a mortgage loan originator and a senior commercial lending
officer in recent years. Loan sales were reduced during the same period as the
Bank has begun to retain certain fixed-rate loans with terms of greater than 15
years in its portfolio.

<TABLE>
<CAPTION>
                                                       Years Ended September 30,
                                         ----------------------------------------------------
                                           1997       1996       1995       1994       1993
                                         --------   --------   --------   --------   --------
                                                           (In thousands)

<S>                                      <C>        <C>        <C>        <C>        <C>
Beginning balance(1).................    $ 40,735   $ 32,948   $ 27,894   $ 29,233   $ 31,310
                                         ----------------------------------------------------

  Mortgage loan originations(2)......      18,712     13,090      8,722      6,214      7,586
  Consumer loan originations.........       3,145      1,844        964        613        559
  Commercial loan originations.......       1,710      1,321      1,127         --         --
Less:
  Amortization and payoffs(3)........      (9,920)    (8,468)    (5,310)    (5,496)    (4,990)
  Transfers to OREO..................          --         --         --         --         --
  Net loans originated...............      13,647      7,787      5,503      1,331      3,155
                                         ----------------------------------------------------
  Total loans sold...................          --         --       (449)    (2,670)    (5,232)
                                         ----------------------------------------------------
Ending balance(1)....................    $ 54,382   $ 40,735   $ 32,948   $ 27,894   $ 29,233
                                         ====================================================

<FN>
-------------------
<F1>   Net of deferred loan origination fees and unadvanced principal.

<F2>   Includes residential and commercial real estate loans.

<F3>   Includes unadvanced principal.
</FN>
</TABLE>

      Non-Performing Assets, Asset Classification and Allowances for Losses.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of principal and interest
are doubtful.

      Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or its
fair value. Any required write-down of the loan to its fair value is charged to
the allowance for loan losses.

<TABLE>
<CAPTION>
                                                              At September 30,
                                                 ------------------------------------------
                                                  1997     1996     1995     1994     1993
                                                 ------   ------   ------   ------   ------
                                                           (Dollars in thousands)

<S>                                              <C>      <C>      <C>      <C>      <C>
Loans 30-89 days past due (not included in 
 non-performing loans).......................    $ 290    $  81    $  --    $  62    $  --

Loans 30-89 days past due as a percent of 
 total loans.................................      .53%     .20%      --%     .22%      --%
Non-performing loans: (90 days past due).....    $  30    $  14    $  --    $ 322    $ 342
OREO.........................................    $  --       --       --       --       85
                                                 -----------------------------------------

      Total non-performing assets............    $  30    $  14    $  --    $ 322    $ 427
                                                 =========================================
Non-performing loans as a percent of total 
 loans.......................................      .06%     .03%      --%    1.15%    1.17%
Non-performing assets as a percent of total
 assets......................................      .03%     .02%      --%     .43%     .57%
</TABLE>

      During the year ended September 30, 1997, gross interest income of $3,426
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the period. No interest on such loans was
included in income during the respective periods. At September 30, 1997,
management was not aware of any loans not currently classified as non-accrual,
90 days past due or restructured but which may be so classified in the near
future because of concerns over the borrower's ability to comply with repayment
terms.

      Federal and state regulations require each banking institution to
classify its asset quality on a regular basis. In addition, in connection with
examinations of such banking institutions, federal and state examiners have
authority to identify problem assets and, if appropriate, classify them. An
asset is classified substandard if it is determined to be inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. As a general rule, the Bank will classify a loan as
substandard if the Bank can no longer rely on the borrower's income as the
primary source for repayment of the indebtedness and must look to secondary
sources such as guarantors or collateral. An asset is classified as doubtful if
full collection is highly questionable or improbable. An asset is classified as
loss if it is considered uncollectible, even if a partial recovery could be
expected in the future. The regulations also provide for a special mention
designation, described as assets which do not currently expose a banking
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention. Assets classified as substandard or doubtful require a banking
institution to establish general allowances for loan losses. If an asset or
portion thereof is classified loss, a banking institution must either establish
specific allowances for loan losses in the amount of the portion of the asset
classified loss, or charge off such amount. Examiners may disagree with a
banking institution's classifications and amounts reserved. If a banking
institution does not agree with an examiner's classification of an asset, it
may appeal this determination to the FDIC Regional Director. At September 30,
1997, the Bank had no assets classified as special mention or doubtful, and $
101,000 in assets designated as substandard and $6,000 classified as loss.

      In originating loans, the Bank recognizes that credit losses will occur
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain an adequate
general allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Further, after properties are acquired following loan defaults, additional
losses may occur with respect to such properties while the Bank is holding them
for sale. The Bank increases its allowances for loan losses and losses on real
estate owned by charging provisions for possible losses against the Bank's
income. Specific reserves also are recognized against specific assets when
warranted.

      Results of recent examinations by bank regulators indicate that these
regulators may be applying more conservative criteria in evaluating real estate
market values, requiring significantly increased provisions for potential loan
losses. While Falmouth believes it has established its existing allowances for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing the Bank's loan portfolio,
will not request the Bank to increase its allowance for loan losses, thereby
negatively affecting the Bank's financial condition and earnings.

      In December 1993, the banking regulatory agencies, including the FDIC,
adopted a policy statement regarding maintenance of an adequate allowance for
loan and lease losses and an effective loan review system. This policy includes
an arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of the
industry as a whole. Examiners will review an institution's allowance for loan
losses and compare it against the sum of (i) 50% of the portfolio that is
classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and circumstances
as of the evaluation date. This amount is considered neither a "floor" nor a
"safe harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.

      The following table analyzes activity the Bank's allowance for loan
losses for the periods indicated.

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                     ---------------------------------------------------------
                                                       1997        1996        1995        1994        1993
                                                     ---------   ---------   ---------   ---------   ---------
                                                                       (Dollars in thousands)

<S>                                                  <C>         <C>         <C>         <C>         <C>
Average loans, net................................   $ 47,288    $ 36,387    $ 30,244    $ 28,283    $ 29,563
Period-end total loans............................     54,382      40,735      32,948      27,894      29,233
Allowance for possible loan losses at beginning 
 of period........................................        498         445         310         277         313
Loans charged-off.................................         --          --          --          (2)        (37)
Plus recoveries...................................          3           2         135          26           1
Provision charged to operations...................         --          51          --           9          --
                                                     --------------------------------------------------------
Allowance for possible loan losses at end of 
 period...........................................   $    501    $    498    $    445    $    310    $    277
                                                     ========================================================
Ratios:
  Allowance for possible loan losses as a 
   percentage of period end total loans...........        .92%       1.22%       1.35%       1.11%        .95%
  Allowance for possible loan losses as a
   percentage of non-performing loans.............   1,670.00%   3,557.14%         --%      96.27%      80.99%
  Net charge-offs to average loans, net...........         --          --          --          --         .12
  Net charge-offs to allowance for possible loan
   losses.........................................         --          --          --          --       13.36
</TABLE>

      The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any loan category.

<TABLE>
<CAPTION>
                                  1997               1996               1995               1994               1993
                            ----------------   ----------------   ----------------   ----------------   ----------------
                                    Percent            Percent            Percent            Percent            Percent
                                    of Loans           of Loans           of Loans           of Loans           of Loans
                                    in Each            in Each            in Each            in Each            in Each
                                    Category           Category           Category           Category           Category
                                    to Total           to Total           to Total           to Total           to Total
                            Amount   Loans     Amount   Loans     Amount   Loans     Amount   Loans     Amount   Loans
                            ------  --------   ------  --------   ------  --------   ------  --------   ------  --------
                                                              (Dollars in thousands)

<S>                         <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
Real estate mortgage:
  Residential               $ 363     86.88%   $ 428     82.57%   $ 295     78.67%   $ 188     78.33%   $ 199     78.05%
  Commercial                   64      4.46%      32     10.56       96     10.67      103     11.06       63      9.83%
  Commercial loans, other      38      1.98%       8       .91       32      2.49       --        --       --        --
  Consumer, including home
   equity loans                36      6.68%      30      5.96       22      8.17       19     10.61       15     12.12%
                            -------------------------------------------------------------------------------------------
      Total allowance for 
       loan losses          $ 501    100.00%   $ 498    100.00%   $ 445    100.00%   $ 310    100.00%   $ 277    100.00%
                            ===========================================================================================
</TABLE>

Investment Activities

      General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net withdrawals from savings accounts and current
borrowings. It has been generally the Bank's policy to maintain a liquidity
portfolio in excess of regulatory requirements. At September 30, 1997, the
Bank's liquidity ratio was 56.05%. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives, management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities, management's expectations of the level of yield that will
be available in the future and management's projections as to the short-term
demand for funds to be used in Falmouth's loan origination and other
activities.

      Interest income from investments in various types of liquid assets
provides a significant source of revenue for the Bank. In the late 1980s, the
Bank maintained its conservative underwriting standards in an effort to avoid
asset quality problems and chose instead to invest excess liquidity in its
investment portfolio. The Bank's short-term investments include United States
Treasury securities and United States Agency securities, commercial paper, bank
certificates of deposits, equity securities, short-term corporate debt
securities and overnight federal funds. The balance of the securities
investments maintained by the Bank in excess of regulatory requirements
reflects management's historical objective of maintaining liquidity at a level
that assures the availability of adequate funds, taking into account
anticipated cash flows and available sources of credit, for meeting withdrawal
requests and loan commitments and making other investments.

      The Bank purchases securities through a primary dealer of United States
Government obligations or such other securities dealers authorized by the Board
of Directors and requires that the securities be delivered to the safekeeping
agent (First National Bank of Boston) before the funds are transferred to the
broker or dealer. The Bank purchases investment securities pursuant to an
investment policy established by the Board of Directors.

      All securities and investments are recorded on the books of the Bank in
accordance with generally accepted accounting principles. The Bank does not
purchase securities and investments for trading. Effective October 1, 1994, the
Bank implemented SFAS 115. Available-for-sale securities are reported at fair
value with unrealized gains or losses reported as a separate component of net
worth. All purchases of securities and investments conform to the Bank's
interest rate risk policy.

      The following tables sets forth the scheduled maturities, carrying
amounts, average yields, amortized cost and market value for the Bank's
investment securities at September 30, 1997.

<TABLE>
<CAPTION>
                                                                      September 30, 1997
                            ------------------------------------------------------------------------------------------------------
                            One Year or Less                                           More than Ten 
                                  Years        One to Five Years  Five to Ten Years        Years        Total Investment Portfolio
                            -----------------  -----------------  -----------------  -----------------  --------------------------
                            Carrying  Average  Carrying  Average  Carrying  Average  Carrying  Average  Carrying  Average  Market
                             Amount    Yield    Amount    Yield    Amount    Yield    Amount    Yield    Amount    Yield   Amount
                            --------  -------  --------  -------  --------  -------  --------  -------  --------  -------  -------
                            (Dollars in thousands)

<S>                         <C>        <C>      <C>       <C>     <C>        <C>     <C>         <C>       <C>      <C>     <C>
U.S. Government 
 Obligations.............   $ 6,809    5.85%   $ 6,814    6.31%   $ 1,000    6.13%   $     --      --%   $ 14,623   6.09%  $14,634
Mortgage-backed 
 Securities..............        --      --         --      --        583    5.05       2,828    7.51       3,411   7.09     3,434
Corporate Notes and 
 Bonds...................     5,407    6.46      3,794    7.91      1,092    8.35          --      --      10,293   7.20    10,302
                            -------            -------            -------            --------            --------          -------
      Total..............   $12,216    6.12     10,608    6.89    $ 2,675    6.80    $  2,828    7.51      28,327   6.62    28,370
                            =======            =======            =======            ========            ========          =======
Marketable Equity
 Securities..............                                                                                   7,670   4.87     7,670
FHLB Stock...............                                                                                     405   5.67       405
                                                                                                         --------          -------
      Total Investment 
       Portfolio.........                                                                                $ 36,402   6.24   $36,445
                                                                                                         ========          =======
</TABLE>

<TABLE>
<CAPTION>
                                                                    September 30, 1997
                                            -------------------------------------------------------------------
                                                   Available-for-Sale                  Held-to-Maturity
                                            --------------------------------   --------------------------------
                                            Amortized   Market                 Amortized   Market
                                              Cost       Value    Percent(1)     Cost       Value    Percent(2)
                                            ---------   -------   ----------   ---------   -------   ----------
                                                                  (Dollars in thousands)

<S>                                          <C>        <C>         <C>        <C>         <C>         <C>
Investment securities(3):
  U.S. government obligations............    $11,486    $11,529      45.3%     $ 3,095     $ 3,104      29.4%
  Other bonds and obligations............      3,448      3,468      13.6        6,824       6,834      64.9
  Marketable equity securities...........      7,087      7,670      30.1           --          --        --
  Mortgage-backed securities(4)..........      2,755      2,814      11.0          597         621       5.7
                                             ----------------------------------------------------------------
      Total Investment Portfolio.........    $24,776    $25,481     100.0%     $10,516     $10,559     100.0%
                                             ================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                     September 30,
                                              -----------------------------------------------------------
                                                    1997                 1996                 1995
                                              -----------------    -----------------    -----------------
                                              Amount    Percent    Amount    Percent    Amount    Percent
                                              -------   -------    -------   -------    -------   -------
                                                                 (Dollars in thousands)
<S>                                           <C>        <C>       <C>        <C>       <C>        <C>
Investment securities(3):
  U.S. government obligations............     $14,624     40.6%    $25,486     55.9%    $19,301     54.3%
  Other bonds and obligations............      10,292     28.6      10,440     22.9       7,732     21.7
  Marketable equity securities...........       7,670     21.3       6,764     14.9       6,583     18.5
  Mortgage-backed securities(4)..........       3,411      9.5       2,863      6.3       1,960      5.5
                                              -----------------------------------------------------------
      Total Investment Portfolio.........     $35,997    100.0%    $45,553    100.0%    $35,576    100.0%
                                              ===========================================================
<FN>
-------------------
<F1>  As a percentage of market value.

<F2>  As a percentage of amortized cost.

<F3>  Includes $4.2 million invested in Bank Investment Fund One, a mutual bond
      fund offered by the Co-operative Central Bank, a quasi-governmental
      agency, and does not include interest-earning overnight deposits of
      $1,352,403 or Federal Home Loan Bank Stock of $405,200.

<F4>  Consists of collateralized mortgage obligations, GNMA and FHLMC 
      certificates.
</FN>
</TABLE>

Deposit Activity and Other Sources of Funds

      General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from principal repayments and interest payments on loans and investments as
well as other sources arising from operations in the production of net
earnings. Loan repayments and interest payments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources, or on a longer term basis for general business purposes.

      Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including passbook savings, NOW accounts, demand deposits, money
market accounts and certificates of deposit. Deposit account terms vary, with
the principal differences being the minimum balance required, the time periods
the funds must remain on deposit and the interest rate.

      The Bank's policies are designed primarily to attract deposits from local
residents and businesses rather than to solicit deposits from areas outside its
primary market. The Bank does not accept deposits from brokers due to the
volatility and rate sensitivity of such deposits. Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by the Bank on a
periodic basis. Determination of rates and terms are predicated upon funds
acquisition and liquidity requirements, rates paid by competitors, growth goals
and federal regulations.

      Management attributes the net decrease in deposits before interest
credited in recent years primarily to the interest rates offered by the Bank as
compared to alternative investments and increased competition from other
financial institutions.

      The following table sets forth the various types of deposit accounts at
Falmouth and the balances in these accounts at September 30, 1997.

<TABLE>
<CAPTION>
                                                                      At September 30,
                            -----------------------------------------------------------------------------------------------------
                                  1997                 1996                 1995                 1994                 1993
                            -----------------    -----------------    -----------------    -----------------    -----------------
                            Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent
                            -------   -------    -------   -------    -------   -------    -------   -------    -------   -------
                                                                    (Dollars in thousands)

<S>                         <C>       <C>        <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Savings deposits            $15,828     21.9%    $13,986     21.1%    $13,921     21.5%    $16,092     24.2%    $16,596     24.6%
NOW accounts                  6,983      9.7       5,674      8.5%      5,562      8.6%      5,261      7.9%      5,161      7.6
Money market deposits         9,111     12.6       7,770     11.7%      8,441     13.0%     10,268     15.5%     10,825     16.0
                            -----------------------------------------------------------------------------------------------------
      Total                  31,922     44.2      27,430     41.3%     27,924     43.1%     31,621     47.6%     32,582     48.2
                            =====================================================================================================

Demand deposits               3,136      4.4         947      1.4%        701      1.1%        141      0.2%         --       --
Certificates of deposit      37,133     51.4      38,066     57.3%     36,157     55.8%     34,666     52.2%     34,989     51.8
                            -----------------------------------------------------------------------------------------------------
      Total deposits        $72,191   100.00%    $66,443    100.0%    $64,782    100.0%    $66,428    100.0%    $67,571    100.0%
                            =====================================================================================================
</TABLE>

      For more information on the Bank's deposit accounts, see Note 6 of Notes
to Financial Statements.

      The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity at September 30,
1997.

<TABLE>
<CAPTION>

            Maturity Period                  Certificates of Deposit
            ---------------                  -----------------------
                                                 (In thousands)

            <S>                                      <C>
            0-12 months...................           $ 3,587
            1-2 years.....................               770
            2-3 years.....................                --
                                                     -------
            Total.........................           $ 4,357
</TABLE>

      The following table sets forth the deposit activity, exclusive of
mortgage escrow accounts, of the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                                Years Ended September 30,
                                                 --------------------------------------------------------
                                                   1997        1996        1995        1994        1993
                                                 --------    --------    --------    --------    --------
                                                                     (In thousands)

<S>                                              <C>         <C>         <C>         <C>         <C>
Deposits......................................   $179,911    $153,704    $ 84,785    $ 70,679    $ 73,404
Withdrawals...................................    176,904     155,067      88,973      73,950      76,675
                                                 --------------------------------------------------------

      Net increase (decrease) before interest
       credited...............................      3,007      (1,363)     (4,188)     (3,271)     (3,271)
Interest credited.............................      2,740       2,786       2,542       2,128       2,461
                                                 --------------------------------------------------------
      Net increase (decrease) in deposits.....   $  5,747    $  1,423    $ (1,646)   $ (1,143)   $   (810)
                                                 ========================================================
</TABLE>

      Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Boston to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB would be secured by the Bank's
stock in the FHLB and a portion of the Bank's mortgage loans. The Bank had no
FHLB advances outstanding at September 30, 1997.

      The FHLB of Boston functions as a central reserve bank providing credit
for savings institutions and certain other financial institutions. As a member,
the bank is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations of,
or guaranteed by the United States) provided certain standards related to
creditworthiness have been met.

Competition

      The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits primarily comes from larger commercial
banks and other savings institutions located in or near the Bank's primary
market area which generally have significantly greater financial and
technological resources than the Bank. Additional significant competition for
savings deposits comes from credit unions, money market funds and brokerage
firms. The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from commercial banks, other thrift institutions, mortgage bankers, mortgage
brokers and insurance companies. Management considers the Bank's competitors in
its market area to consist of 15 branches of financial institutions
headquartered outside of its market area. The Bank is the only independent
financial institution headquartered in Falmouth.

Employees

      At September 30, 1997, the Bank had 26 full-time and 6 part-time
employees. The Bank's employees are not represented by a collective bargaining
agreement, and the Bank considers its relationship with its employees to be
good.


                           FEDERAL AND STATE TAXATION

Federal Taxation

      General. The following is a discussion of material federal income tax
matters and does not purport to be a comprehensive description of the federal
income tax rules applicable to the Bank or the Company. The Bank has not been
audited by the Internal Revenue Service since 1975. For federal income tax
purposes, after the Reorganization, Bancorp and the Bank may file consolidated
income tax returns and report their income on a fiscal year basis using the
accrual method of accounting and will be subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's tax reserve for bad debts, discussed below.

      Tax Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Tax Act"), which was enacted on August 20, 1996, made significant changes
to provisions of the Internal Revenue Code of 1986 (the "Code") relating to a
savings institution's use of bad debt reserves for federal income tax purposes
and requires such institutions to recapture (i.e., take into income) certain
portions of their accumulated bad debt reserves. The effect of the 1996 Tax Act
on the Bank is discussed below. Prior to the enactment of the 1996 Tax Act, the
Bank was permitted to establish tax reserves for bad debts and to make annual
additions thereto, which additions, within specified formula limits, were
deducted in arriving at the Bank's taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, was permitted to be computed using an amount based
on a six-year moving average of the Bank's charge-offs for actual losses (the
"Experience Method"), or a percentage equal to 8% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. The Bank's deduction with respect to non-qualifying
loans was required to be computed under the Experience Method. Each year the
Bank reviewed the most favorable way to calculate the deduction attributable to
an addition to the tax bad debt reserves, which historically has been the PTI
Method.

      The 1996 Tax Act. Under the 1996 Tax Act, the PTI Method was repealed for
savings institutions and the Bank will be required to use only the Experience
Method of computing additions to its bad debt reserves for taxable years
beginning with the taxable year beginning October 1, 1996. In addition, the
Bank will be required to recapture (i.e., take into income) over a six year
period the excess of the balance of its bad debt reserves for losses on
nonqualifying and qualifying loans as of September 30, 1996 over the greater of
(a) the balance of such reserves as of September 30, 1988 or (b) an amount that
would have been the balance of such reserves as of September 30, 1996 had the
Bank always computed the additions to its reserves using the Experience Method.
However, under the 1996 Act, such recapture requirements will be suspended for
each of the Bank's two successive taxable years beginning October 1, 1996 in
which the Bank originates a minimum amount of certain residential loans during
such years that is not less than the average of the principal amounts of such
loans made by the Bank during its six taxable years preceding October 1, 1996.
The Bank's post-September 30, 1988 nonqualifying and qualifying bad debt
reserves at September 30, 1997 was approximately $239,000 which will require
the Bank to report an additional tax liability of approximately $98,000. Since
the Bank has already provided a deferred income tax liability of this amount
for financial reporting purposes, there will be no adverse impact to the Bank's
financial condition or results of operations from the enactment of this
legislation.

      Distributions. Under the 1996 Tax Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of September 30, 1988) and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non- dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.

      The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in income for
federal income tax purposes, assuming a 34% federal corporate income tax rate.
The Bank does not intend to pay dividends that would result in a recapture of
any portion of its tax bad debt reserves.

      Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, the Bank's AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before
January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with
certain modifications) over $2 million is imposed on corporations, including
the Bank, whether or not an AMT is paid. The Bank does not expect to be subject
to the AMT, but may be subject to the environmental tax liability.

      Elimination of Dividends; Dividends Received Deduction. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. A 70% dividends received deduction
generally applies with respect to dividends received from domestic corporations
that are not members of such affiliated group, except that an 80% dividends
received deduction applies if Bancorp and the Bank own more than 20% of the
stock of a corporation paying a dividend.

State Taxation

      Massachusetts Taxation. The Bank currently files a separate Massachusetts
excise tax return, based on net income. Prior to July, 1995, the Bank was
subject to an annual Massachusetts excise (income) tax equal to 12.54% of its
pre-tax income. In 1995, legislation was enacted to reduce the Massachusetts
bank excise (income) tax rate and to allow Massachusetts-based financial
institutions to apportion income earned in other states. Further, this
legislation expands the applicability of the tax to non-bank entities and
out-of-state financial institutions. The Massachusetts excise tax rate for
co-operative banks is currently 11.32% of federal taxable income, adjusted for
certain items. It is anticipated that this rate will be gradually reduced over
the next few years so that the Bank's tax rate will become 10.5% by March 31,
2000. Taxable income includes gross income as defined under the Code, plus
interest from bonds, notes and evidences of indebtedness of any state,
including Massachusetts, less deductions, but not the credits, allowable under
the provisions of the Code. No deductions, however, are allowed for dividends
received until July 1, 1999. In addition, carryforwards and carrybacks of net
operating losses are not allowed.

      The Bank's active subsidiary, Falmouth Securities Corporation, was
established solely for the purpose of acquiring and holding investments which
are permissible for banks to hold under Massachusetts law. Falmouth Securities
Corporation has applied to the Massachusetts Department of Revenue to qualify
as a "security corporation" under Massachusetts law, qualifying it to take
advantage of the 1.32% income tax rate on gross income applicable to companies
that are so classified.

      The Bank and the Company are not permitted to file a combined
Massachusetts excise tax return. The Company will be subject to Massachusetts
corporate excise tax, which is determined by two measures: (1) the income
measure, a tax of 9.5% on net income attributable to Massachusetts; and (2) the
non-income measure, a tax of $2.60 per $1,000 imposed on either (a) tangible
property, if the corporation is a tangible property corporation, or (b) net
worth, if the corporation is an intangible property corporation. Unlike the
definition of net income for purposes of the Bank's taxation, net operating
loss carryovers and a 95% dividends received deduction for intercompany
dividends is permissible for corporations.

      For additional information regarding taxation, see Note 7 of the Notes to
Financial Statements.

      Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.


                           REGULATION AND SUPERVISION

General

      As a co-operative bank chartered by the Commonwealth of Massachusetts
whose deposits are insured by the BIF of the FDIC, the Bank is subject to
extensive regulation under state law with respect to many aspects of its
banking activities; this state regulation is administered by the Division of
Banks. In addition, the FDIC levies assessments or deposit insurance premiums
and is vested with authority to supervise the Bank and to exercise a broad
range of enforcement powers. Finally, the Bank is required to maintain reserves
against deposits according to a schedule established by the Federal Reserve
System. These laws and regulations have been established primarily for the
protection of depositors and the deposit insurance fund, not the Company's
stockholders.

      The following references to the laws and regulations under which the Bank
is regulated are brief summaries thereof, do not purport to be complete and are
qualified in their entirety by reference to such laws and regulations.

Federal Banking Regulations

      Capital Requirements. Under FDIC regulations, insured state-chartered
banks that are not members of the Federal Reserve System ("state non-member
banks") are required to maintain minimum levels of capital. State non-member
banks must satisfy a leverage capital ratio of Tier 1 capital to total assets
of at least 3% if the FDIC determines that the institution is not anticipating
or experiencing significant growth and has well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity,
good earnings and is in general a strong banking organization, rated composite
1 under the Uniform Financial Institutions Ranking System (the CAMEL rating
system) established by the Federal Financial Institutions Examination Council.
For all but the most highly rated institutions meeting the conditions set forth
above, the minimum leverage capital ratio is 3% plus an additional "cushion"
amount of at least 100 to 200 basis points. Tier 1 capital is the sum of common
stockholders' equity, noncumulative perpetual preferred stock (including any
related surplus) and minority investments in certain subsidiaries, less most
intangible assets.

      The FDIC has also adopted risk-based capital guidelines to which the Bank
is subject. The guidelines establish a systematic analytical framework designed
to make regulatory capital requirements sensitive to differences in risk
profiles among banking organizations. The FDIC guidelines require state
non-member banks to maintain certain levels of regulatory capital in relation
to regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based
capital ratio." Risk-based capital ratios are determined by allocating assets
and specified off- balance sheet items to four risk-weighted categories ranging
from 0% to 100%, with higher levels of capital being required for the
categories perceived as representing greater risk. Under the FDIC's
risk-weighting system, cash and securities backed by the full faith and credit
of the U.S. government are given a 0% risk weight. Mortgage-backed securities
that qualify under the Secondary Mortgage Enhancement Act, including those
issued, or fully guaranteed as to principal and interest, by the FNMA or the
Federal Home Loan Mortgage Corporation ("FHLMC"), are assigned a 20% risk
weight. Single-family first mortgages not more than 90 days past due with
loan-to-value ratios under 80%, multi-family mortgages (maximum 36 dwelling
units) with loan-to-value ratios under 80% and average annual occupancy rates
over 80%, and certain qualifying loans for the construction of one- to
four-family residences pre-sold to home purchasers, are assigned a risk weight
of 50%. Consumer loans and commercial real estate loans, repossessed assets and
assets more than 90 days past due, as well as all other assets not specifically
categorized, are assigned a risk weight of 100%.

      State non-member banks must maintain a minimum ratio of qualifying total
capital to risk-weighted assets of at least 8%, of which at least one-half must
be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus
Tier 2 or supplementary capital items, which include allowances for loan losses
in an amount of up to 1.25% of risk-weighted assets, cumulative preferred
stock, preferred stock with a maturity of over 20 years, and certain other
capital instruments. The includable amount of Tier 2 capital cannot exceed the
amount of the institution's Tier 1 capital. Qualifying total capital is further
reduced by the amount of the bank's investments in banking and finance
subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks and
certain other deductions.

      The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
for insured institutions to ensure that those standards take adequate account
of interest-rate risk ("IRR"), concentration of credit risk, and the risk of
nontraditional activities, as well as to reflect the actual performance and
expected risk of loss on multi-family residential loans. In August 1995, the
FDIC, along with the other federal banking agencies, adopted a regulation
providing that the agencies will take account of the exposure of a bank's
capital and economic value to the risks of changes in interest rates in
assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank, and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
also issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a previously issued proposal
to develop a supervisory framework for measuring interest rate risk and to
require an explicit capital component for interest rate risk.

      The following table shows the Bank's leverage capital ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at September
30, 1997. The Bank exceeded the minimum capital adequacy requirements at
September 30, 1997.

<TABLE>
<CAPTION>
                                               At September 30, 1997
                                 -------------------------------------------------
                                                                         Percent
                                 Capital    Percent of      Capital         of
                                 Amount     Assets(1)     Requirement    Assets(1)
                                 -------    ----------    -----------    ---------
                                               (Dollars in thousands)

<S>                              <C>          <C>           <C>            <C>
Tier 1 leverage capital          $22,390      23.64%        $3,789         4.00%
Tier 1 risk-based capital         22,390      41.36          2,166         4.00
Total risk-based capital          22,891      42.28          4,331         8.00

<FN>
-------------------
<F1>  For purposes of calculating the Tier 1 leverage capital ratio, assets
      include adjusted total average assets. In calculating Tier 1 risk-based
      capital and total risk-based capital ratio, assets include total
      risk-weighted assets.
</FN>
</TABLE>

Enforcement

      The FDIC has extensive enforcement authority over insured co-operative
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
orders and to remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
to unsafe or unsound practices.

      The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank was "critically undercapitalized" on average during the
calendar quarter beginning 270 days after the date on which the bank became
"critically undercapitalized." For this purpose, "critically undercapitalized"
means having a ratio of tangible capital to total assets of less than 2%. The
FDIC may also appoint a conservator or receiver for a state bank on the basis
of the institution's financial condition or upon the occurrence of certain
events, including: (i) insolvency (whereby the assets of the bank are less than
its liabilities to depositors and others); (ii) substantial dissipation of
assets or earnings through violations of law or unsafe or unsound practices;
(iii) existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the bank will be unable to meet the demands of its depositors
or to pay its obligations in the normal course of business; and (v)
insufficient capital, or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.

Deposit Insurance

      The FDIC has adopted a risk-based deposit insurance assessment system.
The FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information that the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for BIF deposits currently range from 0 basis points
to 27 basis points. The Bank's assessment rate is currently 0 basis points. The
FDIC is authorized to raise the assessment rates in certain circumstances,
including to maintain or achieve the designated reserve ratio of 1.25%, which
requirement the BIF currently meets. The FDIC has exercised its authority to
raise rates in the past and may raise insurance premiums in the future. If such
action is taken by the FDIC, it could have an adverse effect on the earnings of
the Bank. In addition, recent legislation requires BIF-insured institutions
like the Bank to assist in the payment of FICO bonds.

      Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the FICO bonds was expanded to add,
beginning January 1, 1997, the deposits of BIF-insured institutions, such as
the Bank. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits.
The annual rate of assessments for the payments on the FICO bonds for the
semi-annual period beginning on January 1, 1997 was 0.0130% for BIF-assessable
deposits and 0.0648% for SAIF-assessable deposits and for the semi-annual
period beginning on July 1, 1997 was 0.0126% for BIF-assessable deposits and
0.0630% for SAIF-assessable deposits.

      Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the Division. The management of the Bank
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.

Transactions with Affiliates and Insiders

      Transactions between state non-member banks and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
bank is any company or entity which controls, is controlled by or is under
common control with the bank but does not include a subsidiary of the bank.
Generally, Section 23A (i) limits the extent to which the bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital and surplus, and contains an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20% of such capital and surplus and (ii) requires that all such transactions
be on terms that are consistent with safe and sound banking practices. The term
"covered transaction" includes the making of loans, purchase of assets,
issuance of guarantees and similar other types of transactions. In addition,
most extensions of credit by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100% to 130% of the loan amounts, depending
on the type of collateral. Section 23B requires that any covered transaction,
and certain other transactions, including the bank's sale of assets and
purchase of services from an affiliate must be on terms that are substantially
the same, or at least as favorable, to the institution as those that would
prevail in a comparable transaction with a non-affiliate.

      Banks are also subject to the restrictions contained in Section 22(h) of
the Federal Reserve Act and the FRB's Regulation O thereunder on loans to
executive officers, directors and principal stockholders. Under Section 22(h),
loans to a director, an executive officer or a holder of more than 10% of the
shares of a bank, as well as certain affiliated interests of such persons, may
not exceed, together with all other outstanding loans to such person and
affiliated interests, the loans-to-one-borrower limit applicable to national
banks (generally 15% of an institution's unimpaired capital and surplus) and
all loans to all such persons in the aggregate may not exceed an institution's
unimpaired capital and unimpaired surplus. Regulation O also prohibits the
making of loans in an amount greater than the lesser of $25,000 or 5% of
capital and surplus but in any event over $500,000, to a director, executive
officer and greater than 10% stockholder of a bank, and the respective
affiliates of such a person, unless such loans are approved in advance by a
majority of the board of directors of the bank, with any "interested" director
not participating in the voting. Further, the FRB pursuant to Regulation O
requires that loans to directors, executive officers and principal stockholders
(a) be made on terms substantially the same as those that are offered in
comparable transactions to persons not affiliated with the bank and (b) follow
credit underwriting procedures not less stringent than those prevailing for
comparable transactions with persons not affiliated with the bank. Regulation O
also prohibits a depository institution from paying, with certain exceptions,
an overdraft of any of the executive officers or directors of the institution
or any of its affiliates unless the overdraft is paid pursuant to written
pre-authorized extension of interest-bearing extension of credit or transfer of
funds from another account at the bank.

      State chartered non-member banks are further subject to the requirements
and restrictions against certain tying arrangements and on extensions of credit
involving correspondent banks. Specifically, a depository institution is
prohibited from extending credit to or offering any other service, or fixing or
varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain exceptions. In addition, a depository
institution with a correspondent banking relationship with another depository
institution is prohibited from extending credit to the executive officers,
directors, and holders of more than 10% of the stock of the other depository
institution, unless such extension of credit is on substantially the same terms
as those prevailing at the time for comparable transactions with other persons
and does not involve more than the normal risk of repayment or present other
unfavorable features.

Real Estate Lending Policies

      Under FDIC regulations which became effective March 19, 1993,
state-chartered nonmember banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interest in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards,
including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators.

      The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.

Standards for Safety and Soundness

      Under FDICIA, each federal banking agency is required to prescribe, by
regulation, safety and soundness standards for institutions under its
authority. The federal banking agencies, including the FDIC, have adopted
standards covering internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, employee compensation, fees, and benefits, asset quality and earnings
sufficiency. These standards are in the form of broad guidelines for
performance that generally leave to each institution the methods for achieving
the objectives. The Bank believes it meets the FDIC's safety and soundness
standards.

Federal Home Loan Bank System

      The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institution. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. Falmouth was in compliance with this requirement with an
investment in FHLB of Boston stock at September 30, 1997, of $405,200.

      The FHLB of Boston serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It offers
policies and procedures established by the FHFB and the Board of Directors of
the FHLB of Boston. Long-term advances may only be made for the purpose of
providing funds for residential housing finance.

Federal Reserve System

      Pursuant to regulations of the FRB, a bank must maintain average daily
reserves equal to 3.0% on the first $52 million of net transaction accounts,
above an exempt amount of $4.3 million, plus 10% on the remainder. This
percentage is subject to adjustment by the FRB. Because required reserves must
be maintained in the form of vault cash or in a non-interest bearing account at
a Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of September 30, 1997,
the Bank met its reserve requirements.


Massachusetts Banking Laws and Supervision

      Massachusetts co-operative banks such as the Bank are also regulated and
supervised by the Division of Banks. The Division of Banks is required to
regularly examine each state-chartered bank. The approval of the Division of
Banks is required to establish or close branches, to merge with another bank,
to form a bank holding company, to issue stock or to undertake many other
activities. Any Massachusetts bank that does not operate in accordance with the
regulations, policies and directives of the Division of Banks is subject to
sanctions. The Division of Banks may under certain circumstances suspend or
remove directors or officers of a bank who have violated the law, conducted a
bank's business in a manner which is unsafe, unsound or contrary to the
depositors' interests, or been negligent in the performance of their duties.

      All Massachusetts-chartered co-operative banks are required to be members
of the Co-operative Central Bank and are subject to its assessments. The
Co-operative Central Bank maintains the Share Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. In addition, the Co-operative Central Bank acts as a source
of liquidity to its members in supplying them with low-cost funds, and
purchasing certain qualifying obligations from them.

      Major changes in Massachusetts law in 1982 and 1983 substantially
expanded the powers of co-operative banks. Their powers were made virtually
identical to those of state-chartered commercial banks. The powers which
Massachusetts-chartered co-operative banks can exercise under these laws are
summarized below.

      Lending Activities. A wide variety of mortgage loans may be made.
Fixed-rate loans, adjustable-rate loans, variable-rate loans, participation
loans, graduated payment loans, construction loans, condominium and
co-operative loans, second mortgage loans and other types of loans may be made
in accordance with applicable regulations. Mortgage loans may be made on real
estate in Massachusetts or in another New England state if the bank making the
loan has an office there or under certain other circumstances. In addition,
certain mortgage loans may be made on improved real estate located anywhere in
the United States. Commercial loans may be made to corporations and other
commercial enterprises with or without security. With certain exceptions, such
loans may be made without geographic limitations. Consumer and personal loans
may be made with or without security and without geographic limitations. Loans
to individual borrowers generally will be limited to 20% of the total of the
Bank's capital accounts and stockholders' equity.

      Investments Authorized. Massachusetts-chartered co-operative banks have
broad investment powers under Massachusetts law, including so-called "leeway"
authority for investments that are not otherwise specifically authorized. The
investment powers authorized under Massachusetts law are restricted by federal
law to permit only investments of the kinds that would be permitted for
national banks. The Bank has authority to invest in all of the classes of loans
and investments that are permitted by its existing loan and investment
policies.

      Payment of Dividends. A co-operative bank only may pay dividends on its
capital stock if such payment would not impair the bank's capital stock and
surplus account. No dividends may be paid to stockholders of a bank if such
dividends would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.

      Branches. With the approval of the Division of Banks, bank branches may
be established in any city or town in Massachusetts. In addition, co-operative
banks may operate automated teller machines at any of their offices or, with
the approval of the Division of Banks, anywhere in Massachusetts. Sharing of
ATMs or "networking" is also permitted with the approval of the Division of
Banks. Massachusetts chartered co-operative banks may also operate ATMs outside
of Massachusetts if permitted to do so by the law of the jurisdiction in which
the ATM is located.

      Interstate Acquisitions. In 1996, the Massachusetts legislature passed a
new interstate banking statute in anticipation of the June 1, 1997 effective
date of the federal interstate banking law. Pursuant to this statute, an
out-of-state bank may (subject to various regulatory approvals and to
reciprocity in its home state) establish and maintain bank branches in
Massachusetts by (i) merging with a Massachusetts bank that has been in
existence for at least three years, (ii) acquiring a branch or branches of a
Massachusetts bank without acquiring the entire bank, or (iii) opening such
branches de novo. Massachusetts banks' ability to exercise similar interstate
banking powers in other states depends upon the laws of the other states. For
example, according to the law of the bordering state of New Hampshire,
out-of-state banks may acquire New Hampshire banks by merger, but may not
establish de novo branches in New Hampshire.

      Other Powers. Massachusetts-chartered co-operative banks may also lease
machinery and equipment, act as trustee or custodian for tax qualified
retirement plans, establish trust departments and act as professional trustee
or fiduciary, provide payroll services for their customers, issue or
participate with others in the issuance of mortgage-backed securities and
establish mortgage banking companies and discount securities brokerage
operations. Some of these activities require the prior approval of the Division
of Banks.

Regulation of Holding Company

      Federal Regulation. The Company is subject to examination, regulation and
periodic reporting under the BHCA, as administered by the FRB. The FRB has
adopted capital adequacy guidelines for bank holding companies on a
consolidated basis substantially similar to those of the FDIC for the Bank.

      The Company is required to obtain the prior approval of the FRB and the
Massachusetts Board of Bank Incorporation ("BBI") to acquire all, or
substantially all, of the assets or any bank of bank holding company. Prior FRB
and BBI approval would be required for the Company to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of
such bank or bank holding company.

      Bancorp will be required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of Bancorp's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.

      The status of Bancorp as a registered bank holding company under the BHCA
will not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.

      In addition, a bank holding company is prohibited generally from engaging
in, or acquiring 5% or more of any class of voting securities of any company
engaged in, non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the FRB to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to
be so closely related to banking as to be a proper incident thereto are: (i)
making or servicing loans; (ii) performing certain data processing services;
(iii) providing discount brokerage services; (iv) acting as fiduciary,
investment or financial advisor; (v) leasing personal or real property; (vi)
making investments in corporations or projects designed primarily to promote
community welfare; and (vii) acquiring a savings and loan association.

      Under FIRREA, depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a
commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would have potential
applicability if Bancorp ever acquired as a separate subsidiary a depository
institution in addition to the Bank. There are no current plans for such an
acquisition.

      Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal stockholders of the Bank, Bancorp,
any subsidiary of Bancorp and related interests of such persons. Moreover,
subsidiaries of bank holding companies are prohibited from engaging in certain
tie-in arrangements (with the holding company or any of its subsidiaries) in
connection with any extension of credit, lease or sale of property or
furnishing of services.

Federal Securities Laws

      The Company's Common Stock is registered with the SEC under Section 12(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") . The Company is
subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.


ITEM 2.  DESCRIPTION OF PROPERTY.

      The following table sets forth certain information at September 30, 1997
regarding Falmouth's office facilities, and certain other information relating
to the properties at that date.

<TABLE>
<CAPTION>
                                                                    Net Book Value
                               Year Completed                      at September 30,
                                or Acquired      Square Footage          1997
                               --------------    --------------    ----------------

<S>                                 <C>              <C>               <C>
Main Office:                        1978             10,696            $282,106
 20 Davis Straits
 Falmouth, MA 02540

Branch Offices:

  North Falmouth, MA                1997                400              23,321
  91 County Rd.
  N. Falmouth, MA 02556

  East Falmouth, MA                 1997              2,200             354,308
  775 E. Falmouth Hwy
  E. Falmouth, MA 02536
</TABLE>

      At September 30, 1997, the net book value of Falmouth's computer
equipment and other furniture, fixtures and equipment at its office totaled
$1.0 million. For more information, see Note 5 of Notes to Financial
Statements.

ITEM 3.  LEGAL PROCEEDINGS.

      Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors or
its officers is a party or to which any of its property is subject as of the
date of this Form 10-KSB.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.


                                    PART II


ITEM 5.  MARKET FOR THE BANK'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

      The following information included in the Falmouth Bancorp, Inc. 1997
Annual Report to Stockholders (the "Annual Report") is incorporated herein by
reference: "Market for the Bank's Common Stock."

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

      The following information included in the Falmouth Bancorp, Inc.1997
Annual Report to Stockholders (the "Annual Report") is incorporated herein by
reference: "Management's Discussion and Analysis of Financial Condition and
Results of Operations"

Asset/Liability Management

      A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets have longer terms to maturity than its primary source
of funds, i.e., deposit liabilities, increases in general interest rates will
generally result in an increase in the Bank's cost of funds before the yield on
its asset portfolio adjusts upwards. Banking institutions generally have sought
to reduce their exposure to adverse changes in interest rates by attempting to
achieve a closer match between the periods in which their interest-bearing
liabilities and interest-earning assets can be expected to reprice through the
origination of adjustable-rate mortgages and loans with shorter terms and the
purchase of other shorter term interest-earning assets.

      The term "interest rate sensitivity" refers to those assets and
liabilities which mature and reprice periodically in response to fluctuations
in market rates and yields. Thrift institutions historically have operated in a
mismatched position with interest-sensitive liabilities exceeding
interest-sensitive assets in the short-term time periods. As noted above, one
of the principal goals of the Bank's asset/liability program is to more closely
match the interest rate sensitivity characteristics of the asset and liability
portfolios.

      In order to properly manage interest rate risk, the Bank's Board of
Directors has an Executive Committee to monitor the difference between the
Bank's maturing and repricing assets and liabilities and to develop and
implement strategies to decrease the "negative gap" between the two. The
primary responsibilities of the committee are to assess the Bank's
asset/liability mix, recommend strategies to the Board of Directors that will
enhance income while managing the Bank's vulnerability to changes in interest
rates and report to the Board of Directors the results of the strategies used.

      Since the mid 1980s, the Bank has stressed the origination of
adjustable-rate residential mortgage loans and adjustable-rate home equity
loans. Historically, the Bank did not retain fixed rate loans with terms in
excess of 15 years in its portfolio. Beginning in March, 1995, the Bank
retained a portion of its fixed rate loans with terms in excess of 15 years in
the portfolio. At September 30, 1997, the Bank's loan portfolio included $26.0
million of adjustable-rate mortgages and $2.8 million of adjustable-rate home
equity loans which together represent 53.0% of the Bank's total loans.

      In order to increase the interest rate sensitivity of its assets, the
Bank has also maintained a consistent level of investment securities and other
assets of maturities of three years or less. At September 30, 1997, the Bank
had $15.7 million of investment securities maturing within one year or less and
$12.7 million of investment securities maturing over one through five years.

      In the future, in managing its interest rate sensitivity, the Bank
intends to continue to stress the origination of adjustable-rate mortgages and
loans with shorter maturities and the maintenance of a consistent level of
short-term securities.

Interest Rate Sensitivity Analysis

      The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities, and is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Generally, during a period of rising
interest rates, a negative gap would adversely affect net interest income while
a positive gap would result in an increase in net interest income, while
conversely during a period of falling interest rates, a negative gap would
result in an increase in net interest income and a positive gap would
negatively affect net interest income.

      The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997 which are
expected to mature or reprice in each of the time periods shown. The investment
securities and mortgage backed securities in the following table are presented
at amortized cost.

<TABLE>
<CAPTION>
                                                                 At September 30, 1997
                                                 -------------------------------------------------------
                                                             Over One    Over Five
                                                 One Year    Through      Through    Over Ten
                                                 or Less    Five Years   Ten Years    Years      Total
                                                 --------   ----------   ---------   --------   --------
<S>                                              <C>         <C>          <C>        <C>        <C>
Interest-earning assets:
  Investment securities.....................     $ 15,744    $ 10,581     $ 2,073    $     --   $ 28,398
  Mortgage-backed securities................           --          --         583       2,769      3,352
  Other interest-earning assets.............        1,395       4,233          --          --      5,628
  Adjustable rate 1-4 family loans..........       12,466      12,374       1,178          --     26,018
  Fixed rate 1-4 family loans...............          258         690       2,023      18,886     21,857
  Commercial real estate loans..............        4,418         631          --         113      5,162
  Consumer and commercial loans.............        1,223         122          --          --      1,345
                                                 -------------------------------------------------------
      Total.................................     $ 35,504    $ 28,631     $ 5,857    $ 21,768   $ 91,760
                                                 =======================================================
Interest-bearing liabilities:
  Certificates of deposit...................     $ 29,826    $  7,292     $    --    $     15   $ 37,133
  Money market accounts.....................        9,111          --          --          --      9,111
  NOW accounts..............................        6,983          --          --          --      6,983
  Passbook accounts.........................       15,828          --          --          --     15,828
  ESOP loan.................................           --         742          --          --        742
                                                 -------------------------------------------------------
      Total.................................     $ 61,748    $  8,034     $    --    $     15   $ 69,797
                                                 =======================================================
  Interest sensitivity gap..................      (26,244)     20,597       5,857      21,753     21,963
  Cumulative interest sensitivity gap.......      (26,244)     (5,647)        210      21,963
  Ratio of cumulative gap to total assets...      (27.23%)      (5.86%)       .22%      22.80%
</TABLE>

      Management believes the current one-year gap of negative 27.23% presents
a risk to net interest income should a sustained increase occur in the current
level of interest rates. If interest rates increase, the Bank's negative
one-year gap should cause the net interest margin to decrease. A conservative
rate-gap policy provides a stable net interest income margin. Accordingly,
management emphasizes a structured schedule of investments spread by term to
maturity with greater emphasis on maturities of one year or less. The preceding
table utilized no assumptions or adjustments regarding prepayment of loans and
decay rates based upon Falmouth's actual experience. Accordingly, it is
possible that the actual interest rate sensitivity of the Bank's assets and
liabilities could vary significantly from the information set forth in the
table due to market and other factors.

      Certain shortcomings are inherent in the method of analysis presented.
Although certain assets and liabilities may have similar maturity or periods of
repricing, they may react in different degrees to changes in the market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while rates on
other types of assets and liabilities may lag behind changes in market interest
rates. Certain assets, such as adjustable-rate mortgages, generally have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Additionally, an increased credit risk
may result as the ability of many borrowers to service their debt may decrease
in the event of an interest rate increase. Virtually all of the adjustable-rate
loans in the Bank's portfolio contain conditions which restrict the periodic
change in interest rate.

Average Balances, Interest and Average Yields

      The following tables set forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and
rates paid for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from monthly balances. Management does not believe that the use of
monthly balances instead of daily balances has caused any material difference
in the information presented. Interest earned on loan portfolios is net of
reserves for uncollected interest.

<TABLE>
<CAPTION>

                                                                     Year Ended September 30,
                                    --------------------------------------------------------------------------------------------
                                                1997                            1996                             1995
                                    ----------------------------    ----------------------------    ----------------------------
                                                         Average                         Average                         Average
                                    Average              Yield/     Average              Yield/     Average              Yield/
                                    Balance   Interest    Cost      Balance   Interest    Cost      Balance   Interest    Cost
                                    -------   --------   -------    -------   --------   -------    -------   --------   -------

<S>                                 <C>        <C>         <C>      <C>        <C>         <C>      <C>        <C>         <C>
Assets:
Interest-earning assets:
Loans, net:
  Mortgages                         $43,301    $3,416      7.89%    $32,693    $2,573      7.87%    $26,867    $2,113      7.86%
  Consumer and other                  3,987       360      9.03       3,694       393     10.64       3,377       313      9.27
                                    -------    ------               -------    ------               -------    ------
Total loans, net                     47,288     3,776      7.99      36,387     2,966      8.15      30,244     2,426      8.02
Investments                          34,120     2,085      6.11      37,086     2,154      5.81      34,096     2,031      5.96
Other earning assets                  7,372       398      5.40       7,203       456      6.33       5,633       358      6.36
                                    -------    ------               -------    ------               -------    ------
Total interest-earning assets        88,780     6,259      7.05      80,676     5,576      6.91      69,973     4,815      6.88%
                                               ------                          ------                          ------
Cash and due from banks               1,161                           1,080                             910
Other assets                          1,417                           1,387                           1,461
                                    -------                         -------                         -------
Total assets                        $91,358                         $83,143                         $72,344
                                    =======                         =======                         =======

Liabilities:
Interest-bearing liabilities:
Deposits:
  Savings deposits                  $14,118    $  360      2.55%    $13,829    $  366      2.65%    $14,143    $  357      2.53%
  NOW                                 5,690        54       .95       5,972        73      1.22       4,930        74      1.50
  Money market deposits               8,303       254      3.06       8,081       259      3.21       8,879       288      3.24
  Certificates of deposit            37,603     2,060      5.48      37,198     2,100      5.65      35,386     1,768      5.00
  Borrowed money                        785        66      8.41         429        35      8.16          --        --        --
                                    -------    ------               -------    ------               -------    ------
      Total interest-bearing 
       liabilities                   66,499     2,794      4.20      65,509     2,833      4.32%     63,338     2,487      3.93%
                                                         ------                ------                          ------
Non-interest bearing liabilities      2,617                           1,375                           1,008
                                    -------                         -------                         -------
Total liabilities                    69,116                          66,884                          64,346
Stockholders' equity                 22,242                          16,259                           7,998
                                    -------                         -------                         -------
      Total liabilities and 
       stockholders' equity         $91,358                         $83,143                         $72,344
                                    =======                         =======                         =======
Net interest and dividend income               $3,465                          $2,743                          $2,328
                                               ======                          ======                          ======
Interest rate spread                                       2.85%                           2.59%                           2.95%

Net interest margin                                        3.90%                           3.40%                           3.33%
Ratio of average interest-earning
 assets to average interest-
 bearing liabilities                                     133.51%                         123.15%                         110.48%
</TABLE>

Rate/Volume Analysis

      The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change
in rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated between changes in rate and
changes in volume.

<TABLE>
<CAPTION>
                                                       Year Ended September 30,
                                         ------------------------------------------------------
                                               1997 vs. 1996                1996 vs. 1995
                                            Increase (Decrease)          Increase (Decrease)
                                                  Due To                       Due To
                                         -------------------------    -------------------------
                                         Volume    Rate     Total     Volume    Rate     Total
                                         ------   -------   ------    ------   -------   ------
                                                            (In thousands)

<S>                                      <C>      <C>       <C>       <C>      <C>       <C>
Interest-earning assets:
  Loans                                  $  869   $  (59)   $  810    $  494   $    46   $  540
  Investments                              (167)      40      (127)      277       (56)     221
                                         ------------------------------------------------------
      Total interest-earning assets         702      (19)      683       771       (10)     761
                                         ------------------------------------------------------

Interest-bearing liabilities:
  Savings deposits                            8      (14)       (6)       (8)       16        8
  NOW                                        (3)     (16)      (19)       14       (15)      (1)
  Money Market deposits                       7      (12)       (5)      (27)       (2)     (29)
  Certificates of Deposit                    23      (63)      (40)       98       234      332
  ESOP loan                                  29        2        31        35        --       35
                                         ------------------------------------------------------
    Total interest-bearing liabilities       64     (103)      (39)      112       233      345
                                         ------------------------------------------------------
Net change in net interest income        $  638   $   84    $  722    $  659    $ (243)  $  416
                                         ======================================================
</TABLE>

Impact of New Accounting Standards

      In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transactions that are secured borrowings. SFAS No. 125 is effective
for transfers occurring after December 31, 1996. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB State No. 125, an Amendment of FASB Statement No. 125." In February 1997,
the FASB issued SFAS No. 128, "Earnings per Share," which provides for the
computation, presentation and disclosure requirements for earnings per share.
SFAS No. 128 simplifies the computation of earnings per share for common stock
and potential common stock. The adoption of SFAS Nos. 125, 127 and 128 is not
expected to have a material effect on the Bank's or the Company's future
financial condition, results of operations or reported results of operations.

      In June of 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). Accounting principles generally require all recognized
revenue, expenses, gains and losses to be included in net income. Various FASB
statements, however, require companies to report certain changes in assets and
liabilities as a separate component of the equity section of the balance sheet
such as unrealized gains and losses on available for sale securities. This such
item, along with net income, is a component of comprehensive income. SFAS 130
is effective for fiscal years beginning after December 15, 1997, and is not
expected to have a material impact on the Company.

      Also, in June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"). SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997 and is not expected to have a
material effect on the Company. SFAS 131 establishes standards for the way that
public companies report information about operating segments in annual
financial statements and selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments.

      SFAS 131 also requires companies to report information about the way that
the operating segments were determined, the product and services provided by
the operating segments, differences between the measurements used in reporting
segment information and those used by the company in its general purpose
financial statements, and changes in the measurement of segment amounts from
period to period.

Year 2000

      All of the material data processing of the Bank that could be affected by
this potential Year 2000 problem is provided by a third party service bureau.
The service bureau of the Bank has advised the Bank that it expects to resolve
any Year 2000 issues by December 31, 1998. However, if the service bureau is
unable to solve this potential problem in time, the Bank would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Bank.

      Internally, the Bank has determined that continued monitoring of the
progress made by outside vendors will be key to a successful move into the next
millennium. The Bank does not believe that the costs associated with its
actions and those of its vendors will be material.

      An FDIC off-site examinations was conducted on September 9, 1997 and
based upon the examination results, the Bank was considered to be (1) aware of
the Year 2000 issues; (2) advanced in reviewing the issues with outside
vendors; (3) advanced in evaluating internal software and hardware; (4) in
compliance with Year 2000 Director awareness; and (5) making progress with its
Year 2000 action plan.

ITEM 7.  FINANCIAL STATEMENTS

      The following information included in the Annual Report is incorporated
herein by reference: "Financial Statements and Notes to Financial Statements."

ITEM 8.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
         DISCLOSURE

      None.


                                    PART III

ITEM 9.  DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK

      (a)   Directors of the Bank
            ---------------------

      The following information included in the Proxy Statement is incorporated
herein by reference: "Proposal 1 -- Election of Directors."

      (b)   Principal Officers of the Company and the Bank
            ----------------------------------------------

      The following information included in the Proxy Statement is incorporated
herein by reference: "Management of the Company."

      (c)   Compliance with Section 16 (a) of the Exchange Act
            --------------------------------------------------

      The following information included in the Proxy Statement is incorporated
herein by reference: "Section 16(a) Beneficial Ownership Reporting Compliance."

ITEM 10. EXECUTIVE COMPENSATION

      The following information included in the Proxy Statement is incorporated
herein by reference: "Proposal 1 -- Election of Directors -- Directors'
Compensation," "-- Summary Compensation Table," "-- Certain Employee Benefit
Plans and Employment Agreement" and "-- Transactions with Certain Related
Persons."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following information included in the Proxy Statement is incorporated
herein by reference: "Stock Ownership of Management" and "Security Ownership of
Certain Beneficial Owners."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The following information included in the Proxy Statement is incorporated
herein by reference: "Transactions with Certain Related Persons."

ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K

      (a)   (1)   The following financial statements included in the 1997
                  Annual Report are incorporated herein by reference:

            Balance Sheets -- At September 30, 1997 and 1996;
            Statements of Income -- Years Ended September 30, 1997, 1996 and
             1995;
            Statements of Changes in Stockholders' Equity -- Years Ended
             September 30, 1997, 1996 and 1995;
            Statements of Cash Flows -- Years Ended September 30, 1997, 1996 
             and 1995; and
            Notes to Financial Statements -- Years Ended September 30, 1997,
             1996 and 1995

      (b)   Exhibits. The following exhibits are either filed as part of this
            report or are incorporated herein by reference:

             3.1   Certificate of Incorporation of Falmouth Bancorp, Inc.(1)

             3.2   By-laws of Falmouth Bancorp, Inc.(1)

             4.3   Specimen Stock Certificate of Falmouth Bancorp, Inc.(1) .
                   10.1 1997 Stock Option Plan for Outside Directors, Officers
                   and Employees of Falmouth Bancorp, Inc.(1)

            10.2   1997 Recognition and Retention Plan for Outside Directors,
                   Officers and Employees of Falmouth Bancorp, Inc.(1)

            10.3   Agreement and Plan of Reorganization by and among Falmouth
                   Co-operative Bank and Falmouth Bancorp, Inc., dated November
                   25, 1997 (1)

            10.4   Employment Agreement by and between Falmouth Co-operative
                   Bank and Santo Pasqualucci.(1)

            10.5   Employment Agreement by and between Falmouth Co-operative
                   Bank and George Young.(1)

            10.6   Falmouth Co-operative Bank Employee Stock Ownership Plan.(1)

            10.7   Falmouth Bancorp, Inc. Employee Stock Ownership Trust.(1)

            13     Annual Report to Stockholders for the Year Ended September
                   30, 1997.

            14     1997 Proxy Statement to Stockholders, dated December 23,
                   1997.(2)

            21     Subsidiaries of the Registrant.

            27     Financial Data Schedule.*

-------------------
(1)   Incorporated herein by reference Registration Statement on Form S-4
      (Registration No. 333- 16931), as filed with the Securities and Exchange
      Commission on November 27, 1996.

(2)   Incorporated by reference, to Schedule 14A filed with the Securities and
      Exchange Commission on December 23, 1997.

*     Filed in electronic format only.


b.    Reports on Form 8-K.

      None.


      This Form 10-KSB contains certain forward looking statements consisting
of estimates with respect to the financial condition, results of operations and
business of the Bank and the Company that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include: changes in general, economic and market conditions, or the
development of an adverse interest rate environment that adversely affects the
interest rate spread or other income anticipated from the Bank's or the
Company's operations and investments.



                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

FALMOUTH BANCORP, INC.

By: /s/ Santo P. Pasqualucci
    -------------------------------------------
        Santo P. Pasqualuuci
        President and Chief Executive Officer


      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>

               Name                                      Title                            Date
----------------------------------      ---------------------------------------     ------------------

<S>                                     <C>                                         <C>
/s/ Santo P. Pasqualucci                Director, President and Chief Executive     December 16, 1997
----------------------------------      Officer (Principal executive officer)
    Santo P. Pasqualucci

/s/ George E. Young, III                Vice President and Chief Financial          December 16, 1997
----------------------------------      Officer (Principal financial officer)
    George E. Young, III

/s/ John W. Holland, Jr.                Director                                    December 16, 1997
----------------------------------
    John W. Holland, Jr.

/s/ James A. Keefe                      Director                                    December 16, 1997
----------------------------------
    James A. Keefe

/s/ Gardner L. Lewis                    Director                                    December 16, 1997
----------------------------------
    Gardner L. Lewis

/s/ John J. Lynch, Jr.                  Director                                    December 16, 1997
----------------------------------
    John J. Lynch, Jr.

/s/ Ronald L. McLane                    Director                                    December 16, 1997
----------------------------------
    Ronald L. McLane

/s/ Eileen C. Miskell                   Director                                    December 16, 1997
----------------------------------
    Eileen C. Miskell

/s/ Robert H. Moore                     Director                                    December 16, 1997
----------------------------------
    Robert H. Moore

/s/ Walter A. Murphy                    Director                                    December 16, 1997
----------------------------------
    Walter A. Murphy

/s/ William E. Newton                   Director                                    December 16, 1997
----------------------------------
    William E. Newton

/s/ Armand Ortins                       Director                                    December 16, 1997
----------------------------------
    Armand Ortins
</TABLE>