SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One):

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934. For the fiscal year ended: September 30, 1997,

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR  15(d)  OF  THE  SECURITIES
     EXCHANGE ACT OF 1934. For the transition period from to .

Commission File No. 0-21113

                              AFSALA Bancorp, Inc.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

           Delaware                                      14-1793890
--------------------------------                     -------------------
 (State or Other Jurisdiction of                      (I.R.S. Employer
Incorporation or Organization)                       Identification No.)

161 Church Street, Amsterdam, New York                      12010
--------------------------------------                      -----
(Address of Principal Executive Offices)                  (Zip Code)

                                 (518) 842-5700
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:                None
                                                                           ----

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Securities  Exchange Act of 1934 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 contained in this form,  and no disclosure  will be
contained,  to the best of the  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. [ ]

         State issuer's revenues for its most recent fiscal year. $11,174,465

         As of December 12, 1997,  there were issued and  outstanding  1,388,440
shares of the registrant's Common Stock.

         Registrant's voting stock is listed on the Nasdaq National Market under
the symbol  "AFED."  The  aggregate  market  value of the  voting  stock held by
non-affiliates of the registrant, based on the closing price of the registrant's
Common Stock on December 12, 1997, was $22.5 million.

Transition Small Business Disclosure Format (check one) YES [ ] NO [X]

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the fiscal year ended
     September 30, 1997 (Part II).

2.   Portions of the Proxy Statement for the Annual Meeting of Stockholders  for
     the fiscal year ended September 30, 1997 (Part III).


<PAGE>



                                     PART I

Item 1.  Business
-----------------

General

         AFSALA  Bancorp,   Inc.  (the  "Company"  or  the  "Registrant")  is  a
Delaware-chartered  corporation  organized  in  June  1996 at the  direction  of
Amsterdam Federal Bank (the "Bank") to acquire all of the capital stock that the
Bank  issued  upon the  Bank's  conversion  from  the  mutual  to stock  form of
ownership  (the  "Conversion")  on September 30, 1996. As of September 30, 1997,
the  Company  had total  assets  of $160.4  million,  total  deposits  of $135.3
million,  and  stockholders'  equity of $20.6  million or 12.85% of total assets
under generally accepted accounting principles ("GAAP").  The only subsidiary of
the  Company is the Bank.  As such,  references  herein to the Bank  include the
Company unless the context otherwise indicates.

         The Company is a unitary savings and loan holding company which,  under
existing laws,  generally is not restricted in the types of business  activities
in which it may engage, provided that the Bank retains a specified amount of its
assets in housing-related  investments.  The Company does not employ any persons
other than  officers,  but utilizes  the support  staff of the Bank from time to
time.

         The Bank  attracts  deposits  from the  general  public  and uses  such
deposits primarily to originate loans,  including home equity loans,  secured by
first mortgages on one- to four-family  residences in its market areas. The Bank
also originates  consumer loans,  consisting of personal loans, home improvement
loans,  and passbook  loans,  and to a much lesser extent,  the Bank  originates
commercial real estate loans and other commercial loans. Although the total loan
portfolio still consists of a small amount of education  loans,  the Bank ceased
making such loans in June 1994.

         The principal  sources of funds for the Bank's  lending  activities are
deposits,  the repayment and maturity of loans and sale,  maturity,  and call of
securities,  and Federal Home Loan Bank ("FHLB") advances.  The principal source
of income is interest on loans and securities. The principal expense is interest
paid on deposits.

         The Bank is subject to examination and comprehensive  regulation by the
Office  of Thrift  Supervision  ("OTS")  and its  deposits  have been  federally
insured by the Savings Association  Insurance Fund ("SAIF") and its predecessor,
the Federal Savings and Loan Insurance  Corporation  ("FSLIC"),  since 1937. The
Bank is a member of and owns capital stock in the FHLB of New York, which is one
of the 12 regional banks in the FHLB System.

Market Area and Competition

         The Bank  operates  five  offices and an  operations  center.  The main
office,  the operations center, and two branch offices are located in Amsterdam,
New York,  in Montgomery  County.  One branch office which was opened in October
1994,  is in a Shop N Save  Supermarket  located in  Gloversville,  New York, in
Fulton County, and one branch office, which was opened in May 1995, is in a Shop
N Save Supermarket located in Oneonta,  New York, in Otsego County. Based on the
Bank's  branch  locations and deposit  activity,  the Bank has two market areas.
Both market areas are defined by existing  boundaries.  One market area consists
of the Cities of Amsterdam, Gloversville, Johnstown, and the Towns of Amsterdam,
Johnstown,  Florida, Mohawk,  Broadalbin,  Mayfield, and Perth. The other market
area  consists of the City of Oneonta and Town of Oneonta.  The Bank  expects to
open  another  branch  during  fiscal  1998 in a Price  Chopper  supermarket  in
Norwich, New York.


                                        2

<PAGE>



         Economic  growth in the Bank's market areas remains  dependent upon the
local  economy.  The  deposit  and loan  activity  of the Bank is  significantly
affected by economic conditions in its market areas. The economies of the Bank's
market areas have remained  stagnant for several years. The largest employers in
the Bank's market areas are smaller sized  manufacturers.  Trade,  service,  and
government  related  industries are other employers.  Because there are no major
employers in these market areas, many residents commute to Schenectady County or
the state capitol for employment.  The Bank has been able to increase its market
share in originating  first mortgage  loans on residential  property  within its
primary market areas,  even though total first mortgage loan originations in the
Bank's market areas have been declining.  The Bank has also increased its market
share of deposits and consumer loans for at least the last five years.

         The Bank has been  able to  maintain  its  position  in  mortgage  loan
originations,  market share, and deposit accounts throughout its market areas by
virtue of its local presence,  competitive  pricing, and referrals from existing
customers.  The Bank is one of many  financial  institutions  serving its market
areas.

         The  competition  for  deposits  comes  from  other  insured  financial
institutions such as commercial banks, thrift  institutions,  credit unions, and
multi-state  regional  banks in the Bank's market areas.  Competition  for funds
also includes a number of insurance products sold by local agents and investment
products  such as mutual funds and other  securities  sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other  insured  financial   institutions   such  as  commercial  banks,   thrift
institutions,  credit  unions,  and  multi-state  regional  banks,  and mortgage
bankers, many of whom have far greater resources than the Bank.

Lending Activities

         General. The Bank's loan portfolio  predominantly  consists of mortgage
loans secured by one- to four-family residences. The Bank emphasizes home equity
loans  secured  by  first  and  second  mortgage  loans  on one- to  four-family
residences.  The Bank also  originates  consumer  loans,  consisting of personal
loans, home improvement  loans, and passbook loans. To a lesser extent, the Bank
originates commercial real estate loans and other commercial loans. Although the
loan  portfolio  still consists of a small amount of education  loans,  the Bank
ceased making such loans in June 1994.

         At September  30,  1997,  loans  secured by first  mortgages on one- to
four-family  residences  totalled $44.9 million,  or 58.38%, of the Bank's total
loan  portfolio.  Prior to 1988, the Bank purchased  loans,  however,  it is the
current practice of the Bank not to purchase loans. Other than educational loans
which were  sold,  the Bank does not sell  loans,  and the Bank is  primarily  a
portfolio  lender.  For its mortgage loan portfolio,  the Bank originates  fixed
rate and adjustable-rate mortgage loans. At September 30, 1997,  adjustable-rate
residential   mortgage  loans  totalled   approximately  34.27%  of  the  Bank's
residential mortgage loans.

         Loan  originations  are generally  obtained  from  existing  customers,
members of the local community, and referrals from real estate brokers, lawyers,
accountants,  and current and past customers within the Bank's lending area. The
Bank  also  advertises  on an  extensive  basis in the  local  print  media  and
periodically  advertises on radio and television.  Mortgage loans  originated by
the Bank in its portfolio generally include due-on-sale clauses that provide the
Bank with the contractual  right to deem the loan immediately due and payable in
the event that the borrower  transfers  ownership  of the  property  without the
Bank's consent.



                                        3

<PAGE>



         Analysis of Loan Portfolio.  The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
                                                                                    September 30,
                                                          -----------------------------------------------------------------
                                                                      1997                                  1996
                                                          ----------------------------         ----------------------------
                                                               $                 %                  $                  %
                                                                             (Dollars in Thousands)
<S>                                                        <C>                <C>               <C>                 <C>   
Type of Loans:
Real Estate Loans:
  Residential..................................             $44,908            58.38%            $43,966             61.44%
  Commercial...................................               3,665             4.76               3,015              4.21
  Home equity .................................              17,677            22.98              14,666             20.50
                                                             ------            -----              ------             -----
     Total real estate loans...................              66,250            86.12              61,647             86.15
                                                             ------            -----              ------             -----
Consumer Loans:
  Personal secured(1)..........................               3,875             5.04               3,943              5.51
  Personal unsecured...........................                 475             0.62                 432              0.60
  Education....................................                  86             0.11                  91              0.13
  Home improvement.............................               1,790             2.32               1,560              2.18
  Passbook.....................................                 938             1.22                 779              1.09
                                                             ------           ------              ------            ------
     Total consumer loans......................               7,164             9.31               6,805              9.51
                                                             ------           ------              ------            ------
Commercial Loans...............................               3,513             4.57               3,104              4.34
                                                             ------           ------              ------            ------
     Total loans...............................              76,927           100.00%             71,556            100.00%
                                                                              ======                                ======
Less:
  Allowance for loan losses....................               1,108                                  879
                                                             ------                               ------
     Net loans receivable......................             $75,819                              $70,677
                                                             ======                               ======

</TABLE>
-------------------
(1)  Includes  loans secured by, among other  things,  automobiles,  boats,  and
     mobile homes.



                                        4

<PAGE>



         Loan  Maturity  Tables.  The  following  table sets forth the estimated
maturity of the Bank's loan  portfolio at September 30, 1997. The table does not
include  the  effects of  possible  prepayments  or  scheduled  repayments.  All
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
                                                                       At September 30, 1997
                                        ------------------------------------------------------------------------------------------
                                        Residential         Commercial           Commercial            Other
                                        Real Estate(1)      Real Estate            Loans               Loans               Total
                                        --------------      -----------            -----               -----               -----
                                                                          (In thousands)

<S>                                         <C>                <C>                  <C>                <C>                <C>    
Non-performing.................             $   312            $    --              $   10             $   147            $   469
                                             ======             ======               =====              ======             ======
Amounts Due:
Within 1 year..................             $   281             $   40              $1,534              $2,057            $ 3,912
1 to 5 years...................               7,221                591                 761               2,058             10,631
More than 5 years..............              55,082              3,034               1,218               3,050             62,384
                                             ------              -----               -----               -----             ------
Total due after one year.......              62,303              3,625               1,979               5,108             73,015
                                             ------              -----               -----               -----             ------
Total amount due...............             $62,584             $3,665              $3,513              $7,165            $76,927
                                             ======              =====               =====               =====             ======

Less:
Allowance for loan losses.....................................................................................              1,108
                                                                                                                           ------
  Net loans receivable........................................................................................            $75,819
                                                                                                                           ======
</TABLE>


---------------
(1)      Includes home equity loans.


         The  following  table  sets  forth  the  dollar  amount  of  all  loans
contractually  due after  September 30, 1998, and shows the amount of such loans
which have  pre-determined  interest rates and which have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
                                                                 At September 30, 1997
                                             Fixed Rates            Adjustable Rates           Total
                                             -----------            ----------------           -----
                                                                     (In Thousands)

<S>                                             <C>                      <C>                  <C>    
Residential real estate(1).........             $40,923                  $21,380              $62,303
Commercial real estate.............               3,033                      592                3,625
Commercial loans...................               1,979                       --                1,979
Other loans........................               5,066                       42                5,108
                                                 ------                   ------               ------
  Total............................             $51,001                  $22,014              $73,015
                                                 ======                   ======               ======
</TABLE>


-------------------
(1)      Includes home equity loans.

         One- to  Four-Family  Residential  Loans.  The Bank's  primary  lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property  located in the Bank's primary market areas.  The Bank
generally  originates  owner-occupied one- to four-family  residential  mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged  property without requiring mortgage  insurance.  The Bank will
originate a mortgage  loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property,  however,  mortgage insurance is
required for the amount in excess of 80% of such value. Non-owner-

                                        5

<PAGE>



occupied  residential  mortgage  loans are originated up to 75% of the lesser of
the appraised value or selling price of the property on a fixed rate basis only.
The Bank, on a very limited basis, also originates  construction permanent loans
on one- to four-family  residences.  The Bank retains all mortgage loans that it
originates.  Adjustable-rate  mortgage loans, which can adjust annually or every
three or five  years  over the life of the loan  depending  on the  terms of the
loan,  can  have  maturities  of up to 30  years.  Fixed  rate  loans  can  have
maturities of up to 15 or 20 years  depending on the terms of the loan. The Bank
also  originates a fixed rate 8 year balloon  loan with  principal  and interest
payments calculated using a 30 year amortization.

         For all adjustable-rate  mortgage loans, the Bank requires the borrower
to qualify at the fully  indexed  rate  after the first  adjustment.  The Bank's
adjustable-rate mortgage loans provide for periodic interest rate adjustments of
plus or minus 1% to 2% per year with a maximum  adjustment  over the term of the
loan as set forth in the loan agreement and usually ranges from 4% to 6.5% above
the initial  interest rate  depending on the terms of the loan.  Adjustable-rate
mortgage loans typically reprice every year, although some adjust every three or
five years, and provide for terms of up to 30 years with most loans having terms
of between 15 and 30 years. The Bank offers  adjustable-rate  loans with initial
interest rates set below the fully indexed rate.

         The Bank offers adjustable-rate  mortgage loans indexed to the one year
U.S.  Treasury  bill  rate.   Interest  rates  charged  on  mortgage  loans  are
competitively  priced based on market  conditions  and the Bank's cost of funds.
Generally,  the Bank's  standard  underwriting  guidelines  for  mortgage  loans
conform to the Federal National  Mortgage  Association  ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Bank's loans
can be sold in the secondary market.  However, it is the current practice of the
Bank to remain a portfolio lender.

         Commercial  Loans.  The Bank  originates a limited amount of commercial
real estate and other commercial loans.  Commercial real estate loans consist of
loans made for the  purpose of  purchasing  the  commercial  real estate used as
collateral  and includes loans secured by mixed  residential  and commercial use
property,  professional  office  buildings,  and restaurants.  Commercial loans,
other than  commercial  real  estate  loans,  consist of,  among  other  things,
commercial lines of credit,  commercial vehicle loans, and working capital loans
and are typically secured by residential or commercial property,  receivables or
inventory,  or some  other  form of  collateral.  The Bank  requires  a personal
guarantee  from the principal of the  commercial  enterprise  on all  commercial
loans.  Loans secured by commercial  property may be originated in amounts up to
75% of the appraised value for a maximum term of 15 years.

         Home Equity  Loans.  The Bank  originates  home equity loans secured by
first and second mortgages on residential real estate.  The loans are originated
as fixed rate loans with terms of 3 to 15 years. The loans are generally subject
to  an  80%  combined  loan-to-value  ratio,  including  any  other  outstanding
mortgages  or  liens.  However,  the  Bank  may  occasionally  permit  a  higher
loan-to-value  ratio based on other  factors,  such as the  strength  and credit
history  of the  applicant  and the terms of the loan.  The Bank has  emphasized
these loans as a means of supplementing its mortgage loan origination volume.

         Consumer  Loans.  The Bank offers  consumer loans in order to provide a
wider range of financial services to its customers. Federal savings associations
are  permitted to make secured and unsecured  consumer  loans up to 35% of their
assets. In addition,  savings  associations have lending authority above the 35%
limitation for certain consumer loans,  such as home equity,  home  improvement,
mobile home, and savings account or passbook loans. The Bank originates  secured
and unsecured  consumer loans,  consisting of personal loans,  home  improvement
loans, and passbook loans.


                                        6

<PAGE>



         Loan Underwriting  Risks.  Adjustable-rate  mortgage loans decrease the
risks associated with changes in interest rates by periodically  repricing,  but
involve other risks because as interest rates increase,  the underlying payments
by the borrower increase, thus increasing the potential for default. At the same
time, the marketability of the underlying  collateral may be adversely  affected
by higher interest rates. Upward adjustment of the contractual  interest rate is
also limited by the maximum periodic  interest rate adjustment  permitted by the
adjustable-rate  mortgage loan documents,  and, therefore is potentially limited
in  effectiveness  during periods of rapidly rising interest rates.  These risks
have not had an adverse effect on the Bank.

         While  commercial  real  estate and  consumer  or other  loans  provide
benefits to the Bank's asset/liability management program by reducing the Bank's
exposure to interest rate changes,  due to their  generally  shorter terms,  and
producing higher yields,  such loans may entail  significant  additional  credit
risks compared to owner-occupied residential mortgage lending. However, the Bank
believes that the higher yields and shorter  terms  compensate  the Bank for the
increased credit risk associated with such loans. In addition, home equity loans
provide  certain  benefits   compared  to  longer  term,  fixed  rate,  one-  to
four-family  residential  loans; home equity loans provide reduced interest rate
risk due to their  shorter  terms and  provide  higher  yields.  However,  these
benefits may not compensate for the increased  credit risk that results from not
holding the first lien on the underlying collateral for home equity loans.

         Commercial lending entails  significant  additional risks when compared
with one- to four-family  residential  lending.  For example,  commercial  loans
typically  involve larger loan balances to single borrowers or groups of related
borrowers,  the payment  experience on such loans  typically is dependent on the
successful  operation  of the  project  and  these  risks  can be  significantly
impacted by the cash flow of the borrowers  and supply and demand  conditions in
the market for commercial  office,  retail,  and warehouse  space. In periods of
decreasing  cash flows,  the  commercial  borrower may permit a lapse in general
maintenance of the property  causing the value of the  underlying  collateral to
deteriorate.

         In addition, due to the type and nature of the collateral, and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk  when  compared  with one- to  four-family  residential  lending.  Consumer
lending  collections  are  typically  dependent  on  the  borrower's  continuing
financial  stability,  and thus, are more likely to be adversely effected by job
loss, divorce,  illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted  consumer loan will not provide an adequate source of
repayment of the outstanding loan balance.  The remaining  deficiency often does
not warrant further  substantial  collection efforts against the borrower and is
usually turned over to a collection agency.

         Loan Approval  Authority  and  Underwriting.  The Bank has  established
various  lending  limits  for its  officers  and  maintains  an  Executive  Loan
Committee  comprised of the President,  Chief Lending Officer and two members of
the Board of Directors.  A report of all mortgage loans  originated is presented
to the Board of Directors monthly.  Upon receipt of a completed loan application
from a prospective  borrower,  a credit report is generally ordered,  income and
certain other  information is verified and, if necessary,  additional  financial
information  is  requested.  An  appraisal  from  an  independent  licensed  fee
appraiser of the real estate intended to be used as security for a proposed loan
is  obtained.  For  construction/permanent  loans,  funds  advanced  during  the
construction  phase are held in a  loan-in-process  account and disbursed  based
upon various  stages of completion in accordance  with the results of inspection
reports that are based upon physical  inspection of the  construction  by a loan
officer.  For real estate loans,  each title is reviewed by the attorney for the
Bank to determine the necessity for title insurance.  Historically, the Bank has
not required title  insurance  except in those  instances where the attorney has
seen a need for title insurance. Borrowers must also obtain fire and

                                        7

<PAGE>



casualty  insurance  (for  loans on  property  located  in a flood  zone,  flood
insurance  is required)  prior to the closing of the loan.  The Bank is named as
mortgagee/loss payee of this insurance.

         Loan  Commitments.  The Bank issues written  commitments to prospective
borrowers on all approved  mortgage loans which generally  expire within 60 days
of the date of issuance.  The Bank charges no commitment  fees or points to lock
in rates or to  secure  commitments.  In some  instances,  after a review of the
rate,  terms, and  circumstances,  commitments may be renewed or extended beyond
the 60 day limit.  At September 30, 1997,  the Bank had $866,000 of  outstanding
commitments on residential mortgage loans,  $150,000 of outstanding  commitments
on commercial  real estate loans,  and $589,000 in undisbursed  funds related to
construction  loans.  Management  believes that less than 5% of loan commitments
expire.  Furthermore,  at September  30,  1997,  the Bank had $277,000 in unused
personal lines of credit and $40,000 in standby letters of credit.

         Loans to One Borrower.  Regulations limit  loans-to-one  borrower or an
affiliated  group of borrowers in an amount equal to 15% of  unimpaired  capital
and  unimpaired  surplus of the Bank.  The Bank is  authorized  to lend up to an
additional 10% of unimpaired capital and unimpaired surplus if the loan is fully
secured  by  readily  marketable  collateral.  The  Bank's  maximum  loan-to-one
borrower limit as set by the Board of Directors is 10% of unimpaired capital and
surplus.

         At September 30, 1997,  the Bank's  largest  lending  relationship  was
comprised of loans secured by commercial and residential properties, in addition
to,  equipment,  inventory and receivables  aggregating  approximately  $830,000
located in the Bank's  market areas.  The second  largest  lending  relationship
consisted of loans secured by commercial and residential  properties aggregating
approximately  $730,000 at  September  30,  1997,  located in the Bank's  market
areas.  Likewise,  the third  largest  lending  relationship  consisted of loans
secured by  commercial  and  residential  properties  aggregating  approximately
$610,000 at September 30, 1997 located in the Bank's market areas.  At September
30, 1997, all of these loans were performing in accordance with their terms.

         Loan  Delinquencies.  Loans are  reviewed  on a  monthly  basis and are
placed  on  non-accrual  status  when  considered   doubtful  of  collection  by
management.  Generally,  loans  past  due 90 days or  more  as to  principal  or
interest and, in the opinion of management, not adequately secured to ensure the
collection  of the entire  outstanding  balance of the loan,  including  accrued
interest,  are placed on non-accrual status.  Interest accrued and unpaid at the
time a loan is placed on non-accrual  status is charged against interest income.
Subsequent  cash  payments,   if  any,  are  generally  applied  to  reduce  the
outstanding principal balance.


                                        8

<PAGE>



         Non-Performing  Assets.  The  following  table sets  forth  information
regarding  non-accrual loans,  accruing loans which are past due 90 days or more
as to principal or interest  payments,  and foreclosed  assets.  As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring.
<TABLE>
<CAPTION>
                                                                                 At September 30,
                                                                             -------------------------
                                                                               1997             1996
                                                                             -------           -------
                                                                          (Dollars in Thousands)
<S>                                                                          <C>               <C>    
Non-accruing loans:
  Residential real estate(1)....................................             $  312            $  624
  Commercial real estate........................................                  0                 0
  Consumer and commercial loans.................................                157                92
                                                                                ---               ---
     Total                                                                     $469              $716
                                                                                ===               ===

Accruing loans past due 90 days or more:
  Residential real estate(1)....................................             $    0            $    0
  Commercial real estate........................................                  0                 0
  Consumer and commercial loans.................................                  0                66
                                                                                ---               ---
     Total......................................................             $    0            $   66
                                                                                ===               ===

Total non-performing loans......................................             $  469            $  782
                                                                                ===               ===

Foreclosed assets:
  Residential real estate(1)....................................                 31                 0
  Commercial real estate........................................                  0                 0
  Consumer and commercial.......................................                  0                 0
                                                                                ---               ---
     Total......................................................                 31                 0
                                                                                ===               ===

Total non-performing assets.....................................             $  500            $  782
                                                                                ===               ===
Allowance for loan losses.......................................             $1,108            $  879
                                                                              =====               ===
Coverage of non-performing loans(2).............................             236.09%           112.40%
                                                                             ======            ======
Non-performing assets as a percentage of total assets...........               0.31%             0.51%
                                                                              =====             =====
</TABLE>

--------------
(1)      Includes home equity loans.
(2)      Calculated as the period end allowance for loan losses as a  percentage
         of the period end non-performing loans.

         Interest income that would have been recorded on loans accounted for on
a  non-accrual  basis  under the  original  terms of such loans was  $30,000 and
$33,000 for the years ended September 30, 1997 and 1996, respectively and $9,000
and $29,000  was  collected  and  included  in the Bank's  interest  income from
non-accrual loans for the years ended September 30, 1997 and 1996.

         Classified Assets. OTS regulations provide for a classification  system
for problem assets of insured  institutions.  Under this classification  system,
problem  assets  of  insured   institutions  are  classified  as  "substandard,"
"doubtful," or "loss." An asset is considered  substandard if it is inadequately
protected  by the  current  equity and paying  capacity of the obligor or of the
collateral  pledged,  if any.  Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the  weaknesses  inherent in those  classified  as  substandard,  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable  and  improbable."  Assets  classified as loss are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the establishment of a specific loss reserve is not

                                        9

<PAGE>



warranted.  Assets may be  designated  "special  mention"  because of  potential
weakness  that  does  not  currently  warrant   classification  in  one  of  the
aforementioned categories.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem assets as loss, it is required either to establish a specific  allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's  determination as to the classification of its
assets and the amount of its  valuation  allowances  is subject to review by the
OTS, which may order the  establishment  of additional  general or specific loss
allowances.  A portion of general loss allowances  established to cover possible
losses  related to assets  classified as substandard or doubtful may be included
in determining an institution's  regulatory  capital,  while specific  valuation
allowances for loan losses generally do not qualify as regulatory capital.

         In  accordance  with its  classification  of  assets  policy,  the Bank
regularly  reviews the problem assets in its portfolio to determine  whether any
assets require classification in accordance with applicable regulations.  On the
basis of management's  review of its assets, at September 30, 1997, the Bank had
classified $402,000 of loans as substandard,  $363,000 of loans as doubtful, and
none as loss.

         Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as other real estate
owned until it is sold.  When  property is acquired,  it is recorded at the fair
value at the date of foreclosure less estimated costs of disposition.

         The Bank records  loans as  in-substance  foreclosures  if the Bank has
taken  possession of the  collateral  regardless of whether  formal  foreclosure
proceedings have been instituted. In-substance foreclosures are accounted for as
real estate acquired through foreclosure,  however,  title to the collateral has
not been acquired by the Bank. There may be significant  other expenses incurred
such as legal and other servicing costs involved with in substance  foreclosures
and  foreclosed  real  estate.  At September  30, 1997,  other real estate owned
consisted  of one  residential  one-to-four  family  property  and  amounted  to
$31,000. There was no other real estate owned at September 30, 1996.

         Allowances for Loan Losses.  Management  regularly performs an analysis
to identify  the  inherent  risk of loss in its loan  portfolio.  This  analysis
includes evaluation of concentrations of credit,  past loss experience,  current
economic  conditions,  amount and  composition of the loan portfolio  (including
loans being  specifically  monitored  by  management),  estimated  fair value of
underlying collateral,  loan commitments outstanding,  delinquencies,  and other
factors.

         The Bank will  continue  to monitor its  allowance  for loan losses and
make future additions to the allowance  through the provision for loan losses as
economic conditions dictate.  Although the Bank maintains its allowance for loan
losses at a level that it  considers  to be adequate to provide for the inherent
risk of loss in its loan portfolio, there can be no assurance that future losses
will not exceed estimated amounts or that additional  provisions for loan losses
will not be required in future periods. In addition, the Bank's determination as
to the amount of its  allowance for loan losses is subject to review by the OTS,
as part of its examination process,  which may result in the establishment of an
additional  allowance  based upon the  judgment of the OTS after a review of the
information available at the time of the OTS examination.


                                       10

<PAGE>



         Analysis of Allowance for Loan Losses.  The following  table sets forth
information  with respect to the Bank's  allowance  for loan losses at the dates
indicated:
<TABLE>
<CAPTION>
                                                             Year Ended September 30,
                                                             ------------------------
                                                                 1997        1996
                                                              --------    ---------
                                                              (Dollars in Thousands)
<S>                                                           <C>          <C>     
Total loans outstanding (end of period) ...................   $ 76,927     $ 71,556
                                                              ========     ========
Average total loans outstanding (period to date) ..........   $ 73,678     $ 68,878
                                                              ========     ========
Allowance for loan loss at beginning of period ............        879          678
Loan charge-offs:
  Residential real estate(1) ..............................         (1)         (11)
  Commercial real estate ..................................          0            0
  Consumer and commercial loans ...........................        (22)         (18)
                                                              --------     --------
     Total charge-offs ....................................        (23)         (29)
                                                              --------     --------
Total recoveries ..........................................          2            0
                                                              --------     --------
Loan charge-offs, net of recoveries .......................        (21)         (29)
Provision charged to operations ...........................        250          230
                                                              --------     --------
Allowance for loan losses at end of period ................   $  1,108     $    879
                                                              ========     ========
Ratio of net charge-offs during the period to average loans
  outstanding during the period ...........................       0.03%        0.04%
                                                              ========     ========
Provision as a percentage of average loans ................       0.34%        0.33%
                                                              ========     ========
Allowance as a percentage of total loans (end of period) ..       1.44%        1.23%
                                                              ========     ========
</TABLE>

--------------
(1)      Includes home equity loans.

         Allocation of the Allowance for Loan Losses.  The following  table sets
forth the allocation of the allowance for loan losses by category as prepared by
the Bank.  In  management's  opinion,  the  allocation  has, at best,  a limited
utility.  It is based on management's  assessment as of a given point in time of
the  risk  characteristics  of each of the  component  parts of the  total  loan
portfolio  and is subject  to changes as and when the risk  factors of each such
component  part change.  The allocation is not indicative of either the specific
amounts or the loan  categories in which future  charge-offs  may be taken,  nor
should it be taken as an  indicator  of future  loss  trends.  In  addition,  by
presenting the allocation, management does not mean to imply that the allocation
is  exact  or  that  the  allowance  has  been  precisely  determined  from  the
allocation.  The allocation of the allowance to each category is not necessarily
indicative of future loss in any  particular  category and does not restrict the
use of the allowance to absorb losses in any category.


                                       11

<PAGE>
<TABLE>
<CAPTION>
                                                                               September 30,
                                                -----------------------------------------------------------------------------
                                                                 1997                                   1996
                                                ---------------------------------------   -----------------------------------
                                                                        Percent of                             Percent of
                                                       Amount of        Loans in Each        Amount of         Loans in Each
                                                       Loan Loss         Category to         Loan Loss          Category to
                                                       Allowance         Total Loans         Allowance          Total Loans
                                                       ---------         -----------         ---------          -----------
                                                                          (Dollars in Thousands)
<S>                                                     <C>                <C>                  <C>               <C>    
Allocation of allowance for loan losses(1):
Residential real estate(2)...................           $  231              81.36%              $201               81.94%
Commercial real estate.......................               31               4.76                 23                4.21
Consumer and commercial loans ...............              403              13.88                232               13.85
Unallocated..................................              443               0.00                423                0.00
                                                         -----             ------                ---              ------
     Total...................................           $1,108             100.00%              $879              100.00%
                                                         =====             ======                ===              ======
</TABLE>


-------------------
(1)      Percentages represent loans to gross loans in each category.
(2)      Includes home equity loans.


Investment Activities

         General.  The Bank is required under federal  regulations to maintain a
minimum  amount of liquid  assets which may be invested in specified  short term
securities  and  certain  other  investments.  See "  Regulation  of the  Bank -
Liquidity Requirements." The Bank has maintained a liquidity portfolio in excess
of  regulatory  requirements.  Liquidity  levels may be  increased  or decreased
depending  upon the  yields on  investment  alternatives  and upon  management's
judgment as to the  attractiveness  of the yields then  available in relation to
other  opportunities  and its  expectation  of future yield  levels,  as well as
management's projections as to the short term demand for funds to be used in the
Bank's  loan  origination  and  other   activities.   The  Bank  classifies  its
investments as securities  available for sale or investments  securities held to
maturity in  accordance  with SFAS No. 115. At September  30,  1997,  the Bank's
investment  portfolio  policy allowed  investments  in instruments  such as U.S.
Treasury  obligations,   U.S.  federal  agency  or  federally  sponsored  agency
obligations,   municipal  obligations,   mortgage-backed  securities,   banker's
acceptances,  certificates of deposit,  federal funds,  including FHLB overnight
and term  deposits (up to six months),  as well as  investment  grade  corporate
bonds,  commercial paper and the mortgage  derivative  products described below.
The Board of Directors may authorize additional investments.

         The Bank's securities available for sale and investment securities held
to maturity  portfolios at September 30, 1997 did not contain  securities of any
issuer  with an  aggregate  book  value in excess of 10% of the  Bank's  equity,
excluding those issued by the United States Government or its agencies.

         Mortgage-Backed  Securities. To supplement lending activities, the Bank
has  invested  in  residential   mortgage-backed   securities.   Mortgage-backed
securities can serve as collateral for borrowings and, through repayments,  as a
source  of  liquidity.  Mortgage-backed  securities  represent  a  participation
interest in a pool of  single-family  or other type of mortgages,  the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally  quasi-governmental  agencies) that pool and repackage
the participation interests in the form of securities,  to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.

                                       12

<PAGE>




         The  Bank's  mortgage-backed  securities,   other  than  collateralized
mortgage obligations  ("CMOs"),  are classified as investment securities held to
maturity at September 30, 1997 and were all issued by GNMA,  FHLMC,  or FNMA and
represented  participating  interests in direct  pass-through pools of long-term
mortgage  loans  originated  and  serviced  by the  issuers  of the  securities.
Expected  maturities  will differ from  contractual  maturities due to scheduled
repayments  and  because  borrowers  may  have  the  right  to  call  or  prepay
obligations with or without prepayment penalties.

         Mortgage-backed  securities  typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest  rates  that  are  within  a range  and have  varying  maturities.  The
underlying   pool  of  mortgages  can  be  composed  of  either  fixed  rate  or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  are  generally
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages (i.e., fixed rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security  is  equal  to the life of the  underlying  mortgages.  Mortgage-backed
securities  issued  by  FHLMC,  FNMA,  and  GNMA  make  up  a  majority  of  the
pass-through certificates market.

         The Bank also invests in CMOs, a type of mortgage-backed  security, and
as of September 30, 1997 maintains CMOs  classified as securities  available for
sale.  Substantially all of the Bank's CMOs were issued by GNMA, FHLMC, or FNMA.
CMOs  have been  developed  in  response  to  investor  concerns  regarding  the
uncertainty  of  cash  flows  associated  with  the  prepayment  option  of  the
underlying mortgagor and are typically issued by government agencies, government
sponsored  enterprises,  and special purpose  entities  established by financial
institutions and other similar institutions.  Some CMO instruments are most like
traditional  debt  instruments  because they have stated  principal  amounts and
traditionally  defined  interest  rate terms.  Purchasers  of certain  other CMO
instruments  are entitled to the excess,  if any, of the issuer's  cash inflows,
including reinvestment  earnings,  over the cash outflows for debt servicing and
administrative  expenses.  CMOs may include  instruments  designated as residual
interests,  which  represent  an equity  ownership  interest  in the  underlying
collateral,  subject to the first lien of the  investors in the other classes of
the CMO and may be riskier than many  regular CMO  interests.  At September  30,
1997, all of the Bank's CMOs consisted of regular  interests and did not include
any  residual  interests or  interest-only  or principal  only  securities.  The
securities  are backed by  mortgages  on one- to  four-family  residential  real
estate and have contractual  maturities up to 30 years in the case of adjustable
rate and 15 years in the case of fixed rate mortgage-backed securities.

         At September 30, 1997, the Bank held CMOs in its  securities  available
for  sale  portfolio  with a fair  value  of  $5.0  million  resulting  in a net
unrealized  loss  of  approximately   $85,000.  The  Bank  held  mortgage-backed
securities  in its  investment  securities  held to maturity  portfolio  with an
amortized cost of $11.2 million at September 30, 1997. The average yield on CMOs
available for sale and mortgage-backed  securities held to maturity at September
30, 1997 was 6.54% and 7.17%, respectively.

         Securities Portfolio. The following table sets forth the carrying value
of the Bank's  securities at the dates  indicated.  At September  30, 1997,  the
approximate  fair value of the Bank's  securities  available  for sale was $37.7
million resulting in a net unrealized gain of $11,000, net of taxes.


                                       13

<PAGE>
<TABLE>
<CAPTION>

                                                                             At September 30,
                                                                       -----------------------------
                                                                          1997               1996
                                                                       ---------           ---------
                                                                           (In Thousands)
<S>                                                                     <C>                 <C>    
Securities available for sale, at fair value:
  U.S. Government and agency securities.......................          $29,158             $ 8,779
  States and political subdivisions...........................            3,536               4,993
  Collateralized mortgage obligations.........................            5,011               3,360
                                                                         ------              ------
     Total securities available for sale......................          $37,705             $17,132
                                                                         ======              ======

Investment securities held to maturity, at amortized cost:
  U.S. Government and agency securities.......................          $24,036             $22,787
  Mortgage-backed securities..................................            11,182             12,172
  Other.......................................................               46                  41
                                                                         ------              ------
     Total investment securities held to maturity.............          $35,264             $35,000
                                                                         ======              ======
</TABLE>





                                       14

<PAGE>



         The  following  table sets forth  information  regarding  the scheduled
maturities,  carrying  values,  approximate  fair values,  and weighted  average
yields for the Bank's securities  portfolio at September 30, 1997 by contractual
maturity.  The following table does not take into  consideration  the effects of
scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>

                                                                                   At September 30, 1997
                                   Less than         1 to             Over 5 to          Over 10                  Total
                                    1 year           5 years          10 years            years                 Securities
                            ------------------- ----------------- ----------------- ------------------  ---------------------------
                             Amortized  Average Amortized Average Amortized Average Amortized  Average  Amortized  Average  Fair
                                Cost     Yield    Cost    Yield     Cost     Yield    Cost      Yield    Cost       Yield   Value
                            ----------  ------- --------- ------- --------- ------- ---------- -------  ---------- ------- --------
                                                                                            (Dollars in Thousands)
<S>                           <C>        <C>    <C>        <C>    <C>        <C>    <C>       <C>        <C>        <C>    <C>    
Securities available 
for sale:
  U.S. Government and
    agencies securities ....  $ 1,501    5.62%  $14,049    6.58%  $13,506    7.16%  $    --        --%   $29,056    6.80%  $29,158
  States and political                                                                                                        
    subdivisions ...........    1,944    4.03     1,592    3.83        --      --        --        --      3,536    3.93     3,536
  Collateralized mortgage                                                                                                     
    obligations ............       --      --        --      --        --      --     5,096      6.54      5,096    6.54     5,011
                              ------- -------   -------   -----   -------  ------   -------   -------    -------  ------ ---------
     Total securities                                                                                                         
       available for sale ..  $ 3,445    4.72%  $15,641    6.30%  $13,506    7.16%  $ 5,096      6.54%   $37,688    6.49%  $37,705
                              ======= =======   =======   =====   =======  ======   =======   =======    =======  ====== =========
                                                                                                                              
Investment securities                                                                                                         
held to maturity:                                                                                                             
  U.S. Government and                                                                                                         
    agencies securities ....  $ 6,295    5.32%  $11,240    6.35%  $ 5,501    7.22%  $ 1,000      7.60%   $24,036    6.33%  $24,074 
  Mortgaged-backed                                                                                                            
    securities .............       41    8.71       315    6.45     1,241    7.72     9,585      7.12     11,182    7.17    11,350 
                                                                                                                              
  Other ....................       --     --         --      --        --      --        46        --         46      --        46
                              ------- -------   -------   -----   -------  ------   -------   -------     ------  ------   -------
     Total investment                                                                                                         
       securities held to                                                                                                     
       maturity ............  $ 6,336    5.34%  $11,555    6.35%  $ 6,742    7.31%  $10,631      7.13%   $35,264    6.59%  $35,470
                              ======= =======   =======   =====   =======  ======   =======   =======     ======  ======   =======
</TABLE>
                                                                        
                                                                        
                                                                        
                                                                         
                                       15
                                                                             
<PAGE>                                                                   



Sources of Funds

         General.  Deposits are the major source of the Bank's funds for lending
and  other  investment  purposes.  The  Bank  also  derives  funds  from the (1)
amortization  and  prepayment  of loans,  (2)  sales,  maturities,  and calls of
securities,  and (3)  operations.  Scheduled  loan  principal  repayments  are a
relatively  stable source of funds,  while deposit inflows and outflows and loan
prepayments are  significantly  influenced by general  interest rates and market
conditions. The Bank may also borrow funds from the FHLB as a source of funds.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from within the Bank's  primary market areas through the offering of a selection
of deposit instruments  including savings accounts,  NOW accounts,  money market
accounts, and time deposits or certificate of deposit accounts.  Deposit account
terms vary according to the minimum balance required,  the time period the funds
must remain on deposit, and the interest rate, among other factors.

         The  interest  rates paid by the Bank on deposits are set weekly at the
direction of the asset/liability  management committee.  The Bank determines the
interest rate to offer the public on new and maturing  accounts by reviewing the
market interest rates offered by competitors, the Bank's need for funds, and the
current  cost of money.  The Bank  reviews,  weekly,  the  interest  rates being
offered by other financial institutions within its market areas.

         Regular  savings,  money  market,  and NOW accounts  constituted  $57.7
million,  or 42.7%,  of the Bank's  deposit  portfolio  at  September  30, 1997.
Non-interest  bearing  deposits  constituted  $7.9  million or 5.8%of the Bank's
deposit portfolio at September 30, 1997. Time deposits constituted $69.7 million
or 51.5% of the deposit  portfolio  of which $8.6 million or 6.4% of the deposit
portfolio  were time deposits with balances of $100,000 or more. As of September
30, 1997, the Bank had no brokered deposits.

         Time Deposits.  The following  table indicates the amount of the Bank's
time  deposits  of  $100,000  or more by time  remaining  until  maturity  as of
September 30, 1997.


                                                            Amount of     
                      Maturity Period                     Time Deposits
                      ---------------                     -------------
                                                         (In Thousands)
       Within three months.........................          $3,344
       Three through six months....................             931
       Six through twelve months...................           2,145
       Over twelve months..........................           2,229
                                                              -----
            Total..................................          $8,649
                                                              =====


         Borrowings.  The Bank may obtain  advances from the FHLB of New York to
supplement its supply of lendable funds.  Advances from the FHLB of New York are
typically  secured by a pledge of the Bank's stock in the FHLB of New York and a
portion of the Bank's first  mortgage  loans.  Each FHLB  borrowing  has its own
interest  rate,  which may be fixed or variable,  and range of  maturities.  The
Bank,  if the need arises,  may also access the Federal  Reserve  Bank  discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  At September  30,  1997,  the Bank had $1.4 million in fixed rate
long-term  borrowings  outstanding  from the FHLB of New York.  At September 30,
1997, the Bank had no other borrowings outstanding.


                                       16

<PAGE>



Subsidiary Activity

         The  Company  has one  wholly-owned  subsidiary,  the  Bank,  which  is
organized under the laws of the United States and conducts business as Amsterdam
Federal  Bank.  The Bank is  permitted  to invest up to 2% of its  assets in the
capital  stock of, or secured or unsecured  loans to,  subsidiary  corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community  development  purposes.  At September 30, 1997,
the Bank had one wholly-owned subsidiary, AFS Service Corp., organized under the
laws of New York.  AFS  Service  Corp.  was formed in October  1995 to act as an
agent for the sale of Savings Bank Life Insurance.  The Bank's investment in its
subsidiary  totaled  $1,000 at September 30, 1997. As of September 30, 1997, AFS
Service Corp. had not conducted any business.

Personnel

         The Company has no employees  other than  officers.  At  September  30,
1997, the Bank had 36 full-time and 17 part-time  employees.  None of the Bank's
employees are represented by a collective bargaining group.

Regulation

         Set forth below is a brief  description of certain laws which relate to
the regulation of the Company and the Bank. The description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

Company Regulation

         General.  The  Company is a unitary  savings and loan  holding  company
subject to regulatory  oversight by the OTS. As such, the Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Company and its non-savings association  subsidiaries,  should such subsidiaries
be formed,  which also permits the OTS to restrict or prohibit  activities  that
are determined to be a serious risk to the subsidiary savings association.  This
regulation  and  oversight  is  intended  primarily  for the  protection  of the
depositors of the Bank and not for the benefit of stockholders of the Company.

         Qualified  Thrift  Lender Test.  As a unitary  savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the  Qualified  Thrift  Lender  ("QTL")  test or meets  the
definition of a domestic building and loan association  pursuant to section 7701
of the Internal Revenue Service of 1986, as amended (the "Code"). If the Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the  Company  and any of its  subsidiaries  (other  than the  Bank or any  other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies  unless the other  associations  each also
qualify  as a QTL or  meet  the  definition  of a  domestic  building  and  loan
association and were acquired in a supervisory acquisition. See "- Regulation of
the Bank - Qualified Thrift Lender Test."

         Federal  Securities Law. The Company is subject to filing and reporting
requirements  by  virtue  of  having  its  common  stock  registered  under  the
Securities Exchange Act of 1934. Furthermore,  company stock held by persons who
are affiliates (generally officers,  directors,  and principal  stockholders) of
the Company may not be resold without  registration or unless sold in accordance
with

                                       17

<PAGE>



certain  resale  restrictions.  If the Company meets  specified  current  public
information  requirements,  each affiliate of the Company is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

Regulation of the Bank

         General. As a federally  chartered,  SAIF-insured  savings association,
the Bank is subject to extensive  regulation by the OTS and the Federal  Deposit
Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal statutory and regulatory  requirements.  The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

         Insurance of Deposit Accounts.  The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured  member (as defined by law
and  regulation).  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
institution's primary regulator.

         As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total  deposits  prior to September 30, 1996.
The FDIC also maintains another insurance fund, The Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits.  In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF  members  placed  SAIF  members  at a  competitive  disadvantage  to BIF
members.

         Effective  September  30,  1996,  federal  law was revised to mandate a
one-time  special  assessment on SAIF members such as the Bank of  approximately
 .657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance  assessment  for SAIF  members  was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period,  BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF  members  should  be  the  same.  It  is  expected  that  these  continuing
assessments  for both  SAIF and BIF  members  will be used to repay  outstanding
Financing Corporation bond obligations.  As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance  assessed on the Bank declined by
approximately 70%.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted  assets,  (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based  capital  requirement
equal to 8.0% of total  risk-weighted  assets.  The  Bank's  regulatory  capital
exceeded all minimum  regulatory  capital  requirements  applicable  to it as of
September 30, 1997.

         Savings  associations  with a greater than  "normal"  level of interest
rate exposure may, in the future,  be subject to a deduction from capital for an
interest  rate  risk  ("IRR")   component  for  purposes  of  calculating  their
risk-based capital requirement.

         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require  the  Bank  to  give  the OTS 30 days  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.

         OTS regulations  impose  limitations upon all capital  distributions by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of

                                       18

<PAGE>



another institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, based primarily on an
institution's  capital level.  An institution  that exceeds all fully  phased-in
capital  requirements before and after a proposed capital  distribution ("Tier 1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional  capital  distributions  require prior  regulatory  approval.  At
September 30, 1997, the Bank was a Tier 1  institution.  In the event the Bank's
capital fell below its fully  phased-in  requirement or the OTS notified it that
it was in need of more than  normal  supervision,  the  Bank's  ability  to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

         In  addition,  the Bank may not  declare or pay a cash  dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount  required for the liquidation  account  established in
connection with the Conversion.

         Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS  regulations or the  definition of a domestic  building
and loan  association  in section  7701 of the Code.  If the Bank  maintains  an
appropriate  level  of  certain  specified  investments  (primarily  residential
mortgages   and  related   investments,   including   certain   mortgage-related
securities)  and  otherwise  qualifies as a QTL or a domestic  building and loan
association,  it will continue to enjoy full borrowing  privileges from the FHLB
of New York. The required percentage of investments under the QTL test is 65% of
portfolio assets while the Code requires investments of 60% of portfolio assets.
An association must be in compliance with the QTL test or definition of domestic
building and loan association on a monthly basis in 9 out of every 12 months. As
of September 30, 1997, the Bank was in compliance  with its QTL  requirement and
met the definition of a domestic building and loan association.  There can be no
assurance  that the Bank  will  continue  to meet  the QTL  requirements  or the
definition of a domestic building and loan association in future periods.

         Liquidity  Requirements.  All  savings  associations  are  required  to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.

         Federal Home Loan Bank System.  The Bank is a member of the FHLB of New
York,  which is one of 12 regional  FHLBs that  administers  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction  accounts (primarily  checking,  NOW, and Super
NOW checking accounts) and non-personal time deposits.  The balances  maintained
to meet the reserve  requirements  imposed by the Federal  Reserve  Board may be
used to

                                       19

<PAGE>



satisfy the liquidity requirements that are imposed by the OTS. At September 30,
1997, the Bank was in compliance with these requirements.

Item  2.  Description of Property
---------------------------------

         (a) Properties.

         The Company owns no real property but utilizes the offices of the Bank.
The Bank operates from its main office and four branch offices. In addition, the
Bank leases space in the Amsterdam  Riverfront  Center. A majority of this space
is used as an  operations  center  and houses  the loan  servicing,  accounting,
bookkeeping  and  proof  departments,  marketing and business  development,  and
branch operations. The remaining space is used as a branch office with an ATM.

         (b) Investment Policies.

         See "Item 1.  Business"  above for a general  description of the Bank's
investment  policies and any  regulatory  or Board of  Directors'  percentage of
assets limitations regarding certain investments.

         (1)  Investments in Real Estate or Interests in Real Estate.  See "Item
1. Business - Lending  Activities," "Item 1. Business - Regulation of the Bank,"
and "Item 2. Description of Property. (a) Properties" above.

         (2)  Investments  in Real  Estate  Mortgages.  See "Item 1.  Business -
Lending Activities" and "Item 1. Business - Regulation of the Bank."

         (3)  Investments  in  Securities  of or Interests in Persons  Primarily
Engaged in Real Estate Activities.  See "Item 1. Business - Lending Activities,"
"Item 1.  Business - Regulation of the Bank," and "Item 1. Business - Subsidiary
Activity."

         (c)  Description of Real Estate and Operating Data.

         Not Applicable.

Item  3.  Legal Proceedings
---------------------------

         The  Company and the Bank,  from time to time,  are parties to ordinary
routine  litigation,  which  arises in the normal  course of  business,  such as
claims to enforce  liens,  condemnation  proceedings  on properties in which the
Bank holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Company and the
Bank.  No claims or lawsuits  were pending or  threatened  at September 30, 1997
that would be considered  material to the financial position of the Bank and the
Company.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year ended September 30, 1997.


                                       20

<PAGE>



                                     PART II


Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters
--------------------------------------------------------------------------------

         The  information  contained  under the section  captioned  "Stock Price
Information" in the Company's  Annual Report to Stockholders for the fiscal year
ended  September  30, 1997 (the  "Annual  Report"),  is  incorporated  herein by
reference.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item  7.  Financial Statements
------------------------------

         Registrant's financial statements listed under Item 13 are incorporated
herein by reference.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure
--------------------------------------------------------------------------------

         Not applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
--------------------------------------------------------------------------------

         The information  contained under the section  captioned  "Proposal I --
Election of Directors" and "Voting  Securities and Principal  Holders Thereof --
Security  Ownership of Certain  Beneficial  Owners" in  Registrant's  definitive
proxy  statement for  Registrant's  Annual Meeting of  Stockholders  (the "Proxy
Statement") is incorporated herein by reference.

Item 10.  Executive Compensation

         The  information  contained under the section  captioned  "Director and
Executive  Compensation"  in the  Proxy  Statement  is  incorporated  herein  by
reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         (a)      Security Ownership of Certain Beneficial Owners

                  Information  required by this item is  incorporated  herein by
                  reference  to the section  captioned  "Voting  Securities  and
                  Principal Holders Thereof" in the Proxy Statement.

         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference  to the section  captioned  "Voting  Securities  and
                  Principal  Holders  Thereof"  and to  the  first  table  under
                  "Proposal 1 -- Election of Directors" in the Proxy Statement.


                                       21

<PAGE>



         (c)      Management  of  the  Corporation  knows  of  no  arrangements,
                  including  any  pledge  by any  person  of  securities  of the
                  Corporation,  the operation of which may at a subsequent  date
                  result in a change in control of the Registrant.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  section   captioned   "Certain   Relationships  and  Related
Transactions" in the Proxy Statement.

Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

         (a)      The following documents are filed as a part of this report:

                  1.  The  following  financial  statements  and the  report  of
independent  accountants of Registrant included in Registrant's Annual Report to
Stockholders are incorporated herein by reference and also in Item 7 hereof.

         Independent Auditors' Report

         Consolidated Balance Sheets as of September 30, 1997 and 1996.

         Consolidated  Statements  of Income for the Years Ended  September  30,
         1997 and 1996.

         Consolidated  Statements  of  Changes in  Stockholders'  Equity for the
         Years Ended September 30, 1997 and 1996.

         Consolidated Statements of Cash Flows for the Years Ended September 30,
         1997 and 1996.

         Notes to Consolidated Financial Statements.

                  2. Financial  Statement  Schedules for which provision is made
in the applicable  accounting  regulations of the SEC are not required under the
related instructions or are inapplicable and therefore have been omitted.

                  3. The  following  exhibits  are  included  in this  Report or
incorporated herein by reference:

                  (a)      List of Exhibits:

                  3.1      Articles of Incorporation of AFSALA Bancorp, Inc.*

                  3.2      Bylaws of AFSALA Bancorp, Inc.*

                  10.1     Employment contract with John M. Lisicki

                  10.2     Supplemental Retirement Benefit Agreement with 
                           John M. Lisicki*

                  10.3     Restricted Stock Plan

                                       22

<PAGE>



                  10.4     1997 Stock Option Plan

                  13       Portions of 1997 Annual Report to Stockholders

                  21       Subsidiaries of the Registrant

                  27       Financial Data Schedule

                  (b)      Reports on Form 8-K.

                  None.

---------------
*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-1 (File No. 333- 06399)  declared  effective by the SEC on August 9,
     1996.



                                       23

<PAGE>




                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           AFSALA BANCORP, INC.



Dated:  December 29, 1997                   By:      /s/ John M. Lisicki
                                                     ---------------------------
                                                     John M. Lisicki
                                                     President, Chief Executive
                                                     Officer and Director (Duly
                                                     Authorized Representative)

         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
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>

<S>      <C>                                             <C>      <C>
By:      /s/ John M. Lisicki                             By:      /s/ Dr. Daniel J. Greco           
         --------------------------------------------             ---------------------------------------
         John M. Lisicki                                          Dr. Daniel J. Greco
         President, Chief Executive Officer                       Director
         and Director (Principal Executive               
         Officer)                                        
                                                         
Date:    December 29, 1997                              Date:    December 29, 1997
                                                         
                                                         
By:      /s/ Dr. Ronald S. Tecler                        By:      /s/ John A. Tesiero, Jr.
         --------------------------------------------             ---------------------------------------
         Dr. Ronald S. Tecler                                     John A. Tesiero, Jr.
         Director                                                 Director
                                                         
Date:    December 29, 1997                               Date:    December 29, 1997
                                                         
                                                         
By:      /s/ Joseph G. Opalka                            By:      /s/ Florence B. Opiela
         --------------------------------------------             ---------------------------------------
         Joseph G. Opalka                                         Florence B. Opiela
         Director                                                 Director
                                                         
Date:    December 29, 1997                               Date:    December 29, 1997
                                                         
                                                         
By:      /s/ James J. Alescio                            By:
         --------------------------------------------             ---------------------------------------
         James J. Alescio                                         John A. Kosinski, Jr.
         Treasurer and Chief Financial Officer                    Director
         (Principal Financial and Accounting Officer)    
                                                         
Date:    December 29, 1997                               Date:    December ____, 1997
                                                         
</TABLE>