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 (No Fee required)

       For the fiscal year ended   June 30, 1998

                                       OR

[ ]    Transition report pursuant to section 13 or 15(d) of the Securities
       Exchange Act of 1934 (No Fee required)

       For the transition period from              to               .
                                        ------------    ------------

Commission File No. 0-21885

                            Advance Financial Bancorp
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

Delaware                                                      55-0753533
----------------------------------------------         -------------------------
(State or Other Jurisdiction of Incorporation               I.R.S. Employer
or Organization)                                            Identification No.

1015 Commerce Street, Wellsburg, West Virginia                  26070
----------------------------------------------                ---------
(Address of Principal Executive Offices                       (Zip Code)

Issuer's Telephone Number, Including Area Code:             (304) 737-3531
                                                            --------------

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

Securities registered under to Section 12(g) of the Exchange 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  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 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. [ ]

         State issuer's revenues for its most recent fiscal year.   $8,968,000

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant,  based on the average bid and asked price of the registrant's
Common Stock on September 23, 1998 was $14.3 million.

         As of September 23, 1998,  there were issued and outstanding  1,030,648
shares of the registrant's Common Stock.

         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
     June 30, 1998. (Part II)

2.   Portions of the Proxy Statement for the Annual Meeting of Stockholders  for
     the Fiscal Year ended June 30, 1998. (Part III)

                                        

<PAGE>
PART I


         ADVANCE  FINANCIAL  BANCORP (THE  "COMPANY") MAY FROM TIME TO TIME MAKE
WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS",  INCLUDING STATEMENTS CONTAINED IN
THE COMPANY'S  FILINGS WITH THE  SECURITIES AND EXCHANGE  COMMISSION  (INCLUDING
THIS ANNUAL REPORT ON FORM 10-KSB AND THE EXHIBITS  THERETO),  IN ITS REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY,  WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY  PURSUANT TO THE "SAFE  HARBOR"  PROVISIONS  OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.

         THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,  SUCH
AS STATEMENTS OF THE COMPANY'S PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND
INTENTIONS,  THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S  FINANCIAL  PERFORMANCE TO DIFFER  MATERIALLY FROM THE
PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND  INTENTIONS  EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND  THE  STRENGTH  OF  THE  LOCAL  ECONOMIES  IN  WHICH  THE  COMPANY  CONDUCTS
OPERATIONS;  THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL POLICIES
AND LAWS,  INCLUDING  INTEREST  RATE  POLICIES OF THE BOARD OF  GOVERNORS OF THE
FEDERAL  RESERVE  SYSTEM,   INFLATION,   INTEREST  RATE,   MARKET  AND  MONETARY
FLUCTUATIONS;  THE TIMELY  DEVELOPMENT  OF AND  ACCEPTANCE  OF NEW  PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED  OVERALL  VALUE OF THESE  PRODUCTS AND
SERVICES BY USERS,  INCLUDING  THE  FEATURES,  PRICING  AND QUALITY  COMPARED TO
COMPETITORS'  PRODUCTS AND  SERVICES;  THE  WILLINGNESS  OF USERS TO  SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES;  THE
SUCCESS OF THE  COMPANY IN  GAINING  REGULATORY  APPROVAL  OF ITS  PRODUCTS  AND
SERVICES,  WHEN REQUIRED;  THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS   (INCLUDING  LAWS  CONCERNING   TAXES,   BANKING,   SECURITIES  AND
INSURANCE);  TECHNOLOGICAL CHANGES,  ACQUISITIONS;  CHANGES IN CONSUMER SPENDING
AND  SAVINGS  HABITS;  AND THE  SUCCESS  OF THE  COMPANY AT  MANAGING  THE RISKS
INVOLVED IN THE FOREGOING.

         THE COMPANY  CAUTIONS THAT THE FOREGOING  LIST OF IMPORTANT  FACTORS IS
NOT  EXCLUSIVE.  THE COMPANY DOES NOT  UNDERTAKE TO UPDATE ANY FORWARD-  LOOKING
STATEMENT,  WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.


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

General

         The Company is a Delaware  corporation  organized in September  1996 at
the  direction of Advance  Financial  Savings Bank (the "Bank" or  "Advance") to
acquire all of the capital stock that the Bank issued in its conversion from the
mutual to stock form of ownership (the "Conversion"). On December 31,

                                        2

<PAGE>



1996, the Bank completed the Conversion and became a wholly owned  subsidiary of
the Company.  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  conducts no
significant  business  or  operations  of its own other than  holding all of the
outstanding  stock of the Bank and investing  the  Company's  portion of the net
proceeds obtained in the conversion.

         The Bank,  chartered in 1935 under the name Advance Federal Savings and
Loan of West Virginia, is a federally chartered stock savings bank headquartered
in  Wellsburg,   West  Virginia.   The  Bank  is  subject  to  examination   and
comprehensive  regulation  by the Office of Thrift  Supervision  ("OTS") and its
deposits  are  federally  insured  by the  Savings  Association  Insurance  Fund
("SAIF").  The  Bank is a  member  of and  owns  capital  stock  in the  FHLB of
Pittsburgh, which is one of the 12 regional banks in the FHLB System.

         The Bank  operates a  traditional  savings  bank  business,  attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.

Competition

         The Bank is one of many financial  institutions serving its market area
which  consists of Brooke and Hancock  counties of West Virginia and portions of
Jefferson County Ohio and Washington County,  Pennsylvania.  The competition for
deposit  products  comes  from  other  insured  financial  institutions  such as
commercial banks, thrift  institutions,  credit unions, and multi-state regional
banks in the Bank's market area.  Deposit  competition 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,
multi-state regional banks, and mortgage bankers.



                                        3

<PAGE>

Lending Activities

         Analysis of Loan  Portfolio.  Set forth below is selected data relating
to the  composition  of the Bank's  loan  portfolio  by type of loan and type of
security on the dates indicated:

<TABLE>
<CAPTION>
                                                                                           June 30,
                                                        --------------------------------------------------------------------------
                                                                   1998                                     1997
                                                        -----------------------------------           ----------------------------
                                                           Amount                 Percent               Amount           Percent
                                                        ----------                -------             ---------          -------
                                                                                     (Dollars in Thousands)
<S>                                                     <C>                       <C>                  <C>              <C>  
Type of Loans:
Real Estate Loans:
  Construction.......................................   $   5,017                    4.98%              $ 2,455            2.78%
  One- to four-family(1) ............................      59,359                   58.91                57,746           65.32
  Multi-family ......................................       1,786                    1.77                 1,595            1.80
  Non-residential....................................      15,581                   15.46                11,482           12.99
Consumer Loans:
  Home improvement...................................       1,001                    0.99                   906            1.02
  Automobile.........................................       7,659                    7.60                 7,419            8.39
  Share..............................................       1,297                    1.29                 1,270            1.44
  Education..........................................          42                    0.04                    89             .10
  Other..............................................       2,347                    2.33                 1,973            2.23
Commercial loans.....................................       6,676                    6.63                 3,478            3.93
                                                         --------                 -------                ------          ------
     Total loans.....................................     100,765                  100.00%               88,413          100.00%
                                                                                  =======                                ======

Less:
  Loans in process...................................      (3,061)                                       (1,761)
  Deferred loan origination fees and costs...........        (181)                                         (216)
  Allowance for loan losses..........................        (478)                                         (368)
                                                         --------                                        ------
     Total loans, net................................   $  97,045                                       $86,068
                                                         ========                                        ======
</TABLE>


-------------------------------
(1)      At June 30, 1998, includes $1,455,000 in loans held for sale.

                                        4

<PAGE>



Loan Maturity Tables

         The  following  table sets forth the  estimated  maturity of the Bank's
loan portfolio,  including loans held for sale, at June 30, 1998. The table does
not include  prepayments or scheduled principal  repayments.  All mortgage loans
are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>
                                                                           Due after
                                                         Due within        1 through            Due after
                                                           1 year           5 years              5 years            Total
                                                           ------           -------              -------            -----
                                                                                    (In Thousands)

<S>                                                        <C>               <C>                 <C>             <C>     
One- to four-family real estate...................          $ 4,907           $ 2,072             $ 52,380        $ 59,359
Multi-family real estate..........................                -                13                1,773           1,786
Non-residential real estate.......................                -               927               14,654          15,581
Construction......................................            1,513               352                3,152           5,017
Consumer..........................................              858             9,989                1,499          12,346
Commercial........................................            1,417             2,797                2,462           6,676
                                                             ------            ------              -------           -----
Total Amount Due..................................          $ 8,695           $16,150             $ 75,920        $100,765
                                                             ======            ======              =======         =======

</TABLE>

         The following table sets forth the dollar amount of all loans due after
June 30, 1999, which have pre-determined  interest rates and which have floating
or adjustable interest rates.

<TABLE>
<CAPTION>
                                         Fixed Rates         Adjustable Rates              Total
                                         -----------         ----------------              -----
                                                             (In Thousands)
<S>                                          <C>                      <C>               <C>      
One- to four-family real estate
mortgage...........................           $  18,559                $  35,893         $  54,452
Multi-family.......................                 955                      831             1,786
Non-residential real estate........               8,210                    7,371            15,581
Construction.......................               1,938                    1,566             3,504
Consumer...........................                   -                   11,488            11,488
Commercial.........................               3,069                    2,190             5,259
                                                -------                  -------           -------
    Total..........................           $  32,731                $  59,339         $  92,070
                                               ========                 ========          ========
</TABLE>

         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's
one- to four-family  residential  loan portfolio also includes  second  mortgage
loans and home equity  loans  secured by second  mortgages.  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-occupied  residential
mortgage loans are originated up to 80% of the lesser of the appraised  value or
selling price of the property.  The Bank also originates  construction permanent
loans on one- to four-family  residences.  The Bank retains most of the 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
type of the loan, can have  maturities of up to 30 years.  Fixed-rate  loans can
have maturities of up to 30 years depending on the type of the loan.

         For all adjustable-rate  mortgage loans, the Bank requires the borrower
to qualify  at the  initial  rate.  The Bank's  adjustable-rate  mortgage  loans
provide for periodic  interest rate adjustments of plus or minus 1% to 2% with a
maximum adjustment over the term of the loan as set forth in the loan agreement

                                        5

<PAGE>



and usually  ranges from 6% to 7% above the initial  interest rate  depending on
the terms of the loan.  Adjustable-rate mortgage loans reprice every year, every
three  years or every 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 weekly
average of the one year U.S.  Treasury bill.  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 Home Loan Mortgage  Corporation  ("FHLMC") guidelines and
most of the Bank's loans are salable in the secondary  market. It is the current
policy of the Bank to remain a portfolio lender for its adjustable rate loans.

         Adjustable-rate  mortgage  loans  decrease  the risks  associated  with
changes in interest rates by more closely reflecting these changes,  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 adjustable-rate mortgage loan documents, thereby potentially
limiting their  effectiveness  during periods of rising  interest  rates.  These
risks have not had an adverse effect on the Bank.

         Non-residential  Real Estate Loans.  Non-residential  real estate loans
consist  of  loans  made  for the  purpose  of  purchasing  or  refinancing  the
non-residential  real estate used as  collateral  and includes  loans secured by
mixed  residential and commercial use property,  professional  office buildings,
churches  and  restaurants.  Loans  secured by  non-residential  property may be
originated in amounts up to 80% of the appraised  value for a maximum term of 20
years.   Non-residential  lending  entails  significant  additional  risks  when
compared   with  one-  to   four-family   residential   lending.   For  example,
non-residential 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.

         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  improvement,  credit card,
education,  savings  account or passbook loans.  The Bank originates  automobile
loans with terms of up to 6 years for new automobiles and up to 5 years for used
automobiles. Most of these automobile loans are originated directly by the Bank.
The Bank originates  automobile  loans  indirectly by purchasing such loans from
automobile  dealers with whom the Bank provides floor plan  financing.  Indirect
automobile  loans  are  underwritten  by the Bank and a fee is  remitted  to the
automobile dealer upon the successful  underwriting and closing of the loan. The
fee is rebated to the Bank,  on a pro rata basis,  if the loan is repaid  within
the first six months.  The Bank does not have  recourse  against the  automobile
dealer in the event of a default by the  borrower.  Each  indirect  auto loan is
originated in accordance with its underwriting  standards and procedures,  which
are intended to assess the  applicant's  ability to repay the amounts due on the
loan and the adequacy of the financed vehicle as collateral.

         Commercial Loans.  Commercial loans,  other than commercial real estate
loans, consist of, among other things, commercial lines of credit (which include
automobile  floor plan lines of credit),  commercial  vehicle loans, and working
capital loans and are typically  secured by residential or commercial  property,
receivables or inventory, vehicles comprising the automobile floor plan, or some

                                        6

<PAGE>



other form of collateral. Floor plan financing involves continuing financing for
an automobile  dealer that is secured by automobiles  physically  located on the
dealer's lot. The Bank holds the title to the automobiles during the pendency of
the sale. Floor plan financing  typically  involves high loan origination volume
and repayment within 90 days of origination.

         Construction Loans. The Bank makes construction loans primarily for the
construction of single-family  dwellings.  Approximately 90% of these loans were
made to persons who are  constructing  properties  for the purpose of  occupying
them. Such loans may also be made to builders to construct  properties for sale.
Loans made to builders are generally "pure construction" loans which require the
payment  of  interest  at fixed  rates  during the  construction  period and the
payment of the principal in full at the end of the  construction  period.  Loans
made to  individual  property  owners  are  either  pure  construction  loans or
"construction-permanent"  loans  which  generally  provide  for the  payment  of
interest only during a construction  period,  after which the loans convert to a
permanent  loan at fixed or  adjustable  interest  rates having terms similar to
other one- to four-family residential loans.

         Construction  loans made to builders  who are building to resell have a
maximum  loan-to-value  ratio of 80% of the  appraised  value  of the  property.
Construction  loans to  individuals  who intend to occupy the finished  premises
generally have a maximum loan-to-value ratio of 80%.

         Loan Approval  Authority  and  Underwriting.  The Bank has  established
various lending limits for its officers and maintains a Loan Committee. A report
of all mortgage loans originated is presented to the Board of Directors monthly.
The President  and Senior Vice  President of the Bank each have the authority to
approve  applications  for mortgage  loans up to $100,000,  consumer loans up to
$40,000  for  secured  loans and up to $10,000 for  unsecured  loans.  Six other
officers  have  authority  to approve  secured  credit  applications  in varying
amounts up to $35,000.

         The Loan Committee  considers all  applications for commercial loans up
to $250,000,  whether  secured or unsecured,  and all consumer  loans in amounts
above the lending limit  established  above. All loans in excess of those limits
set for the Loan Committee  require the consideration and approval of the entire
Board of Directors.

         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 a  licensed  fee  appraiser  of the real  estate
intended  to be used  as  security  for  the  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  that
title is clear.  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 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 30 days
of the date of issuance. The Bank charges no commitment fees or points to secure
commitments.  A customer  may lock in a fixed rate for 30 days by  depositing  a
nonrefundable fee with the Bank. In some instances,  after a review of the rate,
terms, and  circumstances,  commitments may be renewed or extended beyond the 30
day limit. At June 30, 1998, the Bank had $3,515,000 of outstanding  commitments
to originate  loans and $2,971,000 in undisbursed  funds related to construction
loans.

                                        7

<PAGE>




         Loans to One Borrower. SAIF-insured savings bank are subject to certain
lending  limitations to a single  borrower or group of borrowers.  Under current
law,  the Bank's  lending  limits  equals an amount  equal to 15% of  unimpaired
capital and unimpaired  surplus on an unsecured  basis and an additional  amount
equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured
by readily marketable  collateral.  Savings  associations are authorized to make
loans to one borrower,  for any purpose, in an amount up to $500,000. The Bank's
maximum loan-to-one borrower limit was approximately  $2,300,000 million at June
30, 1998. At June 30, 1998, the aggregate loans  outstanding of the Bank's three
largest   borrowers  have  outstanding   balances  of  between   $1,067,000  and
$1,609,000,  and were secured by property in the Bank's market area. These loans
were performing in accordance with their  contractual  terms and were within the
Bank's lending limit.

Non-Performing and Problem Assets

         Loan Delinquencies.  The Bank's collection procedures provide that when
a mortgage loan is 30 days past due, a delinquent notice is sent to the borrower
and a late charge is imposed in  accordance  with the  mortgage or Deed of Trust
agreement.  If payment is still  delinquent  after 90 days,  the  borrower  will
receive a notice of default establishing a date by which the borrower must bring
the account current or foreclosure proceedings will be instituted.  Late charges
are also imposed in accordance with the mortgage or Deed of Trust agreement.  If
the delinquency continues,  similar subsequent efforts are made to eliminate the
delinquency.  If the loan continues in a delinquent  status for 90 days past due
and no  repayment  plan is in effect,  the account is turned over to an attorney
for  foreclosure.  Management  meets  regularly  to determine  when  foreclosure
proceedings  should be initiated and the borrower is notified  when  foreclosure
has been commenced.

         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,  are not  adequately  secured to insure 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
are generally  applied to interest income unless,  in the opinion of management,
the collection of principal and interest is doubtful. In those cases, subsequent
cash payments would be applied to principal.


                                        8

<PAGE>



         Non-Performing  Assets.  The  following  table sets  forth  information
regarding  non-accrual  loans,  real estate owned, and certain other repossessed
assets and loans. As of the dates indicated,  the Bank had no loans  categorized
as troubled debt restructuring within the meaning of SFAS 15.

<TABLE>
<CAPTION>
                                                                  At June 30,
                                                           -------------------------
                                                            1998               1997
                                                           ------             ------
                                                            (Dollars in Thousands)
<S>                                                        <C>                <C>   
Loans accounted for on a non-accrual basis:
Mortgage loans:
  One- to four-family.................................     $  185             $   76
  Multi-family........................................          -                  -
  Non-residential.....................................          -                 77
  Construction........................................          -                  -
Consumer..............................................          2                  2
Commercial............................................         96                  -
                                                            -----              -----
    Total non-accrual loans...........................        283                155
                                                            -----              -----
Accruing loans greater than 90 days past due:
Mortgage loans:
    One- to four-family...............................          -                 26
    Multi-family......................................          -                 --
    Commercial........................................          -                 --
    Construction......................................          -                 --
Consumer..............................................        169                268
Commercial............................................          -                159
                                                            -----              -----
Total accruing loans greater than 90 days past due....        169                453
                                                            -----              -----
Total non-performing loans............................        452                608
Real estate acquired in settlement of loans...........         76                  -
Other non-performing assets...........................         13                  -
                                                            -----              -----
Total non-performing assets...........................     $  541             $  608
                                                            =====              =====
Total non-performing loans to total loans.............       0.46%               .70%
                                                             =====              =====
Total non-performing loans to total assets............       0.40%              0.58%
                                                             =====              =====
Total non-performing assets to total assets...........       0.47%              0.58%
                                                             =====              =====
</TABLE>


         Interest income that would have been recorded on loans accounted for on
a non-accrual  basis under the original  terms of such loans was $26,000 for the
year ended June 30, 1998 and $11,000 was  collected  and  included in the Bank's
interest income from non-accrual loans for the year ended June 30, 1998.

         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 net worth 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

                                        9

<PAGE>



specific  loss  reserve  is not  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 June 30,  1998,  the Bank had
classified  $227,000 of assets as  substandard,  $131,000 of assets as doubtful,
$49,000 of assets as loss, and $555,000 of assets as special mention.

         Real Estate  Acquired in Settlement of Loans.  Real estate  acquired by
the  Bank as a  result  of  foreclosure  or by deed  in lieu of  foreclosure  is
classified as 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.

         Allowances for Loan Losses.  It is  management's  policy to provide for
losses on unidentified loans in its loan portfolio.  A provision for loan losses
is charged to operations based on management's evaluation of the losses that may
be incurred in the Bank's loan  portfolio.  Such  evaluation,  which  includes a
review of all loans of which full  collectibility  of interest and principal may
not be reasonably assured, considers the Bank's past loan loss experience, known
and inherent  risks in the  portfolio,  adverse  situations  that may affect the
borrower's ability to repay, estimated value of any underlying  collateral,  any
existing guarantees,  past performance of the loan, available  documentation for
the loan, legal impediments to collection,  financial condition of the borrower,
and current economic conditions.

         Management  will  continue  to review  the  entire  loan  portfolio  to
determine the extent, if any, to which further additional loss provisions may be
deemed  necessary.  There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.


                                       10

<PAGE>



         The following table sets forth  information  with respect to the Bank's
allowance for loan losses at the dates indicated:


<TABLE>
<CAPTION>
                                                                                        Year Ended June 30,
                                                                                   -----------------------------
                                                                                      1998                 1997
                                                                                   ---------             -------
                                                                                       (Dollars in Thousands)

<S>                                                                                 <C>                  <C>    
Total loans outstanding................................................             $100,765             $88,413
                                                                                     =======              ======
Average loans outstanding..............................................             $ 93,708             $83,694
                                                                                     =======              ======
Allowance balance (at beginning of period).............................             $    368             $   325
Provision:
  Mortgages............................................................                  178                  31
  Consumer.............................................................                   40                  10
  Commercial...........................................................                   36                  10
Charge-offs:
  Mortgages............................................................                   (6)                 (1)
  Consumer.............................................................                  (34)                (18)
  Commercial...........................................................                 (118)                 --
Recoveries:
  Mortgages............................................................                   --                   3
  Consumer.............................................................                   14                   5
  Commercial...........................................................                    -                   3
                                                                                     -------             -------
Allowance balance (at end of period)...................................             $    478            $    368
                                                                                     =======             =======

Allowance for loan losses as a percent of total loans outstanding......                 0.47 %              0.42 %
Net loans charged off as a percent of average loans outstanding........                (0.19)%             (0.02)%

</TABLE>



                                       11

<PAGE>



Analysis of the Allowance for Loan Losses

         The  following  table sets forth the  allocation  of the  allowance  by
category,  which  management  believes can be allocated  only on an  approximate
basis.  The  allocation  of the  allowance to each  category is not  necessarily
indicative  of future loss and does not  restrict  the use of the  allowance  to
absorb losses in any category.

<TABLE>
<CAPTION>
                                                                     June 30,
                                         ---------------------------------------------------------------
                                                      1998                              1997
                                         -------------------------------   -----------------------------
                                                            Percent of                       Percent of
                                                             Loans in                         Loans in
                                                               Each                             Each
                                                             Category                         Category
                                                             to Total                         to Total
                                                 Amount       Loans               Amount       Loans
                                                 ------       -----               ------       -----
                                                              (Dollars in Thousands)

<S>                                            <C>             <C>             <C>              <C>   
Mortgages:
  One- to four-family.................         $    128          58.91%          $    83          65.32%
  Multi-family........................               11           1.77                 8           1.80
  Non-residential ....................               89          15.46                65          12.99
  Construction........................               --           4.98                --           2.78
  Consumer............................              102          12.25                82          13.18
  Commercial..........................              148           6.63               130           3.93
                                                -------           ----            ------        -------
     Total............................         $    478         100.00%          $   368         100.00%
                                                =======         ======            ======         ======
</TABLE>


Investment Activities and Mortgage-Backed Securities

         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.  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 June 30,  1998,  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 June 30, 1998 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.

                                       12

<PAGE>



         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  Federal  Home  Loan  Mortgage
Corporation  ("FHLMC"),  Government National Mortgage Association ("GNMA"),  and
Federal National Mortgage Association ("FNMA").

         The  Bank's  mortgage-backed  securities  were  classified  as  held to
maturity  at June 30,  1998 and were all  issued by GNMA or FHLMC,  representing
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  and GNMA make up a  majority  of the  pass-through
certificates market.

Investment Activities

         Investment Portfolio. The following table sets forth the carrying value
of the Bank's securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                               At June 30,
                                                                           -------------------------
                                                                             1998              1997
                                                                           -------           -------
                                                                            (Dollars in Thousands)

<S>                                                                        <C>               <C>    
U.S. Treasury and other U.S. Government agency securities........          $ 1,746           $ 7,844
Securities available for sale....................................              264                55
Mortgage-backed securities.......................................              339               367
Interest-bearing deposits in other financial institutions........            7,749             5,888
FHLB Stock.......................................................              622               577
                                                                            ------           -------
  Total..........................................................          $10,720           $14,731
                                                                            ======            ======
</TABLE>



                                       13

<PAGE>



         The  following  table sets forth  information  regarding  the scheduled
maturities,  carrying  values,  market value and weighted average yields for the
Bank's  investment  securities  portfolio at June 30, 1998. The following  table
does not take into  consideration  the effects of  scheduled  repayments  or the
effects of possible prepayments.

<TABLE>
<CAPTION>
                                                                    At June 30, 1998
                              ------------------------------------------------------------------------------------------------------
                                  Less than             1 to              Over 5 to          Over 10             Total
                                   1 year              5 years            10 years            years           Securities
                              -----------------   -----------------   ----------------  -----------------  -------------------------
                              Carrying  Average   Carrying Average    Carrying Average  Carrying Average   Carrying           Market
                               Value     Yield     Value    Yield      Value    Yield    Value    Yield     Value    Yield    Value
                               -----     -----     -----    -----      -----    -----    -----    -----     -----    -----    -----
                                                                  (Dollars in Thousands)
<S>                           <C>          <C>    <C>          <C>     <C>        <C>     <C>              <C>         <C>   <C>    
U.S. Treasury and other
  U.S. Government
  agency securities...........$   245      5.88%  $ 1,001      6.63%   $  500     6.75%   $   -         -% $ 1,746     6.56% $ 1,753
Securities available for
  sale........................    249      1.98         -         -        15    11.16        -         -      264     2.48      264
Mortgage-backed
  securities..................      -         -         -         -         -        -      339      9.42      339     9.42      364
Interest-bearing deposits
  in other financial
  institutions................  7,749      6.11         -         -         -        -        -         -    7,749     6.11    7,749

FHLB stock (1)................    622      6.50         -         -         -        -        -         -      622     6.50      622
                               ------              ------               -----              ----             ------            ------
 
  Total.......................$ 8,865      6.02%  $ 1,001      6.63%   $  515     6.88%   $ 339      9.42% $10,720     6.22% $10,752
                               ======     =====    ======    ======     =====   ======     ====     =====   ======    =====   ======
</TABLE>
----------------------------
(1)  Recorded at cost.


                                       14

<PAGE>



Sources of Funds

         General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes.  The Bank derives funds from amortization
and prepayment of loans and, to a much lesser  extent,  maturities of investment
securities,  borrowings,  mortgage-backed  securities and 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.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from within the Bank's  primary  market area through the offering of a selection
of  deposit  instruments  including  regular  savings  accounts,   money  market
accounts, and term certificate 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.  At June 30, 1998, the Bank had no
brokered accounts.

         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 June
30, 1998.

                      Maturity Period                   Time Deposits
                      ---------------                   -------------
                                                    (Dollar in Thousands)

Within three months..........................                $ 1,371
More than three through six months...........                  1,281
More than six through nine months............                  2,730
Over nine months.............................                  4,380
                                                              ------
         Total...............................                $ 9,762
                                                              ======


Borrowings

         The Bank may obtain  advances from the FHLB of Pittsburgh to supplement
its supply of lendable funds. Advances from the FHLB of Pittsburgh are typically
secured by a pledge of the Bank's stock in the FHLB of Pittsburgh  and a portion
of the Bank's first  mortgage  loans and certain other assets.  Each FHLB credit
program 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.


                                       15

<PAGE>



         The following table sets forth information concerning borrowings during
the periods indicated.

                                                             Year Ended June 30,
                                                             -------------------
                                                             1998         1997
                                                             ----         ----
                                                          (Dollars In Thousands)

FHLB advances:
   Ending Balance.................................           $10,000     $7,747
   Average Balance during year ...................             9,716      7,329
   Maximum month-end balance during the year......            11,727      8,267
   Average interest rate during the year..........              5.20%      5.43%
   Weighted average rate at year end..............              5.32%      5.73%


Employees

         At June 30, 1998 the Bank had 49 full-time  and 2 part-time  employees.
None of the Bank's employees are represented by a collective  bargaining  group.
The Bank believes that its relationship with its employees is good.

Regulation

         Set forth below is a brief description of certain laws which related 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. 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 such other  associations  each also
qualify  as a QTL  and  were  acquired  in a  supervisory  acquisition.  See  "-
Regulation of the Bank Qualified Thrift Lender Test."


                                       16

<PAGE>



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 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.

         The OTS, in conjunction with the FDIC,  regularly examines the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law,  especially in such matters as the ownership of savings  accounts
and the form and content of the Bank's mortgage documents.

         The Bank must file  reports  with the OTS and the FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the SAIF and depositors.
The  regulatory  structure  also  gives  the  regulatory  authorities  extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes.

         Under  separate  proposed  legislation,  Congress  is  considering  the
elimination of the federal thrift charter and the separate federal regulation of
thrifts.  As a result,  the Bank might have to convert to a different  financial
institution  charter and be  regulated  under  federal law as a bank,  including
being subject to the more restrictive  activity  limitations imposed on national
banks.  The Bank cannot  predict the impact of its  conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.

         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.  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 most 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

                                       17

<PAGE>



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 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.

         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 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.  As of
June 30,  1998,  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.

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing  privileges  from the FHLB of  Pittsburgh.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus  intangible  assets,  property used by the  institution  in conducting its
business and liquid  assets equal to 10% of total  assets).  Certain  assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying  QTIs. An  association  must be in compliance  with the QTL test on a
monthly basis in nine out of every 12 months.  As of June 30, 1998, the Bank was
in compliance with its QTL requirement with 75% of its assets invested in QTIs.

         Federal  Home  Loan  Bank  System.  The Bank is a member of the FHLB of
Pittsburgh,  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.

                                       18

<PAGE>




         As a member, the Bank is required to purchase and maintain stock in the
FHLB of  Pittsburgh  in an amount equal to at least 1% of its  aggregate  unpaid
residential mortgage loans, home purchase contracts or similar obligations or 5%
of its  outstanding  borrowings to the FHLB of  Pittsburgh,  at the beginning of
each year.

         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.  At June 30, 1998, the Bank's required liquid
asset ratio was 10.8%.

         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 satisfy the liquidity  requirements that are imposed by the OTS. At June
30,  1998,  the  Bank  was  in  compliance  with  these  Federal  Reserve  Board
requirements.

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

(a)      Properties.

         The Bank operates from its main office and two branch office.

                                                                 Year Leased
Location                               Leased or Owned           or Acquired
--------                               ---------------           -----------
  1015 Commerce Street                   Owned                      1984
  Wellsburg, West Virginia

OFFICES:
  1409 Main Street                       Leased (1)                 1996
  Follansbee, West Virginia

  805 Main Street
  Wintersville, Ohio                     Leased (2)                 1997

-----------------------
(1)  The Bank holds a 40 year lease on the land upon which its branch  office is
     located.  The Bank owns the branch  building.  In  addition,  the Bank owns
     property at 901 Main Street, Follansbee,  West Virginia, which was formerly
     a branch office.

(2)  The  Wintersville  office  opened  June 8, 1998.  The Bank holds a ten year
     lease  (with  two five year  renewal  options)  on the land upon  which its
     branch office is located. The Bank owns the branch building.



                                       19

<PAGE>



(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.  The Bank's investments are
primarily acquired to produce income,  and to a lesser extent,  possible capital
gain.

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

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

(c)      Description of Real Estate and Operating Data.

         Not Applicable.

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

         There are various  claims and lawsuits in which the Company or the Bank
are  periodically  involved,  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 Bank's business. In the opinion of management,  no material loss
is expected from any of such pending claims or lawsuits.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.


                                     PART II

Item  5.  Market for Common Equity and Related Stockholder Matters
------------------------------------------------------------------

         The  information  contained under the section  captioned  "Stock Market
Information" of the Company's  Annual Report to stockholders for the fiscal year
ended June 30, 1998 (the "Annual Report") is incorporated herein by reference.

Item  6.  Management's Discussion and Analysis or Plan of Operation
-------------------------------------------------------------------

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

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

                                       20

<PAGE>




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 sections  captioned "Section 16(a)
Beneficial Ownership Reporting  Compliance" and "I - Information with Respect to
Nominees for Director,  Directors Continuing in Office, and Executive Officers -
Election  of  Directors"  and  "  -  Biographical  Information"  in  the  "Proxy
Statement" is incorporated herein by reference.

Item 10.  Executive Compensation
--------------------------------

         The  information  contained  in the  section  captioned  "Director  and
Executive Officer 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 first  chart in the section  captioned  "I -
                  Information  with Respect to Nominees for Director,  Directors
                  Continuing  in Office,  and  Executive  Officers" in the Proxy
                  Statement.

         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference  to the first  chart in the section  captioned  "I -
                  Information  with Respect to Nominees for Director,  Directors
                  Continuing  in Office,  and  Executive  Officers" in the Proxy
                  Statement.

         (c)      Management  of  the  Registrant   knows  of  no  arrangements,
                  including  any  pledge  by any  person  of  securities  of the
                  Registrant,  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) Listed below are all  financial  statements  and exhibits  filed as
part of this report.

                  1.       The consolidated  balance sheets of Advance Financial
                           Bancorp and  Subsidiary  as of June 30, 1998 and 1997
                           and the related consolidated statements of income,

                                       21

<PAGE>



                    changes in  stockholders'  equity and cash flows for each of
                    the  years  in the two year  period  ended  June  30,  1998,
                    together  with  the  related   notes  and  the   independent
                    auditors'  report  of  S.  R.  Snodgrass,  A.C.  independent
                    certified public accountants.

                 2. Schedules omitted as they are not applicable.

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

                    (a)  List of Exhibits:
<TABLE>
<CAPTION>
                        <S>     <C>
                         3(i)    Certificate of Incorporation of Advance Financial Bancorp *
                         3(ii)   Bylaws of Advance Financial Bancorp ***
                         4(i)    Specimen Stock Certificate *
                         4(ii)   Shareholder Rights Plan **
                         10      Employment Agreement between the Bank and Stephen M.
                                 Gagliardi ***
                         10.1    1998 Stock Option Plan ****
                         10.2    Restricted Stock Plan and Trust Agreement ****
                         13      Portions of the 1998 Annual Report to Stockholders
                         21      Subsidiaries of the Registrant (See "Item 1- Description of
                                 Business)
                         27      Financial Data Schedule (electronic filing only)

</TABLE>

---------------------
*    Incorporated by reference to the  registration  statement on Form S-1 (File
     No. 333-13021) declared effective by the SEC on November 12, 1996.
**   Incorporated by reference to the Form 8-K (File No. 0-21885) filed with the
     SEC on July 17, 1997.
***  Incorporated  by  reference  to the June 30, 1997 Form 10KSB filed with the
     SEC on September 24, 1997.
**** Incorporated by reference to the Proxy Statement for the Special Meeting of
     Stockholders  on January 20,  1998 and filed with the SEC on  December  12,
     1997.



                    (b)  None.



                                       22

<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   as   of
September 28, 1998.

                             ADVANCE FINANCIAL BANCORP


                             By: /s/Stephen M. Gagliardi
                                 -----------------------------------------------
                                 Stephen M. Gagliardi
                                 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 indicated as of September 28, 1998.


/s/Stephen M.Gagliardi                               /s/George H. Johnson
-----------------------------------------------      ---------------------------
Stephen M. Gagliardi                                 George H. Johnson
President, Chief Executive Officer and Director      Director
(Principal Executive Officer)


                                                     /s/John R. Sperlazza
                                                     ---------------------------
                                                     John R. Sperlazza
                                                     Director


/s/Steven D. Martino                                 /s/William E. Watson
-----------------------------------------------      ---------------------------
Steven D. Martino                                    William E. Watson
Vice President                                       Director


/s/Gary Young                                        /s/James R. Murphy
-----------------------------------------------      ---------------------------
Gary Young                                           James R. Murphy
Director                                             Director


/s/William B.Chesson
-----------------------------------------------     
William B. Chesson
Director