UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB

              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


         For the Quarter ended June 30, 1998 Commission File No. 0-21113


                              AFSALA BANCORP, INC.
             ------------------------------------------------------             
             (Exact name of registrant as specified in its charter)



        DELAWARE                                     14-1793890
---------------------------------        ---------------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)


                     161 CHURCH STREET, AMSTERDAM, NY 12010
                     --------------------------------------
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (518) 842-5700


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes   X    No
                                       -----     -----
Indicate the number of shares of outstanding of each of the issuer's  classes of
common stock, as of the latest practicable date:

                                       Number of shares outstanding
    Class of Common Stock                  as of August  7, 1998
    ---------------------              ----------------------------

    Common Stock, Par $.10                      1,319,018


Transitional Small Business Disclosure Format (Check One):  Yes       No   X
                                                                -----    -----

<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1998


INDEX

Part I    CONSOLIDATED FINANCIAL INFORMATION                               Page
------
Item 1.   Financial Statements...............................................1

          Consolidated Balance Sheets as of June 30, 1998
          (unaudited) and September 30, 1997             ....................1

          Consolidated Statements of Income for the three
          months ended June 30, 1998 and 1997 (Unaudited) ...................2

          Consolidated Statements of Income for the nine
          months ended June 30, 1998 and 1997 (Unaudited) ...................3

          Consolidated Statements of Cash Flows for the nine
          months ended June 30, 1998 and 1997 (Unaudited)....................4

          Notes to unaudited consolidated interim financial statements.......5

Item 2.  Management's Discussion and Analysis
            of Financial Condition and Results of Operations.................8



Part II   OTHER INFORMATION
-------
Item 1.   Legal
Proceedings.................................................................23

Item 2.   Changes in Securities and Use of
Proceeds....................................................................23

Item 3.   Defaults Upon Senior
Securities..................................................................23

Item 4.   Submission of Matters to a Vote of Security Holders...............23

Item 5.   Other
Information.................................................................23

Item 6.   Exhibits and Reports on Form 8-K.   ..............................23

Signatures..................................................................24


<PAGE>




                       AFSALA BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                        June 30,      September 30,
                                                                                          1998             1997

                                                                                     -------------    -------------
<S>                                                                                 <C>              <C>          
     Assets
       Cash and due from banks                                                       $   5,309,168    $   5,127,320
       Federal funds sold                                                               12,500,000        2,675,000
       Term deposits with the Federal Home Loan Bank                                     3,000,000            --
                                                                                     -------------    -------------
                        Total cash and cash equivalents                                 20,809,168        7,802,320
                                                                                     -------------    -------------

       Securities available for sale, at fair value                                     45,901,769       37,705,373
       Investment securities held to maturity                                           16,619,065       35,263,826
       Federal Home Loan Bank of New York stock, at cost                                   565,300          565,300

       Loans receivable                                                                 81,118,419       76,927,350
       Less:  Allowance for loan losses                                                 (1,147,901)      (1,108,080)
                                                                                     -------------    -------------
            Net loans receivable                                                        79,970,518       75,819,270
                                                                                     -------------    -------------

       Accrued interest receivable                                                       1,388,204        1,405,687
       Premises and equipment, net                                                       1,747,141        1,659,444
       Other assets                                                                        300,226          186,066
                                                                                     -------------    -------------
                        Total assets                                                 $ 167,301,391    $ 160,407,286
                                                                                     =============    =============

       Liabilities and Stockholders' Equity
       Liabilities:
                Deposits                                                               144,546,188      135,316,322
                Federal Home Loan  Bank of New York long term
                   borrowings                                                            1,599,272        1,415,625
                Escrow accounts                                                            486,676          266,656
                Accrued expenses and other liabilities                                   1,594,583        2,789,562
                                                                                     -------------    -------------
                        Total liabilities                                              148,226,719      139,788,165
                                                                                     -------------    -------------

       Commitments and contingent liabilities

       Stockholders' Equity:
         Preferred stock, $0.10 par value;  authorized 500,000 shares; none issued
                                                                                             --               --   
         Common stock, $0.10 par value; authorized 3,000,000 shares;
                     1,454,750 shares issued                                               145,475          145,475
         Additional paid-in capital                                                     13,556,761       13,465,092
         Retained earnings, substantially restricted                                     9,485,393        9,048,824
         Common stock acquired by ESOP                                                    (969,325)      (1,080,105)
         Unearned Restricted Stock Plan                                                   (615,359)        (733,194)
         Treasury stock, at cost                                                        (2,561,731)        (238,125)
         Net unrealized gain on securities available for sale, net of tax                   33,458           11,154
                                                                                     -------------    -------------

                        Total  stockholders' equity                                     19,074,672       20,619,121
                                                                                     -------------    -------------

                        Total liabilities and stockholders' equity                   $ 167,301,391    $ 160,407,286
                                                                                     =============    =============
</TABLE>


 See accompanying notes to unaudited consolidated interim financial statements

                                       -1-
<PAGE>

                       AFSALA BANCORP, INC. AND SUBSIDIARY
                        Consolidated Statements of Income
                For the three months ended June 30, 1998 and 1997
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                   1998           1997
                                                                                ------------- ------------
<S>                                                                              <C>          <C>       
            Interest and dividend income:
                  Interest and fees on loans                                      $1,605,241   $1,522,309
                  Interest on federal funds sold                                     124,078       80,516
                  Interest on FHLB term deposits                                     117,670         --
                  Interest on securities available for sale                          672,898      432,366
                  Interest on investment securities                                  310,537      674,214
                  Dividends on Federal Home Loan Bank of NY stock                     10,500        8,809
                                                                                  ----------   ----------
                         Total interest and dividend income                        2,840,924    2,718,214
                                                                                  ----------   ----------
                                                                                  
            Interest expense:                                                     
                  Deposits and escrow accounts                                     1,502,532    1,372,241
                  Federal Home Loan Bank of New York long term                    
                     borrowings                                                       27,985       28,907
                                                                                  ----------   ----------
                         Total interest expense                                    1,530,517    1,401,148
                                                                                  ----------   ----------
                                                                                  
                         Net interest income                                       1,310,407    1,317,066
                                                                                  
            Provision for loan losses                                                  5,000       60,000
                                                                                  ----------   ----------
                         Net interest income after provision for losses            1,305,407    1,257,066
                                                                                  ----------   ----------
                                                                                  
             Non-interest  income:                                                
                  Service charges on deposit accounts                                 83,849       83,136
                  Other                                                                2,638        2,237
                                                                                  ----------   ----------
                         Total  non-interest income                                   86,487       85,373
                                                                                  ----------   ----------
                                                                                  
            Non-interest expenses:                                                
                  Compensation and benefits                                          516,637      402,668
                  Occupancy and equipment                                            144,166      134,255
                  FDIC deposit insurance premium                                      21,439       20,519
                  Data processing fees                                                76,280       63,889
                  Professional services fees                                          51,824       81,967
                  Advertising                                                         21,129       18,534
                  Supplies                                                            22,212       35,654
                  Acquisition-related expenses                                       126,522         --
                  Other                                                              140,757      115,032
                                                                                  ----------   ----------
                         Total  non-interest expenses                              1,120,966      872,518
                                                                                  ----------   ----------
                                                                                  
                         Income before income tax expense                            270,928      469,921
                                                                                  
            Income tax expense                                                       155,000      160,000
                                                                                  ----------   ----------
                                                                                  
                         Net income                                               $  115,928   $  309,921
                                                                                  ==========   ==========
                                                                                  
                         Earnings per share:                                      
                               Basic                                              $     0.10   $     0.23
                                                                                  ==========   ==========
                               Diluted                                            $     0.09   $     0.23
                                                                                  ==========   ==========
</TABLE>
                                                                                
  See accompanying notes to unaudited consolidated interim financial statements
                                      - 2 -
<PAGE>

                       AFSALA BANCORP, INC. AND SUBSIDIARY
                        Consolidated Statements of Income
                For the nine months ended June 30, 1998 and 1997
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                   1998             1997
                                                                                ------------    ------------
<S>                                                                              <C>          <C>      
Interest and dividend income:
      Interest and fees on loans                                                  $4,718,477   $4,559,434
      Interest on federal funds sold                                                 306,007      278,163
      Interest on FHLB term deposits                                                 185,558      142,037
      Interest on securities available for sale                                    1,882,266      936,270
      Interest on investment securities                                            1,249,721    2,014,125
      Dividends on Federal Home Loan Bank of NY stock                                 30,860       27,053
                                                                                  ----------   ----------
             Total interest and dividend income                                    8,372,889    7,957,082
                                                                                  ----------   ----------

Interest expense:
      Deposits and escrow accounts                                                 4,351,568    3,968,968
      Federal Home Loan Bank of New York long term
         borrowings                                                                   86,886       88,482
                                                                                  ----------   ----------
             Total interest expense                                                4,438,454    4,057,450
                                                                                  ----------   ----------

             Net interest income                                                   3,934,435    3,899,632

Provision for loan losses                                                             55,000      210,000
                                                                                  ----------   ----------
      Net interest income after provision for loan losses                          3,879,435    3,689,632
                                                                                  ----------   ----------

Non-interest income:
      Service charges on deposit accounts                                            260,582      282,172
      Other                                                                           19,241       31,657
                                                                                  ----------   ----------
             Total  non-interest income                                              279,823      313,829
                                                                                  ----------   ----------

Non-interest expenses:
      Compensation and benefits                                                    1,462,034    1,139,741
      Occupancy and equipment                                                        407,536      407,048
      FDIC deposit insurance premium                                                  64,455       96,532
      Data processing fees                                                           222,026      205,963
      Professional service fees                                                      115,975      213,591
      Advertising                                                                     48,264       43,024
      Supplies                                                                        81,792       85,295
      Acquisition-related expenses                                                   155,943         --  
      Other                                                                          432,419      485,163
                                                                                  ----------   ----------
             Total non-interest expenses                                           2,990,444    2,676,357
                                                                                  ----------   ----------

             Income before income tax expense                                      1,168,814    1,327,104

Income tax expense                                                                   485,825      464,731
                                                                                  ----------   ----------

             Net income                                                           $  682,989   $  862,373
                                                                                  ==========   ==========

             Earnings per share:
                   Basic                                                          $     0.56   $     0.64
                                                                                  ==========   ==========
                   Diluted                                                        $     0.54   $     0.64
                                                                                  ==========   ==========
</TABLE>

 See accompanying notes to unaudited consolidated interim financial statements
                                      - 3 -


<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY
                         Consolidated Statements of Cash
                    Flows For the nine months ended June 30,
                                  1998 and 1997
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                    1998               1997
                                                                                    ----               ----
<S>                                                                             <C>             <C>         
Increase  (decrease) in cash and cash  equivalents:  
Cash flows from operating activities:
         Net income                                                              $    682,989    $    862,373
         Adjustments to reconcile net income to net
             cash provided by (used in) operating activities:
              Depreciation                                                            119,556         129,857
              Provision for loan losses                                                55,000         210,000
              Allocation of ESOP stock                                                170,951          32,406
              RSP compensation expense                                                117,835          13,093
              Decrease (increase) in accrued interest receivable                       17,483        (218,082)
              (Increase) decrease in other assets                                    (114,160)        232,048
              Increase (decrease) in accrued expenses and other liabilities           471,425      (3,758,615)
                                                                                 ------------    ------------
                    Total adjustments                                                 838,090      (3,359,293)
                                                                                 ------------    ------------
                    Net cash provided by (used in) operating activities             1,521,079      (2,496,920)
                                                                                 ------------    ------------

Cash flows from investing activities:
          Proceeds from the maturity and call of securities
                 available for sale                                                19,687,398       8,132,062
          Purchases of securities available for sale                              (29,350,000)    (18,000,000)
          Proceeds from the maturity and call of investment securities             19,184,102       6,088,234
          Purchases of investment securities                                         (539,340)    (11,485,060)
          Net loans made to customers                                              (4,206,248)     (3,422,015)
          Capital expenditures                                                       (207,254)       (113,957)
                                                                                 ------------    ------------
                   Net cash provided by ( used in) investing activities             4,568,658     (18,800,736)
                                                                                 ------------    ------------

Cash flows from financing activities:
          Net increase in deposits                                                  9,229,866       8,787,040
          Borrowing from the Federal Home Loan Bank                                   500,000            --
          Repayments on long term borrowings from the
                 Federal  Home Loan Bank                                             (316,353)       (303,125)
          Net increase (decrease) in escrow accounts                                  220,020         (73,937)
          Purchase of treasury stock                                               (2,470,002)           --
          Cash dividends paid on common stock                                        (246,420)        (53,870)
                                                                                 ------------    ------------
                   Net cash provided by financing activities                        6,917,111       8,356,108
                                                                                 ------------    ------------

Net increase (decrease) in cash and cash equivalents                               13,006,848     (12,941,548)
Cash and cash equivalents at beginning of period                                    7,802,320      27,016,392
                                                                                 ------------    ------------
Cash and cash equivalents at end of period                                       $ 20,809,168    $ 14,074,844
                                                                                 ============    ============

Additional  Disclosures Relative to Cash Flows:
                  Interest paid                                                  $  4,437,120    $  4,066,692
                                                                                 ============    ============

                 Taxes paid                                                      $    882,268    $    307,738
                                                                                 ============    ============
Supplemental schedule of non-cash investing and financing activities:
  Change in net unrealized gain on securities available for sale, net of tax     $     22,304    $       (829)
                                                                                 ============    ============
  Decrease in amounts due to broker from purchases of
         securities available for sale                                           $ (1,500,000)   $       --
                                                                                 ============    ============
  Tax benefit associated with the vesting of Restricted Stock Plan shares        $     31,498    $       --
                                                                                 ============    ============
  Decrease in amounts due to broker from purchases of treasury stock             $   (146,396)   $       --
                                                                                 ============    ============
</TABLE>

 See accompanying notes to unaudited consolidated interim financial statements
                                      -4 -


<PAGE>




                       AFSALA BANCORP, INC. AND SUBSIDIARY
          NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS


NOTE 1.  Presentation of Financial Information

The accompanying unaudited consolidated interim financial statements include the
accounts of AFSALA  Bancorp,  Inc. and its  subsidiary  (the Company)  Amsterdam
Federal  Bank.  The  accompanying   unaudited   consolidated  interim  financial
statements  have been  prepared  in  accordance  with the  instructions  to Form
10-QSB.  Accordingly,  they do not include all of the  information and footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements.  The accounting and reporting policies of the Company conform in all
material  respects to generally  accepted  accounting  principles and to general
practice within the savings bank industry.  It is the opinion of management that
the accompanying unaudited consolidated interim financial statements reflect all
adjustments  which are  considered  necessary  to report  fairly  the  financial
position as of June 30,  1998,  the  Consolidated  Statements  of Income for the
three months and nine months ended June 30, 1998 and 1997, and the  Consolidated
Statements  of Cash Flows for the nine months ended June 30, 1998 and 1997.  The
results  of  operations  for the  nine  months  ended  June  30,  1998,  are not
necessarily  indicative  of results  that may be  expected  for the entire  year
ending  September 30, 1998.  The  accompanying  unaudited  consolidated  interim
financial  statements should be read in conjunction with AFSALA Bancorp,  Inc.'s
September  30,  1997  consolidated  financial  statements,  including  the notes
thereto,  which are included in AFSALA Bancorp, Inc's 1997 Annual Report on Form
10-KSB.


NOTE 2.  Proposed Merger

On April 23, 1998, AFSALA Bancorp, Inc. ("AFSALA") jointly announced that it had
entered into a Reorganization and Merger Agreement (the "Agreement") with Ambanc
Holding Co., Inc., Amsterdam,  New York ("Ambanc") for the merger of AFSALA with
and into Ambanc and the merger of AFSALA's  wholly-owned  subsidiary,  Amsterdam
Federal Bank, with and into Ambanc's wholly-owned subsidiary,  Amsterdam Savings
Bank, FSB (collectively, the "Merger"). The parties to the Agreement will in the
future jointly rename the resulting bank. In consideration  of the merger,  each
outstanding share of common stock of AFSALA will be exchanged for 1.07 shares of
Ambanc common stock.  Consummation of the Merger is subject to satisfaction of a
number of conditions,  including, among other things, stockholder and regulatory
approval  and the  receipt  of a written  fairness  opinion  by AFSALA  that the
consideration  offered  pursuant to the Agreement is fair from a financial point
of view to the stockholders of AFSALA. It is anticipated that the Merger will be
consummated during the fourth quarter of calendar 1998 and will be accounted for
as a purchase transaction.

In connection  with the  Agreement,  AFSALA and Ambanc have entered into a Stock
Option Agreement dated April 24, 1998, pursuant to which Ambanc has the right to
purchase  344,500  shares of AFSALA  common stock at a price of $20.75 per share
exercisable under certain circumstances.



                                      -5 -

<PAGE>

NOTE 3.  Earnings Per Share

On December  31,  1997,  the Company  adopted the  provisions  of  Statement  of
Financial  Accounting  Standards (SFAS) No. 128,  "Earnings per Share." SFAS No.
128 establishes standards for computing and presenting earnings per share (EPS).
SFAS No. 128 supersedes  Accounting  Principles  Board Opinion No. 15, "Earnings
per Share" and related interpretations.  SFAS No. 128 requires dual presentation
of basic and diluted EPS on the face of the income  statement  for all  entities
with  complex   capital   structures   and   specifies   additional   disclosure
requirements.

Basic EPS  excludes  dilution  and is computed by dividing  income  available to
common  stockholders by the weighted average number of common shares outstanding
for the period.  Unvested  restricted  stock awards are  considered  outstanding
common shares and included in the  computation  of basic EPS as of the date that
they are fully vested.  Diluted EPS reflects the  potential  dilution that could
occur if securities or other  contracts to issue common stock were  exercised or
converted  into common  stock or resulted in the  issuance of common  stock that
then shared in the earnings of the entity (such as the Company's stock options).

All prior period EPS data has been restated to conform to the provisions of this
Statement.

The following tables provide the calculation of basic and diluted EPS:
<TABLE>
<CAPTION>

                                                                  For the Three Months Ended June  30,
                                      ---------------------------------------------------------------------------------------
                                                        1998                                           1997
                                      ------------------------------------------      ---------------------------------------
                                                      Weighted      Per- Share                       Weighted      Per- Share    
                                           Income    Avg. Shares      Amount              Income    Avg. Shares      Amount
                                           ------    -----------      ------              ------    -----------      ------
<S>                                    <C>           <C>           <C>                <C>            <C>          <C>       
Basic EPS:                                                                           
   Net income available to                                                           
       common stockholders              $  115,928    1,201,259     $     0.10         $ 309,921      1,346,740    $     0.23
                                                                     =========                                      =========
                                                                                     
 Effect of  Dilutive Securities:                                                     
  Stock options                                          37,813                                           2,699
  Unvested restricted stock awards                       15,596                                             945
                                                        -------                                       ---------
                                                                                     
Diluted EPS                             $  115,928    1,254,668     $     0.09         $ 309,921      1,350,384    $     0.23
                                         =========    =========      =========          ========      =========     =========
                                                                                     
</TABLE>
                                                                                
<TABLE>
<CAPTION>
                                                                        For the Nine Months Ended June  30,
                                      ----------------------------------------------------------------------------------------
                                                        1998                                           1997
                                      ------------------------------------------        --------------------------------------
                                                      Weighted      Per- Share                        Weighted      Per- Share  
                                           Income    Avg. Shares      Amount               Income    Avg. Shares      Amount
                                           ------    -----------      ------               ------    -----------      ------
<S>                                    <C>           <C>           <C>                 <C>            <C>          <C>       
Basic EPS:                                                                            
   Net income available to                                                            
       common stockholders              $ 682,989     1,219,410     $     0.56          $ 862,373      1,345,817    $     0.64
                                                                    ==========                                      ==========
                                                                                      
 Effect of  Dilutive Securities:                                                      
  Stock options                                          35,130                      
                                                                                                             900
  Unvested restricted stock awards                       15,379                                              315
                                                      ---------                                        ---------                    
                                                                                      
Diluted EPS                            $  682,989     1,269,919     $     0.54          $ 862,373      1,347,031    $     0.64
                                      ============   ===========    ==========          =========    ===========    ==========
</TABLE>

                                      -6 -


<PAGE>

NOTE 4.  Recent Accounting Pronouncements

In June 1997, the Financial  Accounting Standards Board (`FASB") issued SFAS No.
130,  "Reporting   Comprehensive  Income"  (Statement  130),  which  establishes
standards for reporting and display of  comprehensive  income and its components
in financial statements. Statement 130 states that comprehensive income includes
reported  net  income  of a  company,  adjusted  for  items  that are  currently
accounted for as direct entries to equity,  such as the net  unrealized  gain or
loss on securities  available for sale.  This  statement is effective for fiscal
years  beginning  after  December 15, 1997. As required,  the Company will adopt
Statement 130 in the first  quarter of fiscal 1999,  and will report and display
comprehensive income in accordance with the new statement.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related Information" (Statement 131), which establishes standards
for reporting by public  companies about  operating  segments of their business.
Statement 131 also establishes  standards for related disclosures about products
and services, geographic areas, and major customers. This Statement is effective
for periods  beginning  after December 15, 1997.  Management does not anticipate
that the adoption of this statement will have a material effect on the Company's
consolidated financial statements.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities.  This  Statement  is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.






















                                      -7 -


<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General

AFSALA Bancorp,  Inc. (the Company) is a Delaware corporation  organized in June
1996 at the direction of Amsterdam  Federal Bank (the Bank) to aquire all of the
capital stock that the Bank issued upon the Bank's conversion from the mutual to
stock form of  ownership.  On September  30,  1996,  the Company  completed  its
initial public stock offering, issuing 1,454,750 shares of $.10 par value common
stock at $10.00 per share.  Net proceeds to the Company were $13.6 million after
conversion  costs.  Approximately  $1.1 million of the proceeds were utilized to
fund a loan by the Company to the Company's Employee Stock Ownership Plan (ESOP)
which  purchased  110,780  shares  of the  Company's  common  stock  during  the
offering.  The  Company is not an  operating  company and has not engaged in any
significant business to date. As such,  references herein to the Bank subsequent
to  September  30,  1996  include  the  Company  unless  the  context  otherwise
indicates.

The Bank's  results of operations  are  primarily  dependent on its net interest
income,  which is the difference between the interest and dividend income earned
on its assets, primarily loans and investments,  and the interest expense on its
liabilities,  primarily  deposits and  borrowings.  Net  interest  income may be
affected  significantly  by general  economic  and  competitive  conditions  and
policies  of  regulatory  agencies,  particularly  those with  respect to market
interest rates. The results of operations are also  significantly  influenced by
the level of  non-interest  expenses,  such as employee  salaries and  benefits,
other income, such as fees on deposit-related services, and the Bank's provision
for loan losses.

 The Bank  has  been,  and  intends  to  continue  to be,  a  community-oriented
financial  institution  offering a variety of financial  services.  Management's
strategy  has been to try to  achieve a high  loans to  assets  ratio and a high
proportion of lower-costing, non-time deposit accounts in the deposit portfolio.
At June 30, 1998, the Bank's loans  receivable,  net, to assets ratio was 47.8%,
up from 47.3% at September  30, 1997.  At June 30, 1998 and  September 30, 1997,
$70.7  million  or 48.9%  and $65.6  million  or  48.5%,  respectively  of total
deposits were in non-time deposits accounts.

Forward-Looking Statements

This Form 10-QSB includes forward-looking statements that involve inherent risks
and  uncertainties.  The Company  cautions  readers  that a number of  important
factors  could  cause  actual  results  to differ  materially  from those in the
forward-looking  statements.  Those  factors  include  fluctuations  in interest
rates,   inflation,   government   regulations,   and  economic  conditions  and
competition in the  geographic and business areas in which the Company  conducts
its operations.  The interim financial information should be read in conjunction
with the Company's 1997 Annual Report on Form 10-KSB.

                                      - 8 -

<PAGE>

Mergers and Acquisitions

On April 23, 1998, AFSALA Bancorp, Inc. ("AFSALA") jointly announced that it had
entered into a Reorganization and Merger Agreement (the "Agreement") with Ambanc
Holding Co., Inc., Amsterdam,  New York ("Ambanc") for the merger of AFSALA with
and into Ambanc and the merger of AFSALA's  wholly-owned  subsidiary,  Amsterdam
Federal Bank, with and into Ambanc's wholly-owned subsidiary,  Amsterdam Savings
Bank, FSB (collectively, the "Merger"). The parties to the Agreement will in the
future jointly rename the resulting bank. In consideration  of the merger,  each
outstanding share of common stock of AFSALA will be exchanged for 1.07 shares of
Ambanc common stock.  Consummation of the Merger is subject to satisfaction of a
number of conditions,  including, among other things, stockholder and regulatory
approval  and the  receipt  of a written  fairness  opinion  by AFSALA  that the
consideration  offered  pursuant to the Agreement is fair from a financial point
of view to the stockholders of AFSALA. It is anticipated that the Merger will be
consummated during the fourth quarter of calendar 1998 and will be accounted for
as a purchase transaction.

In connection  with the  Agreement,  AFSALA and Ambanc have entered into a Stock
Option Agreement dated April 24, 1998, pursuant to which Ambanc has the right to
purchase  344,500  shares of AFSALA  common stock at a price of $20.75 per share
exercisable under certain circumstances.

Consolidated Financial Condition

Total assets  increased  by $6.9  million or 4.3% to $167.3  million at June 30,
1998 from $160.4  million at September  30, 1997.  This  increase was  primarily
attributable to an increase in federal funds sold of $9.8 million or 367.3%,  an
increase  in term  deposits  with the  Federal  Home  Loan  Bank from $0 to $3.0
million,  and an increase  in net loans  receivable  of $4.2  million or 5.5% to
$80.0  million.  The increase in net loans  receivable was due to increased loan
activity  primarily  in  residential  mortgage  and  home  equity  loans.  These
increases where offset by a decrease in total securities  (securities  available
for sale and investment  securities held to maturity) of $10.4 million or 14.3%.
These  shifts  were  primarily  the  result  of the  investment  of  funds  from
maturities and calls of  securities,  in addition to the proceeds from growth in
deposits,  into federal fund sold and term  deposits  with the Federal Home Loan
Bank.

The Company's  deposits  increased by $9.2 million or 6.8% to $144.5  million at
June 30,  1998 from  $135.3  million at  September  30,  1997 due in part to the
opening of a new supermarket branch in December 1997. In addition,  Federal Home
Loan Bank of New York long term  borrowings  increased $184 thousand or 13.0% to
$1.6 million at June 30, 1998 from $1.4 million at September 30, 1997, due to an
additional  borrowing of $500  thousand,  offset by repayments of $316 thousand.
Accrued expenses and other  liabilities  decreased $1.2 million or 42.8% to $1.6
million at June 30, 1998 from $2.8  million at  September  30,  1997,  resulting
primarily  from  the  payment  of  amounts  due to  brokers  from  purchases  of
securities outstanding on September 30, 1997.

Stockholders'  equity decreased by $1.5 million or 7.5% to $19.1 million at June
30, 1998 from $20.6  million at September  30, 1997.  The decrease was primarily
the result of purchases of treasury stock and cash dividends paid, offset by net
income for the nine months ended June 30, 1998.  In addition,  11,078  shares of
common stock were  committed to be released by the Company's ESOP as of December
31, 1997, which increased equity by $171 thousand.
                                      - 9 -


<PAGE>


Asset /Liability Management

The Bank's net interest income is sensitive to changes in interest rates, as the
rates paid on its interest-bearing  liabilities generally change faster than the
rates earned on its  interest-earning  assets. As a result,  net interest income
will  frequently  decline in periods of rising  interest  rates and  increase in
periods of decreasing interest rates.

To mitigate the impact of changing  interest  rates on its net interest  income,
the Bank manages its interest  rate  sensitivity  and  asset/liability  products
through its asset/liability management committee. The asset/liability management
committee meets weekly to determine the rates of interest for loans and deposits
and consists of the President and Chief  Executive  Officer,  the Vice President
and Chief Lending Officer, and the Treasurer and Chief Financial Officer.  Rates
on deposits are primarily based on the Bank's needs for funds and on a review of
rates  offered  by other  financial  institutions  in the Bank's  market  areas.
Interest  rates on loans are  primarily  based on the interest  rates offered by
other  financial  institutions in the Bank's primary market areas as well as the
Bank's cost of funds.

In an effort to reduce  interest rate risk and protect  itself from the negative
effects of rapid or prolonged changes in interest rates, the Bank has instituted
certain asset and liability management measures,  including (i) originating, for
its portfolio,  a large base of adjustable-rate  residential mortgage loans, and
(ii) maintaining  substantial levels of interest-bearing term deposits,  federal
funds, and securities with one to five year terms to maturity.

The  committee  manages the interest  rate  sensitivity  of the Bank through the
determination  and  adjustment  of   asset/liability   composition  and  pricing
strategies. The committee then monitors the impact of the interest rate risk and
earnings  consequences  of such  strategies  for  consistency  with  the  Bank's
liquidity needs, growth, and capital adequacy.  The Bank's principal strategy is
to reduce the interest rate  sensitivity of its  interest-earning  assets and to
match, as closely as possible,  the maturities of  interest-earning  assets with
interest-bearing liabilities.

The  experience  of the Bank has been that net  interest  income  declines  with
increases  in  interest  rates  and  that net  interest  income  increases  with
decreases in interest rates.  Generally,  during periods of increasing  interest
rates, the Bank's interest rate sensitive  liabilities would reprice faster than
its interest rate sensitive assets causing a decline in the Bank's interest rate
spread and  margin.  This would  result  from an  increase in the Bank's cost of
funds  that  would  not be  immediately  offset by an  increase  in its yield on
earning assets. An increase in the cost of funds without an equivalent  increase
in the yield on earning  assets  would tend to reduce net interest  income.  The
Bank's  interest rate spread  decreased to 2.76% for the three months ended June
30,1998 from 2.89% for the three months ended June 30, 1997.  The interest  rate
spread for the nine months  ended June 30, 1998 was 2.80%,  as compared to 2.90%
for the nine months ended June 30, 1997.

In times of decreasing interest rates, fixed rate assets could increase in value
and the lag in repricing of interest rate sensitive  assets could be expected to
have a positive effect on the Bank's net interest income.


                                      - 10-


<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY
                Average Balance Sheet, Interest Rates and Yields
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                        For the Three Months Ended June  30,
                                         --------------------------------------------------------------------------------       
                                                         1998                                       1997
                                         ---------------------------------------     ------------------------------------       
                                                       Interest       Average                     Interest        Average
                                          Average       Earned/        Yield/        Average       Earned/         Yield/
                                          Balance        Paid         Cost(1)        Balance        Paid          Cost(1)
                                          -------        ----         -------        -------        ----          -------
                                                                     (Dollars in Thousands)
<S>                                    <C>             <C>            <C>        <C>             <C>             <C> 
Interest-earning assets:
   Federal funds sold                    $  9,322           124          5.34%      $  6,105            81          5.32%
   Term deposits with the FHLB              8,553           118          5.53           --            --
   Securities available for sale (2)       41,741           673          6.47         27,465           432          6.31
   Investment securities held to           
     maturity                              19,436           311          6.42         41,673           674          6.49         
   FHLB of NY stock                           565            10          7.10            565             9          6.39
   Net loans receivable (3)                76,895         1,605          8.37         72,462         1,522          8.42
                                        ---------      --------         -----      ---------      --------         -----
       Total interest-earning assets      156,512         2,841          7.28        148,270         2,718          7.35
                                                       --------         -----                     --------         -----            
Non-interest earning assets                 8,337                                      7,739
                                        ---------                                  ---------
       Total assets                    $  164,849                                 $  156,009
                                        =========                                  =========
                                                                                            

Interest-bearing liabilities:
   Savings accounts                    $   37,649           283          3.00     $   36,364           272          3.00
   NOW  accounts                           12,238            70          2.29         11,227            65          2.32
   Money market accounts                   10,786           117          4.35          9,266            95          4.11
   Time deposit accounts                   73,129         1,031          5.65         67,277           939          5.60
   Escrow accounts                            376             2          2.13            204             1          1.97
   FHLB of NY
       long term borrowings                 1,639            28          6.85          1,631            29          7.13
                                       ----------    ----------        ------    -----------    ----------        ------
Total interest-bearing liabilities        135,817         1,531          4.52        125,969         1,401          4.46
                                                     ----------        ------                   ----------        ------ 

Non-interest bearing deposits               8,419                                      7,970
Other non-interest bearing liabilities      1,087                                        816
Equity                                     19 526                                     21,254
                                       ----------                                -----------
       Total liabilities and equity   $   164,849                                 $  156,009
                                       ==========                                ===========

Net interest income                                 $    1,310                                   $   1,317
                                                     =========                                    ========

Interest rate spread                                                     2.76%                                      2.89%
                                                                       ======                                     ======


Net interest margin                                                      3.36%                                      3.56%
                                                                       ======                                     ======

Ratio of average interest-earning
        assets to average
        interest-bearing liabilities       115.24%                                    117.70%
                                       ==========                                 ==========
</TABLE>

(1)  Annualized
(2)  Average  securities  available  for sale are included at  approximate  fair
     value. The adjustment to approximate fair value is not considered material.
(3)  Calculated net of allowance for loan losses. Includes non-accrual loans.


                                     - 11 -

<PAGE>

                       AFSALA BANCORP, INC. AND SUBSIDIARY
                Average Balance Sheet, Interest Rates and Yields
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                        For the Nine Months Ended June  30,
                                         --------------------------------------------------------------------------------       
                                                         1998                                       1997
                                         ---------------------------------------     ------------------------------------       
                                                       Interest       Average                     Interest        Average
                                          Average       Earned/        Yield/        Average       Earned/         Yield/
                                          Balance        Paid         Rate(1)        Balance        Paid          Rate(1)
                                          -------        ----         -------        -------        ----          -------
                                                                     (Dollars in Thousands)
<S>                                   <C>            <C>            <C>            <C>           <C>             <C> 
Interest-earning assets:
   Federal funds sold                   $  7,660           306         5.34%        $   7,121         278           5.22%
   Term deposits with the FHLB             4,504           186         5.52             3,480         142           5.46
   Securities available for sale (2)      38,793         1,882         6.49            20,846         936           6.00
   Investment securities held to          
     maturity                             25,654         1,250         6.51            41,129       2,014           6.55
   FHLB of NY stock                          565            31         7.34               565          27           6.39
   Net loans receivable (3)               76,118         4,718         8.29            72,068       4,560           8.46
                                        --------        ------      -------          --------      ------          -----
       Total interest-earning assets     153,294         8,373         7.30           145,209       7,957           7.33
                                                         -----      -------                        ------          -----
Non-interest earning assets                7,729                                        7,000
                                        --------                                     --------
       Total assets                    $ 161,023                                    $ 152,209
                                        ========                                     ========  


Interest-bearing liabilities:
   Savings accounts                    $  36,448          819          3.00         $  35,911         805           3.00
   NOW  accounts                          12,081          206          2.28            10,957         189           2.31
   Money market accounts                  10,524          336          4.27             8,745         263           4.02
   Time deposit accounts                  70,651        2,984          5.65            64,853       2,706           5.58
   Escrow accounts                           343            6          2.34               267           6           3.00
   FHLB of NY
       long term borrowings                1,694           87          6.87             1,677          88           7.02
                                        --------        -----       -------          --------     -------          -----
Total interest-bearing liabilities       131,741        4,438          4.50           122,410       4,057           4.43
                                                        -----       -------                       -------          -----

Non-interest bearing deposits              8,196                                        7,703
Other non-interest bearing liabilities     1,220                                        1,099
Equity                                    19,866                                       20,997
                                        --------                                    ---------
       Total liabilities and equity    $ 161,023                                   $  152,209
                                        ========                                    =========

Net interest income                                  $  3,935                                    $  3,900
                                                      =======                                     =======

Interest rate spread                                                   2.80%                                        2.90%
                                                                    =======                                        =====


Net interest margin                                                    3.43%                                        3.59%
                                                                    =======                                        =====

Ratio of average interest-earning
        assets to average
        interest-bearing liabilities     116.36%                                      118.63%
                                        =======                                     ========
</TABLE>

(1)  Annualized
(2)  Average  securities  available  for sale are included at  approximate  fair
     value. The adjustment to approximate fair value is not considered material.
(3)  Calculated net of allowance for loan losses. Includes non-accrual loans.

                                     - 12 -



<PAGE>
                       AFSALA BANCORP, INC. AND SUBSIDIARY
                              RATE/ VOLUME ANALYSIS
                                   (Unaudited)

                         THREE MONTHS ENDED JUNE 30,1998
                                  COMPARED WITH
                        THREE MONTHS ENDED JUNE 30, 1997
                        --------------------------------
<TABLE>
<CAPTION>
                                                       INCREASE   (DECREASE)
                                         ------------------------------------------------
                                                         DUE TO
                                         ------------------------------------------------
                                              VOLUME              RATE             NET
<S>                                    <C>                   <C>               <C>   
Interest and dividend  income:
   Federal funds sold                     $    43,253               309           43,562
   Term deposits with the FHLB                117,670                 -          117,670
   Securities available for sale              229,345            11,188          240,533
   Investment securities held to         
     maturity                                (356,473)           (7,205)        (363,678)                       
   FHLB of NY stock                                 -             1,691            1,691
   Net loans receivable                        92,062            (9,130)          82,932
                                           ----------         ---------         -------- 
Total interest and dividend income            125,857            (3,147)         122,710
                                           ----------         ---------         --------  

Interest expense:
   Savings accounts                            10,528                 -           10,528
   NOW  accounts                                5,889              (834)           5,055
   Money market accounts                       16,593             5,909           22,502
   Time deposit accounts                       83,441             8,564           92,005
   Escrow  accounts                               183                18              201
   FHLB of NY long term borrowings                146            (1,068)            (922)
                                           ----------          --------         --------
Total interest expense                        116,780            12,589          129,369
                                           ----------          --------         --------

Net change in net interest income          $    9,077         $ (15,736)       $  (6,659)
                                            =========          ========         ========
</TABLE>
                         NINE MONTHS ENDED JUNE 30,1998
                                  COMPARED WITH
                         NINE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
                                                       INCREASE   (DECREASE)
                                         ------------------------------------------------
                                                         DUE TO
                                         ------------------------------------------------
                                              VOLUME              RATE             NET

<S>                                    <C>                   <C>               <C>   
Interest and dividend  income:
   Federal funds sold                    $    21,356              6,488             27,844
   Term deposits with the FHLB                41,954              1,567             43,521
   Securities available for sale             864,038             81,958             945,997
   Investment securities held to            
     maturity                               (752,195)           (12,210)           (764,405) 
   FHLB of NY stock                                -              3,807             3,807
   Net loans receivable                      252,150            (93,106)            159,044
                                        ------------         -----------        -----------
Total interest and dividend income           427,303            (11,496)            415,807
                                        ------------         -----------        -----------

Interest expense:
   Savings accounts                           13,521                  -              13,521
   NOW  accounts                              19,868             (2,401)             17,467
   Money market accounts                      55,902             17,091              72,993
   Time deposit accounts                     244,071             34,243             278,314
   Escrow  accounts                            1,658             (1,354)                304
   FHLB of NY long term borrowings               673             (2,268)             (1,595)
                                         -----------         -----------        -----------
Total interest expense                       335,693             45,311             381,004
                                         -----------         -----------        -----------

Net change in net interest income         $   91,610         $  (56,807)        $    34,803
                                         ===========         ===========        ===========
</TABLE>
                                     - 13 -
<PAGE>



      Comparison of Operating Results for the Three Months Ended June 30,
                                 1998 and 1997.

Net Income.  Net income decreased by $194 thousand or 62.6% for the three months
ended June 30, 1998 to $116  thousand  from $310  thousand  for the three months
ended June 30,  1997.  Net income for the three  months  ended June 30, 1998 was
reduced primarily as a result of increased non-interest expenses, offset in part
by a decrease in the  provision  for loan  losses.  These and other  changes are
discussed in more detail below.

Net Interest Income.  Net interest income remained  constant at $1.3 million for
the three months ended June 30, 1998 and 1997. During the period,  total average
interest-earning  assets  increased  $8.2  million or 5.6%,  to $156.5  million.
However,  the  increase  in  the  average  balance  of  total   interest-bearing
liabilities of $9.8 million or 7.8%, to $135.8 million, exceeded the increase in
total  average   interest-earning   assets.   Total   average   interest-bearing
liabilities  increased  $1.6  million more than total  average  interest-earning
assets due primarily to the Company's repurchase of 136 thousand shares of stock
for a total cost of $2.6  million  through  June 30,  1998.  The increase in the
average  balance of total  interest-bearing  liabilities  was accompanied by a 6
basis point increase in the average rate paid on these funds, while the increase
in the average  balance of interest  earning assets was offset by a decline of 7
basis points in the average yield on interest-earning assets during the period.

Interest-earning  assets primarily  consist of loans  receivable,  federal funds
sold,  securities  (securities  available  for  sale  combined  with  investment
securities held to maturity), and interest bearing deposits with the FHLB of New
York.   Interest-bearing   liabilities  primarily  consist  of  interest-bearing
deposits and long term borrowings from the FHLB of New York.

The interest rate spread,  which is the difference  between the yield on average
interest-earning  assets and the  percentage  cost of  average  interest-bearing
liabilities,  decreased  to 2.76% for the three  months ended June 30, 1998 from
2.89% for the three  months  ended June 30,  1997.  The decrease in the interest
rate  spread is  primarily  the result of a  decrease  in the  average  yield of
interest-earning  assets  coupled  with  an  increase  in the  average  cost  of
interest-bearing liabilities during this period.

Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $123  thousand or 4.5% to $2.8 million for the three months ended
June 30, 1998 from $2.7 million for the three  months  ended June 30, 1997.  The
increase  was largely  the result of an increase of $8.2  million or 5.6% in the
average  balance of  interest  earning  assets to $156.5  million  for the three
months  ended June 30, 1998 as compared to $148.3  million for the three  months
ended June 30,  1997.  The increase in the average  balance of interest  earning
assets consisted  primarily of increases in the average balance of federal funds
sold of $3.2 million or 52.7%, term deposits with the FHLB of NY from $0 to $8.6
million,  and an increase in the average balance of net loans receivable of $4.4
million  or 6.1%.  These  increases  were  offset by a decrease  in the  average
balance  of total  securities  (securities  available  for  sale and  investment
securities  held to  maturity) of $8.0 million or 11.5%.  Also,  offsetting  the
effects of the increase in the average balance of interest-earning  assets was a
7 basis point decrease in the average yield on total interest earning assets.

The yield on the average balance of interest  earning assets was 7.28% and 7.35%
for the three months ended June 30, 1998 and 1997, respectively.

                                     - 14 -

<PAGE>

Interest  income on  securities  available for sale  increased  $241 thousand or
55.6% to $673  thousand  for the  three  months  ended  June 30,  1998 from $432
thousand for the same period of the previous  year.  This  increase is primarily
the result of an increase in the average  balance of  securities  available  for
sale of $14.3  million  combined  with a 16 basis point  increase in the average
yield on these  securities.  Interest  income on investment  securities  held to
maturity  decreased $364 thousand or 53.9% to $311 thousand for the three months
ended June 30, 1998 from $674  thousand  for three  months  ended June 30, 1997.
This  decrease is primarily  the result of a decrease in the average  balance of
investment  securities  held to maturity of $22.2 million  offset in part by a 7
basis point increase in the average yield on these securities.


Interest  and fees on loans  increased  $83 thousand or 5.4% to $1.6 million for
the three months ended June 30, 1998.  This increase was primarily the result of
an increase  in the  average  balance of net loans  receivable  of $4.4  million
offset by a 5 basis point decrease in the average yield on net loans receivable.




Interest  Expense.  Interest on deposits and escrow  accounts  increased by $130
thousand for the three  months ended June 30, 1998  compared to the three months
ended June 30, 1997.  This increase in interest on deposits and escrow  accounts
was  substantially  due to the  increase  in interest  expense  related to money
market and time  deposit  accounts.  Interest  expense on money  market and time
deposit accounts was $117 thousand and $1.0 million, respectively, for the three
months  ended  June 30,  1998,  compared  to $95  thousand  and  $939  thousand,
respectively,  for the three  months June 30,  1997.  These  increases  were due
primarily to increases in the average balances of the respective deposit types.



Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased approximately $1 thousand or 3.2% to $28 thousand
for the three months ended June 30, 1998.  This  decrease was primarily due to a
decrease of 28 basis  points in the average  cost of  borrowings  offset by a $8
thousand  increase in the average  amount of borrowings  outstanding  during the
comparable  periods.  The Company  uses FHLB  advances  as a funding  source and
generally  uses long  term  borrowings  to  supplement  deposits,  which are the
Company's primary source of funds.


                                     - 15 -

<PAGE>


Provision  for Loan Losses.  The Company's  management  monitors and adjusts its
allowance  for loan losses  based upon its analysis of the loan  portfolio.  The
allowance is increased by a charge to the provision for loan losses,  the amount
of which depends upon an analysis of the changing  risks  inherent in the Bank's
loan  portfolio.  Management  determines  the adequacy of the allowance for loan
losses  based upon its  analysis  of risk  factors in the loan  portfolio.  This
analysis includes evaluation of credit risk, historical loss experience, current
economic   conditions,   estimated   fair   value  of   underlying   collateral,
delinquencies,  and  other  factors.  The Bank has  historically  experienced  a
limited  amount of loan  charge-offs.  However,  there can be no assurance  that
additions  to the  allowance  for loan  losses  will not be  required  in future
periods or that actual losses will not exceed estimated  amounts.  The provision
for loan losses for the three months ended June 30, 1998  decreased $55 thousand
from $60 thousand for the three months ended June 30, 1997.


Non-Interest  Income.  Non-interest  income and its components  remained  fairly
constant for the three months ended June 30, 1998 and 1997.


Non-Interest Expenses. Non-interest expenses increased $248 thousand or 28.5% to
$1.1 million for the three months ended June 30, 1998 from $873 thousand for the
three months ended June 30, 1997.


Compensation  and  benefits  expense  increased  by $114  thousand  or 28.3% due
primarily to increased costs related to the Company's ESOP, the establishment of
the  Restricted  Stock Plan in May 1997, the opening of a new branch in December
1997,  as  well as  general  cost of  living  and  merit  raises  to  employees.
Management  believes  that  compensation  and benefits  expenses may increase in
future  periods as a result of the costs related to the  Company's  ESOP, as the
expense related to the ESOP is dependent on the Company's average stock price.

Professional service fees for the three months ended June 30, 1998 were down $30
thousand or 36.8% from $82 thousand  for the same period in the  previous  year.
This  decrease  was due  primarily  to  additional  legal and  accounting  costs
incurred  during the three  months ended June 30, 1997  associated  with being a
newly-formed public company.

Non-interest  expenses  for the  three  months  ended  June  30,  1998  included
non-tax-deductible  acquisition-related  expenses  totaling  approximately  $127
thousand  incurred in connection with the previously  announced merger agreement
with  Ambanc  Holding  Co.,  Inc.   Management   expects  to  incur   additional
acquisition-related expenses in future periods, which will increase non-interest
expenses.


Income Tax Expense.  Income tax expense decreased by $5 thousand or 3.1% to $155
thousand  for the three  months  ended June 30, 1998 from $160  thousand for the
three months ended June 30, 1997. However, the effective tax rate increased from
34.1% for the three  months  ended June 30,  1997 to 57.2% for the three  months
ended June 30, 1998. The increase in the effective tax rate was due primarily to
the non-tax-deductible acquisition-related expenses mentioned above.

                                      - 16-


<PAGE>




       Comparison of Operating Results for the Nine Months Ended June 30,
                                 1998 and 1997.

Net Income.  Net income  decreased by $179 thousand or 20.8% for the nine months
ended June 30,  1998 to $683  thousand  from $862  thousand  for the nine months
ended June 30,  1997.  Net income for the nine  months  ended June 30,  1998 was
reduced primarily as a result of increased  non-interest expenses offset in part
by a decrease in the  provision  for loan  losses.  These and other  changes are
discussed in more detail below.

Net Interest  Income.  Net interest  income  increased $35 thousand for the nine
months  ended June 30, 1998 as  compared to the same period in 1997.  During the
period, total average interest-earning assets increased $8.1 million or 5.6%, to
$153.3  million.   However,  the  increase  in  the  average  balance  of  total
interest-bearing  liabilities  of $9.3  million  or  7.6%,  to  $131.7  million,
exceeded the increase in total  average  interest-earning  assets.  This was due
primarily to the  Company's  repurchase  of 136  thousand  shares of stock for a
total cost of $2.6 million  through  June 30, 1998.  The increase in the average
balance of total interest-bearing liabilities was accompanied by a 7 basis point
increase in the average rate paid on these funds, while the increase in the
average balance of interest earning assets was offset by a decline of 3 basis
points in the average yield on interest-eaning assets during the period.


Interest and Dividend  Income.  Interest and dividend  income  increased by $416
thousand or 5.2% to $8.4  million  for the nine months  ended June 30, 1998 from
$8.0 million for the nine months  ended June 30, 1997.  The increase in interest
and  dividend  income was largely  the result of an increase of $8.1  million or
5.6% in the average balance of interest earning assets to $153.3 million for the
nine  months  ended June 30,  1998 as  compared  to $145.2  million for the nine
months  ended June 30,  1997.  The  increase in the average  balance of interest
earning assets  consisted  primarily of increases in the average  balance of net
loans receivable of $4.1 million or 5.6%, total securities (securities available
for sale and  investment  securities  held to maturity) of $2.5 million or 4.0%,
and an increase in the average  balance of term  deposits with the FHLB of NY of
$1.0 million or 29.4%.


Interest  income on  securities  available for sale  increased  $946 thousand or
101.0%  to $1.9  million  for the nine  months  ended  June 30,  1998  from $936
thousand for the same period of the previous  year.  This  increase is primarily
the result of an increase in the average  balance of  securities  available  for
sale of $17.9  million  combined  with a 49 basis point  increase in the average
yield on these  securities.  Interest  income on investment  securities  held to
maturity  decreased  $764  thousand or 38.0% to $1.2 million for the nine months
ended June 30, 1998 from $2.0 million for nine months ended June 30, 1997.  This
decrease  is  primarily  the  result of a  decrease  in the  average  balance of
investment  securities held to maturity of $15.5 million combined with a 4 basis
point decrease in the average yield on these securities.


Interest and fees on loans  increased  $159 thousand or 3.5% to $4.7 million for
the nine months  ended June 30, 1998 from $4.6 million for the nine months ended
June 30,  1997.  This  increase was  primarily  the result of an increase in the
average  balance of net loans  receivable of $4.1 million,  offset by a 17 basis
point decrease in the average yield on net loans receivable.

                                      -17-
<PAGE>

Interest  Expense.  Interest on deposits and escrow  accounts  increased by $383
thousand  for the nine months  ended June 30,  1998  compared to the nine months
ended June 30, 1997.  This increase in interest on deposits and escrow  accounts
was  primarily due to the increase in interest  expense  related to money market
and time  deposit  accounts.  Interest  expense on money market and time deposit
accounts was $336 thousand and $3.0 million,  respectively,  for the nine months
ended June 30, 1998,  compared to $263 thousand and $2.7 million,  respectively,
for the nine months ended June 30, 1997.  These  increases were due primarily to
increases in the average balances of the respective  deposit types combined with
slight increases in the average rate paid on these deposits.

Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased approximately $2 thousand or 1.8% to $87 thousand
for the nine months ended June 30, 1998.  This  decrease was  primarily due to a
decrease of 15 basis  points in the average cost of  borrowings  offset by a $17
thousand or 1.0% increase in the average amount of borrowings outstanding during
the comparable periods.


Provision for Loan Losses. The provision for loan losses decreased $155 thousand
to $55 thousand  for the nine months ended June 30, 1998 from $210  thousand for
the nine months ended June 30, 1997. The Company's  provision for loan losses is
based upon its  analysis  of the  adequacy  of the  allowance  for loan  losses.
Management  determines  the adequacy of the allowance for loan losses based upon
its  analysis of risk  factors in the loan  portfolio.  This  analysis  includes
evaluation  of  credit  risk,  historical  loss  experience,   current  economic
conditions,  estimated fair value of underlying collateral,  delinquencies,  and
other factors.

Non-Interest Income.  Non-interest income decreased during the nine months ended
June 30, 1998 to $280  thousand  compared with $314 thousand for the nine months
ended June 30,  1997.  Decreases in service  charges on deposit  accounts of $22
thousand and other  non-interest  income of $12 thousand  comprised the decrease
from the previous period.

Non-Interest Expenses. Non-interest expenses increased $314 thousand or 11.7% to
$3.0  million for the nine months  ended June 30, 1998 from $2.7 million for the
nine months ended June 30, 1997.


Compensation and benefits  expense  increased by $322 thousand or 28.3% from the
previous  period due primarily to increased costs related to the Company's ESOP,
the establishment of the Restricted Stock Plan in May 1997, the opening of a new
branch in December  1997,  as well as general cost of living and merit raises to
employees.  Management  believes  that  compensation  and benefits  expenses may
increase  in future  periods as a result of the costs  related to the  Company's
ESOP, as the expense  related to the ESOP is dependent on the Company's  average
stock price.


FDIC deposit insurance premiums decreased by $32 thousand or 33.2% due primarily
to reduced  deposit  insurance  premium rates for the nine months ended June 30,
1998, as compared to the same period in the previous year.

                                      -18-

<PAGE>

Professional  service fees for the nine months ended June 30, 1998, decreased by
$98  thousand or 45.7% from $214  thousand  for the nine  months  ended June 30,
1997,  primarily as a result of additional  legal and accounting  costs incurred
during the nine months ended June 30, 1997  associated with being a newly-formed
public company.

Non-interest  expenses  for  the  nine  months  ended  June  30,  1998  included
non-tax-deductible  acquisition-related  expenses  totaling  approximately  $156
thousand  incurred to date in connection  with the previously  announced  merger
agreement with Ambanc Holding Co., Inc.  Management  expects to incur additional
acquisition-related expenses in future periods, which will increase non-interest
expenses.

Other non-interest expenses decreased $53 thousand or 10.9% to $432 thousand for
the nine  months  ended June 30,  1998 when  compared  to the same period in the
previous  year.  The  decrease  is  primarily  attributed  to  general  expenses
associated with being a newly-formed  public  company,  in addition to the write
off of certain  items deemed  uncollectible  by  management  during the previous
period.


Income Tax Expense.  Income tax expense  increased to $486 thousand for the nine
months ended June 30, 1998 from $465 thousand for the nine months ended June 30,
1997. The increase to income tax expense was due primarily to the effects of the
non-tax-deductible  acquisition-related  expenses mentioned above offset in part
by the decrease in income before income tax expense.


Liquidity and Capital Resources


The Bank is required by OTS regulations to maintain,  for each calendar month, a
daily average balance of cash and eligible  liquid  investments of not less than
5% of the average daily balance of its net  withdrawable  savings and borrowings
(due in one year or less) during the preceding  calendar  month.  This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10%. The Bank's average  liquidity ratio was 46.67% and 45.18% at
June 30, 1998 and September 30, 1997, respectively.

The Company's sources of liquidity include cash flows from operations, principal
and interest payments on loans,  maturities of securities,  deposit inflows, and
borrowings from the FHLB of New York. During the nine months ended June 30, 1998
and 1997, the primary source of funds was cash flows from deposit growth.

While  maturities and scheduled  amortization  of loans and  securities  are, in
general, a predictable  source of funds,  deposit flows and prepayments on loans
and  securities  are greatly  influenced  by general  interest  rates,  economic
conditions  and  competition.  In  addition,  the Bank  invests  excess funds in
overnight deposits which provide liquidity to meet lending requirements.

In addition to deposit growth,  from time to time the Company borrows funds from
the  FHLB of New  York to  supplement  its  cash  flows.  At June  30,  1998 and
September 30, 1997, the Company had outstanding borrowings from the FHLB of $1.6
million and $1.4 million, respectively.

                                      -19-

<PAGE>

As of June 30, 1998 and  September  30, 1997,  the Company had $45.9 million and
$37.7 million of securities, respectively,  classified as available for sale and
$16.6  million  and  $35.3  million  of  investment  securities,   respectively,
classified as held to maturity.  The liquidity of the  securities  available for
sale portfolio  provides the Bank with  additional  potential cash flows to meet
loan growth and deposit flows.

Liquidity may be adversely  affected by unexpected  deposit outflows,  excessive
interest rates paid by competitors, adverse publicity relating to the saving and
loan industry,  and similar matters.  Management  monitors  projected  liquidity
needs  and  determines  the  level  desirable,  based  in part on the  Company's
commitments to make loans and management's  assessment of the Company's  ability
to generate funds.

The Bank is subject to federal  regulations  that impose certain minimum capital
requirements.  At  June  30,  1998,  the  Bank's  capital  exceeded  each of the
regulatory  capital  requirements of the OTS. The Bank is "well  capitalized" at
June  30,  1998  according  to  regulatory  definition.  At June 30,  1998,  the
Company's  consolidated tangible and core capital levels were both $19.0 million
(11.38% of total  adjusted  assets) and its total  risk-based  capital level was
$19.1 million (25.73% of total  risk-weighted  assets).  The minimum  regulatory
capital ratio  requirements of the Bank are 1.5% for tangible capital,  3.0% for
core capital, and 8.0% for total risk-based capital.

During fiscal 1997, the  stockholders  approved the Restricted Stock Plan, which
allows for a stock repurchase of 4% of the Company's  outstanding  common stock.
Under this plan,  58,190 shares were  repurchased  by the Company in open-market
transactions  at a total cost of $939 thousand or $16.14 per share. In addition,
the Company as been  approved by the OTS to  repurchase  up to 10% of its common
stock to be used for general corporate  purposes.  As of June 30, 1998,  135,732
shares (which  represents the maximum number of shares  approved by the OTS) had
been  repurchased by the Company in open-market  transactions at a total cost of
$2.6 million or $18.87 per share.

Impact of the Year 2000

The  Company  is aware of the issues  associated  with the  programming  code in
existing  computer systems as the millennium (year 2000)  approaches.  The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

The Company is  utilizing  both  internal  and  external  resources to identify,
correct or  reprogram,  and test its  systems  for year 2000  compliance.  It is
anticipated  that all  reprogramming  efforts  will be complete by December  31,
1998,  allowing  adequate  time for testing.  To date,  confirmations  have been
received  from the  Company's  primary  processing  vendors that plans are being
developed to address  processing  of  transactions  in the year 2000.  Moreover,
testing has begun with its outside data processing service bureau.  Furthermore,
the Company expects any corrective measures required to be prepared for the year
2000 to be implemented on a timely basis. The Company's Y2K Committee reports on
a quarterly  basis to the Board of  Directors  as to the  Company's  progress in
resolving  any year  2000  problems.  Expected  costs  related  to the Year 2000
problem are estimated between $35 and $50 thousand.  Subsequent to June 30, 1998
and through August 7, 1998, the Company has incurred  approximately $10 thousand
in expense.

                                     - 20 -

<PAGE>

Effect of Inflation and Changing Prices


The  Company's  consolidated  financial  statements  and related data  presented
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles,  which require the  measurement of financial  position and operating
results  in terms of  historical  dollars,  without  considering  changes in the
relative purchasing power of money over time due to inflation. Unlike industrial
companies,   virtually  all  of  the  assets  and  liabilities  of  a  financial
institution  are  monetary in nature.  As a result,  interest  rates have a more
significant impact on a financial institution's  performance than the effects of
general levels of inflation.  Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.




                                     - 21 -

<PAGE>

                       AFSALA BANCORP, INC. AND SUBSIDIARY
                              Key Operating Ratios
                                   (unaudited)

The table below sets forth certain  performance and financial  ratios
of the Company for the periods indicated:
<TABLE>
<CAPTION>
                                                            At or for the nine      At or for the
                                                               months ended          year ended
                                                               June 30,1998         September 30, 1997
<S>                                                         <C>                <C>    
Performance Ratios:

Earnings per share:
       Basic                                                  $        0.56      $        0.89
       Diluted                                                         0.54               0.88
Return on average assets (annualized)                                  0.57%              0.77%
Return on average stockholders' equity (annualized)                    4.60%              5.65%
Interest rate spread                                                   2.80%              2.89%
Net interest margin                                                    3.43%              3.57%
Efficiency ratio (1)                                                  66.81%             63.21%
Expense ratio (annualized) (2)                                         2.34%              2.32%

Asset Quality Ratios:

Non-performing loans to total loans                                    0.63%              0.61%
Allowance for loan losses to non-performing loans                    223.02%            236.09%
Allowance for loan losses to total loans receivable                    1.42%              1.44%
Non-performing assets to total assets                                  0.33%              0.31%

Capital Ratios (3):

Stockholders' equity to total assets at period end                    11.40%             12.85%
Average stockholders' equity to average total assets                  12.34%             13.68%
Tangible capital                                                      11.38%             13.00%
Core (Tier I) capital                                                 11.38%             13.00%
Total risk-based capital                                              25.73%             30.90%
Book value per share (4)                                      $       16.23      $       16.19

</TABLE>

(1)  Total non-interest expenses,  excluding other real estate owned expense and
     acquisition-related  expenses,  as a percentage of net interest  income and
     total non-interest income.

(2)  Total non-interest expenses,  excluding other real estate owned expense and
     acquisition-related expenses, as a percentage of average total assets.

(3)  Capital ratios are presented for the consolidated Company.

(4)  Excludes unallocated ESOP shares and unvested Restricted Stock Plan shares.



                                     - 22 -


<PAGE>





                                OTHER INFORMATION

Item 1.       Legal Proceedings
              Not applicable

Item 2.       Changes in Securities and Use of Proceeds
              Not applicable

Item 3.       Defaults upon Senior Securities
              Not applicable

Item 4.       Submission of Matters to a Vote of Security Holders
              Not applicable

Item 5.       Other Information
              Registrant  filed  proxy material  concerning its proposed  merger
              with  Ambanc  Holding  Co.,  Inc.  (By  means of Form S-4 filed by
              Ambanc Holding Co., Inc.)

Item 6.       Exhibits and Reports on Form 8-K

              (a) Exhibits
                  None

              (b) Reports on Form 8-K

                  A  Form  8-K  (item 5 & 7) dated  April  23,  1998  was  filed
                  during the quarter.


                                     - 23 -


<PAGE>



SIGNATURES
----------


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.



                                            AFSALA BANCORP, INC.
                                            --------------------


DATE:  August  7, 1998              BY:  /s/ John M. Lisicki
                                         -------------------
                                         John M. Lisicki
                                         President (principal executive officer)




DATE:  August  7, 1998              BY:  /s/ James J. Alescio
                                         --------------------
                                         James J. Alescio
                                         Treasurer (principal financial officer)





                                     - 24 -