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 March 31, 1997 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
            incorporation or organization)        Identification Number)


                     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 May  7, 1997
                ---------------------        -------------------------

                Common Stock, Par $.10                 1,454,750


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


<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY

                                   FORM 10-QSB

                                 MARCH 31, 1997

<TABLE>
<CAPTION>

INDEX
-----

Part I    CONSOLIDATED FINANCIAL INFORMATION                                                 Page

<S>                                                                                            <C>            
Item 1. Financial Statements.........................................................           1

        Consolidated Balance Sheets as of March 31, 1997
        (unaudited) and September 30, 1996...........................................           1

        Consolidated Statements of Income for the three
        months ended March 31, 1997 and 1996 (Unaudited) ............................           2

        Consolidated Statements of Income for the six
        months ended March 31, 1997 and 1996 (Unaudited) ............................           3

        Consolidated Statements of Cash Flows for the six
        months ended March 31, 1997 and 1996 (Unaudited).............................           4

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

Item 2. Management's Discussion and Analysis
        of Financial Condition and Results of Operations.............................           7


Part II   OTHER INFORMATION
-------

Item 1.   Legal Proceedings..........................................................          21

Item 2.   Changes in Securities......................................................          21

Item 3.   Defaults Upon Senior Securities............................................          21

Item 4.   Submission of Matters to a Vote of Security Holders........................          21

Item 5.   Other Information..........................................................          21

Item 6.   Exhibits and Reports on Form 8-K.   .......................................          21

Signatures...........................................................................          22

</TABLE>

<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                                 March 31,     September 30,
                                                                                   1997             1996
                                                                              -------------    --------------
Assets
------
<S>                                                                           <C>              <C>          
Cash and due from banks                                                       $   4,620,640    $   4,816,392
Federal funds sold                                                                6,125,000       19,200,000
Term deposits with the Federal Home Loan Bank                                            --        3,000,000
                                                                              -------------    -------------
                    Total cash and cash equivalents                              10,745,640       27,016,392
                                                                              -------------    -------------

Securities available for sale, at approximate fair value                         23,366,666       17,131,802
Investment securities held to maturity                                           41,911,889       34,999,930
Federal Home Loan Bank of New York stock,
     at cost                                                                        565,300          565,300
Loans receivable, net                                                            72,419,756       70,677,291
Accrued interest receivable                                                       1,364,287        1,156,466
Premises and equipment, net                                                       1,658,487        1,703,491
Other assets                                                                        221,954          426,015
                                                                              -------------    -------------
                    Total assets                                              $ 152,253,979    $ 153,676,687
                                                                              =============    =============

Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits                                                                        128,356,450      126,460,081
Federal Home Loan  Bank of New York long term
     borrowings                                                                   1,621,875        1,815,625
Escrow accounts                                                                     206,498          365,187
Accrued expenses and other liabilities                                              982,266        4,444,922
                                                                              -------------    -------------
                 Total liabilities                                              131,167,089      133,085,815
                                                                              -------------    -------------

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 1,454,750 shares
     issued and outstanding                                                         145,475          145,475
Additional paid-in capital                                                       13,465,092       13,460,381
Retained earnings, substantially restricted                                       8,673,316        8,120,864
Common stock acquired by ESOP                                                    (1,080,105)      (1,107,800)
Net unrealized loss on securities available for sale, net of tax                   (116,888)         (28,048)
                                                                              -------------    -------------

                   Total  stockholders' equity                                   21,086,890       20,590,872
                                                                              -------------    -------------

                   Total liabilities and stockholders' equity                 $ 152,253,979    $ 153,676,687
                                                                              =============    =============

</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 March 31, 1997 and 1996
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                        1997         1996
                                                                     -----------  ------------



Interest and dividend income:
<S>                                                                  <C>          <C>       
      Interest and fees on loans                                     $1,518,471   $1,414,375
      Interest on Federal funds sold                                     87,595       82,705
      Interest on FHLB term deposits                                     35,149       21,535
      Interest on securities available for sale                         269,149      248,776
      Interest on investment securities                                 704,153      460,527
      Dividends on Federal Home Loan Bank of NY stock                     8,851        9,151
                                                                     ----------   ----------
              Total interest and dividend income                      2,623,368    2,237,069
                                                                     ----------   ----------

Interest expense:

      Deposits and escrow accounts                                    1,294,221    1,290,658
      Federal Home Loan Bank of New York long term
         borrowings                                                      28,678       36,740
                                                                     ----------   ----------    
              Total interest expense                                  1,322,899    1,327,398
                                                                     ----------   ----------

               Net interest income                                    1,300,469      909,671

Provision for loan losses                                                70,000       50,000
                                                                     ----------   ----------
               Net interest income after provision for loan losses    1,230,469      859,671
                                                                     ----------   ----------    

 Non-interest  income:

      Service charges on deposit accounts                                88,698       91,810
      Other                                                              16,409       13,985
                                                                     ----------   ----------
               Total  non-interest income                               105,107      105,795
                                                                     ----------   ----------

Non-interest expense:

      Compensation and benefits                                         365,270      301,564
      Occupancy and equipment                                           139,355      121,140
      FDIC deposit insurance premium                                     20,696       65,853
      Data processing fees                                               72,107       67,178
      Professional services fees                                         72,874       25,692
      Advertising                                                        10,101        7,618
      Supplies                                                           23,803       25,885
      Other                                                             191,018      101,992
                                                                     ----------   ----------
           Total  non-interest expense                                  895,224      716,922
                                                                     ----------   ----------

               Income before income tax expense                         440,352      248,544

Income tax expense                                                      157,500       80,500
                                                                     ----------   ----------

               Net income                                            $  282,852   $  168,044
                                                                     ==========   ==========

               Net income per share                                  $     0.21   $      N/A
                                                                     ==========   ==========

</TABLE>

  See accompanying notes to unaudited consolidated interim financial statements

                                      - 2 -




<PAGE>




                       AFSALA BANCORP, INC. AND SUBSIDIARY
                        Consolidated Statements of Income
                For the six months ended March 31, 1997 and 1996
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          1997           1996
                                                       -----------    ------------

Interest and dividend income:
<S>                                                    <C>            <C>        
      Interest and fees on loans                       $3,037,125     $ 2,811,188
      Interest on Federal funds sold                      197,647         162,933
      Interest on FHLB term deposits                      142,037          44,773
      Interest on securities available for sale           503,904         280,648
      Interest on investment securities                 1,339,911       1,124,778 
      Dividends on Federal Home Loan Bank of NY stock      18,244          18,927
                                                       ----------     -----------
            Total interest and dividend income          5,238,868       4,443,247
                                                       ----------     -----------

Interest expense:
      Deposits and escrow accounts                      2,596,727       2,574,091
      Federal Home Loan Bank of New York long term
        borrowings                                         59,575          76,056
                                                       ----------     -----------
            Total interest expense                      2,656,302       2,650,147
                                                       ----------     -----------


             Net interest income                        2,582,566       1,793,100

Provision for loan losses                                 150,000          80,000
                                                       ----------     -----------
      Net interest income after provision for loan
       losses                                           2,432,566       1,713,100
                                                       ----------     -----------

Non-interest income:
      Service charges on deposit accounts                 199,036         180,241
      Other                                                29,420          16,892
                                                       ----------     -----------
             Total  non-interest income                   228,456         197,133
                                                       ----------     -----------

Non-interest expense:
      Compensation and benefits                           737,073         627,288
      Occupancy and equipment                             272,793         232,471
      FDIC deposit insurance premium                       76,013         128,904
      Data processing fees                                142,074         132,966
      Professional service fees                           131,624          58,541
      Advertising                                          24,490          17,972
      Supplies                                             49,641          38,864
      Other                                               370,131         216,255
                                                       ----------     -----------
              Total non-interest expense                1,803,839       1,453,261
                                                       ----------     -----------

              Income before income tax expense            857,183         456,972

Income tax expense                                        304,731         138,600
                                                       ----------     -----------

               Net income                              $  552,452     $   318,372
                                                       ==========     ===========

               Net income per share                    $     0.41     $       N/A
                                                       ==========     ===========   

</TABLE>

 See accompanying notes to unaudited consolidated interim financial statements.

                                      - 3 -


<PAGE>

                       AFSALA BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                For the six months ended March 31, 1997 and 1996
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                        1997            1996
                                                                                    ------------    ------------
Increase  (decrease)  in cash and cash  equivalents:  
Cash flows from  operating activities:
<S>                                                                                 <C>             <C>         
         Net income                                                                 $    552,452    $    318,372
         Adjustments to reconcile net income to net
            cash (used in) provided by operating activities:
              Depreciation                                                                91,273          81,871
              Provision for loan losses                                                  150,000          80,000
              ESOP compensation expense                                                   32,406              --
              (Increase) decrease in accrued interest receivable                        (207,821)          1,874
              Decrease in other assets                                                   204,061          18,514
              Decrease in accrued expenses and other liabilities                      (3,416,891)       (125,991)
                                                                                    ------------    ------------
               Total adjustments                                                      (3,146,972)         56,268
                                                                                    ------------    ------------
                     Net cash (used in) provided by operating activities              (2,594,520)        374,640
                                                                                    ------------    ------------

Cash flows from investing activities:
    Proceeds from the maturity and call of securities
       available for sale                                                              4,180,531         924,819
    Purchase of securities available for sale                                        (10,550,000)             --
    Proceeds from the maturity and call of investment securities                       4,089,885       6,538,108
    Purchase of investment securities                                                (11,001,844)     (7,426,899)
    Net loans made to customers                                                       (1,892,465)     (2,361,980)
    Capital expenditures                                                                 (46,269)        (55,053)
                                                                                    ------------    ------------
                   Net cash used in investing activities                             (15,220,162)     (2,381,005)
                                                                                    ------------    ------------


Cash flows from financing activities:
    Increase in deposits                                                               1,896,369       5,370,422
    Decrease in escrow accounts                                                         (158,689)       (191,298)
    Repayments on long term borrowings from the
      Federal  Home Loan Bank                                                           (193,750)       (231,250)
                                                                                    ------------    ------------
                  Net cash provided by financing activities                            1,543,930       4,947,874
                                                                                    ------------    ------------

Net (decrease) increase in cash and cash equivalents                                 (16,270,752)      2,941,509
Cash and cash equivalents at beginning of period                                      27,016,392       9,673,328
                                                                                    ------------    ------------
Cash and cash equivalents at end of period                                          $ 10,745,640    $ 12,614,837
                                                                                    ============    ============

Additional  Disclosures Relative to Cash Flows:
         Interest paid                                                              $  2,664,664    $  2,647,905
                                                                                    ============    ============

         Taxes paid                                                                 $    135,228    $     40,000
                                                                                    ============    ============

 Supplemental schedule of non-cash investing and financing activities:

    Investment  securities held to maturity transferred to
       securities available for sale                                                $         --    $ 16,602,489
                                                                                    ============    ============

    Change in unrealized gain (loss) on securities available for sale, net of tax   $     88,840    $    (37,153)
                                                                                    ============    ============
</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 March 31, 1997,  the  Consolidated  Statements  of Income for the
three months and six months ended March 31, 1997 and 1996, and the  Consolidated
Statements  of Cash Flows for the six months ended March 31, 1997 and 1996.  The
results  of  operations  for  the six  months  ended  March  31,  1997,  are not
necessarily  indicative  of results  that may be  expected  for the entire  year
ending  September 30, 1997.  The  accompanying  unaudited  consolidated  interim
financial  statements should be read in conjunction with AFSALA Bancorp,  Inc.'s
September  30,  1996  consolidated  financial  statements,  including  the notes
thereto,  which are included in AFSALA Bancorp, Inc's 1996 Annual Report on Form
10-KSB.


NOTE 2.  Net Income Per Share

Net income per share for the three  months and six months  ended  March 31, 1997
has been  determined  by dividing net income by the weighted  average  number of
shares  of common  stock  outstanding  for the  period.  Shares of common  stock
outstanding  are reduced by the Company's  Employee Stock  Ownership Plan (ESOP)
shares that have not been committed to be released in accordance  with SOP 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". The weighted average
number of shares of common stock outstanding for the three months and six months
ended March 31, 1997 was 1,347,000 and 1,345,000,  respectively.  Net income per
share  for the the three  months  and six  months  ended  March 31,  1996 is not
applicable as there were no shares outstanding during these time periods.

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128,  "Earnings per Share" (Statement 128),
which  establishes  standards for computing  and  presenting  earnings per share
(EPS).  This  Statement  simplifies  the standards for computing EPS making them
comparable to international EPS standards and supersedes  Accounting  Principals
Board  Opinion  No.  15,  "Earnings  per  Share"  and  related  interpretations.
Statement 128 replaces the  presentation of primary EPS with the presentation of
basic EPS. It also  requires dual  presentation  of basic and diluted EPS on the
face of the income  statement for all entities with complex  capital  structures
and requires a reconciliation  of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.

                                      -5 -




<PAGE>





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.  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.  This  Statement  is  effective  for  financial
statements issued for periods ending after December 15, 1997,  including interim
periods.   Earlier  application  is  not  permitted.   This  Statement  requires
restatement  of  all  prior-period  EPS  data  presented.  Management  does  not
anticipate  that the adoption of this statement  will have a material  effect on
the Company's consolidated financial statements.









                                       -6-


<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  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 March 31,
1997, the Bank's loans receivable,  net, to assets ratio was 47.6% up from 46.0%
at September 30, 1996.  At March 31, 1997 and September 30, 1996,  $63.8 million
or 49.7% and $62.6  million or 49.5%,  respectively  of total  deposits  were in
non-time deposits accounts.




                                      - 7 -






<PAGE>



Consolidated Financial Condition


Total assets  decreased  by $1.4 million or 0.9% to $152.2  million at March 31,
1997 from $153.7 million at September 30, 1996,  primarily due to the payment of
cashier checks which were issued and outstanding on September 30, 1996 to refund
the over-subscriptions related to the Company's initial public offering. Cashier
checks are drawn upon deposit accounts at the Bank and are classified as accrued
expenses and other  liabilities until ultimately paid through the Bank's Federal
Reserve correspondent account. The payment of these cashier checks resulted in a
decrease in accrued  expenses and other  liabilities of $3.5 million or 77.9% to
$982  thousand  at March 31,  1997 from $4.4  million  at  September  30,  1996.
Offsetting  this  decrease  in accrued  expenses  and other  liabilities  was an
increase in deposits as deposits grew $1.9 million or 1.5% to $128.4  million at
March 31, 1997 from $126.5 million at September 30, 1996.

The Company's  securities  available for sale increased $6.2 million or 36.4% to
$23.4  million at March 31,  1997 from  $17.1  million at  September  30,  1996.
Likewise,  investment  securities held to maturity  increased by $6.9 million or
19.7% to $41.9 million at March 31,1997,  up from $35.0 million at September 30,
1996. These increases are primarily the result of the investment of the proceeds
from the offering into higher yielding instruments.

The  Company's net loans  receivable  increased by $1.7 million or 2.5% to $72.4
million at March 31,  1997 up from $70.7  million at  September  30, 1996 due to
increased loan activity primarily in residential mortgage and home equity loans.

Stockholders'  equity  increased  by $496  thousand or 2.4% to $21.1  million at
March 31, 1997 from $20.6  million at  September  30,  1996.  The  increase  was
primarily  the  result of net income for the six month  period  ended  March 31,
1997. Equity during the period was also effected by 2,770 shares of common stock
committed to be released by the Company's ESOP as of December 31, 1996.



                                      - 8 -


<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  increased for the three months ended March 31,1997
and 1996 from 2.60% to 2.97% and for the six  months  ended  March 31,  1997 and
1996 from 2.55% to 2.89%.

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.


                                       -9-



<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY
                 Average Balance Sheet, Interest Rates and Yield
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                            For the Three Months Ended March  31,
                                             -----------------------------------------------------------------------
                                                                1997                            1996
                                             ----------------------------------- -----------------------------------
                                               Average        Interest  Average    Average     Interest    Average
                                             Outstanding       Earned/   Yield/  Outstanding    Earned/     Yield/
                                               Balance          Paid     Cost(1)   Balance       Paid       Cost(1)
                                             -----------     ---------- -------- -----------   ---------   ---------
                                                                     (Dollars in Thousands)
Interest-earning assets:
<S>                                           <C>         <C>            <C>     <C>         <C>            <C> 
     Federal funds sold                       $  6,974          88       5.12    $  6,473         83        5.16
     Term deposits with Federal
          Home Loan Bank of NY                   2,581          35       5.50       1,602         22        5.52
     Securities available for sale (3)          18,286         269       5.97      18,474        249        5.42
     Investment securities held to maturity     42,988         704       6.64      30,134        460        6.14
     FHLB of NY stock                              565           9       6.46         566          9        6.40
     Loans receivable, net(2)                   72,292       1,518       8.52      67,388      1,414        8.44
                                              --------    --------     ------    --------   --------      ------
        Total interest-earning assets          143,686       2,623       7.40     124,637      2,237        7.22
                                                          --------     ------               --------      ------
Non-interest earning assets                      6,679                              6,454
                                              --------                           --------   
        Total assets                          $150,365                           $131,091
                                              ========                           ========


Interest-bearing liabilities:
      Savings accounts                        $ 35,696         264       3.00    $ 34,461        257        3.00
      NOW  accounts                             10,781          61       2.29       9,462         54        2.30
      Money market accounts                      8,818          88       4.05       6,214         55        3.56
      Time deposit accounts                     63,997         879       5.57      62,889        922        5.90
      Escrow accounts                              261           2       3.11         435          2        1.85
      FHLB of NY
         long term borrowings                    1,651          29       7.12       2,107         37        7.06
                                              --------    --------     ------    --------   --------      ------
Total interest-bearing liabilities             121,204       1,323       4.43     115,568      1,327        4.62
                                                          --------     ------               --------      ------
Non-interest bearing deposits                    7,403                              6,278
Other non-interest bearing liabilities             756                              1,084
Equity                                          21,002                              8,161
                                              --------                           --------
         Total liabilities and equity         $150,365                           $131,091
                                              ========                           ========

Net interest income                                       $  1,300                           $   910
                                                          ========                          ========

 Interest rate spread                                                    2.97%                              2.60%
                                                                        =====                              ===== 


 Net interest margin                                                     3.67%                              2.94%
                                                                        =====                              ===== 


Ratio of average interest-earning
     assets to average
     interest-bearing liabilities               118.55%                            107.85%
                                                ======                             ====== 
</TABLE>



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

                                     - 10 -




<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY
                Average Balance Sheet, Interest Rates and Yields
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                 For the Six Months Ended March 31,
                                            ------------------------------------------------------------------------
                                                             1997                                  1996
                                            -------------------------------------   --------------------------------
                                              Average      Interest     Average      Average    Interest    Average
                                            Outstanding     Earned/      Yield/     Outstanding  Earned/     Yield/
                                               Balance       Paid        Rate(1)     Balance      Paid       Rate(1)
                                            ------------   --------     --------    ----------- ---------   ---------
                                                                        (Dollars in Thousands)
Interest-earning assets:
<S>                                           <C>         <C>            <C>       <C>        <C>         <C> 
     Federal funds sold                       $  7,630         198       5.20        $6,258        163        5.21
     Term deposits with Federal
          Home Loan Bank of NY                   5,220         142       5.46         1,601         45        5.62
     Securities available for sale (3)          17,536         504       5.76        10,349        281        5.43
     Investment securities held to maturity     40,856       1,340       6.58        38,022      1,124        5.91
     FHLB of NY stock                              565          18       6.39           566         19        6.71
     Loans receivable, net(2)                   71,871       3,037       8.47        66,920      2,811        8.40
                                              --------     -------     ------      --------    -------      ------
        Total interest-earning assets          143,678       5,239       7.31       123,716      4,443        7.18
                                                          --------    -------     ---------   --------      ------
Non-interest earning assets                      6,631                                6,132
                                              --------                             --------
        Total assets                          $150,309                             $129,848
                                              ========                             ========

Interest-bearing liabilities:
      Savings accounts                        $ 35,685         533       3.00      $ 34,198        514        3.00
      NOW  accounts                             10,822         124       2.30         9,305        106        2.28
      Money market accounts                      8,485         168       3.97         6,012        106        3.53
      Time deposit accounts                     63,641       1,767       5.57        62,408      1,843        5.91
      Escrow accounts                              299           4       2.68           474          5        2.11
      FHLB of NY
         long term borrowings                    1,701          60       7.07         2,170         76        7.00
                                              --------    --------    -------     ---------   --------      ------
Total interest-bearing liabilities             120,633       2,656       4.42       114,567      2,650        4.63
                                                          --------    -------     ---------   --------      ------

Non-interest bearing deposits                    7,569                                6,245
Other non-interest bearing liabilities           1,239                                  962
Equity                                          20,868                                8,074
                                              --------                             --------
         Total liabilities and equity         $150,309                             $129,848
                                              ========                             ========

Net interest income                                       $  2,583                            $  1,793
                                                          ========                            ========

Interest rate spread                                                     2.89%                                2.55%
                                                                       ======                               ======


 Net interest margin                                                     3.61%                                2.90%
                                                                       ======                               ======


Ratio of average interest-earning
     assets to average
     interest-bearing liabilities               119.10%                              107.99%
                                              ========                             ========
</TABLE>


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

                                     - 11 -



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

                        THREE MONTHS ENDED MARCH 31,1997
                                  COMPARED WITH
                        THREE MONTHS ENDED MARCH 31, 1996
                        ---------------------------------
<TABLE>
<CAPTION>
                                                     INCREASE   (DECREASE)
                                             -----------------------------------
                                                      DUE TO
                                             ----------------------
                                               VOLUME         RATE         NET
                                             ----------    ----------   --------
Interest and dividend  income:
<S>                                          <C>          <C>          <C>  
    Federal funds sold                       $   6,252       (1,362)       4,890
    Term deposits with FHLB of NY               13,867         (253)      13,614
    Securities available for sale               (2,546)      22,919       20,373
    Investment securities held to maturity     208,244       35,382      243,626
    FHLB of NY stock                              (194)        (106)        (300)
    Loans receivable, net                      102,517        1,579      104,096
                                             ---------    ---------    ---------
 Total interest and dividend income            328,140       58,159      386,299
                                             ---------    ---------    ---------

 Interest expense:
    Savings accounts                             9,239       (2,122)       7,117
    NOW  accounts                                7,539         (682)       6,857
    Money market accounts                       25,214        7,716       32,930
    Time deposit accounts                       16,179      (59,092)     (42,913)
    Escrow  accounts                            (1,162)         732         (430)
   FHLB of NY long term borrowings              (8,067)           5       (8,062)
                                             ---------    ---------    ---------
 Total interest expense                         48,942      (53,443)      (4,501)
                                             ---------    ---------    ---------

Net change in net interest income            $ 279,198    $ 111,602    $ 390,800
                                             =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                            SIX MONTHS ENDED MARCH 31,1997
                                     COMPARED WITH
                            SIX MONTHS ENDED MARCH 31, 1996
                            -------------------------------

                                                  INCREASE   (DECREASE)
                                            -----------------------------------
                                                     DUE TO
                                            ------------------------
                                              VOLUME        RATE         NET
                                            ----------   ----------    ---------
Interest and dividend income:
<S>                                         <C>          <C>          <C>   
   Federal funds sold                       $  35,478         (764)      34,714
   Term deposits with FHLB of NY               98,706       (1,442)      97,264
   Securities available for sale              206,083       17,173      223,256
   Investment securities held to maturity      86,746      128,387      215,133
   FHLB of NY stock                               (21)        (662)        (683)
   Loans receivable, net                      210,116       15,821      225,937
                                            ---------    ---------    ---------
Total interest and dividend income            637,108      158,513      795,621
                                            ---------    ---------    ---------

Interest expense:
     Savings accounts                          21,151       (1,478)      19,673
     NOW  accounts                             16,954          625       17,579
     Money market accounts                     47,538       14,051       61,589
    Time deposit accounts                      36,191     (111,568)     (75,377)
     Escrow  accounts                          (2,033)       1,205         (828)
    FHLB of NY long term borrowings           (17,011)         530      (16,481)
                                            ---------    ---------    ---------
   Total interest expense                     102,790      (96,635)       6,155
                                            ---------    ---------    ---------

Net change in net interest income           $ 534,318    $ 255,148    $ 789,466
                                            =========    =========    =========
</TABLE>
                                     - 12 -



<PAGE>



Comparison  of  Operating  Results for the Three Months Ended March 31, 1997 and
1996.

Net Income.  Net income increased by $115 thousand or 68.3% for the three months
ended March 31, 1997 to $283  thousand  from $168  thousand for the three months
ended  March 31,  1996.  Net income for the three  months  ended  March 31, 1997
increased  primarily as a result of increased net interest income offset in part
by an increase  in  non-interest  expense and  provision  for loan  losses.  Net
interest  income  increased  by $391  thousand or 43.0% to $1.3  million for the
three  months  ended March 31, 1997 as compared to $910  thousand  for the three
months ended March 31, 1996.  Non- interest  expense  increased $178 thousand or
24.9% to $895  thousand  for the three  months  ended  March 31,  1997 from $717
thousand for the three months ended March 31, 1996.  This increase was primarily
due to increased  compensation and benefit expenses as a result of costs related
to the  Company's  new ESOP,  in addition to  increased  professional  fees as a
result of being a public company, as well as additional expenses associated with
the opening of a new Operations  Center. The provision for loan losses increased
$20  thousand  to $70  thousand  for the three  months  ended  March  31,  1997,
primarily due to the loan growth noted above, and local economic trends.

Net  Interest  Income.  Net interest  income  increased  by  approximately  $391
thousand or 43.0% to $1.3 million for the three months ended March 31, 1997. The
increase  was  primarily  due to an  increase  of $19.0  million or 15.3% in the
average balance of interest  earning  assets,  in addition to an increase in the
interest  rate  spread from 2.60% for the three  months  ended March 31, 1996 to
2.97% for the three months  ended March 31,  1997,  offset by an increase in the
average balance of total interest-bearing liabilities of $5.6 million or 4.9%.

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,  increased  to 2.97% for the three months ended March 31, 1997 from
2.60% for the three months  ended March 31,  1996.  The increase in the interest
rate  spread is  primarily  the result of  increases  in the yields of  interest
earning  assets  coupled  with  decreases  in  the  cost  of  interest   bearing
liabilities during this period.

Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $386 thousand or 17.3% to $2.6 million for the three months ended
March 31, 1997 from $2.2 million for the three months ended March 31, 1996.  The
increase was largely the result of an increase of $19.0  million or 15.3% in the
average balance of interest  earning assets to $144 million for the three months
ended  March 31, 1997 as compared  to $125  million for the three  months  ended
March 31, 1996. This increase was primarily due to the Company's  initial public
offering on September 30, 1996, which generated  approximately  $13.6 million in
net proceeds which have been redeployed by management into various earning asset
categories.  The  increase in the average  balance of  interest  earning  assets
consisted  primarily  of an  increase  in  the  average  balance  of  net  loans
outstanding  of  approximately  $4.9  million or 7.3%,  and an  increase  in the
average  balance of total  securities  (both  securities  available for sale and
investment  securities held to maturity) of $12.7 million or 26.1%.  Also adding
to the increase in interest and dividend income was a 18 basis point increase in
the average yield on all interest earning assets.
                                     - 13 -

<PAGE>

Interest  income  on  investment  securities  held to  maturity  increased  $244
thousand to $704  thousand  for the three  months ended March 31, 1997 from $460
thousand for three months ended March 31, 1996.  This  increase is primarily the
result of an increase in the average  balance of investment  securities  held to
maturity of $12.9 million combined with a 50 basis point increase in the average
yield on these  securities.  Interest  income on  securities  available for sale
increased $20 thousand or 8.2% to $269 thousand for the three months ended March
31,  1997 from $249  thousand  for the same  period of the  previous  year.  The
increase in interest  income on securities  available for sale was primarily the
result of a 55 basis point increase in the average yield on these securities.

Interest and fees on loans  increased  $104 thousand or 7.4% to $1.5 million for
the three  months  ended March 31, 1997 from $1.4  million for the three  months
ended March 31, 1996.  This  increase was primarily the result of an increase in
the average  balance of net loans  receivable of $4.9 million  combined with a 8
basis point increase in the average yield on net loans receivable.

The yield on the average balance of interest  earning assets was 7.40% and 7.22%
for the three months ended March 31, 1997 and 1996, respectively.

Interest  Expense.  Interest on deposits  and escrow  accounts  increased  by $4
thousand for the three months ended March 31, 1997  compared to the three months
ended March 31, 1996.  This nominal  increase in interest on deposits and escrow
accounts was  substantially  due to the increase in interest  expense related to
savings,  NOW,  and money  market  accounts  offset by the  decrease in interest
expense  related  to time  deposit  accounts.  The  interest  expense on savings
accounts was $264  thousand for the three months ended March 31, 1997,  compared
to $257  thousand for the three months March 31, 1996.  The interest  expense on
NOW  accounts  was $61  thousand  for the three  months  ended  March 31,  1997,
compared to $54 thousand for the three months March 31, 1996. Likewise, interest
expense on money  market  accounts  was $88  thousand for the three months ended
March 31,  1997,  compared to $55  thousand for the three months March 31, 1996.
However,  interest  expense on time  deposits  was $879  thousand for the months
ended March 31, 1997,  compared to $922  thousand for the three months March 31,
1996.  This decrease was due primarily to a decrease in the average cost for the
current  period of 5.57% as compared to the average cost for the prior period of
5.90%.

Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest  expense,  decreased by $8 thousand or 21.9% to $29 thousand for the
three months ended March 31, 1997 when  compared to the three months ended March
31,  1996,  as the average  amount of  borrowing  outstanding  decreased by $456
thousand  or 21.6%  partially  offset  by an  increase  in the rate  paid by the
Company of 6 basis points.  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.

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.  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 Company's ratio of non-performing  loans
to total assets was 0.38% and
                                     - 14 -
<PAGE>

0.51% at March 31, 1997 and September 30, 1996, respectively.  The provision for
loan losses for the three months ended March 31, 1997  increased $20 thousand to
$70 thousand  from $50  thousand for the three months ended March 31, 1996.  The
increase was primarily due to the growth in the loan portfolio  discussed above,
as well as local economic trends.

Non-Interest Income.  Non-interest income remained fairly constant for the three
months ended March 31, 1997 and 1996.


Non-Interest Expenses. Non-interest expenses increased $178 thousand or 24.9% to
$895  thousand for the three months ended March 31, 1997 from $717  thousand for
the three months ended March 31, 1996. The increase in compensation and benefits
expense of $64 thousand or 21.1% was  primarily  the result of costs  related to
the  Company's  new ESOP,  as well as general cost of living and merit raises to
employees.  Occupancy and equipment  expenses increased by $18 thousand or 15.0%
due primarily to the new operations center opened in July 1996.

FDIC deposit insurance premiums decreased by $45 thousand or 68.6% due primarily
to reduced deposit insurance premium rates for the quarter ended March 31, 1997.
The reduced  rates are the result of the  capitalization  of the SAIF  through a
one-time special assessment during September 1996.

Professional  service  fees  increased by $47 thousand or 183.6% to $73 thousand
from $27 thousand due  primarily to  increased  legal and  accounting  fees as a
result of being a public company.

Other  expenses  increased  $89 thousand to $191  thousand for the quarter ended
March 31,  1997 when  compared  to the same  quarter of 1996.  The  increase  is
primarily  attributed  to general  expenses  related to being a public  company,
Delaware  franchise  taxes,  and  the  write  off of  certain  items  deemed  by
management to be uncollectible.

Management  believes that  compensation  and benefits  expenses will increase in
future  periods  as a result of the costs  related  to the  Company's  new ESOP.
Furthermore,  the Company expects that certain operating  expenses will increase
as a result of the costs associated with being a public company, as noted above.

Income Tax  Expense.  Income tax expense  increased  by $77 thousand or 95.7% to
$158  thousand  for the three  months ended March 31, 1997 from $81 thousand for
the three months ended March 31, 1996.  The increase was primarily the result of
the increase in income before income tax expense.




                                      - 15-


<PAGE>

Comparison  of  Operating  Results  for the Six Months  Ended March 31, 1997 and
1996.

Net Income.  Net income  increased by $234  thousand or 73.5% for the six months
ended  March 31, 1997 to $552  thousand  from $318  thousand  for the six months
ended  March 31,  1996.  Net  income  for the six months  ended  March 31,  1997
increased  primarily  as a  result  of  increases  in net  interest  income  and
non-interest income of $789 thousand and $31 thousand,  respectively,  offset by
increases  in  non-interest  expense and the  provision  for loan losses of $351
thousand and $70 thousand, respectively.

Net  Interest  Income.  Net interest  income  increased  by  approximately  $789
thousand or 44.0% to $2.6  million  from $1.8  million for the six months  ended
March 31, 1996. The increase in net interest  income was primarily the result of
the increase in the amount of average  interest  earning  assets  exceeding  the
increase in average interest bearing  liabilities.  Likewise,  the interest rate
spread increased to 2.89% for the six months ended March 31, 1997 from 2.55% for
the same period of the previous year.  This increase in the interest rate spread
is primarily due to the increase in the average yield of interest earning assets
offset by a decrease in the average cost of interest bearing liabilities.

Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $796  thousand or 17.9% to $5.2  million for the six months ended
March 31, 1997 from $4.4 million for the six months  ended March 31,  1996.  The
increase in interest and  dividend  income was largely the result of an increase
of $20.0 million or 16.1% in the average  balance of interest  earning assets to
$144 million for the six months ended March 31, 1997 as compared to $124 million
for the six months ended March 31, 1996.  This increase was primarily due to the
Company's  initial  public  offering on  September  30,  1996,  which  generated
approximately  $13.6  million  in net  proceeds  which have been  redeployed  by
management into various earning asset categories. Also adding to the increase in
interest and dividend income was a 13 basis point increase in the average yields
on all interest earning assets.  The increase in the average balance of interest
earning assets consisted  primarily of an increase in the average balance of net
loans  outstanding  of  approximately  $5.0 million or 7.4%,  an increase in the
average  balance of total  securities  (both  securities  available for sale and
investment  securities  held to maturity) of $10.0 million or 20.7%, an increase
in the average  balance of term  deposits with the FHLB of NY of $3.6 million or
226.0%,  and an increase in the  average  balance of federal  funds sold of $1.4
million or 21.9%.


Interest  income  on  investment  securities  held to  maturity  increased  $216
thousand or 19.2% to $1.3  million for the six months  ended March 31, 1997 from
$1.1 million for the six months ended March 31, 1996. This increase is primarily
the result of a 67 basis point increase in the average yield on these securities
combined  with an  increase  in the average  balance of $2.8  million.  Interest
income on securities available for sale increased $223 thousand or 79.4% to $504
thousand for the six months ended March 31, 1997 from $281 thousand for the same
period of the  previous  year.  The  increase in interest  income on  securities
available for sale is primarily due to a increase of $7.2 million in the average
balance  as well as a 33 basis  point  increase  in the  average  yield on these
securities.

                                      -16-

<PAGE>


Interest and fees on loans  increased  $226 thousand or 8.0% to $3.0 million for
the six months  ended March 31, 1997 from $2.8  million for the six months ended
March 31, 1996.  This  increase was  primarily  the result of an increase in the
average balance of net loans  receivable of $5.0 million combined with a 7 basis
point increase in the average yield on net loans receivable.

Interest  Expense.  Interest on deposits  and escrow  accounts  amounted to $2.6
million for the six months ended March 31, 1997 and 1996.  The nominal  increase
over the prior  year's  period of $23  thousand or 0.9% is a result of increased
average  balances in savings,  NOW,  money  market,  and time  deposit  accounts
coupled with increased average costs on NOW and money market accounts, offset by
decreased average cost of time deposit accounts.

Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased by $16 thousand or 21.7 % to $60 thousand for the
six months ended March 31, 1997 when  compared to the six months ended March 31,
1996, as the average amount of borrowing  outstanding decreased by $469 thousand
or 21.6%  partially  offset by an  increase in the rate paid by the Company of 7
basis points.

Provision for Loan Losses.  The provision for loan losses increased $70 thousand
to $150  thousand  for the six months ended March 31, 1997 from $80 thousand for
the six months ended March 31, 1996. The Company's ratio of non-performing loans
to total  assets was 0.38% and 0.51% at March 31, 1997 and  September  30, 1996,
respectively.  The  increase  in  the  amount  of the  provision  was  based  on
management's  evaluation of the inherent risks associated with the growth in the
loan portfolio, as well as local economic trends.

Non-Interest  Income.  Non-interest  income  increased  for the six months ended
March  31,  1997  to  $228   thousand   compared  with  $197  thousand  for  the
corresponding  period in the  previous  year.  Increases  in service  charges on
deposit  accounts and other  non-interest  income  comprised the majority of the
increase from the same period last year.

Non-Interest Expenses. Non-interest expenses increased $351 thousand or 24.1% to
$1.8  million for the six months  ended March 31, 1997 from $1.5 million for the
six months ended March 31, 1996. Compensation and benefits expenses, the largest
component of non-interest expense,  increased by $110 thousand or 17.5% from the
previous period as a result of costs related to the Company's new ESOP,  coupled
with  general  cost of living  and  merit  raises to  employees.  The  increased
cccupancy  and  equipment  expenses of $40  thousand or 17.3% for the six months
ended March 31, 1997 was due  primarily to the new  operations  center opened in
July 1996. FDIC deposit  insurance  premiums  decreased by $53 thousand or 41.0%
due primarily to reduced  deposit  insurance  premium rates during the six month
period ended March 31, 1997.  Professional  service fees and other  non-interest
expenses  for the six months  ended March 31,  1997,  increased  $73 thousand or
124.8%  and $154  thousand  or 71.2%,  respectively,  as a result of  additional
legal,  accounting  and other fees related to being a publicly  traded  company,
Delaware   franchise   taxes,   and  the  write  off  of  certain  items  deemed
uncollectible by management.



                                      -17-

<PAGE>


Income Tax expense.  Income tax expense  increased to $305  thousand for the six
months  ended March 31, 1997 from $139  thousand  for the six months ended March
31, 1996. The increase was primarily the result of the increase in income before
income tax expense during the period.

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 45.91% and 47.02% at
March 31, 1997 and September 30, 1996, 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 six months ended March 31, 1997
and 1996,  the primary  source of funds was cash flows from deposit  growth.  On
September 30, 1996, the company also had significant cash flows from its initial
public  offering on that date which provided  investable  cash flows for the six
months ended March 31, 1997.

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  March  31,  1997 and
September 30, 1996, the Company had outstanding borrowings from the FHLB of $1.6
million and $1.8 million, respectively.

As of March 31, 1997 and September  30, 1996,  the Company had $23.4 million and
$17.1 million of securities, respectively,  classified as available for sale and
$41.9  million  and  $35.0  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.


                                      -18-

<PAGE>


The Bank is subject to federal  regulations  that impose certain minimum capital
requirements.  At March  31,  1997,  the  Bank's  capital  exceeded  each of the
regulatory  capital  requirements of the OTS. The Bank is "well  capitalized" at
March 31, 1997  according  to  regulatory  definition.  At March 31,  1997,  the
Company's  consolidated tangible and core capital levels were both $21.2 million
(13.91% of total  adjusted  assets) and its total  risk-based  capital level was
$22.0 million (33.88% 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.




Effect of Inflation and Changing Prices


The  Company's  consolidated  interim  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.







                                     - 19 -
<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 six   At or for the 
                                                      months ended         year ended
                                                     March 31, 1997     September 30, 1996

Performance Ratios (1):

<S>                                                    <C>                <C>       
Net income per share                                   $     0.41             N/A
Return on average assets (annualized)                        0.74%            0.16%
Return on average stockholders' equity (annualized)          5.31%            2.55%
Interest rate spread                                         2.89%            2.69%
Net interest margin                                          3.61%            3.02%
Efficiency ratio (2)                                        64.14%           88.03%
Expense ratio (annualized) (3)                               2.41%            2.79%
                                                                           
Asset Quality Ratios:                                                      
                                                                           
Non-performing loans to total assets                         0.38%            0.51%
Non-performing loans to total loans                          0.79%            1.09%
Allowance for loan losses to non-performing loans          174.35%          112.40%
Allowance for loan losses to total loans receivable          1.38%            1.23%
Non-performing assets to total assets                        0.38%            0.51%
                                                                           
Capital Ratios (4):                                                        
                                                                           
Stockholders' equity to total assets at period end          13.85%           13.40%
Average stockholders' equity to average total assets        13.88%            6.21%
Tangible capital                                            13.91%           13.41%
Core (Tier I) capital                                       13.91%           13.41%
Total risk-based capital                                    33.88%           33.54%
Book value per share (5)                               $    15.66         $  15.32
                                                                     
</TABLE>


(1) Performance  ratios for the year ended September 30, 1996 were significantly
effected by the SAIF one-time special assessment which amounted to approximately
$702 thousand before applicable taxes.

(2) Total non-interest expense,  excluding other real estate owned expense, as a
percentage of net interest income and total non-interest  income,  excluding net
securities transactions.

(3) Total  non-interest  expense,  excluding  other real  estate  expense,  as a
percentage of average total assets.

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

(5) Does not include the effect of 108,010  ESOP shares and 110,780  ESOP shares
at March 31, 1997 and September 30,1996, respectively.

                                     - 20 -
<PAGE>


                           PART II - OTHER INFORMATION

Item 1.           Legal Proceedings
                  Not applicable

Item 2.           Changes in Securities
                  Not applicable

Item 3.           Defaults upon Senior Securities
                  Not applicable

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

Item 5.           Other Information
                  Not applicable

Item 6.           Exhibits and Reports on Form 8-K

                  (a) Exhibits
                      None

                  (b) Reports on Form 8-K
                      None




                                     - 21 -


<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:  May  8, 1997           BY:  /s/ John M. Lisicki
                                   -------------------
                                   John M. Lisicki
                                       President (principal executive officer)




DATE:  May  8, 1997           BY:  /s/ James J. Alescio
                                   --------------------
                                   James J Alescio
                                       Treasurer (principal financial officer)






                                     - 22 -