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 December 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 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 February  9, 1998
        ---------------------            ------------------------------

        Common Stock, Par $.10                       1,378,440


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

<PAGE>


                       AFSALA BANCORP, INC. AND SUBSIDIARY

                                   FORM 10-QSB

                                December 31, 1997


INDEX

Part I    CONSOLIDATED FINANCIAL
INFORMATION
                                                                            Page

Item 1.   Financial Statements

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

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

            Consolidated Statements of Cash Flows for the three
            months ended December 31, 1997 and 1996 (Unaudited) ............  3

            Notes to unaudited consolidated interim financial statements....  4

Item 2.  Management's Discussion and Analysis
            of Financial Condition and Results of Operations................  6


Part II   OTHER INFORMATION

Item 1.   Legal
Proceedings................................................................. 17

Item 2.   Changes in
Securities.................................................................. 17

Item 3.   Defaults Upon Senior
Securities.................................................................. 17

Item 4.   Submission of Matters to a Vote of Security Holders............... 17

Item 5.   Other
Information................................................................. 17

Item 6.   Exhibits and Reports on Form 8-K.   .............................. 17

Signatures.................................................................. 18


<PAGE>



                       AFSALA BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                               December 31,    September 30,
Assets                                                                             1997             1997
------                                                                       --------------    -------------
<S>                                                                           <C>              <C>          
Cash and due from banks                                                       $   4,774,251    $   5,127,320
Federal funds sold                                                               10,600,000        2,675,000
                                                                              -------------    -------------
                 Total cash and cash equivalents                                 15,374,251        7,802,320
                                                                              -------------    -------------

Securities available for sale, at fair value                                     37,144,966       37,705,373
Investment securities held to maturity                                           27,885,715       35,263,826
Federal Home Loan Bank of New York stock, at cost                                   565,300          565,300

Loans receivable                                                                 77,253,519       76,927,350
Less:  Allowance for loan losses                                                 (1,127,169)      (1,108,080)
                                                                              -------------    -------------
     Net loans receivable                                                        76,126,350       75,819,270
                                                                              -------------    -------------

Accrued interest receivable                                                       1,456,095        1,405,687
Premises and equipment, net                                                       1,664,515        1,659,444
Other assets                                                                        190,518          186,066
                                                                              -------------    -------------
                 Total assets                                                 $ 160,407,710    $ 160,407,286
                                                                              =============    =============

Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
         Deposits                                                               136,083,414      135,316,322
         Federal Home Loan  Bank of New York long term
            borrowings                                                            1,811,614        1,415,625
         Escrow accounts                                                            506,622          266,656
         Accrued expenses and other liabilities                                   1,919,592        2,789,562
                                                                              -------------    -------------
                 Total liabilities                                              140,321,242      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 issued                                                      145,475          145,475
  Additional paid-in capital                                                     13,525,263       13,465,092
  Retained earnings, substantially restricted                                     9,286,399        9,048,824
  Common stock acquired by ESOP                                                    (969,325)      (1,080,105)
  Unearned Restricted Stock Plan                                                   (693,916)        (733,194)
  Treasury stock, at cost                                                        (1,285,791)        (238,125)
  Net unrealized gain on securities available for sale, net of tax                   78,363           11,154
                                                                              -------------    -------------

                 Total  stockholders' equity                                     20,086,468       20,619,121
                                                                              -------------    -------------

                 Total liabilities and stockholders' equity                   $ 160,407,710    $ 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 December 31, 1997 and 1996
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                      1997         1996
                                                                   ----------   ----------
<S>                                                                <C>          <C>       
Interest and dividend income:
      Interest and fees on loans                                   $1,564,629   $1,518,654
      Interest on federal funds sold                                   54,114      110,052
      Interest on FHLB term deposits                                     --        106,888
      Interest on securities available for sale                       637,370      234,755
      Interest on investment securities                               518,297      635,758
      Dividends on Federal Home Loan Bank of NY stock                  10,045        9,393
                                                                   ----------   ----------
             Total interest and dividend income                     2,784,455    2,615,500
                                                                   ----------   ----------

Interest expense:
      Deposits and escrow accounts                                  1,429,344    1,302,506
      Federal Home Loan Bank of New York long term
         borrowings                                                    29,425       30,897
                                                                   ----------   ----------
             Total interest expense                                 1,458,769    1,333,403
                                                                   ----------   ----------

             Net interest income                                    1,325,686    1,282,097

Provision for loan losses                                              35,000       80,000
                                                                   ----------   ----------
             Net interest income after provision for loan losses    1,290,686    1,202,097
                                                                   ----------   ----------

 Non-interest  income:
      Service charges on deposit accounts                              89,733      110,338
      Other                                                             2,803       13,011
                                                                   ----------   ----------
             Total  non-interest income                                92,536      123,349
                                                                   ----------   ----------

Non-interest expenses:
      Compensation and benefits                                       462,536      371,803
      Occupancy and equipment                                         123,562      133,438
      FDIC deposit insurance premium                                   21,428       55,317
      Data processing fees                                             71,206       69,967
      Professional services fees                                       20,481       58,750
      Advertising                                                      17,132       14,389
      Supplies                                                         28,997       25,838
      Other                                                           158,645      179,113
                                                                   ----------   ----------
             Total  non-interest expenses                             903,987      908,615
                                                                   ----------   ----------

             Income before income tax expense                         479,235      416,831

Income tax expense                                                    168,325      147,231
                                                                   ----------   ----------

             Net income                                            $  310,910   $  269,600
                                                                   ==========   ==========

             Earnings per share:
                   Basic                                           $     0.25   $     0.20
                                                                   ==========   ==========
                   Diluted                                         $     0.24   $     0.20
                                                                   ==========   ==========
</TABLE>

See accompanying notes to unaudited consolidated interim financial statements. 

                                    - 2 -


<PAGE>


                       AFSALA BANCORP, INC. AND SUBSIDIARY
                         Consolidated Statements of Cash Flows
              For the three months ended December 31, 1997 and 1996
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                   1997            1996
                                                                               -----------    ------------ 
<S>                                                                           <C>             <C>         
Increase  (decrease) in cash and cash  equivalents:  
Cash flows from operating activities:
         Net income                                                           $    310,910    $    269,600
         Adjustments to reconcile net income to net
             cash provided by (used in) operating activities:
              Depreciation                                                          40,160          51,837
              Provision for loan losses                                             35,000          80,000
              Allocation of ESOP stock                                             170,951          32,406
              RSP compensation expense                                              39,278            --
              Increase in accrued interest receivable                              (50,408)       (106,009)
              (Increase) decrease in other assets                                   (4,452)        259,327
              Increase (decrease) in accrued expenses and other liabilities        241,804      (3,351,517)
                                                                               -----------    ------------ 
                    Total adjustments                                              472,333      (3,033,956)
                                                                               -----------    ------------ 
                    Net cash provided by (used in) operating activities            783,243      (2,764,356)
                                                                               -----------    ------------ 
                                                                                                            
Cash flows from investing activities:
          Proceeds from the maturity and call of securities
                 available for sale                                              6,262,238       1,777,713
          Purchases of securities available for sale                            (6,600,000)       (500,000)
          Proceeds from the maturity and call of investment securities           7,378,111       2,439,094
          Purchases of investment securities                                          --       (10,996,844)
          Net loans made to customers                                             (342,080)     (1,592,478)
          Capital expenditures                                                     (45,231)        (21,972)
                                                                               -----------    ------------ 
                  Net cash provided by (used in) investing activities            6,653,038      (8,894,487)
                                                                               -----------    ------------ 
                                                                                                            
Cash flows from financing activities:
          Increase (decrease) in deposits                                          767,092        (794,485)
          Borrowing from the Federal Home Loan Bank                                500,000            --
          Repayments on long term borrowings from the
                 Federal  Home Loan Bank                                          (104,011)       (109,375)
          Increase in escrow accounts                                              239,966          86,704
          Purchase of treasury stock                                            (1,194,062)           --
          Dividends paid                                                           (73,335)           --
                                                                               -----------    ------------ 
                   Net cash provided by (used in) financing activities             135,650        (817,156)
                                                                               -----------    ------------ 
                                                                                                             
Net increase (decrease) in cash and cash equivalents                             7,571,931     (12,475,999)
Cash and cash equivalents at beginning of period                                 7,802,320      27,016,392
                                                                               -----------    ------------ 
Cash and cash equivalents at end of period                                    $ 15,374,251    $ 14,540,393
                                                                              ============    ============
                                                                                                             
Additional  Disclosures Relative to Cash Flows:
                  Interest paid                                               $  1,456,018    $  1,329,364
                                                                              ============    ============

                 Taxes paid                                                   $     59,260    $    134,130
                                                                              ============    ============

Supplemental schedule of non-cash investing and financing activities:
  Change in unrealized gain on securities available for sale, net of tax      $     67,209    $     23,810
                                                                              ============    ============
  Net decrease in amounts due to broker from purchases of
         securities available for sale                                        $  1,000,000    $       --
                                                                              ============    ============
  Decrease in amounts due to broker from purchases of treasury stock          $    146,396    $       --
                                                                              ============    ============
                                                                                                             
</TABLE>

See accompanying notes to unaudited consolidated interim financial statements.

                                      -3 -


<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 December 31, 1997, the Consolidated  Statements of Income for the
three months ended December 31, 1997 and 1996, and the  Consolidated  Statements
of Cash Flows for the three months ended December 31, 1997 and 1996. The results
of operations for the three months ended December 31, 1997, 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.  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 (ESP).
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 adoption of this Statement did not have a material effect on the
Company's financial position or results of operations.


                                      -4 -
<PAGE>


The following table provides the calculation of basic and diluted EPS:
<TABLE>
<CAPTION>
                                                                 For the Three Months Ended December  31,
                                      -----------------------------------------------------------------------------------
                                                              1997                                           1996
                                      ---------------------------------------------   -----------------------------------

                                                      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              $  310,910     1,233,920    $     0.25    $ 269,600      1,344,920    $     0.20
                                                                    ==========                                ==========

 Effect of  Dilutive Securities
  Stock options                                           34,247                                      -
                                                                                                      
  Unvested restricted stock awards                        14,346                                      -
                                                                                                      

Diluted EPS                             $  310,910     1,282,513    $     0.24    $ 269,600      1,344,000    $     0.20
                                      ============   ===========    ==========    =========    ===========    ==========

</TABLE>

NOTE 3.  Recent Accounting Pronouncements



In June 1997, the Financial Accounting Standards Board (`FASB") issued Statement
of Financial  Accounting  Standards No. 130,  "Reporting  Comprehensive  Income"
(Statement  130),  which  establishes  standards  for  reporting  and display of
comprehensive income and its compenents 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,
foreign  currency  items,  and  minimum  pension  liability  adjustments.   This
statement  is  effective  for both interim and annual  periods  beginning  after
December 15,  1997.  As required,  the Company will adopt  Statement  130 in the
second quarter of fiscal 1998, and will report and display  comprehensive income
in accordance with the new statement.


In June 1997, the FASB issued  Statement of Financial  Accounting  Standards 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.




                                      -5 -


<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 December
31, 1997,  the Bank's net loans  receivable  to assets ratio was 47.5%,  up from
47.3% at September 30, 1997. At December 31, 1997,  $66.7 million,  or 49.0%, of
total deposits were in non-time deposits accounts, as compared to $65.6 million,
or 48.5%, at September 30, 1997.






                                      - 6 -

<PAGE>


Consolidated Financial Condition


Total assets remained consistent at $160.4 million at both December 31, 1997 and
September 30, 1997. Cash and cash equivalents increased $7.6 million or 97.0% to
$15.4  million at December  31, 1997 from $7.8  million at  September  30, 1997.
Conversely,  investment  securities  held to maturity  decreased $7.4 million or
20.9% to $27.9  million at December 31, 1997 from $35.3 million at September 30,
1997.  Likewise,  the Company's  securities  available for sale  decreased  $560
thousand  or 1.5% to $37.1  million at December  31, 1997 from $37.7  million at
September 30, 1997. These shifts were primarily the result of the  re-investment
of funds from  maturities  and calls of securities  into federal fund sold.  The
Company's  net loans  receivable  increased by $307 thousand to $76.1 million at
December 31, 1997 up from $75.8 million at September  30, 1997.  The increase in
net loans  receivable  was  primarily  in  residential  mortgage and home equity
loans.


The Company's  deposits increased by $767 thousand to $136.1 million at December
31, 1997 from $135.3  million at September 30, 1997.  In addition,  Federal Home
Loan Bank of New York long term  borrowings  increased $396 thousand or 28.0% to
$1.8  million at December  31, 1997 from $1.4  million at  September  30,  1997,
primarily due to additional  borrowings in the amount of $500 thousand made from
the Federal Home Loan Bank. Offsetting these increases was a decrease in accrued
expenses  and other  liabilities  of $870  thousand or 31.2% to $1.9  million at
December 31, 1997 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 $533  thousand or 2.6% to $20.1  million at
December  31, 1997 from $20.6  million at September  30, 1997.  The decrease was
primarily  the result of the purchases of treasury  stock,  offset by net income
for the three months ended  December 31,  1997.  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.












                                      - 7 -


<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 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  for the three  months  ended  December
31,1997 from the three months ended December 31, 1996 from 2.82% to 2.80%.

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.



                                      - 8-


<PAGE>


                       AFSALA BANCORP, INC. AND SUBSIDIARY
                 Average Balance Sheet, Interest Rates and Yield
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                  For the Three Months Ended December  31,
                                      --------------------------------------------------------------------------------------------
                                                                1997                                         1996
                                      ---------------------------------------------   --------------------------------------------

                                                              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                        $     4,216            54        5.08%        $     8,271           110        5.28%
   Term deposits FHLB of NY                            -             -           -               7,803           107        5.44
   Securities available for sale (2)              38,936           637        6.49              16,802           235        5.55
   Investment securities held to maturity         32,034           518        6.42              38,771           636        6.51
   FHLB of NY stock                                  565            10        7.02                 565             9        6.32
   Net loans receivable (3)                       75,672         1,565        8.21              71,459         1,518        8.43
                                          --------------        ------    --------          ----------       -------     -------
       Total interest-earning assets             151,423         2,784        7.29             143,671         2,615        7.22
                                                                 -----    --------                           -------     -------
Non-interest earning assets                        7,177                                         6,584
                                          --------------                                    ----------
       Total assets                          $   158,600                                   $   150,255
                                          ==============                                    ==========


Interest-bearing liabilities:
   Savings accounts                          $    35,738           270        3.00         $    35,674            269       3.00
   NOW  accounts                                  11,952            69        2.29              10,863             63       2.30
   Money market accounts                          10,438           110        4.18               8,158             80       3.89
   Time deposit accounts                          68,770           978        5.64              63,292            888       5.57
   Escrow accounts                                   340             2        2.33                 335              2       2.37
   FHLB of NY
       long term borrowings                        1,697            29        6.78               1,749             31       7.03
                                          --------------    ----------    --------          ----------       -------     ------
Total interest-bearing liabilities               128,935         1,458        4.49             120,071          1,333       4.40
                                                            ----------     -------                            -------     ------

Non-interest bearing deposits                      8,316                                          7,732
Other non-interest bearing liabilities             1,266                                          1,714
Equity                                            20 083                                         20,738
                                          --------------                                    -----------
       Total liabilities and equity          $   158,600                                   $    150,255
                                          ==============                                    ===========

Net interest income                                         $    1,326                                       $  1,282
                                                            ==========                                        =======

Interest rate spread                                                          2.80%                                         2.82%
                                                                           =======                                        ======


Net interest margin                                                           3.47%                                         3.54%
                                                                           =======                                        ======

Ratio of average interest-earning
        assets to average
        interest-bearing liabilities              117.44%                                        119.66%
                                          ==============                                    ===========
</TABLE>



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


                                      - 9 -
<PAGE>


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

                       THREE MONTHS ENDED DECEMBER 31,1997
                                  COMPARED WITH
                      THREE MONTHS ENDED DECEMBER 31, 1996
                      ------------------------------------
<TABLE>
<CAPTION>
                                                         INCREASE   (DECREASE)
                                                ------------------------------------
                                                                DUE TO
                                                ------------------------
                                                  VOLUME         RATE         NET
                                                  ------         ----         ---
<S>                                             <C>          <C>         <C>     
Interest and dividend  income:
   Federal funds sold                           $ (51,926)      (4,012)     (55,938)
   Term deposits with FHLB of NY                 (106,888)        --       (106,888)
   Securities available for sale                  356,747       45,868      402,615
   Investment securities held to maturity        (108,804)      (8,657)    (117,461)
   FHLB of NY stock                                    --          652          652
   Net loans receivable                            86,805      (40,830)      45,975
                                                ---------    ---------    ---------
Total interest and dividend income                175,934       (6,979)     168,955
                                                ---------    ---------    ---------
                                                
Interest expense:                               
   Savings accounts                                 1,214         --          1,214
   NOW  accounts                                    6,300         (274)       6,026
   Money market accounts                           23,842        6,360       30,202
   Time deposit accounts                           79,438        9,869       89,307
   Escrow  accounts                                   123          (34)          89
   FHLB of NY long term borrowings                   (688)        (804)      (1,472)
                                                ---------    ---------    ---------
Total interest expense                            110,249       15,117      125,366
                                                ---------    ---------    ---------
                                                
Net change in net interest income               $  65,685    $ (22,096)   $  43,589
                                                =========    =========    =========
</TABLE>                             
















                                     - 10 -



<PAGE>


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

Net Income.  Net income  increased by $41 thousand or 15.3% for the three months
ended December 31, 1997 to $311 thousand from $270 thousand for the three months
ended December 31, 1996. Net income for the three months ended December 31, 1997
increased  primarily as a result of increased net interest  income and decreased
non-interest  expenses and provision for loan losses offset in part by decreased
non-interest  income and  increased  income tax  expense.  Net  interest  income
increased  by $44  thousand or 3.4% to $1.3  million for the three  months ended
December 31, 1997. Non-interest expenses and provision for loan losses decreased
$5 thousand and $45 thousand to $904  thousand and $35  thousand,  respectively,
for the three months ended December 31, 1997. In addition,  non-interest  income
decreased $31 thousand or 25.0% to $93 thousand and income tax expense increased
$21 thousand or 14.3% to $168 thousand for the quarter ended December 31, 1997.

Net Interest Income. Net interest income increased by approximately $44 thousand
or 3.4% to $1.3  million for the three  months  ended  December  31,  1997.  The
increase was primarily due to an increase of $7.8 million or 5.4% in the average
balance of interest-earning assets, offset in part by an increase in the average
balance  of total  interest-bearing  liabilities  of $8.9  million or 7.4% and a
decrease  in the  interest  rate spread  from 2.82% for the three  months  ended
December 31, 1996 to 2.80% for the three months ended December 31, 1997.

Interest-earning  assets primarily  consist of loans  receivable,  federal funds
sold, and  securities  (securities  available for sale combined with  investment
securities held to maturity).  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 cost of average  interest-bearing  liabilities,
decreased to 2.80% for the three  months ended  December 31, 1997 from 2.82% for
the three months ended  December  31,  1996.  The decrease in the interest  rate
spread is primarily  the result of  increases  in the cost of interest-  bearing
liabilities  being greater than the increases in the yields on interest  earning
assets during these periods.


Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $169  thousand or 6.5% to $2.8 million for the three months ended
December  31, 1997 from $2.6  million for the three  months  ended  December 31,
1996. The increase was largely the result of an increase of $7.8 million or 5.4%
in the average  balance of  interest  earning  assets to $151.4  million for the
three months ended December 31, 1997 as compared to $143.7 million for the three
months ended December 31, 1996. The increase in the average  balance of interest
earning  assets  consisted  primarily  of an increase in the average  balance of
total securities (both securities  available for sale and investment  securities
held to  maturity)  of $15.4  million or 27.7%,  and an  increase in the average
balance of net loans  receivable of $4.2 million or 5.9%.  These  increases were
partially  offset by decreases in the average  balance of federal  funds sold of
$4.1 million,  or 49.0%,  and Term deposits with the FHLB of NY of $7.8 million,
or 100.0%.  Also adding to the increase in interest and dividend  income was a 7
basis point increase in the average yield on all interest earning assets.

                                      -11 -
<PAGE>

Interest  income on  securities  available for sale  increased  $403 thousand or
171.5% to $637  thousand for the three months ended  December 31, 1997 from $235
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 $22.1  million  combined  with a 94 basis point  increase in the average
yield on these  securities.  Interest  income on investment  securities  held to
maturity  decreased $117 thousand or 18.5% to $518 thousand for the three months
ended  December 31, 1997 from $636 thousand for three months ended  December 31,
1996. This decrease is primarily the result of a decrease in the average balance
of  investment  securities  held to maturity of $6.7 million  combined  with a 9
basis point decrease in the average yield on these securities.

Interest  and fees on loans  increased  $46 thousand or 3.0% to $1.6 million for
the three months ended  December 31, 1997 from $1.5 million for the three months
ended  December 31, 1996.  This increase was primarily the result of an increase
in the average balance of net loans  receivable of $4.2 million,  offset by a 22
basis point decrease in the average yield.

The yield on the average balance of interest  earning assets was 7.29% and 7.22%
for the three months ended December 31, 1997 and 1996, respectively.

Interest  Expense.  Interest on deposits and escrow  accounts  increased by $127
thousand  for the three months  ended  December  31, 1997  compared to the three
months ended December 31, 1996. This increase in interest on deposits and escrow
accounts was primarily due to the increase in interest  expense  related to NOW,
money market,  and time deposit  accounts.  Interest expense on NOW accounts was
$69  thousand for the three  months  ended  December  31, 1997,  compared to $63
thousand for the three months December 31, 1996.  Likewise,  interest expense on
money market and time  deposit  accounts  was $110  thousand and $978  thousand,
respectively,  for the three  months ended  December  31, 1997,  compared to $80
thousand and $888  thousand,  respectively,  for the three  months  December 31,
1996. 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 4.8% to $29 thousand
for the three months ended December 31, 1997. This decrease was primarily due to
a decrease of 25 basis points in the average cost of borrowings  offset by a $52
thousand or 3.0% decrease 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.

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 loans was 0.57% and


                                     - 12 -
<PAGE>


0.61% at December 31, 1997 and September 30, 1997,  respectively.  The provision
for loan losses for the three  months ended  December 31, 1997  decreased to $35
thousand from $80 thousand for the three months ended December 31, 1996.


Non-Interest Income. Total non-interest income decreased during the three months
ended  December 31, 1997 to $93  thousand  compared  with $123  thousand for the
three months ended  December 31, 1996.  Decreases in service  charges on deposit
accounts of $21 thousand and other non-interest income of $10 thousand comprised
the decrease from the previous period.


Non-Interest Expenses. Total non-interest expenses decreased $5 thousand to $904
thousand for the three months ended December 31, 1997 from $909 thousand for the
three months ended December 31, 1996.

Compensation  and  benefits  expense  increased  by $91  thousand  or 24.4%  due
primarily to costs  related to the  Company's  ESOP,  the  establishment  of the
Restricted  Stock Plan in May 1997,  the opening of a new branch in May 1997, as
well as  general  cost of living  and  merit  raises  to  employees.  Management
believes that compensation and benefits expenses will increase in future periods
as a result of the costs related to the Company's ESOP as well as the Restricted
Stock Plan.

FDIC deposit insurance premiums decreased by $34 thousand or 61.3% due primarily
to reduced  deposit  insurance  premium rates for the quarter ended December 31,
1997.

Professional  service  fees  for the  three  months  ended  December  31,  1997,
decreased  by $38 thousand or 65.1% from $59 thousand for the three months ended
December 31, 1996, as a result of additional legal and accounting costs incurred
during  the three  months  ended  December  31,  1996  associated  with  being a
newly-formed company.

Other  non-interest  expenses  decreased  $20 thousand or 11.4% from the quarter
ended December 31, 1996 to the quarter ended  December 31, 1997,  primarily as a
result of the write off of certain  items  deemed  uncollectible  by  management
during the previous quarter.


Income Tax  Expense.  Income tax expense  increased  by $21 thousand or 14.3% to
$168  thousand for the three months ended  December 31, 1997 from $147  thousand
for the three months ended  December 31, 1996.  The increase was  primarily  the
result of the increase in income before income tax expense.





                                      - 13-


<PAGE>



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 46.74% and 45.18% at
December 31, 1997 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 quarters  ended  December 31,
1997 and 1996, the primary source of funds was cash flows from deposit inflows.


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 inflows, from time to time the Company borrows funds from
the FHLB of New York to  supplement  its cash flows.  At  December  31, 1997 and
September 30, 1997, the Company had outstanding borrowings from the FHLB of $1.8
million and $1.4 million, respectively.


As of December 31, 1997 and  September  30, 1997,  the Company had $37.1 million
and $37.7 million of securities, respectively,  classified as available for sale
and $27.9  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 outflows.


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.





                                      -14-
<PAGE>

The Bank is subject to federal  regulations  that impose certain minimum capital
requirements.  At December 31, 1997,  the Bank's  capital  exceeded  each of the
regulatory  capital  requirements of the OTS. The Bank is "well  capitalized" at
December 31, 1997 according to regulatory definition.  At December 31, 1997, the
Company's  consolidated tangible and core capital levels were both $20.0 million
(12.48% of total  adjusted  assets) and its total  risk-based  capital level was
$20.1 million (29.70% 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 December 31, 1997, 71,310
shares had been  repurchased  by the Company in  open-market  transactions  at a
total cost of $1.3 million or $18.03 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.  Currently
management does not expect a significant impact on the Company's earnings.


Effect of Inflation and Changing Prices


The Company's unaudited  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.

                                     - 15 -
<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 three      At or for the
                                                                                   months ended          year ended
                                                                                 December 31,1997     September 30, 1997
<S>                                                                            <C>                      <C>       
Performance Ratios:

Earnings per share:
       Basic                                                                   $    0.25                $     0.89
       Diluted                                                                      0.24                      0.88
Return on average assets (annualized)                                               0.78%                     0.77%
Return on average stockholders' equity (annualized)                                 6.14%                     5.65%
Interest rate spread                                                                2.80%                     2.89%
Net interest margin                                                                 3.47%                     3.57%
Efficiency ratio (annualized) (1)                                                  63.56%                    63.21%
Expense ratio (annualized) (2)                                                      2.25%                     2.32%

Asset Quality Ratios:

Non-performing loans to total loans                                                 0.57%                     0.61%
Allowance for loan losses to non-performing loans                                 254.04%                   236.09%
Allowance for loan losses to total loans receivable                                 1.46%                     1.44%
Non-performing assets to total assets                                               0.30%                     0.31%

Capital Ratios (3):

Stockholders' equity to total assets at period end                                 12.52%                    12.85%
Average stockholders' equity to average total assets                               12.66%                    13.68%
Tangible capital                                                                   12.48%                    13.00%
Core (Tier I) capital                                                              12.48%                    13.00%
Total risk-based capital                                                           29.70%                    30.90%
Book value per share (4)                                                       $   16.35                $    16.19
</TABLE>


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

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

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

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



                                     - 16 -
<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
                  A form 8-K  (item  5&7)  dated  November  28,  1997 was filed
                  during the quarter.




















                                     - 17 -


<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:  February  9, 1998       BY:  /s/ John M. Lisicki
                                    -------------------
                                    John M. Lisicki
                                    President (principal executive officer)




DATE:  February  9, 1998       BY:  /s/ James J. Alescio
                                    --------------------
                                    James J Alescio
                                    Treasurer (principal financial officer)



























                                     - 18 -