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


                                   FORM 10-QSB

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


         For the Quarter ended June 30, 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 August  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

                                  JUNE 30, 1997

<TABLE>
<CAPTION>

INDEX

Part I    CONSOLIDATED FINANCIAL INFORMATION
------
                                                                                                      Page
<S>                                                                                                    <C>
Item 1.     Financial Statements

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

            Consolidated Statements of Income for the three
            months ended June 30, 1997 and 1996 (Unaudited) ............................................2

            Consolidated Statements of Income for the nine
            months ended June 30, 1997 and 1996 (Unaudited) ............................................3

            Consolidated Statements of Cash Flows for the nine
            months ended June 30, 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............................................8


Part II     OTHER INFORMATION
-------

Item 1.     Legal
Proceedings............................................................................................22

Item 2.     Changes in
Securities.............................................................................................22

Item 3.     Defaults Upon Senior
Securities.............................................................................................22

Item 4.     Submission of Matters to a Vote of Security Holders........................................22

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

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

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

</TABLE>

<PAGE>

                       AFSALA BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                          June 30,     September 30,
Assets                                                                      1997           1996
------                                                                 --------------   -----------
<S>                                                                    <C>              <C>          
Cash and due from banks                                                $   4,224,844    $   4,816,392
Federal funds sold                                                         9,850,000       19,200,000
Term deposits with the Federal Home Loan Bank                                   --          3,000,000
                                                                       -------------    -------------


                 Total cash and cash equivalents                          14,074,844       27,016,392
                                                                       -------------    -------------

Securities available for sale, at approximate fair value                  26,998,486       17,131,802
Investment securities held to maturity                                    40,396,756       34,999,930
Federal Home Loan Bank of New York stock, at cost                            565,300          565,300
Loans receivable, net                                                     73,857,917       70,677,291
Accrued interest receivable                                                1,374,548        1,156,466
Premises and equipment, net                                                1,687,591        1,703,491
Other assets                                                                 225,356          426,015
                                                                       -------------    -------------
                 Total assets                                          $ 159,180,798    $ 153,676,687
                                                                       =============    =============

Liabilities and Stockholders' Equity
------------------------------------
Liabilities:

         Deposits                                                        135,247,121      126,460,081
         Federal Home Loan  Bank of New York long term
            borrowings                                                     1,512,500        1,815,625
         Escrow accounts                                                     291,250          365,187
         Accrued expenses and other liabilities                              685,882        4,444,922
                                                                       -------------    -------------
                 Total liabilities                                       137,736,753      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                                              14,250,657       13,460,381
  Retained earnings, substantially restricted                              8,929,367        8,120,864
  Common stock acquired by ESOP                                           (1,080,105)      (1,107,800)
  Unearned Restricted Stock Plan                                            (772,472)            --
  Net unrealized loss on securities available for sale, net of tax           (28,877)         (28,048)
                                                                       -------------    -------------

                 Total  stockholders' equity                              21,444,045       20,590,872
                                                                       -------------    -------------

                 Total liabilities and stockholders' equity            $ 159,180,798    $ 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 June 30, 1997 and 1996
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                     1997                      1996
                                                                                --------------            ------------
<S>                                                                             <C>                     <C>         
Interest and dividend income:
      Interest and fees on loans                                                $   1,522,309             $ 1,443,523
      Interest on Federal funds sold                                                   80,516                  88,666
      Interest on FHLB term deposits                                                       --                  27,607
      Interest on securities available for sale                                       432,366                 233,086
      Interest on investment securities                                               674,214                 503,940
      Dividends on Federal Home Loan Bank of NY stock                                   8,809                   8,799
                                                                                        -----                   -----
             Total interest and dividend income                                     2,718,214               2,305,621
                                                                                    ---------               ---------

Interest expense:
      Deposits and escrow accounts                                                  1,372,241               1,280,358
      Federal Home Loan Bank of New York long term
         borrowings                                                                    28,907                  34,669
                                                                                       ------                  ------
             Total interest expense                                                 1,401,148               1,315,027
                                                                                    ---------               ---------

             Net interest income                                                    1,317,066                 990,594

Provision for loan losses                                                              60,000                  55,000
                                                                                       ------                  ------

             Net interest income after provision for loan losses                    1,257,066                 935,594
                                                                                    ---------                 -------

 Non-interest  income:
      Service charges on deposit accounts                                              83,136                  88,810
      Other                                                                             2,237                   2,054
                                                                                        -----                   -----
            Total  non-interest income                                                 85,373                  90,864
                                                                                       ------                  ------      
Non-interest expenses:
      Compensation and benefits                                                       402,668                 311,146
      Occupancy and equipment                                                         134,255                 126,367
      FDIC deposit insurance premium                                                   20,519                  67,675
      Data processing fees                                                             63,889                  66,752
      Professional services fees                                                       81,967                  26,722
      Advertising                                                                      18,534                  14,685
      Supplies                                                                         35,654                  20,723
      Other                                                                           115,032                 118,546
                                                                                      -------                 -------       
             Total  non-interest expenses                                             872,518                 752,616
                                                                                      -------                 -------       


             Income before income tax expense                                         469,921                 273,842

Income tax expense                                                                    160,000                  91,000
                                                                                      -------                  ------      


             Net income                                                          $    309,921            $    182,842
                                                                                 ============            ============            

             Net income per share                                                $       0.23            $        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 nine months ended June 30, 1997 and 1996
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                      1997                   1996
                                                                                -------------           -------------
<S>                                                                             <C>                     <C>          
Interest and dividend income:
      Interest and fees on loans                                                $   4,559,434           $   4,254,711
      Interest on Federal funds sold                                                  278,163                 251,599
      Interest on FHLB term deposits                                                  142,037                  72,380
      Interest on securities available for sale                                       936,270                 513,734
      Interest on investment securities                                             2,014,125               1,628,718
      Dividends on Federal Home Loan Bank of NY stock                                  27,053                  27,726
                                                                                       ------                  ------
             Total interest and dividend income                                     7,957,082               6,748,868
                                                                                    ---------               ---------
Interest expense:
      Deposits and escrow accounts                                                  3,968,968               3,854,449
      Federal Home Loan Bank of New York long term
         borrowings                                                                    88,482                 110,725
                                                                                       ------                 -------
             Total interest expense                                                 4,057,450               3,965,174
                                                                                    ---------               ---------

            Net interest income                                                     3,899,632               2,783,694

Provision for loan losses                                                             210,000                 135,000
                                                                                      -------                 -------

      Net interest income after provision for loan losses                           3,689,632               2,648,694
                                                                                    ---------               ---------


Non-interest income:
      Service charges on deposit accounts                                             282,172                 269,051
      Other                                                                            31,657                  18,946
                                                                                       ------                  ------
             Total  non-interest income                                               313,829                 287,997
                                                                                      -------                 -------

Non-interest expenses:
      Compensation and benefits                                                     1,139,741                 938,434
      Occupancy and equipment                                                         407,048                 358,838
      FDIC deposit insurance premium                                                   96,532                 196,579
      Data processing fees                                                            205,963                 199,718
      Professional service fees                                                       213,591                  85,263
      Advertising                                                                      43,024                  32,657
      Supplies                                                                         85,295                  59,587
      Other                                                                           485,163                 334,801
                                                                                      -------                 -------
             Total non-interest expenses                                            2,676,357               2,205,877
                                                                                    ---------               ---------

             Income before income tax expense                                       1,327,104                 730,814

Income tax expense                                                                    464,731                 229,600
                                                                                      -------                 -------

             Net income                                                           $   862,373             $   501,214
                                                                                  ===========             ===========

             Net income per share                                                 $      0.64             $       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 nine months ended June 30, 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                                                                               $   862,373           $   501,214
         Adjustments to reconcile net income to net
             cash (used in) provided by operating activities:
              Depreciation                                                                            129,857               122,021
              Provision for loan losses                                                               210,000               135,000
              Allocation of ESOP stock                                                                 32,406                    --
              RSP compensation expense                                                                 13,093                    --
              Increase in accrued interest receivable                                                (218,082)              (38,645)
              Decrease (increase) in other assets                                                     232,048              (320,985)
              (Decrease) increase in accrued expenses and other liabilities                        (3,758,615)              137,834
                                                                                                  -----------           -----------
                    Total adjustments                                                              (3,359,293)               35,225
                                                                                                  -----------           -----------
                    Net cash (used in) provided by operating activities                            (2,496,920)              536,439
                                                                                                  -----------           -----------

Cash flows from investing activities:
          Proceeds from the maturity and call of securities
                 available for sale                                                                 8,132,062             2,534,141
          Purchase of securities available for sale                                               (18,000,000)             (500,000)
          Proceeds from the maturity and call of investment securities                              6,088,234             8,775,319
          Purchase of investment securities                                                       (11,485,060)          (11,931,899)
          Net loans made to customers                                                              (3,422,015)           (3,773,507)
          Capital expenditures                                                                       (113,957)              (73,223)
                                                                                                 ------------           -----------
                   Net cash used in investing activities                                          (18,800,736)           (4,969,169)
                                                                                                 ------------           -----------

Cash flows from financing activities:
          Increase in deposits                                                                      8,787,040             9,261,257
          Repayments on long term borrowings from the
                 Federal  Home Loan Bank                                                             (303,125)             (353,125)
          Decrease in escrow accounts                                                                 (73,937)              (97,801)
          Dividends paid                                                                              (53,870)                   --
                                                                                                     --------           -----------
                   Net cash provided by financing activities                                        8,356,108             8,810,331
                                                                                                    ---------           -----------

Net (decrease) increase in cash and cash equivalents                                              (12,941,548)            4,377,601
Cash and cash equivalents at beginning of period                                                   27,016,392             9,673,328
                                                                                                   ----------           -----------
Cash and cash equivalents at end of period                                                        $14,074,844           $14,050,929
                                                                                                  ===========           ===========
Additional  Disclosures Relative to Cash Flows:
                  Interest paid                                                                   $ 4,066,692           $ 3,962,945
                                                                                                  ===========           ===========

                 Taxes paid                                                                       $   307,738           $   135,000
                                                                                                  ===========           ===========
Supplemental schedule of non-cash investing and financing activities:

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

  Transfer of loans to real estate owned                                                          $    31,389           $        --
                                                                                                  ===========           ============
  Change in unrealized gain (loss) on securities available for sale, net of tax                   $      (829)          $   (61,854)
                                                                                                  ===========           ===========
</TABLE>

 See accompanying notes to unaudited consolidated interim financial statements.

                                      -4 -



<PAGE>




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


NOTE 1.  Presentation of Financial Information

The accompanying unaudited consolidated interim financial statements include the
accounts of AFSALA  Bancorp,  Inc. and its  subsidiary  (the Company)  Amsterdam
Federal  Bank.  The  accompanying   unaudited   consolidated  interim  financial
statements  have been  prepared  in  accordance  with the  instructions  to Form
10-QSB.  Accordingly,  they do not include all of the  information and footnotes
required by generally  accepted  accounting  principles  for complete  financial
statements.  The accounting and reporting policies of the Company conform in all
material  respects to generally  accepted  accounting  principles and to general
practice within the savings bank industry.  It is the opinion of management that
the accompanying unaudited consolidated interim financial statements reflect all
adjustments  which are  considered  necessary  to report  fairly  the  financial
position as of June 30,  1997,  the  Consolidated  Statements  of Income for the
three months and nine months ended June 30, 1997 and 1996, and the  Consolidated
Statements  of Cash Flows for the nine months ended June 30, 1997 and 1996.  The
results  of  operations  for the  nine  months  ended  June  30,  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 nine  months  ended June 30, 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 nine
months ended June 30, 1997 was 1,347,000 and 1,346,000, respectively. The effect
of outstanding  stock option awards and shares issued under the Restricted Stock
Plan are not material to the calculation of net income per share. Net income per
share  for the the three  months  and nine  months  ended  June 30,  1996 is not
applicable as there were no shares outstanding during these time periods.

See also Note 4.

                                      -5 -

<PAGE>

NOTE 3.  Employee Benefits


AFSALA Bancorp, Inc. 1997 Stock Option Plan
-------------------------------------------


On May 30, 1997, the stockholders  approved the AFSALA Bancorp,  Inc. 1997 Stock
Option Plan ("Option Plan"). Under the Option Plan, options to purchase a number
of shares  equal to 10% of the  Company's  shares  issued in its initial  public
offering, or 145,475 shares, became available for award to officers,  directors,
key employees and other persons from time to time.  Concurrent with the approval
of the Option Plan,  145,475 stock  options were granted to officers,  directors
and key  employees  of the  Company  at an  exercise  price of $13.50 per share,
representing  the fair market value of the stock on the grant date.  The options
vest over a five year period at a rate of 20%  annually,  commencing  on the one
year anniversary of the grant date.


Amsterdam Federal Bank Restricted Stock Plan
--------------------------------------------

On May 30, 1997, the stockholders approved the Amsterdam Federal Bank Restricted
Stock Plan ("RSP") for the benefit of officers,  directors, and key employees of
the Company.  Under the RSP, 4% of the Company's common stock, or 58,190 shares,
became  available for award in  recognition of expected  future  services to the
Company  by  its  directors,   officers,   and  key  employees  responsible  for
implementation  of the policies  adopted by the Company's Board of Directors and
as a means of  providing  a further  retention  incentive.  Concurrent  with the
approval of the RSP, 58,190 shares were awarded and vest over a five year period
at a rate of 20% annually,  commencing on the one year  anniversary of the grant
date.  The  fair  market  value  of the  shares  awarded  on the  grant  date of
approximately  $786,000  is  being  amortized  to  compensation  expense  as the
participants  become vested in those shares. For the three and nine months ended
June 30, 1997, the Company recognized compensation expense related to the RSP of
approximately  $13,000. The restricted stock related to the RSP has not yet been
issued by the Company.


NOTE 4.  Recent Accounting Pronouncements

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.

                                      -6 -


<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.


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.







                                      -7 -



<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General

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

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

The Bank has been, and intends to continue to be, a community-oriented financial
institution offering a variety of financial services.  Management's strategy has
been to try to achieve a high  loans to assets  ratio and a high  proportion  of
lower-costing,  non-time deposit accounts in the deposit portfolio.  At June 30,
1997, the Bank's loans receivable, net, to assets ratio was 46.4%, up from 46.0%
at September  30, 1996.  At June 30, 1997,  $65.9  million,  or 48.8%,  of total
deposits were in non-time deposits  accounts,  as compared to $62.6 million,  or
49.5%, at September 30, 1996.



                                      - 8 -

<PAGE>

Consolidated Financial Condition


Total assets  increased  by $5.5  million or 3.6% to $159.2  million at June 30,
1997 from $153.7  million at September  30, 1996,  primarily due to increases in
total securities (both securities  available for sale and investment  securities
held to maturity) of $15.3 million,  or 29.3%,  and net loans receivable of $3.2
million,  or 4.5%. These increases were partially offset by decreases in federal
funds sold and term deposits with the Federal Home Loan Bank of $9.4 million, or
48.7%, and $3.0 million,  or 100.0%,  respectively.  These shifts were primarily
the result of the re-  investment  of the proceeds from the offering into higher
yielding instruments.

The Company's  securities  available for sale increased $9.9 million or 57.6% to
$27.0  million  at June 30,  1997 from  $17.1  million at  September  30,  1996.
Likewise,  investment  securities held to maturity  increased by $5.4 million or
15.4% to $40.4  million at June 30, 1997, up from $35.0 million at September 30,
1996.

The  Company's net loans  receivable  increased by $3.2 million or 4.5% to $73.9
million  at June 30,  1997 up from $70.7  million at  September  30,  1996.  The
increase in net loans receivable was due to improved loan activity, primarily in
residential mortgage and home equity loans.

The Company's  deposits  increased by $8.8 million or 6.9% to $135.2  million at
June 30, 1997 from $126.5 million at September 30, 1996 primarily due to various
marketing  promotions offered in the supermarket branches along with the opening
of a new branch in May 1997. Offsetting this increase in deposits was a decrease
in  accrued  expenses  and  other  liabilities  as  accrued  expenses  and other
liabilities  decreased  $3.7 million or 84.6% to $686  thousand at June 30, 1997
from $4.4 million at September  30, 1996  resulting  from 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.


Stockholders' equity increased by $853 thousand or 4.1% to $21.4 million at June
30, 1997 from $20.6  million at September  30, 1996.  The increase was primarily
the result of net income for the nine months ended June 30, 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.  In June 1997,  the
Company received the necessary regulatory and Board approval to initiate a stock
repurchase plan covering up to 5% or 72,737 shares of the Company's common stock
to be purchased in the open market.










                                      - 9 -
<PAGE>
Asset /Liability Management

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

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

In an effort to reduce  interest rate risk and protect  itself from the negative
effects of rapid or prolonged changes in interest rates, the Bank has instituted
certain asset and liability management measures,  including (i) originating, for
its portfolio,  a large base of adjustable-rate  residential mortgage loans, and
(ii) maintaining  substantial levels of 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 June 30,1997
and 1996 from 2.77% to 2.89% and for the nine  months  ended  June 30,  1997 and
1996 from 2.63% to 2.90%.

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

                                      - 10-

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


                                                        For the Three Months Ended June  30,
                                                         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)
<S>                                         <C>        <C>         <C>         <C>       <C>          <C>  
Interest-earning assets:                                                      
   Federal funds sold                       $  6,105         81      5.32%    $  7,012         89      5.10%
   Term deposits with Federal                                                 
         Home Loan Bank of NY                      -          -         -        2,069         28      5.44
   Securities available for sale (3)          27,465        432      6.31       17,203        233      5.45
   Investment securities held to maturity     41,673        674      6.49       32,485        504      6.24
   FHLB of NY stock                              565          9      6.39          566          9      6.40
   Loans receivable, net(2)                   72,462      1,522      8.42       68,535      1,443      8.47
                                            --------   --------   -------      -------   --------      ----
       Total interest-earning assets         148,270      2,718      7.35      127,870      2,306      7.25
                                                          -----   -------      -------   --------      ----
Non-interest earning assets                    7,739                             6,281
                                              ------                            ------
       Total assets                         $156,009                          $134,151
                                            ========                          ========
                                                                              
                                                                              
Interest-bearing liabilities:                                                 
   Savings accounts                          $36,364        272      3.00     $ 35,608       266      3.00
   NOW  accounts                              11,227         65      2.32       10,247        58      2.28
   Money market accounts                       9,266         95      4.11        6,981        64      3.69
   Time deposit accounts                      67,277        939      5.60       62,957       890      5.69
   Escrow accounts                               204          1      1.97          303         2      2.65
   FHLB of NY long term borrowings             1,631         29      7.13        1,986        35      7.09
                                             -------    -------   -------      -------   -------      ----
Total interest-bearing liabilities           125,969      1,401      4.46      118,082     1,315      4.48
                                                        -------   --------               -------      ----
                                                                              
Non-interest bearing deposits                  7,970                             6,783
Other non-interest bearing liabilities           816                             1,000
Equity                                        21,254                             8,286
                                            --------                           -------
       Total liabilities and equity         $156,009                          $134,151
                                            ========                          ========
                                                                              
Net interest income                                     $ 1,317                          $   991
                                                        =======                          =======
                                                                              
Interest rate spread                                                 2.89%                            2.77%
                                                                  =======                          =======
                                                                              
                                                                              
Net interest margin                                                  3.56%                            3.12%
                                                                  =======                          =======
Ratio of average interest-earning                                             
        assets to average                                                     
        interest-bearing liabilities          117.70%                           108.29%
                                            ========                           =======
                                                                              
</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
                Average Balance Sheet, Interest Rates and Yields
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                        For the Nine Months Ended June  30,
                                                         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)
<S>                                         <C>        <C>         <C>         <C>       <C>          <C>  
Interest-earning assets:
   Federal funds sold                       $  7,121        278        5.22%   $  6,509         251        5.15%
   Term deposits with Federal
         Home Loan Bank of NY                  3,480        142         5.46      1,756          72        5.48
   Securities available for sale (3)          20,846        936         6.00     12,626         514        5.44
   Investment securities held to maturity     41,129      2,014         6.55     36,183       1,629        6.01
   FHLB of NY stock                              565         27         6.39        566          28        6.61
   Loans receivable, net(2)                   72,068      4,560         8.46     67,456       4,255        8.43
                                            --------     ------      -------   --------     -------      ------
       Total interest-earning assets         145,209      7,957         7.33    125,096       6,749        7.21
                                                         ------      -------                 ------      ------
Non-interest earning assets                    7,000                              6,181
                                              ------                             ------
       Total assets                         $152,209                           $131,277
                                            ========                           ========


Interest-bearing liabilities:
   Savings accounts                         $ 35,911        805         3.00   $ 34,666         779        3.00
   NOW  accounts                              10,957        189         2.31      9,617         164        2.28
   Money market accounts                       8,745        263         4.02      6,334         171        3.61
   Time deposit accounts                      64,853      2,706         5.58     62,591       2,733        5.83
   Escrow accounts                               267          6         3.00        417           7        2.24
   FHLB of NY long term borrowings             1,677         88         7.02      2,109         111        7.03
                                            --------     ------      -------   --------      ------       -----
Total interest-bearing liabilities           122,410      4,057         4.43    115,734       3,965        4.58
                                                         ------      -------                  -----       -----
Non-interest bearing deposits                  7,703                              6,424
Other non-interest bearing liabilities         1,099                                974
Equity                                        20,997                              8,145
                                            --------                           --------
       Total liabilities and equity         $152,209                           $131,277
                                            ========                           ========

Net interest income                                      $3,900                            $  2,784
                                                         ======                            ========

Interest rate spread                                                     2.90%                             2.63%
                                                                      =======                             =====


Net interest margin                                                      3.59%                             2.97%
                                                                      =======                             =====

Ratio of average interest-earning
        assets to average
        interest-bearing liabilities           118.63%                           108.09%
                                            ==========                         ========
</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.

                                     - 12 -
<PAGE>
                       AFSALA BANCORP, INC. AND SUBSIDIARY
                              RATE/ VOLUME ANALYSIS
                                   (Unaudited)

                         THREE MONTHS ENDED JUNE 30,1997
                                  COMPARED WITH
                        THREE MONTHS ENDED JUNE 30, 1996
                        --------------------------------
<TABLE>
<CAPTION>

                                                      INCREASE   (DECREASE)
                                            ------------------------------------
                                                       DUE TO
                                            -------------------------
                                               VOLUME         RATE        NET
                                               ------         ----        ---
<S>                                         <C>          <C>          <C>      
Interest and dividend  income:
   Federal funds sold                       $ (12,049)       3,899       (8,150)
   Term deposits with FHLB of NY              (27,607)        --        (27,607)
   Securities available for sale              156,930       42,350      199,280
   Investment securities held to maturity     147,842       22,432      170,274
   FHLB of NY stock                                (6)          16           10
   Loans receivable, net                       83,340       (4,554)      78,786
                                            ---------    ---------    ---------
Total interest and dividend income            348,450       64,143      412,593
                                            ---------    ---------    ---------

Interest expense:
   Savings accounts                             5,735          740        6,475
   NOW  accounts                                6,101        1,297        7,398
   Money market accounts                       22,324        7,970       30,294
   Time deposit accounts                       59,767      (11,942)      47,825
   Escrow  accounts                               (61)         (48)        (109)
   FHLB of NY long term borrowings             (6,065)         303       (5,762)
                                            ---------    ---------    ---------
Total interest expense                         87,801       (1,680)      86,121
                                            ---------    ---------    ---------

Net change in net interest income           $ 260,649    $  65,823    $ 326,472
                                            =========    =========    =========
</TABLE>


                         NINE MONTHS ENDED JUNE 30,1997
                                  COMPARED WITH
                         NINE MONTHS ENDED JUNE 30, 1996
                         -------------------------------
<TABLE>
<CAPTION>
                                                      INCREASE   (DECREASE)
                                            ------------------------------------
                                                       DUE TO
                                            -------------------------
                                               VOLUME         RATE        NET
                                               ------         ----        ---
<S>                                         <C>          <C>         <C>      
Interest and dividend income:
   Federal funds sold                       $  23,416        3,148       26,564
   Term deposits with FHLB of NY               69,989         (332)      69,657
   Securities available for sale              365,340       57,196      422,536
   Investment securities held to maturity     233,568      151,839      385,407
   FHLB of NY stock                               (30)        (643)        (673)
   Loans receivable, net                      293,412       11,311      304,723
                                            ---------    ---------   ----------
Total interest and dividend income            985,695      222,519    1,208,214
                                            ---------    ---------   ----------

Interest expense:
   Savings accounts                            26,892         (744)      26,148
   NOW  accounts                               22,963        2,015       24,978
   Money market accounts                       70,918       20,965       91,883
   Time deposit accounts                       95,684     (123,238)     (27,554)
   Escrow  accounts                            (2,923)       1,987         (936)
   FHLB of NY long term borrowings            (21,991)        (252)     (22,243)
                                            ---------    ---------   ----------
Total interest expense                        191,543      (99,267)      92,276
                                            ---------    ---------   ----------

Net change in net interest income           $ 794,152    $ 321,786   $1,115,938
                                            =========    =========   ==========
</TABLE>
                                     - 13 -
<PAGE>



Comparison  of  Operating  Results for the Three  Months Ended June 30, 1997 and
1996.

Net Income.  Net income increased by $127 thousand or 69.5% for the three months
ended June 30, 1997 to $310  thousand  from $183  thousand  for the three months
ended  June 30,  1996.  Net  income for the three  months  ended  June 30,  1997
increased  primarily as a result of increased net interest income offset in part
by an increase in non-interest  expenses.  Net interest income increased by $326
thousand or 33.0% to $1.3  million for the three  months  ended June 30, 1997 as
compared to $991 thousand for the three months ended June 30, 1996. Non-interest
expenses  increased $120 thousand or 15.9% to $873 thousand for the three months
ended June 30, 1997 from $753 thousand for the three months ended June 30, 1996.
This increase was primarily due to increased  compensation  and benefit expenses
as a result  of  costs  related  to the  Company's  new ESOP and RSP,  increased
professional fees as a result of being a public company, and additional expenses
associated with the opening of a new Operations Center and a new branch office.

Net  Interest  Income.  Net interest  income  increased  by  approximately  $326
thousand or 33.0% to $1.3 million for the three months ended June 30, 1997.  The
increase  was  primarily  due to an  increase  of $20.4  million or 16.0% in the
average balance of interest  earning  assets,  in addition to an increase in the
interest  rate  spread  from 2.77% for the three  months  ended June 30, 1996 to
2.89% for the three  months  ended June 30,  1997,  offset by an increase in the
average balance of total interest bearing liabilities of $7.9 million or 6.7%.

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 2.89% for the three  months ended June 30, 1997 from
2.77% for the three  months  ended June 30,  1996.  The increase in the interest
rate spread is the result of a 10 basis point  increase in the average  yield on
interest  earning  assets  combined with a 2 basis point decrease in the average
cost of interest bearing liabilities during this period.

Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $413 thousand or 17.9% to $2.7 million for the three months ended
June 30, 1997 from $2.3 million for the three  months  ended June 30, 1996.  The
increase was largely the result of an increase of $20.4  million or 16.0% in the
average balance of interest  earning assets to $148 million for the three months
ended June 30, 1997 as compared to $128  million for the three months ended June
30, 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
assets  categories.  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 $19.5 million or 39.1%,  and an increase in the average  balance of
net loans  receivable  of $3.9  million or 5.7%.  Also adding to the increase in
interest and dividend  income was a 10 basis point increase in the average yield
on all interest earning assets.

                                      -14 -
<PAGE>

Interest  income on  securities  available for sale  increased  $199 thousand or
85.5% to $432  thousand  for the  three  months  ended  June 30,  1997 from $233
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 $10.3  million  combined  with a 86 basis point  increase in the average
yield on these  securities.  Interest  income on investment  securities  held to
maturity  increased $170 thousand or 33.8% to $674 thousand for the three months
ended June 30, 1997 from $504  thousand  for three  months  ended June 30, 1996.
This increase is primarily  the result of an increase in the average  balance of
investment  securities held to maturity of $9.2 million combined with a 25 basis
point increase in the average yield on these securities.

Interest  and fees on loans  increased  $79 thousand or 5.5% to $1.5 million for
the three  months  ended June 30, 1997 from $1.4  million  for the three  months
ended June 30, 1996.  This  increase was  primarily the result of an increase in
the average balance of net loans receivable of $3.9 million,  offset slightly by
a 5 basis point decrease in the average yield.

The yield on the average balance of interest  earning assets was 7.35% and 7.25%
for the three months ended June 30, 1997 and 1996, respectively.

Interest  Expense.  Interest on deposits  and escrow  accounts  increased by $92
thousand for the three  months ended June 30, 1997  compared to the three months
ended June 30, 1996.  This increase in interest on deposits and escrow  accounts
was due to the  increase in interest  expense  related to  savings,  NOW,  money
market, and time deposit accounts.  The interest expense on savings accounts was
$272  thousand  for the three  months  ended  June 30,  1997,  compared  to $266
thousand  for the three  months  June 30,  1996.  The  interest  expense  on NOW
accounts was $65 thousand for the three months ended June 30, 1997,  compared to
$58 thousand for the three months June 30, 1996.  Likewise,  interest expense on
money  market and time deposit  accounts  was $95  thousand  and $939  thousand,
respectively, for the three months ended June 30, 1997, compared to $64 thousand
and $890  thousand,  respectively,  for the three  months June 30,  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 by $6 thousand or 16.6% to $29 thousand for the
three  months  ended June 30, 1997 when  compared to the three months ended June
30,  1996,  as the average  amount of  borrowing  outstanding  decreased by $355
thousand  or  17.9%,  partially  offset by an  increase  in the rate paid by the
Company of 4 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 0.45% and

                                     - 15 -
<PAGE>

0.51% at June 30, 1997 and September 30, 1996,  respectively.  The provision for
loan losses for the three  months  ended June 30, 1997  increased $5 thousand to
$60 thousand  from $55  thousand  for the three months ended June 30, 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 June 30, 1997 and 1996.


Non-Interest Expenses. Non-interest expenses increased $120 thousand or 15.9% to
$873  thousand for the three  months ended June 30, 1997 from $753  thousand for
the three months ended June 30, 1996. The increase in compensation  and benefits
expense of $92 thousand or 29.4% was  primarily  the result of costs  related to
the Company's new ESOP, and the  establishment  of the Restricted Stock Plan, as
well as general  cost of living and merit  raises to  employees.  Occupancy  and
equipment  expenses  increased  by $8 thousand or 6.2% due  primarily to the new
operations center opened in July 1996 and the new branch opened in May 1997.

FDIC deposit insurance premiums decreased by $47 thousand or 69.7% due primarily
to reduced deposit  insurance premium rates for the quarter ended June 30, 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 $55 thousand or 206.7% to $82 thousand
from $27 thousand due  primarily to  increased  legal and  accounting  fees as a
result of being a public company.

Management  believes that  compensation  and benefits  expenses will increase in
future  periods as a result of the costs  related to both the Company's new ESOP
and  Restricted  Stock Plan.  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 $69 thousand or 75.8% to
$160 thousand for the three months ended June 30, 1997 from $91 thousand for the
three months ended June 30, 1996.  The increase was  primarily the result of the
increase in income before income tax expense.

                                      - 16-
<PAGE>
Comparison  of  Operating  Results for the Nine  Months  Ended June 30, 1997 and
1996.

Net Income.  Net income  increased by $361 thousand or 72.1% for the nine months
ended June 30,  1997 to $862  thousand  from $501  thousand  for the nine months
ended  June 30,  1996.  Net  income  for the nine  months  ended  June 30,  1997
increased  primarily  as a  result  of  increases  in net  interest  income  and
non-interest  income of $1.1 million and $26 thousand,  respectively,  offset by
increases in  non-interest  expenses and the  provision  for loan losses of $470
thousand and $75 thousand, respectively.

Net Interest Income. Net interest income increased by approximately $1.1 million
or 40.1% to $3.9  million  from $2.8  million for the nine months ended June 30,
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 2.90% for the nine  months  ended June 30, 1997 from 2.63% for the
same period of the previous  year.  This increase in the interest rate spread is
due to a 12 basis point increase in the average yield on interest earning assets
combined with a 15 basis point decrease in the average cost of interest  bearing
liabilities.

Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $1.2  million or 17.9% to $7.9  million for the nine months ended
June 30, 1997 from $6.7  million for the nine months  ended June 30,  1996.  The
increase in interest and  dividend  income was largely the result of an increase
of $20.1 million or 16.1% in the average  balance of interest  earning assets to
$145 million for the nine months ended June 30, 1997 as compared to $125 million
for the nine months ended June 30, 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 12 basis point increase in the average yield
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
total securities (both securities  available for sale and investment  securities
held to maturity) of $13.2 million or 27.0%,  an increase in the average balance
of net loans  outstanding of approximately  $4.6 million or 6.8%, an increase in
the  average  balance of term  deposits  with the FHLB of NY of $1.7  million or
98.2%,  and an  increase in the  average  balance of federal  funds sold of $612
thousand or 9.4%.


Interest  income  on  investment  securities  held to  maturity  increased  $385
thousand or 23.7% to $2.0  million for the nine months  ended June 30, 1997 from
$1.6 million for the nine months ended June 30, 1996. This increase is primarily
the result of an increase in the average balance of $4.9 million combined with a
54 basis  point  increase  in the average  yield on these  securities.  Interest
income on securities available for sale increased $422 thousand or 82.2% to $936
thousand for the nine months ended June 30, 1997 from $514 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 $8.2 million in the average
balance,  as well as a 56 basis point  increase  in the  average  yield on these
securities.

                                      -17-
<PAGE>

Interest and fees on loans  increased  $305 thousand or 7.2% to $4.6 million for
the nine months  ended June 30, 1997 from $4.3 million for the nine months ended
June 30,  1996.  This  increase was  primarily  the result of an increase in the
average balance of net loans  receivable of $4.6 million combined with a 3 basis
point increase in the average yield.

Interest  Expense.  Interest on deposits  and escrow  accounts  amounted to $4.0
million for the nine months  ended June 30,  1997,  up from $3.9 million for the
nine months ended June 30, 1996.  The increase  over the prior year's  period of
$115 thousand or 3.0% 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 $22 thousand or 20.1 % to $88 thousand for the
nine months ended June 30, 1997 when  compared to the nine months ended June 30,
1996, primarily due to the average amount of borrowing outstanding decreasing by
$432 thousand or 20.5%.

Provision for Loan Losses.  The provision for loan losses increased $75 thousand
to $210  thousand for the nine months ended June 30, 1997 from $135 thousand for
the nine months ended June 30, 1996. The Company's ratio of non-performing loans
to total  assets was 0.45% and 0.51% at June 30, 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 nine months ended
June 30, 1997 to $314 thousand compared with $288 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 $470 thousand or 21.3% to
$2.7  million for the nine months  ended June 30, 1997 from $2.2 million for the
nine months ended June 30, 1996. Compensation and benefits expenses, the largest
component of non-interest expenses, increased by $201 thousand or 21.5% from the
previous  period  primarily as a result of costs  related to the  Company's  new
ESOP, the establishment of the Restricted Stock Plan, as well as general cost of
living and merit raises to  employees.  The increase in cccupancy  and equipment
expenses of $48  thousand  or 13.4% for the nine months  ended June 30, 1997 was
due  primarily  to the new  operations  center  opened  in July 1996 and the new
branch opened in May 1997.  FDIC deposit  insurance  premiums  decreased by $100
thousand or 50.9% due  primarily  to reduced  deposit  insurance  premium  rates
during the nine month period ended June 30, 1997.  Professional service fees and
other non-interest  expenses for the nine months ended June 30, 1997,  increased
$128 thousand or 150.5% and $150 thousand or 44.9%, 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.



                                      -18-
<PAGE>

Management  believes that  compensation  and benefits  expenses will increase in
future  periods as a result of the costs  related to both the Company's new ESOP
and  Restricted  Stock Plan.  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 to $465 thousand for the nine
months ended June 30, 1997 from $230 thousand for the nine months ended June 30,
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 47.73% and 47.02% at
June 30, 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 nine months ended June 30, 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 nine
months ended June 30, 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 June  30,  1997 and
September 30, 1996, the Company had outstanding borrowings from the FHLB of $1.5
million and $1.8 million, respectively.

As of June 30, 1997 and  September  30, 1996,  the Company had $27.0 million and
$17.1 million of securities, respectively,  classified as available for sale and
$40.4  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 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.

                                      -19-

<PAGE>



The Bank is subject to federal  regulations  that impose certain minimum capital
requirements.  At  June  30,  1997,  the  Bank's  capital  exceeded  each of the
regulatory  capital  requirements of the OTS. The Bank is "well  capitalized" at
June  30,  1997  according  to  regulatory  definition.  At June 30,  1997,  the
Company's  consolidated tangible and core capital levels were both $21.5 million
(13.48% of total  adjusted  assets) and its total  risk-based  capital level was
$22.3 million (32.75% 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.

                                     - 20 -
<PAGE>

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


The table  below sets forth  certain  performance  and  financial  ratios of the
Company for the periods indicated:

<TABLE>
<CAPTION>
                                                                 At or for the nine           At or for the
                                                                    months ended                year ended
                                                                    June 30, 1997           September 30, 1996

<S>                                                                 <C>                          <C>      

Performance Ratios (1):

Net income per share                                                $     0.64                         N/A
Return on average assets (annualized)                                     0.76%                       0.16%
Return on average stockholders' equity (annualized)                       5.49%                       2.55%
Interest rate spread                                                      2.90%                       2.69%
Net interest margin                                                       3.59%                       3.02%
Efficiency ratio (2)                                                     63.12%                      88.03%
Expense ratio (annualized) (3)                                            2.34%                       2.79%

Asset Quality Ratios:

Non-performing loans to total assets                                      0.45%                       0.51%
Non-performing loans to total loans                                       0.95%                       1.09%
Allowance for loan losses to non-performing loans                       150.86%                     112.40%
Allowance for loan losses to total loans receivable                       1.44%                       1.23%
Non-performing assets to total assets                                     0.47%                       0.51%

Capital Ratios (4):

Stockholders' equity to total assets at period end                       13.47%                      13.40%
Average stockholders' equity to average total assets                     13.79%                       6.21%
Tangible capital                                                         13.48%                      13.41%
Core (Tier I) capital                                                    13.48%                      13.41%
Total risk-based capital                                                 32.75%                      33.54%
Book value per share (5)                                            $    15.92                    $  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 expenses, 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 expenses, excluding other real estate owned expense, as a
percentage average total assets.

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

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

                                     - 21 -
<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

At the annual meeting of stockholders held on May 30, 1997, there were 1,369,394
voting shares  present in person or by proxy,  which  represented  94.13% of the
Company's  outstanding  shares of  1,454,750.  Votes were taken on the following
proposals:

Proposal #1 - The election of two directors of the Company.

                               Votes for               Withheld
                               ---------               --------

John M. Lisicki                1,368,009                  1,385
Dr. Daniel J. Greco            1,368,609                    785


The Board of Directors of the Company  currently  consists of seven menbers.  In
addition to the two directors named above,  continuing  directors are Dr. Ronald
S. Tecler,  John A. Tesiero,  Jr., John A. Kosinski,  Jr., Joseph G. Opalka, and
Florence B. Opiela.

Proposal #2- The approval of the AFSALA Bancorp, Inc. 1997 Stock Option Plan.

                               Votes for          Votes Against       Abstain
                               ---------          -------------       -------

                                 975,584             104,382           17,695


 Proposal #3- The approval of the Amsterdam Federal Bank Restricted Stock Plan.

                               Votes for          Votes Against       Abstain
                               ---------          -------------       -------

                                 940,128             132,621           23,531

                                      - 22 
<PAGE>



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

                                     - 23-


<PAGE>

SIGNATURES
----------


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



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


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




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



                                     - 24 -