U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                  FORM 10-QSB

     (Mark One)

[X]  Quarterly  report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934

For the quarterly period ended:  December 31, 1996
                                 -----------------

[ ]  Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from _____________ to _____________

Commission file number: 0-21113

                             AFSALA Bancorp, Inc.
-------------------------------------------------------------------------------
       (Exact Name of Small Business Issuer as Specified in Its Charter)

          Delaware                                             14-1793890
--------------------------------                           -------------------
 (State or Other Jurisdiction of                            (I.R.S. Employer
  Incorporation or Organization)                           Identification No.)

                               161 Church Street
                          Amsterdam, New York  12010
-------------------------------------------------------------------------------
                   (Address of Principal Executive Offices)

                                (518) 842-5700
-------------------------------------------------------------------------------
               (Issuer's Telephone Number, Including Area Code)


-------------------------------------------------------------------------------
        (Former Name, Former Address and Former Fiscal Year, if Changed
                               Since Last Report)

      Check  whether the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.

Yes  X   No
    ---     ---

Number of shares  outstanding  of each  issuer's  classes of common equity as of
February 7, 1997: 1,454,750

      Transitional Small Business Disclosure Format (check one):

Yes      No  X
    ---     ---




                                     -1-

<PAGE>



                              AFSALA BANCORP, INC.

                                      INDEX
<TABLE>
<CAPTION>


<S>                                                                         <C>
PART I - CONSOLIDATED FINANCIAL INFORMATION                                 Page No.
                                                                            --------

Item 1    Financial Statements.............................................     1

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

            Consolidated Statements of Income for the three
            months ended December 31, 1996 and 1995 (unaudited)............     2

            Consolidated  Statements  of Cash Flows for the 
            three  months  ended December 31, 1996 and 1995 (unaudited)....     3

            Notes to (unaudited) Consolidated Interim Financial Statements.     4

Item 2    Management's Discussion and Analysis of Financial Condition and
          Results of Operations............................................     5

PART II - OTHER INFORMATION

Item 1    Legal Proceedings................................................     16

Item 2    Changes in Securities............................................     16

Item 3    Defaults upon Senior Securities..................................     16

Item 4    Submission of Matters to a Vote of Security Holders..............     16

Item 5    Other Information................................................     16

Item 6    Exhibits and Reports on Form 8-K.................................     16

SIGNATURES

</TABLE>

                                        -i-

<PAGE>

                       AFSALA BANCORP,INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                 December 31,    September 30,
                      Assets                                        1996             1996
                      ------                                    --------------   --------------

<S>                                                              <C>              <C>       
         Cash and due from banks                                 $  4,440,393     $  4,816,392
         Federal funds sold                                         3,100,000       19,200,000
         Term deposits with the Federal Home Loan                   7,000,000        3,000,000
         Bank
                                                                --------------   --------------
                     Total cash and cash equivalents               14,540,393       27,016,392
                                                                --------------   --------------

         Securities available for sale, at                         15,890,167       17,131,802
         approximate fair value
         Investment securities held to maturity                    43,557,680       34,999,930
         Federal Home Loan Bank of New York stock,                    565,300          565,300
         at cost
         Loan receivable, net                                      72,189,769       70,677,291
         Accrued interest receivable                                1,262,475        1,156,466
         Premises and equipment, net                                1,673,626        1,703,491
         Other assets                                                 166,688          426,015
                                                                --------------   --------------
                 Total assets                                    $149,846,098     $153,676,687
                                                                ==============   ==============



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

         Liabilities:
             Deposits                                             125,665,596      126,460,081
             Federal Home Loan Bank of New York long term
                 borrowings                                         1,706,250        1,815,625
             Escrow accounts                                          451,891          365,187
             Accrued expenses and other liabilities                 1,105,673        4,444,922
                                                                --------------   --------------
                 Total liabilities                                128,929,410      133,085,815

         Commitments and contingent liabilities

         Stockholders'  Equity:
             Preferred stock, $0.10 par value; authorized
                 500,000 shares; none issued                                -                -
             Common stock, $0.10 par value; authorized
                 1,454,750 shares issued and
                 outstanding                                          145,475          145,475
             Additional paid-in capital                            13,465,092       13,460,381
             Retained earnings, substantially restricted            8,390,464        8,120,864
             Common stock acquired by ESOP                        (1,080,105)       (1,107,800)
             Net unrealized (loss) on securities
                 available for sale, net of tax                       (4,238)          (28,048)
                                                                --------------   --------------

                 Total stockholders' equity                       20,916,688        20,590,872
                                                                --------------   --------------

                 Total liabilities and stockholders' equity     $149,846,098      $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 December 31, 1996 and 1995
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                               1996             1995
                                                                           -----------      ------------
                                                                          
       Interest and dividend income:                                      
<S>                                                                        <C>               <C>       
           Interest and fees on loans                                      $1,518,654        $1,396,813
           Interest on Federal funds sold                                     110,052            80,228
           Interest on FHLB term deposits                                     106,888            23,238
           Interest on securities available for sale                          234,755            31,872
           Interest on investment securities                                  635,758           664,251
           Dividends on Federal Home Loan Bank of New York stock                9,393             9,776
                                                                           -----------      ------------
                   Total interest and dividend income                       2,615,500         2,206,178
                                                                           -----------      ------------
                                                                          
       Interest expense:                                                  
           Deposits and escrow accounts                                     1,302,506         1,283,433
           Federal Home Loan Bank of New York long term                   
              borrowings                                                       30,897            39,316
                                                                           -----------      ------------
                   Total interest expense                                   1,333,403         1,322,749
                                                                           -----------      ------------
                                                                          
                   Net interest income                                      1,282,097           883,429
                                                                           -----------      ------------
                                                                          
       Provision for loan losses                                               80,000            30,000
                                                                           -----------      ------------
                   Net interest income after provision for loan losses      1,202,097           853,429
                                                                          
       Non-interest income:                                               
           Service charges on deposit accounts                                110,338            88,431
           Other                                                               13,011             2,907
                                                                           -----------      ------------
                   Total non-interest income                                  123,349            91,338
                                                                           -----------      ------------
                                                                          
                                                                          
       Non-interest expense:                                              
           Compensation and benefits                                          371,803           325,724
           Occupancy and equipment                                            133,438           111,331
           FDIC deposit insurance premium                                      55,317            63,051
           Data processing fees                                                69,967            65,788
           Professional service fees                                           58,750            32,849
           Advertising                                                         14,389            10,354
           Supplies                                                            25,838            12,979
           Other                                                              179,113           114,263
                                                                           -----------      ------------
                   Total non-interest expense                                 908,615           736,339
                                                                           -----------      ------------
                                                                          
                   Income before income tax expense                           416,831           208,428
                                                                          
       Income tax expense                                                     147,231            58,100
                                                                           -----------      ------------
                                                                          
                   Net Income                                              $  269,600        $  150,328
                                                                           ===========      ============
                                                                          
                                                                          
                   Net Income per share                                    $     0.20               N/A
                                                                           ===========      ============
                                                                    
</TABLE>


See accompanying notes to unaudited consolidated interim financial statements

                                       2

<PAGE>

                       AFSALA BANCORP,INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                         Three months ended December 31,
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                      1996                1995
                                                                -----------------    ----------------
Increase  (decrease)  in cash and cash  equivalents:  
Cash flows from  operating activities:
<S>                                                                 <C>                 <C>        
    Net income                                                      $   269,600         $   150,328
    Adjustments to reconcile net income to net cash provided by
        (used in) operating activities:
              Depreciation                                               51,837              42,216
              Provision for loan losses                                  80,000              30,000
              ESOP Compensation expense                                  32,406                   -
              (Increase) decrease in accrued interest receivable       (106,009)             57,755
              Decrease in other assets                                   259,327             43,355
              (Decrease) increase in accrued expenses and other
                 liabilities                                         (3,351,517)             91,275
                                                                    -----------         ------------
                                                                     (3,033,956)            264,601
                                                                    -----------         ------------
                                                                     (2,764,356)            414,929
                                                                    -----------         ------------

Cash flows from investing activities:
    Proceeds from the maturity and call of securities available
       for sale                                                       1,777,713                  842
    Purchase of securities available for sale                          (500,000)                   -
    Proceeds from the maturity and call of investment securities      2,439,094            3,117,245
    Purchase of investment securities                               (10,996,844)          (2,426,899)
    Net loans made to customers                                      (1,592,478)          (1,492,177)
    Capital expenditures                                                (21,972)             (49,518)
                                                                    -----------         ------------
                                                                     (8,894,487)            (850,507)
                                                                    -----------         ------------

Cash flows from financing activities:
    Net (decrease) increase in deposits                                (794,485)           3,202,845
    Net increase in escrow accounts                                      86,704              126,327
    Repayments on long term borrowings from the Federal
         Home Loan Bank                                                (109,375)            (109,375)
                                                                    -----------         ------------
                                                                       (817,156)           3,219,797
                                                                    -----------         ------------

Net increase (decrease) in cash and cash equivalents                (12,475,999)           2,784,219
Cash and cash equivalents at beginning of period                     27,016,392            9,673,328
                                                                    -----------         ------------
Cash and cash equivalents at end of period                          $14,540,393         $ 12,457,547
                                                                    ===========         ============

Additional Disclosures Relative to Cash Flows:
    Interest paid                                                   $ 1,329,364         $  1,322,365
                                                                    ===========         ============

    Taxes paid                                                      $   134,130         $     40,000
                                                                    ===========         ============

Supplemental schedules of non-cash investing and financing 
      activities:
    Investment securities held to maturity transferred to
         securities available for sale                              $         -         $ 16,602,489
                                                                    ===========         ============

    Change in net unrealized gain (loss) on securities
      available for sale, net of tax                                $    23,810         $      2,734
                                                                    ===========         ============

</TABLE>

See accompanying notes to unaudited consolidated interim financial statements

                                       3


<PAGE>

                              AFSALA Bancorp, Inc.
           Notes to Unaudited Consolidated Interim Financial Statements

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, 1996,  the  Consolidated  Statements of Income
      for  the  three  months  ended   December  31,  1996  and  1995,  and  the
      Consolidated  Statements of Cash Flows for the three months ended December
      31, 1996 and 1995.  The results of  operations  for the three months ended
      December 31, 1996 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.

2.    Earnings Per Share

      Earnings  per share  for the  quarter  ended  December  31,  1996 has been
      determined by dividing net income by the weighted average number of shares
      of common  stock  outstanding  for the  quarter.  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".
      Earnings  per  share  for the  quarter  ended  December  31,  1995 are not
      applicable as there were no shares outstanding during this time period.

3.    Employee Stock Ownership Plan

      On December 31, 1996, the Company was committed to release 2,770 shares of
      its common stock owned by the Company's  ESOP. The commitment  resulted in
      approximately $32 thousand of additional compensation cost.


                                       4
<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 acquire all
of the capital  stock that the Bank issued upon the Bank's  conversion  from the
mutual to stock form of ownership.  On September 30, 1996, the Company completed
its initial public stock offering,  issuing  1,454,750  shares of $.10 par value
common stock at $10.00 per share. Net proceeds to the Company were $13.6 million
after conversion costs. Approximately $1.1 million of the proceeds were utilized
to fund a loan by the Company to the Company's  Employee  Stock  Ownership  Plan
(ESOP) which purchased  110,780 shares of the Company's  common stock during the
offering.  The  Company is not an  operating  company and has not engaged in any
significant business to date. As such,  references herein to the Bank subsequent
to  September  30,  1996  include  the  Company  unless  the  context  otherwise
indicates.

        The Bank's  results of  operations  are  primarily  dependent on its net
interest income,  which is the difference  between the interest income earned on
its assets,  primarily loans and  investments,  and the interest  expense on its
liabilities,  primarily  deposits and  borrowings.  Net  interest  income may be
affected  significantly  by general  economic  and  competitive  conditions  and
policies  of  regulatory  agencies,  particularly  those with  respect to market
interest rates. The results of operations are also  significantly  influenced by
the level of  non-interest  expenses,  such as employee  salaries and  benefits,
other income,  such as loan-related fees and 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  loan to asset  ratio  and a high
proportion of lower-costing, non-time deposit accounts in the deposit portfolio.
At December 31,  1996,  the Bank's  loans  receivable,  net, to assets ratio was
48.2% up from 46.0% at September  30, 1996.  At December 31, 1996 and  September
30, 1996,  $62.3  million or 49.6% and $62.6 million or 49.5%,  respectively  of
total deposits were in non-time deposit accounts.

Financial Condition

     Total  assets  decreased  by $3.8  million  or 2.5% to  $149.8  million  at
December 31, 1996 from $153.7  million at September  30, 1996,  primarily due to
the payment of cashier checks which were issued and outstanding on September 30,
1996 to refund the  over-subscriptions  related to the Company's  initial public
offering.  Cashier  checks are drawn upon  deposit  accounts at the Bank and are
classified  as accrued  expenses and other  liabilities  until  ultimately  paid
through the Bank's Federal Reserve  correspondent  account. The payment of these
cashier  checks  resulted  in  the  decrease  of  accrued   expenses  and  other
liabilities  from $4.4 million at September 30, 1996 to $1.1 million at December
31, 1996, a decrease of $3.3 million or 75.1%.

                                       5

<PAGE>

      The Company's  deposits  remained stable at $125.7 million at December 31,
1996 as  compared  to $126.5  million  at  September  30,1996.  The  change  was
primarily due to checking acount activity during the quarter.

      The Company's securities available for sale decreased $1.2 million or 7.2%
to $15.9  million at December 31, 1996 from $17.1 million at September 30, 1996,
primarily  due to  scheduled  maturities  or called  securities.  The  Company's
investment  securities  held to maturity  increased  by $8.6 million or 24.5% to
$43.6 million at December 31, 1996, up from $35.0 million at September 30, 1996,
primarily  because of the investment of the proceeds of the offering into higher
yielding instruments.

      The  Company's net loans  receivable  increased by $1.5 million or 2.1% to
$72.2  million at December  31,1996 up from $70.7  million at September 30, 1996
due to increased loan activity primarily in residential mortgage and home equity
loans.

      Stockholders'  equity  increased by $326 thousand or 1.6% to $20.9 million
at December 31, 1996 from $20.6 million at September 30, 1996.  The increase was
primarily the result of earnings for the period ended December 31, 1996.  Equity
at December 31, 1996 was also effected by 2,770 common stock shares committed to
be released by the Company's ESOP.

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 need for funds and
on a review of rates  offered  by other  financial  institutions  in the  Bank's
market areas.  Interest rates on loans are primarily based on the interest rates
offered by other  financial  institutions  in the Bank's primary market areas as
well as the Bank's cost of funds.

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

                                       6

<PAGE>


      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 net interest rate spread  increased  for the three months ended  December
31, 1996 from the three months ended December 31, 1995 from 2.52% to 2.82%.

      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.

                                       7

<PAGE>


Average Balance Sheet, Interest Rates, and Yield


<TABLE>
<CAPTION>

                                                              For the Three Months Ended December 31,
                                                 ------------------------------------------------------------------
                                                              1996                               1995
                                                 -------------------------------     ------------------------------
                                                  Average              Average       Average              Average
                                                  Balance   Interest Yield/Cost      Balance    Interest  Yield/Cost
                                                                       (1)                                (1)
                                                                      (Dollars in Thousands)
Interest-earning assets:
<S>                                             <C>        <C>             <C>     <C>          <C>           <C>   
   Federal funds                                $    8,271 $     110       5.28 %  $    6,045   $    80       5.26 %
   sold
   Term deposits with Federal Home Loan Bank         7,803       107       5.44         1,600        23       5.72
   of New York
   Securities available for sale                    16,802       235       5.55         2,313        32       5.50
   Investment securities held to maturity           38,771       636       6.51        45,825       664       5.76
   Federal Home Loan Bank of New York stock,           565         9       6.32           566        10       7.03
   at cost
   Loans                                            71,459     1,518       8.43        66,457     1,397       8.36
   receivable, net
   (2)
      Total interest-earning assets                143,671     2,615       7.22       122,806     2,206       7.15

Non-interest                                         6,584                              5,811
earning assets
                                                 ----------                          ---------
      Total assets                              $  150,255                         $  128,617
                                                 ==========                          =========

Interest-bearing
liabilities:
   Savings accounts                             $   35,674       269       3.00    $   33,938       257       3.00
   NOW accounts                                     10,863        63       2.30         9,149        52       2.26
   Money market                                      8,158        80       3.89         5,812        51       3.49
   accounts
   Time deposit                                     63,292       888       5.57        61,932       921       5.92
   accounts
   Escrow accounts                                     335         2       2.37           513         3       2.33
   Federal Home Loan Bank of New York long           1,749        31       7.03         2,233        39       6.95
   term borrowings
                                                 ---------- ---------  ---------     ---------  --------  ---------
      Total interest-bearing liabilities           120,071     1,333       4.40       113,577     1,323       4.63
                                                            ---------  ---------                --------  ---------
Non-interest bearing deposits                        7,732                              6,212
Other non-interest bearing liabilities               1,714                                839
Equity                                              20,738                              7,989
                                                 ----------                          ---------
      Total liabilities and equity              $  150,255                         $  128,617
                                                 ==========                          =========

Net interest income                                        $   1,282                            $   883
                                                            =========                           ========

Interest rate                                                              2.82 %                             2.52 %
spread
                                                                       =========                          =========

Net interest margin                                                        3.54 %                             2.86 %
                                                                       =========                          =========

Ratio of average interest-earning assets to
   average interest-bearing liabilities             119.66                             108.13 %   
                                                 ==========                          =========
</TABLE>

------------------------
(1)  Annualized.
(2)  Calculated net of allowance for loan losses.  Includes non-accrual loans.

                                       8

<PAGE>


Rate/Volume Analysis


<TABLE>
<CAPTION>

                                                                 Three Months Ended December
                                                                             31,
                                                                ------------------------------
                                                                                1996
                                                                                 vs.
                                                                                1995
                                                                ------------------------------
                                                                     Increase
                                                                    (Decrease)
                                                                      Due to
                                                                -------------------
                                                                                      Total
                                                                                     Increase
                                                                 Volume     Rate     (Decrease)
Interest income:                                             
<S>                                                           <C>          <C>       <C>   
   Federal funds sold                                         $   29,303       521     29,824
   Term deposits with Federal Home Loan Bank of New York          84,769    (1,119)    83,650
   Securities available for sale                                 202,500       383    202,883
   Investment securities held to maturity                       (110,070)   81,577    (28,493)
   Federal Home Loan Bank of New York stock, at cost                  (6)     (377)      (383)
   Loans receivable, net                                         106,140    15,701    121,841
                                                                ---------  --------  ---------
       Total interest income                                     312,636    96,686    409,322
                                                                ---------  --------  ---------
                                                             
Interest expense:                                            
   Savings accounts                                               11,918       638     12,556
   NOW accounts                                                    9,665     1,057     10,722
   Money market accounts                                          22,191     6,468     28,659
   Time deposit accounts                                          20,068   (52,535)   (32,467)
   Escrow accounts                                                  (489)       92       (397)
   Federal Home Loan Bank of New York long term                   (8,944)      525     (8,419)
   borrowings                                                
                                                                ---------  --------  ---------
       Total interest expense                                     54,409   (43,755)    10,654
                                                                ---------  --------  ---------
                                                             
Net change in net interest income                             $  258,227   140,441    398,668
                                                                =========  ========  =========
                                                           
</TABLE>

                                       9

<PAGE>

Comparison of Operating Results for the Three Months Ended December 31, 1996 and
1995.

      Net Income.  Net income  increased by $119 thousand or 79.3% for the three
months ended December 31, 1996 to $270 thousand from $150 thousand for the three
months ended  December 31, 1995.  Net income for the three months ended December
31, 1996  increased  primarily as a result of increased net interest  income and
non-interest  income,  offset in part by an increase in non-interest expense and
provision  for loan losses.  Net interest  income  increased by $399 thousand or
45.1% to $1.3 million for the three  months ended  December 31, 1996 as compared
to $883  thousand  for the three months  ended  December 31, 1995.  Non-interest
income  increased  $32  thousand or 35.0% to $123  thousand for the three months
ended  December  31, 1996 as compared to $91 thousand for the three months ended
December  31,1995.  This  increase  was  primarily  the result of  increases  in
transaction account activity. Non-interest expense increased by $172 thousand or
23.4% to $909  thousand for the three  months ended  December 31, 1996 from $736
thousand  for the three  months  ended  December  31,  1995.  This  increase was
primarily  due to  increased  compensation  and benefit  expenses as a result of
costs  related  to the  Company's  new  ESOP  plan,  in  addition  to  increased
professional  fees as a result of being a public company,  as well as additional
expenses  associated with the opening of a new Operations  Center. The provision
for loan losses  increased  $50  thousand to $80  thousand  for the three months
ended December 31, 1996, primarily due to the loan growth noted above, and local
economic trends.

      Net Interest Income.  Net interest income increased by approximately  $399
thousand or 45.1% to $1.3 million for the three months ended  December 31, 1996.
The increase  was  primarily  due to an increase of $20.9 million or 17% in the
average  balance of  interest  earning  assets,  in  addition  to an increase in
interest rate spread from 2.52% for the three months ended  December 31, 1995 to
2.82% for the three months ended December 31, 1996, offset by an increase in the
average balance of total interest-bearing liabilities of $6.5 million or 5.7%.

      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 in 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 2.82% for the three months ended December 31,
1996 from 2.52% for the three  months ended  December 31, 1995.  The increase in
the interest  rate spread is primarily  the result of increases in the yields of
interest  earning assets coupled with decreases in the cost of interest  bearing
liabilities during this period.

     Interest and Dividend  Income.  Interest and dividend  income  increased by
approximately  $409 thousand or 18.6% to $2.6 million for the three months ended
December  31, 1996 from $2.2  million for the three  months  ended  December 31,
1995. The increase was largely the result of an increase of $20.9 million or 17%
in the average  balance of  interest  earning  assets to $143.7  million for the
three months ended December 31, 1996 as compared to $122.8 million for the three
months ended December 31, 1995. The increase in the average  balance of interest
earning  assets  consisted  primarily  of an increase in the average  balance of
loans  outstanding  of  approximately  $5.0 million or 7.5%,  an increase in the
average  balance of total  securities  (both  securities  available for sale and
investment  securities  held to  maturity)  of $7.4  million  or  15.4%,  and an
increase in the average  balance of federal funds sold of $2.2 million or 36.8%.
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.

                                       10

<PAGE>


      Interest income on total securities increased by $174 thousand or 25.1% to
$871  thousand for the three months ended  December 31, 1996 from $696  thousand
for the three months ended December 31, 1995. The decrease in interest income on
investment  securities  held to maturity is primarily  due to a decrease of $7.1
million  or  15.4% in the  average  balance  of  investment  securities  held to
maturity  for  the  three  months  ended   December  31,  1996   reflecting  the
reclassification of approximately $16.6 million of investment securities held to
maturity to securities  available  for sale in December 1995 in accordance  with
the FASB's "Special  Report",  partially  offset by a 75 basis point increase in
the average yield on investment securities held to maturity.  Interest income on
securities  available for sale  increased $203 thousand to $235 thousand for the
three  months  ended  December  31, 1996 from $32  thousand for the three months
ended December 31, 1995. This increase is primarily the result of an increase in
the average balance of securities available for sale of $14.5 million due to the
December 1995  reclassification,  combined with a 5 basis point  increase in the
average yield on these securities.

      Interest and fees on loans increased $122 thousand or 8.7% to $1.5 million
for the three  months  ended  December  31, 1996 from $1.4 million for the three
months ended  December 31, 1995.  This  increase was  primarily the result of an
increase in the average  balance of loans  receivable  of $5.0 million  combined
with a 7 basis point increase in the average yield on loans receivable.

      The yield on the average balance of interest  earning assets was 7.22% and
7.15% for the three months ended December 31, 1996 and 1995, respectively.

      Interest  Expense.  Interest on deposits and escrow accounts  increased by
approximately  $19  thousand or 1.5% to $1.3  million for the three months ended
December 31, 1996 when compared to the three months ended December 31, 1995. The
increase in interest on deposit  accounts and escrow accounts was  substantially
due to the  increase in interest  expense  related to  savings,  now,  and money
market  accounts  offset by the  decrease  in interest  expense  related to time
deposit accounts. The interest expense on savings accounts was $269 thousand for
the three months ended  December  31,  1996,  compared to $257  thousand for the
three months  December 31,  1995.  The interest  expense on now accounts was $63
thousand for the three months ended December 31, 1996,  compared to $52 thousand
for the three  months  December 31, 1995.  Likewise,  interest  expense on money
market  accounts was $80 thousand for the three months ended  December 31, 1996,
compared to $51  thousand  for the three  months  December  31,  1995.  However,
interest  expense on time  deposits was $888 thousand for the three months ended
December 31, 1996,  compared to $921 thousand for the three months  December 31,
1995.  This decrease was due primarily to a decrease in the average cost for the
current period as compared to the prior period, 5.57% and 5.92%, respectively.

      Interest on long term borrowings,  which is a less significant  portion of
interest  expense,  decreased  by $8 thousand or 21.4% to $31  thousand  for the
three  months ended  December  31, 1996 when  compared to the three months ended
December 31, 1995, as the average amount of borrowing  outstanding  decreased by
$484 thousand or 21.7%  partially  offset by an increase in the rate paid by the
Company of 8 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.

                                       11

<PAGE>

      Provision for Loan Losses. The Company's  management  monitors and adjusts
its allowance for loan losses based upon its analysis of the loan portfolio. The
allowance is increased by a charge to the provision for loan losses,  the amount
of which depends upon an analysis of the changing  risks  inherent in the Bank's
loan portfolio.  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 0.42% and 0.51% at December 31, 1996 and September 30, 1996,
respectively.  The provision for loan losses for the three months ended December
31, 1996  increased $50 thousand to $80 thousand from $30 thousand for the three
months ended  December 31, 1995. 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 increased to $123 thousand during
the three months ended  December 31, 1996 from $91 thousand for the three months
ended  December  31,  1995.  The  increase in  non-interest  income is primarily
attributable to increased  service  charges on deposit  accounts of $22 thousand
for the three months ended  December 31, 1996 when  compared to the three months
ended December 31, 1995. The increase in service charges on deposit  accounts is
primarily the result of increased  activity in transaction  accounts  during the
quarter.

      Non-Interest  Expense.  Non-interest  expense  increased  $172 thousand or
23.4% to $909  thousand for the three  months ended  December 31, 1996 from $736
thousand  for the  three  months  ended  December  31,  1995.  The  increase  in
compensation  and benefits  expense of $46 thousand or 14.1% was  primarily  the
result of costs  related to the  Company's  new ESOP, as well as general cost of
living and merit raises to  employees.  Occupancy  and  equipment  expenses also
increased by $22 thousand or 19.9% due primarily to the new operations center.

      FDIC deposit insurance premiums also decreased by $8 thousand or 12.3% due
primarily  to reduced  deposit  insurance  premium  rates for the quarter  ended
December 31, 1996. The reduced rates are the result of the capitalization of the
SAIF through a one-time special  assessment  during  September 1996.  Management
expects  that the  premiums  paid for FDIC  deposit  insurance  will be  reduced
further in future quarters.

      Other expenses increased $64.9 thousand to $179.1 thousand for the quarter
ended December 31, 1996 when compared the the same quarter of 1995. The increase
is primarily  attributed to Delaware franchise taxes, write off of certain items
deemed by management to be uncollectible,  and general expenses related to being
a public company.

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

                                       12

<PAGE>

      Provision  for Income  Taxes.  Provision  for income  taxes  increased  by
approximately $89 thousand or 153.4% to $147 thousand for the three months ended
December 31, 1996 from $58,000 for the three months ended December 31, 1995. The
increase was  primarily  the result of the increase in income  before income tax
expense.

Liquidity and Capital Resources

      The Bank is required by OTS  regulations  to maintain,  for each  calendar
month, a daily average  balance of cash and eligible  liquid  investments of not
less than 5% of the average  daily balance of its net  withdrawable  savings and
borrowings (due in one year or less) during the preceding  calendar month.  This
liquidity  requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Bank's average liquidity ratio was 45.18% and
47.02% at December 31, 1996 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 quarters ended
December  31,  1996 and 1995,  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 quarter ended December 31, 1996.

      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  infuenced 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 December 31, 1996 and
September 30, 1996, the Company had outstanding borrowings from the FHLB of $1.7
million and $1.8 million, respectively.

      As of December  31, 1996 and  September  30,  1996,  the Company had $15.9
million and $17.1 million of securities,  respectively,  classified as available
for  sale  and  $43.6  million  and  $35.0  million  of  investment  securities,
respectively,  classified as held to maturity.  The liquidity of the  securities
available for sale portfolio  provides the Bank with  additional  potential cash
flows to meet loan growth and deposit flows.

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

      The Bank is subject to federal  regulations  that impose  certain  minimum
capital requirements.  At December 31, 1996, the Bank's capital exceeded each of
the regulatory  capital  requirements of the OTS. The Bank is "well capitalized"
at December 31, 1996 according to regulatory  definition.  At December 31, 1996,
the  Company's  consolidated  tangible and core  capital  levels were both $20.9
million (13.96% of total adjusted assets) and its total risk-based capital level
was $21.7 million (34.06% 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 risk based capital.

                                       13

<PAGE>


Effect of Inflation and Changing Prices

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

                                       14

<PAGE>


Key Operating Ratios

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

                                          At or for the         At or for the
                                        three months ended        year ended
                                         December 31, 1996    September 30, 1996


Performance Ratios (1):

Earnings per share                           $   0.20                 N/A
Return on average assets (annualized)            0.71%               0.16%
Return on average shareholders' equity           5.16%               2.55%
(annualized)
Net interest rate spread                         2.82%               2.69%
Net interest margin                              3.54%               3.02%
Efficiency ratio (2)                            64.63%              88.03%
Expense ratio (3)                                2.40%               2.79%

Asset Quality Ratios

Non-performing loans to total assets             0.42%               0.51%
Non-performing loans to total loans              0.86%               1.09%
Allowance for loan losses to                   152.02%             112.40%
non-performing loans
Allowance for loan losses to total loans         1.31%               1.23%
receivable
Non-performing assets to total assets            0.42%               0.51%

Capital Ratios (4):

Equity to total assets at period end             13.96%             13.40%
Average equity to average total assets           13.80%              6.21%
Tangible capital                                 13.96%             13.41%
Core (Tier I) capital                            13.96%             13.41%
Total risk-based capital                         34.06%             33.54%
Book value per share (5)                     $   15.53          $   15.32


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

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

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

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

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

                                       15

<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

                 No.    Exhibit
                 --     -------

                 27     Financial Data Schedule

            (b) Reports on Form 8-K

                        None






                                       16

<PAGE>


      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 11, 1997          By:   /s/ John M. Lisicki
                                       -------------------
                                       John M. Lisicki
                                       President (principal executive officer)



Date: February 11, 1997                /s/ James J. Alescio
                                       --------------------
                                       James J. Alescio
                                       Treasurer (principal financial officer)