================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One):
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF
     1934
For the fiscal year ended June 30, 2004.

                                       OR
[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934
For the transition period from                to               .
                               --------------    --------------
                         Commission File Number: 0-25854
                                                 -------

                               GFSB BANCORP, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its Charter)

                  Delaware                                04-2095007
--------------------------------------------    --------------------------------
(State or Other Jurisdiction of Incorporation         (I.R.S. Employer
or Organization)                                     Identification No.)

221 West Aztec Avenue, Gallup, New Mexico             87301
------------------------------------------        ------------
(Address of Principal Executive Offices)           (Zip Code)

                    Issuer's Telephone Number: (505) 722-4361
                                               --------------

       Securities Registered Under Section 12(b) of the Exchange Act: None

         Securities Registered Under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

         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 .

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         State issuer's revenues for its most recent fiscal year:  $12,981,533
                                                                   -----------

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  of the registrant,  based on the average of the bid and
asked price for the  registrant's  Common Stock on the Nasdaq SmallCap Market at
September 15, 2004, was  $11,348,682.  Solely for purposes of this  calculation,
the  term  "affiliate"  refers  to  directors  and  executive  officers  and the
beneficial owners of more than 10% of the issuer's Common Stock.

         As of September 15, 2004,  there were issued and outstanding  1,146,645
shares of the issuer's Common Stock.

         Transitional Small Business Disclosure format (check one):
Yes      No  X
    ---     ---
                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Proxy Statement for the 2004 Annual Meeting of Stockholders.
(Part III)

================================================================================
<PAGE>

                                     PART I

         GFSB Bancorp,  Inc. (the  "Company" or  "Registrant")  may from time to
time make written or oral  "forward-looking  statements",  including  statements
contained in the Company's  filings with the Securities and Exchange  Commission
(including this annual report on Form 10-KSB and the exhibits  thereto),  in its
reports to stockholders and in other  communications  by the Company,  which are
made in good faith by the Company  pursuant to the "safe  harbor"  provisions of
the Private Securities Litigation Reform Act of 1995.

         These forward-looking statements involve risks and uncertainties,  such
as statements of the Company's plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the Board of  Governors of the
Federal  Reserve  System,   inflation,   interest  rate,   market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes;  acquisitions;  changes in consumer spending
and saving habits; and the success of the Company at managing these risks.

         The  Company  cautions  that  this  list of  important  factors  is not
exclusive. The Company does not undertake to update forward-looking  statements,
whether  written or oral,  that may be made from time to time by or on behalf of
the Company.

Item 1.  Description of Business
-------  -----------------------

General

         The Company is a unitary savings and loan holding company which,  under
existing laws,  generally is not restricted in the types of business  activities
in which it may engage provided that the Bank retains a specified  amount of its
assets in  housing-related  investments.  The Company  conducts  no  significant
business or  operations  of its own other than  holding  all of the  outstanding
stock of the Bank.  References to the Company or Registrant  generally refers to
the  consolidated  entity which includes the main operating  company,  the Bank,
unless the context indicates otherwise.

         The Bank is a federally  chartered stock savings bank  headquartered in
Gallup, New Mexico. It is subject to examination and comprehensive regulation by
the Office of Thrift Supervision  ("OTS") and its deposits are federally insured
by the Savings Association Insurance Fund ("SAIF").  The Bank is a member of and
owns capital  stock in the Federal Home Loan Bank  ("FHLB") of Dallas,  which is
one of the 12 regional banks in the FHLB System.

         The Company  operates a traditional  savings bank business,  attracting
deposit accounts from the general public and using those deposits, together with
other  funds,  primarily  to  originate  and invest in loans

                                       1
<PAGE>

secured by one- to  four-family  residential  loans and  commercial  real estate
loans.  To a lesser  extent,  the Company also  originates  construction  loans,
commercial business loans, consumer loans, and multi-family loans.

Competition

         The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift  institutions,  credit unions, and
multi-state   regional  banks  in  the  Company's  market  area  of  Gallup  and
Farmington,  New Mexico and the surrounding communities of McKinley and San Juan
Counties,  New  Mexico.  Based on data  compiled by the FDIC as of June 30, 2003
(the latest date for which data is available), the Bank had the largest share of
FDIC-insured deposits in McKinley County with 33.25% and the sixth largest share
in San Juan  County with 2.23%.  This data does not take into  account  deposits
held by credit unions.  Deposit  competition also includes a number of insurance
products sold by local agents and  investment  products such as mutual funds and
other securities sold by local and regional  brokers.  Loan  competition  varies
depending  upon  market  conditions  and  comes  from  other  insured  financial
institutions  such as commercial  banks,  thrift  institutions,  credit  unions,
multi-state regional banks, and mortgage bankers.

                                       2

<PAGE>

Lending Activities

         Loan Portfolio  Composition.  The following table sets forth the dollar
amounts and  percentage of the portfolio  represented  by the Company's  various
types of loans at the dates indicated.
<TABLE>
<CAPTION>
        `                                                                 At June 30,
                             ---------------------------------------------------------------------------------------- ------------
                                    2004                2003                 2002               2001                  2000
                             -----------------  -------------------  ------------------  -----------------     -------------------
                                 $         %       $            %        $          %        $        %           $          %
                             --------   ------  --------     ------  --------    ------  --------   ------     --------   -------
                                                                    (Dollars in Thousands)
<S>                         <C>         <C>     <C>          <C>     <C>         <C>     <C>        <C>     <C>            <C>

Type of Loans:
-------------
  Mortgage loans:
    Residential              $ 85,543(1) 55.00%  $85,730(1)   57.51%  $89,804(1)  61.42%  $81,662(1) 60.44%    $ 78,920(1) 69.08%
    Commercial real estate     34,647    22.28    25,913      17.38    21,726     14.86    23,085    17.09       18,376    16.09
  Construction:
    Residential                 1,388     0.89     2,735       1.84     2,623      1.79       830     0.62          581     0.51
    Commercial                  1,811     1.17     5,280       3.54     4,715      3.23     5,397     3.99        3,787     3.31
                             --------   ------  --------     ------  --------    ------  --------   ------     --------   ------
                              123,388    79.34   119,658      80.27   118,868     81.30   110,974    82.14      101,664    88.99
                             --------   ------  --------     ------  --------    ------  --------   ------     --------   ------

  Commercial business          26,573    17.09    23,655      15.87    21,824     14.93    18,042    13.35        6,853     6.00
                             --------   ------  --------     ------  --------    ------  --------   ------     --------   ------

  Consumer:
    Savings account             1,637     1.05     1,212       0.81     1,452      0.99     1,228     0.91        1,083     0.95
    Automobile and other        3,920     2.52     4,538       3.05     4,061      2.78     4,867     3.60        4,642     4.06
                             --------   ------  --------     ------  --------    ------  --------   ------     --------   ------
                                5,557     3.57     5,750       3.86     5,513      3.77     6,095     4.51        5.725     5.01
                             --------   ------  --------     ------  --------    ------  --------   ------     --------   ------

  Total loans                $155,518   100.00% $149,063     100.00% $146,205    100.00% $135,111   100.00%    $114,242   100.00%
                             --------   ======  --------     ======  --------    ======  --------   ======     --------   ======
Less:
  Loan participations sold        (41)              (475)                (773)             (3,156)               (3,308)
  Loans in process                 --                 --                   --                  --                    --
  Deferred loan
    origination fees
    and costs                   (922)              (796)                (767)               (699)                 (645)
  Allowance for loan losses   (1,714)            (1,396)                (984)               (825)                 (512)
                             --------           --------             --------            --------              --------

Total loans, net             $152,842           $146,396             $143,681            $130,431              $109,777
                             ========           ========             ========            ========              ========
</TABLE>
-------------------
(1)  Included  in  this  category  are  loans  classified  as held  for  sale of
     $411,400,  $132,000,  $297,000, $980,000 and $105,000,  respectively.  Such
     loans constitute one-to-four family mortgage loans.

                                       3
<PAGE>

         Loan Maturity  Schedules.  The following table sets forth the estimated
maturity of the Company's  loan  portfolio at June 30, 2004.  The table does not
include prepayments or scheduled principal repayments.  Prepayments or scheduled
principal repayments totaled $48.7 million for the year ended June 30, 2004. All
mortgage loans are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>
                                                                       Due after
                                                           Due within  1 through  Due after
                                                            1 year      5 years   5 years      Total
                                                            --------   --------   --------   --------
                                                                       (In Thousands)
<S>                                                         <C>        <C>        <C>        <C>
One-to-four-family ......................................   $  1,018   $  9,903   $ 69,585   $ 80,506
Multi-family and commercial real estate .................      3,234     25,115     11,334     39,683
Construction ............................................      2,664        418        117      3,199
Commercial business .....................................     11,345     10,445      4,783     26,573
Consumer ................................................      1,336      2,436      1,785      5,557
                                                            --------   --------   --------   --------
Total ...................................................   $ 19,597   $ 48,317   $ 87,604   $155,518
                                                            ========   ========   ========   ========
</TABLE>

         The following table sets forth as of June 30, 2004 the dollar amount of
all loans due more than one year after June 30, 2004,  which have fixed rates of
interest and floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                              Floating or
                                                Fixed Rates  Adjustable Rates       Total
                                                -----------  ----------------       -----
                                                               (In Thousands)

<S>                                              <C>             <C>             <C>
One-to-four-family ............................   $ 79,313        $    175        $ 79,488
Multi-family and commercial real estate .......     14,574          21,875          36,449
Construction ..................................        335             200             535
Commercial business ...........................      3,172          12,056          15,228
Consumer ......................................      2,618           1,603           4,221
                                                  --------        --------        --------
Total .........................................   $100,012        $ 35,909        $135,921
                                                  ========        ========        ========
</TABLE>

         One-to-Four-Family  Residential  Loans.  The Company's  primary lending
activity consists of the origination of one-to-four-family  residential mortgage
loans  secured by property  located in its  primary  market  areas.  The Company
generally  originates  owner-occupied  one-to-four-family  residential  mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. The Company will
originate a mortgage  loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property,  however,  mortgage insurance is
generally   required   for  the   amount  in  excess  of  80%  of  such   value.
Non-owner-occupied  residential  mortgage  loans are originated up to 80% of the
lesser of the appraised value or selling price of the property.

         The Company primarily  originates  fixed-rate  mortgage loans that have
maturities of up to 15 years.  In addition,  the Company  originates  loans with
terms over 15 years for sale in the secondary market.  Generally,  the Company's
underwriting  guidelines  conform  to  Federal  Home Loan  Mortgage  Corporation
("FreddieMac")   and  Federal  National   Mortgage   Association   ("FannieMae")
guidelines.   At  June  30,  2004,   fixed-rate  loans  held-for-sale   totalled
approximately $411,400.

                                       4

<PAGE>

         For all  adjustable-rate  mortgage  loans,  the  Company  requires  the
borrower to qualify at the initial  index  interest  rate.  The  adjustable-rate
mortgage  loans  provide for annual  interest  rate  adjustments  based upon the
one-year treasury rate with a maximum annual adjustment of not more than 2% over
the initial rate of interest.  Adjustable-rate mortgage loans reprice every year
and provide for terms of up to 30 years with most loans having terms of 15 or 30
years.

         It is the current  policy of the  Company to remain a portfolio  lender
for its adjustable-rate loans. Adjustable rate loans do have higher credit risks
compared to fixed-rate mortgage loans due to the possibility of borrower default
when interest rates reset higher and monthly payment amounts increase.

         The one-to-four-family  residential loan portfolio also includes second
mortgage  loans if the Company  holds the first  mortgage loan for such property
and the combined loan to value ratio is no greater than 80%.

         Multi-family  and  Commercial  Real  Estate  Loans.   Multi-family  and
commercial  real estate secured loans are originated in amounts  generally up to
80% of the appraised  value of the property.  Such appraised value is determined
by an independent  appraiser  previously approved by the Company.  The Company's
commercial  real estate loans are permanent  loans secured by approved  property
such as churches,  motels,  small office buildings,  retail stores,  small strip
plazas, and other  non-residential  buildings.  The Company generally originates
fixed-rate  commercial  real estate loans with balloon  maturities of five years
and  with  amortization  periods  of up to 25  years,  and to a  lesser  extent,
adjustable-rate loans based on a margin over the Wall Street Journal prime rate.

         Multi-family  loans  are  primarily  secured  by  apartment  buildings,
located in the Company's  primary  market area.  Loans  secured by  multi-family
property  may be  originated  in amounts up to 80% of the  appraised  value with
either fixed or adjustable rates of interest.  The Company generally  originates
fixed-rate  multi-family  loans with balloon  maturities  of five years and with
amortization periods of up to 25 years, and to a lesser extent,  adjustable-rate
loans based on a margin over the Wall Street Journal prime rate.

         Multi-family and commercial real estate loans have  significantly  more
risk than  one-to-four-family  mortgage  loans due to the  usually  higher  loan
amounts and the credit risk,  which arises from  concentration of principal in a
smaller number of loans,  the effects of general  economic  conditions on income
producing property and the difficulty of evaluating and monitoring the loans.

         Construction Loans. The Company makes construction loans to individuals
to  construct  single-family  owner-occupied  homes and to  builders  who have a
proven track  record on either a pre-sold or  speculative  basis.  Loans made to
individual property owners are  construction-to-permanent  loans which generally
provide  for the payment of interest  during a  construction  period at fixed or
adjustable  interest  rates and then covert to  permanent  loans,  having  terms
similar to one-to-four-family residential mortgage loans. Loans made to builders
are generally  loans which require the payment of interest at fixed rates during
the construction term and the payment of the principal in full at the end of the
construction period, which generally is for a term of 6 months.

         Construction  financing  generally  has a higher  degree of credit risk
than one-to-four-family  residential loans. The risk is dependent largely on the
value  of the  property  when  completed  as  compared  to the  estimated  cost,
including  interest,  of  building  the  property.  If the  estimated  value  is
inaccurate,  the Company may have a  completed  project  with a value too low to
assure full repayment of the loan.

                                       5

<PAGE>

         Construction  loans made to builders  who are building to resell have a
maximum  loan-to-value  ratio of 80% of the  appraised  value  of the  property.
Construction  loans to  individuals  who intend to occupy the finished  premises
generally have a maximum loan-to-value ratio of 80%.

         Commercial  Business  Loans.   Commercial  business  loans,   primarily
consisting of revolving lines of credit,  short-term  working capital loans, and
term loans up to seven years,  are  originated  to meet the needs of local small
businesses.  The  majority  of the loans are  secured by  inventory,  equipment,
accounts  receivable,  marketable  securities,  savings  deposits,  real estate,
personal guaranties,  or a combination of these types of collateral.  Commercial
business  loans  generally  involve  a greater  degree of risk than  residential
mortgage  loans and frequently  carry larger loan  balances.  The Company offers
fixed-rate  commercial  business  loans and  adjustable-rate  loans which adjust
daily based upon Wall Street  Journal  prime.  This  increased  credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and  borrowers,  the effects of general  economic  conditions on
business cash flow, and the difficulty of evaluating and monitoring  these types
of loans.

         Consumer Loans.  Consumer loans primarily  consist of automobile loans,
home equity lines of credit,  loans  secured by savings  accounts and  unsecured
personal loans. Home equity lines of credit are originated on an adjustable rate
basis,  with a loan to value  ratio  of 90%,  if the  Company  holds  the  first
mortgage loan. Otherwise,  the maximum loan to value ratio is 80%. Loans secured
by  vehicles  are  financed  for terms of up to 60 months,  with fixed  interest
rates.  The  underwriting  standards  employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the  borrower's  ability to make payments on the proposed loan and
other indebtedness.  In addition to the  creditworthiness of the applicant,  the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. Consumer loans tend to have higher
interest rates and shorter  maturities  than one- to four-family  first mortgage
loans,  but are  considered  to entail a greater  risk of  default  than  one-to
four-family mortgage loans.

         Loan Approval Authority and Underwriting.  The loan approval process is
segmented by the type and size of loan. All loans secured by deposit accounts as
well as small real  estate,  commercial  and  consumer  loans may be approved by
certain loan officers within  designated  limits.  Members of senior  management
have varying  individual levels of authority to approve loans up to a maximum of
$100,000 for unsecured loans and $350,000 for secured loans. The Management Loan
Committee, consisting of three members of senior management and two non-employee
Directors,  may approve  loans in excess of  individual  officer  limits up to a
maximum of  $1,000,000  secured and $500,000  unsecured.  The Board of Directors
approves loans over $1,000,000  secured and $500,000  unsecured and also reviews
all loans that have been approved by officers or committees.

         The Company uses board approved independent fee appraisers on most real
estate  loans.  It is the  Company's  policy to obtain  title  insurance  on all
properties   securing  real  estate  loans  and  to  obtain  insurance  coverage
appropriate to the collateral on secured loans.

         Loan  Commitments.  At June 30,  2004,  the  Company  had $7 million of
outstanding  commitments  to originate new loans at market  interest  rates,  $3
million in undisbursed funds related to construction loans and straight lines of
credit and $9 million in  commitments  to fund  revolving  lines and  letters of
credit.

                                       6

<PAGE>

Non-Performing and Problem Assets

         Loan Delinquencies.  The Company's  collection  procedures provide that
when a mortgage  loan is 15 days past due, a notice of  nonpayment  is sent.  If
payment is still  delinquent after 30 days past due, the customer will receive a
telephone call within ten days. If the delinquency continues, similar subsequent
efforts  are made to  eliminate  the  delinquency.  If the loan  continues  in a
delinquent  status for 120 days or more and no repayment plan is in effect,  the
Bank typically initiates foreclosure  proceedings.  For consumer loans, a notice
is  generated  when the loan is ten days past due.  Further  collection  efforts
generally  commence for consumer  loans by the time a payment is  delinquent  20
days. Collection procedures for other non-mortgage loans generally begin after a
loan is one day  delinquent.  Loans  are  reviewed  on a  monthly  basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent.  Interest  accrued  and  unpaid  at the  time a loan  is  placed  on
non-accrual  status is charged  against  interest  income.  Subsequent  interest
payments,  if any, are either applied to the  outstanding  principal  balance or
recorded  as  interest  income,  depending  on the  assessment  of the  ultimate
collectibility of the loan.

         The following table sets forth information  regarding nonaccrual loans,
accruing loans more than 90 days past due and real estate owned, as of the dates
indicated.  At each of the dates  presented,  the Company had no impaired  loans
within the meaning of Statement of Financial  Accounting  Standards ("SFAS") No.
114, as amended by SFAS No. 118.  Interest  income that would have been recorded
on loans accounted for on a nonaccrual basis or as a troubled debt restructuring
under the original  terms of such loans would have totaled  $59,037 and $16,643,
respectively,  for the year ended June 30,  2004.  A total of $1,123 in interest
income was recognized on the troubled debt  restructuring and no interest income
was recognized on the non-accrual loans during the year ended June 30, 2004.

                                       7

<PAGE>

<TABLE>
<CAPTION>
                                                                                    At June 30,
                                                                   ----------------------------------------------
                                                                    2004      2003      2002      2001      2000
                                                                   ------    ------    ------    ------    ------
                                                                                (Dollars in thousands)

<S>                                                               <C>       <C>        <C>      <C>       <C>
Troubled debt restructurings ...................................   $  306    $   --     $   --   $   --    $   --
                                                                   ======    ======     ======   ======    ======
Loans accounted for on a non-accrual basis:
Mortgage loans:
  Construction .................................................   $   --    $1,124    $   --    $   --    $   --
  Permanent loans secured by 1-4 dwelling units ................      471       771        70       398       542
  All other mortgage loans .....................................       --       317         6        48        83
Non-mortgage loans:
  Commercial ...................................................      876        56       164        64        16
  Consumer .....................................................        4        49         6        99        78
                                                                   ------    ------    ------    ------    ------
      Total ....................................................   $1,351    $2,317    $  246    $  609    $  719
                                                                   ------    ------    ------    ------    ------

Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
  Permanent loans secured by 1-4 dwelling units ................   $   --    $   --    $  621    $   --    $   --
  All other mortgage loans .....................................       --        --       108        --        --

Non-mortgage loans:
  Commercial ...................................................       --        --        20        --        --
  Consumer .....................................................       --        --        67        --        --
                                                                   ------    ------    ------    ------    ------
      Total ....................................................   $   --    $   --    $  816    $   --    $   --
                                                                   ------    ------    ------    ------    ------

Total non-accrual and accrual loans ............................   $1,351    $2,317    $1,062    $  609    $  719
                                                                   ------    ------    ------    ------    ------
Real estate owned ..............................................      432       195       143        --        38
Other repossessed assets .......................................        5        19         7        --        --
                                                                   ------    ------    ------    ------    ------
Total non-performing assets ....................................   $1,788    $2,531    $1,212    $  609    $  757
                                                                   ======    ======    ======    ======    ======

Total non-accrual and 90-day past due loans
    to net loans ...............................................     0.88%     1.59%     0.74%     0.47%     0.66%
Total non-accrual and 90-day past due loans
    to total assets ............................................     0.58%     1.01%     0.51%     0.31%     0.41%
Total non-performing assets to total assets ....................     0.77%     1.10%     0.59%     0.31%     0.43%
</TABLE>

         At June 30, 2004,  there were no loans not presented above with respect
to which known  information  about the possible credit problems of the borrowers
or the cash flows of the  security  properties  have caused  management  to have
concerns  as to the  ability  of the  borrowers  to  comply  with  present  loan
repayment terms.

         Classified Assets. OTS regulations provide for a classification  system
for problem  assets of insured  institutions  which  covers all problem  assets.
Under this  classification  system,  problem assets of insured  institutions are
classified  as  "substandard,"  "doubtful,"  or "loss."  An asset is  considered
substandard if it is inadequately  protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include  those  characterized  by the  "distinct  possibility"  that the insured
institution  will sustain  "some loss" if the  deficiencies  are not  corrected.
Assets  classified  as  doubtful  have all of the  weaknesses  inherent in those
classified  substandard,  with the  added  characteristic  that  the  weaknesses
present  make  "collection  or  liquidation  in full," on the basis of currently
existing facts,  conditions and values,  "highly  questionable  and improbable."
Assets  classified  as loss are  those  considered  "uncollectible"  and of such
little value that their  continuance  as assets without the

                                       8

<PAGE>

establishment  of a  specific  loss  reserve  is not  warranted.  Assets  may be
designated  "special  mention"  because of a  potential  weakness  that does not
currently warrant classification in one of the aforementioned categories.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem assets as loss, it is required either to establish a specific  allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's  determination as to the classification of its
assets and the amount of its  valuation  allowances  is subject to review by the
OTS, which may order the  establishment  of additional  general or specific loss
allowances.  A portion of general loss allowances  established to cover possible
losses  related to assets  classified as substandard or doubtful may be included
in determining an institution's  regulatory  capital,  while specific  valuation
allowances for loan losses generally do not qualify as regulatory capital.

         The  following  table sets  forth the  Company's  classified  assets in
accordance with its classification system at June 30, 2004 (in thousands):


                  Special mention           $ 3,118
                  Substandard                 7,035
                  Doubtful                       --
                  Loss                           --
                                            -------
                  Total                     $10,153
                                            =======

         Out of  the  $10,153,000  of the  Company's  loans  classified  special
mention or substandard at June 30, 2004,  $9,518,000  were either not delinquent
or were  delinquent  less than ninety days,  and were  therefore not included as
non-accrual  loans.  These  loans are  classified  due  either  to a history  of
delinquency or to other credit quality concerns.

         Allowances  for Loan Losses.  A provision for loan losses is charged to
operations  based on management's  evaluation of the losses that may be incurred
in the Company's loan portfolio. Such evaluation, which includes a review of all
loans  of  which  full  collectibility  of  interest  and  principal  may not be
reasonably assured, considers the Company's past loan loss experience, known and
inherent  risks  in the  portfolio,  adverse  situations  that  may  affect  the
borrower's ability to repay, estimated value of any underlying  collateral,  any
existing guarantees,  past performance of the loan, available  documentation for
the loan, legal impediments to collection,  financial condition of the borrower,
and current economic conditions.

         Management  will  continue  to review  the  entire  loan  portfolio  to
determine the extent, if any, to which further additional loss provisions may be
deemed  necessary.  There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.

                                       9

<PAGE>

         The  following  table  sets  forth  information  with  respect  to  the
Company's allowance for loan losses at the dates indicated.

<TABLE>
<CAPTION>
                                                                         At June 30,
                                              -----------------------------------------------------------------
                                                 2004          2003          2002          2001          2000
                                              ---------     ---------     ---------     ---------     ---------
                                                                (Dollars in thousands)
<S>                                          <C>           <C>           <C>           <C>           <C>
Total loans outstanding, net ..............   $ 152,842     $ 146,396     $ 143,681     $ 130,431     $ 109,777
                                              =========     =========     =========     =========     =========
Average loans outstanding .................   $ 155,587     $ 144,841     $ 137,754     $ 121,237     $ 103,252
                                              =========     =========     =========     =========     =========

Allowance balances (at beginning of period)   $   1,396     $     984     $     825     $     512     $     443
Provision:
  Residential .............................          --            11            48            58            57
  Consumer and commercial business ........         969           441           177           287           148
                                              ---------     ---------     ---------     ---------     ---------

                                                    969           452           225           345           205
                                              ---------     ---------     ---------     ---------     ---------

Charge-offs:
  Residential .............................         (24)           (6)          (11)           --          (113)
  Consumer and commercial business ........        (643)          (37)          (81)          (32)          (25)
                                              ---------     ---------     ---------     ---------     ---------
                                                   (667)          (43)          (92)          (32)         (138)
Recoveries:
  Residential .............................          --             1            --            --            --
  Consumer and commercial business ........          16             2            26            --             2
                                              ---------     ---------     ---------     ---------     ---------
                                                     16             3            26            --             2
                                              ---------     ---------     ---------     ---------     ---------
Net charge-offs ...........................        (651)          (40)          (66)          (32)         (136)
                                              ---------     ---------     ---------     ---------     ---------

Allowance balance (at end of period) ......   $   1,714     $   1,396     $     984     $     825     $     512
                                              =========     =========     =========     =========     =========

Allowance for loan losses as a percent
  of total loans outstanding, net .........        1.12%         0.95%         0.68%         0.63%         0.47%
                                              =========     =========     =========     =========     =========
</TABLE>

         Out of the $643,000 in charge-offs on consumer and commercial  business
loans  during  the  year  ended  June  30,  2004,  $339,000  was  a  loss  on  a
participation  loan purchased in a commercial real estate  construction  project
for a  hotel,  $198,000  was a loss on a  commercial  loan  to a local  start-up
manufacturing  entity,  and the remaining  $106,000 consisted of losses on small
consumer and commercial loans.

                                       10

<PAGE>

Analysis of the Allowance for Loan Losses

         The  following  table sets forth the  allocation  of the  allowance  by
category,  which  management  believes can be allocated  only on an  approximate
basis.  The  allocation  of the  allowance to each  category is not  necessarily
indicative  of future loss and does not  restrict  the use of the  allowance  to
absorb losses in any category.

<TABLE>
<CAPTION>
                                                             At June 30,
               --------------------------------------------------------------------------------------------------------------
                     2004                  2003                   2002                  2001                   2000
               --------------------   -------------------   -------------------    -------------------    -------------------
                        Percent of            Percent of             Percent of             Percent of             Percent of
                       Loans in Each         Loans in Each          Loans in Each          Loans in Each          Loans in Each
                        Category to           Category to           Category to            Category to            Category to
               Amount   Total Loans   Amount  Total Loans   Amount  Total Loans    Amount  Total Loans    Amount  Total Loans
               ------   -----------   ------  -----------   ------  -----------    ------  -----------    ------  -----------
                                                           (Dollars in thousands)

<S>           <C>        <C>         <C>        <C>         <C>         <C>        <C>         <C>        <C>      <C>
Residential
  real estate   $  300     55.00%      $  312     57.51%      $ 307       61.42%     $275        60.44%     $217     69.08%
Commercial
  real estate      281     22.28          221     17.38         163       14.86       156        17.09       131     16.09
Construction,
  consumer and
  commercial
  business       1,133     22.72          863     25.11         514       23.72       394        22.47       164     14.83
                ------    ------       ------    ------       -----      ------      ----       ------      ----    ------

  Total         $1,714    100.00%      $1,396    100.00%      $ 984      100.00%     $825       100.00%     $512    100.00%
                ======    ======       ======    ======       =====      ======      ====       ======      ====    ======
</TABLE>

                                       11

<PAGE>

Investment Activities

         General. The Company is required under federal regulation to maintain a
sufficient level of liquid assets (including specified short-term securities and
certain other investments), as determined by management and defined and reviewed
for adequacy by the OTS during its regular examinations.  The OTS, however, does
not prescribe by regulation a minimum amount or percentage of liquid assets. The
level of liquid assets varies depending upon several factors, including: (i) the
yields  on  investment  alternatives,  (ii)  management's  judgment  as  to  the
attractiveness of the yields then available in relation to other  opportunities,
(iii) expectation of future yield levels,  and (iv) management's  projections as
to the  short-term  demand  for funds to be used in loan  origination  and other
activities.  Investment securities,  including mortgage-backed  securities,  are
classified  at the time of  purchase,  based upon  management's  intentions  and
abilities, as securities held to maturity or securities available-for-sale. Debt
securities  acquired  with  the  intent  and  ability  to  hold-to-maturity  are
classified  as  held-to-maturity  and  are  stated  at  cost  and  adjusted  for
amortization of premium and accretion of discount,  which are computed using the
level yield method and recognized as adjustments of interest  income.  All other
debt securities are classified as available-for-sale.

         Current  regulatory  and  accounting  guidelines  regarding  investment
securities  (including  mortgage-  backed  securities)  require  the  Company to
categorize securities as "held-to-maturity,"  "available-for-sale" or "trading."
As  of  June  30,  2004,  Company  had  securities  (including   mortgage-backed
securities)  classified as "held-to-maturity"  and  "available-for-sale"  in the
amount  of  $398,999  and  $61,199,023,  respectively,  and  had  no  securities
classified  as "trading."  Securities  classified  as  "available-for-sale"  are
reported  for  financial  reporting  purposes at the fair market  value with net
changes  in the  market  value  from  period to period  included  as a  separate
component of stockholders'  equity,  net of income taxes.  Changes in the market
value of securities  available-for-sale  do not affect the Company's  income. In
addition,  changes in the market value of securities  available-for-sale  do not
affect the Bank's regulatory  capital  requirements or its loan-to-one  borrower
limit.

         At June 30, 2004,  the Company's  investment  portfolio  policy allowed
investments in instruments  such as: (i) U.S.  Treasury  obligations,  (ii) U.S.
federal  agency or  federally  sponsored  agency  obligations,  (iii)  municipal
obligations,  (iv) mortgage-backed  securities,  (v) banker's acceptances,  (vi)
certificates of deposit, (vii) investment grade corporate bonds, (viii) mortgage
derivative  securities,  (ix) private-label  mortgage  pass-thru  securities and
commercial paper. The board of directors may authorize additional investments.

         As  a  source  of  liquidity  and  to  supplement   Company's   lending
activities, the Company has invested in residential  mortgage-backed securities.
Mortgage-backed  securities can serve as collateral for borrowings and,  through
repayments,  as a source of liquidity.  Mortgage-backed  securities  represent a
participation  interest in a pool of  single-family  or other type of mortgages.
Principal  and  interest  payments  are passed  from the  mortgage  originators,
through  intermediaries  (generally  quasi-governmental  agencies) that pool and
repackage the participation  interests in the form of securities,  to investors,
like us. The quasi-governmental  agencies guarantee the payment of principal and
interest to investors and include the FreddieMac,  Government  National Mortgage
Association ("GinnieMae"), and FannieMae.

         Mortgage-backed  securities  typically are issued with stated principal
amounts.  The  securities  are backed by pools of mortgages that have loans with
interest  rates that are  within a set range and have  varying  maturities.  The
underlying  pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage  loans.  Mortgage-backed  securities are generally  referred to as
mortgage participation certificates or pass-through  certificates.  The interest
rate risk  characteristics of the underlying pool of

                                       12

<PAGE>

mortgages  (i.e.,  fixed rate or adjustable  rate) and the prepayment  risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security is equal to the life of the underlying  mortgages.  Expected maturities
will differ from contractual  maturities due to scheduled repayments and because
borrowers  may have the  right to call or  prepay  obligations  with or  without
prepayment   penalties.   Mortgage-backed   securities   issued  by  FreddieMac,
GinnieMae,  and FannieMae  make up a majority of the  pass-through  certificates
market.

         The Company  also  invests in  mortgage-related  securities,  primarily
collateralized   mortgage  obligations,   issued  or  sponsored  by  FreddieMac,
GinnieMae,  and FannieMae,  as well as private issuers.  Collateralized mortgage
obligations are a type of debt security that  aggregates  pools of mortgages and
mortgage-backed  securities  and  creates  different  classes of  collateralized
mortgage  obligations   securities  with  varying  maturities  and  amortization
schedules as well as a residual  interest with each class having  different risk
characteristics.  The cash  flows from the  underlying  collateral  are  usually
divided into "tranches" or classes whereby  tranches have descending  priorities
with  respect to the  distribution  of principal  and interest  repayment of the
underlying  mortgages and mortgage backed  securities as opposed to pass through
mortgage  backed  securities  where cash flows are  distributed  pro rata to all
security  holders.  Unlike  mortgage  backed-securities  from which cash flow is
received and prepayment risk is shared pro rata by all securities holders,  cash
flows  from  the   mortgages   and   mortgage   backed   securities   underlying
collateralized  mortgage obligations are paid in accordance with a predetermined
priority  to  investors   holding   various   tranches  of  such  securities  or
obligations.  A particular  tranche or class may carry prepayment risk which may
be  different  from  that  of the  underlying  collateral  and  other  tranches.
Collateralized  mortgage  obligations  attempt  to  moderate  reinvestment  risk
associated  with   conventional   mortgage-backed   securities   resulting  from
unexpected prepayment activity.

         Investment Portfolio. The following table sets forth the carrying value
of the Company's securities at the dates indicated.

                                                            At June 30,
                                                  -----------------------------
                                                    2004       2003       2002
                                                  -------    -------    -------
                                                         (In thousands)
 Securities held-to-maturity:
   Tax-exempt securities                            $ 399      $ 676      $ 410
   Corporate debt securities                           --         --        995
                                                  -------    -------    -------
     Total securities held-to-maturity                399        676      1,405
                                                  -------    -------    -------

 Securities available-for-sale:
   Mutual funds                                     9,800      9,943      2,828
   US agency securities                             5,015      5,626      2,771
   FreddieMac stock                                 1,392      1,116      1,346
   FannieMae/SLMA preferred                         1,200      1,425      1,500
   SLMA asset-backed note                           1,300      1,858      1,980
   Tax-exempt securities                            5,523      5,443      5,610
   Taxable securities                                  --         --         --
   Collateralized mortgage obligations              6,289      3,869      7,939
   Mortgage-backed securities                      30,680     38,517     27,290
                                                  -------    -------    -------
     Total securities available-for-sale           61,199     67,797     51,264
                                                  -------    -------    -------
 Total investment and mortgage-backed securities  $61,598    $68,473    $52,669
                                                  =======    =======    =======

                                       13

<PAGE>

         The  following  table sets forth  information  regarding  the scheduled
maturities,  carrying  values,  market value and weighted average yields for the
Bank's  investment  securities  portfolio at June 30, 2004. The following  table
does not take into  consideration  the effects of  scheduled  repayments  or the
effects of possible prepayments.

<TABLE>
<CAPTION>
                                                                      At June 30, 2004
                             ------------------------------------------------------------------------------------------------------
                                  Less than            1 to              Over 5 to         Over 10                 Total
                                   1 year             5 years            10 years           years                Securities
                             ------------------  -----------------  ----------------- -----------------   -------------------------
                              Carrying  Average  Carrying  Average   Carrying Average Carrying  Average   Carrying           Market
                                Value    Yield     Value    Yield      Value   Yield    Value    Yield      Value   Yield    Value
                              -----      -----     -----    -----      -----   -----    -----    -----      -----   -----    -----
                                                                 (Dollars in thousands)
<S>                          <C>       <C>      <C>        <C>       <C>     <C>     <C>         <C>      <C>       <C>    <C>
Securities
held-to-maturity:
  Tax-exempt
    securities (1)..........  $    --     --%    $   145    4.25%     $   --    --%   $    254    8.75%    $   399   7.11%  $   408
                              -------            ------               ------          -------              -------          -------
      Total
        securities
        held-to-maturity....       --                145    4.25          --               254    8.75         399   7.11       408
                              -------            ------               ------          -------              -------          -------

Securities
available-for-sale:
  Mutual funds..............    9,949   2.21          --      --          --    --          --      --       9,949   2.21     9,800
  US Agency securities......    4,013   2.59       1,004    1.73          --    --          --      --       5,017   2.42     5,015
  FreddieMac stock (2)......       --     --          --      --          --    --           8    1.08           8   1.78     1,392
  FannieMae/SLMA
    preferred...............       --     --          --      --          --    --       1,500    1.47       1,500   1.47     1,200
  SLMA asset-backed
    securities..............       --     --          --      --       1,296  1.97          --      --       1,296   1.97     1,300
  Tax-exempt
    securities (1)..........      136   1.51         895    3.79          --    --       4,166    6.17       5,197   5.64     5,523
  Taxable securities........       --     --          --      --          --    --          --      --          --     --        --
  Collateralized
    mortgage
    obligations
    securities..............       --     --         819    3.33          --    --       5,508    2.68       6,327   2.76     6,289
   Mortgage-backed
     securities.............       --     --         --       --       1,932  5.80      29,133    4.28      31,065   4.37    30,680
                              -------            ------               ------          -------              -------          -------
      Total securities
        available-for-sale..   14,098   2.31       2,718    2.89       3,228  4.26      40,315    4.15      60,359   3.67    61,199
                              -------            ------               ------          -------              -------          -------

Total investment and
  mortgage-backed
  securities ...............  $14,098   2.31%    $2,863     2.96%     $3,228  4.26%   $40,569     4.18%    $60,758   3.69%  $61,607
                              =======   ====     ======     ====      ======  ====    =======     ====     =======   ====   =======
</TABLE>

------------------
(1)  Average  yield  is  computed  on a  book  value  basis  rather  than  a tax
     equivalent basis.
(2)  Average yield is computed on a redemption value basis.

                                       14

<PAGE>

Sources of Funds

         General.  Deposits are a major external  source of the Company's  funds
for lending  and other  investment  purposes.  The  Company  derives  funds from
amortization  and  prepayment  of loans and, to a lesser  extent,  maturities of
investment   securities,    borrowings,    amortization   and   prepayments   of
mortgage-backed securities, and operations.  Scheduled loans and mortgage-backed
securities  principal  repayments are a relatively stable source of funds, while
deposit  inflows  and  outflows,   and  loans  and  mortgage-backed   securities
prepayments are  significantly  influenced by general  interest rates and market
conditions.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from  within the  Company's  primary  market  area  through  the  offering  of a
selection of deposit  instruments  including  regular  savings  accounts,  money
market  accounts,  and term  certificate  accounts.  Deposit  account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate, among other factors.

         Deposit  Distribution.  The  following  table  sets  forth the  average
balance  and the  weighted  average  rates for each  period on each  category of
deposits presented.

<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                              -----------------------------------------------------------------------------
                                     2004                       2003                       2002
                              --------------------   --------------------------  --------------------------
                                          Weighted                   Weighted                    Weighted
                               Average    Average       Average       Average      Average       Average
                               Balance      Rate        Balance        Rate        Balance         Rate
                               -------      ----        -------        ----        -------         ----
                                                     (Dollars in thousands)
<S>                          <C>            <C>       <C>              <C>        <C>              <C>
Demand deposits               $ 16,169       0.00%     $ 13,122         0.00%      $ 9,024          0.00%
Interest-bearing  demand
    and NOW deposits            10,877       0.28         8,830         0.75         8,081          0.94
Money market savings            12,723       0.83        11,421         1.93        10,465          1.57
Savings accounts                 7,338       0.89         5,910         1.08         8,271          0.74
Time deposits                   89,923       2.88        77,180         3.55        75,510          4.98
                              --------                 --------                   --------
    Total deposits            $137,030       2.04%     $116,463         2.65%     $111,351          3.65%
                              ========                 ========                   ========
</TABLE>

         Time  Deposits.  The  following  table  indicates  the  amount  of  the
Company's time deposits of $100,000 or more by time remaining  until maturity as
of June 30, 2004.

                Maturity Period                                 Time Deposits
                ---------------                                 -------------
                                                                (In thousands)

                Within three months                                   $ 8,452
                More than three through six months                      7,703
                More than six through nine months                       3,629
                Over nine months                                       25,319
                                                                      -------
                                Total                                 $45,103
                                                                      =======

         Borrowings.  The  Company may obtain  advances  from the FHLB of Dallas
(the "FHLB") to supplement its supply of lendable funds.  Advances from the FHLB
are typically  secured by a pledge of the Company's stock in the FHLB, a portion
of the Company's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable,  and range of
maturities. The Company, if the need arises, may also access the Federal Reserve
Bank  discount

                                       15

<PAGE>

window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  At June 30, 2004, borrowings with the FHLB totaled $73,652,218 of
which  $30,756,838  were  short-term.  The  following  table sets forth  certain
information  regarding the Company's FHLB advances (which were its only category
of short-term borrowing) for the periods indicated.

<TABLE>
<CAPTION>
                                                                         June 30,
                                                                --------------------------------
                                                                2004       2003          2002
                                                                ----       ----          ----
                                                                     (Dollars in thousands)

<S>                                                          <C>        <C>       <C>
Amount  outstanding at end of period......................     $73,652    $76,642   $    76,387
Weighted average interest rate at end of period ..........        3.48%      4.01%         4.32%
Maximum amount of short-term borrowingsoutstanding
  at any month end .......................................     $33,418    $39,954   $    34,727
Approximate average short-term borrowings  outstanding....     $30,757    $32,978   $    30,072
Approximate weighted average rate paid during period......        3.61%      4.23%         4.62%
</TABLE>

Personnel

         As of June 30, 2004, the Company  employed 54 employees with 51 working
full-time.  None of the  Company's  employees  are  represented  by a collective
bargaining  group. The Company believes that its relationship with its employees
is good.

                                   REGULATION

         Set forth below is a brief  description of certain laws which relate to
the regulation of the Company and the Bank. The description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

Regulation of the Company

         General.  The  Company is a unitary  savings and loan  holding  company
subject to regulatory  oversight by the OTS. As such, the Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Company and its non-savings association  subsidiaries,  should such subsidiaries
be  formed,  which  authority  also  permits  the OTS to  restrict  or  prohibit
activities  that are determined to be a serious risk to the  subsidiary  savings
association.  This  regulation  and  oversight  is  intended  primarily  for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Company.

         As a unitary savings and loan holding company, the Company generally is
not  subject  to  any  restrictions  on  its  business  activities.   While  the
Gramm-Leach-Bliley  Act (the "GLB Act")  terminated the "unitary  thrift holding
company"  exemption  from  activity  restrictions  on a prospective  basis,  the
Company enjoys  grandfathered status under this provision of the GLB Act because
it acquired the Bank prior to May 4, 1999. As a result,  the  Company's  freedom
from activity restrictions as a unitary savings and loan holding company was not
affected by the GLB Act.  However,  if the Company were to acquire control of an
additional  savings  association,  its business  activities  would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Company were in
the future to sell control of the Bank to any other company,  such company would
not succeed to the Company's grandfathered status under the GLB Act and would be
subject to the same activity  restrictions.  The  continuation  of the Company's
exemption from restrictions on business activities as a unitary savings and loan
holding company is also subject to the Company's  continued  compliance with the
Qualified  Thrift Lender ("QTL") test. See "- Regulation of the Bank - Qualified
Thrift Lender Test."

                                       16

<PAGE>

Regulation of the Bank

         General.  Set forth below is a brief  description  of certain laws that
relate to the  regulation of the Bank.  The  description  does not purport to be
complete and is qualified  in its entirety by reference to  applicable  laws and
regulations.  As a federally chartered,  SAIF-insured  savings association,  the
Bank is subject  to  extensive  regulation  by the OTS and the  Federal  Deposit
Insurance  Corporation  ("FDIC") Lending  activities and other  investments must
comply with various federal statutory and regulatory  requirements.  The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

         The OTS  regularly  examines  the Bank  and  prepares  reports  for the
consideration  of the Bank's  Board of Directors  on any  deficiencies  that are
found in the Bank's operations.  The Bank's relationship with its depositors and
borrowers  is also  regulated  to a great  extent  by  federal  and  state  law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.

         The Bank must file reports with the OTS  concerning  its activities and
financial  condition,  in addition to obtaining  regulatory  approvals  prior to
entering into certain transactions such as mergers with or acquisitions of other
savings   institutions.   This   regulation   and   supervision   establishes  a
comprehensive  framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure  also  gives  the  regulatory   authorities  extensive  discretion  in
connection with their  supervisory  and  enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.

         Insurance of Deposit  Accounts.  The deposit  accounts held by the Bank
are insured by the SAIF to a maximum of  $100,000  for each  insured  member (as
defined by law and  regulation).  Insurance of deposits may be terminated by the
FDIC  upon a finding  that the  institution  has  engaged  in unsafe or  unsound
practices,  is in an unsafe or unsound  condition to continue  operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.

         The Bank is required to pay insurance premiums based on a percentage of
its insured  deposits  to the FDIC for  insurance  of its  deposits by the SAIF.
Under  the  risk-based  system  established  by the  FDIC  for  setting  deposit
insurance  premiums,   the  2004  insurance  assessment  rates  for  SAIF-member
institutions  range from 0% to 0.27% of insured deposits on an annualized basis,
with the  assessment  rate for most  savings  institutions  set at 0%.  The Bank
currently  qualifies  for  the  lowest  assessment  rate  under  the  risk-based
assessment  system  and,   accordingly,   did  not  pay  any  deposit  insurance
assessments during the past fiscal year.

         In addition, all FDIC-insured institutions are required through 2017 to
pay  assessments  to the FDIC to fund  interest  payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government  established
to  recapitalize  the  predecessor  to the SAIF.  For calendar  2004, the annual
assessment rate has been approximately 0.154% of insured deposits.

         Loans to One  Borrower.  A savings  association  may not make a loan or
extend  credit to a single or related group of borrowers in excess of 15% of the
associations's unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of the unimpaired capital and surplus, under certain circumstances.
At June 30, 2004, the Company's lending limit for loans to one borrower was

                                       17

<PAGE>

approximately  $2,766,702  and the Company had no outstanding  commitments  that
exceeded the loans to one borrower limit at the time originated or committed.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets for savings  institutions  that receive the highest  supervisory
rating for safety and  soundness and 4% of total  adjusted  assets for all other
thrifts,  and (3) risk-based capital equal to 8% of total risk-weighted  assets.
At June 30,  2004,  the  Bank was in  compliance  with  its  regulatory  capital
requirements.

         For  purposes  of the OTS  capital  regulations,  tangible  capital  is
defined as core capital less all intangible assets,  except for certain mortgage
servicing  rights,  and less certain  investments.  Core,  or Tier 1, capital is
defined as common stockholders' equity,  noncumulative perpetual preferred stock
and minority  interests  in the equity  accounts of  consolidated  subsidiaries,
certain  nonwithdrawable   accounts  and  pledged  deposits  of  mutual  savings
associations and qualifying supervisory goodwill, less nonqualifying  intangible
assets, certain mortgage servicing rights and certain investments.

         The risk-based capital standard for savings  institutions  requires the
maintenance  of  total  risk-based  capital  of  8%  of  risk-weighted   assets.
Risk-based  capital  equals  the  sum of core  and  supplementary  capital.  The
components  of  supplementary  capital  include,  among other items,  cumulative
perpetual preferred stock,  perpetual  subordinated debt, mandatory  convertible
subordinated debt, intermediate-term preferred stock, general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted  assets,  and up
to 45% of unrealized gains on equity securities.  Overall, supplementary capital
is limited to 100% of core capital.  A savings  association  must  calculate its
risk-weighted  assets by multiplying  each asset and  off-balance  sheet item by
various risk factors as determined  by the OTS,  which range from 0% for cash to
100% for delinquent  loans,  property acquired through  foreclosure,  commercial
loans, and other assets.

         In addition to the above  regulatory  capital  requirements,  the OTS's
prompt corrective action regulation  classifies savings  associations by capital
levels and provides that the OTS will take various corrective actions, including
imposing significant operational restrictions,  against any thrift that fails to
meet  the  regulation's  capital  standards.  Under  this  regulation,  a  "well
capitalized"  savings  association  is one that has a total  risk-based  capital
ratio of at least 10%, a Tier 1  risk-based  capital  ratio of at least 6% and a
leverage  capital  ratio  of 5%,  and is not  subject  to any  capital  order or
directive.  A thrift is deemed  "adequately  capitalized"  category  if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%.  Institutions  with
lower  capital  levels  are  deemed  to  be  "undercapitalized,"  "significantly
undercapitalized" or "critically  undercapitalized,"  depending on their capital
levels. A thrift that falls within any of the three undercapitalized  categories
is subject to severe  regulatory  sanctions under the prompt  corrective  action
regulation. At June 30, 2004, the Bank was classified as "well capitalized.

         Dividend and Other Capital  Distribution  Limitations.  The OTS imposes
various  restrictions or requirements on the ability of savings  institutions to
make capital distributions, including cash dividends.

         A savings  association,  such as the Bank,  that is a  subsidiary  of a
savings and loan holding  company must file an  application or a notice with the
OTS at least 30 days before making a capital distribution.  Savings associations
are not  required  to file  an  application  for  permission  to make a  capital
distribution  and need only file a notice if the following  conditions  are met:
(1) they are eligible for expedited  treatment under OTS  regulations,  (2) they
would  remain  adequately  capitalized  after the  distribution,  (3) the annual
amount of capital  distribution does not exceed net income for that year to date
added to retained net income

                                       18

<PAGE>

for the two preceding years, and (4) the capital  distribution would not violate
any  agreements  between  the  OTS  and  the  savings  association  or  any  OTS
regulations. Any other situation would require an application to the OTS.

         The OTS may disapprove an application or notice if the proposed capital
distribution   would:  (i)  make  the  savings   association   undercapitalized,
significantly  undercapitalized,  or  critically  undercapitalized;  (ii)  raise
safety  or  soundness  concerns;  or (iii)  violate  a  statue,  regulation,  or
agreement  with  the OTS (or  with  the  FDIC),  or a  condition  imposed  in an
OTS-approved application or notice. Further, a federal savings association, like
the  Bank,  cannot  distribute   regulatory  capital  that  is  needed  for  its
liquidation account.

         Qualified Thrift Lender Test.  Federal savings  institutions  must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal  Revenue Code by maintaining at least 60% of its total assets
in specified types of assets,  including cash,  certain  government  securities,
loans  secured  by and  other  assets  related  to  residential  real  property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by  maintaining at
least 65% of its "portfolio assets" in  certain"Qualified  Thrift  Investments".
Qualified thrift investments  consist primarily of an institution's  residential
mortgage  loans and other loans and  investments  relating to  residential  real
estate and manufactured housing and also include student,  credit card and small
business  loans,  stock  issued by a Federal  Home Loan Bank,  the FHLMC and the
FNMA,  and other  enumerated  assets.  For purposes of the  statutory  QTL test,
portfolio assets are defined as total assets minus intangible  assets,  property
used by the  institution in conducting its business,  and liquid assets equal to
10% of total assets. A savings  institution must maintain its status as a QTL on
a monthly basis in at least nine out of every 12 months. A failure to qualify as
a QTL  would  result  in a number  of  sanctions,  including  certain  operating
restrictions.  At June  30,  2004,  the  Bank  was in  compliance  with  its QTL
requirement, with 81.58% of its assets invested in Qualified Thrift Investments.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which
is one of 12 regional FHLBs that  administers the home financing credit function
of savings  associations.  Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated  obligations of the FHLB System. It makes loans to
members (i.e.,  advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the  beginning of each year or 5% of the Bank's  advances from the FHLB. At June
30, 2004, the Bank was in compliance with this requirement.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction  accounts (primarily  checking,  NOW, and Super
NOW checking accounts) and non-personal time deposits.  The balances  maintained
to meet the reserve  requirements  imposed by the Federal  Reserve  Board may be
used to satisfy the liquidity  requirements that are imposed by the OTS. At June
30,  2004,  the  Bank  was  in  compliance  with  these  Federal  Reserve  Board
requirements.

                                       19

<PAGE>

Item 2.  Description of Property.
-------  ------------------------

         (a) The Company owns its main office and branch  office  located at 221
West Aztec Avenue,  Gallup, New Mexico and 1501 San Juan Boulevard,  Farmington,
New  Mexico,  respectively.  During the fiscal  year  ended June 30,  2004,  the
Company  purchased  property to be used for a possible future branch site on the
north side of Gallup,  New Mexico for $424,000 and is liable for a  non-interest
bearing  note  payable to the seller with one final  payment of $137,000  due in
January 2005. The Company also leases  additional office space across the street
from its main office. The lease expires December 31, 2007 and the Company has an
option,  upon  notification  of the lessor by August 1, 2007,  to  purchase  the
building for $275,000 or to extend the lease for an additional 10 years.

         (b) Investment  Policies.  See "Item 1.  Business"  above for a general
description of the Company's  investment policies and any regulatory or Board of
Directors' percentage of assets limitations  regarding certain investments.  The
Company's  investments are primarily acquired to produce income, and to a lesser
extent, possible capital gain.

               (1)  Investments in Real Estate or Interests in Real Estate.  See
                    "Item 1. Business - Lending  Activities  and - Regulation of
                    the Bank," and "Item 2. Description of Property."

               (2)  Investments in Real Estate Mortgages.  See "Item 1. Business
                    - Lending Activities and - Regulation of the Bank."

               (3)  Investments   in  Securities  of  or  Interests  in  Persons
                    Primarily  Engaged in Real Estate  Activities.  See "Item 1.
                    Business - Lending Activities and - Regulation of the Bank."

         (c) Description of Real Estate and Operating Data. Not Applicable.

Item 3.  Legal Proceedings
-------  -----------------

         Neither the  Company nor the Bank are engaged in any legal  proceedings
of a material  nature at the present time. From time to time the Bank is a party
to legal  proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year.

                                       20

<PAGE>

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         (a) Market  Information.  Since its initial  issuance on June 29, 1995,
the Company's  common stock has been traded on the Nasdaq  SmallCap Market under
the symbol "GUPB." The following  table reflects the high and low bid prices for
the Common Stock as published by the Nasdaq SmallCap Market as well as dividends
declared per share for each quarter during the most recent two fiscal years. The
quotations reflect inter-dealer  prices,  without retail mark-up,  markdown,  or
commission, and may not represent actual transactions.


                                                                     Dividends
         Quarter Ended                        High        Low        Declared
         -------------                        ----        ---        --------

         June 30, 2004                       $23.18     $21.00        $0.125
         March 31, 2004                       23.75      21.06         0.125
         December 31, 2003                    21.34      16.75         0.125
         September 30, 2003                   17.00      16.03         0.11
         June 30, 2003                        17.63      15.94         0.11
         March 31, 2003                       17.55      14.32         0.11
         December 31, 2002                    15.99      12.76         0.11
         September 30, 2002                   15.15      13.78         0.10

         As of June 30, 2004,  there were  1,146,645  shares of the Common Stock
outstanding  and 211  stockholders  of record.  This number does not reflect the
number of persons or entities who held stock in nominee or "street" name through
various brokerage firms.

         The Company's  ability to pay dividends to  stockholders  is subject to
the  requirements of Delaware law. No dividend may be paid by the Company unless
its board of directors determines that the Company will be able to pay its debts
in the ordinary  course of business after payment of the dividend.  In addition,
the Company's ability to pay dividends is dependent, in part, upon the dividends
it receives  from the Bank.  The Bank may not declare or pay a cash  dividend on
any of its stock if the effect  thereof would be to cause the Bank's  regulatory
capital to be reduced below (1) the amount required for the liquidation  account
established in connection with the Bank's  conversion from mutual to stock form,
or (2) the  regulatory  capital  requirements  imposed  by the  Office of Thrift
Supervision.

         (b) Application of Proceeds. Not applicable.

         (c) Issuer Purchases of Equity Securities. During the fiscal year 2004,
the Company made no purchases of its Common Stock.

         On June 20,  2002 the Company  issued a press  release  announcing  its
authorization  to repurchase  115,010  shares (10% of its 1,150,106  outstanding
shares on that date) of its common stock.  The maximum number of shares that may
yet be purchased under the plan is 106,374 shares.

                                       21

<PAGE>

Item 6.  Management's Discussion and Analysis or Plan of Operation
-------  ---------------------------------------------------------

General

         The Private  Securities  Litigation  Reform Act of 1995  contains  safe
harbor  provisions  regarding  forward-looking  statements.  When  used  in this
discussion, the words "believes", "anticipates",  "contemplates", "expects", and
similar expressions are intended to identify  forward-looking  statements.  Such
statements  are  subject to certain  risks and  uncertainties  which could cause
actual  results to differ  materially  from  those  projected.  Those  risks and
uncertainties  include  changes in interest  rates,  risks  associated  with the
ability  to  control  costs,  expenses,  and  general  economic  conditions.  We
undertake  no  obligation  to publicly  release the results of any  revisions to
those  forward-looking  statements  which  may be  made  to  reflect  events  or
circumstances   after  the  date  hereof  or  to  reflect  the   occurrence   of
unanticipated events.

Overview

         GFSB  Bancorp,  Inc.  is a unitary  savings  and loan  holding  company
headquartered in Gallup, New Mexico, which provides a full range of deposits and
traditional  mortgage loan products through its wholly-owned banking subsidiary,
Gallup Federal  Savings Bank (Bank).  All references  refer  collectively to the
Company and the Bank, unless the context indicates otherwise.

         During fiscal 2002, to provide  opportunity for growth, the Bank opened
an office in Farmington,  New Mexico under the trade name of Farmington  Savings
Bank,  a Branch  of  Gallup  Federal  Savings  Bank.  Because  of  operating  an
additional branch, non-interest expense increased during fiscal 2003.

Proposed Merger

         On  August  25,  2004,  The  Company  announced  that it had  signed  a
definitive  merger  agreement  with First  Federal Banc of the  Southwest,  Inc.
("FFBSW"),  the holding  company for First  Federal Bank,  Roswell,  New Mexico,
pursuant to which the Company will merge with and into FFBSW.

         Under the terms of the agreement,  upon  consummation  of the merger of
the Company into FFBSW,  each  outstanding  share of the Company's  common stock
will be  converted  into the  right to  receive  either  $20.00 in cash or FFBSW
common stock, at the election of the holder,  subject to an overall  requirement
that 51% of the Company's total outstanding common stock be exchanged for stock.
The transaction is subject to various conditions, including stockholder approval
of both the Company and FFBSW, and approval by the applicable banking regulatory
agencies.

         Pursuant  to the terms of the  merger  agreement,  FFBSW has  agreed to
register  FFBSW's common stock under the Securities  Exchange Act of 1934 and it
will file reports with the Securities and Exchange Commission. In addition, upon
the  completion  of the  merger,  its  shares are  expected  to be listed on the
NASDAQ.

Critical Accounting Policies, Judgments and Estimates

         The  Company's  accounting  and  reporting  policies  conform  with the
accounting  principles  generally  accepted in the United  States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United  States of  America  requires  management  to make  estimates  and
assumptions that affect the amounts

                                       22

<PAGE>

reported in the financial  statements and the accompanying notes. Actual results
could differ from those estimates.  These policies are critical because they are
highly  dependent  upon  subjective  or  complex   judgments,   assumptions  and
estimates.

         Management  bases its estimates and judgments on historical  experience
and on various  other  factors  that are  believed  to be  reasonable  under the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other  sources.  There can be no assurance  that actual  results will not differ
from  those  estimates.  If  actual  results  are  different  than  management's
judgments and estimates,  the Company's financial results could change, and such
change could be material to the Company.

         Allowance for Loan Losses.  Determining the amount of the allowance for
loan losses  necessarily  involves a high degree of judgment.  The allowance for
loan losses is the estimated amount considered  necessary to cover credit losses
inherent in the loan  portfolio  at the balance  sheet date.  The  allowance  is
established  through the  provision  for loan losses,  which is charged  against
income.  Management  performs an evaluation of the adequacy of the allowance for
loan losses on a quarterly basis, at a minimum. The balance in the allowance for
loan losses is determined  based on  management's  review and  evaluation of the
loan portfolio in relation to past loss experience,  the size and composition of
the portfolio, current economic conditions, delinquency statistics, the adequacy
of the underlying collateral,  the financial strength of the borrowers,  results
of internal  loan reviews,  geographic  and industry  concentrations,  and other
factors  related  to the  collectibility  of the  loan  portfolio.  All of these
factors may be susceptible to significant  change. To the extent actual outcomes
differ from management's estimates, additional provisions for loan losses may be
required that would adversely impact earnings in future periods.

         For purposes of the Company's allowance for loan loss methodology,  all
criticized loans,  meaning all loans classified as "substandard",  "doubtful" or
"loss" or designated "special mention", are divided into two primary categories:
(1)  loans  secured  by real  estate  and (2)  other  loans.  Within  these  two
categories loss allocation percentages are assigned based on the severity of the
classification or designation.  All other loans are segregated into one of seven
general  categories:   (1)  consumer  residential   mortgages,   (2)  commercial
residential mortgages,  (3) residential mortgage loan participations  purchased,
(4) commercial  loans, (5) commercial real estate loans, (6) consumer loans, and
(7) loans secured by deposit accounts.  Loss allocation percentages are assigned
to each of these seven categories.  An additional loss allocation  percentage is
assigned to all loans within these seven  categories  that have been  designated
"pass/watch", meaning loans that have been identified as having potential credit
concerns  less  severe  than  criticized  loans.   Finally  an  additional  loss
allocation is assigned to unfunded commitments on existing loans.

         Credit  losses are an  inherent  part of the  Company's  business  and,
although management believes the methodologies for determining the allowance for
loan losses and the current level of the allowance are adequate,  it is possible
that there may be  unidentified  losses in the portfolio that may become evident
only at a future date.  Additional  provisions  for such losses,  if  necessary,
would negatively impact earnings.

Management of Interest Rate Risk and Market Risk

         Because  the  majority  of the  Company's  assets and  liabilities  are
sensitive to changes in interest rates, its most significant form of market risk
is interest rate risk, or changes in interest  rates.  The Company is vulnerable
to an  increase  in  interest  rates to the  extent  that  its  interest-bearing
liabilities mature or reprice more rapidly than its interest-earning assets. The
Company's lending  activities have emphasized the purchase or the origination of
fixed rate loans  secured by one-to four family  residences  and the

                                       23

<PAGE>

purchase  of  mortgage  backed  securities  and  available-for-sale   investment
securities.  The  primary  source of funds  has been  deposits  with  maturities
substantially  shorter than the related  assets.  While having  interest-bearing
liabilities  that  reprice  more  frequently  than  interest-earning  assets  is
generally  beneficial  to net  interest  income  during  a period  of  declining
interest  rates,  this  type  of  an   asset/liability   mismatch  is  generally
detrimental during periods of rising interest rates.

         Senior  management of the Company  reviews loan and deposit pricing and
production volumes, interest rate risk analysis,  liquidity and borrowing needs,
and a variety of other asset and liability  management topics on a weekly basis.
The Company's Investment Committee meets on a monthly basis to review these same
items. On behalf of the Investment Committee,  the Chairman reports to the Board
of Directors.

         To reduce the effect of interest  rate changes on net interest  income,
the Company has adopted various  strategies to enable it to improve the matching
of interest-earning  asset maturities to interest-bearing  liability maturities.
The principal elements of these strategies include seeking to:

          o    sell new  originated  long-term  fixed rate  mortgage  loans that
               conform to Federal National Mortgage Association  guidelines when
               sales can be achieved on terms favorable to the Company;

          o    lengthen  the  maturities  of  liabilities  when it would be cost
               effective  through  the  pricing  and  promotion  of higher  rate
               certificates of deposit and utilization of FHLB advances;

          o    attract low cost checking and transaction  accounts which tend to
               be less interest rate sensitive when interest rates rise;

          o    maintain  interest-bearing   deposits,  federal  funds  and  U.S.
               government   securities  with  short  to  intermediate  terms  to
               maturities; and

          o    maintain  an  investment  portfolio  that  provides a stable cash
               flow, thereby providing investable funds in varying interest rate
               cycles.

         Although the maintenance of a large  percentage of the Company's assets
in  short-term  and   intermediate-term   assets,   such  as  cash  equivalents,
mortgage-backed  securities and  investment  securities,  reduces  interest rate
risk, it adversely  affects  interest  income and net earnings.  The Company has
made a  significant  effort to  maintain  its level of lower cost  deposits as a
method  of  enhancing   profitability.   At  June  30,  2004,  the  Company  had
approximately $50 million, or 38%, of its deposits in low-cost savings, checking
and money market accounts. These deposits have traditionally remained relatively
stable and are  expected  to be only  moderately  affected in a period of rising
interest  rates.  This stability has enabled the Company to offset the impact of
rising rates in other deposit accounts.

Net Portfolio Value

         Management  activity  monitors  exposure  to  interest  rate risk.  The
Company's  objective is to maintain a consistent level of  profitability  within
acceptable  risk  tolerances  across a broad range of  potential  interest  rate
environments. The Bank uses the OTS Net Portfolio Value ("NPV") Model to monitor
its exposure to interest rate risk,  which  calculates  changes in net portfolio
value. The NPV model, in addition to management's  suggestions,  are reviewed by
the Investment Committee and reported to the Board of Directors quarterly.

                                       24

<PAGE>

         The Bank  computes  amounts by which the net present value of cash flow
from assets,  liabilities and off balance sheet items ("net portfolio  value" or
"NPV")  would  change  in the  event of a range of  assumed  changes  in  market
interest  rates.  Based upon OTS  assumptions,  the following table presents the
Bank's  percentage change in NPV, assuming an immediate change in interest rates
of plus or minus 300 basis points from the level at June 30,  2004.  Changes due
to a 200 and 300 basis point  decline are not  presented due to the low interest
rate environment.

            Change in
            Interest Rates
            In Basis Points       NPV
            ("BP")                Ratio (2)       Change(3)
            ------                ---------       ---------
            +300 bp                8.07%          -193 bp
            +200 bp(1)             8.95%          -106 bp
            +100 bp                9.62%          - 39 bp
               0                  10.00%            -- bp
            -100 bp                9.87%          - 13 bp

---------------
(1)  Denotes the rate shock used to compute the NPV capital ratios.
(2)  Calculated as the estimated NPV divided by present value of assets.
(3)  Calculated  as the  excess  (deficiency)  of the  NPV  ratio  assuming  the
     indicated change in interest rates over the estimated NPV ratio assuming no
     change in interest rates.

         These  calculations  indicate  that the Bank's  NPV could be  adversely
affected by  increases  in interest  rates and could also be somewhat  adversely
affected by decreases in interest rates.  In addition,  the Bank could be deemed
to have  more  than a normal  level  of  interest  rate  risk  under  applicable
regulatory capital requirements if interest market rates increase.

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  prepayments and deposit  run-offs and should not be relied upon
as  indicative  of actual  results.  Certain  shortcomings  are inherent in such
computations.  Although certain assets and liabilities may have similar maturity
or periods of  repricing,  they may react at  different  times and in  different
degrees to changes in the market interest  rates.  The interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market
interest  rates,  while rates on other types of assets and  liabilities  may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short-term  basis  and over the life of the  asset.  In the event of a change in
interest  rates,   prepayments  and  early   withdrawal   levels  could  deviate
significantly  from  those  assumed  in making  calculations  set  forth  above.
Additionally,  an  increased  credit  risk may  result  as the  ability  of many
borrowers to service  their debt may  decrease in the event of an interest  rate
increase.

                                       25

<PAGE>

Average Balance Sheet

  The following table sets forth certain  information  relating to the Company's
  average balance sheet and reflects the yield on assets and cost of liabilities
  for the periods  indicated and the yields  earned and rates paid.  Such yields
  and costs are derived by dividing  income or expense by the average balance of
  assets  or  liabilities,  respectively,  for the  periods  presented.  Average
  balances are derived from month-end balances. Management does not believe that
  the use of month-end balances instead of daily average balances has caused any
  material differences in the information presented.

<TABLE>
<CAPTION>
                                                                               Year Ended June 30,
                                         -------------------------------------------------------------------------------------------
                                                     2004                             2003                          2002
                                         ------------------------------  ------------------------------  ---------------------------
                                         Average              Average    Average              Average    Average           Average
                                         Balance   Interest  Yield/Cost  Balance    Interest Yield/Cost  Balance Interest Yield/Cost
                                         -------   --------  ----------  -------    -------- ----------  ------- -------- ----------
                                                                                       (Dollars in thousands)
<S>                                   <C>         <C>         <C>     <C>         <C>          <C>    <C>      <C>           <C>
Interest-earning assets
   Loans receivable (1)                 $155,587    $9,973      6.41%   $144,841     $10,324     7.13%  $137,754 $10,358       7.53%
   Investment securities and
      mortgage-backed securities          66,181     2,059      3.11      56,387       2,285     4.05     56,365   2,997       5.32
   Other interest-earning assets (2)       5,164        83      1.16       5,141         134     2.61      4,837     149       3.08
                                        --------    ------              --------     -------            --------
     Total interest-earning assets       226,932    12,115      5.30%    206,369      12,743     6.17%   198,956  13,504       6.79%
                                                    ------                           -------
Non-interest-earning assets               10,756                           9,307                           7,255
                                        --------                        --------                        --------
     Total assets                       $237,688                        $215,676                        $206,211
                                        ========                        ========                        ========

Interest-bearing liabilities
   Interest-bearing demand
      and NOW deposits                  $ 10,877    $   30      0.28    $  8,830     $    66     0.75   $  8,081 $    76       0.94
   Passbook savings                        7,338        65      0.89       5,910          64     1.08      8,271      61       0.74
   Money market accounts                  12,723       105      0.83      11,421         129     1.93     10,465     164       1.57
   Time deposits                          89,923     2,590      2.88      77,180       2,741     3.55     75,510   3,759       4.98
   Other liabilities (3)                  81,044     2,679      3.31      79,864       3,162     3.96     80,206   3,415       4.26
                                        --------    ------              --------     -------            --------  ------

     Total interest-bearing
       liabilities                       201,905     5,469      2.71%    183,205       6,162     3.36%   182,533   7,475       4.10%
                                                    ------                           -------                      ------

Non-interest-bearing liabilities          17,738                          15,275                           7,861
                                        --------                        --------                        --------
     Total liabilities                  $219,643                        $198,480                        $190,394
Stockholders' equity                      18,045                          17,196                          15,817
                                        --------                        --------                        --------
     Total liabilities and
       stockholders' equity             $237,688                        $215,676                        $206,211
                                        ========                        ========                        ========

Net interest income                                 $6,646                           $ 6,581
                                                    ======                           =======
                                                                                                                  $6,029
                                                                                                                  ======

Interest rate spread (4)                                        2.59%                            2.81%                         2.69%
Net interest margin (5)                                         2.93%                            3.19%                         3.03%
Ratio of average interest-earning assets
  to average interest-bearing liabilities                       1.12x                            1.13x                         1.09x
</TABLE>

--------------------
(1)  Average balances include non-accrual loans.
(2)  Includes interest-bearing deposits in other financial institutions.
(3)  Other liabilities  include FHLB advances,  repurchase  agreements and other
     secured borrowings.
(4)  Interest-rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(5)  Net  interest  margin  represents  net interest  income as a percentage  of
     average interest earning assets.


<PAGE>

Rate/Volume Analysis

  The table below sets forth certain  information  regarding changes in interest
  income and interest expense of the Company for the periods indicated. For each
  category  of  interest-earning   assets  and   interest-bearing   liabilities,
  information  is  provided  on changes  attributable  to: (i) changes in volume
  (changes in average  volume  multiplied  by old rate);  (ii)  changes in rates
  (changes in rate multiplied by old average volume);  and (iii) changes in rate
  (volume changes in rate multiplied by the change in average volume).

<TABLE>
<CAPTION>
                                               Year ended June 30,                       Year ended June 30,
                                                  2004 vs. 2003                            2003 vs. 2002
                                               Increase (Decrease)                       Increase (Decrease)
                                                    Due to                                    Due to
                                      -------------------------------------     ---------------------------------------
                                                           Rate/                                       Rate/
                                      Volume     Rate      Volume       Net      Volume      Rate      Volume       Net
                                      ------     ----      ------       ---      ------      ----      ------       ---
                                                 (In thousands)                              (In thousands)
<S>                                 <C>       <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest income
  Loans receivable                   $   766   $(1,043)   $   (74)   $  (351)   $   696    $  (677)   $   (53)   $   (34)
  Mortgage-backed securities and
     investment securities               397      (530)       (93)      (226)         1       (716)         3       (712)
  Other interest-earning  assets           1       (51)        (1)       (51)         9        (23)        (1)       (15)
                                     -------   -------    -------    -------    -------    -------    -------    -------

     Total interest-earning assets     1,164    (1,624)      (168)      (628)       706     (1,416)       (51)      (761)
                                     -------   -------    -------    -------    -------    -------    -------    -------

  Interest expense
    Transaction accounts                  15       (42)        (9)       (36)         7        (15)        (2)       (10)
    Savings accounts                      15       (11)        (3)         1        (17)        28         (8)         3
    Money markets                         15       (34)        (5)       (24)        15        (46)        (4)       (35)
    Certificates of deposit              452      (517)       (86)      (151)        88     (1,079)       (22)    (1,013)
    Other liabilities                     47      (519)       (11)      (483)        68       (315)        (6)      (253)
                                     -------   -------    -------    -------    -------    -------    -------    -------
     Total  interest-bearing
       liabilities                       544    (1,123)      (114)      (693)       161     (1,427)       (42)    (1,308)
                                     -------   -------    -------    -------    -------    -------    -------    -------

  Net change in interest income      $   620   $  (501)   $   (54)   $    65    $   545    $    11    $    (9)   $   547
                                     =======   =======    =======    =======    =======    =======    =======    =======
</TABLE>


Selected Operating Ratios:

                                                         Year Ended June 30,
                                                     ---------------------------
                                                      2004       2003      2002
                                                     ------     ------    ------

Return on average assets...........................   0.57%      0.78%     0.89%
Return on average equity...........................   7.48       9.84     10.19
Average equity to average assets...................   7.59       7.97      7.67
Dividend payout ratio..............................  41.18      29.22     27.84

                                       27

<PAGE>

Financial Condition

         General.  The Company's total assets increased $2,132,000, or 0.93%, to
$232,087,000 at June 30, 2004 from  $229,955,000 at June 30, 2003. This increase
was  primarily  the result of a $6,166,000  increase in the  Company's  net loan
portfolio,  an  increase  in cash and due from  banks of  $1,055,000,  partially
offset by a  $6,874,000  decrease in the  Company's  security  portfolio.  Other
contributing  factors include increases in interest bearing deposits with banks,
prepaid assets, loans held for sale, deferred tax asset,  premises and equipment
and other assets.

         Loans receivable, net, increased $6,166,000 to $152,430,000 at June 30,
2004 from $146,264,000 at June 30, 2003. The increase in loans receivable,  net,
was primarily the result of increases of  $12,882,000  in loans secured by other
real estate  properties and $2,381,000 in commercial  business loans,  partially
offset by decreases of $3,800,000  in loans on  one-to-four  family  residences,
$2,666,000 in construction loans,  $2,420,000 in loan participations  purchased,
and $201,000 in consumer loans.

         The  $6,874,000  decrease  in  the  Company's  security  portfolio  was
primarily   the  result  of  a   $7,837,000   decrease   in   available-for-sale
mortgage-backed   securities  and  a  $277,000   decrease  in   held-to-maturity
securities  partially  offset by a  $1,240,000  increase  in  available-for-sale
investment  securities.  The  decreases in  available-for-sale  mortgage  backed
securities and held-to-maturity  securities is primarily the result of principal
payments   received   and   a   decrease   in   purchases.   The   increase   in
available-for-sale  investment securities in primarily the result of an increase
in purchases of collateralized mortgage obligations.

         At  June  30,  2004,   total   liabilities   increased   $1,745,000  to
$213,955,000  from  $212,210,000  at  June  30,  2003.  The  increase  in  total
liabilities was primarily attributable to an increase in deposits of $4,100,000,
an increase in other  secured  borrowings of  $1,157,000  partially  offset by a
$2,990,000 decrease in advances from the Federal Home Loan Bank.

         The  increase in  deposits  was  primarily  the result of growth in the
Company's Transaction and NOW accounts and Savings deposits offset by a decrease
in Time  deposits.  Transactions  and NOW  accounts  increased  $4,050,000  from
$24,938,000  to  $28,988,000  and Savings  deposits  increased  $4,237,000  from
$17,265,000 to $21,502,000.  The increase is primarily due to an increase in the
Farmington  Branch's  deposit volume.  Time deposits  decreased  $4,187,000 from
$87,557,000  to $83,370,000  primarily due to a $5,000,000  decrease in brokered
accounts. Funds from the growth of deposits were used to repay Federal Home Loan
Bank advances.  The increase in other secured borrowings was primarily due to an
increase in participation loans sold under agreements to purchase.

         The  Company  offers its  corporate  customers  an  investment  product
fashioned  in the  form  of a  repurchase  agreement.  Under  the  terms  of the
agreement,  deposits in  designated  demand  accounts of the customers are swept
daily into an investment  vehicle,  through which the funds are used to purchase
an interest in designated marketable  securities.  The Company in turn agrees to
repurchase  these  investments  on a daily basis,  paying the customer the daily
interest  earned based on current  market  rates.  At June 30, 2004,  repurchase
agreements  totaled  $157,000,  a decrease of $428,000 from $585,000 at June 30,
2003.

         Total  stockholders'  equity at June 30,  2004  increased  $388,000  to
$18,132,000  from  $17,744,000 at June 30, 2003.  The increase in  stockholders'
equity  reflects  net income of  $1,350,000,  plus minor  changes in  additional
paid-in-capital  and unearned ESOP stock for the year ended June 30, 2004,  less
dividends  paid  to  stockholders  of  $543,000.  Other  comprehensive  earnings
decreased $733,000 due to unrealized investment losses, net of tax benefit.

                                       28

<PAGE>

Comparison of Operating Results for Years Ended June 30, 2004 and 2003

         General.  Net earnings decreased $340,000 or 20.1% to $1,350,000 ($1.14
per diluted share) for the year ended June 30, 2004 from  $1,690,000  ($1.46 per
diluted  share) for the year ended June 30,  2004.  The decrease in net earnings
was primarily the result of a $260,000  increase in  non-interest  expense and a
$517,000  increase in the  provision  for loan  losses,  partially  offset by an
increase  in net  interest  earnings of  $65,000,  an  increase in  non-interest
earnings of $244,000 and a $128,000 decrease in income tax expense.

         Interest Earnings.  Total interest earnings totaled $12,115,000 for the
year ended June 30, 2004, a decrease of $628,000  from the  $12,743,000  for the
year ended June 30, 2003. The decrease is primarily due to a decline in rates on
the Bank's lending and investment  activities.  Please refer to "Average Balance
Sheets" for an analysis  of the change in interest  earnings  for the year ended
June 30, 2004 compared to the same period in 2003.

         Interest  Expense.  Total  interest  expense  decreased  $693,000  from
$6,162,000  for the year ended June 30,  2003 to  $5,469,000  for the year ended
June 30,  2004,  primarily  due to a decline  in rates on time  deposits,  money
market deposits and FHLB  borrowings.  Please refer to "Average  Balance Sheets"
for an analysis of the change in interest  earnings  for the year ended June 30,
2004 compared to the same period in 2003.

         Provision for Losses on Loans.  The Company  maintains an allowance for
loan losses based upon  management's  periodic  evaluation of known and inherent
risks in the loan portfolio,  past loss experience,  adverse situations that may
affect the borrower's ability to repay loans,  estimated value of the underlying
collateral and current and expected  market  conditions.  The provision for loan
losses was  $969,000  and  $452,000  for the years ended June 30, 2004 and 2003,
respectively.  The increase in the  provisions for loan losses was primarily the
result of an increase in classified  loans,  an increase in charge-offs and loan
growth in commercial business loans and commercial real estate loans, which tend
to have greater credit risk than  residential real estate loans. The increase in
classified loans is primarily attributable to two loans, each with unique credit
quality concerns.

         Non-Interest   Earnings.   Total  non-interest  earnings  increased  by
$244,000 or 39.2% to $867,000 for the year ended June 30, 2004 from $623,000 for
the year ended June 30, 2003.  This increase was primarily due to an increase in
service  charge  income of $263,000 and an increase in  miscellaneous  income of
$44,000,  partially  offset by a  decrease  in net gains  from sales of loans of
$62,000.  The increase in miscellaneous  income is primarily due to gains on the
sale of other real  estate  owned.  The  increase  in service  charge  income is
primarily  due to  increased  insufficient  funds  charges  collected on NOW and
checking accounts because of increased volume of insufficient funds checks.

         Non-Interest Expense.  Total non-interest expense increased $260,000 or
5.9% to $4,631,000 for the year ended June 30, 2004 from $4,371,000 for the year
ended  June 30,  2003.  The  increase  in  non-interest  expense  was  primarily
attributable to increases in professional fees,  compensation and benefits, data
processing, ATM expense, postage and other operating expenses,  partially offset
by a decrease in stationary,  printing and office supplies. The $82,000 increase
in  professional  fees is  primarily  attributable  to  $52,000  in fees paid to
consultants  for  strategic  planning  services and a $30,000  increase in legal
fees, audit expense and accounting fees largely due to the Company's  efforts to
comply with  requirements  of the  Sarbanes-Oxley  Act. The $72,000  increase in
compensation  and benefits is primarily  attributable  to a $74,000  increase in
general  salaries and benefits  due to the hiring of two  additional  employees,
general  salary  increases and an increase in retirement  benefits  expenses,  a
$44,000 increase in expense associated with employee stock  compensation  plans,
and an increase of $21,000 in  director's  fees,  partially  offset by a $68,000
reduction  in  performance  bonus  accruals,  due  to  operating  results  below
expectations for the Company during the six months ended June 30, 2004. Data

                                       29

<PAGE>

processing  expense  increased  $38,000,  primarily due to increases in expenses
resulting from the processing  cost  associated with the growth in the volume of
deposit accounts,  statement  processing,  servicing for the online home banking
system and an  increase  in the number of  transactions  processed.  ATM expense
increased  $25,000,  primarily  due to the  installation  and  operation  of one
additional ATM and  transaction  volume  increases.  Postage  expense  increased
$19,000 due to the  mailing  costs  associated  with the growth in the volume of
deposit accounts and statement  processing.  Other operating  expenses increased
$31,000, primarily due to increases in charitable contributions, armored transit
expense,  supervisory exam fees, correspondent bank expense and franchise taxes.
Stationary,  printing and office supplies decreased $32,000, since a substantial
portion of such  expenses the previous  year were  attributable  to the start-up
costs during the first year of operation of the Farmington branch.

         Income Tax Expense. Income tax expense decreased $128,000 or 18.5% from
$691,000  for the year ended June 30, 2003 to  $563,000  for the year ended June
30, 2004. The decrease was primarily due to the recognition of certain permanent
tax differences.

Off-Balance Sheet Arrangements

         At  June 30, 2004, the Company was not party to any  off-balance  sheet
arrangements  that  are  reasonably  likely  to have a  material  effect  on our
financial condition, results of operations or cash flows.

Liquidity and Capital Resources

         The  Company's  primary  sources  of funds  are  deposits,  borrowings,
amortization and prepayment of loans and mortgage-backed securities,  maturities
of investment  securities,  and funds provided from operations.  While scheduled
loan repayments are a relatively  predictable source of funds, deposit flows and
loan and mortgage-backed  security  prepayments are significantly  influenced by
general interest rates, economic conditions,  and competition.  In addition, the
Company invests excess funds in overnight  deposits,  which provide liquidity to
meet lending requirements and deposit fluctuations.

         The Bank's  most  liquid  assets are cash and cash  equivalents,  which
include investments in highly liquid short-term investments.  The level of these
assets  is  dependent  on the  Company's  operating,  financing,  and  investing
activities  during any given period. At June 30, 2004, cash and cash equivalents
totaled $8,707,000. The Bank has an additional source of liquidity if a need for
additional funds should arise, that being FHLB of Dallas advances. The Bank also
has the ability to borrow against mortgage-backed and other securities.  At June
30,  2004,  the Bank had  outstanding  borrowings  from  the FHLB of  Dallas  of
$73,652,000.  Some of these  outstanding  borrowings were used to fund loans and
purchase additional investment securities.

         The  primary  investment  activity  of the Bank is the  origination  of
loans;  primarily mortgage loans.  During the year ended June 30, 2004, the Bank
originated $67,877,000 in total loans (including loan participations purchased),
of which  $47,046,000 were mortgage loans.  Another  investment  activity of the
Bank  is  the  investment  of  funds  in  U.S.   Government  agency  securities,
mortgage-backed   securities,   collateralized  mortgage  obligations,   readily
marketable  equity  securities,  municipal  bonds,  and FHLB of Dallas overnight
funds.  During  periods  when the Bank's loan  demand is  limited,  the Bank may
purchase  short-term  investment  securities  to  obtain  a  higher  yield  than
otherwise available.

         The   Company's   cash   flows   are   comprised   of   three   primary
classifications:  cash flows from operating activities, investing activities and
financing  activities.   Cash  flows  from  operating   activities,   consisting
principally of net earnings,  provision for loan losses depreciation of premises
and  equipment,   amortization  of  investment  and  mortgage-backed  securities
premiums,  stock based  compensation  costs and net changes in various operating

                                       30

<PAGE>

assets and  liabilities  less deferred loan  origination  fees,  gain on sale of
loans and securities,  stock dividend on FHLB stock and (benefit)  provision for
deferred  income taxes,  were $1,930,000 and $2,038,000 for the years ended June
30,  2004 and  2003,  respectively.  Net  cash  used  for  investing  activities
consisting  primarily of loan  origination  and  principal  repayments on loans,
change in secured borrowings and purchases of securities offset by proceeds from
the sale of loans,  principal payments on securities and maturities and proceeds
from sale of securities  were $785,000 and  $18,843,000 for the years ended June
30, 2004 and 2003,  respectively.  Net cash provided from  financing  activities
consisting  primarily  of net  activity  in  deposit  and  escrow  accounts  and
repurchase  agreements,  proceeds and repayments of FHLB advances and payment of
dividends,  were $309,000 and  $18,406,000 for the years ended June 30, 2004 and
2003, respectively.

         The Bank  anticipates  that it will have sufficient  funds available to
meet its current  commitments.  As of June 30, 2004, the Bank had commitments to
fund loans of  $19,292,000.  The Bank has  sufficient  collateral  available  to
provide for approximately $37,381,000 in additional FHLB advances.  Certificates
of deposit scheduled to mature in one year or less totaled $51,506,000. Based on
historical  withdrawals  and outflows,  and on internal  monthly deposit reports
monitored by  management,  management  believes that a majority of deposits will
remain with the Bank. As a result, no adverse liquidity effects are expected.

Item 7.   Financial Statements
-------   --------------------

              The Company's  financial  statements  are contained in this Annual
Report on Form 10-KSB immediately following Item 14.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
--------  ----------------------------------------------------------------------
          Financial Disclosure
          --------------------

          Not Applicable.

Item 8A.  Controls and Procedures
--------  -----------------------

         (a) Evaluation of disclosure  controls and  procedures.  Based on their
             --------------------------------------------------
evaluation of the Company's  disclosure  controls and  procedures (as defined in
Rule 13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange  Act"))
the Company's  principal  executive officer and principal financial officer have
concluded that as of the end of the period covered by this Annual Report on Form
10-KSB such  disclosure  controls and  procedures  are  effective to ensure that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.

         (b) Changes in internal  control over financial  reporting.  During the
             ------------------------------------------------------
last  quarter  of the  fiscal  year  under  report,  there  was no change in the
Company's  internal  control  over  financial   reporting  that  has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.

Item 8B.  Other Information.
--------  ------------------

          Not applicable.

                                       31

<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
------- ------------------------------------------------------------------------
        with Section 16(a) of the Exchange Act
        --------------------------------------

         The  information  required  under this item is  incorporated  herein by
reference  to the  Proxy  Statement  for the 2004  Annual  Meeting  (the  "Proxy
Statement")  contained under the sections  captioned  "Section 16(a)  Beneficial
Ownership  Reporting  Compliance,"  "Proposal I - Election of Directors," and "-
Biographical Information."

         The Company has adopted a Code of Ethics that applies to its  principal
executive officer,  principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Company's Code
of Ethics will be provided to any person without charge upon written  request to
Jerry R. Spurlin,  Chief Financial Officer,  GFSB Bancorp,  Inc., 221 West Aztec
Avenue, Gallup, New Mexico 87301.

Item 10.  Executive Compensation
--------  ----------------------

         The  information  required by this item is incorporated by reference to
the  Proxy  Statement  contained  under  the  section  captioned  "Director  and
Executive Officer Compensation."

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
-------   ----------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

(a)      Security Ownership of Certain Beneficial Owners
(b)      Security Ownership of Management

         The information required by items (a) and (b) is incorporated herein by
reference  to  the  Proxy  Statement  contained  under  the  sections  captioned
"Principal Holders" and "Proposal I - Election of Directors."

(c) Changes in Control.  On August 25, 2004,  the Company  announced that it had
signed a definitive  merger  agreement with First Federal Banc of the Southwest,
Inc. ("FFBSW"), the holding company for First Federal Bank, Roswell, New Mexico,
pursuant to which the Company will merge with and into FFBSW.

         Under the terms of the agreement,  upon  consummation  of the merger of
the Company into FFBSW,  each  outstanding  share of the Company's  common stock
will be  converted  into the  right to  receive  either  $20.00 in cash or FFBSW
common stock, at the election of the holder,  subject to an overall  requirement
that 51% of the Company's total outstanding common stock be exchanged for stock.
The transaction is subject to various conditions, including stockholder approval
of both the Company and FFBSW, and approval by the applicable banking regulatory
agencies.

         Pursuant  to the terms of the  merger  agreement,  FFBSW has  agreed to
register  FFBSW's common stock under the Securities  Exchange Act of 1934 and it
will file reports with the Securities and Exchange Commission. In addition, upon
the  completion  of the  merger,  its  shares are  expected  to be listed on the
NASDAQ.

         Management of the Company knows of no other arrangements, including any
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.

                                       32

<PAGE>

(d)  Securities Authorized for Issuance Under Equity Compensation Plans

         Set forth  below is  information  as of June 30,  2004 with  respect to
compensation  plans under which equity  securities of the Company are authorized
for issuance.

<TABLE>
<CAPTION>
                                         EQUITY COMPENSATION PLAN INFORMATION
                                                   (a)                    (b)                      (c)
                                                                                            Number of securities
                                          Number of securities     Weighted-average        remaining available for
                                            to be issued upon      exercise price of    future issuance under equity
                                               exercise of            outstanding       compensation plans (excluding
                                          outstanding options,     options, warrants       securities reflected in
                                          warrants and rights         and rights                 column (a))
                                          -------------------         ----------                 -----------
<S>                                            <C>                   <C>                          <C>
Equity compensation plans approved by
shareholder:
    1995 Stock Option Plan.............           88,349                $ 8.48                       58,680
    Management Stock
         Bonus Plan....................            5,135                    --                       20,077
    2000 Stock Option Plan.............               --                   N/A                       58,500
Equity compensation plans
not approved by shareholders:
    Directors Stock
         Compensation Plan(1)..........           11,946                 11.00                           --
                                                 -------                ------                      -------
     TOTAL                                       105,430                $ 8.35                      137,257
                                                 =======                ======                      =======
</TABLE>

---------------
(1)  Plan approved by the Company's board of directors on March 22, 2000.

Item 12.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference to the Proxy Statement  contained under the section captioned "Certain
Relationships and Related Transactions."

Item 13.  Exhibits
--------  --------

       The  following  exhibits are included in this Report or are  incorporated
herein by reference.

     2.1    Agreement and Plan of Merger, dated as of August 25, 2004, between
              GFSB Bancorp, Inc. and First Federal Banc of the Southwest, Inc.*
     3.1    Certificate of Incorporation of GFSB Bancorp, Inc.**
     3.2    Bylaws of GFSB Bancorp, Inc.**
     10.1+  1995 Stock Option Plan***
     10.2+  Management Stock Bonus Plan***
     10.3+  Form of Directors Deferred Compensation Agreement between the Bank
              and Directors****

                                       33

<PAGE>

     10.4+  Form of Directors Stock Compensation Plan between the Company and
              Directors of the Company****
     10.5+  2000 Stock Option Plan*****
     10.6+  Change-in-Control Severance Agreement with Richard P. Gallegos
     10.7+  Change-in-Control Severance Agreement with Jerry R. Spurlin
     10.8+  Change-in-Control Severance Agreement with William W. Head, Jr.
     10.9+  Change-in-Control Severance Agreement with Leonard C. Salzi
     21     Subsidiaries of the Company (See "Item 1 - Description of Business")
     23     Consent of Neff + Ricci LLP
     31.1   Rule 13a-14(a)/15d-14(a) Certification
     31.2   Rule 13a-14(a)/15d-14(a) Certification
     32     Section 1350 Certification


--------------
+      Management contract or compensatory plan or arrangement.
*      Incorporated  herein by reference to the identically  numbered exhibit to
       the current report on Form 8-K filed with the SEC on August 26, 2004.
**     Incorporated  herein by reference to the  Registration  Statement on Form
       S-1  of  the  Company  (File  No.  33-90400)  initially  filed  with  the
       Commission on March 17, 1995.
***    Incorporated  by reference to the  identically  numbered  exhibits of the
       Annual  Report on Form  10-KSB  for the fiscal  year ended June 30,  1997
       (File No. 0-25854) filed with the SEC.
****   Incorporated  by reference to the  identically  numbered  exhibits of the
       Quarterly  Report on Form  10-QSB for the  quarter  ended  March 31, 2001
       filed with the SEC.
*****  Incorporated by reference to Exhibit 4.1 to the Registration Statement on
       Form S-8 (File No. 333-51498) filed with the SEC on December 8, 2000.

Item 14.   Principal Accountant Fees and Services

         The   information  set  forth  under  the  caption   "Ratification   of
Independent   Auditors"  in  the  Proxy  Statement  is  incorporated  herein  by
reference.

<PAGE>

                               GFSB BANCORP, INC.




CONSOLIDATED FINANCIAL STATEMENTS

         Consolidated Statements of Financial Condition....................F-2

         Consolidated Statements of Earnings and
         Comprehensive Earnings............................................F-4

         Consolidated Statements of Changes in Stockholders' Equity........F-6

         Consolidated Statements of Cash Flows.............................F-8

         Notes to Consolidated Financial Statements........................F-10

<PAGE>

                         [NEFF + RICCI LLP LETTERHEAD]



             Report of Independent Registered Public Accounting Firm


Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico


We have audited the accompanying  consolidated statements of financial condition
of GFSB Bancorp,  Inc. (a Delaware  corporation)  and  Subsidiary as of June 30,
2004  and  2003,  and  the  related  consolidated  statements  of  earnings  and
comprehensive earnings,  changes in stockholders' equity, and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of GFSB Bancorp,  Inc.
and Subsidiary as of June 30, 2004 and 2003, and the results of their operations
and their cash flows for the years then ended,  in  conformity  with  accounting
principles generally accepted in the United States of America.

/s/Neff + Ricci LLP

Albuquerque, New Mexico
July 30, 2004, except for note 19, as to which the date is August 25, 2004.

                                      F-1

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2004 and 2003


<TABLE>
<CAPTION>
ASSETS
                                                            2004           2003

<S>                                                  <C>            <C>
Cash and due from banks                                $  7,840,712      6,785,410
Interest-bearing deposits with banks                        866,281        466,948
Available-for-sale investment securities                 30,518,828     29,279,417
Available-for-sale mortgage-backed securities            30,680,195     38,517,103
Held-to-maturity investment securities                      398,999        675,997
Stock of Federal Home Loan Bank, at cost, restricted      4,409,200      4,332,800
Loans receivable, net, substantially pledged            152,430,322    146,264,291
Loans held-for-sale                                         411,400        132,000
Accrued interest and dividends receivable                   859,298        844,722
Premises and equipment                                    2,513,992      2,313,815
Prepaid and other assets                                    883,058        342,150
Deferred tax asset                                          275,125             --
                                                       ---------------------------

           Total assets                                $232,087,410    229,954,653
                                                       ===========================
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-2
<PAGE>

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                         2004             2003

<S>                                                                <C>                 <C>
     Transaction and NOW accounts                                  $  28,987,811       24,937,782
     Savings deposits                                                 21,501,954       17,264,978
     Time deposits                                                    83,369,991       87,556,558
     Advances from the Federal Home Loan Bank                         73,652,218       76,641,834
     Other secured borrowings                                          4,814,763        3,657,911
     Repurchase agreements                                               157,119          584,902
     Accrued interest payable                                            460,520          515,872
     Advances from borrowers for taxes and insurance                     499,998          365,193
     Accounts payable and accrued liabilities                            369,595          250,015
     Deferred tax liability                                                   --          312,796
     Dividends declared and payable                                      140,895          122,467
                                                                   ------------------------------

               Total liabilities                                     213,954,864      212,210,308
                                                                   ------------------------------

Commitments and Contingencies


Stockholders' Equity
     Preferred stock, $.10 par value, 500,000 shares authorized;
        no shares issued or outstanding                                       --               --
     Common stock, $.10 par value, 1,500,000 shares authorized;
        1,146,645 and 1,146,270 shares in 2004 and 2003,
        respectively, issued and outstanding                             114,665          114,627
     Additional paid-in capital                                        3,095,718        2,853,446
     Unearned ESOP stock                                                 (68,048)        (139,882)
     Retained earnings, substantially restricted                      14,440,118       13,633,421
     Accumulated other comprehensive earnings                            550,093        1,282,733
                                                                   ------------------------------

               Total stockholders' equity                             18,132,546       17,744,345
                                                                   ------------------------------

               Total liabilities and stockholders' equity          $ 232,087,410      229,954,653
                                                                   ==============================
</TABLE>

                                      F-3

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS
Years Ended June 30, 2004 and 2003

<TABLE>
<CAPTION>

                                                                2004            2003
Interest Earnings
<S>                                                      <C>                <C>
     Loans receivable
         Mortgage loans                                    $  7,610,021       7,972,501
         Commercial loans                                     1,402,333       1,332,818
         Share and consumer loans                               402,975         404,669
         Service fee income                                     557,229         613,825
     Investment and mortgage-backed securities                2,059,471       2,284,798
     Other interest-earning assets                               82,749         134,508
                                                           ----------------------------

                Total interest earnings                      12,114,778      12,743,119
                                                           ----------------------------

Interest Expense
     Deposits                                                 2,789,603       2,999,831
     Advances from Federal Home Loan Bank                     2,679,009       3,158,101
     Repurchase agreements                                          147           3,871
                                                           ----------------------------

                Total interest expense                        5,468,759       6,161,803
                                                           ----------------------------

                Net interest earnings                         6,646,019       6,581,316

Provision for Loan Losses                                       969,003         452,137
                                                           ----------------------------

                Net interest earnings after provision
                   for loan losses                            5,677,016       6,129,179
                                                           ----------------------------

Non-Interest Earnings
     Service charge income                                      697,875         434,514
     Miscellaneous income                                       102,554          58,971
     Gain from sale of loans                                     67,743         129,858
     Loss on sale of available-for-sale securities               (1,417)             --
                                                           ----------------------------

                Total non-interest earnings                     866,755         623,343
                                                           ----------------------------

Non-Interest Expense
     Compensation and benefits                                2,402,684       2,330,217
     Insurance and SAIF Premiums                                 74,950          70,254
     Stationery, printing, and office supplies                  117,722         155,937
     ATM expense                                                 78,916          53,569
     Supervisory exam fees                                       61,255          55,954
     Postage                                                     81,882          63,056
</TABLE>

See Notes to Consolidated Financial Statements

                                      F-4
<PAGE>

GFSB BANCORP, INC
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE EARNINGS (CONTINUED)
Years Ended June 30, 2004 and 2003

<TABLE>
<CAPTION>

                                                                2004            2003

<S>                                                      <C>                <C>
Non-Interest Expense - Continued
     Other                                                 $    430,118         399,610
     Occupancy                                                  553,695         545,599
     Data processing                                            375,481         337,845
     Professional fees                                          217,024         134,980
     Advertising                                                206,764         199,485
     Stock services                                              29,904          24,389
                                                           ----------------------------

                Total non-interest expense                    4,630,395       4,370,895
                                                           ----------------------------

Earnings before Income Taxes                                  1,913,376       2,381,627
                                                           ----------------------------

Income Tax Expense
     Currently payable                                          773,802         941,568
     Deferred benefit                                          (210,501)       (250,000)
                                                           ----------------------------

                Total income tax expense                        563,301         691,568
                                                           ----------------------------

                Net earnings                                  1,350,075       1,690,059

Other Comprehensive Earnings
     Unrealized investment losses, net of tax benefit of
         $377,420 in 2004 and $5,933 in 2003                   (732,640)        (11,515)
                                                           ----------------------------

                Net comprehensive earnings                 $    617,435       1,678,544
                                                           ============================


Basic Net Earnings per Share                                       1.20            1.52

Dilutive Net Earnings per Share                                    1.14            1.46

Weighted average number of common shares
     outstanding-basic                                        1,126,964       1,115,076
Weighted average number of common shares
     outstanding-dilutive                                     1,183,099       1,159,917
</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-5

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                Common Stock         Additional   Unearned                 Other
                                           ---------------------       Paid-in      ESOP       Retained Comprehensive
                                             Shares       Amount       Capital      Stock      Earnings    Earnings     Total
                                             ------       ------       -------      -----      --------    --------     -----

<S>                                      <C>         <C>          <C>           <C>        <C>          <C>       <C>
Balances, June 30, 2002                    1,150,106   $ 115,011    $ 2,761,251   (207,926)  12,420,358   1,294,248 $ 16,382,942
                                                                                                                    ------------

Comprehensive earnings
     Net earnings                                  -           -              -          -    1,690,059           -    1,690,059
     Unrealized gain on
       available-for-sale securities,
       net of taxes                                -           -              -          -            -     (11,515)     (11,515)
                                                                                                                    ------------

          Total comprehensive earnings                                                                                 1,678,544
                                                                                                                    ------------

Distribution of stock vested under the
     management stock bonus plan                   -           -         17,893          -            -           -       17,893
Stock issued upon exercise of
     stock options                             4,800         480         43,965                                           44,445
Expense incurred by the Company for
     stock purchased within six months
     of exercise of related options                -           -         34,264          -            -           -       34,264
Acquisition of common stock by the
     Company under the stock
     repurchase plan                          (8,636)       (864)      (142,423)         -            -           -     (143,287)
Released and committed to be released
     18,810.4264 shares of common
     stock owned by the ESOP                       -           -        138,496     68,044            -           -      206,540
Dividends declared and paid to
     stockholders                                  -           -              -          -     (476,996)          -     (476,996)
                                           ----------------------   -------------------------------------------------------------

Balances, June 30, 2003                    1,146,270     114,627      2,853,446   (139,882)  13,633,421   1,282,733   17,744,345
                                                                                                                    -------------

Comprehensive earnings
     Net earnings                                  -           -              -          -    1,350,075           -    1,350,075
     Unrealized gain on available for
       sale securities, net of taxes               -           -              -          -            -    (732,640)    (732,640)
                                                                                                                    -------------

          Total comprehensive earnings                                                                                   617,435
                                                                                                                    -------------

Distribution of stock vested under the
     management stock bonus plan                   -           -              -          -            -           -            -
Stock issued upon exercise of
     stock options                               375          38         34,860          -            -           -       34,898
Released and committed to be released
     20,176.9392 shares of common
     stock owned by the ESOP                       -           -        207,412     71,834            -           -      279,246
Dividends declared and paid to
     stockholders                                  -           -              -          -     (543,378)          -     (543,378)
                                           ----------------------   -------------------------------------------------------------

Balances, June 30, 2004                    1,146,645   $ 114,665    $ 3,095,718    (68,048)  14,440,118     550,093   18,132,546
                                           ======================   =============================================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                                                    F-6 and F-7

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2004 and 2003


<TABLE>
<CAPTION>
                                                                                2004               2003
<S>                                                                   <C>                 <C>
Cash Flows from Operating Activities
     Net earnings                                                       $     1,350,075          1,690,059
     Adjustments to reconcile net earnings to net cash
        provided by operations
            Deferred loan origination fees                                     (557,229)          (613,825)
            Gain on sale of loans and securities                                (66,326)          (129,858)
            Provision for loan losses                                           969,003            452,137
            Depreciation of premises and equipment                              293,990            296,831
            Amortization of investment and mortgage-backed
               securities premiums                                              420,863            224,230
            Stock dividend on FHLB stock                                        (76,400)          (114,300)
            Release of ESOP stock                                               279,246            206,540
            Stock compensation under management bonus stock plan                     --             17,893
            Stock compensation resulting from stock purchased by
               the Company within six months of exercise
               of related options                                                    --             34,264
            Benefit for deferred income taxes                                  (210,501)          (250,000)
     Net changes in operating assets and liabilities
            Accrued interest and dividends receivable                           (14,576)           228,479
            Prepaid and other assets                                           (208,410)           (68,737)
            Income taxes receivable                                            (332,498)            (1,168)
            Accrued interest payable                                            (55,352)            66,918
            Accounts payable and other accrued liabilities                      119,580            (13,287)
            Dividends declared and payable                                       18,428             11,961
                                                                        ----------------------------------

               Net cash provided by operating activities                      1,929,893          2,038,137
                                                                        ----------------------------------

Cash Flows from Investing Activities
     Purchase of premises and equipment                                        (494,167)           (99,473)
     Loan origination and principal repayment on loans, net                 (10,580,846)       (10,523,156)
     Change in secured borrowings                                             1,156,852           (275,222)
     Proceeds from the sale of loans                                          3,791,384          8,099,732
     Principal payments on mortgage-backed securities                        14,498,176         11,246,417
     Principal payments on available-for-sale securities                      2,906,236          6,214,437
     Principal payments on held-to-maturity securities                            6,998              4,000
     Purchases of mortgage-backed securities                                 (7,071,196)       (22,490,693)
     Purchases of available-for-sale securities                              (5,968,059)       (13,412,658)
     Purchases of held-to-maturity securities                                        --           (274,594)
     Maturities and proceeds from sale of available-for-sale
        securities                                                              700,000          1,668,000
     Maturities and proceeds from sale of available-for-sale
        mortgage-backed securities                                                   --                 --
     Maturities and proceeds from sale of held-to-maturity securities           270,000          1,000,000
                                                                        ----------------------------------

               Net cash used by investing activities                           (784,622)       (18,843,210)
                                                                        ----------------------------------
</TABLE>

See Notes to Consolidated Financial Statements

                                      F-8
<PAGE>

GFSB BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 2004 and 2003

<TABLE>
<CAPTION>

                                                                                   2004               2003
<S>                                                                   <C>                 <C>
Cash Flows from Financing Activities
     Net increase in transaction accounts, passbook savings,
        money market accounts, and certificates of deposit              $     4,100,438         19,409,843
     Repurchase agreements                                                     (427,783)          (649,955)
     Net increase (decrease) in mortgage escrow finds                           134,805            (51,382)
     Proceeds from FHLB advance                                           1,383,164,296        808,623,387
     Repayments on FHLB advances                                         (1,386,153,912)      (808,368,008)
     Purchase of GFSB Bancorp stock under the stock
        repurchase plan in cash                                                      --           (143,287)
     Dividends paid or to be paid in cash                                      (543,378)          (476,996)
     Proceeds from exercise of stock options                                     34,898             44,445
     Price paid for vested management bonus stock plan stock                         --             17,893
                                                                        ----------------------------------

               Net cash provided by financing activities                        309,364         18,405,940
                                                                        ----------------------------------

Increase in cash and cash equivalents                                         1,454,635          1,600,867

Cash and cash equivalents at beginning of year                                7,252,358          5,651,491
                                                                        ----------------------------------

Cash and cash equivalents at end of year                                $     8,706,993          7,252,358
                                                                        ==================================

Supplemental disclosures
     Cash paid during the year for
        Interest on deposits and advances                               $     5,524,111          6,091,015
        Income taxes                                                            743,501            943,200

     Change in market value, net of deferred taxes on
        available-for-sale securities (other comprehensive
        earnings)                                                              (732,640)           (11,515)

</TABLE>

See Notes to Consolidated Financial Statements.

                                      F-9
<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004


NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A  summary  of  significant  accounting  policies  consistently  applied  in the
preparation of the accompanying statements follows:

Organization and Operations. Effective June 29, 1995, Gallup Federal Savings and
Loan Association  (Association) converted from a federal mutual savings and loan
association  to a federal  stock  savings  bank with the  formation of a holding
company (GFSB Bancorp,  Inc.). The conversion was accomplished through amendment
of the  Association's  federal  charter  and the sale of the  Holding  Company's
common stock.  The  Association  also changed its name to Gallup Federal Savings
Bank (Bank).

GFSB  Bancorp,  Inc.  (Company) is a unitary  savings and loan  holding  company
incorporated  under the laws of the State of Delaware.  The Company acquired all
of the common  stock of the Bank on June 29, 1995 and the Company  also made its
initial public offering of common stock.

Basis  of  Presentation.  The  accompanying  consolidated  financial  statements
include the accounts of the Company and the Bank. All  significant  balances and
transactions between entities have been eliminated.

Cash and Cash Equivalents.  Cash and cash equivalents include cash on hand, cash
items,  amounts due from banks,  amounts  held with the  Federal  Reserve  Bank,
interest  bearing  deposits with the Federal Home Loan Bank,  and time deposits.
For purposes of the statements of cash flows,  the Company  considers all highly
liquid debt instruments  with original  maturities of three months or less to be
cash equivalents. The amounts in each of these above categories are as follows:

                                                  2004        2003

Cash on hand                                  $3,328,677    2,522,184
Cash items                                        18,838       (6,340)
Amounts due from banks                         4,125,108    3,614,410
Interest bearing deposits                        866,281      268,948
Time deposits                                         --      198,000
Federal Reserve Bank deposits                    368,089      655,156
                                              -----------------------

Total cash and cash equivalents               $8,706,993    7,252,358
                                              =======================

The amounts due from banks includes $85,050 and $78,250 for the years ended June
30, 2004 and 2003, respectively,  held in trust by the Company for the employees
awarded  stock under the  Management  Stock Bonus  Plan.  The amount  represents
dividends earned on non-vested shares.

                                      F-10

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004


NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Available-for-Sale  Investment  Securities.  All  available-for-sale  investment
securities  are stated at fair value.  The Company has recorded a net unrealized
gain,  net of  deferred  income  taxes,  as  accumulated  comprehensive  income.
Realized  gains and losses on the sale of investment  securities  are determined
using the specific identification method when such sales occur. The amortization
of premiums and accretion of discounts are  recognized in interest  income using
methods approximating the interest method over the period of maturity.

Available-for-Sale  Mortgage-Backed Securities. All mortgaged-backed and related
securities  are stated at fair value.  The Company has recorded a net unrealized
gain,  net of  deferred  income  taxes,  as  accumulated  comprehensive  income.
Realized  gains  and  losses  on the  sale  of  mortgage-backed  securities  are
determined using the specific  identification  method when such sales occur. All
sales are made without  recourse.  The amortization of premiums and accretion of
discounts are  recognized in interest  income using  methods  approximating  the
interest method over the remaining period of maturity.

Held-to-Maturity  Securities.  Government,  Federal  agency,  and corporate debt
securities  that  management  has the  positive  intent  and  ability to hold to
maturity  are  reported at cost,  adjusted  for  amortization  of  premiums  and
accretion of discounts  that are  recognized  in interest  income using  methods
approximating   the   interest   method  over  the  period  to   maturity.   All
held-to-maturity securities are recorded at amortized cost.

Loans Receivable. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at unpaid
principal  balances,  less the allowance for loan losses,  and net deferred loan
origination fees and discounts.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs  (net  of  recoveries).  Management's  periodic  evaluation  of  the
adequacy  of the  allowance  is based on past  loan loss  experience,  known and
inherent  risks  in the  portfolio,  adverse  situations  that  may  affect  the
borrower's ability to repay, estimated value of any underlying  collateral,  and
current economic conditions.

An impaired  loan can be valued based upon its fair value or the market value of
the underlying  collateral if the loan is primarily  collateral  dependent.  The
Company  assesses  for  impairment  all  loans  delinquent  more  than 90  days.
Uncollectible  interest on loans that are contractually past due is charged off,
or  an  allowance  account  is  established   based  on  management's   periodic
evaluation. The allowance is established by a charge to

                                      F-11

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004


NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

interest  income  equal  to all  interest  previously  accrued,  and  income  is
subsequently recognized only to the extent cash payments are received, until, in
management's  judgment,  the borrower's  ability to make periodic  principal and
interest  payments  is back to  normal,  in which case the loan is  returned  to
accrual status.

Transfers of Financial  Assets.  The Company accounts for transfers of financial
assets by recognizing  the financial  assets it controls and the  liabilities it
has incurred,  derecognizes  financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The statement also distinguishes
transfers of financial  assets that are sales from transfers of financial assets
that are secured borrowings.

Loans  Held-For-Sale.  Loans  held-for-sale  are those loans the Company has the
intent to sell in the foreseeable future. Loans held-for-sale are carried at the
lower of aggregate cost or market value.  Gains and losses on sales of loans are
recognized at settlement  dates and are  determined  by the  difference  between
sales proceeds and carrying value of the loans.

Mortgage loans sold to others are not included in the accompanying statements of
financial condition.  For the years ended June 30, 2004 and 2003, $3,791,384 and
$8,099,732,  respectively,  of loans have been sold.  No  servicing  rights were
retained  on these  loans.  Gains on the sale of these  loans were  $67,743  and
$129,858 for the years ended June 30, 2004 and 2003, respectively.

Loan  Origination  Fees and Related  Costs.  Loan fees and  certain  direct loan
origination  costs are deferred,  and the net fee is recognized as an adjustment
to interest income using the interest  method over the  contractual  life of the
loans.  Historical prepayment experience for the Company is minimal for purposes
of adjusting the contractual life of the loans.

Foreclosed Real Estate.  Real estate properties acquired through, or in lieu of,
loan  foreclosure  are  initially   recorded  at  fair  value  at  the  date  of
foreclosure. The Company generally holds foreclosed assets as held for sale, and
accordingly,  after  foreclosure,  such  assets are carried at the lower of fair
value  minus  estimated  costs to sell,  or cost.  Valuations  are  periodically
performed by management,  and an allowance for losses is established by a charge
to operations if the fair value of a property does not exceed its cost.

                                      F-12

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Premises  and  Equipment.   Land  is  carried  at  cost.  Building,   furniture,
improvements,  fixtures,  and  equipment are carried at cost,  less  accumulated
depreciation.  Maintenance  and  repairs  are  charged to earnings in the period
incurred.  Building,  improvements,   furniture,  fixtures,  and  equipment  are
depreciated  using a straight-line  method over the following  estimated  useful
lives of the assets:

    Buildings                                       40 years
    Furniture, fixtures and equipment           5 - 10 years
    Parking lot improvements                         5 years
    Leasehold improvements                      5 - 10 years

Income Taxes. Deferred income taxes are provided on temporary differences in the
recognition of income and expense for tax and financial reporting purposes.

Deferred  tax assets and  liabilities  are  determined  based on the  difference
between  the  financial  statement  and tax bases of assets and  liabilities  as
measured by the enacted tax rates that will be in effect when these  differences
reverse.  As changes in tax laws or rates are  enacted,  deferred tax assets and
liabilities are adjusted through the provision for income taxes in the period of
enactment.

Earnings Per Share.  Earnings  per share have been  computed on the basis of the
weighted  average number of shares of common stock and common stock  equivalents
outstanding  for the year. The Company  accounts for the shares  acquired by its
ESOP in accordance  with  Statement of Position 93-6;  shares  controlled by the
ESOP are not  considered in the weighted  average  number of shares  outstanding
until the  shares are  committed  for  allocation  to an  employee's  individual
account.

Fair Value of Financial Instruments.  The following methods and assumptions were
used by the  Company in  estimating  fair  values of  financial  instruments  as
disclosed herein:

               Cash and cash equivalents. - The carrying amount of cash and cash
               equivalents approximate their fair value.

               Available-for-sale and held-to-maturity securities. - Fair values
               for securities are based on quoted market prices.

               Loans  receivable.   -  For  variable-rate   loans  that  reprice
               frequently  and have no significant  change in credit risk,  fair
               values are based on  carrying  values.  Fair  values for  certain
               mortgage loans are based on quoted market prices of similar loans
               sold in conjunction with securitization transactions. Fair values

                                      F-13

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004


NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

               for  commercial  real estate and  commercial  loans are estimated
               using  discounted  cash  flow  analyses,   using  interest  rates
               currently being offered for loans with similar terms to borrowers
               of similar  credit  quality.  Fair values for impaired  loans are
               estimated  using  discounted  cash flow  analyses  or  underlying
               collateral values, where applicable.

               Deposit  liabilities.  - The fair  values  disclosed  for  demand
               deposits  are,  by  definition,  materially  equal to the  amount
               payable on demand at the reporting  date (that is, their carrying
               amounts).   The  carrying  amounts  of  fixed-term  money  market
               accounts  approximate  their fair values at the  reporting  date.
               Fair values for fixed-rate certificates of deposits are estimated
               using a discounted cash flow  calculation  that applies  interest
               rates  currently  being offered on  certificates to a schedule of
               aggregated expected monthly maturities on time deposits.

               Short-term  borrowings.  - The  carrying  amounts  of  short-term
               borrowings   approximate   their  fair  values   given  that  the
               borrowings are at the Bank's current incremental borrowing rate.

               Off-balance    sheet    instruments.    -   Fair    values    for
               off-balance-sheet lending commitments are based on fees currently
               charged to enter into similar agreements, taking into account the
               remaining terms of the agreements and the counter parties' credit
               standings.

Financial  Instruments.  In the  ordinary  course of  business  the  Company has
entered into off-balance sheet financial  instruments  consisting of commitments
to extend credit and commercial  letters of credit.  Such financial  instruments
are recorded in the  financial  statements  when they are funded or related fees
are incurred or received.

Estimates. The preparation of financial statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management  to make  estimates  and  assumptions  that effect  certain  reported
amounts and  disclosures.  Accordingly,  actual  results could differ from those
estimates.

A substantial  estimate for the Company is the  allowance for loan losses.  This
estimate could change substantially within a year if borrowers' ability to repay
or the estimated value of underlying collateral should decline dramatically.

                                      F-14

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004


NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Stock Options. The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. No compensation  cost has been recognized
for its stock option  plans.  Had  compensation  cost for the stock option plans
been  determined  based on the fair  value  method of FASB  Statement  123,  the
Company's  net  income and  earnings  per share  would have been  reduced to the
pro-forma amounts indicated below:

                                                           2004         2003

    Net income (as reported)                           $ 1,350,075    1,690,059
      Net income (pro-forma)                             1,339,903    1,682,112

    Basic earnings per share (as reported)                    1.20         1.52
      Basic earnings per share (pro-forma)                    1.19         1.51

    Diluted earnings per share (as reported)                  1.14         1.46
      Diluted earnings per share (pro-forma)                  1.13         1.45

The fair value of each option grant was estimated using the Black-Scholes option
pricing model with the following assumptions:

                                                           2004         2003

    Expected dividend yield                              2.1062%      2.3644%
    Expected stock price volatility                          22%          14%
    Risk free rate of return                                4.6%         4.4%
     Expected life of options                           10 years     10 years


Investment in Federal Home Loan Bank Stock. The Bank, as a member of the Federal
Home Loan Bank  System,  is required to  maintain an  investment  in its capital
stock of the Federal  Home Loan Bank (FHLB) in an amount equal to the greater of
1% of its  outstanding  home  loans or 5% of  advances  from the FHLB.  No ready
market exists for the Federal Home Loan Bank Stock,  and it has no quoted market
value.

Segment Reporting. The Company is required to report information about operating
segments in and related  disclosures  about  products and  services,  geographic
areas and major customers. The Company only has one operating segment.

                                      F-15

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Recent  Accounting  Developments.  In  December  2003 the  Financial  Accounting
Standards Board (the "FASB") revised Statement of Financial Accounting Standards
("SFAS")   No.  132,   "Employers'   Disclosures   about   Pensions   and  Other
Postretirement  Benefits.".  The  provisions of this statement do not change the
measurement  and  recognition  provisions  of  previous  statements,   but  adds
disclosures about retirement plan assets, employer obligations,  key assumptions
in these measurements and the measurement date(s) used to determine pensions and
other postretirement  benefit measurements that make up at least the majority of
plan assets and benefit  obligations.  These provisions are effective for annual
and interim financial  statements for periods beginning after December 15, 2003.
The adoption of this  statement as of January 1, 2004 did not have a significant
impact on the Company's financial statements.

In December 2003, the Accounting  Standards  Executive Committee of the American
Institute of Certified  Public  Accountants  (the "AcSEC")  issued  Statement of
Position ("SOP") 03-3,  Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. The SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption  encouraged.  A certain  transition
provision  applies for certain  aspects of loans  currently  within the scope of
Practice  Bulletin 6,  Amortization of Discounts on Certain  Acquired Loans. The
SOP addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt  securities  (loans)  acquired  in a  transfer  if  those  differences  are
attributable, at least in part, to credit quality. It includes loans acquired in
business  combinations and applies to all  nongovernmental  entities,  including
not-for-profit organizations.  The SOP does not apply to loans originated by the
entity. Adoption of this SOP is not expected to have a significant impact on the
Company's financial statements.

On March 31, 2004, the FASB ratified a consensus  opinion of the Emerging Issues
Task Force (EITF),  issue 03-1, The Meaning of  Other-Than-Temporary  Impairment
and Its Application to Certain  Investments.  A consensus was reached  regarding
disclosures  about  unrealized  losses  on  available-for-sale  debt and  equity
securities  accounted for under FASB Statements No. 115,  Accounting for Certain
Investments in Debt and Equity Securities,  and No. 124,  Accounting for Certain
Investments Held by  Not-for-Profit  Organizations.  The guidance for evaluating
whether an investment is  other-than-temporarily  impaired  should be applied in
other-than-temporary  impairment evaluations made in reporting periods beginning
after  June  15,  2004.  The  disclosures  are  effective  in  annual  financial
statements  for fiscal  years ending after  December 15, 2003,  for  investments
accounted for under Statements 115 and 124. For all other investments within the
scope  of  this  Issue,  the  disclosures  are  effective  in  annual  financial
statements  for  fiscal  years  ending  after  June  15,  2004.  The  additional
disclosures  for cost method  investments  are effective for fiscal years ending
after  June 15,  2004.  Adoption  of the

                                      F-16

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004


provisions  of this  opinion  that are  effective as of this report date did not
have a significant  impact on the Company's  financial  statements.  Adoption of
further provisions when they are effective is not expected to have a significant
impact on the Company's financial statements.

In March,  2004 the Securities and Exchange  Commission (the "SEC") issued Staff
Accounting Bulletin ("SAB") 105,  "Application of Accounting  Principles to Loan
Commitments." This SAB summarizes the views of the SEC regarding the application
of generally accepted accounting principles to loan commitments accounted for as
derivative  instruments.  Under this SAB, banks will no longer be able to record
interest  rate  lock  commitments   (IRLCs)  as  assets,  but  only  record  any
liabilities  resulting  from these IRLCs.  Through  March 31, 2004,  the Company
followed  industry  practice in recording  these IRLCs as assets or liabilities,
depending on the net  position  the Company had on these  IRLCs.  As of April 1,
2004,  the Company has adopted this SAB. This did not have a significant  effect
on the Company's financial statements.

On June 17,  2004,  the SEC issued a  Proposed  Rule in which it  described  the
parameters  under which banks may sell  securities  to their  customers  without
having to register as broker-dealers with the SEC in accordance with Title II of
the  Gramm-Leach-Bliley  Act of  1999.  The  proposal,  which is  designated  as
Regulation B, clarifies,  among other things:  (i) the limitations on the amount
that  unregistered  bank  employees may be compensated  for making  referrals in
connection with a third-party  brokerage  arrangement;  (ii) the manner by which
banks may be compensated for effecting securities transactions for its customers
in a  fiduciary  capacity;  and (iii) the  extent to which  banks may  engage in
certain  securities  transactions  as a custodian.  At this time,  it appears as
though this proposed regulation, if adopted, will have no material effect on the
Company's activities or financial results.

                                      F-17

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 2.        AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES

The   carrying   values  and   estimated   fair  values  of   available-for-sale
mortgage-backed securities are summarized as follows:

<TABLE>
<CAPTION>
                                                                          Gross       Gross
                                             Unamortized               Unrealized  Unrealized
                            Principal         Premiums     Amortized     Holding     Holding       Fair
    June 30, 2004            Balance         (Discounts)     Cost         Gains      Losses        Value

<S>                  <C>                   <C>        <C>              <C>     <C>           <C>
   FNMA ARM
     Certificates     $   19,898,238          489,300    20,387,538       42,233  (248,661)     20,181,110
   FHLMC ARM
     Certificates          5,094,086           76,486     5,170,572       15,411   (44,592)      5,141,391
   GNMA ARM
     Certificates          5,357,260          149,209     5,506,469          301  (149,076)      5,357,694
   SBA                -               -                -             -            -         -
   Mortgage Pass-
     through
     Certificates                  -                -             -            -         -               -
                      ------------------------------------------------------------------------------------
                      $   30,349,584          714,995    31,064,579       57,945  (442,329)     30,680,195
                      ====================================================================================

June 30, 2003

   FNMA ARM
     Certificates     $   26,015,268          690,736    26,706,004      225,397   (50,279)     26,881,122
   FHLMC ARM
     Certificates          5,017,296          125,255     5,142,551       42,716   (26,536)      5,158,731
   GNMA ARM
     Certificates          5,152,408          157,441     5,309,849        2,407   (24,628)      5,287,628
   SBA                       334,870                -       334,870       26,789         -         361,659
   Mortgage Pass-
     through
     Certificates            811,339          (14,533)      796,806       31,157         -         827,963
                      ------------------------------------------------------------------------------------
                      $   37,331,181          958,899    38,290,080      328,466  (101,443)     38,517,103
                      ====================================================================================
</TABLE>

During the years  ended June 30,  2004 and 2003,  the  Company  did not have any
proceeds from the sales of mortgage-backed  securities.  The Company had pledged
$16,902,868  (current face) and $14,710,776  (current face) at June 30, 2004 and
2003,  respectively,  in  mortgage-backed  and  investment  securities to public
entities that have on deposit amounts in excess of the federally  insured limit.
The Company  also had pledged  $276,220  and $309,378 at June 30, 2004 and 2003,
respectively,  in mortgage-backed securities to the Federal Reserve Bank for its
Treasury Tax and Loan Account.

                                      F-18

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 3.        INVESTMENTS

The amortized  cost and fair values of investment  securities  are summarized as
follows:

Available-for-sale

<TABLE>
<CAPTION>
                                                                        Gross              Gross
                                                                     Unrealized         Unrealized
                                                    Amortized          Holding            Holding          Fair
                                                      Cost              Gains             Losses           Value
<S>                                          <C>                   <C>              <C>               <C>
    June 30, 2004
    Mutual funds                               $     9,949,093                 -        (149,523)         9,799,570
    US agency securities                             5,017,198             5,754          (7,324)         5,015,628
    FHLMC stock                                          7,786         1,390,736          (6,935)         1,391,587
    Tax-exempt securities                            5,197,245           331,227          (5,404)         5,523,068
    FNMA/SLMA preferred                              1,500,000                 -        (300,000)         1,200,000
    CMO                                              6,326,875            30,112         (68,129)         6,288,858
    SLMA asset-backed note                           1,295,960             4,157               -          1,300,117
                                               --------------------------------------------------------------------

                                               $    29,294,157         1,961,986        (537,315)        30,518,828
                                               ====================================================================
    June 30, 2003
    Mutual funds                               $     9,937,752             5,645               -          9,943,397
    US agency securities                             5,555,404            69,998               -          5,625,402
    FHLMC stock                                          7,786         1,108,341               -          1,116,127
    Tax-exempt securities                            4,856,181           586,466               -          5,442,647
    FNMA/SLMA preferred                              1,500,000                 -         (75,000)         1,425,000
    CMO                                              3,854,101            31,147         (16,493)         3,868,755
    SLMA asset-backed note                           1,851,683             6,406               -          1,858,089
                                               --------------------------------------------------------------------

                                               $    27,562,907         1,808,003         (91,493)        29,279,417
                                               ====================================================================
Held-to-maturity

   June 30, 2004
    US Agency Securities                       $       144,999             4,837                -           149,836
    Tax-exempt securities                              254,000             3,934                -           257,934
                                               --------------------------------------------------------------------
                                               $       398,999             8,771                -           407,770
                                               ====================================================================

   June 30, 2003
    Tax-exempt securities                      $       675,997            21,096                -           697,093
                                               ====================================================================
</TABLE>

                                      F-19


<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 3.        INVESTMENTS (CONTINUED)


The  amortized  cost  and  fair  value of all  debt  securities  by  contractual
maturity,  are shown below.  Expected  maturities  will differ from  contractual
maturities  because  borrowers may have the right to call or prepay  obligations
with or without call or prepayment penalties.

                                                    Amortized          Fair
                                                      Cost             Value
Available-for-sale
    Due within one year                          $ 3,005,185         3,010,939
    Due after one year through five years          3,043,207         3,052,600
    Due after five years through ten years                --                --
    Due after ten years                            4,166,051         4,475,157
    Mutual funds                                   9,949,093         9,799,570
    FHLMC stock                                        7,786         1,391,587
    FNMA                                           1,500,000         1,200,000
    SLMA asset-backed note                         1,295,960         1,300,117
    CMO                                            6,326,875         6,288,858
    Mortgage-backed securities                    31,064,579        30,680,195
                                                 -----------------------------

                                                 $60,358,736        61,199,023
                                                 =============================

Held-to-maturity
    Due within one year                          $   144,999           149,836
    Due after one year through five years                 --                --
    Due after five years through ten years                --                --
    Due after ten years                              254,000           257,934
                                                 -----------------------------

                                                 $   398,999           407,770
                                                 =============================

$200,000  in mutual  fund  investments  were sold during the year ended June 30,
2004, No investments were sold during the year ended June 30, 2003.

                                      F-20

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 4.        LOANS RECEIVABLE

Loans receivable are summarized as follows:

<TABLE>
<CAPTION>

                                                                                 2004             2003
<S>                                                                   <C>                  <C>
    First mortgage loans (principally conventional)
        Principal balances
           Secured by one-to-four family residences                     $     73,664,930        77,464,489
           Secured by other properties                                        38,909,272        26,027,088
           Construction loans                                                  2,517,887         5,183,423
        Loan participations purchased                                          7,886,097        10,306,393
        Commercial loans                                                      26,573,325        24,192,171
        Consumer loans
           Unsecured                                                             315,752           320,330
           Loans secured by deposits                                           1,636,914         1,212,031
           Secured by vehicles                                                 1,257,875         1,527,815
           Home equity lines                                                   1,603,047         1,766,753
           Other consumer                                                        743,044           930,450
                                                                         ---------------------------------
                                                                             155,108,143       148,930,943
        Loan participations sold                                                 (41,285)         (474,486)
        Net deferred loan origination fees                                      (922,449)         (795,738)
        Allowance for loan losses                                             (1,714,087)       (1,396,428)
                                                                        ----------------------------------

           Total loans receivable                                       $    152,430,322       146,264,291
                                                                        ==================================
</TABLE>

Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>
<S>                                                                     <C>                 <C>

        Balance at beginning of year                                     $     1,396,428           984,071
        Provision charged to income                                              969,003           452,137
        Charge-offs, recoveries and other, net                                  (651,344)          (39,780)
                                                                         ---------------------------------

           Balance at end of year                                        $     1,714,087         1,396,428
                                                                         =================================
</TABLE>

The Company has commitments to fund new loans,  lines,  and letters of credit as
follows:

<TABLE>
<CAPTION>
<S>                                                                     <C>                 <C>

        Fixed rate                                                       $     4,427,916         1,120,000
        Variable rate                                                         12,967,169         8,964,000
        Commitments for new originations                                       1,897,000        10,956,000
                                                                         ---------------------------------

           Total                                                         $    19,292,085        21,040,000
                                                                         =================================
</TABLE>

                                      F-21

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 4. LOANS RECEIVABLE (CONTINUED)

Fixed rate commitments at June 30, 2004 and 2003, had interest rates that ranged
from  7.45% to 5.88%.  Total  loans  with  fixed  rates  were  $102,172,015  and
$107,678,913 at June 30, 2004 and 2003, respectively.  Total loans with variable
rates were $52,936,128 and $40,113,806 at June 30, 2004 and 2003, respectively.

Non-accrual  loans for which  interest has been reduced  totaled  $1,350,677 and
$2,320,562  at June 30, 2004 and 2003,  respectively.  Interest  income that was
foregone   amounted   to  $59,037  and  $95,962  at  June  30,  2004  and  2003,
respectively.  Restructured loans at June 30, 2004 totaled $305,758,  there were
no restructured loans at June 30, 2003.

The weighted average rate for the loan portfolio was 6.09% and 6.54% at June 30,
2004 and 2003, respectively.

There were no impaired loans at June 30, 2004 or 2003.

NOTE 5.        ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

Accrued interest and dividends receivable is summarized as follows:

                                                       2004             2003

    Loans receivable                                 $ 582,212      521,885
    Available-for-sale investment securities           131,931      145,561
    Available-for-sale mortgage-backed securities      135,600      170,532
    Dividends                                            9,555        5,863
    Time deposits                                            -          881
                                                     ----------------------

    Total accrued interest and dividends             $ 859,298      844,722
                                                     ======================

                                      F-22

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 6. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                                              2004               2003

<S>                                                                    <C>                  <C>
    Buildings                                                            $    1,506,206          1,506,206
    Furniture, fixtures, and equipment                                        1,231,499          1,181,694
    Parking lot improvements                                                      5,265              5,265
    Leasehold improvements                                                      573,939            563,328
    Land                                                                        867,300            443,550
                                                                         ---------------------------------
                                                                              4,184,209          3,700,043
    Allowance for depreciation                                               (1,670,217)        (1,386,228)
                                                                         ---------------------------------

    Total premises and equipment                                         $    2,513,992          2,313,815
                                                                         =================================
</TABLE>


NOTE 7.        DEPOSITS

Deposits are summarized as follows:

                                       Weighted
                                        Average
                                        Rate at
                                       June 30,             June 30, 2004
                                         2004            Amount       Percent

     Passbook savings accounts            .89%     $  8,621,424         6.44%
     Money market accounts                .83        12,880,530         9.62
     Transaction and NOW accounts         .28        28,987,811        21.66
                                                   -------------------------
                                                     50,489,765        37.72
                                                   -------------------------

    Certificates of deposit:
       1.00%-3.00%                       1.86        60,830,615        45.43
       3.01%-6.00%                       4.26        20,677,624        15.45
       6.01%-7.00%                       6.34         1,861,752         1.40
                                                   -------------------------
     Total certificates of deposit                   83,369,991        62.28
                                                   -------------------------

     Total deposits                                $133,859,756          100%
                                                   =========================

                                      F-23

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 7.        DEPOSITS (CONTINUED)

                                    Weighted
                                     Average
                                     Rate at
                                    June 30,             June 30, 2003
                                      2003      --------------------------------
                                                    Amount             Percent

     Passbook savings accounts          1.08%   $     6,319,124         4.87%
     Money market accounts              1.13         10,945,854         8.43
     Transaction and NOW accounts        .75         24,937,782        19.22
                                                ----------------------------
                                                     42,202,760        32.52
                                                ----------------------------

    Certificates of deposit:
       1.00%-3.00%                      2.41         55,761,113        42.97
       3.01%-6.00%                      4.75         27,416,892        21.13
       6.01%-7.00%                      6.43          4,378,553         3.38
                                                ----------------------------
     Total certificates of deposit                   87,556,558        67.48
                                                ----------------------------

     Total deposits                             $   129,759,318          100%
                                                ============================

The  aggregate  amount  of jumbo  certificates  with a minimum  denomination  of
$100,000  was   $45,103,483   and   $45,260,872  at  June  30,  2004  and  2003,
respectively.

Certificates of deposit by remaining maturity are as follows:

                                                        2004           2003

    Less than 1 year                            $    51,506,421     58,998,082
    1 year to 2 years                                17,910,580     14,147,760
    2 years to 3 years                                4,357,659      4,992,188
    3 years to 4 years                                4,221,923      1,692,720
    4 years to 5 years                                1,930,785      3,990,563
    Thereafter                                        3,442,623      3,735,245
                                                ------------------------------

                                                $    83,369,991     87,556,558
                                                ==============================

                                      F-24

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 7.        DEPOSITS (CONTINUED)

Interest expense on deposits is summarized as follows:

                                            2004             2003

    Certificates of deposit           $  2,589,808         2,740,664
    Money market accounts                  104,613           128,743
    Passbook savings                        65,402            64,125
    Transaction and NOW deposits            29,780            66,299
                                      ------------------------------

                                      $  2,789,603         2,999,831
                                      ==============================


NOTE 8.        REPURCHASE AGREEMENTS

Under the terms of the  repurchase  agreement,  deposits  in  designated  demand
accounts of the customer are put into an investment  vehicle which is used daily
to purchase an interest in designated  marketable  securities owned by the Bank.
The Bank in turn agrees to repurchase these investments on a daily basis and pay
the  customer  the daily  interest  earned  on them.  The  amount of  repurchase
agreements was $157,119 and $584,902 at June 30, 2004 and 2003, respectively.


NOTE 9.        REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
               EARNINGS

The Bank is subject to certain  restrictions  on the amount of dividends that it
may declare  without  prior  regulatory  approval.  The Bank is also  subject to
various  regulatory  capital  requirements  administered  by the federal banking
agencies.  Failure to meet minimum  capital  requirements  can initiate  certain
mandatory and possibly additional  discretionary  actions by regulators that, if
undertaken,  could  have  a  direct  material  effect  on the  Bank's  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's assets,  liabilities,  and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments  by the  regulators  about  components,  risk  weightings,  and  other
factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum  amounts and ratios set forth in the table
below. Management believes, as of June 30, 2004, that the Bank meets all capital
adequacy requirements to which it is subject.


                                      F-25

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 9.        REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
               EARNINGS (CONTINUED)

Current regulations  require  institutions to have a minimum regulatory tangible
capital equal to 1.5% of total assets,  a minimum 4% leverage  capital ratio and
an 8% risk-based capital ratio.

The Bank at June 30,  2004,  meets  the  regulatory  tangible  capital  and core
(leverage) capital  requirements and the risk-based capital requirement of 8% of
total risk-weighted assets.

The  following is a  reconciliation  of the Bank's  capital in  accordance  with
accounting  principles generally accepted in the United States of America (GAAP)
to the three  components  of  regulatory  capital  calculated  under  regulatory
requirements at June 30, 2004:

<TABLE>
<CAPTION>

                               Tangible Capital        Core Capital            Risk-Based Capital
                          ------------------------------------------------------------------------------
                              Amount     Percent    Amount       Percent       Amount      Percent
<S>                      <C>            <C>    <C>                <C>      <C>                 <C>
GAAP Capital              $ 17,316,520          $  17,316,520               $17,316,520

Disallowed servicing
   assets, disallowed
   deferred tax assets,
   and other disallowed
   assets                     (275,125)              (275,125)                 (275,125)

Accumulated losses
   (gains) on certain
   available-for-sale
   securities                 (648,778)              (648,778)                 (648,778)

Unrealized (gains)
   losses on available-
   for-sale equity securities                                                   420,425

Other disallowed
   deferred tax
   liabilities                       -                      -                         -

Qualifying general
   loan loss allowance               -                      -                 1,631,637
                          ---------------------------------------------------------------------------

Regulatory capital
   computed                 16,392,617   7.11%     16,392,617      7.11%     18,444,679        13.59%

   Minimum capital
   requirement               3,478,200   1.50%      9,225,276      4.00%     10,856,720         8.00%
                          ---------------------------------------------------------------------------

   Regulatory capital
   excess                 $ 12,914,417   5.61%  $   7,167,341      3.11%    $ 7,587,959         5.59%
                          ===========================================================================
</TABLE>

                                      F-26

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 10.       RELATED PARTY TRANSACTIONS

The Company has several loans  receivable  outstanding to related  parties.  The
Company's  policy  is that  all such  loan  transactions  be on the same  terms,
including underwriting criteria and collateral,  as those prevailing at the same
time for comparable  transactions with others. The Company offers a 1% reduction
in  interest  rates  from  those  prevailing  at the same  time  for  comparable
transactions  with others for loans to  employees,  officers and  directors  for
personal purposes.

A summary of the activity for outstanding loans receivable to related parties is
as follows:

                                                   2004              2003

    Balance, beginning of year             $     2,722,235         2,250,533
    New loans                                      210,500         1,000,925
    Repayments                                    (566,294)         (529,223)
                                           ---------------------------------
    Balance, end of year                   $     2,366,441         2,722,235
                                           =================================

The Company also has several deposits from related parties. Outstanding deposits
from related parties  amounted to $5,071,616 and $3,316,172 at June 30, 2004 and
2003,  respectively.  The Company  also  expensed  $175,679 and $154,187 for the
years ended June 30, 2004 and 2003, respectively, for directors' fees.

In 2004, the Company purchased its insurance,  including  property and casualty,
general liability,  workers'  compensation,  umbrella,  and group medical, life,
disability and dental insurance,  through a company owned by a board member. All
purchases were completed  through a competitive bid process.  For the year ended
June 30, 2004, total insurance  products purchased through the related party was
$263,104.

NOTE 11.       CONCENTRATIONS OF CREDIT RISK

The Company is active in originating primarily first mortgage loans primarily in
San Juan and McKinley County, New Mexico.  Significant loans are approved by the
Board of Directors  through its loan  committee.  Collateral  is required on all
real estate  loans,  substantially  all  commercial  loans,  and the majority of
consumer  loans.  Real estate  exposure is primarily  limited to the counties in
which the Company operates. The Company generally maintains loan to value ratios
of no greater than 80%.

The Company maintains its cash balances with other financial  institutions.  The
balances  on  deposit  with  other  banks are  insured  by the  Federal  Deposit
Insurance  Corporation  up to $100,000.  The Company's  uninsured  cash balances
totaled  $1,431,909  and $932,301 at June 30, 2004 and 2003,  respectively.  The
Company is required to maintain  reserve balances in cash or on deposit with the
Federal  Reserve  Bank,  based on a percentage  of deposits.  The Company met or
exceeded  the  minimum  reserve  balances  for the years ended June 30, 2004 and
2003.

                                      F-27

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 12.       INCOME TAXES

Income tax expense consists of:
                                              2004             2003
  Current
      Federal                         $      642,387           809,096
      State                                  131,415           132,472
                                      ---------------------------------
                                             773,802           941,568
                                      ---------------------------------
  Deferred benefit
      Federal                               (185,577)         (237,500)
      State                                  (24,924)          (12,500)
                                      ---------------------------------
                                            (210,501)         (250,000)
                                      ---------------------------------

         Total income tax expense     $      563,301           691,568
                                      =================================

Temporary  differences  create  deferred tax assets and  (liabilities)  that are
detailed below as of June 30, 2004 and 2003:

                                                           2004       2003

 Loan loss allowance                                   $   516,093     390,276
 Depreciation on premises and equipment                    (18,404)     (5,586)
 Employee Stock Ownership Plan compensation                169,133      97,767
 Management Bonus Stock Plan compensation                   14,866      13,549
 Net unrealized gain on available-for-sale securities     (283,381)   (660,801)
 Federal Home Loan Bank Stock dividends                   (146,216)   (179,780)
 Non accrual interest income                                23,034      31,779
                                                       -----------------------

                                                       $   275,125    (312,796)
                                                       =======================

The deferred tax liability for  unrealized  holding gains on  available-for-sale
securities  has reduced the  unrealized  holding gains  reported as  accumulated
other comprehensive earnings within stockholders' equity.

                                      F-28

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 12.       INCOME TAXES (CONTINUED)

The  reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense is:


                                                   2004              2003

    Tax at statutory rate of 34%               $  650,548           809,753
    State income taxes, net of federal
        tax benefit                                61,810            72,349
    Non-taxable interest and dividends           (123,874)         (177,107)
    Other, net                                    (25,183)          (13,427)
                                               ----------------------------

                                               $  563,301           691,568
                                               ============================

    Effective tax rate                                29%                29%


NOTE 13.       EMPLOYEE STOCK OWNERSHIP PLAN

In connection with the conversion, referred to in Note 1, the Company adopted an
Employee  Stock  Ownership  Plan  (ESOP) for the benefit of all of its full time
employees.  Contributions  to the Plan are  determined at the  discretion of the
Company  and are  limited  to the  maximum  amount  deductible  for  income  tax
purposes.  Eligible employees include all full-time  employees with a minimum of
one year of service as of any  anniversary  date of the Plan. The ESOP purchased
105,000  (as  adjusted  for  previous  stock  dividends)  common  shares  of the
Company's  stock issued in the  conversion,  which was funded by a $560,000 loan
from the Company.  Per Statement of Position  93-6,  Employer's  Accounting  for
Employee Stock Ownership Plans, the unpaid balance of the ESOP loan has not been
reported in the  Consolidated  Statements of Financial  Position.  Stockholders'
equity has been reduced by the aggregate  purchase  price of the shares owned by
the ESOP, net of the shares committed to be released.  Contributions to the ESOP
by the Company are made to fund the principal and interest  payments on the debt
of the ESOP.  As of June 30,  2004,  77,414.2068  ESOP shares were  allocated to
participants,  and for the year ended June 30, 2004,  $279,646 in  contributions
was  made to the ESOP by the  Company.  As of June 30,  2003,  63,962.2115  ESOP
shares were released and  contributions of $206,537 were made to the Plan by the
Company.   The  remaining   unallocated  ESOP  shares  at  June  30,  2004  were
19,481.7932. The fair value of the remaining unallocated shares at June 30, 2004
is $452,952.  Dividends on  unallocated  ESOP shares are recorded as  additional
contributions  to the ESOP by the Company to prepay  principal  on the ESOP loan
and release  additional  shares.  Dividends on  allocated  shares are charged to
retained earnings.

                                      F-29

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 14.       STOCK PLANS

At June 30, 2004, the Company has four stock-based compensation plans, which are
described below.

On January 5, 1996, the Board of Directors of the Company adopted a Stock Option
Plan.  Pursuant  to the Plan,  an amount of stock  equal to 10% of the shares of
common stock (177,891  shares as adjusted for previous  stock  dividends) of the
Corporation  issued and outstanding is reserved for issuance by the Company upon
exercise of stock options which may be granted to directors, officers, and other
key  employees  from time to time.  The Plan provides for both  incentive  stock
options and non-incentive stock options. The options vest at a rate of one-fifth
of the award per year and have an  exercise  date of ten years  from the date of
grant.  In  connection  with the  adoption of the Plan,  the Company has granted
34,982  incentive  stock options and 53,366  non-incentive  stock options to its
directors,  officers,  and other key employees.  The weighted average  remaining
life of common  stock  options at June 30, 2004 and 2003 is 5.72 and 6.60 years,
respectively. During the year, no incentive stock options were forfeited and 375
incentive  stock  options  were  exercised.  Remaining  options  available to be
granted in the future amount to 58,680 shares.

A summary of common  stock  options  under the Stock  Option  Plan for the years
ended June 30, 2004 and 2003 follows:
                                                         Weighted
                                             Price       Average     Options
                              Options        Range        Price    Exercisable

    Balance, June 30, 2002     93,523   $ 7.40 - 12.95   $  8.48      77,149
                                                                    ========
        Granted                     -                -         -
        Forfeited                   -                -         -
        Exercised              (4,800)    7.40 - 11.37      9.26
                             ---------

    Balance, June 30, 2003     88,723     7.40 - 12.95      8.44      77,724
                                                                    ========
        Granted                     -                -         -
        Forfeited                   -                -         -
        Exercised                (375)           11.37     10.71
                            ---------

    Balance, June 30, 2004     88,348   $ 7.40 - 12.95   $  8.48      85,248
                            =========                     ======    ========

On January 5, 1996,  the Company  also  adopted a  Management  Stock Bonus Plan.
Sufficient  funds  were  contributed  to the Plan  representing  up to 4% of the
aggregate  number of shares issued in the conversion.  Awards under the Plan are
determined  based on the position and  responsibilities  of the  employees,  the
length and value of their services, and the compensation paid to employees. From
January 5, 1996 to June 30,  2004,  the Company made awards under the Plan (less
forfeited  shares)  in the  amount of 55,804  shares.  The value of the stock is
determined

                                      F-30

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 14.       STOCK PLANS (CONTINUED)

(less  forfeited  shares and shares  withheld for taxes) annually as vested (and
paid),  based on the current market value. At June 30, 2004 and 2003, 20,077 and
19,032 shares, respectively,  remain to be awarded under the Plan in the future.
Awards  under the Plan are earned at the rate of one-fifth of the award per year
as of the  one-year  anniversary  of the  effective  date  of  the  Plan.  Total
compensation  expense recorded under the management stock bonus plan was $36,589
and $17,893 for the years ended June 30, 2004 and 2003, respectively.

On March 22, 2000,  the Board of  Directors of the Company  adopted a Director's
Stock Compensation Plan.  Pursuant to the Plan an amount of stock equal to 1% of
the shares of common stock of the corporation issued and outstanding is reserved
for  issuance by the Company  upon  exercise  of stock  options  which are to be
issued to Directors of the Company. The options vest upon date of grant and have
an  exercise  date of ten  years  from  date of grant.  In  connection  with the
adoption of the Plan, the Company has granted all 11,946 shares  available under
the Plan to its  Directors.  The option  price  established  for the shares upon
exercise is $11.00 per share.

On October 27, 2000, the Board of Directors  adopted the 2000 stock option plan.
Pursuant  to the Plan,  an  amount  equal to 5% of the  shares  of common  stock
(58,500  shares) of the  Corporation  issued and  outstanding  is  reserved  for
issuance by the Company upon  exercise of stock  options which may be granted to
directors,  officers,  and  other  key  employees  from  time to time.  The Plan
provides for both incentive stock options and non- incentive stock options.  The
options  vest at a rate of  one-fifth of the award per year and have an exercise
date of ten years from the date of grant. No options were issued during the year
ended June 30, 2004.

During the 1997 fiscal  year,  the  Company  began a stock  repurchase  program.
During the year ended June 30, 2004,  the Company did not repurchase any shares.
During the year ended June 30, 2003, the Company repurchased 8,636 shares of its
common stock for $143,287.


NOTE 15.   FEDERAL HOME LOAN BANK ADVANCES

In October  1995,  the Bank entered  into an  "Advances,  Collateral  Pledge and
Security  Agreement"  (Agreement)  with the  Federal  Home  Loan  Bank of Dallas
(FHLB).  The purpose of the Agreement is to allow the Bank to obtain  extensions
of credit from the FHLB to use in its operations. At June 30, 2004, the Bank has
$73,652,218 in outstanding advances with the FHLB. The advances bear interest at
a fixed rate, which range from 1.09% to 6.97%, and mature as follows:

                                      F-31

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 15.   FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)


Maturities for the fiscal years ending June 30:

                  2005                $   30,756,838
                  2006                     9,290,000
                  2007                    13,228,626
                  2008                     4,540,000
                  2009                     7,289,156
                  Thereafter               8,547,598
                                      --------------

                                      $   73,652,218
                                      ==============

Several of the advances due in July were subsequently refinanced after year-end.
The advances are secured by the Bank's  investments  in FHLB stock of $2,014,376
and  mortgage-backed  securities of $30,680,195.  In addition,  the advances are
secured under a "blanket credit  facility"  whereby the entire Bank's 1-4 family
and  commercial  real  estate  loans  are  also  collateral  under  the  advance
agreement.


NOTE 16.       FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company is required to disclose the  estimated  fair value of its  financial
instruments  in accordance  with SFAS No. 107,  Disclosures  about Fair Value of
Financial Instruments. These disclosures do not attempt to estimate or represent
the  Company's  fair  value as a  whole.  The  disclosure  excludes  assets  and
liabilities  that  are not  financial  instruments  as  well as the  significant
unrecognized value associated with core deposits relationships.

Fair value amounts disclosed represent  point-in-time  estimates that may change
in  subsequent  reporting  periods due to market  conditions  or other  factors.
Estimated fair value amounts in theory  represent the amounts at which financial
instruments  could be  exchanged  or  settled in a current  transaction  between
willing parties. In practice,  however, this may not be the case due to inherent
limitations in the  methodologies  and assumptions  used to estimate fair value.
For example,  quoted  market  prices may not be realized  because the  financial
instrument  may be traded in a market  that  lacks  liquidity;  or a fair  value
derived  using a discounted  cash flow  approach may not be the amount  realized
because of the subjectivity involved in selecting underlying  assumptions,  such
as  projecting  cash flows or selecting a discount  rate.  The fair value amount
also may not be  realized  because  it  ignores  transaction  costs and does not
include  potential tax effects.  The Company does not plan to dispose of, either
through sale or settlement,  the majority of its financial  instruments at these
estimated fair values.

                                      F-32

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 16.       FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

The estimated fair values of the Company's financial  instruments as of June 30,
2004 were as follows:

<TABLE>
<CAPTION>

                                                                             Carrying            Fair
                                                                               Value             Value
<S>                                                                    <C>                 <C>
    Financial Assets
        Cash and due from banks                                          $     7,840,712         7,840,712
        Interest-bearing deposits with banks                                     866,281           866,281
        Available-for-sale-investment securities                              30,518,828        30,518,828
        Available-for-sale mortgage-backed securities                         30,680,195        30,680,195
        Held-to-maturity investment securities                                   398,999           407,770
        Loans receivable, net                                                152,841,722       155,756,000
        Accrued interest receivable                                              859,298           859,298

    Financial Liabilities
        Transaction and NOW deposits                                          28,987,811        29,010,000
        Savings deposits                                                      21,501,954        21,547,000
        Time deposits                                                         83,369,991        83,708,000
        Advances from the FHLB                                                73,652,218        80,151,000
        Accrued interest payable                                                 460,520           460,520

    Off-Balance Sheet Liabilities
        Commitments to extend credit                                          19,292,085        19,292,085

                                                                                    June 30, 2003
                                                                         ----------------------------------
                                                                             Carrying            Fair
                                                                               Value             Value
    Financial Assets
        Cash and due from banks                                          $     6,785,410         6,785,410
        Interest-bearing deposits with banks                                     466,948           466,948
        Available-for-sale-investment securities                              29,279,417        29,279,417
        Available-for-sale mortgage-backed securities                         38,517,103        38,517,103
        Held-to-maturity investment securities                                   675,997           697,093
        Loans receivable, net                                                146,396,291       155,564,645
        Accrued interest receivable                                              844,722           844,722

    Financial Liabilities
        Transaction and NOW deposits                                          24,937,782        24,962,000
        Savings deposits                                                      17,264,978        17,432,000
        Time deposits                                                         87,556,558        90,109,000
        Advances from the FHLB                                                76,641,834        85,940,000
        Accrued interest payable                                                 515,872           515,872

    Off-Balance Sheet Liabilities
        Commitments to extend credit                                          21,040,000        21,040,000
</TABLE>

                                      F-33

<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 17.   EARNINGS PER SHARE

Basic earnings per share are computed by dividing  earnings  available to common
stockholders by the weighted average number of common shares  outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive  potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial statements:

<TABLE>
<CAPTION>
                                                                         For the Year Ended June 30, 2004
                                                             ------------------------------------------------------
                                                                     Income           Shares              Per-share
                                                                   (Numerator)     (Denominator)           Amount

<S>                                                         <C>                    <C>         <C>
    Income available to common stockholders -
        basic earnings per share                              $     1,350,076        1,126,964   $             1.20
                                                                                                 ==================
    Effect of dilutive securities
        Options                                                             -           56,135
                                                              --------------------------------
    Income available to common stockholders -
        diluted earnings per share                            $     1,350,076        1,183,099   $             1.14
                                                              =====================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                         For the Year Ended June 30, 2003
                                                              -----------------------------------------------------
                                                                     Income           Shares              Per-share
                                                                   (Numerator)     (Denominator)           Amount

    Income available to common stockholders -
<S>                                                         <C>                    <C>         <C>
        basic earnings per share                              $     1,690,059        1,115,076   $             1.52
                                                                                                 ==================
    Effect of dilutive securities
        Options                                                             -           44,841
                                                              --------------------------------
    Income available to common stockholders -
        diluted earnings per share                            $     1,690,059        1,159,917   $             1.46
                                                              =====================================================
</TABLE>

                                      F-34
<PAGE>

GFSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004



NOTE 18.       LEASES

The Company is obligated  under a lease  agreement  entered into on December 30,
1997 for the building  across the street from its  offices,  which is the Bank's
loan  center.  Rental  expense  for the years  ended June 30,  2004 and 2003 was
$35,254 and $30,000, respectively.

The following is a schedule of  non-cancelable  future  minimum  lease  payments
required under the operating lease:

        Years Ending June 30,                              Amount

              2005                                $        30,000
              2006                                         30,000
              2007                                         15,000

The  lease  expires  December  31,  2007.  The  Company  has  an  option,   upon
notification  of the lessor by August 1, 2007,  to  purchase  the  building  for
$275,000 or to extend the lease for an additional 10 years. Effective January 1,
2003,  and each year  thereafter  during the term of the lease or any  renewals,
there is a cost of  living  adjustment.  In no event  will the rent be less than
$30,000  a year.  The  above  schedule  does  not  contain  any  cost of  living
increases.

NOTE 19.       SUBSEQUENT EVENT - PROPOSED MERGER


On August 25, 2004,  GFSB Bancorp,  Inc.  (GFSB)  announced that it had signed a
definitive  merger  agreement  with First  Federal Banc of the  Southwest,  Inc.
(FFBSW),  the  holding  company for First  Federal  Bank,  Roswell,  New Mexico,
pursuant to which GFSB will merge with and into FFBSW.

Under the terms of the agreement,  upon  consummation of the merger of GFSB into
FFBSW,  each  outstanding  share of GFSB common stock will be converted into the
right to receive either $20.00 in cash or FFBSW common stock, at the election of
the holder,  subject to an overall requirement that 51% of the total outstanding
GFSB common stock be exchanged for stock.  The transaction is subject to various
conditions,  including stockholder approval of both GFSB and FFBSW, and approval
by the applicable banking regulatory agencies.

Pursuant  to the terms of the merger  agreement,  FFBSW has  agreed to  register
FFBSW's common stock under the Securities  Exchange Act of 1934 and it will file
reports with the  Securities  and  Exchange  Commission.  In addition,  upon the
completion of the merger, its shares are expected to be listed on the NASDAQ.

Through  the  date  of  the  completion  of the  expected  merger,  the  Company
anticipates  incurring  between  $1,100,000  and  $1,400,000  in merger  related
expenses. Total merger related expenses through June 30, 2004 were approximately
$52,000.

                                      F-35
<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the Company
has duly  caused  this  report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized on September 27, 2004.

                               GFSB BANCORP, INC.


                                        By:  /s/Richard C. Kauzlaric
                                             -----------------------------------
                                             Richard C. Kauzlaric
                                             President
                                             (Duly Authorized Representative)


         In accordance  with the Exchange Act, this report has been signed below
by the  following  persons  on  behalf  of  the  Company  and in the  capacities
indicated on September 27, 2004.

<TABLE>
<CAPTION>

<S>                                               <C>
                                                     /s/Richard C. Kauzlaric
----------------------------------                   --------------------------------------------
James Nechero, Jr.                                   Richard C. Kauzlaric
Director and Chairman of the Board                   President and Director
                                                     (Principal Executive Officer)


/s/Vernon I. Hamilton                                /s/Jerry R. Spurlin
----------------------------------                   --------------------------------------------
Vernon I. Hamilton                                   Jerry R. Spurlin
Director                                             Chief Financial Officer
                                                     (Principal Financial and Accounting Officer)


/s/Charles L. Parker, Jr.                            /s/Michael P. Mataya
----------------------------------                   --------------------------------------------
Charles L. Parker, Jr.                               Michael P. Mataya
Director                                             Treasurer and Director



----------------------------------
George S. Perce
Secretary and Director

</TABLE>