SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One):

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended June 30, 2001, OR

[_]  TRANSITION REPORT PURSUANT TO 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, Including Area Code:         (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. $14,855,149
                                                                  -----------

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  of the  registrant,  based on the average bid and asked
price  of the  registrant's  Common  Stock  on the  Nasdaq  Smallcap  Market  at
September 14, 2001, was $7.0 million.

         As of September 14, 2001,  there were issued and outstanding  1,150,106
shares of the registrant's Common Stock.

         Transitional Small Business Disclosure format (check one):

Yes               No    X
    -------          -------

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Annual  Report to  Stockholders  for Fiscal Year ended June 30,
     2001. (Part II)
2.   Portions of Proxy  Statement for the 2001 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 Registrant 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 Registrant 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 Registrant's market area of Gallup, New Mexico
and  the  surrounding  communities  of  McKinley  County,  New  Mexico.  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

         The following table sets forth the composition of the Registrant's loan
portfolio in dollar amounts and in  percentages of the respective  portfolios at
the dates indicated.

<TABLE>
<CAPTION>
                                                                                     At June 30,
                                                                        ---------------------------------------
                                                                                2001                2000
                                                                        ------------------   ------------------
                                                                            $        %          $          %
                                                                        --------   ------   --------    ------
                                                                                 (Dollars in Thousands)
<S>                                                                    <C>        <C>       <C>        <C>
Type of Loans:
-------------
  Mortgage loans:
    Residential................................................         $ 81,662    60.44%  $ 78,920     69.08%
    Commercial real estate.....................................           23,085    17.09     18,376     16.09
  Construction:
    Residential................................................              830      .62        581       .51
    Commercial.................................................            5,397     3.99      3,787      3.31
                                                                        --------   ------   --------    ------
                                                                         110,974    82.14    101,664     88.99
                                                                        --------   ------   --------    ------
  Commercial business..........................................           18,042    13.35      6,853      6.00
                                                                        --------   ------   --------    ------
  Consumer:
    Savings account ...........................................            1,228      .91      1,083       .95
    Automobile and other.......................................            4,867     3.60      4,642      4.06
                                                                        --------   ------   --------    ------
                                                                           6,095     4.51      5,725      5.01
                                                                        --------   ------   --------    ------

  Total loans..................................................         $135,111   100.00%  $114,242    100.00%
                                                                         -------   ======    -------    ======
Less:
  Loan participations sold.....................................           (3,156)             (3,308)
  Deferred loan origination fees and costs.....................             (699)               (645)
  Allowance for loan losses....................................             (825)               (512)
                                                                        --------            --------

Total loans, net...............................................         $130,431            $109,777
                                                                         =======             =======
Type of Security:
 Mortgage loans:
    One-to-four-family.........................................         $ 83,251    61.62%  $ 78,790     68.97%
    Commercial real estate.....................................           26,546    19.65     22,135     19.38
    Multi-family...............................................              991      .73        711       .62
                                                                        --------   ------   --------    ------
                                                                         110,788    82.00    101,636     88.97
                                                                        --------   ------   --------    ------

  Commercial business .........................................           18,228    13.49      6,881      6.02
                                                                         -------   ------   --------    ------
  Consumer:
    Savings accounts...........................................            1,188      .88      1,083       .95
    Automobile and other.......................................            4,907     3.63      4,642      4.06
                                                                        --------   ------   --------    ------
                                                                           6,095     4.51      5,725      5.01
                                                                        --------   ------   --------    ------

Total..........................................................         $135,111   100.00%  $114,242    100.00%
                                                                        ========   ======   ========    ======
</TABLE>
                                        3
<PAGE>

Loan Maturity Tables

         The  following   table  sets  forth  the  estimated   maturity  of  the
Registrant's  loan  portfolio  at June 30,  2001.  The  table  does not  include
prepayments  or  scheduled  principal   repayments.   Prepayments  or  scheduled
principal repayments totaled $32.6 million for the year ended June 30, 2001. All
mortgage loans are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>
                                                            Due           Due after
                                                           within         1 through       Due after
                                                           1 year          5 years         5 years     Total
                                                           ------          -------         -------     -----
                                                                             (In Thousands)
<S>                                                      <C>              <C>             <C>        <C>
One-to-four-family...................................      $   245          $ 1,917         $80,259    $82,421
Multi-family and commercial real estate..............        3,998           11,011           7,131     22,140
Construction.........................................        1,436              764           4,027      6,227
Commercial business..................................        6,581            7,168           4,479     18,228
Consumer.............................................        1,363            2,811           1,921      6,095
                                                           -------          -------         -------   --------
Total................................................      $13,623          $23,671         $97,817   $135,111
                                                           =======          =======         =======   ========
</TABLE>

         The following table sets forth as of June 30, 2001 the dollar amount of
all loans due after  June 30,  2002,  which  have fixed  rates of  interest  and
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                    Floating or
                                                           Fixed     Adjustable
                                                           Rates       Rates        Total
                                                           -----       -----       --------
                                                                   (In Thousands)
<S>                                                     <C>        <C>           <C>
One-to-four-family..................................      $75,687    $ 6,489       $ 82,176
Multi-family and commercial real estate.............       11,265      6,877         18,142
Construction........................................        1,453      3,338          4,791
Commercial business.................................        6,130      5,517         11,647
Consumer............................................        2,907      1,825          4,732
                                                          -------    -------       --------
Total...............................................      $97,442    $24,046       $121,488
                                                          =======    =======       ========
</TABLE>

         One-to-Four-Family  Residential Loans. The Registrant'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 Registrant
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 Registrant
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 Registrant primarily originates fixed-rate mortgage loans that have
maturities of up to 15 years. In addition,  the Registrant originates loans with
terms  over  15  years  for  sale  in  the  secondary  market.   Generally,  the
Registrant's  underwriting  guidelines conform to FHLMC and FNMA guidelines.  At
June  30,  2001,  fixed  rate  loans   held-for-sale   constituted  92%  of  the
one-to-four-family residential loan portfolio.

                                        4
<PAGE>

         For all  adjustable-rate  mortgage loans,  the Registrant  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  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 Registrant 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 Registrant 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  Registrant.   The
Registrant'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 Registrant
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  Registrant'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  Registrant  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  Registrant  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 Registrant 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 Registrant 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  Registrant  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 Registrant 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 $250,000 for secured loans. The Management Loan
Committee,  consisting of all senior  management and one non-employee  Director,
may  approve  loans in excess of  individual  officer  limits up to a maximum of
$350,000. The Executive Committee may approve loans up to $750,000. The Board of
Directors  approves  loans over  $750,000.  The Board of Directors  ratifies all
loans that have been approved by officers or committees.

         The Registrant  uses board approved  independent fee appraisers on most
real estate loans.  It is the  Registrant'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, 2001, the Registrant had $7.1 million of
outstanding  commitments  to originate  new loans at market  interest  rates and
$894,000 in undisbursed funds related to construction loans.

                                        6
<PAGE>

Non-Performing and Problem Assets

         Loan Delinquencies. The Registrant'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 or more  and no  repayment  plan is in
effect, the Board of Directors  typically approves the initiation of 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  and,  in the  opinion  of
management, the collection of additional interest is doubtful.  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
and real estate owned,  as of the dates  indicated.  The Registrant has no loans
categorized as troubled debt restructurings  within the meaning of the Statement
of Financial  Accounting  Standards ("SFAS") 15 and no impaired loans within the
meaning of SFAS 114,  as amended by SFAS 118.  Interest  income  that would have
been recorded on loans  accounted  for on a nonaccrual  basis under the original
terms of such loans totalled $59,671 for the year ended June 30, 2001.

                                        7
<PAGE>

<TABLE>
<CAPTION>
                                                                    At June 30,
                                                                   -------------
                                                                   2001    2000
                                                                   ----    ----
                                                                  (In Thousands)

<S>                                                              <C>     <C>
Loans accounted for on a non-accrual basis:

Mortgage loans:
  Permanent loans secured by 1-4 dwelling units ................   $398    $542
  All other mortgage loans .....................................     48      83
Non-mortgage loans:
  Commercial ...................................................     64      16
  Consumer .....................................................     99      78
                                                                   ----    ----
      Total ....................................................   $609    $719
                                                                   ----    ----

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

Total non-accrual and accrual loans ............................   $609    $719
                                                                   ----    ----
Real estate owned ..............................................      0      38
                                                                   ----    ----
Total non-performing assets ....................................   $609    $757
                                                                   ====    ====

Total non-accrual and accrual loans to net loans ...............    .47%    .66%
Total non-accrual and accrual loans to total assets ............    .31%    .41%
Total non-performing assets to total assets ....................    .31%    .43%
</TABLE>

         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  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

                                        8
<PAGE>

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.

         At June 30,  2001,  there  were no loans 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.

         The following table sets forth the  Registrant's  classified  assets in
accordance with its classification system at June 30, 2001 (in thousands):



               Special mention...................      $3,954
               Substandard.......................         971
               Doubtful .........................          13
               Loss .............................          --
                                                       ------
               Total.............................      $4,938
                                                       ======


         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 Registrant'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 Registrant'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
Registrant's allowance for loan losses at the dates indicated.


                                                            At June 30,
                                                     -------------------------
                                                         2001           2000
                                                     ---------       ---------
                                                       (Dollars in Thousands)

Total loans outstanding, net ...................     $ 130,431       $ 109,777
                                                     =========       =========
Average loans outstanding ......................     $ 121,237       $ 103,252
                                                     =========       =========

Allowance balances (at beginning of period) ....     $     512       $     443
Provision:
  Residential ..................................            58              57
  Consumer and commercial business .............           287             148
                                                     ---------       ---------
                                                           857             648
                                                     ---------       ---------
Charge-offs:
  Residential ..................................            --            (113)
  Consumer and commercial business .............           (32)            (25)
Recoveries:
  Residential ..................................            --              --
  Consumer and commercial business .............            --               2
                                                     ---------       ---------
Net (charge-offs) recoveries ...................           (32)           (136)
                                                     ---------       ---------

Allowance balance (at end of period) ...........     $     825       $     512
                                                     =========       =========

Allowance for loan losses as a percent
  of total loans outstanding, net ..............           .63%            .47%
                                                     =========       =========

                                       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.


                                                   At June 30,
                                   --------------------   ---------------------
                                          2001                          2000
                                   --------------------   ---------------------
                                            Percent of              Percent of
                                           Loans in Each           Loans in Each
                                            Category to             Category to
                                   Amount   Total Loans   Amount    Total Loans
                                   ------   -----------   ------    -----------
                                             (Dollars in Thousands)

Residential real estate......       $ 275          60%     $ 217            69%
Commercial real estate.......         156          17        131            20
Consumer and
  commercial business........         394          23        164            11
                                    -----         ---      -----           ---

  Total......................       $ 825         100%     $ 512           100%
                                    =====         ===      =====           ===

Investment Activities

         The  Registrant  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 to 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 Registrant to
categorize securities as "held-to-maturity,"  "available-for-sale" or "trading."
As of June  30,  2001,  Registrant  had  securities  (including  mortgage-backed
securities)  classified as "held-to-maturity"  and  "available-for-sale"  in the
amount  of  $1,945,720  and  $54,180,919,  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.

                                       11
<PAGE>

         At June 30, 2001, the Registrant'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  Registrant's  lending
activities,   the  Registrant   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 Federal Home Loan Mortgage
Corporation  ("FHLMC"),  Government National Mortgage Association ("GNMA"),  and
Federal National Mortgage Association ("FNMA").

         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 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 FHLMC, GNMA, and FNMA make up a majority of
the pass- through certificates market.

                                       12
<PAGE>

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

                                                                At June 30,
                                                             -------------------
                                                              2001        2000
                                                             -------     -------
                                                               (In Thousands)

Securities held-to-maturity:
  Tax-exempt securities ................................     $   955     $   695
  Corporate debt securities ............................         991         986
                                                             -------     -------
    Total securities held-to-maturity ..................       1,946       1,681
                                                             -------     -------

Securities available-for-sale:
  Mutual funds .........................................       2,716       2,552
  US Agency securities .................................       1,192       4,582
  FHLMC stock ..........................................           8           8
  FNMA/SLMA preferred ..................................       2,506       1,513
  SLMA asset-backed note ...............................       1,992       1,992
  Tax-exempt securities ................................       4,957       4,695
  Taxable securities ...................................        --           330
  CMO Securities .......................................       6,563       9,068
  Mortgage-backed securities ...........................      32,326      29,432
                                                             -------     -------
    Total securities available-for-sale ................      52,260      54,172
                                                             -------     -------
Total investment and mortgage-backed securities ........     $54,206     $55,853
                                                             =======     =======

                                                        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, 2001. The following  table
does not take into  consideration  the effects of  scheduled  repayments  or the
effects of possible prepayments.

<TABLE>
<CAPTION>
                                                               At June 30, 2001
                           ---------------------------------------------------------------------------------------------------

                                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%   $   810     8.25% $  955    7.64%   $   947
  Corporate debt
    securities...........        --     --        991    4.74        --      --        --        --     991    4.74        995
                             ------           -------           -------           -------            -------           -------
      Total
        securities
        held-to-
        maturity.........        --     --        991    4.74       145    4.25       810      8.25   1,946    6.16      1,942
                             ------           -------           -------           -------            -------           -------

Securities
available-
for-sale:
  Mutual funds...........     2,716   5.35         --      --        --      --        --        --   2,716    5.35      2,717
  US Agency
    securities...........        --     --      1,192    7.11        --      --        --        --   1,192    7.11      1,238
  FHLMC stock (2)........        --     --         --      --        --      --         8      1.17       8    1.17      1,539
  FNMA/SLMA preferred....        --     --         --      --     1,000    5.00     1,506      5.76   2,506    5.46      2,509
  SLMA asset-backed
    securities...........        --     --         --      --        --      --     1,992      4.36   1,992    4.36      1,980
  Tax-exempt
    securities (1).......       301   3.96        420    5.32        --      --     4,236      6.20   4,957    5.90      5,119
  Taxable securities.....        --     --         --      --        --      --        --        --      --      --         --
  CMO securities.........        --     --        470    4.51     1,676    9.29     4,417      5.21   6,563    6.18      6,703
   Mortgage-backed
     securities..........     1,445   6.23     19,624    6.56     7,792    6.88     5,465      7.37  32,326    7.17     32,377
                             ------           -------           -------           -------            -------           -------
      Total
        securities
        available-
        for-sale.........     4,462   5.55     21,706    6.52    10,468    7.09    17,624      6.07  52,260    6.90     54,182
                             ------           -------           -------           -------            -------           -------
Total investment
   and mortgage-
   backed securities.....    $4,462   5.55%   $22,697    6.43%  $10,613    7.05%  $18,434      6.17% $54,206   6.38%   $56,124
                             ======   ====    =======    ====   =======    ====   =======      ====  =======   ====    =======
</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 Registrant's funds
for lending and other  investment  purposes.  The Registrant  derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities,  borrowings,  mortgage-backed  securities and operations.
Scheduled  loan principal  repayments  are a relatively  stable source of funds,
while  deposit  inflows and  outflows  and loan  prepayments  are  significantly
influenced by general interest rates and market conditions.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from  within the  Registrant'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.  At June 30, 2001, the
Registrant had $5,000,000 in brokered accounts.

         Time  Deposits.  The  following  table  indicates  the  amount  of  the
Registrant's  time deposits of $100,000 or more by time remaining until maturity
as of June 30, 2001.


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

Within three months..................................         $ 5,694
More than three through six months...................           9,838
More than six through nine months....................          13,267
Over nine months.....................................          18,668
                                                              -------
         Total.......................................         $47,467
                                                              =======

Borrowings

         The Registrant 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  Registrant's  stock in the FHLB and a portion of the
Registrant'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  Registrant,  if the need  arises,  may also access the Federal
Reserve Bank discount  window to supplement  its supply of lendable funds and to
meet deposit withdrawal requirements. At June 30, 2001, borrowings with the FHLB
totaled $72,105,997,  of which $32,820,000 were short-term.  The following table
sets  forth the  maximum  month end  balances  and the  average  balance of FHLB
advances for the periods indicated.

<TABLE>
<CAPTION>
                                                                               During the Year Ended
                                                                                      June 30,
                                                                           ---------------------------
                                                                               2001              2000
                                                                           --------------- -----------
                                                                                   (In thousands)
<S>                                                                        <C>               <C>
Maximum amount of short-term borrowings outstanding at any month end:
  Advances from FHLB....................................................... $69,095           $57,239
Approximate average short-term borrowings outstanding with respect to:
  Advances from FHLB....................................................... $54,559           $37,174
  Approximate weighted average rate paid on:
  Advances from FHLB.......................................................    5.17%             5.98%
</TABLE>

                                       15
<PAGE>

Personnel

         As of June 30,  2001,  the  Registrant  employed 39  employees  with 37
working  full-time.  None of the  Registrant's  employees are  represented  by a
collective  bargaining group. The Registrant 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"), enacted in November 2000, 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, 2000.  As a result,
the Company's  freedom from activity  restrictions as a unitary savings and loan
holding company were 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."

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  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.

                                       16
<PAGE>

         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. The
FDIC has set the deposit insurance assessment rates for SAIF-member institutions
for the  first  six  months  of 2001 at 0% to .027% of  insured  deposits  on an
annualized basis, with the assessment rate for most savings  institutions set at
0%. In addition,  all FDIC-insured  institutions are required to pay assessments
to the FDIC at an annual  rate of  approximately  .0212% of insured  deposits 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. These assessments will continue until the FICO bonds mature in 2017.

         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
association'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,  2001,  the  Bank's  lending  limit  for loans to one  borrower  was
approximately  $2,011,284  and the  Bank  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,  2001,  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,  less  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

                                       17
<PAGE>

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,  the  portion  of  the
allowance for loan losses not designated for specific loan losses, and up to 45%
of unrealized gains on equity securities.  The portion of the allowance for loan
and lease losses includable in supplementary  capital is limited to a maximum of
1.25% of risk-weighted assets. 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, 2001, 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 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.

                                       18
<PAGE>

         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"
(defined  to include  residential  mortgages  and  related  equity  investments,
certain  mortgage-related  securities,  small business loans,  student loans and
credit card loans, and 50% of certain community development loans). 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, 2001,  the Bank was in
compliance  with its QTL  requirement,  with  72,35% 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, 2001, 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,  2001,  the  Bank  was  in  compliance  with  these  Federal  Reserve  Board
requirements.

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

         The  Registrant  owns its main office located at 221 West Aztec Avenue,
Gallup,  New Mexico.  The Registrant  leases  additional office space across the
street  from its main  office.  The  lease  expires  December  31,  2007 and the
Registrant 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.

         On September 5, 2001, the Registrant  entered into a Purchase Agreement
to acquire the real estate and building  located in San Juan County,  New Mexico
for the purpose of opening a branch office of the Bank. The Registrant  will pay
approximately $900,000 for such real estate and related building.

         (b) Investment  Policies.  See "Item 1.  Business"  above for a general
description of the Registrant's  investment policies and any regulatory or Board
of Directors' percentage of assets limitations

                                       19

<PAGE>

regarding  certain  investments.  The  Registrant'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 matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

         The  information  contained under the section  captioned  "Stock Market
Information" in the Company's  Annual Report to Stockholders for the fiscal year
ended June 30, 2001 (the "Annual Report") is incorporated herein by reference.

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

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

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

         The Company's  consolidated  financial  statements listed under Item 13
herein are incorporated herein by reference.

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

         Not applicable.

                                       20

<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 2001  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."

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
------------------------------------------------------------------------

(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) Management of the Company knows of no 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.

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, List, and Reports on Form 8-K
------------------------------------------------

(a)  Listed below are all  financial  statements  and exhibits  filed as part of
     this report.

         1. The consolidated  statements of financial condition of GFSB Bancorp,
Inc. and  Subsidiary  as of June 30, 2001 and 2000 and the related  consolidated
statements  of earnings and  comprehensive  earnings,  changes in  stockholders'
equity and cash flows for each of the two years  ended June 30,  2001,  together
with the related notes and the independent auditors' report of Neff & Ricci LLP,
independent certified public accountants.

         2.       Schedules omitted as they are not applicable.

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

                                       21
<PAGE>
<TABLE>
<CAPTION>
       <S>          <C>
         3.  (a)      List of Exhibits

             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***
             10.4     Form of Directors Stock Compensation Plan between the Company and Directors
                      of the Company***
             10.5     2000 Stock Option Plan****
             13       Portions of the 2001 Annual Report to Stockholders
             21       Subsidiaries of the Registrant (See "Item 1 - Description of Business")
             23       Consent of Neff & Ricci LLP

</TABLE>


--------------
*        Incorporated  herein  by  reference  to  exhibits  3(i)(Certificate  of
         Incorporation) and 3(ii)(Bylaws) to the Registration  Statement on Form
         S-1 of the  Registrant  (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 the Proxy Statement for the Annual Meeting
         of Stockholders on October 27, 2000 and filed with the SEC on September
         25, 2000.

(b)      Not applicable.




                                                        22

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized as of September 28,
2001.

                                                GFSB BANCORP, INC.


                                       By:      /s/James Nechero, Jr.
                                                --------------------------------
                                                James Nechero, Jr.
                                                President
                                                (Duly Authorized Representative)


         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates  indicated as of September 28,
2001.

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

By: /s/Dr. Wallace R. Phillips     By: /s/Jerry R. Spurlin
------------------------------     ---------------------------------------------
Dr. Wallace R. Phillips            Jerry R. Spurlin
Chairman of the Board              Chief Financial Officer
                                   (Principal Financial and Accounting Officer)


By: /s/Vernon I. Hamilton          By: /s/James Nechero, Jr.
------------------------------     ---------------------------------------------
Vernon I. Hamilton                 James Nechero, Jr.
Director                           President and Director
                                   (Principal Executive Officer)


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


By: /s/Richard P. Gallegos         By: /s/George S. Perce
------------------------------     ---------------------------------------------
Richard P. Gallegos                George S. Perce
President of Bank                  Secretary and Director



By: /s/Richard C. Kauzlaric        By: /s/Leonard C. Scalzi
------------------------------     ---------------------------------------------
Richard C. Kauzlaric               Leonard C. Scalzi
Director                           Senior Vice President

</TABLE>