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 [FEE REQUIRED] For the fiscal year ended June 30, 1997, OR

|_|   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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. |_|

      State issuer's revenues for its most recent fiscal year. $6,127,343.

      The aggregate market value of the voting stock held by  non-affiliates  of
the  Registrant,  based upon the average  bid and asked  prices of such stock on
September 15, 1997, was $8.9 million (468,116 shares at $18.875 per share).

      As of September 15, 1997, there were issued and outstanding 800,708 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,
    1997. (Part II)
2.  Portions of Proxy  Statement  for the 1997 Annual  Meeting of  Stockholders.
    (Part III)


<PAGE>



                                    PART I

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

General

      GFSB Bancorp,  Inc. (the  "Company") is a unitary savings and loan holding
company  that was  incorporated  in March  1995  under  the laws of the State of
Delaware for the purpose of acquiring all of the common stock of Gallup  Federal
Savings Bank (the "Bank"). This acquisition occurred June 29, 1995 at which time
the Bank  simultaneously  converted  from a mutual  to  stock  institution  (the
"Conversion"),  sold all of its outstanding capital stock to the Company and the
Company  made its initial  public  offering of its common  stock.  The  expenses
associated  with the  Conversion  were  charged  to paid-in  capital  while $4.5
million of the net proceeds of $9.1 million from the public offering was used to
purchase all of the issued and outstanding  stock of the Bank issued pursuant to
the  Conversion  with the remaining  $4.5 million being retained by the Company.
This  transaction  was  accounted  for  in a  manner  similar  to a  pooling  of
interests,  consequently  no goodwill or other  intangibles  were  recorded as a
result of this transaction.

      Since the primary activities of the Company are those of the Bank, much of
the  discussion  herein  pertains  to the Bank,  however,  comparisons  to total
assets, liabilities, etc. are based on the Company's consolidated numbers. As of
June 30, 1997,  the Company had total assets of $94 million,  total  deposits of
$58 million and stockholders' equity of $14 million or 15% of total assets under
generally accepted accounting  principles  ("GAAP").  The only subsidiary of the
Company is the Bank. The Bank currently has no subsidiaries.

      The Bank is a federally  chartered  capital  stock savings bank located in
Gallup, New Mexico. The Bank was founded in 1934 under the name the Bank Savings
and Loan Association.  In connection with the Bank's conversion from a federally
chartered  mutual  savings  association to a federally  chartered  stock savings
bank,  the Bank  changed its name to Gallup  Federal  Savings  Bank.  The Bank's
deposits  are  federally  insured  by the  Savings  Association  Insurance  Fund
("SAIF"), as administered by the Federal Deposit Insurance Corporation ("FDIC").

      The  Company's  business  activities  to date  have  been  limited  to its
investment  in the Bank,  loans made to the Bank for use in the normal course of
the Bank's business, and a loan made to the Gallup Federal Savings Bank Employee
Stock  Ownership  Plan  ("ESOP")  to enable the ESOP to  purchase  shares of the
Company's common stock in the initial public offering.

      The Bank offers a variety of  financial  services to meet the needs of the
communities it serves. The Bank's principal business is attracting deposits from
the general public and investing those  deposits,  together with funds generated
from operations,  to originate first mortgages on one- to four-family residences
in its market area. The Bank also  originates a limited number of  multi-family,
commercial real estate,  construction,  commercial  business and consumer loans.
The Bank intends to materially  increase its origination of loans not secured by
one- to four-family residences.


                                       -1-

<PAGE>



      The  principal  sources of funds for the  Bank's  lending  activities  are
deposits,  the  amortization,  repayment and maturity of loans,  mortgage-backed
securities,  investment  securities  and  borrowings  from the  FHLB.  Principal
sources of income are  interest and fees on loans,  mortgage-backed  securities,
investment securities,  and deposits held in other financial  institutions.  The
Bank's principal expense is interest paid on deposits and FHLB borrowings.

      The Company's dividend payout ratios for the fiscal  years  ended June 30,
1997 and June 30, 1996, are 51.9% and 79.5%, respectively.

      The  Company  operates  from its main  office  located  at 221 West  Aztec
Avenue, Gallup, New Mexico.

Market Area and Competition

      The City of Gallup,  New  Mexico is  considered  to be the Bank's  primary
market  area.  McKinley  County,  New  Mexico  is  considered  to be the  Bank's
secondary  market.  McKinley County is located in northwestern  New Mexico,  and
occupies a part of the Colorado  Plateau called the San Juan Plateau.  More than
half of the people in the County are Native  Americans;  including  Navajos  and
Zunis. McKinley County includes the trading and service center of Gallup and the
southeastern edge of the Navajo Indian  Reservation.  In January 1995,  McKinley
County had a population of approximately  67,000. The Bank intends to expand its
secondary market area to adjacent  counties,  which will include a major portion
of the Navajo Indian Reservation and Apachi County, Arizona.

      The general  economy of Gallup is centered around the wholesale and retail
trade, public administration,  manufacturing,  transportation services,  tourism
and mining.  The production of Indian arts and crafts by smaller businesses also
constitutes  a major part of the  County's  economic  base.  The largest  single
employer in McKinley County is the Bureau of Indian Affairs.

      During its sixty-three year existence, the Bank has focused on serving its
customers  located  in the  New  Mexico  community  of  Gallup  and  surrounding
communities  in  McKinley  County.  Economic  growth in the Bank's  market  area
remains  dependent  upon the local  economy.  In addition,  the deposit and loan
activity of the Bank is  significantly  affected by economic  conditions  in its
market area. The Bank's  principal  competitors are financial  institutions  and
mortgage  banking  companies,  many of which are  significantly  larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes  principally  from commercial  banks,  mortgage
brokers,  banking and  insurance  companies.  Its  competition  for deposits has
historically come from commercial banks. In addition,  the Bank faces increasing
competition for deposits from non-bank institutions, such as brokerage firms and
insurance  companies in such areas as short-term  money market funds,  corporate
and government securities funds, mutual funds and annuities.  The Bank is one of
five  savings  associations  and  commercial  banks having an office in McKinley
County.   The  Bank  is  the  only  savings   association  or  commercial   bank
headquartered  in Gallup.  The Bank also competes with three local credit unions
and several mortgage banking companies located outside of McKinley County.

Lending Activities

      General.  The Bank's loan portfolio  consists of mortgage loans secured by
one- to  four-family  residences,  and  multi-family,  commercial  real  estate,
construction, consumer and commercial business loans.

      At June 30, 1997, the Bank's  loan  portfolio  totaled $52 million.  Loans
secured  by  first  mortgages  on one- to  four-family  residences  totaled  $38
million,  or 73% of the Bank's loan portfolio at

                                       -2-

<PAGE>


June 30, 1997. For its mortgage loan  portfolio,  the Bank primarily  originates
fixed-rate  loans  with up to  15-year  terms.  As part of its  asset  liability
strategy,  the Bank recently began offering more  adjustable-rate loan products.
In addition, the Bank sells conventional one- to four-family fixed rate mortgage
loans over 15 years in maturity into the secondary market.

      Analysis of Loan  Portfolio.  The following  table sets forth  information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
loan participations, deferred loan origination fees and costs and allowances for
losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                                At June 30,
                                              ------------------------------------------------
                                                      1997                      1996
                                              ------------------------   ---------------------
                                                  $              %           $          %
                                              ---------       --------   ---------    --------
                                                          (Dollars in Thousands)
Type of Loans:
<S>                                           <C>              <C>       <C>         <C>    
Residential................................   $ 36,716         70.58 %   $ 29,178     75.34 %
Commercial real estate.....................     11,827         22.73        6,614     17.08
Construction:
  Residential..............................        232           .44        443        1.14
  Commercial...............................      3,579          6.88      2,617        6.76
Commercial business .......................      1,961          3.77      1,632        4.21
Consumer:
  Savings account .........................      1,113          2.14      1,141        2.95
  Automobile and other.....................      1,618          3.11        548        1.42
Less:
  Loans in process.........................     (1,383)        (2.66)    (2,106)      (5.44)
  Loan participations sold.................     (2,961)        (5.69)      (710)      (1.83)
 Deferred loan origination fees
   and costs...............................       (341)         (.65)      (320)      (0.83)
  Allowance for loan losses................       (339)         (.65)      (309)      (0.80)
                                             ---------        ------    -------      ------  
Total loans, net...........................  $  52,022           100 %  $38,728       100.00%
                                             =========        ======    =======      ======  

Type of Security:
  Residential real estate
    1-4 family.............................    $36,948         71.02    $28,275       73.01%
    Multi-family dwelling units............      2,741          5.27      1,346        3.48
  Commercial real estate...................     12,536         24.09      9,231       23.84
  Commercial business .....................      2,090          4.02      1,632        4.21
  Consumer:
    Savings accounts.......................      1,113          2.14      1,141        2.95
    Automobile and other...................      1,618          3.11        548        1.41
Less:
  Loan participations sold.................     (2,961)        (5.69)      (710)      (1.83)
  Loans in process.........................     (1,383)        (2.66)    (2,106)      (5.44)
  Deferred loan origination fees and costs.       (341)         (.65)      (320)      (0.83)
  Allowance for loan losses................       (339)         (.65)      (309)      (0.80)
                                             ---------        ------    -------      ------  
  Total loans, net.........................  $  52,022           100 %  $38,728      100.00 %
                                             =========        ======    =======      ======  
</TABLE>



                                       -3-

<PAGE>



Loan Maturity Tables

      The following  table sets forth the maturity of the Bank's loan  portfolio
at June 30, 1997. The table does not include  prepayments or scheduled principal
repayments.  Prepayments and scheduled principal repayments on loans totaled $17
million  and  $12  million,  for  the  years  ended  June  30,  1997  and  1996,
respectively.  Adjustable-rate  mortgage  loans are shown as  maturing  based on
contractual maturities.

<TABLE>
<CAPTION>
                                            Multi-family and                Consumer and
                              1-4 Family       Commercial                    Commercial
                              Real Estate     Real Estate    Construction     Business     Total
                              -----------   ---------------- ------------   ------------  -------

                                                       (In Thousands)
Amounts Due:
<S>                             <C>             <C>          <C>              <C>        <C>     
Within 3 months...........      $   198         $     9      $   442          $  303     $    952

3 months to 1 Year........          559             293          402           1,660        2,914

After 1 year:
  1 to 3 years............        1,054           1,442          116           1,043        3,655
  3 to 5 years............        2,296           4,968           59             547        7,870
  5 to 10 years...........       10,004             684          129             159       10,976
  10 to 20 years..........       17,456           3,009        2,663             977       24,105
  Over 20 years...........        6,437               -            -               -        6,437
                                -------         -------      -------          ------     --------

Total due after one year..       37,247          10,103        2,967           2,726       53,043
                                -------         -------      -------          ------     --------

Non-performing............          134               -            -               3          137
                                -------         -------      -------          ------     --------

Total amount due..........      $38,138         $10,405      $ 3,811          $4,692     $ 57,046
                                -------         -------      -------          ------     --------

Less:
Loan participations sold..                                                               $ (2,961)
Allowance for loan loss...                                                                   (339)

Loans in process..........                                                                 (1,383)

Deferred loan fees........                                                                   (341)
                                                                                         --------
  Loans receivable, net...                                                               $ 52,022
                                                                                         ========

</TABLE>




                                       -4-

<PAGE>



      The following  table sets forth the dollar amount,  before  deductions for
loans in process,  deferred  loan  origination  fees and costs and allowance for
loan losses,  at June 30, 1997 of all loans due after June 30, 1998,  which have
pre-determined  interest  rates and which have floating or  adjustable  interest
rates.

<TABLE>
<CAPTION>
                                                  Floating or
                                Fixed Rates    Adjustable Rates    Total
                                -----------    ----------------   -------
                                                (In Thousands)
<S>                                <C>              <C>           <C>    
One- to four-family(1)......       $33,103          $ 5,140       $38,243
Multi-family and
  commercial real estate(1).        10,569            3,542        14,111

Consumer and commercial
  business..................         2,756            1,936         4,692
                                   -------          -------       -------


    Total...................       $46,428          $10,618       $57,046
                                   =======          =======       =======
</TABLE>

---------------
(1)   Includes construction loans.


      One- to Four-Family  Residential  Loans. Prior to 1994, the Bank's primary
lending activity consisted of the origination of one- to four-family residential
mortgage loans secured by owner-occupied  property located in the Bank's primary
market  area and loans  secured by  deposit  accounts.  The Bank now  originates
multi-family,  commercial  business,  commercial real estate and consumer loans.
The Bank generally  originates  one- to four-family  residential  mortgage loans
without private  mortgage  insurance in amounts up to 80% of the appraised value
of the  mortgaged  property,  or up to  95% if  private  mortgage  insurance  is
obtained to reduce the Bank's exposure to 80% or below of the appraised value of
the properties.  To a lesser extent,  the Bank makes loans on non-owner occupied
one- to  four-family  properties  acquired as an  investment by the borrowers in
amounts up to 80% of the appraised value of the property. In addition,  the Bank
originates FHA and VA loans.

      The Bank  primarily  originates  fixed-rate  mortgage  loans  for its loan
portfolio with up to 15 year terms. In addition,  the Bank originates loans with
terms over 15 years for sale in the secondary  market.  The Bank offers  various
loan  programs  with  varying  interest  rates and fees which are  competitively
priced based on market conditions and the Bank's cost of funds.  Generally,  the
Bank's  underwriting  guidelines for fixed-rate  mortgage loans conform to FHLMC
and  FNMA  guidelines.   In  March  1995,  the  Bank  began  offering   one-year
adjustable-rate  mortgage  ("ARM")  loans which adjust  annually  based upon the
one-year  treasury rate. The program is structured so that such loans  generally
may not adjust more than 2% in any one year.  The Bank will not originate  loans
below the fully  indexed  rate.  Generally,  during  periods of rising  interest
rates,  the risk of default on an ARM loan is  considered to be greater than the
risk of default on a fixed-rate  loan due to the upward  adjustment  of interest
costs to the  borrower.  The Bank will not  originate  ARM loans  with  negative
amortization or with initial  "teaser" rates.  The Bank also offers a variety of
loan  products  for low and  moderate  income  housing.  The Bank offers  second
mortgage  loans on one- to  four-family  residences  if the Bank holds the first
mortgage loan for such property and the combined loan to value ratio will be 90%
or lower.

      Commercial Real Estate and  Multi-Family  Loans.  Since 1994, the Bank has
actively  increased its origination of commercial  real estate and  multi-family
loans and expects to continue to do so. The

                                       -5-

<PAGE>



Bank became  involved  in these  types of loans due to a  perceived  need in the
Bank's market area and in an attempt to increase the Bank's net interest margin.
Commercial real estate and multi-family  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 Bank. The
Bank'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 Bank 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 New York prime rate.  At June
30,  1997,  the Bank's  largest  commercial  real  estate  loan  consisted  of a
$1,500,000  performing  loan secured by a strip shopping  center in Gallup,  New
Mexico,  of which  $500,000  has been  sold to  another  bank as a  non-recourse
participation.  At June 30, 1997, the Bank's largest multi-family loan consisted
of a $693,000 performing loan secured by two multi-family apartment buildings in
Gallup, New Mexico.

      Loans  secured  by  commercial  real  estate and  multi-family  properties
generally  involve a greater degree of risk than residential  mortgage loans and
carry larger loan balances.  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 income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore,  the repayment of loans secured by commercial real estate
is typically dependent upon the successful  operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be  impaired.  The Bank  intends  to  continue  to  emphasize
commercial real estate lending and accordingly, its credit risk may increase.

      Consumer and Commercial Business Loans. In response to a perceived need in
the local  community and to provide for  diversification  of its asset portfolio
and improved  interest rate risk management,  the Bank began making consumer and
commercial  business loans at the beginning of 1994. At June 30, 1997,  consumer
loans totaled $1.6 million or 2.8% of the loan portfolio. The Bank is attempting
to increase its level of consumer  lending  through new  products,  such as home
equity  lines  of  credit,   second  mortgage  loans  and  automobile  loans,  a
competitive  pricing  structure,   promotional  activities,   and  cross-selling
consumer  products through its office,  without  incurring  unacceptable  credit
risk. The home equity lines of credit are made with  adjustable  rates with loan
to value  ratios  of 90% if the Bank has the first  mortgage  and 80% if it does
not. The Bank also offers  automobile and other consumer loans offered primarily
on a fixed-rate,  short-term basis. The underwriting  standards  employed by the
Bank 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.  The Bank's  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 mortgage loans.

      The Bank intends to continue to actively increase its commercial  business
loan originations so that they will equal  approximately 10% to 20% of the total
loan portfolio. 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. Some loans are unsecured, but the majority 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 Bank
offers  fixed-rate  commercial  business loans and  adjustable-rate  loans which
adjust daily based upon New York prime.  This increased  credit risk is a result
of several factors, including the concentration of principal in a

                                       -6-

<PAGE>



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.

      Construction  Loans.  The  Bank  primarily  makes  construction  loans  to
individuals to construct  single-family  owner-occupied homes for which the Bank
also provides permanent financing and to builders who have a proven track record
on either a pre-sold or speculative basis.  Construction  financing is generally
considered to involve a higher degree of risk of loss than  long-term  financing
on  improved,  occupied  real  estate.  Risk of loss on a  construction  loan is
dependent  largely upon the accuracy of the initial  estimate of the  property's
value at completion  of  construction  or  development  and the  estimated  cost
(including interest) of construction. During the construction phase, a number of
factors  could  result  in  delays  and  cost  overruns.   If  the  estimate  of
construction costs proves to be inaccurate,  the Bank may be required to advance
funds  beyond  the  amount  originally  committed  to permit  completion  of the
development.  If the estimate of value proves to be inaccurate,  the Bank may be
confronted,  at or prior to the  maturity of the loan,  with a project  having a
value which is insufficient to assure full repayment.

      Loan  Commitments.  The Bank issues  written  commitments  to  prospective
borrowers on all real estate approved loans. Generally,  the commitment requires
acceptance  within ten days of the date of  issuance  and must be closed  within
thirty  days of  issuance.  At June 30,  1997,  the Bank had  $10.5  million  of
commitments  to fund  new  loans  at  market  interest  rates  and to  fund  the
undisbursed portion of construction loans and home equity lines of credit.

      Loans to One Borrower. Savings institutions are subject to the same limits
as those  applicable to national banks,  which under current  regulations  limit
loans-to-one  borrower  in an  amount  equal to 15% of  unimpaired  capital  and
retained income on an unsecured  basis and an additional  amount equal to 10% of
unimpaired  capital  and  retained  income  if the loan is  secured  by  readily
marketable collateral  (generally,  financial  instruments,  not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.8 million as of June 30, 1997.

      At June 30, 1997, the Bank's  largest  lending  relationship  consisted of
four performing loans,  including two amortizing  loans, a commercial  revolving
line of credit loan and a construction loan, totaling  $3,568,000,  of which all
but  $343,000  has been  funded and of which  $2,023,000  has been sold to other
banks as non-recourse participations,  secured by three motel properties, two in
Gallup  and  one  in  Grants,   New  Mexico.   The  next  four  largest  lending
relationships,  all of which  consist  of  performing  loans,  at June 30,  1997
consisted of a $200,000 commercial revolving line of credit secured by inventory
and  $1,500,000  loan  secured by a strip  shopping  center in Gallup,  of which
$500,000  has been sold to another  bank as a  non-recourse  participation,  two
loans totaling  $1,188,000  secured by two Gallup commercial office  properties,
two loans totaling $1,407,000,  secured by a motel property and adjacent land in
Gallup,  of which  $647,000  has been  sold to  another  bank as a  non-recourse
participation,  and a  $693,000  loan  secured  by  two  multi-family  apartment
buildings located in Gallup.

Non-Performing and Problem Assets

     Loan Delinquencies. 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.  At June 30,  1997,  the Bank had total  delinquent
loans of $864,430, of which $543,187 were delinquent over 30 days, $321,243 were
delinquent over 60 days, and $136,921 were delinquent 90 days or more.

                                       -7-

<PAGE>



      The following table sets forth information  regarding  non-accrual  loans,
real estate owned, and certain other repossessed assets and loans.

<TABLE>
<CAPTION>
                                                                   At June 30,
                                                                 --------------
                                                                 1997      1996
                                                                 -----     ----
                                                                  (In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S>                                                              <C>       <C> 
  Permanent loans secured by 1-4 dwelling unit..............     $134      $ 49
  All other mortgage loans .................................        3        --

Non-mortgage loans:
  Commercial real estate ...................................       --        96
  Consumer .................................................        4
                                                                 ----      ----
      Total ................................................     $ --      $100
                                                                 ====      ====
Accruing loans which are contractually past
  due 90 days or more:
Mortgage loans:
  Permanent loans secured by 1-4 dwelling units.............     $ --      $  2
  All other mortgage loans .................................       --        --
                                                                 ----      ----
      Total ................................................     $ --      $  2
                                                                 ====      ====

Total non-accrual and accrual loans ........................     $137      $151
Real estate owned ..........................................       --        --
                                                                 ----      ----
otal non-performing assets ................................      $137      $151
                                                                 ====      ====
Total non-accrual and accrual loans to net loans ...........      .26%      .39%
Total non-accrual and accrual loans to total assets.........       15%      .21%
Total non-performing assets to total assets ................      .15%      .21%

</TABLE>

      Interest  income that would have been recorded on loans accounted for on a
non-accrual  basis under the original terms of such loans was immaterial for the
year ended June 30, 1997. Amounts included in the Bank's interest income for the
year ended June 30, 1997 was, likewise, immaterial.

      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.

      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

                                       -8-

<PAGE>



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.  Although the Bank
had a low level of non-performing loans at June 30, 1997, the Bank has only been
originating  commercial business loans and consumer loans since the beginning of
1994 and does not have a history on the performance of such loans.

      At June 30, 1997,  with the exception of two loans on one- to  four-family
homes totaling  $51,000 and one commercial  business and consumer loan totalling
$283,000,  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 provides further  information about the Bank's problem
assets as of June 30, 1997.

<TABLE>
<CAPTION>

                                                                             At
                                                                           June 30,
                                                                            1997
                                                                       --------------
                                                                       (In Thousands)
<S>                                                                         <C> 
Substandard ......................................................          $630
Doubtful .........................................................            --
Loss .............................................................            --
General loss allowance ...........................................           339
Specific loss allowance - loans ..................................            --
Specific loss allowance - real estate owned ......................            --
</TABLE>



      Real  Estate  Owned.  Real  estate  acquired  by the Bank as a  result  of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold.  When  property is acquired it is recorded at the lower of the
cost or fair value.  The Bank records loans as in substance  foreclosures if the
borrower  has  little or no equity in the  property  based  upon its  documented
current fair value,  the Bank can only expect repayment of the loan to come from
the sale of the property and if the borrower has effectively  abandoned  control
of the  collateral  or has  continued to retain  control of the  collateral  but
because of the current  financial  status of the  borrower  it is  doubtful  the
borrower will be able to repay the loan in the foreseeable  future. In substance
foreclosures  are accounted  for as real estate  acquired  through  foreclosure,
however, title to the collateral has not been acquired by the Bank. There may be
significant  other  expenses  incurred such as attorney and other  extraordinary
servicing  costs  involved  with in  substance  foreclosures.  There was no real
estate owned at June 30, 1997.

      Allowance for Loan and Real Estate Losses.  It is  management's  policy to
provide for losses on  unidentified  loans in its loan  portfolio and foreclosed
real  estate.  A  provision  for loan losses is charged to  operations  based on
management's  evaluation  of the  potential  losses  that may be incurred in the
Bank'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 Bank'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  and  current
economic  conditions.  The allowance for loan losses, as a ratio of total loans,
net, was .65% at June 30, 1997.


                                       -9-

<PAGE>



      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.

      As a result of the declines in regional  real estate market values and the
significant losses experienced by many financial institutions,  there has been a
greater level of scrutiny by regulatory  authorities  of the loan  portfolios of
financial institutions  undertaken as part of the examination of the institution
by the  FDIC,  OTS or other  federal  or state  regulators.  Results  of  recent
examinations  indicate that these  regulators may be applying more  conservative
criteria  in  evaluating  real estate  market  values,  requiring  significantly
increased  provisions for potential loan losses.  While the Bank believes it has
established  an adequate  allowance  for loan losses,  there can be no assurance
that  regulators,  in reviewing the Bank's loan portfolio,  will not request the
Bank to significantly increase its allowance for loan losses, thereby negatively
affecting the Bank's  financial  condition and earnings or that the Bank may not
have to increase its level of loan loss allowance in the future.

Allocation of Allowance for Loan Losses

      The following table sets forth the allocation of the Bank's  allowance for
loan losses by loan  category and the percent of loans in each category to total
loans  receivable,  net,  at the dates  indicated.  The portion of the loan loss
allowance allocated to each loan category does not represent the total available
for future losses which may occur within the loan category  since the total loan
loss allowance is a valuation reserve applicable to the entire loan portfolio.

<TABLE>
<CAPTION>
                                                       At June 30,
                                      ---------------------------------------------
                                              1997                   1996
                                      ---------------------- ----------------------
                                                Percent of             Percent of
                                               Loans in Each          Loans in Each
                                               Category to            Category to
                                      Amount   Total Loans   Amount   Total Loans
                                      ------   -----------   ------   -------------
                                                (Dollars in Thousands)

<S>                                   <C>          <C>         <C>        <C>
Residential real estate............   $   139       65%        $ 152       70%
Commercial real estate.............       116       27            82       22
Consumer and
  commercial business..............        84        8            75        8
                                      -------      ---         -----      --- 

  Total............................   $   339      100%        $ 309      100%
                                      =======      ===         =====      === 


</TABLE>





                                      -10-

<PAGE>



Analysis of the Allowance for Loan Losses

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

<TABLE>
<CAPTION>
                                                             At June 30,
                                                      -------------------------
                                                        1997            1996
                                                      ---------       ---------
                                                        (Dollars in Thousands)

<S>                                                   <C>             <C>     
Total loans outstanding, net ...................      $ 52,022        $ 38,728
                                                      ========        ========
Average loans outstanding ......................      $ 44,246        $ 34,934
                                                      ========        ========

Allowance balances (at beginning of
  period) ......................................      $    309        $    316
Provision (credit):
  Residential ..................................            --              --
  Consumer and commercial business .............            21              29

Charge-offs:
  Residential ..................................            --             (36)
  Consumer and commercial business .............           (26)             --

Recoveries:
  Residential ..................................            --              --
  Consumer and commercial business .............            35              --
Net (charge-offs) recoveries ...................             9             (36) 

Allowance balance (at end of period$ ...........      $    339        $    309
                                                      ========        ========

Allowance for loan losses as a percent
  of total loans outstanding, net ..............           .65%           0.80%

</TABLE>



                                      -11-

<PAGE>



Analysis of the Allowance for Real Estate Owned

      The  following  table sets forth  information  with  respect to the Bank's
allowance for losses on real estate owned at the dates indicated.

<TABLE>
<CAPTION>
                                                 At June 30,
                                         --------------------------
                                             1997          1996
                                         -----------     ----------
                                           (Dollars in Thousands)

Total real estate owned and other
<S>                                      <C>                <C>  
  repossessed assets, net..............  $     --           $  --

Allowance balances - beginning.........        --              --
Provision..............................        --              --
Net charges-offs.......................  $     --           $  --
                                         ========           =====

Allowance balances - ending............        --%             --%
                                         ========           =====

Allowance  for losses on real estate 
owned and other  repossessed  assets
to net real estate owned and other
repossessed assets.....................        --%             --%

</TABLE>


Mortgage-Backed Securities

      The   following   table   sets  forth  the   composition   of  the  Bank's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                    At June 30,
                                     -------------------------------------------
                                             1997                   1996
                                     ---------------------  --------------------
                                                  Percent                Percent
                                      Amount     of Total    Amount     of Total
                                     --------   ----------  --------   ---------
                                                (Dollars in Thousands)
Mortgage-backed securities(1):
<S>                                  <C>           <C>      <C>           <C>   
  FNMA...........................    $21,069       65.70%   $12,148       48.12%
  GNMA...........................      7,274       22.68      9,193       36.41
  FHLMC..........................      2,765        8.62      3,189       12.63
                                      -------      -----    -------      ------
      Total......................     31,108        97.0     24,530       97.16
  Net premiums...................        962         3.0        716        2.84
Net mortgage-backed securities...    $32,070         100%   $25,246      100.00%
                                     =======       =====    =======      ====== 
</TABLE>

--------------------------
(1)   Effective July 1, 1993, the Bank adopted Statement of Financial Accounting
      Standards No. 115,  "Accounting for Certain Investments in Debt and Equity
      Securities."  At June  30,  1997 and June 30,  1996,  all  investments  in
      mortgage-backed  securities  are classified as "available for sale" rather
      than "held for  investment"  and  accordingly  are  recorded at fair value
      versus carrying value.



                                      -12-

<PAGE>



      The  following  table  sets forth the  Bank's  mortgage-backed  securities
activities information for the periods indicated.

<TABLE>
<CAPTION>
                                          For the Year Ended June 30,
                                          --------------------------
                                              1997          1996
                                          ------------   -----------
                                                (In Thousands)
Mortgage-backed securities(1):
<S>                                          <C>           <C>    
  Beginning balance:                         $25,246       $10,739
    Mortgage-backed securities
      purchased....................           12,591        18,040

    Fair value adjustments.........              312          (252)
                                             -------       -------
  Less:
    Mortgage-backed securities sold               --            --
    Principal repayments...........           (6,079)       (3,281)
                                             -------       -------
Ending balance.....................          $32,070       $25,246
                                             =======       =======

</TABLE>

------------------
(1)   Includes premiums and discounts.


      To  supplement  lending  activities,   the  Bank  invests  in  residential
mortgage-backed  securities.  Mortgage-backed securities serve as collateral for
borrowings   and,   through   repayments,   as  a  source  of   liquidity.   The
mortgage-backed   securities   portfolio   at  June  30,   1997   consisted   of
adjustable-rate  certificates  issued by the FHLMC,  GNMA and FNMA.  At June 30,
1997, the mortgage-backed  securities portfolio classified as available for sale
had a fair value of $32  million  and an  amortized  cost of $32 million and had
contractual maturities between 10 and 30 years.

      Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages,  the principal and interest payments on
which  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  such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.

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


                                      -13-

<PAGE>



Investment Activities

      At June 30, 1997,  the Bank had an investment  portfolio of  approximately
$4.3 million, consisting primarily of mutual funds and U.S. Treasury bills. To a
lesser  extent,  the  portfolio  also  includes  FHLMC stock,  and FHLB and FNMA
debentures.  The Bank  classifies  its investment  securities,  as available for
sale,  in accordance  with SFAS 115. The fair value of investment  securities at
June 30, 1997 was $4.3 million,  resulting in a net unrealized gain at that date
of approximately $784,000.

Investment Portfolio

      The  following  table sets  forth the fair value of the Bank's  investment
securities portfolio.

<TABLE>
<CAPTION>
                                                  At June 30,
                                             ---------------------
                                               1997          1996
                                             --------      -------
Debt securities:(1)                              (In Thousands)
<S>                                          <C>           <C>    
 Mutual funds.........................       $ 2,163       $ 2,025
 U.S. Treasury bills..................         1,002           990
 FHLB and FNMA debentures.............           397           889
 FHLMC Stock..........................           780           470
 Federal Farm Credit Bank.............            --           199
                                             -------         -----
   Total investment securities........       $ 4,342        $4,573
                                              ======         =====
</TABLE>

---------------------
(1)   Effective July 1, 1993, the Bank adopted Statement of Financial Accounting
      Standards No. 115,  "Accounting for Certain Investments in Debt and Equity
      Securities."  At  June  30,  1996  and  June  30,  1997,  investments  are
      classified as "available for sale" rather than "held for  investment"  and
      accordingly are recorded at fair value versus carrying value.



                                      -14-

<PAGE>




Investment Portfolio Maturities

      The following table sets forth certain information  regarding the carrying
values,  weighted  average  yields  and  maturities  of  the  Bank's  investment
securities portfolio at June 30, 1997.

<TABLE>
<CAPTION>
                                                                  At June 30, 1997
                     ---------------------------------------------------------------------------------------------------------------
                       One Year or Less     One to Five Years    Five to Ten Years  More than Ten Years  Total Investment Securities
                     --------------------  -------------------  ------------------  -------------------  ---------------------------
                     Carrying    Average   Carrying    Average   Carrying  Average   Carrying  Average      Carrying       Average
                       Value      Yield      Value      Yield      Value    Yield      Value    Yield         Value         Yield
                     ---------   -------   --------    -------   --------  -------   --------- -------      ---------      --------
                        (Dollars in Thousands)

<S>                  <C>          <C>       <C>                  <C>                <C>                   <C>            <C>  
U. S. Treasury bills.$   1,002    6,345%    $   --          %    $    --     --%    $   --       --%      $  1,002       6.34%
Mutual funds.........    2,163     6.07         --                    --     --         --       --          2,163       6.07
FNMA debentures......       --       --        397      5.27          --     --         --       --            397       5.27
FHLMC stock..........       --       --         --                    --     --        780     1.13            780       1.13
  Total..............$   3,165     6.16%    $  397      5.27%    $    --     --%    $  780     1.13%      $  4,342       5.17%
                     =========     ====     =====      =====     =======   ====     ======     ====       ========       ====  

</TABLE>




                                      -15-

<PAGE>



Sources of Funds

      General. Deposits are the major source of the Bank's funds for lending and
other  investment  purposes.  The  Bank  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.  The Bank can obtain advances from
the FHLB as an alternative  to retail  deposit funds.  FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes.  These  advances are  collateralized  by the capital stock of the FHLB
held by the Bank and by certain of the Bank's mortgage loans. The Bank had $20.9
million in FHLB advances at June 30, 1997.

      Deposits. The Bank currently offers regular passbook savings, money market
deposit  accounts (which are actually  statement  savings  accounts with limited
third  party  transfer  or  check  writing  provisions),  and  term  certificate
accounts, primarily to consumers within its primary market area. A full range of
demand and NOW accounts  are now  offered,  both for  consumers  and  commercial
customers. 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. As of June 30, 1997, the Bank had no brokered deposits.

Jumbo Certificate Accounts

      The following  table  indicates the amount of the Bank's  certificates  of
deposit of  $100,000  or more by time  remaining  until  maturity as of June 30,
1997.

<TABLE>
<CAPTION>
                                                  Certificates
                                                  of Deposits
                                                 --------------
Maturity Period                                  (In Thousands)
---------------
<S>                                                  <C>    
Within three months............................      $ 1,977
Three through six months.......................        1,834
Six through twelve months......................       10,601
Over twelve months.............................        1,393
                                                     -------
                                                     $15,805
                                                     =======
</TABLE>


Personnel

      As of June 30,  1997,  the Bank had 18  full-time  employees.  None of the
Bank's  employees are  represented by a collective  bargaining  group.  The Bank
believes that its relationship with its employees is good.



                                      -16-

<PAGE>



                                  REGULATION

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

General

      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.

Insurance of Deposit Accounts

      The  Bank's  deposit  accounts  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 FDIC may also prohibit an insured  depository  institution  from engaging in
any activity the FDIC determines to pose a serious threat to the SAIF.

      The FDIC charges an assessment  for the insurance of deposits based on the
risk a particular  institution  poses to its deposit  insurance fund,  depending
upon the institution's risk classification. This risk classification is based on
an institution's capital group and supervisory subgroup assignment. In addition,
the FDIC is  authorized  to increase  deposit  insurance  rates on a semi-annual
basis if it determines that such action is necessary to cause the balance in the
SAIF to reach the  designated  reserve ratio of 1.25% of  SAIF-insured  deposits
within a reasonable  period of time. The FDIC may impose special  assessments on
SAIF members to repay amounts  borrowed from the U.S.  Treasury or for any other
reason  deemed  necessary  by the FDIC.  Prior to September  30,  1996,  savings
associations  paid within a range of .23% to .31% of domestic  deposits  and the
SAIF was substantially underfunded. By comparison,  prior to September 30, 1996,
members of the Bank Insurance Fund ("BIF"), predominantly commercial banks, were
required to pay substantially  lower, or virtually no, federal deposit insurance
premiums.

      Effective  September  30,  1996,  federal  law was  revised  to  mandate a
one-time  special  assessment on SAIF members such as the Bank of  approximately
 .657% of deposits held on March 31, 1995.  The Bank recorded a $250,000  pre-tax
expense for this  assessment at September 30, 1996.  Beginning  January 1, 1997,
deposit  insurance  assessments  for SAIF members were reduced to  approximately
 .064% of deposits on an annual basis;  this rate may continue through the end of
1999. During this same period,  BIF members are expected to be annually assessed
approximately  .013%  of  deposits.  Thereafter,  assessments  for BIF and  SAIF
members  should be the same and the SAIF and BIF may be merged.  It is  expected
that these continuing  assessments for both SAIF and BIF members will be used to
repay outstanding Financing  Corporation bond obligations.  As a result of these
changes,  beginning January 1, 1997, the rate of deposit insurance  assessed the
Bank substantially declined.


                                      -17-

<PAGE>



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) a
leverage ratio (core capital) equal to at least 3% of total adjusted  assets and
(3) a  risk-based  capital  requirement  equal  to 8.0% of  total  risk-weighted
assets.

      Savings  associations  with a greater than "normal" level of interest rate
risk exposure may, in the future,  be subject to a deduction from capital for an
interest  rate risk  component  for  purposes of  calculating  their  risk-based
capital requirements.

Prompt Corrective Action

      Under the prompt  corrective  action  system,  the banking  regulators are
required  to  take  certain   supervisory   actions   against   undercapitalized
institutions,  the severity of which  depends upon the  institution's  degree of
capitalization.  Under the OTS final rule  implementing  the  prompt  corrective
action  provisions,  an institution shall be deemed to be (i) "well capitalized"
if it has total  risk-based  capital of 10.0% or more,  has a Tier I  risk-based
capital  ratio (core or  leverage  capital to  risk-weighted  assets) of 6.0% or
more, has a leverage  capital of 5.0% or more and is not subject to any order or
final  capital  directive to meet and maintain a specific  capital level for any
capital  measure,  (ii)  "adequately  capitalized" if it has a total  risk-based
capital ratio of 8.0% or more, a Tier I risked-based ratio of 4.0% or more and a
leverage  capital ratio of 4.0% or more (3.0% under certain  circumstances)  and
does not meet the definition of "well capitalized," (iii)  "undercapitalized" if
it has a  total  risk-based  capital  ratio  that is less  than  8.0%,  a Tier I
risk-based capital ratio that is less than 4.0% or a leverage capital ratio that
is  less  than  4.0%  (3.0%  in  certain  circumstances),   (iv)  "significantly
undercapitalized"  if it has a total risk-based  capital ratio that is less than
6.0%,  a Tier I  risk-based  capital  ratio that is less than 3.0% or a leverage
capital ratio that is less than 3.0% and (v) "critically undercapitalized" if it
has a ratio of  tangible  equity to total  assets  that is equal to or less than
2.0%. In addition,  under certain  circumstances,  a federal  banking agency may
reclassify a well  capitalized  institution  as adequately  capitalized  and may
require an adequately capitalized institution or an undercapitalized institution
to comply  with  supervisory  actions as if it were in the next  lower  category
(except  that the  FDIC  may not  reclassify  a  significantly  undercapitalized
institution   as   critically   undercapitalized).   The  Bank  is  currently  a
"well-capitalized"  institution  as  defined  in the  prompt  corrective  action
regulations and as such is not subject to any prompt corrective action measures.

Dividend and Other Capital Distribution Limitations

      OTS  regulations  require the Bank to give the OTS 30 days' advance notice
of any proposed  declaration  of  dividends to the Company,  and the OTS has the
authority under its  supervisory  powers to prohibit the payment of dividends to
the Company. In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the  amount  required  for the  liquidation  account  established
pursuant to the Bank's Plan of Conversion.

      A savings association is prohibited from making a capital distribution if,
after making the distribution, the savings association would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).


                                      -18-

<PAGE>



Qualified Thrift Lender Test

      The  Home  Owners'  Loan  Act,  as  amended  ("HOLA"),   requires  savings
institutions  to meet a  qualified  thrift  lender  ("QTL")  test.  If the  Bank
maintains  an  appropriate  level  of  Qualified  Thrift  Investments   ("QTIs")
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) and otherwise qualifies as a QTL, it will continue
to  enjoy  full  borrowing  privileges  from the FHLB of  Dallas.  The  required
percentage  of QTIs is 65% of  portfolio  assets  (defined  as all assets  minus
intangible  assets,  property used by the institution in conducting its business
and liquid assets equal to 20% of total assets). Certain assets are subject to a
percentage  limitation  of  20%  of  portfolio  assets.  In  addition,   savings
associations  may  include  shares  of stock  of the  FHLBs,  FNMA and  FHLMC as
qualifying  QTIs. 

Liquidity Requirements

      All savings associations are required to maintain an average daily balance
of liquid  assets equal to a certain  percentage of the sum of its average daily
balance of net withdrawable  deposit accounts and borrowings payable in one year
or less.  The liquidity  requirement  may vary from time to time (between 4% and
10%)  depending  upon  economic  conditions  and  savings  flows of all  savings
associations. At June 30, 1997, the Bank's required liquid asset ratio was 5%.

Federal Home Loan Bank System

      The Bank is a member of the FHLB of  Dallas,  which is one of 12  regional
FHLBs  that   administer   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.

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, 1997, the Bank's
total  transaction  accounts  were below the minimum level for which the Federal
Reserve Board requires a reserve.

      Savings  associations  have  authority to borrow from the Federal  Reserve
Bank "discount  window," but Federal Reserve policy  generally  requires savings
associations  to exhaust  all OTS  sources  before  borrowing  from the  Federal
Reserve System. The Bank had no such borrowings at June 30, 1997.

Company Regulation

      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 will have enforcement  authority over the Company
and its  non-savings  association  subsidiaries,  should  such  subsidiaries  be
formed,  which also permits the OTS to restrict or prohibit  activities that are
determined to be a serious

                                      -19-

<PAGE>



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.

      QTL Test.  As a unitary  savings  and loan  holding  company,  the Company
generally  will not be  subject  to  activity  restrictions,  provided  the Bank
satisfies  the QTL test.  See "- Qualified  Thrift  Lender Test." If the Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the  Company  and any of its  subsidiaries  (other  than the  Bank or any  other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies and those activities  specified by the OTS
as permissible for a multiple savings and loan holding company unless such other
associations  each  also  qualify  as a QTL or  were  acquired  in a  supervised
acquisition.

      Recent  and  Proposed   Legislation.   Bills  have  been   introduced   to
congressional  committees that would  consolidate the OTS with the Office of the
Comptroller  of the Currency  ("OCC").  The resulting  agency would regulate all
federally chartered commercial banks and thrift institutions.  In the event that
the OTS is  consolidated  with the OCC, it is possible  that the thrift  charter
could be eliminated and thrifts could be forced to convert to commercial  banks.
Legislation  passed in 1996 required the recapture  (for income tax purposes) of
the Bank's post 1987 additions to bad debt reserves; however, this recapture did
not have a material  effect on the  earnings of the Bank or the Company  because
the Bank had previously provided deferred taxes on its bad debt reserves.  Under
current law and regulations, a unitary savings and loan holding company, such as
the  Company,  which  has only  one  thrift  subsidiary  such as the  Bank,  has
essentially unlimited investment  authority.  Legislation has also been proposed
which, if enacted, would limit the non-banking related activities of savings and
loan holding companies to those activities permitted for bank holding companies.

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

      The Bank owns its main office  located at 221 West Aztec  Avenue,  Gallup,
New Mexico.  The Bank's total  investment  in office  property and  equipment is
$1,141,000  with a net book value of $677,000 at June 30, 1997. The Bank may add
on additional office space to its current office in the future.

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

      Not applicable.


                                    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, 1997 (the "Annual Report") is incorporated herein by reference.


                                      -20-

<PAGE>



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

      On March 12, 1997, the board of directors of the registrant  determined to
engage Neff & Company LLP as its independent  auditors for the fiscal year ended
June 30, 1998. On March 12, 1997, the registrant orally notified Atkinson & Co.,
Ltd.  ("Atkinson"),  its independent auditors for the fiscal year ended June 30,
1997  and  for  the  fiscal  years  ended  June  30,  1996  and  1995,  of  this
determination  and that Atkinson would not be engaged for the fiscal year ending
June 30, 1998 but that Atkinson  remained engaged for the fiscal year ended June
30, 1997 and that the registrant expected that Atkinson would issue a report for
the fiscal year ended June 30, 1997. The  determination  to replace Atkinson was
recommended  by the audit  committee and approved by the full board of directors
of the registrant.

      The report of Atkinson  for the fiscal  years ended June 30, 1995 and 1996
contained no adverse  opinion or  disclaimer of opinion and was not qualified or
modified as to  uncertainty,  audit scope or accounting  principles.  During the
fiscal  years  ended June 30,  1995 and 1996 and during the period from June 30,
1996 to March 12, 1997, there were no  disagreements  between the registrant and
Atkinson  concerning  accounting  principles or practices,  financial  statement
disclosure,  or auditing  scope or  procedure. 


                                   PART III

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

      The  information  contained  under the section  captioned  "Section  16(a)
Beneficial  Ownership  Reporting  Compliance" in the Company's  definitive proxy
statement  for the Company's  1997 Annual  Meeting of  Stockholders  (the "Proxy
Statement") is incorporated herein by reference.

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

      The  information   contained  under  the  section   captioned   "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.


                                      -21-

<PAGE>




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

      The information  contained under the section captioned "Voting  Securities
and Principal  Holders  Thereof" and "Proposal I - Election of Directors" in the
Proxy Statement is incorporated herein by reference.


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

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


Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

(a)   The  Consolidated  Financial  Statements and Independent  Auditors' Report
      included in the Annual Report,  listed below, are  incorporated  herein by
      reference.
       1.   Independent Auditors' Report

       2.   GFSB Bancorp, Inc.

             (a)  Consolidated Statement of Financial Condition at June 30, 1997

             (b)  Consolidated  Statements  of Earnings for each of the years in
                  the two-year period ended June 30, 1997

             (c)  Consolidated  Statements of  Stockholders'  Equity for each of
                  the years in the two-year period ended June 30, 1997

             (d)  Consolidated Statements of Cash Flows for each of the years in
                  the two-year period ended June 30, 1997

             (e)  Notes to Consolidated Financial Statements

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

       3.    (a)  List of Exhibits

                  3.1    Articles of Incorporation of GFSB Bancorp, Inc. 1

                  3.2    Bylaws of GFSB Bancorp, Inc.1

                  10.1   1995 Stock Option Plan

--------
1     Incorporated  herein by reference  from the  Exhibits to the  Registration
      Statement  on Form S-1 of the  Registrant  (File No.  33-90400)  initially
      filed with the Commission on March 17, 1995.

                                      -22-

<PAGE>



                  10.2   Management Stock Bonus Plan

                  13     1997 Annual Report to Stockholders

                  21     Subsidiaries of the Issuer

                  23     Consent of Atkinson & Co., Ltd.

                  27     Financial Data Schedule (in electronic filing only)

(b) No  reports on Form 8-K were  filed  during  the last  quarter of the period
covered by this Report.



                                      -23-

<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.

                                                GFSB BANCORP, INC.


Date:  September 29, 1997                       By:   /s/ Jerry R. Spurlin
                                                --------------------
                                                Jerry R. Spurlin
                                                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.



By: /s/ Dr. Wallace R. Phillips                 By:   /s/ Jerry R. Spurlin
    -------------------------------                   --------------------------
    Dr. Wallace R. Phillips                           Jerry R. Spurlin
    Director                                          President
                                                      (Principal Executive, 
                                                        Financial and Accounting
                                                        Officer)

Date:  September 29, 1997                       Date:   September 29, 1997



By: /s/ Richard C. Kauzlaric                    By:   /s/ James Nechero, Jr.
    -------------------------------                   --------------------------
    Richard C. Kauzlaric                              James Nechero, Jr.
    Chairman of the Board                             Director and Assistant 
                                                       Secretary

Date:  September 29, 1997                       Date:   September 29, 1997



By:                                             By:   
    -------------------------------                   --------------------------
    Vernon I. Hamilton                                Michael T. Mataya
    Director                                          Director

Date:  September    , 1997                      Date:   September    , 1997
                 ---                                              ---


By: /s/ Charles L. Parker, Jr.                  By:  
    -------------------------------                   --------------------------
    Charles L. Parker, Jr.                            George S. Perce
    Director and Treasurer                            Director and Secretary

Date:  September 29, 1997                       Date:   September    , 1997
                                                                  ---