================================================================================

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


                                   FORM 10-QSB


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

                For the quarterly period ended September 30, 1996
                                               ------------------

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                            THE 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 or       (I.R.S. Employer
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
                                                      --------------


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
                                 ---           ---



As of November 12, 1996, there were issued and outstanding 901,313 shares of the
registrant's Common Stock.

================================================================================

<PAGE>

GFSB Bancorp, Inc.


Index

                                                                 Page No.  

               PART I.  FINANCIAL INFORMATION

Item 1  Consolidated Financial Statements:
        
        Consolidated Statements of Financial Condition
          September 30, 1996 and June 30, 1996                           3
        
        Consolidated Statements of Earnings
          Three months ended September 30, 1996 and 1995                 4
        
        Consolidated Statements of Cash Flows
          Three months ended September 30, 1996 and 1995                 6
           
        Notes to Consolidated Financial Statements                       8
        
Item 2  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                      8
        
               PART II.  OTHER INFORMATION
        
Item 6  Exhibits and Reports on Form 8-K                                13
        
        Signatures                                                      14
        
                                        2
        
        
<PAGE>  
                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

                                                       September 30,  June 30,
                                                          1996          1996
                                                       -----------   -----------
                                                       (Unaudited)
ASSETS

<S>                                                    <C>           <C>        
Cash and due from banks                                $ 1,598,242   $ 1,671,053
Interest-bearing deposits with banks                     1,509,599     1,346,141
Federal funds sold                                         150,000       150,000
Available-for-sale investment securities                 4,195,390     4,572,647
Available-for-sale mortgage-backed securities           29,273,575    25,245,896
Stock of Federal Home Loan Bank, at cost, restricted       808,100       550,600
Loans receivable, net, substantially pledged            41,147,834    38,727,535
Accrued interest and dividend receivable                   433,745       400,316
Premises and equipment                                     539,532       537,042
Prepaid and other assets                                    52,117        49,405
                                                       -----------   -----------

    TOTAL ASSETS                                       $79,708,134    73,250,635
                                                       ===========    ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction accounts                                   $ 4,117,198   $ 3,239,079
Savings and now deposits                                11,386,823    10,758,974
Time deposits                                           32,496,279    31,991,757
Accrued interest payable                                   139,219       103,507
Advances from borrowers for taxes and insurance            281,421       174,532
Accounts payable and accrued liabilities                   367,600       172,717
Deferred income taxes                                      125,477        81,087
Dividends declared and payable                              90,131       402,577
Advances from Federal Home Loan Bank                    15,946,000    10,854,000
Income taxes payable                                        12,682       108,929
                                                       -----------   -----------

    TOTAL LIABILITIES                                   64,962,830    57,887,159
                               

                           
COMMITMENTS AND CONTINGENCIES                                    -             -


STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
  shares authorized;  901,313 issued and
  outstanding                                               86,336        91,080
Preferred stock, $.10 par value, 500,000
  shares authorized;  no shares issued or
  outstanding                                                    -             -
Additional paid-in-capital                               7,827,969     8,486,822
Unearned ESOP stock                                       (532,000)     (541,333)
Retained earnings, substantially
  restricted                                             7,149,282     7,199,360
Unrealized gain on available for sale
  securities, net of taxes                                 213,717       127,547

    TOTAL STOCKHOLDERS' EQUITY                          14,745,304    15,363,476
                                                       -----------   -----------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $79,708,134   $73,250,635 
                                                       ===========   =========== 
</TABLE>

See notes to consolidated financial statements.


                                        3

<PAGE>

                               GFSB Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF EARNINGS


                                                       Three months ended
                                                          September 30,
                                                 -----------------------------

                                                      1996             1995
                                                 -----------------------------
                                                   (Unaudited)      (Unaudited)
Interest income
        Loans receivable
                 Mortgage loans                  $  810,743         $  684,817
                 Commercial loans                    47,116             52,557
                 Share and consumer loans            37,926             27,586
        Available-for-sale investment securities
                 and mortgage-backed securities     517,348            313,111
        Other interest-earning assets                47,216             45,055
                                                 ----------         ----------

                 TOTAL INTEREST EARNINGS          1,460,349          1,123,126

Interest expense
        Deposits                                    580,320            479,608
        Advances from Federal Home Loan Bank        205,514                  0
                                                 ----------         ----------

                 TOTAL INTEREST EXPENSE             785,834            479,608
                                                 ----------         ----------
                 NET INTEREST EARNINGS              674,515            643,518

Provision for loan losses                             5,288             12,205
                                                 ----------         ----------

                 NET INTEREST EARNINGS AFTER
                   PROVISION FOR LOAN LOSSES        669,227            631,313

Non-interest earnings
        Income from real estate operations                0              1,650
        Miscellaneous income                            695                 31
        Net gains from sales of loans                 4,942                  0
        Service charge income                         8,580                304
                                                 ----------         ----------
                                                    
                 TOTAL NON-INTEREST EARNINGS         14,217              1,985

Non-interest expense
        Compensation and benefits                   187,324            109,126
        Professional fees                            28,842             20,910
        Occupancy                                    32,109             23,677
        Advertising                                  10,620              3,720
        Data processing                              23,498             26,182
        Insurance                                   279,465             25,501
        Other                                        63,193             28,337
                                                 ----------         ----------

                 TOTAL NON-INTEREST EXPENSE         625,051            237,453




                                        4
<PAGE>

                               GFSB Bancorp, Inc.

                CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED


                                                        Three months ended
                                                            September 30,
                                                 -----------------------------
                                                       1996            1995
                                                 -----------------------------

                                                   (Unaudited)       (Unaudited)

                 EARNINGS BEFORE INCOME TAXES        58,393            395,845
                                                    
Income tax expense                                   23,753            129,365
                                                 ----------         ----------

                 NET EARNINGS                    $   34,640         $  266,480
                                                 ==========         ==========
                                                    
WEIGHTED AVERAGE NUMBER OF
        SHARES OUTSTANDING                          874,805            892,750

EARNINGS PER COMMON SHARE                        $     0.04         $     0.30
                                                 ==========         ==========
                                                    


                                        5
<PAGE>

                               GFSB Bancorp, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>

                                                                    Three months ended
                                                                       September 30,
                                                             -----------------------------

                                                                 1996              1995
                                                             -----------        ----------
                                                               (Unaudited)        (Unaudited)

Cash flows from operating activities                         
<S>                                                          <C>                <C>       
         Net earnings                                        $    34,640        $  266,480
         Adjustments to reconcile net earnings to            
           net cash provided (used) by operations                   
                  Deferred loan origination fees                 (34,951)          (22,851)
                  Gain on sale of sold loans                      (4,942)           (4,538)
                  Provision for loan losses                        5,288            12,205
                  Depreciation of premises and equipment          16,330            11,392
                  Amortization of investment and mortgage-
                    backed securities premiums (discounts         36,525            31,004
                  Stock dividends on FHLB stock                  (10,800)           (7,100)
                  Stock compensation                              14,140                 0
                  ESOP Stock committted to be released             13,533                0
         Net changes in operating assets and liabilities
                  Accrued interest receivable                    (33,429)         (114,018)
                  Prepaid and other assets                        (2,713)           21,164
                  Accrued interest payable                        35,712             2,098
                  Accounts payable and accrued liabilities       180,743           (61,319)
                  Income taxes payable                           (96,247)          109,368
                  Dividends declared and payable                (312,444)                0
                                                             -----------        ----------
                                                            
                           Net cash provided (used) by       
                           operating activities                 (158,615)          243,885
                                                             
Cash flows from investing activities                         
         Purchase of premises and equipment                      (18,820)          (13,535)
         Loan originations and principal                     
           repayment on loans, net                            (2,385,694)       (1,099,463)
         Principal payments on mortgage-backed              
           securities                                          1,148,390           495,338
         Purchases of mortgage-backed securities              (5,174,111)       (4,257,136)
         Purchases of U.S. Agency Securities, FHLB           
           Debentures, bonds, and mutual funds                   (30,666)                0
         Maturities and proceeds from sale of FHLB           
           Debentures, U.S. Agency Securities,               
           certificates of deposit, and bonds                    500,000           435,000
         Purchase of FHLB stock                                 (246,700)                0
                                                             -----------        ----------
                                                             
                           Net cash provided (used) by       
                           investing activities               (6,207,601)       (4,439,796)
                                                             
</TABLE>
                                                             
                                        6
<PAGE>

                               GFSB Bancorp, Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>

                                                                     Three months ended
                                                                        September 30,
                                                                  1996                   1995
                                                              -----------            ----------  
                                                                (Unaudited)           (Unaudited)
Cash flows from financing activities                          
         Net increase in demand deposits, passbook            
           savings, money market accounts, and                
<S>                                                          <C>                    <C>        
           certificates of deposit                           $  2,010,490           $ 1,622,749
         Net increase (decrease) in mortgage escrow funds         106,889                81,375
         Proceeds from FHLB advances                           17,834,910                     0
         Repayments on FHLB advances                          (12,742,910)                    0
         Dividends paid or to be pai                              (84,718)                    0
         Purchase of retired treasury stock                      (667,798)                    0
                                                             ------------            ----------
                           Net cash provided by               
                           financing activities                 6,456,863             1,704,124
                                                              
         Increase (decrease) in cash and cash equivalents          90,647            (2,491,787)
                                                              
         Cash and cash equivalents at beginning of period       3,167,194             4,914,517
                                                              
         Cash and cash equivalents at end of period           $ 3,257,841             2,422,730
                                                              ===========             =========
                                                              
                                                              
Supplemental disclosures                                      
         Cash paid during the period for                      
                  Interest on deposits and advances           $   750,124            $  477,510
                  Income taxes                                    120,000                20,000
                                                              
         Change in unrealized gain (loss), net of deferred
           taxes for implementation of FASB #115                   86,170                49,867
                                                              
  
</TABLE>
                                                              
                                                              
                                        7
<PAGE>                                                        
                                                        
                               GFSB BANCORP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

1.   The  interim  financial  data is  unaudited;  however,  in the  opinion  of
     management,  the interim data includes all adjustments,  consisting only of
     normal recurring  adjustments necessary for a fair statement of the results
     for the interim periods. The financial statements included herein have been
     prepared  by the  Company  pursuant  to the  rules and  regulations  of the
     Securities  and  Exchange  Commission.  Certain  information  and  footnote
     disclosures   normally  included  in  financial   statements   prepared  in
     accordance  with  generally  accepted   accounting   principles  have  been
     condensed or omitted pursuant to such rules and  regulations,  although the
     Company believes that the disclosures  included herein are adequate to make
     the information presented not misleading.

     The organization and business of the Company,  accounting policies followed
     by the  Company and other  information  are  contained  in the notes to the
     Company's  financial  statements  filed as part of the  Company's  June 30,
     1996, Form 10-KSB. This quarterly report should be read in conjunction with
     such annual report.

2.   Dividends
     ---------

     During the quarter ended June 30, 1996,  the Board of Directors  declared a
     cash dividend of $0.10 per share and a special dividend of $0.35 per share,
     on the Company's  outstanding  common  stock,  payable to  stockholders  of
     record as of June 30, 1996. The dividends were paid in July, 1996.

     During  the  quarter  ended  September  30,  1996,  the Board of  Directors
     declared a  quarterly  cash  dividend  of $0.10 per share on the  Company's
     outstanding common stock, payable to stockholders of record as of September
     30, 1996. The dividends were paid in October, 1996.

     As required by SOP 93-6, the dividends on unallocated ESOP shares have been
     recorded as an additional $5,000  compensation cost rather than a reduction
     of retained earnings.

3.   Employee Stock Option Plan
     --------------------------

     On September 30, 1996, the Company was committed to release  933.333 shares
     of its common stock owned by the Company's ESOP. The commitment resulted in
     $14,000 of additional compensation cost.

4.   Management Stock Bonus Plan
     ---------------------------

     On January 5, 1996, the Company made awards under the Plan in the amount of
     20,382 shares.  The shares were awarded at a price of $13 7/8 per share. At
     June 30, 1996,  17,568 shares remained to be awarded under the Plan. Awards
     under the Plan are earned at the rate of one-fifth of the award per year as
     of the one-year anniversary of the effective date of the Plan. As a result,
     at September 30, 1996, a liability and  corresponding  compensation cost in
     the amount of $14,000 has been recorded under the provisions of the Plan.

5.   BIF/SAIF Insurance Premium
     --------------------------

     As a result  of  Congress'  ruling  in  September,  1996,  all SAIF  member
     institutions,  including the Bank,  are to pay a one-time  assessment.  The
     effect of this is to  immediately  reduce the  capital  of the SAIF  member
     institution  by the  amount  of the fee,  and such  amount  is  immediately
     charged to earnings.  The estimated  assessment amount the Bank will pay is
     $250,000.  This amount has been charged to earnings  for the quarter  ended
     September 30, 1996.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

                                       8

<PAGE>


GFSB  Bancorp,  Inc.,  is the 100% owner of Gallup  Federal  Savings  Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an  ownership  interest.  The Bank is  primarily  engaged in the business of
accepting  deposit  accounts  from the  general  public  and using such funds to
originate mortgage loans for the purchase and refinancing of  one-to-four-family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate,  construction,  consumer and commercial  business loans.
The Bank also purchases  mortgage-backed and investment securities.  The largest
components  of the Bank's net  earnings are net  interest  income,  which is the
difference between interest income and interest expense,  and noninterest income
derived primarily from fees. Consequently,  the Bank's earnings are dependent on
its ability to originate loans, net interest income, and the relative amounts of
interest-earning  assets  and  interest-bearing   liabilities.  The  Bank's  net
earnings is also affected by its provision for loan losses as well as the amount
of other expense,  such as compensation and benefit expense,  occupancy  expense
and deposit insurance  premium expenses.  Earnings of the Bank also are affected
significantly  by general  economic  and  competitive  conditions,  particularly
changes in market interest rates,  government policies and actions of regulatory
authorities. The disparity in premiums paid by BIF and SAIF insured institutions
has also adversely impacted the Bank.

In  September,  1996,  Congress  enacted a plan to  mitigate  the  effect of the
BIF/SAIF  insurance  premium  disparity.  This  plan  requires  all SAIF  member
institutions,  including the Bank, to pay a one-time  assessment to recapitalize
the SAIF.  The effect of this is to  immediately  reduce the capital of the SAIF
member  institution  by the amount of the fee,  and such  amount is  immediately
charged  to  earnings.  The  estimated  assessment  amount  the Bank will pay is
$250,000  which is 65.7 basis points on the amount of deposits held by the Bank.
The amount has been  charged to earnings  for the quarter  ended  September  30,
1996. 

Beginning January 1, 1997,  deposit  insurance  assessments for SAIF members are
expected to be reduced to  approximately  .064% of  deposits on an annual  basis
through the end of 1999.  During this same  period,  BIF members  (predominantly
composed of commercial banks) are expected to be assessed approximately .013% of
deposits.  Thereafter,  assessments  for BIF and SAIF members should be the same
and SAIF and BIF may be merged. As a result of these changes,  beginning January
1,  1997,  the rate of  deposit  insurance  assessed  the Bank will  decline  by
approximately 70%.

Management Strategy

Management's  strategy  has been to monitor  interest  rate  risk,  by asset and
liability  management,  and maintain asset quality while enhancing  earnings and
profitability.  The  Bank's  strategy  has  been  primarily  to make  loans  and
secondarily  to  invest  remaining  funds  in  mortgage-backed   securities  and
investment  securities.  The Bank's purchase of mortgage -backed  securities and
investment  securities  is  designed  primarily  for  safety  of  principal  and
secondarily  for rate of return.  The Bank's lending  strategy has  historically
focused on the  origination  of  traditional  one-to-four-family  mortgage loans
primarily secured by one-to-four-family  residences in the Bank's primary market
area. These loans typically have fixed rates. The Bank also invests a portion of
its assets in  construction,  consumer,  commercial  business,  multi-family and
commercial real estate loans as a method of enhancing earnings and profitability
while also  reducing  interest  rate risk.  Since  1994,  the Bank has  actively
originated commercial business loans and increased its origination of commercial
real estate loans and construction  loans. These loans typically have adjustable
interest rates and are for shorter terms than residential  first mortgage loans.
The Bank has  limited  experience  with these  types of loans,  and this type of
lending generally has more risk than residential lending.  Investment securities
in  the  Bank's  portfolio   typically  have  shorter  terms  to  maturity  than
residential  first mortgage  loans.  As part of its  asset/liability  management
strategy,  the Bank sells its fixed rate mortgage loans with terms over 15 years
into the  secondary  market.  The Bank has sought to remain  competitive  in its
market by  offering  a variety  of  products.  The Bank  attempts  to manage the
interest rates it pays on deposits  while  maintaining a stable deposit base and
providing quality services to its customers.

During the past few years the competing financial institutions located in Gallup
have all been acquired by statewide and regional  bank holding  companies.  As a
result,  as of 1995, the Bank is the only local  institution  headquartered  and
managed in Gallup, New Mexico.  The Bank believes that its "hometown"  advantage
will  provide  an  opportunity  to  expand  its  operations  as the  only  local
independent  financial  institution and that the  reorganization  to the holding
company format and the capital raised from the conversion will enable it to take
advantage of this  opportunity.  It intends to use the new structure and capital
to expand  both the  amount  and scope of its  current  lending  and  investment
activities.  The Bank also  believes  that it has a unique  ability to 



                                        9


<PAGE>

grow as a  result  of the  relatively  large  retail  and  wholesale  businesses
specializing in Indian jewelry.  In addition,  the Bank is exploring  methods of
increasing its business with the large Native American population located in the
nearby Navajo and Zuni Pueblo Indian reservations.

Asset and Liability Management

In an effort to reduce  interest  rate  risk and  protect  it from the  negative
effect  of  rapid  increases  and  decreases  in  interest  rates,  the Bank has
instituted  certain asset and liability  management  measures  including selling
fixed rate mortgage loans with terms over 15 years. See "Management Strategy."

The Bank, like many other thrift institutions,  is exposed to interest rate risk
as a result of the  difference in the maturity of  interest-bearing  liabilities
and  interest-earning  assets and the volatility of interest rates. Most deposit
accounts  react  more  quickly to market  interest  rate  movements  than do the
existing  mortgage  loans  because of their  shorter  terms to  maturity;  sharp
decreases  in  interest  rates  would  typically  positively  affect  the Bank's
earnings.  Conversely,  this same mismatch will generally  adversely  affect the
Bank's earnings during periods of inclining interest rates.

During the low interest  rate  environment  that existed from 1991 through 1993,
the Bank, like other financial institutions,  experienced a significant increase
in homeowners seeking to refinance their existing mortgages. This trend resulted
in a decrease in the yield on the Bank's  interest  earning  assets,  namely the
loan portfolio and mortgage-backed  securities portfolios. The net interest rate
spread may  decrease  if deposits  reprice  upward more  rapidly  than  interest
earning assets.

FINANCIAL CONDITION

The Bank's total  assets  increased  $6.4 million or 8.7% from $73.3  million at
June 30, 1996 to $79.7  million at  September  30,  1996.  This  increase is the
result of a $4.0 million increase in mortgage-backed  securities, a $2.4 million
increase  in the Bank's net loan  portfolio,  and an  increase  in cash and cash
equivalents of $91,000. The majority of the increases are directly  attributable
to efforts of Management to take  advantage of the  increased  capital  infusion
made as a result  of the  conversion  from a mutual to stock  form of  ownership
through  increased  investment  and lending  activity and from FHLB  borrowings.
During the same period,  deposits  increased  $2.0 million from $46.0 million at
June 30,  1996,  to $48.0  million at  September  30,  1996.  This  increase  is
primarily  due to an increase in the Bank's  volume of NOW accounts and business
checking  accounts.  The Bank had $214,000 and $128,000 in unrealized gains (net
of deferred  taxes) at September 30, 1996 and June 30, 1996,  respectively  from
market gains on the Bank's investment and mortgage-backed portfolios. Unrealized
gains and losses do not impact the Bank's  financial  statements  until they are
realized.

RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED SEPTEMBER 30, 1996 COMPARED
TO QUARTER ENDED SEPTEMBER 30, 1995

General

Net earnings  decreased  $232,000 or 87.0% for the quarter  ended  September 30,
1996 from the quarter ended  September 30, 1995.  This decrease is primarily the
result of an increase in non-interest  expense of $388,000 offset by an increase
in net interest earnings of $31,000 and a decrease in income taxes of $105,000.

Interest Earnings

Total  interest  income  increased  $337,000 or 30.6% from $1.1  million for the
quarter ended September 30, 1995 to $1.5 million for the quarter ended September
30, 1996.  The increase in this twelve month period was primarily due to a $14.7
million  increase in the Bank's  mortgage-backed  securities  portfolio and some
general increases in interest rates.

Interest Expense

Total interest expense increased $306,000 or 63.8% from $480,000 for the quarter
ended  September 30, 1995 

                                       10


<PAGE>

to $786,000 for the quarter ended September 30, 1996. This increase was due to a
substantial increase in FHLB borrowings,  a general increase in the deposit base
including  the  increase in volume of NOW  accounts  and higher rates on deposit
products.

Provision for Losses on Loans

The Bank maintains an allowance for loan losses based upon management's periodic
evaluation  of  known  and  inherent  risks  in the loan  portfolio,  past  loss
experience,  adverse  situations that may affect the borrower's ability to repay
loans,  estimated  value of the  underlying  collateral and current and expected
market  conditions.  The  allowance for loan losses was $312,000 and $327,000 at
September  30, 1996 and 1995,  respectively.  The provision for loans was $5,000
and $12,000 for the quarters  ended  September 30, 1996 and 1995,  respectively.
Based on a historical  trend of limited losses on residential  loans, the amount
of the loan loss provision  allocated to residential  loans remained  relatively
stable for the two periods. While the Bank maintains its allowance for losses at
a level  which it  considers  to be  adequate,  there can be no  assurance  that
further  additions will not be made to the loss  allowances and that such losses
will  not  exceed  the  estimated  amounts.  The  establishment  of a loan  loss
provision each period adversely impacts the Bank's net earnings.

Non-Interest Expense

Total  non-interest  expense increased  $388,000 or 163.7% from $237,000 for the
quarter ended September 30, 1995 to $625,000 for the quarter ended September 30,
1996.  This  increase  was  primarily  due to an  increase in  compensation  and
benefits of $78,000,  an increase in professional fees of $8,000, an increase in
other  expenses  of  $35,000 an  increase  in  occupancy  costs of $8,000 and an
increase in insurance costs of $254,000.  The increase in  professional  fees is
due to the increased reporting requirements  resulting from the conversion.  The
increase in compensation and benefits was the result of the addition of a senior
operating  officer,  additional  staff and current year accruals for stock-based
compensation plans. The increase in other expenses is due to increased supplies,
travel and phone expenses and stock services due to the conversion. The increase
in insurance is due to the one-time assessment of $250,000 due to be paid by the
Bank to meet the requirements set forth by Congress to recapitalize the SAIF.

Income Tax Expense

Income tax expense  decreased  $105,000 or 81.4% from  $129,000  for the quarter
ended  September 30, 1995 to $24,000 for the quarter  ended  September 30, 1996.
This decrease is directly  attributable  to the decrease in pre-tax  earnings of
$337,000.

Liquidity and Capital Resources

The Bank is required under applicable federal  regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S.  Government,  federal
agency and other investments  having  maturities of five years or less.  Current
OTS regulations require that a savings institution maintain liquid assets of not
less than 5% of its average daily balance of net  withdrawable  deposit accounts
and borrowings  payable in one year or less, of which  short-term  liquid assets
must consist of not less than 1%. At September 30, 1996,  the Bank's  liquidity,
as measured for regulatory  purposes,  was 10.13%. The Bank adjusts liquidity as
appropriate to meet its asset/liability objectives.

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

The Bank's  most  liquid  assets are cash and cash  equivalents,  which  include
investments in highly liquid short-term  investments.  The level of these assets
are  dependent on the Bank's  operating,  financing,  and  investing  activities
during any given  period.  At  September  30,  1996,  cash and cash  equivalents
totaled  $3.3  million.  The Bank has other  sources of  liquidity if a need for
additional  funds  arise.  Additional  sources of funds  include  FHLB of Dallas
advances and the ability to borrow against mortgage-backed and other securities.
At September 30, 1996, the Bank had $15.9 million in outstanding borrowings from
the  FHLB  of  Dallas.  These  outstanding  borrowings  were  used  to  purchase
additional mortgage-backed securities as a means of enhancing earnings.

The  primary  investment  activity  of the  Bank is the  origination  of  loans,
primarily mortgage loans.  During the quarter ended September 30, 1996, the Bank
originated  $3.7  million in total loans,  of which $2.8  million were


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<PAGE>

mortgage  loans.  Another  investment  activity of the Bank is the investment of
funds in U.S. Government Agency securities,  mortgage-backed securities, federal
funds and  FHLB-Dallas  overnight  funds.  During  periods  when the Bank's loan
demand is limited,  the Bank may purchase  short-term  investment  securities to
obtain a higher yield than otherwise available.

The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities,  investing activities and financing activities.  Cash
flows provided in operating activities,  consisting principally of disbursements
of interest and dividends less interest paid on deposits,  were $244,000 for the
three month period ended September 30, 1995 and cash flows provided by operating
activities  were  $159,000 for the three month period ended  September 30, 1996.
Net cash used for investing  activities  consisted  primarily of disbursement of
loan originations and investment in mortgage-backed  security purchases,  offset
by principal collections on loans and proceeds from the maturities of investment
securities.  Such uses were $6.2  million  and $4.4  million for the three month
periods ended September 30, 1996 and 1995, respectively.  Net cash provided from
financing activities  consisting primarily of net activity in deposit and escrow
accounts  and new FHLB  borrowings,  were $6.5  million and $1.7 million for the
three month periods ended September 30, 1996 and 1995 respectively.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current commitments.  As of September 30, 1996, the Bank had commitments to fund
loans of $1.8 million.  Certificates of deposit  scheduled to mature in one year
or less totaled $19.7 million. Based on historical withdrawals and outflows, and
on internal monthly deposit reports monitored by management, management believes
that a majority of deposits will remain with the Bank.  As a result,  no adverse
liquidity effects are expected.

At  September  30,  1996,  the  Bank  exceeded  each of the  three  OTS  capital
requirements on a fully-phased-in basis.

Stock Repurchase Program

In August,  1996, the Company repurchased 47,347 shares, or 5%, of the Company's
common  stock.  The Company has decided to retire  these shares at the advice of
special counsel.

On October 11, the Company  issued a press release  announcing  its intention to
repurchase up to 15% (142,312  shares) of the Company's  common stock. The press
release  indicated that the repurchased  shares will either be retired or become
treasury  shares to be  utilized  for  general  corporate  and  other  purposes,
including  the  issuance  of shares in  connection  with the  exercise  of stock
options.

On November 8, 1996,  the Company  received  regulatory  approval to  repurchase
those shares of common stock before June 28, 1997. The Company  believes that it
has sufficient  capital to complete the repurchase and that the repurchase  will
not cause the Bank to fail to meet its regulatory capital requirements.

Impact of Inflation and Changing Prices

The  consolidated  financial  statements  of  the  Company  and  notes  thereto,
presented  elsewhere  herein,  have been prepared in accordance  with  Generally
Accepted  Accounting  Principals  ("GAAP"),  which  require the  measurement  of
financial  position  and  operating  results  primarily  in terms of  historical
dollars without considering the change in the relative purchasing power of money
over time and due to  inflation.  The impact of  inflation  is  reflected in the
increased cost of the Company's  operations.  Unlike most industrial  companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest  rates have a greater impact on the Company's  performance  than do the
effects of general levels of inflation.  Interest rates do not necessarily  move
in the same direction or to the same extent as the prices of goods and services.

Recent legislation - Recapture of Post 1987 Bad Debt Reserves

The Small Business Job Protection Act of 1996 will, among other things, equalize
the taxation of thrifts and banks.  The bill no longer  allows  thrifts a choice
between the  percentage of taxable  income method and the  experience  method in
determining  additions  to their bad debt  reserves.  Smaller  thrifts with $500
million of assets or less are only allowed to use the experience  method,  which
is generally  available to small banks  currently.  Larger  thrifts must use the
specific  charge off method  regarding its bad debts.  Any reserve 
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<PAGE>

amounts added after 1987 will be taxed over a six year period beginning in 1996;
however,  bad debt reserves set aside through 1987 will  generally not be taxed.
Institutions  can delay these taxes for two years if they meet a  residential  -
lending  test.  At June 30,  1996,  the Bank had  $55,936 of post 1987  bad-debt
reserves.  Any  recapture  of the Bank's  bad-debt  reserves may have an adverse
effect on net earnings.  The Bank is currently  evaluating  the  legislation  to
determine its effect.

Impact of Certain Accounting Standards

Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
be Disposed of

In March,  1995, the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to be Disposed of." This Statement
is currently  effective for the Bank. This statement  established  standards for
the impairment of long-lived  assets and requires that long-lived assets held by
an entity be reviewed for impairment whenever events or changes in circumstances
indicate  that  the  carrying  value  of an asset  may not be  recoverable.  The
Statement also requires that long-lived  assets to be disposed of be reported at
the lower of  carrying  value or fair value less cost to sell.  Adoption of this
Statement has not had and is not  anticipated  to have a material  impact on the
Bank's financial condition.

Accounting for Mortgage Servicing Rights

In May,  1995,  the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 122,  "Accounting  for Mortgage  Servicing
Rights." This Statement  amends FASB No. 65,  "Accounting  for Certain  Mortgage
Banking  Activities." This Statement requires that mortgage banking  enterprises
recognize as separate assets right to service mortgage loans for others, however
those servicing rights are acquired.  Mortgage banking  enterprises that acquire
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage  servicing  rights
and the loans  (without the mortgage  servicing  rights) based on their relative
fair values if it is practicable  to estimate those fair values.  This Statement
applies  beginning the current  fiscal year.  The Bank currently does not retain
servicing  rights on sold loans,  therefore,  the adoption of this Statement has
not had and is not anticipated to have a material impact on the Bank's financial
condition.

PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended September 30, 1996.

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<PAGE>



SIGNATURES

In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                                      GFSB BANCORP, INC.

Date: November 14, 1996               /s/Jerry R. Spurlin
                                         ---------------------------------------
                                      Jerry R. Spurlin
                                      President
                                      (Duly Authorized Representative and
                                      Principal Financial Officer)



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