================================================================================
                                  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 December 31, 1997
                                               -----------------

                                       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 December 31, 1997, there were issued and outstanding 800,708 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
              December 31, 1997 and June 30, 1997                          3

            Consolidated Statements of Earnings
              Three months and six months ended December 31, 1997
               and 1996                                                    4

            Consolidated Statements of Cash Flows
              Six months ended December 31, 1997 and 1996                  6
         
            Notes to Consolidated Financial Statements                     8

Item 2.     Management's Discussion and Analysis or Plan of Operation      10

                           PART II. OTHER INFORMATION

Item 6.     Exhibits and Reports on Form 8-K                               17

            Signatures                                                     18


<PAGE>

                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                         December 31,       June 30,
                                                             1997             1997
                                                       --------------   --------------
                                                          (Unaudited)
                                     ASSETS

<S>                                                    <C>              <C>           
Cash and due from banks                                $    1,645,527   $    1,772,937
Interest-bearing deposits with banks                        1,286,839        1,121,191
Federal funds sold                                                             100,000
Available-for-sale investment securities                    6,969,910        4,342,042
Available-for-sale mortgage-backed securities              38,317,353       32,069,501
Stock of Federal Home Loan Bank, at cost, restricted        1,888,700        1,060,300
Loans receivable, net, substantially pledged               63,118,788       52,021,929
Accrued interest and dividends receivable                     672,162          551,783
Premises and equipment                                        774,400          677,250
Other real estate and repossessed property                          -                -
Prepaid and other assets                                       50,617           55,290
Deferred tax asset                                             20,671           20,671
                                                       --------------   --------------
    TOTAL ASSETS                                       $  114,744,967       93,792,894
                                                       ==============       ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction accounts                                   $    5,763,434   $    4,488,475
Savings and now deposits                                   11,428,153       10,606,993
Time deposits                                              46,056,426       42,777,018
Accrued interest payable                                      213,010          153,049
Advances from borrowers for taxes and insurance               188,583          175,748
Accounts payable and accrued liabilities                      235,464          181,970
Deferred income taxes                                         334,612          287,000
Dividends declared and payable                                 75,220           75,415
Advances from Federal Home Loan Bank                       36,065,250       20,930,000
Income taxes payable                                           45,591          174,090
                                                       --------------   --------------
    TOTAL LIABILITIES                                     100,405,743       79,849,758

                                                          
COMMITMENTS AND CONTINGENCIES                                       -                -          


STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000,000
  shares authorized;  800,700 issued and
  outstanding at June 30, 1997 and 800,700 shares 
   issued and outstanding at December 31, 1997                 76,683           76,684
Preferred stock, $.10 par value, 500,000
  shares authorized;  no shares issued or
  outstanding                                                       -                -                                       
Additional paid-in-capital                                  6,282,372        6,260,680
Unearned ESOP stock                                          (443,747)        (464,881)
Retained earnings, substantially
  restricted                                                7,774,375        7,513,536
Unrealized gain on available for sale                     
  securities, net of taxes                                    649,541          557,117
                                                       --------------   --------------
    TOTAL STOCKHOLDERS' EQUITY                             14,339,224       13,943,136
                                                       --------------   --------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $  114,744,967   $   93,792,894
                                                       ==============   ==============

</TABLE>


See notes to consolidated financial statements.



                                        3



<PAGE>

                               GFSB Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>

                                                      Three months ended              Six months ended
                                                          December 31,                    December 31,
                                                 -----------------------------  ------------------------------  
                                                      1997            1996             1997            1996
                                                   (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)
                                                 ------------    ------------   -------------    ------------
<S>                                              <C>             <C>            <C>              <C>         
Interest income
        Loans receivable
                 Mortgage loans                  $  1,230,456    $    863,653   $   2,338,318    $  1,674,396
                 Commercial loans                      60,062          46,845         116,839          93,961
                 Share and consumer loans              75,129          41,279         140,423          79,206
        Available-for-sale investment securities                                                          
                 and mortgage-backed securities       672,493         509,967       1,315,522       1,027,314
        Other interest-earning assets                  50,672          14,929          90,455          62,145
                                                 ------------    ------------   -------------    ------------

                 TOTAL INTEREST EARNINGS            2,088,812       1,476,673       4,001,559       2,937,022

Interest expense
        Deposits                                      784,041         633,738       1,540,965       1,214,057
        Advances from Federal Home Loan Bank          520,900         186,148         932,925         391,663
                                                 ------------    ------------   -------------    ------------

                 TOTAL INTEREST EXPENSE             1,304,941         819,886       2,473,890       1,605,720
                                                 ------------    ------------   -------------    ------------

                 NET INTEREST EARNINGS                783,871         656,787       1,527,669       1,331,302

Provision for loan losses                                   0               0          37,459           5,288
                                                 ------------    ------------   -------------    ------------

                 NET INTEREST EARNINGS AFTER
                   PROVISION FOR LOAN LOSSES          783,871         656,787       1,490,210       1,326,014

Non-interest earnings
        Income from real estate operations                  -               -               -               0
        Miscellaneous income                            1,305           1,026           6,782           1,721
        Net gains from sales of loans                     955               0           4,212           4,942
        Service charge income                          19,805           8,155          30,247          16,735
                                                 ------------    ------------   -------------    ------------
                 TOTAL NON-INTEREST EARNINGS           22,065           9,181          41,241          23,398

Non-interest expense
        Compensation and benefits                     214,931         237,264         446,295         424,587
        Insurance                                      13,168          30,743          26,328         310,208
        Other                                          83,746          55,281         151,640         116,307
        Occupancy                                      39,513          35,363          79,513          67,472
        Data processing                                31,725          22,327          62,743          45,825
        Professional fees                              30,012          25,951          68,975          54,793
        Advertising                                     9,782          11,997          27,509          22,617
        Stock services                                  4,921           3,588           7,670           5,755
                                                 ------------    ------------   -------------    ------------
                 TOTAL NON-INTEREST EXPENSE           427,798         422,513         870,672       1,047,564

</TABLE>



                                        4

<PAGE>

                               GFSB Bancorp, Inc.

                CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED

<TABLE>
<CAPTION>
                                                       Three months ended              Six months ended
                                                           December 31,                    December 31,
                                                       1997            1996            1997            1996
                                                 ----------------------------      ---------------------------
                                                   (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)
                                                 --------------   ------------    -------------    -----------

<S>                                              <C>             <C>                  <C>             <C>    
                 EARNINGS BEFORE INCOME TAXES         378,138         243,455         660,780         301,848

Income tax expense
        Currently payable                             146,137          97,396         249,501         121,146
        Deferred provision                                  -               -               -               -
                                                 ------------    ------------         -------         -------
                                                      146,137          97,393         249,501         121,146
                                                 ------------    ------------         -------         -------

                 NET EARNINGS                    $    232,001    $    146,062         411,279         180,702
                                                 ============    ============         =======         =======
                                                    
Earnings per common share
        Primary                                  $       0.31            0.17            0.54            0.21
                                                 ============    ============         =======         =======

Weighted average number of common shares 
   outstanding
        Primary                                       755,817         874,536         755,277         874,137
                                                 ============    ============         =======         =======
                                                    
Earnings per common share
        Fully diluted                                    0.30            0.17            0.53            0.21
                                                 ============    ============         =======         =======

Weighted average number of common shares 
   outstanding
        Fully diluted                                 772,743         876,840         770,402         876,879
                                                 ============    ============         =======         =======
</TABLE>







                                        5



<PAGE>

                               GFSB Bancorp, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
                                                                   Six months ended
                                                                      December 31,
                                                             -----------------------------
                                                                  1997           1996
                                                             -------------   -------------
                                                              (Unaudited)     (Unaudited)
<S>                                                          <C>             <C>         
Cash flows from operating activities
         Net earnings                                        $    411,279    $    180,702
         Adjustments to reconcile net earnings to
           net cash provided by operations
                  Deferred loan origination fees                  (79,085)        (69,391)
                  Gain on sale of sold loans                       (4,212)         (4,942)
                  Provision for loan losses                        37,459           5,288
                  Depreciation of premises and equipment           38,936          32,935
                  Amortization of investment and mortgage-
                    backed securities premiums (discounts)        131,256          80,008
                  Stock dividends on FHLB stock                   (49,400)        (10,800)
                  Release of ESOP stock                            52,527          28,280
                  Stock compensation                               24,470          86,180
                  Provision (benefit) for deferred 
                     income taxes                                       -               -

         Net changes in operating assets and liabilities
                  Accrued interest and dividends receivable      (120,379)        (59,284)
                  Prepaid taxes                                         -         (22,854)
                  Prepaid and other assets                          4,672          35,180
                  Accrued interest payable                         59,960          (9,120)
                  Accounts payable and accrued liabilities         53,494          (6,679)
                  Income taxes payable                           (128,499)
                  Dividends declared and payable                     (196)       (319,241)
                                                             ------------    ------------
                           Net cash provided by
                           operating activities                   432,282         (53,738)

Cash flows from investing activities
         Purchase of premises and equipment                      (136,087)       (160,684)
         Loan originations and principal
           repayment on loans, net                            (11,111,598)     (3,873,572)
         Principal payments on mortgage-backed
           securities                                           4,385,694       2,510,672
         Purchases of mortgage-backed securities              (10,770,665)     (5,174,111)
         Purchases of available-for-sale securities            (1,815,562)        (61,902)
         Maturities and proceeds from sale of
           available-for-sale securities                                -         700,000
         Purchases of municipal securities                       (640,000)              -
         Purchase of FHLB stock                                  (779,000)       (246,700)
                                                             ------------    ------------
                           Net cash used by
                           investing activities               (20,867,218)     (6,306,297)

</TABLE>

                                        6

<PAGE>

                               GFSB Bancorp, Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                Increase (decrease) in cash and cash equivalents

<TABLE>
<CAPTION>

                                                                  Six months ended
                                                                     December 31,
                                                             -----------------------------
                                                                 1997             1996
                                                             ------------     ------------
                                                              (Unaudited)      (Unaudited)
<S>                                                          <C>              <C>          
Cash flows from financing activities
         Net increase in transaction accounts, passbook
           savings, money market accounts, and
           certificates of deposit                           $   5,375,528    $   7,863,644
         Net increase (decrease) in mortgage escrow funds           12,835           20,091
         Proceeds from FHLB advances                           234,345,950       54,048,910
         Repayments on FHLB advances                          (219,210,700)     (52,384,910)
         Purchase of GFSB Bancorp stock under the
           stock repurchase plan in cash                                 -       (1,146,173)
         Dividends paid or to be paid in cash                     (150,439)        (142,338)
                                                             -------------    -------------
                           Net cash provided by
                           financing activities                 20,373,174        8,259,224
                                                             -------------    -------------
         Increase (decrease) in cash and cash equivalents          (61,762)       1,899,189

         Cash and cash equivalents at beginning of period        2,994,128        3,167,194
                                                             -------------    -------------
         Cash and cash equivalents at end of period          $   2,932,366        5,066,383
                                                             =============    =============


Supplemental disclosures
         Cash paid during the period for
                  Interest on deposits and ad                $   2,413,930    $   1,614,841
                  Income taxes                                     377,640          142,200

         Change in unrealized gain (loss), net of deferred
           taxes on available-for-sale securities                   92,424          203,084

         Dividends declared not yet paid                            75,219                0

</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  is contained  in the notes to the  Company's
financial  statements filed as part of the Company's June 30, 1997, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.

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

During the quarter ended  September 30, 1997, the Board of Directors  declared a
cash  dividend of $0.10 per share on the  Company's  outstanding  common  stock,
payable to  stockholders  of record as of September 30, 1997. The dividends were
paid in October 1997.

During the quarter ended  December 31, 1997,  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 December 31, 1997. The dividends
were paid in January 1998.

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 Ownership Plan
      -----------------------------

On December 31, 1996,  the Company  released  5568.06 shares of its common stock
owned by the Company's  ESOP. On December 31, 1997, the Company was committed to
release 4134.62 shares of this common stock. The commitment  resulted in $78,000
of additional  compensation  cost for the twelve months ended December 31, 1997,
with $21,000 of that amount booked as additional compensation cost for the three
months ended December 31, 1997.

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.  The
retirement  during the quarter ended September 30, 1997 of an officer to whom an
award had been made under the Plan,  resulted in a reduction  of 2,000 shares in
the total number of shares awarded. At December 31, 1997, 19,568 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 grant of
the award.  As a result of this vesting and the  dividends  earned on the vested
shares, a liability and corresponding compensation cost in the amount of $12,000
has been  recorded at December 31, 1997,  under the  provisions  of the Plan. On
January 5, 1997, 4075 shares under the Plan were earned,  and the  corresponding
liability was paid.

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

The one-time BIF/SAIF  Insurance Premium assessed by Congress in September 1996,
resulted  in a  $250,000  charge to the Bank.  This  assessment  was  charged to
earnings in September 1996, and was paid in November 1996.



                                        8

<PAGE>



6.    Earnings Per Share
      ------------------

The Financial  Accounting  Standards  Board (FASB)  issued  Statement No. 128, "
Earnings Per Share",  which  supersedes  APB Opinion No. 15.  Statement  No. 128
requiring  the  presentation  of earnings  per share by all  entities  that have
common  stock  or  potential  common  stock,  such  as  options,   warrants  and
convertible  securities,  outstanding  that  trade  in a  public  market.  Those
entities that have only common stock  outstanding  are required to present basic
earnings per share amounts. All other entities are required to present basic and
diluted per share  amounts.  Diluted per share  amounts  assume the  conversion,
exercise or issuance of all potential common stock instruments unless the effect
is to reduce a loss or  increase  the income per  common  share from  continuing
operations.  All entities  required to present per share amounts must  initially
apply Statement No. 128 for annual and interim periods ending after December 15,
1997.

Because the Company has potential  common stock  outstanding  (stock  options to
employees and  directors),  the Company is required to present basic and diluted
earnings per share.  The Bank has applied  Statement No. 128 in the accompanying
financial statements.

The weighted  average number of shares of common stock used to compute the basic
earnings  per share was  increased  by 16,926 for the three month  period  ended
December  31, 1997,  and by 2,304 for the three month period ended  December 31,
1996 in computing  the diluted per share data.  The weighted  average  number of
shares  of  common  stock  used to  compute  the  basic  earnings  per share was
increased  by 15,125 for the six month period  ended  December 31, 1997,  and by
2,742 for the six month period ended December 31, 1996, in computing the diluted
per share data.
























                                        9

<PAGE>



Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

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,
and purchases participations in one-to-four family mortgage 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,  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 and equipment  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.

In  September  1996,  Congress  enacted  a plan to  mitigate  the  effect of the
BIF/SAIF  insurance  premium  disparity.  This  plan  required  all SAIF  member
institutions,  including the Bank, to pay a one-time  assessment to recapitalize
the SAIF.  The effect of this  reduced  the capital of the Bank by the amount of
the fee, and such amount was charged to earnings in the quarter ended  September
30, 1996. The  assessment  amount the Bank paid was $250,000 which is 65.7 basis
points on the amount of deposits held by the Bank at March 31, 1995.

Beginning January 1, 1997,  deposit insurance  assessments for most SAIF members
became  .064% of  deposits  on an  annual  basis.  This rate is  expected  to be
effective  through  the end of  1999.  During  this  same  period,  BIF  members
(predominantly  composed of commercial  banks) are to be assessed  .013% of most
deposits.  Thereafter,  assessments  for BIF and SAIF members should be the same
and BIF and SAIF may be merged. As a result of these changes,  beginning January
1,  1997,  the  rate  of  deposit  insurance   assessed  the  Bank  declined  by
approximately 70% from the rate in effect prior to September 30, 1996.

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,
secondarily,  to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase  participations in adjustable rate,  one-to-four family
mortgage loans primarily secured by one-to-four  family  residences.  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.  The Bank's purchase of participations in adjustable rate,
one-to-four  family  mortgage loans is designed to increase  earnings and reduce
interest  rate risk.  These  loans have more risk than loans  originated  by the
Bank, therefore,  they have adjustable rates that are higher than standard.  The
Bank has recently begun purchasing  automobile  loans from dealers.  These loans
have risk and terms  comparable  to  automobile  loans  originated  in the Bank.
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.  Automated  Teller
Machine access and commercial and consumer  credit life insurance are additional
products now offered by the Bank. 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.

                                       10

<PAGE>



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
provides an opportunity  to expand its operations as the only local  independent
financial  institution.  The Bank also believes that it has a unique  ability to
grow as a result of the  relatively  large number of local 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.  (See "Management
Strategy" discussed above).

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 increasing interest rates.

FINANCIAL CONDITION

The Bank's total assets  increased  $20.9 million or 22.2% from $93.8 million at
June 30, 1997 to $114.7 million at December 31, 1997. This increase is primarily
the result of a $6.2  million  increase  in  mortgage-backed  securities,  a $11
million  increase in the Bank's net loan portfolio,  a $2.6 million  increase in
investment  securities and a $828,000 increase in stock of the Federal Home Loan
Bank.  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.  During the same period,  deposits increased $5
million  or 8.6% from  $57.9  million  at June 30,  1997,  to $63.2  million  at
December 31, 1997.  This  increase is primarily due to an increase in the Bank's
volume of NOW accounts,  business checking accounts,  local (non-brokered) Jumbo
Certificates  of Deposit and Public (state and city)  Certificates  of Deposits.
Advances  from the FHLB  increased  $15.1 million from $20.9 million at June 30,
1997 to $36.0 million at December 31, 1997. These additional  borrowings  funded
purchases of loans,  securities and mortgage loan  participations.  The Bank had
$650,000 and $557,000 in  unrealized  gains (net of deferred  taxes) at December
31,  1997  and June 30,  1997,  respectively  from  market  gains on the  Bank's
investment and  mortgage-backed  portfolios.  Unrealized gains and losses do not
impact the Bank's earnings until they are realized.








                                       11

<PAGE>



RESULTS OF OPERATIONS

COMPARISON OF OPERATING  RESULTS FOR QUARTER ENDED DECEMBER 31, 1997 COMPARED TO
QUARTER ENDED DECEMBER 31, 1996

General

Net earnings  increased $86,000 or 58.8% for the quarter ended December 31, 1997
from the quarter ended December 31, 1996.  This increase is primarily the result
of an increase in net interest earnings of $127,000, an increase in non-interest
earnings of $13,000, offset by an increase in non-interest expense of $5,000 and
an increase in income taxes of $48,000.

Interest Earnings

Total  interest  income  increased  $612,000 or 41.4% from $1.5  million for the
quarter ended  December 31, 1996 to $2.1 million for the quarter ended  December
31, 1997. This increase was primarily due to substantial increases in the Bank's
mortgage-backed  securities  portfolio,   investment  securities  and  net  loan
portfolio.

Interest Expense

Total interest expense increased $485,000 or 59.1% from $820,000 for the quarter
ended  December 31, 1996 to $1,305,000  for the quarter ended December 31, 1997.
This  increase  was due to a  substantial  increase  in FHLB  borrowings  and an
increase in the deposit base,  including the increase in volume of NOW accounts,
business checking accounts,  local  (non-brokered) Jumbo Certificates of Deposit
and Public (state and city) Certificates of Deposits.

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 $369,000 and $344,000 at
December 31, 1997 and 1996, 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.  Recent
substantial  increases  in the  loan  portfolio  of the Bank  may  result  in an
increase of  provision  for losses on loans.  The  establishment  of a loan loss
provision each period adversely impacts the Bank's net earnings.

Non-Interest Income

Total  Non-Interest  income  increased  by $13,000 or 142.9% from $8,000 for the
quarter ended  December 31, 1996 to $20,000 for the quarter  ended  December 31,
1997.  This increase was  primarily due to increased  service and NSF charges on
NOW and checking accounts and increased Automated Teller Machine use fees.

Non-Interest Expense

Total  non-interest  expense  increased  $5,000  or 1.2% from  $423,000  for the
quarter ended  December 31, 1996 to $428,000 for the quarter ended  December 31,
1997.  This increase was primarily due to an increase of other costs of $28,000,
an increase of occupancy  expense of $4,000,  an increase in data  processing of
$9,000 and an increase in professional  fees of $4,000,  offset by a decrease in
compensation  and  benefits of $22,000 and a decrease  in  insurance  expense of
$17,000.  The increase in other expenses is primarily due to increased supplies,
automated teller machine expense,  charitable contributions and postage expense.
The increase in occupancy costs is mainly due to the  depreciation of Furniture,
Fixtures  and  Equipment.  The increase in data  processing  is due to increased
transaction  volume  from  growth in  deposits.  The  increase  in  professional
services is the result of using more services of the Bank's  auditing  firm. The
decrease in compensation and benefits is due to a  reclassification  of costs of
stock-based  compensation in December 1997. The decrease in insurance expense is
primarily due to a reduction in the SAIF  insurance  assessment  (See  "General"
under Item 2 discussed above).


                                       12

<PAGE>



RESULTS OF OPERATIONS

COMPARISON  OF OPERATING  RESULTS FOR SIX MONTH  PERIOD ENDED  DECEMBER 31, 1997
COMPARED TO SIX MONTH PERIOD ENDED DECEMBER 31, 1996

General

Net  earnings  increased  $231,000  or  127.6%  for the six month  period  ended
December  31, 1997 from the six month  period  ended  December  31,  1996.  This
increase is  primarily  the result of an increase  in net  interest  earnings of
$164,000,  an  increase  in  non-interest  earnings of $18,000 and a decrease in
non-interest  expense  of  $177,000  offset by an  increase  in income  taxes of
$128,000.

Interest Earnings

Total interest income  increased $1.1 million or 36.2% from $2.9 million for the
six month  period ended  December  31, 1996 to $4 million for the quarter  ended
December 31, 1997.  This increase was primarily due to substantial  increases in
the Bank's mortgage-backed  securities portfolio,  investment securities and net
loan portfolio.

Interest Expense

Total interest expense  increased  $868,000 or 54.1% from $1,606,000 for the six
month period  ended  December  31, 1996 to  $2,474,000  for the six month period
ended December 31, 1997. This increase was due to a substantial increase in FHLB
borrowings and an increase in the deposit base, including the increase in volume
of  NOW  accounts,   business  checking  accounts,  local  (non-brokered)  Jumbo
Certificates of Deposit and Public (state and city) Certificates of Deposits.

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 $369,000 and $344,000 at
December 31, 1997 and 1996,  respectively.  The  provision for loans was $37,000
and $5,000 for the six month period ended December 31, 1997 and 1996. 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 Income

Total  non-interest  income increased  $18,000 or 76.3% from $23,000 for the six
month period  ended  December 31, 1996 to $41,000 for the six month period ended
December 31, 1997. This increase was primarily due to increased  service and NSF
charges on NOW and checking accounts and increased ATM use fees.

Non-Interest Expense

Total  non-interest  expense decreased $177,000 or 20.3% from $1,047,000 for the
six month  period  ended  December 31, 1996 to $870,000 for the six month period
ended  December  31, 1997.  This  decrease  was  primarily  due to a decrease in
insurance  expense  of  $283,000,  offset by an  increase  in  compensation  and
benefits costs of $22,000, an increase in other costs of $35,000, an increase in
occupancy  costs of  $12,000,  an  increase in data  processing  of $17,000,  an
increase in  professional  fees of $14,000 and an  increase  in  advertising  of
$5,000.  The decrease in  insurance  expense was  primarily  due to the one-time
$250,000  assessment  paid  during the  quarter  ended  September  30,  1996 for
resolution  of  the  BIF/SAIF  insurance  premium  disparity  and  reduced  SAIF
insurance  premiums  during the quarter ended  December 31, 1997 (See  "General"
under Item 2 discussed  above).  The increase in compensation and benefits costs
is due to an  increase in staff, some salary increases and current year accruals
for stock-based  compensation plans. The increase in other expenses is primarily
due to increased supplies, automated teller machine expense,

                                       13

<PAGE>



charitable contributions and postage expense. The increase in occupancy costs is
mainly due to the  depreciation of Furniture,  Fixtures and Equipment,  building
repairs and small building improvements.  The increase in data processing is due
to  increased  transaction  volume from growth in  deposits.  The  increased  in
professional  services  is the  result  of using  more  services  of the  Bank's
auditing firm. The increase in advertising is a result of efforts of the Bank to
achieve growth in deposits through attracting new customers.

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.  Prior OTS  regulations  required  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 consist of not less than 1%, with the
qualifying investments limited to those having maturities of five years of less.
Revised OTS regulations  effective  November 13, 1997 lowered the required level
of liquid assets to 4%,  removed the  short-term  liquid asset  requirement  and
deleted the five year or less maturity  requirement.  At December 31, 1997,  the
Bank's  liquidity,  as measured for  regulatory  purposes,  was 6.38%.  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 December 31, 1997, cash and cash equivalents totaled
$2.9 million.  The Bank has other sources of liquidity if a need for  additional
funds arises.  Additional  sources of funds include FHLB of Dallas  advances and
the ability to borrow against mortgage-backed and other securities.  At December
31, 1997, the Bank had $36.1 million in outstanding  borrowings from the FHLB of
Dallas.   These  outstanding   borrowings  were  used  to  purchase   additional
mortgage-backed  securities  and  mortgage  loan  participations  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 December 31, 1997, the Bank
originated  $12 million in total loans,  of which $10.2  million  were  mortgage
loans.  The Bank also  purchased  $1.1 million in mortgage loan  participations.
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 net earnings,
provision  for loan losses,  amortization  of  investment  and  mortgage  backed
securities  premiums and discounts,  stock based  compensation  costs and income
taxes less  disbursements  of interest and dividends,  and loan origination fees
were $432,000 and  ($53,000)for the six month period ended December 31, 1997 and
1996 respectively. Net cash used for investing activities consisted primarily of
loan  originations  and  purchases  of  mortgage-backed  securities,   municipal
securities  and FHLB  Stock,  offset by  principal  collections  on  loans,  and
principal  collections  and  proceeds  from the  maturities  of  mortgage-backed
securities  and  investment  securities.  Such uses were $20.9  million and $6.3
million  for  the  six  month  periods   ended   December  31,  1997  and  1996,
respectively.  Net cash provided from financing activities  consisting primarily
of net  activity in deposit and escrow  accounts and new FHLB  borrowings,  were
$20.4 million and $8.3 million for the six month periods ended December 31, 1997
and 1996, respectively.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current  commitments.  As of December 31, 1997, the Bank had commitments to fund
loans of $1.7 million.  Certificates of deposit  scheduled to mature in one year
or less totaled $30.5 million.  Based on historical withdrawals and outflows, on
internal daily deposit  reports  monitored by management,  and the fact that the
Bank does not accept any brokered deposits,  management believes that a majority
of deposits will remain with the Bank. As a result,

                                       14

<PAGE>



no adverse liquidity effects are expected.

At  December  31,  1997,  the  Bank  exceeded  each  of the  three  OTS  capital
requirements on a fully-phased-in basis.

Stock Repurchase Program

On  September  23,  1997,  the Company  issued a press  release  announcing  its
intention to repurchase up to 5% (40,035 shares) of the Company's  common stock.
On October 2, 1997, the Company received regulatory approval to repurchase these
shares of common stock before June 28,  1998.  As of December 31, 1997,  none of
these shares have been repurchased.  If any shares are repurchased,  the Company
has decided to retire  these  shares as  authorized  but  unissued.  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  Principles  ("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.

Recapture of Post 1987 Bad Debt Reserves

Thrift  institutions  are no longer  allowed 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.  Larger thrifts must use the specific
charge off method  regarding its bad debts. Any reserve 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,  1997,  the Bank had  $55,936 of post 1987  bad-debt  reserves of which
1/6th or $9,323 was  recaptured  into taxable income for the year ended June 30,
1997.  Future  recapture  of the Bank's  bad-debt  reserves  may have an adverse
effect on net earnings. Management does not believe such future recapture of the
Bank's bad debt  reserves  will have a material  impact on the Bank's  financial
condition.

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 Company. 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
Company'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

                                       15

<PAGE>



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 is effective in
the current fiscal year. The Bank currently does not retain  servicing rights on
purchased or 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.

Accounting for Stock-Based Compensation

In October,  1995,  the FASB issued SFAS No. 123  "Statement of  Accounting  for
Stock-Based   Compensation"  which  defines  a  "fair  value  based  method"  of
accounting for an employee stock option whereby compensation cost is measured at
the  grant  date  based on the value of the  award  and is  recognized  over the
service  period.  The FASB encouraged all entities to adopt the fair value based
method,  however, it allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting  Principles Board ("APB") Opinion No. 25.
Under the intrinsic value based method,  compensation  cost is the excess of the
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock.  However,  most stock option plans have no intrinsic value
at the grant date and, as such, no  compensation  cost is  recognized  under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma  disclosures as if the fair value
based method had been  applied.  The Bank has  continued  to use the  "intrinsic
value based method" as prescribed by APB Opinion No. 25.

Transfer and Servicing of Financial Assets and Extinguishment of Liabilities

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards No. 125,  "Transfer and Servicing of Financial  Assets and
Extinguishment of Liabilities."  This Statement requires that transferred assets
could be derecognized  only when control is surrendered,  rather than when risks
and rewards  related to the asset are passed to another party. A liability would
be extinguished when the creditor no longer has ultimate  responsibility for the
liability. Adoption of this Statement has not had and is not anticipated to have
a material impact on the Company's financial condition.

Earnings per Share

Recently the Financial  Accounting Standards Board issued Statement of Financial
Accounting  Standards No. 128, "Earnings per Share." It simplifies the standards
for computing earnings per share,  superseding the standards previously found in
Opinion 15. It replaces the  presentation  of primary  earnings per share with a
presentation of basic earnings per share. It also requires dual  presentation of
basic and diluted earnings per share on the face of the income statement for all
entities with complex capital  structures and requires a  reconciliation  of the
numerator and  denominator  of the basic  earnings per share  computation to the
numerator and denominator of the earnings per share computation.  This Statement
will affect the financial  statements  issued by the Company after  December 15,
1997.

Disclosure of Information about an Entity's Capital Structure

The Financial  Accounting Standards Board recently issued Statement of Financial
Accounting  Standards  No. 129,  "Disclosure  of  Information  about an Entity's
Capital Structure." This Statement applies to all entities. Its requirements are
a  consolidation  of those  found in APB  Opinions 10 and 15, and  Statement  of
Financial  Accounting  Standards  No. 47, and it  eliminates  the  exemption  of
nonpublic  entities from certain  disclosure  requirements.  This Statement will
affect the financial statements issued by the Company after December 15, 1997.

Reporting Comprehensive Income

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income".
This Statement  establishes standards for reporting and display of comprehensive
income on its components (revenues,  expenses, gains and losses).  Comprehensive
income is defined as the  change in equity of a  business  enterprise,  during a
period,  from  transactions  and other events and  circumstances  from  nonowner
sources.   The  Statement   requires  that  entities  classify  items  of  other
comprehensive  income by their nature in a financial  statement  and display the
accumulated  balance of other  comprehensive  income  separately  from  retained
earnings and additional  paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 31, 1997.


                                       16

<PAGE>



Disclosure About Segments of an Enterprise and Related Information

Also in June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public entities  report  information  about  operating  segments in
annual  financial  statements  and  requires  that  selected  information  about
operating  segments be reported in interim  financial  reports as well.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas and major  customers.  This  Statement is effective for fiscal
years beginning after December 31, 1997.

PART II.  OTHER INFORMATION
---------------------------

Item 6.  Exhibits and Reports on Form 8-K

A Form 8-K (Items 4 and 7) dated March 12,  1997,  was filed  during the quarter
ended March 31, 1997 regarding the registrant's change in accountants, effective
for the fiscal year ending June 30, 1998.

An amended Form 8-K (Items 4 and 7) dated March 12, 1997,  was filed  October 6,
1997.

















                                       17

<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: February 13, 1998                   /s/ Jerry R. Spurlin
                                          ------------------------------------
                                          Jerry R. Spurlin
                                          President
                                          (Duly Authorized Representative and
                                          Principal Financial Officer)

















                                       18