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, 1998
                                              ------------------

                                       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
---------------------------------------------
(State or Other Jurisdiction of Incorporation
or Organization)                                                 04-2095007
                                                            -------------------
                                                             (I.R.S. Employer
                                                            Identification No.)
221 West Aztec Avenue, Gallup, New Mexico
-----------------------------------------
(Address of Principal Executive Offices)                            87301  
                                                                ------------
                                                                 (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 October 31, 1998,  there were issued and outstanding  1,051,898  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, 1998 and June 30, 1998                      3

             Consolidated Statements of Earnings
                 and Comprehensive Earnings
                 Three months ended September 30, 1998 
                 and September 30, 1997                                    4

             Consolidated Statements of Cash Flows
                 Three months ended September 30, 1998
                 and September 30, 1997                                    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                             16

             Signatures                                                   17










                                       2
<PAGE>

                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                         September 30,         June 30,         
                                                            1998                 1998           
                                                       ---------------    ----------------      
                                                         (Unaudited)                            
                         ASSETS                                                                 
<S>                                                   <C>                 <C>                   
Cash and due from banks                               $    1,749,589      $    2,047,860        
Interest-bearing deposits with banks                       1,440,171           2,490,120                       
Federal funds sold                                                 0                   0        
Available-for-sale investment securities                   6,729,533           5,188,095                       
Available-for-sale mortgage-backed securities             31,371,453          33,551,219                      
Hold-to-Maturity investment securities                       144,993             144,993                         
Stock of Federal Home Loan Bank, at cost, restricted       2,216,100           1,965,200                       
Loans receivable, net, substantially pledged              82,660,924          75,836,642 
Accrued interest and dividends receivable                    740,953             675,485 
Premises and equipment                                     1,485,557           1,035,668 
Other real estate and repossessed property                    98,212             159,106 
Prepaid and other assets                                      63,636              46,316 
Deferred tax asset                                            68,377              68,377 
                                                       -------------       ------------- 
       TOTAL ASSETS                                   $  128,769,499         123,209,081 
                                                       =============       =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction and NOW accounts                          $    8,518,181      $    6,979,785 
Savings and MMDA deposits                                 12,900,252          13,901,860 
Time deposits                                             49,326,178          48,497,496 
Accrued interest payable                                     249,988             223,702 
Advances from borrowers for taxes and insurance              397,238             225,597 
Accounts payable and accrued liabilities                     296,613             260,332        
Deferred income taxes                                        423,233             426,553                               
Dividends declared and payable                                76,606              82,446                                
Advances from Federal Home Loan Bank                      43,201,476          38,247,631                            
Income taxes payable                                         117,039             154,757                               
                                                       -------------       ------------- 
       TOTAL LIABILITIES                                 115,506,803         109,000,159                           

COMMITMENTS AND CONTINGENCIES


STOCKHOLDERS' EQUITY                                                                          
Common stock, $.10 par value, 1,500,000
 shares authorized; 1,165,537 issued and 
 outstanding at June 30, 1998 and 1,087,661 shares
   issued and outstanding at September 30, 1998              104,208             113,515 
Preferred stock, $.10 par value, 500,000                                            
  shares authorized;  no shares issued or                                             
  outstanding                                                      0                   0
Additional paid-in-capital                                 4,704,153           5,777,881 
Unearned ESOP stock                                         (400,104)           (415,695)
Retained earnings, substantially                                            
  restricted                                               8,169,275           8,041,610 
Accumulated other comprehensive 
  earnings                                                   685,165             691,611 
                                                       -------------       ------------- 
        TOTAL STOCKHOLDERS' EQUITY                        13,262,696          14,208,922 
                                                       -------------       ------------- 
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $  128,769,499      $  123,209,081 
                                                       =============       =============
See notes to consolidated financial statements.

</TABLE>




                                        3
<PAGE>
                               GFSB Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF EARNINGS
                           AND COMPREHENSIVE EARNINGS

     
                                                         Three months ended 
                                                             September 30   
                                                     ---------------------------
                                                          1998          1997  
                                                     ---------------------------
                                                      (Unaudited)   (Unaudited)
Interest income                                                                 
        Loans receivable                                                        
                Mortgage loans                       $  1,516,686   $ 1,107,862
                Commercial loans                          113,963        56,777
                Share and consumer loans                   94,493        65,294
        Investment and mortgage-backed securities         510,863       643,030
        Other interest-earning assets                      51,071        39,784
                TOTAL INTEREST EARNINGS                 2,287,076     1,912,747
                                                      -----------    ----------
Interest expense                                                                
        Deposits                                          829,779       756,924 
        Advances from Federal Home Loan Bank              568,064       412,025 
                                                      -----------    ----------
                TOTAL INTEREST EXPENSE                  1,397,843     1,168,949 
                                                      -----------    ----------
                NET INTEREST EARNINGS                     889,233       743,798 

Provision for loan losses                                  15,000        37,459 

                NET INTEREST EARNINGS AFTER                                     
                  PROVISION FOR LOAN LOSSES               874,233       706,339 

Non-interest earnings                                                           
        Income from real estate operations                                      
        Miscellaneous income                                8,726         5,478 
        Net gains from sales of loans                       2,135         3,257 
        Service charge income                              35,085        10,442 
                                                      -----------    ----------
                TOTAL NON-INTEREST EARNINGS                45,946        19,177 

Non-interest expense                                                            
        Compensation and benefits                         340,237       231,363 
        Insurance                                          14,898        13,159 
        Stock services                                     13,357         2,749 
        Occupancy                                          56,542        40,001 
        Data processing                                    39,545        31,018 
        Professional fees                                  12,954        38,963 
        Advertising                                        16,374        17,726 
        Other                                             105,433        67,894 
                                                      -----------    ----------
                TOTAL NON-INTEREST EXPENSE                599,341       442,873 









                                        4
<PAGE>


                               GFSB Bancorp, Inc.

                       CONSOLIDATED STATEMENTS OF EARNINGS
                     AND COMPREHENSIVE EARNINGS - CONTINUED


                                                        Three months ended      
                                                           September 30         
                                                    --------------------------  
                                                        1998            1997    
                                                    ----------      ----------
                                                    (Unaudited)     (Unaudited)

                EARNINGS BEFORE INCOME TAXES           320,838         282,643 

Income tax expense                                                             
        Currently payable                              116,567         103,364 
        Deferred provision                                   -               -
                                                    ----------      ----------
                                                       116,567         103,364 
                                                    ----------      ----------
                NET EARNINGS                        $  204,271         179,279 
                                                    

Other comprehensive earnings:
        Unrealized gain (loss), net of tax 
          of (2,192) in 1998 and $8,757 in 1997
          on available-for-sale securities              (6,446)         25,756
                                                    ----------      ----------
                COMPREHENSIVE EARNINGS                 197,825         205,035
                                                    ==========      ==========  
Earnings per common share                                                      
        Basic                                       $     0.19            0.16 
                                                    ==========      ==========  
Weighted average number of common
 shares outstanding                                                            
        Basic                                        1,065,025       1,132,140 
                                                    ==========      ==========  
Earnings per common share                                                      
        Diluted                                           0.19            0.16 
                                                    ==========      ==========  
Weighted average number of common
 shares outstanding                                                            
        Diluted                                      1,093,847       1,147,843 
                                                    ==========      ==========  


                                        5


<PAGE>

                               GFSB Bancorp, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
                                                                    Three months ended 
                                                                       September 30,
                                                                 ------------------------
                                                                    1998          1997 
                                                                 ----------    ---------- 
<S>                                                            <C>            <C>        
                                                                (Unaudited)    (Unaudited)
Cash flows from operating activities                                                            
        Net earnings                                           $   204,271    $  179,279 
        Adjustments to reconcile net earnings to                                                
          net cash provided by operations                                               
                Deferred loan origination fees                     (49,078)      (37,180)
                Gain on sale of sold loans                          (2,135)       (3,257)
                Provision for loan losses                           15,000        37,459 
                Depreciation of premises and equipment              30,682        19,025 
                Amortization of investment and mortgage-                                         
                  backed securities premiums (discounts)           104,215        69,562 
                Stock dividends on FHLB stock                      (30,800)      (21,500)
                Release of ESOP stock                               23,028        26,508 
                Stock compensation                                  13,446        12,406 
                Provision (benefit) for deferred income taxes            0             0

        Net changes in operating assets and liabilities                                         
                Accrued interest and dividends receivable          (65,468)      (91,111)
                Prepaid taxes                                            0             0
                Prepaid and other assets                           (17,320)       (1,483)
                Accrued interest payable                            26,286        75,437 
                Accounts payable and accrued liabilities            22,835       (13,910)
                Income taxes payable                               (37,718)      (77,636)
                Dividends declared and payable                      (5,840)         (196)
                                                                 ---------     ---------
                        Net cash provided by                   
                        operating activities                       231,404       173,403 

Cash flows from investing activities                                                    
        Purchase of premises and equipment                        (480,571)      (93,380)
        Loan originations and principal                                          
          repayment on loans, net                               (6,727,178)   (6,693,371)
        Principal payments on mortgage-backed                                           
          securities                                             2,872,988     1,977,923 
        Purchases of mortgage-backed securities                   (880,255)   (9,739,727)
        Purchases of available-for-sale securities              (2,336,396)      (33,085)
        Maturities and proceeds from sale of                                             
          available-for-sale securities                          1,010,000             0
        Purchases of municipal securities                         (211,990)     (640,000)
        Principal payments on municipal securities                  70,000             0
        Purchase of FHLB stock                                    (220,100)     (657,600)
                                                                 ---------     ---------
                        Net cash used by                                    
                        investing activities                    (6,903,502)   (15,879,240)

</TABLE>



                                        6
<PAGE>

                               GFSB Bancorp, Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                Increase (decrease) in cash and cash equivalents

                                                         Three months ended     
                                                            September 30,       
                                                        1998            1997 
                                                     (Unaudited)    (Unaudited)
Cash flows from financing activities                                            
        Net increase in transaction accounts,                                   
        savings and NOW deposits and                                            
        time deposits                                $ 1,365,470    $ 2,476,195 
        Net increase (decrease) in mortgage 
         escrow funds                                    171,641        124,695 
        Proceeds from FHLB advances                   74,832,527     73,282,950 
        Repayments on FHLB advances                  (69,878,682)   (59,861,400)
        Purchase of GFSB Bancorp stock 
         under the stock repurchase plan in cash      (1,090,472)             0
        Dividends paid or to be paid in cash             (76,606)       (75,219)
                                                     -----------     ---------- 
                        Net cash provided by                                    
                        financing activities           5,323,878     15,947,221 
                                                     -----------     ---------- 
        Increase (decrease) in cash and
          cash equivalents                            (1,348,220)       241,384 

        Cash and cash equivalents at
          beginning of period                          4,537,980      2,994,128 
                                                     -----------     ---------- 
        Cash and cash equivalents at end of period   $ 3,189,760      3,235,512 
                                                     ===========     ========== 

Supplemental disclosures                                                        
        Cash paid during the period for                                         
                Interest on deposits and advances    $ 1,371,557    $ 1,093,512 
                Income taxes                             106,578        181,000 

        Change in unrealized gain (loss),
          net of deferred taxes on 
          available-for-sale securities                   (6,446)        25,756 

        Dividends declared not yet paid                   76,606         75,219 











                                        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, 1998, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.

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

During the quarter ended June 30, 1998,  the Board of Directors  declared a cash
dividend of $0.075 per share on the Company's  outstanding common stock, payable
to  stockholders  of record as of June 30, 1998. The dividends were paid in July
1998.

During the quarter ended  September 30, 1998, the Board of Directors  declared a
quarterly cash dividend of $0.075 per share on the Company's  outstanding common
stock, payable to stockholders of record as of September 30, 1998. The dividends
were paid in October 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, 1997 the Company  released  4341.26  shares of its common stock
owned by the Company's ESOP. On September 30, 1998, the Company was committed to
release 4157.61 shares of this common stock. The commitment  resulted in $71,000
of additional  compensation  cost for the nine months ended  September 30, 1998,
with $23,000 of that amount booked as additional compensation cost for the three
months ended September 30, 1998.

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

On January 5, 1996,  the  Company  made  awards  under the Plan in the amount of
30,573 shares. The shares were awarded at a price of $9.25 per share. On January
5, 1998,  the Company made awards under the Plan in the amount of 2,250  shares.
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 3,000 shares
in the total number of shares  awarded.  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. On January 5, 1997, 6,112 shares under the Plan were earned,
and the corresponding liability was paid. On January 5, 1998, 5,363 shares under
the Plan were earned, and the corresponding liability was paid.

At September 30, 1998, 27,102 shares remained to be awarded under the Plan. As a
result  of this  vesting  and the  dividends  earned  on the  vested  shares,  a
liability and corresponding  compensation cost in the amount of $39,000 has been
recorded for the nine months  ended  September  30,  1998,  with $13,000 of that
amount booked as additional  compensation  for the three months ended  September
30, 1998, under the provisions of the Plan.


                                       8
<PAGE>


5.      Earnings Per Share
        ------------------

The Company has potential  dilutive common stock (stock options to employees and
directors)  and,  accordingly,  presents  basic and diluted  earnings per share.
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.

The weighted  average number of shares of common stock used to compute the basic
earnings  per share was  increased  by 28,822 for the three month  period  ended
September 30, 1998, and by 15,703 for the three month period ended September 30,
1997, in computing the diluted per share data.

6.      Comprehensive Earnings
        ----------------------

Comprehensive earnings, defined as the change in equity of a business enterprise
from transactions and other events and circumstances  from nonowner sources,  is
presented for the first time this quarter.  The only item of other comprehensive
earnings  for the Company is the  unrealized  gain (loss) on  available-for-sale
securities.

                                       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 non-interest 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.

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

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

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

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  

                                       10
<PAGE>
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.

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  $5.6 million or 4.5% from $123.2  million at
June 30,  1998 to $128.8  million  at  September  30,  1998.  This  increase  is
primarily  the  result  of a $6.8  million  increase  in  the  Bank's  net  loan
portfolio. The majority of the increases are directly attributable to efforts of
Management to increase investment and lending activity.  During the same period,
deposits  increased  $1.4  million or 2% from $69.4  million at June 30, 1998 to
$70.7  million at September  30,  1998.  This  increase is  primarily  due to an
increase in the Bank's volume of NOW accounts,  business  checking  accounts and
Time Deposits. Advances from the FHLB increased $5 million from $38.2 million at
June  30,  1998 to  $43.2  million  at  September  30,  1998.  These  additional
borrowings funded purchases of loans and mortgage loan participations.  The Bank
had  $685,000  and  $692,000  in  unrealized  gains (net of  deferred  taxes) at
September  30, 1998 and June 30,  1998,  respectively  from market  gains on the
Bank's available-for-sale investment and mortgage-backed portfolios. 

                                       11
<PAGE>
RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1997

General

Net earnings increased $25,000 or 13.9% for the quarter ended September 30, 1998
from the quarter ended September 30, 1997. This increase is primarily the result
of an increase in net interest earnings of $145,000, an increase in non-interest
earnings of $21,000,  a $6,000 gain on the sale of other real estate owned and a
decrease  in  provision  for loan  losses of  $22,000,  offset by an increase in
non-interest  expense of $156,000 and an increase in provision  for income taxes
of $13,000.

Interest Earnings

Total  interest  income  increased  $374,000 or 19.6% from $1.9  million for the
quarter  ended  September  30,  1997,  to $2.3  million  for the  quarter  ended
September 30, 1998. This increase was primarily due to $6.8 million  increase in
the banks net loan portfolio.

Interest Expense

Total  interest  expense  increased  $229,000 or 19.6% from $1.2 million for the
quarter ended September 30, 1997 to $1.4 million for the quarter ended September
30, 1998.  This increase was primarily due to a increase in FHLB  borrowings and
an increase in the deposit base.

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 $401,000 and $374,000 at
September  30,  1998 and 1997,  respectively.  The  provision  for loan loss was
$15,000  and  $37,459  for the  quarters  ended  September  30,  1998  and  1997
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 $27,000 or 142.1% from $19,000 for the
quarter ended  September 30, 1997 to $46,000 for the quarter ended September 30,
1998.  This increase was  primarily due to increased  service and NSF charges on
NOW and checking accounts.

Non-Interest Expense

Total  non-interest  expense  increased  $156,000 or 35.3% from $443,000 for the
quarter ended September 30, 1997 to $599,000 for the quarter ended September 30,
1998.  This  increase  was  primarily  due to an  increase in  compensation  and
benefits  of  $53,300  from the  hiring of  additional  staff to handle  growth,
general  salary   increases  and  increases  due  to  accrual  for   stock-based
compensation programs.  Other expenses in compensation and benefits this quarter
ended  September 30, 1998 were a $12,000  increase in education and training due
to employee  training for the new operating system and application  software and
$43,700 in performance  bonus plan accrual.  This performance bonus plan accrual
was budgeted for the fiscal year ending June 30, 1999 therefore will continue to
increase non-interest expense in future periods. Other factors


                                       12
<PAGE>

were increases in occupancy costs of $16,000,  data processing  costs of $9,000,
stock  services  of  $10,000  and other  operating  costs  $37,000,  offset by a
decrease in  professional  fees of $26,000.  The increase in  occupancy  cost is
primarily due to lease expense and leasehold improvement expense on the new Loan
Center and Furniture,  Fixtures and Equipment  depreciation for the new Drive-up
facility and New  Automated  Teller  Machine.  The  increase in data  processing
expense is  primarily  due to service  bureau  expense  for  upgrading  computer
software.  The increase in stock  services is primarily due to a fee paid to the
OTS for filing a change of control application.  The increase in other operating
costs is primarily due to other real estate owned expenses, increased stationary
and supplies, automated teller machine expense and postage expense. The decrease
in  professional  fees is primarily  due to a $27,000  invoice paid for auditing
services in September 1997 for annual report preparation.

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 September 30, 1998, the
Bank's  liquidity,  as measured for  regulatory  purposes,  was 5.52%.  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,  1998,  cash and cash  equivalents
totaled  $3  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 September 30, 1998, the Bank had $43 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 September 30, 1998, the Bank
originated  $13.7  million in total loans,  of which $9.9 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 and readily  marketable equity  securities.  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  $231,000 and $173,000 for the three month period ended  September 30, 1998
and  1997  respectively.  Net  cash  used  for  investing  activities  consisted
primarily   of   disbursement   of  loan   originations   and   investment   and
mortgage-backed security purchases, offset by principal collections on loans and
principal  collections and proceeds from maturities of investment securities and
mortgage-backed  securities.  Such uses were $7 million  and $16 million for the
three month period ended


                                       13
<PAGE>

September 30, 1998 and 1997,  respectively.  Net cash  provided  from  financing
activities  consisting  primarily of net activity in deposit and escrow accounts
and new FHLB  borrowings,  offset  by  repayments  on FHLB  borrowings,  were $5
million and $16 million for the three month period ended  September 30, 1998 and
1997, respectively.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current commitments.  As of September 30, 1998, the Bank had commitments to fund
loans of $5 million.  Certificates of deposit scheduled to mature in one year or
less totaled $33.1 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, no adverse liquidity effects
are expected.

At  September  30,  1998,  the  Bank  exceeded  each of the  three  OTS  capital
requirements on a fully-phased-in basis.

The Year 2000 issue

Funds spent for Year 2000 expense in the quarter  ended  September  30, 1998 was
$2,000.  The Bank's  operating  budget for the fiscal  year ending June 30, 1999
includes $75,000 for Year 2000 expense.  In September 1998 the bank hired a full
time data processing systems administrator.  Although he will have other duties,
his  primary  duties  initially  will  be  Year  2000  administration,  testing,
remediation,  and contingency planning, and his salary will be allocated to Year
2000 expense.  We have  identified  some  personal  computers and software to be
upgraded.  Management  believes  the  $75,000  budget  allocation  for Year 2000
expense  will cover these costs as well as those for the systems  administrator.
Because management expects to be Year 2000 compliant in almost all risk areas by
June 30, 1999,  Year 2000 costs for the fiscal year ending June 30, 2000 are not
expected to be material. Should the Bank have to resort to alternative operating
procedures  due to major systems or  communication  failures at the beginning of
the Year 2000, the extra costs could be material.

In its initial  Year 2000  Action  Plan,  the Bank  identified  seven  phases as
necessary to  implement a Year 2000  compliant  system.  The Bank is a federally
chartered  financial  institution  regulated by the Office of Thrift Supervision
(OTS).  The OTS identified five phases for Year 2000  compliance.  The following
list describes the five phases as identified by the OTS with  comparable  phases
from the Bank's Year 2000 Action Plan identified in parentheses, if different:

1.   Awareness  -- Inform  senior  management  of Year 2000 issues and  possible
     impact to the overall organization.

2.   Assessment  (Inventory,  Assessment) -- Estimate the scope of the Year 2000
     project and develop  the budget for project  execution.  Develop a complete
     inventory of hardware, software and systems, and categorize by importance.

3.   Renovation  (Analysis,  Renovation)  --  Perform a  detailed  analysis  and
     develop detailed plans for correction,  testing and reimplementing critical
     applications. Correct and replace all critical applications.

4.   Validation  (Testing)  -- Test all  critical  applications  unit and system
     level.

5.   Implementation  -- Implement all critical  applications  and databases in a
     production environment. Integration test.

                                       14
<PAGE>

As of September  30, 1998 the  following  chart shows the current and  projected
status of the Bank's Year 2000 compliance efforts:

Phase                   9/28/98  10/15/98      12/31/98     3/31/99     6/30/99
-----                   -------  --------      --------     -------     -------

Awareness               100%     -             -            -           -

Assessment              100%     -             -            -           -

Renovation               85%     100%          -            -           -   

Validation               10%      60%           85%         100%        -

Implementation           10%      60%           85%          95%        100%


Subsequent Events

In June 1998, the Bank opened a newly constructed  drive-up teller and automated
teller machine facility on a lot previously  purchased for this purpose adjacent
to the present bank  building.  On September  14, 1998,  the Bank moved its loan
operations  into a new Loan Center  across the street from its office.  The 7000
sq. ft.  building  was leased for ten years with an option to  purchase at a set
price.  Management believes the additions will provide the Bank growth potential
by improving its ability to deliver  retail-banking  services in the  community.
These  additions had a minimal impact on financial  performance for the Bank for
the  quarter  ended  September  30,  1998,  but they  will  materially  increase
non-interest expense for the Company during the fiscal year ending June 30, 1999
and subsequent years.

Stock Repurchase Program 

On August 18, 1998, the Company issued a press release  announcing its intention
to  repurchase  up to 5% (58,276  shares) of the  Company's  common  stock.  The
repurchase  was complete on September 9, 1998. On September 9, 1998, the Company
issued a press release  announcing  its intention to repurchase up to 5% (55,363
shares) of the Company's common stock. The repurchase was complete on October 6,
1998. All shares  repurchased have been retired 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

The Small Business Job Protection Act of 1996, among other things, equalized 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


                                       15
<PAGE>

currently.  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, 1998,  the Bank had $46,613 of
post 1987 bad-debt reserves of which 1/6th or $9,323 was recaptured into taxable
income for the year ended June 30, 1998. 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 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.

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, except for interim financial statements
in the initial year of its application.

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

Item 6.  Exhibits and Reports on Form 8-K
None

                                       16
<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 6, 1998                       /s/ Jerry R. Spurlin          
                                             -----------------------------------
                                             Jerry R. Spurlin
                                             President
                                             (Duly Authorized Representative and
                                              Principal Financial Officer)






                                       17