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, 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 February 4, 1999,  there were issued and outstanding  1,047,223  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, 1998 and June 30, 1998                            3

          Consolidated Statements of Earnings and Comprehensive Earnings
               Three months and six months ended December 31, 1998 and 1997   4

          Consolidated Statements of Cash Flows
               Six months ended December 31, 1998 and 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. 4.  Submission of Matters to a Vote of Security Holders                17

Item 6.   Exhibits and Reports on Form 8-K                                   18

          Signatures                                                         19
<PAGE>

                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                               December 31,              June 30,
                                                                                   1998                    1998
                                                                             ------------------      -----------------
                                                                                (Unaudited)
                                         ASSETS
<S>                                                                          <C>              <C>          
Cash and due from banks                                                        $   2,247,589    $   2,047,860
Interest-bearing deposits with banks                                                 828,498        2,490,120
Federal funds sold                                                                         0                0
Available-for-sale investment securities                                           7,475,412        5,188,095
Available-for-sale mortgage-backed securities                                     28,610,552       33,551,219
Hold-to-Maturity investment securities                                             1,125,175          144,993
Stock of Federal Home Loan Bank, at cost, restricted                               2,321,600        1,965,200
Loans receivable, net, substantially pledged                                      88,592,716       75,836,642
Accrued interest and dividends receivable                                            729,093          675,485
Premises and equipment                                                             1,478,628        1,035,668
Other real estate and repossessed property                                           248,671          159,106
Prepaid and other assets                                                              43,579           46,316
Deferred tax asset                                                                    68,377           68,377
                                                                               -------------    -------------

        TOTAL ASSETS                                                           $ 133,769,890      123,209,081
                                                                               =============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction and NOW accounts                                                   $  10,733,232    $   6,979,785
Savings and MMDA deposits                                                         13,557,079       13,901,860
Time deposits                                                                     49,617,482       48,497,496
Accrued interest payable                                                             234,672          223,702
Advances from borrowers for taxes and insurance                                      301,138          225,597
Accounts payable and accrued liabilities                                             423,800          260,332
Deferred income taxes                                                                459,719          426,553
Dividends declared and payable                                                        73,923           82,446
Advances from Federal Home Loan Bank                                              45,184,855       38,247,631
Income taxes payable                                                                  66,761          154,757
                                                                               -------------    -------------

        TOTAL LIABILITIES                                                        120,652,660      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 1,051,898 shares issued and 
  outstanding at December 31, 1998, adjusted for
  30,389 and 45,584 shares at June 30, 1998 and December 31, 1998,
  for unallocated Manangement Stock Bonus Plan shares 
  held by the Company's wholly owned subsidiary, respectively.                       100,631          113,515
Preferred stock, $.10 par value, 500,000
  shares authorized;  no shares issued or
  outstanding                                                                           --               --
Additional paid-in-capital                                                         4,211,497        5,777,881
Unearned ESOP stock                                                                 (400,088)        (415,695)
Retained earnings, substantially
  restricted                                                                       8,312,794        8,041,610
Accumulated other comprehensive
earnings                                                                             892,396          691,611
                                                                               -------------    -------------
        TOTAL STOCKHOLDERS' EQUITY                                                13,117,230       14,208,922
                                                                               -------------    -------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $ 133,769,890    $ 123,209,081
                                                                               =============    =============
</TABLE>

See notes to consolidated financial statements.

                                        3
<PAGE>
                                     GFSB Bancorp, Inc.

                             CONSOLIDATED STATEMENTS OF EARNINGS
                                 AND COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
                                                                     Three months ended                    Six months ended
                                                                        December 31,                         December 31,
                                                                ------------------------------      -------------------------------
                                                                   1998              1997               1998              1997
                                                                ------------------------------      -------------------------------
                                                                (Unaudited)       (Unaudited)       (Unaudited)        (Unaudited)
<S>                                                           <C>               <C>               <C>                    <C>      
Interest income
           Loans receivable
                          Mortgage loans                      $   1,605,430     $   1,230,456     $    3,122,116         2,338,318
                          Commercial loans                          122,734            60,062            236,696           116,839
                          Share and consumer loans                  101,303            75,129            195,796           140,423
           Investment and mortgage-backed securities                484,423           672,493            995,286         1,315,522
           Other interest-earning assets                             52,543            50,672            103,614            90,455
                                                                ------------      ------------      -------------      ------------

                          TOTAL INTEREST EARNINGS                 2,366,433         2,088,812          4,653,509         4,001,559

Interest expense
           Deposits                                                 820,827           784,041          1,650,605         1,540,965
           Advances from Federal Home Loan Bank                     583,917           520,900          1,151,981           932,925
                                                                ------------      ------------      -------------      ------------

                          TOTAL INTEREST EXPENSE                  1,404,744         1,304,941          2,802,587         2,473,890
                                                               ------------      ------------      -------------      ------------

                          NET INTEREST EARNINGS                     961,689           783,871          1,850,922         1,527,669

Provision for loan losses                                            25,000                 0             40,000            37,459
                                                               ------------      ------------      -------------      ------------

                          NET INTEREST EARNINGS AFTER
                            PROVISION FOR LOAN LOSSES               936,689           783,871          1,810,922         1,490,210

Non-interest earnings
           Income from real estate operations                             -                 -                 -                  -
           Miscellaneous income                                       2,564             1,305             11,288             6,782
           Net gains from sales of loans                              7,090               955              9,225             4,212
           Service charge income                                     38,109            19,805             73,194            30,247
                                                               ------------      ------------      -------------      ------------
                          TOTAL NON-INTEREST EARNINGS                47,763            22,065             93,707            41,241

Non-interest expense
           Compensation and benefits                                356,189           214,931            696,426           446,295
           Insurance                                                 14,923            13,168             29,821            26,328
           Stock services                                             3,287             4,921             16,644             7,670
           Occupancy                                                 70,015            39,513            126,558            79,513
           Data processing                                           59,552            31,725             99,097            62,743
           Professional fees                                         14,737            30,012             27,692            68,975
           Advertising                                               19,028             9,782             35,402            27,509
           Other                                                     93,555            83,746            198,988           151,640
                                                                ------------      ------------      -------------      ------------
                          TOTAL NON-INTEREST EXPENSE                631,286           427,798          1,230,627           870,672
</TABLE>

                                        4
<PAGE>

                                     GFSB Bancorp, Inc.

                             CONSOLIDATED STATEMENTS OF EARNINGS
                           AND COMPREHENSIVE EARNINGS - CONTINUED
<TABLE>
<CAPTION>
                                                                     Three months ended                    Six months ended
                                                                        December 31,                         December 31,
                                                                ------------------------------      -------------------------------
                                                                   1998              1997               1998              1997
                                                                ------------------------------      -------------------------------
                                                                (Unaudited)       (Unaudited)       (Unaudited)        (Unaudited)

<S>                                                             <C>               <C>                <C>               <C>      
                          EARNINGS BEFORE INCOME TAXES              353,166           378,138            674,002           660,780

Income tax expense
           Currently payable                                        135,723           146,137            252,289           249,501
           Deferred provision                                             -                 -                 -                  -
                                                               ------------      ------------      -------------      ------------
                                                                    135,723           146,137            252,289           249,501
                                                                ------------      ------------      -------------      ------------
                          NET EARNINGS                          $   217,443       $   232,001            421,714           411,279
                                                                ============      ============      =============      ============
Other Comprehensive Earnings
           Unrealized gain (loss), net of tax
           of $79,543 in 1998 and $47,612 in 1997                                  
           on available-for-sale securities                         207,231            66,668            200,785            92,424
                                                                ============      ============      =============      ============
                          COMPREHENSIVE EARNINGS                    424,674           298,669            622,499           503,703
                                                                ============      ============      =============      ============
                                                                                  
Earnings per common share
           Basic                                                $      0.22              0.20               0.40              0.36
                                                                ============      ============      =============      ============
Weighted average number of common shares outstanding
           Basic                                                  1,008,985         1,133,725          1,047,923         1,132,915
                                                                ============      ============      =============      ============
                                                                                  
Earnings per common share
           Diluted                                                     0.21              0.20               0.39              0.36
                                                                ============      ============      =============      ============

Weighted average number of common shares outstanding
           Diluted                                                1,035,688         1,150,651          1,076,970         1,148,040
                                                                ============      ============      =============      ============
Comprehensive earnings per common share
           Basic                                                       0.42              0.26               0.59              0.44
                                                                ============      ============      =============      ============
           Diluted                                                     0.41              0.26               0.58              0.44
                                                                ============      ============      =============      ============

</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,
                                                                         --------------------------------
                                                                              1998           1997
                                                                         -------------   ----------------
                                                                           (Unaudited)     (Unaudited)
<S>                                                                       <C>             <C>         
Cash flows from operating activities
             Net earnings                                                $    421,714    $    411,279
             Adjustments to reconcile net earnings to
               net cash provided by operations
                         Deferred loan origination fees                      (157,153)        (79,085)
                         Gain on sale of sold loans                            (9,225)         (4,212)
                         Provision for loan losses                             40,000          37,459
                         Depreciation of premises and equipment                69,863          38,936
                         Amortization of investment and mortgage-
                           backed securities premiums (discounts)             197,708         131,256
                         Stock dividends on FHLB stock                        (63,100)        (49,400)
                         Release of ESOP stock                                 45,376          52,527
                         Stock compensation                                    26,893          24,470
                         Provision (benefit) for deferred income taxes           --              --

             Net changes in operating assets and liabilities
                         Accrued interest and dividends receivable            (53,608)       (120,379)
                         Prepaid taxes                                           --              --
                         Prepaid and other assets                               2,736           4,672
                         Accrued interest payable                              10,970          59,960
                         Accounts payable and accrued liabilities             136,574          53,494
                         Income taxes payable                                 (87,996)       (128,499)
                         Dividends declared and payable                        (8,523)           (196)
                                                                         ------------    ------------

                                     Net cash provided by
                                     operating activities                     572,229         432,282

Cash flows from investing activities
             Purchase of premises and equipment                              (512,823)       (136,087)
             Loan originations and principal
               repayment on loans, net                                    (12,719,262)    (11,111,598)
             Principal payments on mortgage-backed
               securities                                                   5,469,927       4,385,694
             Purchases of mortgage-backed securities                         (880,255)    (10,770,665)
             Purchases of available-for-sale securities                    (3,980,260)     (2,455,562)
             Maturities and proceeds from sale of
               available-for-sale securities                                2,010,000            --
             Principal payments on available-for-sale securities               70,000            --
             Purchases of held-to-maturity securities                        (980,000)           --
             Maturities and proceeds from sale of
              held-to-maturity securities                                        --              --
             Purchase of FHLB stock                                          (293,300)       (779,000)
                                                                         ------------    ------------

                                     Net cash used by
                                     investing activities                 (11,815,973)    (20,867,218)
</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,
                                                                         -----------------------------------------
                                                                              1998                     1997
                                                                         ----------------         ----------------
                                                                           (Unaudited)              (Unaudited)
<S>                                                                   <C>                      <C>              
Cash flows from financing activities
             Net increase in transaction accounts, passbook
               savings, money market accounts, and
               certificates of deposit                                 $       4,528,652        $       5,375,528
             Net increase (decrease) in mortgage escrow funds                     75,541                   12,835
             Proceeds from FHLB advances                                     148,835,528              234,345,950
             Repayments on FHLB advances                                    (141,898,304)            (219,210,700)
             Purchase of GFSB Bancorp stock under the
               stock repurchase plan in cash                                  (1,609,036)                                       -
             Dividends paid or to be paid in cash                               (150,530)                (150,439)
                                                                         ----------------         ----------------

                                     Net cash provided by
                                     financing activities                      9,781,851               20,373,174
                                                                         ----------------         ----------------

             Increase (decrease) in cash and cash equivalents                 (1,461,893)                 (61,762)

             Cash and cash equivalents at beginning of period                  4,537,980                2,994,128
                                                                         ----------------         ----------------

             Cash and cash equivalents at end of period                $       3,076,087                2,932,366
                                                                         ================         ================


Supplemental disclosures
             Cash paid during the period for
                         Interest on deposits and advances             $       1,754,827        $       2,413,930
                         Income taxes                                            340,284                  377,640

             Change in unrealized gain (loss), net of deferred
               taxes on available-for-sale securities                            200,785                   92,424

             Dividends declared not yet paid                                      73,923                   75,219


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

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

During the quarter ended  September 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 September 30, 1998. The dividends were
paid in October 1998.

During the quarter ended  December 31, 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 December 31, 1998. The dividends
were paid in January 1999.

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 December 31, 1998, the Company was committed to
release 7022.35 shares of this common stock. The commitment  resulted in $93,000
of additional  compensation  cost for the twelve months ended December 31, 1998,
with $22,000 of that amount booked as additional compensation cost for the three
months ended December 31, 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 December 31, 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 $52,000 has been
recorded  for the twelve  months ended  December 31, 1998,  with $13,000 of that
amount booked as additional compensation for the three months ended December 31,
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 26,703 for the three month  period  ended
December 31, 1998,  and by 16,926 for the three month period ended  December 31,
1997, 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 29,047  for the six month  period  ended
December  31, 1998,  and by 15,125 for the six month  period ended  December 31,
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 non-owner sources, was
presented for the first time in the quarter ended  September 30, 1998.  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  $10.6 million or 8.6% from $123.2 million at
June 30, 1998 to $133.8 million at December 31, 1998. This increase is primarily
the result of a $12.8  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  $4.5  million  or 6.5% from $69.4  million at June 30,  1998 to $73.9
million at December 31, 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 $7 million from $38.2 million at June 30, 1998
to $45.2  million at December  31,  1998.  These  additional  borrowings  funded
purchases of loans and mortgage loan  participations.  The Bank had $892,000 and
$692,000 in  unrealized  gains (net of deferred  taxes) at December 31, 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 DECEMBER 31, 1998 COMPARED TO
QUARTER ENDED DECEMBER 31, 1997

General

Net earnings  decreased  $15,000 or 6.3% for the quarter ended December 31, 1998
from the quarter ended December 31, 1997.  This decrease is primarily the result
of an increase in non-interest expense of $203,000, an increase in the provision
for loan  losses of $25,000  and a decrease  in income tax  expense of  $10,000,
offset by an increase in net  interest  earnings of $178,000  and an increase in
non-interest earnings of $26,000

Interest Earnings

Total  interest  income  increased  $278,000 or 13.3% from $2.1  million for the
quarter ended  December 31, 1997, to $2.4 million for the quarter ended December
31, 1998. This increase was primarily due to substantial  increases in the banks
net loan portfolio.

Interest Expense

Total  interest  expense  increased  $100,000 or 7.6% from $1.3  million for the
quarter ended  December 31, 1997 to $1.4 million for the quarter ended  December
31, 1998.  This increase was primarily due to an 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 $421,000 and $369,000 at
December  31,  1998 and  1997,  respectively.  The  provision  for loan loss was
$25,000 for the quarter ended  December 31, 1998. No provision for loan loss was
made for the quarter  ended  December 31, 1997.  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 $26,000 or 116.5% from $22,000 for the
quarter ended  December 31, 1997 to $48,000 for the quarter  ended  December 31,
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  $203,000 or 47.5% from $428,000 for the
quarter ended  December 31, 1997 to $631,000 for the quarter ended  December 31,
1998.  This  increase  was  primarily  due to an  increase in  compensation  and
benefits  of  $141,000  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 December 31, 1998 include a $44,600  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 were  increases in occupancy  costs of $31,000,  data  processing
costs of  $28,000,  advertising  costs of  $10,000  and  other  operating  costs
$10,000,  offset by a decrease in professional fees of $15,000.  The increase in
occupancy  cost is  primarily  due

                                       12
<PAGE>

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 other  operating  costs is primarily  due to other real estate owned
expenses and Year 2000 expense. The increase in advertising costs is a result of
efforts  of the Bank to  achieve  growth  in  deposits  through  attracting  new
customers.  The decrease in professional  fees is primarily due to a decrease in
legal fees and audit and accounting accruals.



RESULTS OF OPERATIONS

COMPARISON  OF OPERATING  RESULTS FOR SIX MONTH  PERIOD ENDED  DECEMBER 31, 1998
COMPARED TO SIX MONTH PERIOD ENDED DECEMBER 31, 1997

General

Net earnings  increased  $11,000 or 2.5% for the six-month period ended December
31, 1998 from the  six-month  period ended  December 31, 1997.  This increase is
primarily the result of an increase in  net-interest  earnings of $323,000 and a
increase  in  non-interest  earnings  of  $53,000,  offset  by  an  increase  in
non-interest  expense of  $360,000,  an increase in  provision  for loan loss of
$3,000 and an increase in provision for income taxes of $2,000.

Interest Earnings

Total  interest  income  increased  $652,000 or 16.3% from $4.0  million for the
six-month  period ended  December 31,  1997,  to $4.7 million for the  six-month
period ended  December 31, 1998.  This increase was primarily due to substantial
increases in the banks net loan portfolio.

Interest Expense

Total  interest  expense  increased  $329,000 or 13.3% from $2.5 million for the
six-month  period  ended  December  31, 1997 to $2.8  million for the  six-month
period ended  December 31, 1998.  This increase was primarily due to an 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 $421,000 and $369,000 at
December  31,  1998 and  1997,  respectively.  The  provision  for loan loss was
$40,000 and $37,000 for the six-month  period ended  December 31, 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 $53,000 or 127.2% from $41,000 for the
six-month  period  ended  December  31, 1997 to $94,000  for the  quarter  ended
December 31, 1998. This increase was primarily due to increased  service and NSF
charges on NOW and checking accounts.


                                       13
<PAGE>

Non-Interest Expense

Total  non-interest  expense  increased  $360,000 or 41.3% from $871,000 for the
six-month  period ended December 31, 1997 to $1,231,000 for the six month period
ended  December 31, 1998.  This  increase  was  primarily  due to an increase in
compensation  and benefits of $250,000  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
the  six-month  period ended  December 31, 1998  includes a $87,500  performance
bonus plan  accrual and a $12,000  increase in  education  and  training  due to
employee  training for the new operating system and application  software.  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 were  increases in occupancy  costs of $47,000,  data  processing
costs of $36,000, advertising costs of $7,000 and other operating costs $48,000,
an increase in stock  services  of $9,000  offset by a decrease in  professional
fees of  $41,000.  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
other  operating  costs is primarily  due to other real estate  owned  expenses,
increased  stationary and supplies,  automated teller machine  expense,  postage
expense and Year 2000 expense.  The increase in advertising costs is a result of
efforts  of the Bank to  achieve  growth  in  deposits  through  attracting  new
customers.  The increase in stock services is primarily due to a fee paid to the
OTS for filing a change of control  application.  The  decrease in  professional
fees is  primarily  due to a  decrease  in legal  fees and audit and  accounting
accruals.


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, 1998,  the
Bank's  liquidity,  as measured for  regulatory  purposes,  was 5.82%.  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, 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 December
31, 1998,  the Bank had $45 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, 1998 the Bank
originated  $14.6  million in total loans,  of which $11.4 million were mortgage
loans.  The Bank also  purchased  $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

                                       14
<PAGE>

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 $572,000 and $432,000 for the six month period ended  December 31, 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 $11.8  million  and $20.9  million for the six month
period ended  December 31, 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
$9.8 million and $20.4 million for the six month period ended  December 31, 1998
and 1997, respectively.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current  commitments.  As of December 31, 1998, the Bank had commitments to fund
loans of $9 million.  Certificates of deposit scheduled to mature in one year or
less totaled $37.1 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  December  31,  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  December  31, 1998 was
$23,000.  Funds  spent for Year 2000  expense  for the six  month  period  ended
December 31, 1998 was $25,000.  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.

                                       15
<PAGE>

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.

As of December  31,  1998 the  following  chart shows the current and  projected
status of the Bank's Year 2000 compliance efforts:

Phase                      12/31/98       3/31/99          6/30/99
-----                      --------       -------          -------

Awareness                    100%             -                 -

Assessment                   100%             -                 -

Renovation                   100%             -                 -

Validation                    93%            100%               -

Implementation                93%             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  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. On November 24, 1998 the Company
issued a press release  announcing  its intention to repurchase up to 5% (52,595
shares) of the  Company's  common  stock.  As of December 31, 1998 none of these
shares  have been  repurchased.  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.


                                       16
<PAGE>

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  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 4.  Submission of Matters to a Vote of Security Holders.

The annual  meeting of the  stockholders  of the Company was held on November 9,
1998. At the meeting, two directors were elected for terms to expire in 2001 and
the selection of independent accountant was ratified.

                                       17
<PAGE>






The results of voting are shown for each matter considered.

Director election:

Nominee                    Votes For        Votes Withheld      Broker non-votes

Wallace R. Phillips          785,567            1,668                  0
Richard C. Kauzlaric         785,567            1,668                  0


Auditor ratification:

Votes for                    669,650

Votes against                115,073

Abstentions                    2,512


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

                                       18
<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 12, 1999                      /s/Jerry R. Spurlin
                                             -----------------------------------
                                             Jerry R. Spurlin
                                             President
                                             (Duly Authorized Representative and
                                             Principal Financial Officer)






                                       19