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, 1996
                                             -----------------

                                      OR

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

                      For the transition period from to


                       Commission file number: 0-25854


                              GFSB BANCORP, INC.
                ----------------------------------------------
                (Name of Small Business Issuer in its Charter)


Delaware                                                      04-2095007
---------------------------------------------             ---------------------
(State or Other Jurisdiction of Incorporation               (I.R.S. Employer
or Organization)                                          Identification Number)
                                                        
221 West Aztec Avenue, Gallup, New Mexico                        87301
-----------------------------------------                      ----------
(Address of Principal Executive Offices)                       (Zip Code)

Issuer's Telephone Number, Including Area Code:         (505) 722-4361
                                                        --------------

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.
                        Yes    X          No
                            ------            ------


As of February 12, 1997, there were issued and outstanding 843,708 shares of the
registrant's Common Stock.


<PAGE>

                               GFSB Bancorp, Inc.


                                     Index

<TABLE>
<CAPTION>

<S>       <C>                                                                         <C>          
PART I.   FINANCIAL INFORMATION                                                       Page No.

Item 1.   Consolidated Financial Statements

          Consolidated  Statements of Financial Condition September 30, 1996 and
          June 30, 1996                                                                  3

          Consolidated  Statements of Earnings Three months ended  September 30,
          1996 and 1995                                                                  4

          Consolidated Statements of Cash Flows Three months ended September 30,
          1996 and 1995                                                                  5

          Notes to Consolidated Financial Statements                                     7

Item 2.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations                                                          8

PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K                                               12

Signatures                                                                              13

</TABLE>


                                        2


<PAGE>


                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                          December 31,          June 30,
                                                              1996                1996
                                                          ------------         ---------
                                                                    (Unaudited)
ASSETS

<S>                                                    <C>               <C>
Cash and due from banks                                $     1,623,393   $     1,671,053
Interest-bearing deposits with banks                         3,342,990         1,346,141
Federal funds sold                                             100,000           150,000
Available-for-sale investment securities                     4,081,506         4,572,647
Available-for-sale mortgage-backed securities               27,990,074        25,245,896
Stock of Federal Home Loan Bank, at cost, restricted           808,100           550,600
Loans receivable, net, substantially pledged                42,670,152        38,727,535
Accrued interest and dividend receivable                       459,598           400,316
Premises and equipment                                         664,791           537,042
Prepaid Income Taxes                                            19,833                 -
Prepaid and other assets                                        14,225            49,405
                                                       ----------------  ----------------
TOTAL ASSETS                                           $    81,774,662        73,250,635
                                                       ===============   ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction accounts                                   $     5,709,622   $     3,239,079
Savings and now deposits                                    11,127,132        10,758,974
Time deposits                                               37,016,700        31,991,757
Accrued interest payable                                        94,386           103,507
Advances from borrowers for taxes and insurance                194,623           174,532
Accounts payable and accrued liabilities                       194,318           172,717
Deferred income taxes                                          185,706            81,087
Dividends declared and payable                                  83,336           402,577
Advances from Federal Home Loan Bank                        12,518,000        10,854,000
Income taxes payable                                           105,908           108,929
                                                       ----------------  ----------------
TOTAL LIABILITIES                                           67,229,731        57,887,159


COMMITMENTS AND CONTINGENCIES                                        -                 -


STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
  shares authorized;  901,313 issued and
  outstanding at December 31, 1996 and 948,750 shares
   issued and outstanding at June 30, 1996                      83,336            91,080
Preferred stock, $.10 par value, 500,000
  shares authorized;  no shares issued or
  outstanding                                                        -                  -
Additional paid-in-capital                                    7,377,595         8,486,822
Unearned ESOP stock                                            (484,355)         (541,333)
Retained earnings, substantially
  restricted                                                  7,237,724         7,199,360
Unrealized gain on available for sale
  securities, net of taxes                                      330,631           127,547
                                                       ----------------  ----------------
TOTAL STOCKHOLDERS' EQUITY                                   14,544,931        15,363,476
                                                       ----------------  ----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $     81,774,662  $     73,250,635
                                                       ================  ================
</TABLE>

See notes to consolidated financial statements

                                        3

<PAGE>

                               GFSB Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>



                                                 Three months ended          Six months ended
                                                     December 31,               December 31,
                                                   1996         1995        1996         1995
                                               (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
Interest income
Loans receivable
<S>                                            <C>         <C>          <C>           <C>       
Mortgage loans                                 $  863,653  $   704,466  $ 1,674,396   $1,389,282
Commercial loans                                   46,845       48,866       93,961      101,423
Share and consumer loans                           41,279       31,843       79,206       59,428
Available-for-sale investment securities and
mortgage-backed securities                        509,967      343,535    1,027,314      656,646
Other interest-earning assets                      14,929       48,941       62,145       93,997
                                               ----------  -----------  -----------   ----------

TOTAL INTEREST EARNINGS                         1,476,673    1,177,651    2,937,022    2,300,776

Interest expense
Deposits                                          633,738      518,594    1,214,057      998,202
Advances from Federal Home Loan Bank              186,148       48,225      391,663       48,224
                                               ----------  -----------  -----------   ----------
TOTAL INTEREST EXPENSE                            819,886      566,819    1,605,720    1,046,426
                                               ----------  -----------  -----------   ----------
NET INTEREST EARNINGS                             656,787      610,832    1,331,302    1,254,350

Provision for loan losses                               0       15,894        5,288       28,099
                                               ----------  -----------  -----------   ----------
NET INTEREST EARNINGS AFTER
  PROVISION FOR LOAN LOSSES                       656,787      594,938    1,326,014    1,226,251

Non-interest earnings
Income from real estate operations                      0        1,650            0        3,300
Miscellaneous income                                1,026        9,150        1,721        9,181
Net gains from sales of loans                           0            0        4,942            0
Service charge income                               8,155          391       16,735          695
                                               ----------  -----------  -----------   ----------
TOTAL NON-INTEREST EARNINGS                         9,181       11,191       23,398       13,176

Non-interest expense
Compensation and benefits                         237,264      170,044      424,587      266,779
Professional fees                                  25,951       48,743       54,793       69,652
Occupancy                                          35,363       31,874       67,472       55,550
Advertising                                        11,997       11,449       22,617       15,168
Data processing                                    22,327       17,658       45,825       43,839
Insurance                                          30,743       24,653      310,208       50,154
Other                                              58,869       48,018      122,062       76,355
                                               ----------  -----------  -----------   ----------
TOTAL NON-INTEREST EXPENSE                        422,513      352,439    1,047,564      577,497


EARNINGS BEFORE INCOME TAXES                      243,455      253,690      301,848      661,930

Income tax expense                                 97,393      117,442      121,146      246,810
                                               ----------  -----------  -----------   ----------
NET EARNINGS                                   $  146,062   $  136,248      180,702      415,120
                                               ==========   ==========      =======      =======

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING                                856,942      892,760      856,942      892,760

EARNINGS PER COMMON SHARE                      $     0.17   $     0.15         0.21         0.46
                                               ==========   ==========         ====         ====

</TABLE>

                                       4

<PAGE>

                               GFSB Bancorp, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (decrease) in cash and cash equivalents

<TABLE>
<CAPTION>


                                                       Six months ended
                                                          December 31,
                                                      1996             1995
                                                   (Unaudited)      (Unaudited)
Cash flows from operating activities
<S>                                               <C>             <C>         
Net earnings                                      $    180,702    $    415,120
Adjustments to reconcile net earnings to
  net cash provided (used) by operations
Deferred loan origination fees                         (69,391)        (56,314)
Gain on sale of sold loans                              (4,942)         (7,414)
Provision for loan losses                                5,288          15,894
Depreciation of premises and equipment                  32,935          24,599
Amortization of investment and mortgage-
  backed securities premiums (discounts)                80,008          55,116
Stock dividends on FHLB stock                          (10,800)        (14,500)
Stock compensation                                      28,280              --
ESOP stock committed to be released                     86,180          34,285
Net changes in operating assets and liabilities
Accrued interest receivable                            (59,284)       (167,280)
Prepaid income tax                                     (22,854)             --
Prepaid and other assets                                35,180          (1,377)
Accrued interest payable                                (9,120)         54,027
Accounts payable and accrued liabilities                (6,679)        (45,923)
Income taxes payable                                        --         127,399
Dividends declared and payable                        (319,241)             --
                                                    ----------     ----------- 
  Net cash provided (used) by
  operating activities                                 (53,738)        433,632

Cash flows from investing activities
Purchase of premises and equipment                    (160,684)        (23,218)
Loan originations and principal
  repayment on loans, net                           (3,873,572)     (1,539,005)
Principal payments on mortgage-backed
  securities                                         2,510,672       1,356,678
Purchases of mortgage-backed securities             (5,174,111)    (15,840,882)
Purchases of U.S. Agency Securities, FHLB
  Debentures, bonds, and mutual funds                  (61,902)             --
Maturities and proceeds from sale of FHLB
  Debentures, U.S. Agency Securities,
  certificates of deposit, and bonds                   700,000         635,000
Purchase of FHLB stock                                (246,700)        (51,200)
                                                    ----------     ----------- 
  Net cash used by investing activities             (6,306,297)    (15,462,627)

</TABLE>




                                       5

<PAGE>

                               GFSB Bancorp, Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                Increase (decrease) in cash and cash equivalents

<TABLE>
<CAPTION>


                                                         Six months ended
                                                            December 31,
                                                        1996            1995
                                                     (Unaudited)     (Unaudited)
Cash flows from financing activities
Net increase in demand deposits, passbook
  savings, money market accounts, and
<S>                                                 <C>             <C>         
  certificates of deposit                           $  7,863,644    $  3,155,271
Net increase (decrease) in mortgage escrow funds          20,091        (15,759)
Proceeds from FHLB advances                           54,048,910     10,000,000
Repayments on FHLB advances                          (52,384,910)            --
Dividends paid or to be paid in cash                    (142,338)            --
Purchase of retired treasury stock                    (1,146,173)            --
                                                    ------------    ------------
Net cash provided by
financing activities                                   8,259,224     13,139,512
                                                    ------------    ------------
Increase (decrease) in cash and cash equivalent        1,899,189     (1,889,483)

Cash and cash equivalents at beginning of period       3,167,194      4,914,517
                                                    ------------    ------------
Cash and cash equivalents at end of period          $  5,066,383      3,025,034
                                                    ============      =========


Supplemental disclosures
Cash paid during the period for
  Interest on deposits and advances                 $  1,614,841    $   992,399
  Income taxes                                           142,200        135,000

Change in unrealized gain (loss), net of deferred
  taxes for implementation of FASB #115                  203,084        126,970

Dividends declared not yet paid                               --        142,313

</TABLE>








                                       6

<PAGE>

                              GFSB BANCORP, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

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

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

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

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

During the quarter ended  December 31, 1996,  the Board of Directors  declared a
quarterly cash dividend of $0.10 per share on the Company's  outstanding  common
stock,  payable to stockholders of record as of December 31, 1996. The dividends
were paid in January, 1997.

3.    Employee Stock Ownership Plan
      -----------------------------

On December 31, 1996, the Company was committed to release 3169.76 shares of its
common stock owned by the Company's ESOP. The commitment  resulted in $50,000 of
additional compensation cost.

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

On January 5, 1996,  the  Company  made  awards  under the Plan in the amount of
20,382  shares.  The shares  were  awarded  at a price of $13 7/8 per share.  At
December 31, 1996,  17,568 shares remained to be awarded under the Plan.  Awards
under the Plan are earned at the rate of  one-fifth  of the award per year as of
the one-year  anniversary of the effective date of the Plan. As a result of this
vesting  and  the  dividends  earned  on the  vested  shares,  a  liability  and
corresponding  compensation  cost in the amount of $15,000 has been  recorded at
December 31, 1996, under the provisions of the Plan.

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

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


                                      7

<PAGE>





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

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.
The Bank also purchases  mortgage-backed and investment securities.  The largest
components  of the Bank's net  earnings are net  interest  income,  which is the
difference between interest income and interest expense,  and noninterest income
derived primarily from fees. Consequently,  the Bank's earnings are dependent on
its ability to originate loans, net interest income, and the relative amounts of
interest-earning  assets  and  interest-bearing   liabilities.  The  Bank's  net
earnings is also affected by its provision for loan losses as well as the amount
of other expense,  such as compensation and benefit expense,  occupancy  expense
and deposit insurance  premium expenses.  Earnings of the Bank also are affected
significantly  by general  economic  and  competitive  conditions,  particularly
changes in market interest rates,  government policies and actions of regulatory
authorities. The disparity in premiums paid by BIF and SAIF insured institutions
has also adversely impacted the Bank.

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

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

Management Strategy

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



                                      8

<PAGE>



During the past few years the competing financial institutions located in Gallup
have all been acquired by statewide and regional  bank holding  companies.  As a
result,  as of 1995, the Bank is the only local  institution  headquartered  and
managed in Gallup, New Mexico.  The Bank believes that its "hometown"  advantage
will  provide  an  opportunity  to  expand  its  operations  as the  only  local
independent  financial  institution and that the  reorganization  to the holding
company format and the capital raised from the conversion will enable it to take
advantage of this opportunity. The new structure and capital has already enabled
the Bank to  expand  both  the  amount  and  scope of its  current  lending  and
investment  activities.  The Bank also believes that it has a unique  ability to
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  including selling
fixed rate mortgage loans with terms over 15 years. See "Management Strategy."

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

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

FINANCIAL CONDITION

The Bank's total assets  increased  $8.5 million or 11.6% from $73.3  million at
June 30, 1996 to $81.8 million at December 31, 1996. This increase is the result
of a $2.7  million  increase  in  mortgage-backed  securities,  a  $3.9  million
increase  in the Bank's net loan  portfolio,  and an  increase  in cash and cash
equivalents  of  $1.9  million.  The  majority  of the  increases  are  directly
attributable to efforts of Management to take advantage of the increased capital
infusion  made as a result  of the  conversion  from a mutual  to stock  form of
ownership  through  increased  investment  and  lending  activity  and from FHLB
borrowings.  During the same period,  deposits  increased  $7.9 million or 17.2%
from $46.0 million at June 30, 1996, to $53.9 million at December 31, 1996. This
increase is primarily  due to an increase in the Bank's  volume of NOW accounts,
business  checking  accounts  and local  (non-brokered)  Jumbo  Certificates  of
Deposit. The Bank had $331,000 and $128,000 in unrealized gains (net of deferred
taxes) at December 31, 1996 and June 30, 1996, respectively from market gains on
the Bank's  investment  and  mortgage-backed  portfolios.  Unrealized  gains and
losses do not impact the Bank's earnings until they are realized.

RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED DECEMBER 31, 1996 COMPARED
TO QUARTER ENDED DECEMBER 31, 1995

General

Net earnings  increased  $10,000 or 7.2% for the quarter ended December 31, 1996
from the quarter ended December 31, 1995.  This increase is primarily the result
of an increase  in net  interest  earnings  of $46,000  offset by an increase in
non-interest  expense of $70,000, a decrease in the provision for loan losses of
$16,000 and a decrease in income taxes of $20,000.


                                      9

<PAGE>




Interest Earnings

Total  interest  income  increased  $299,000 or 24.9% from $1.2  million for the
quarter ended  December 31, 1995 to $1.5 million for the quarter ended  December
31, 1996.  The increase in this twelve month period was  primarily due to a $2.7
million increase in the Bank's mortgage-backed  securities portfolio, a $900,000
increase in investment securities, and a $8.7 million increase in the Bank's net
loan portfolio.

Interest Expense

Total interest expense increased $253,000 or 44.6% from $567,000 for the quarter
ended  December  31, 1995 to $820,000 for the quarter  ended  December 31, 1996.
This increase was due to a substantial increase in FHLB borrowings and a general
increase in the deposit  base,  including the increase in volume of NOW accounts
and Jumbo Certificates of Deposit.

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 $344,000 and $311,000 at
December 31, 1996 and 1995,  respectively.  The  provision  for loans was $0 and
$16,000 for the quarters ended December 31, 1996 and 1995,  respectively.  Based
on a historical trend of limited losses on residential  loans, the amount of the
loan loss provision  allocated to residential  loans remained  relatively stable
for the two periods.  While the Bank  maintains  its  allowance  for losses at a
level which it considers to be adequate,  there can be no assurance that further
additions will not be made to the loss  allowances and that such losses will not
exceed the estimated  amounts.  The  establishment of a loan loss provision each
period adversely impacts the Bank's net earnings.

Non-Interest Expense

Total  non-interest  expense  increased  $71,000 or 20.2% from  $352,000 for the
quarter ended  December 31, 1995 to $423,000 for the quarter ended  December 31,
1996.  This  increase  was  primarily  due to an  increase in  compensation  and
benefits costs of $67,000, an increase in other costs of $11,000, an increase in
occupancy,  insurance and data processing costs of $14,000, offset by a decrease
in professional  fees of $23,000.  The increase in compensation  and benefits is
due to the addition of two senior  officers,  additional  staff and current year
accruals for stock-based  compensation  plans. The increase in other expenses is
primarily due to increased supplies,  franchise taxes, charitable  contributions
and automatic teller machine expenses. The increase in occupancy,  insurance and
data  processing  costs is due to  adjustments  made for  increased and improved
customer  service.  The  decrease  in  professional  services is the result of a
lesser need for services since the  completion of the conversion  from mutual to
stock ownership.

Liquidity and Capital Resources

The Bank is required under applicable federal  regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S.  Government,  federal
agency and other investments  having  maturities of five years or less.  Current
OTS regulations require that a savings institution maintain liquid assets of not
less than 5% of its average daily balance of net  withdrawable  deposit accounts
and borrowings  payable in one year or less, of which  short-term  liquid assets
must consist of not less than 1%. At December 31, 1996, the Bank's liquidity, as
measured for  regulatory  purposes,  was 11.38%.  The Bank adjusts  liquidity as
appropriate to meet its asset/liability objectives.

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


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<PAGE>



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, 1996, cash and cash equivalents totaled
$5.1 million.  The Bank has other sources of liquidity if a need for  additional
funds arise. Additional sources of funds include FHLB of Dallas advances and the
ability to borrow against mortgage-backed and other securities.  At December 31,
1996,  the Bank had $12.5  million in  outstanding  borrowings  from the FHLB of
Dallas.   These  outstanding   borrowings  were  used  to  purchase   additional
mortgage-backed securities as a means of enhancing earnings.

The  primary  investment  activity  of the  Bank is the  origination  of  loans,
primarily  mortgage loans.  During the quarter ended December 31, 1996, the Bank
originated  $4.3  million in total loans,  of which $2.0  million were  mortgage
loans.  Another  investment  activity of the Bank is the  investment of funds in
U.S. Government Agency securities, mortgage-backed securities, federal funds and
FHLB-Dallas  overnight  funds.  During  periods  when the Bank's  loan demand is
limited,  the Bank may purchase  short-term  investment  securities  to obtain a
higher yield than otherwise available.

The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities,  investing activities and financing activities.  Cash
flows provided in operating  activities,  consisting  principally of stock based
compensation   costs  and  income  taxes  less  disbursements  of  interest  and
dividends,  were  $434,000 for the six month period ended  December 31, 1995 and
cash flows used by  operating  activities  were $54,000 for the six month period
ended  December  31,  1996.  Net cash used for  investing  activities  consisted
primarily of  purchases of  mortgage-backed  securities  and loan  originations,
offset by principal collections on loans, and principal collections and proceeds
from the maturities of  mortgage-backed  securities  and investment  securities.
Such uses were $6.3 million and $15.5  million for the six month  periods  ended
December  31, 1996 and 1995,  respectively.  Net cash  provided  from  financing
activities  consisting primarily of net activity in deposit and escrow accounts,
and new FHLB borrowings less purchases of treasury stock,  were $8.3 million and
$13.1  million  for the six  month  periods  ended  December  31,  1996 and 1995
respectively.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current  commitments.  As of December 31, 1996, the Bank had commitments to fund
loans of $800,000.  Certificates  of deposit  scheduled to mature in one year or
less totaled $19.9 million.  Based on historical  withdrawals  and outflows,  on
internal monthly 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,  1996,  the  Bank  exceeded  each  of the  three  OTS  capital
requirements on a fully-phased-in basis.

Stock Repurchase Program

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

On October 11, the Company  issued a press release  announcing  its intention to
repurchase up to 15% (142,312 shares) of the Company's common stock. On November
8, 1996, the Company received  regulatory approval to repurchase these shares of
common  stock before June 28,  1997.  As of December  31, 1996,  30,000 of these
shares had been  repurchased.  The Company has  decided to retire  these  shares
also.  Subsequent  to  December  31,  an  additional  27,300  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  Principals  ("GAAP"),  which  require the  measurement  of
financial  position  and  operating  results  primarily  in terms of  historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact

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<PAGE>



of inflation is reflected in the  increased  cost of the  Company's  operations.
Unlike most industrial  companies,  nearly all the assets and liabilities of the
Company are financial.  As a result, interest rates have a greater impact on the
Company's  performance  than do the  effects  of  general  levels of  inflation.
Interest  rates do not  necessarily  move in the same  direction  or to the same
extent as the prices of goods and services.

Recent legislation - Recapture of Post 1987 Bad Debt Reserves

The Small Business Job Protection Act of 1996 will, among other things, equalize
the taxation of thrifts and banks.  The bill no longer  allows  thrifts a choice
between the  percentage of taxable  income method and the  experience  method in
determining  additions  to their bad debt  reserves.  Smaller  thrifts with $500
million of assets or less are only allowed to use the experience  method,  which
is generally  available to small banks  currently.  Larger  thrifts must use the
specific  charge off method  regarding its bad debts.  Any reserve amounts added
after 1987 will be taxed over a six year period beginning in 1996; however,  bad
debt reserves set aside through 1987 will  generally not be taxed.  Institutions
can delay these taxes for two years if they meet a  residential  - lending test.
At June 30,  1996,  the Bank had  $55,936 of post 1987  bad-debt  reserves.  Any
recapture  of the Bank's  bad-debt  reserves  may have an adverse  effect on net
earnings. The Bank has evaluated the effects of this legislation and believes it
will not have a material impact on the Bank's financial condition.

Impact of Certain Accounting Standards

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

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

Accounting for Mortgage Servicing Rights

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

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

Item 6.  Exhibits and Reports on Form 8-K

A  Form  8-K  (Item  7)  dated  November  12,  1996,  was  filed  regarding  the
registrant's  Board of Directors'  adoption of a stock  repurchase  program that
authorized the repurchase of up to 15% of the  outstanding  shares of the common
stock of the registrant before June 28, 1997.

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<PAGE>



SIGNATURES

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

                                          GFSB BANCORP, INC.


Date: February 13, 1997                   /s/ Jerry R. Spurlin
                                          -----------------------------------
                                          Jerry R. Spurlin
                                          President
                                          (Duly Authorized Representative and
                                             Principal Financial Officer)


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