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

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


                                   FORM 10-QSB


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

                For the quarterly period ended September 30, 1997
                                               ------------------

                                       OR

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

                 For the transition period from        to
                                                ------    -------

                         Commission file number: 0-25854


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


Delaware                                                       04-2095007
------------------------------------------------               ----------
(State or Other Jurisdiction of Incorporation or            (I.R.S. Employer
Organization)                                               Identification No.)


221 West Aztec Avenue, Gallup, New Mexico                          87301
-----------------------------------------                       ----------
(Address of Principal Executive Offices)                        (Zip Code)


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

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

As of October 31, 1997, there were issued and outstanding  800,708 shares of the
registrant's Common Stock.
================================================================================

<PAGE>
                               GFSB Bancorp, Inc.


                                     Index

                                                                 Page No.
                                                                 --------

                         PART I. FINANCIAL INFORMATION

Item 1Consolidated Financial Statements:

      Consolidated Statements of Financial Condition
        September 31, 1997 and June 30, 1997                           3

      Consolidated Statements of Earnings
        Three months ended September 30, 1997 and 1996                 4

      Consolidated Statements of Cash Flows
        Three months ended September 30, 1997 and 1996                 6

      Notes to Consolidated Financial Statements                       8

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

                           PART II. OTHER INFORMATION

Item 6Exhibits and Reports on Form 8-K                                16

      Signatures                                                      17

                                        2
<PAGE>
                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                      September 30,    June 30,
                                                           1997          1997
                                                      ------------  ------------
                                                       (Unaudited)
<S>                                                   <C>           <C>        
                                     ASSETS

Cash and due from banks                               $  1,656,286  $  1,772,937
Interest-bearing deposits with banks                     1,579,226     1,121,191
Federal funds sold                                              --       100,000
Available-for-sale investment securities                 5,013,634     4,342,042
Available-for-sale mortgage-backed securities           39,802,986    32,069,501
Stock of Federal Home Loan Bank, at cost, restricted     1,739,400     1,060,300
Loans receivable, net, substantially pledged            58,700,292    52,021,929
Accrued interest and dividend receivable                   642,894       551,783
Premises and equipment                                     751,606       677,250
Other real estate and repossessed property                      --            --
Prepaid and other assets                                    56,773        55,290
Deferred tax asset                                          20,671        20,671
                                                      ------------   -----------
    TOTAL ASSETS                                      $109,963,768   $93,792,894
                                                      ============   ===========

                LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction accounts                                  $  4,687,603   $ 4,488,475
Savings and now deposits                                10,987,939    10,606,993
Time deposits                                           44,673,139    42,777,018
Accrued interest payable                                   228,486       153,049
Advances from borrowers for taxes and insurance            300,443       175,748
Accounts payable and accrued liabilities                   168,060       181,970
Deferred income taxes                                      300,268       287,000
Dividends declared and payable                              75,219        75,415
Advances from Federal Home Loan Bank                    34,351,550    20,930,000
Income taxes payable                                        96,454       174,090
                                                      ------------   -----------

    TOTAL LIABILITIES                                   95,869,161    79,849,758


COMMITMENTS AND CONTINGENCIES                                   --            --


STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 2,000,000
  shares authorized;  800,700 issued and
  outstanding at June 30, 1997 and 800,700 shares
   issued and outstanding at September 30, 1997             76,683        76,684
Preferred stock, $.10 par value, 500,000
  shares authorized;  no shares issued or
  outstanding                                                   --            --
Additional paid-in-capital                               6,271,540     6,260,680
Unearned ESOP stock                                       (454,083)     (464,881)
Retained earnings, substantially
  restricted                                             7,617,595     7,513,536
Unrealized gain on available for sale
  securities, net of taxes                                 582,873       557,117
                                                      ------------   -----------

    TOTAL STOCKHOLDERS' EQUITY                          14,094,608    13,943,136
                                                      ------------   -----------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $109,963,768   $93,792,894
                                                      ============   ===========
</TABLE>

See notes to consolidated financial statements.

                                        3

<PAGE>

                               GFSB Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
                                                         Three months ended
                                                            September 30
                                                         1997           1996
                                                       ---------     ---------

                                                      (Unaudited)   (Unaudited)
<S>                                                   <C>           <C>       
Interest income                                       
        Loans receivable                              
                 Mortgage loans                       $1,107,862    $  810,743
                 Commercial loans                         56,777        47,116
                 Share and consumer loans                 65,294        37,926
        Available-for-sale investment securities and
                 mortgage-backed securities              643,030       517,348
        Other interest-earning assets                     39,784        47,216
                                                       ---------     ---------
                                                      
                 TOTAL INTEREST EARNINGS               1,912,747     1,460,349
                                                      
Interest expense                                      
        Deposits                                         756,924       580,320
        Advances from Federal Home Loan Bank             412,025       205,514
                                                       ---------     ---------
                                                     
                 TOTAL INTEREST EXPENSE                1,168,949       785,834
                                                       ---------     ---------
                                                      
                 NET INTEREST EARNINGS                   743,798       674,515
                                                      
Provision for loan losses                                 37,459         5,288
                                                       ---------     ---------
                                                      
                 NET INTEREST EARNINGS AFTER          
                   PROVISION FOR LOAN LOSSES             706,339       669,227
                                                      
Non-interest earnings                                 
        Income from real estate operations                    --            --
        Miscellaneous income                               5,478           695
        Net gains from sales of loans                      3,257         4,942
        Service charge income                             10,442         8,580
                                                       ---------     ---------
                                                     
                 TOTAL NON-INTEREST EARNINGS              19,177        14,217
                                                      
Non-interest expense                                  
        Compensation and benefits                        231,363       187,324
        Insurance                                         13,159       279,465
        Other                                             67,894        61,027
        Occupancy                                         40,001        32,109
        Data processing                                   31,018        23,498
        Professional fees                                 38,963        28,842
        Advertising                                       17,726        10,620
        Stock services                                     2,749         2,166
                                                       ---------     ---------
                                                      
                 TOTAL NON-INTEREST EXPENSE              442,873       625,051
                                                      
</TABLE>                                              
                                                      
                                                 
                                        4
<PAGE>
                               GFSB Bancorp, Inc.

                CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
<TABLE>
<CAPTION>
                                                     Three months ended
                                                        September 30
                                                     1997           1996
                                                  ---------     ---------

                                                 (Unaudited)   (Unaudited)

<S>                                              <C>           <C>       
                 EARNINGS BEFORE INCOME TAXES       282,643        58,393

Income tax expense
        Currently payable                           103,364        23,753
        Deferred provision                               --            --
                                                 ----------    ----------
                                                    103,364        23,753
                                                 ----------    ----------
                 NET EARNINGS                    $  179,279    $   34,640
                                                 ==========    ==========

Earnings per common share
        Primary and fully diluted                $     0.23    $     0.04
                                                 ==========    ==========


Weighted average number of common
    shares outstanding
        Primary and fully diluted                   770,463       897,729
                                                 ==========    ==========



</TABLE>





                                        5
<PAGE>
                               GFSB Bancorp, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
                                                                      Three months ended
                                                                         September 30,
                                                          ------------------------------------------
                                                               1997                        1996  
                                                          --------------              --------------
                                                            (Unaudited)                 (Unaudited
<S>                                                       <C>                         <C>        
Cash flows from operating activities                      
         Net earnings                                     $   179,279                 $    34,640
         Adjustments to reconcile net earnings to         
           net cash provided by operations                
                  Deferred loan origination fees              (37,180)                    (34,951)
                  Gain on sale of sold loans                   (3,257)                     (4,942)
                  Provision for loan losses                    37,459                       5,288
                  Depreciation of premises and equipment       19,025                      16,330
                  Amortization of investment and mortgage-
                    backed securities premiums (discounts)     69,562                      36,525
                  Stock dividends on FHLB stock               (21,500)                    (10,800)
                  Release of ESOP stock                        26,508                      13,533
                  Stock compensation                           12,406                      14,140
                  Provision (benefit) for deferred 
                    income taxes                                   --                          --
                                                          
         Net changes in operating assets and liabilities
                  Accrued interest and dividends receivable   (91,111)                    (33,429)
                  Prepaid taxes                                    --                          --
                  Prepaid and other assets                     (1,483)                     (2,713)
                  Accrued interest payable                     75,437                      35,712
                  Accounts payable and accrued liabilities    (13,910)                    180,743
                  Income taxes payable                        (77,636)                    (96,247)
                  Dividends declared and payable                 (196)                   (312,444)
                                                          -----------                  ---------- 
                                                         
                           Net cash provided by           
                           operating activities               173,403                    (158,615)
                                                          
Cash flows from investing activities                      
         Purchase of premises and equipment                   (93,380)                    (18,820)
         Loan originations and principal                  
           repayment on loans, net                         (6,693,371)                 (2,385,694)
         Principal payments on mortgage-backed            
           securities                                       1,977,923                   1,148,390
         Purchases of mortgage-backed securities           (9,739,727)                 (5,174,111)
         Purchases of available-for-sale securities           (33,085)                    (30,666)
         Maturities and proceeds from sale of             
           available-for-sale securities                           --                     500,000
         Purchases of municipal securities                   (640,000)                         --
         Purchase of FHLB stock                              (657,600)                   (246,700)
                                                          -----------                  ---------- 
                                                         
                           Net cash used by               
                           investing activities           (15,879,240)                 (6,207,601)
                                                          
</TABLE>
                                                          
                                                    
                                        6
<PAGE>
                               GFSB Bancorp, Inc.

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

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

                                                                             Three months ended
                                                                                 September 30,
                                                                      1997                        1996    
                                                                  -----------                 -----------
                                                                  (Unaudited)                 (Unaudited
<S>                                                               <C>                         <C>        
Cash flows from financing activities                              
         Net increase in transaction accounts, passbook
           savings, money market accounts, and                    
           certificates of deposit                                $ 2,476,195                 $ 2,010,490
         Net increase (decrease) in mortgage escrow funds             124,695                     106,889
         Proceeds from FHLB advances                               73,282,950                  17,834,910
         Repayments on FHLB advances                              (59,861,400)                (12,742,910)
         Purchase of GFSB Bancorp stock under the                 
           stock repurchase plan in cash                                   --                    (667,798)
         Dividends paid or to be paid in cash                         (75,219)                    (84,718)
                                                                  -----------                   ---------
                                                                 
                           Net cash provided by                   
                           financing activities                    15,947,221                   6,456,863
                                                                  -----------                   ---------
                                                                  
         Increase (decrease) in cash and cash equivalents             241,384                      90,647
                                                                  
         Cash and cash equivalents at beginning of period           2,994,128                   3,167,194
                                                                  -----------                   ---------
                                                                  
         Cash and cash equivalents at end of period               $ 3,235,512                   3,257,841
                                                                  ===========                   =========
                                                                  
                                                                  
Supplemental disclosures                                          
         Cash paid during the period for                          
                  Interest on deposits and advances               $ 1,093,512                 $   750,124
                  Income taxes                                        181,000                     120,000
                                                                  
         Change in unrealized gain (loss), net of deferred
           taxes on available-for-sale securities                      25,756                      86,170
                                                                  
         Dividends declared not yet paid                               75,219                      90,131
                                                                  
</TABLE>
                                                                  
                                                    



                                        7


<PAGE>



                               GFSB BANCORP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

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

The organization and business of the Company,  accounting  policies  followed by
the Company and other  information  is contained  in the notes to the  Company's
financial  statements filed as part of the Company's June 30, 1997, Form 10-KSB.
This quarterly report should be read in conjunction with such annual report.

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

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

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

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

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

On December 31, 1996,  the Company  released  5568.06 shares of its common stock
owned by the Company's ESOP. On September 30, 1997, the Company was committed to
release 3100.97 shares of this common stock. The commitment  resulted in $57,000
of additional  compensation  cost for the nine months ended  September 30, 1997,
with $22,000 of that amount booked as additional compensation cost for the three
months ended September 30, 1997.

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

On January 5, 1996,  the  Company  made  awards  under the Plan in the amount of
20,382  shares.  The shares  were  awarded at a price of $13 7/8 per share.  The
retirement  during the quarter ended September 30, 1997 of an officer to whom an
award had been made under the Plan,  resulted in a reduction  of 2,000 shares in
the total  number of shares  awarded.  At  September  30,  1997,  19,568  shares
remained to be awarded  under the Plan.  Awards under the Plan are earned at the
rate of one-fifth of the award per year as of the  one-year  anniversary  of the
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 $12,000 has been recorded at September 30, 1997,  under the provisions
of the Plan. On January 5, 1997, 4075 shares under the Plan were earned, and the
corresponding liability was paid.

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

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




                                        8

<PAGE>

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

Earnings per share for the three month period ended  September 30, 1997 and 1996
were  computed by  dividing  net income for the period by the  weighted  average
common sharesor common share equivalents outstanding during the period.

The Financial  Accounting  Standards Board (FASB) has issued  Statement No. 128.
Earnings  Per Share,  which  supersedes  APB Opinion No. 15.  Statement  No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential  common  stock,  such as options,  warrants  and  convertible
securities,  outstanding that trade in a public market. Those entities that have
only common stock  outstanding  are required to present basic earnings per share
amounts.  All other entities are required to present basic and diluted per share
instruments  unless  the effect is to reduce a loss or  increase  the income per
common share from continuing  operations.  All entities  required to present per
share  amounts must  initially  apply  Statement  No. 128 for annual and interim
periods ending after December 15, 1997. Early application is not permitted.

Because the Company has potential  common stock  outstanding  (stock  options to
employees  and  directors),  the Company  will be required to present  basic and
diluted earnings per share. If the Company had applied  Statement No. 128 in the
accompanying  financial  statements,  the following per share amounts would have
been reported.

<TABLE>
<CAPTION>
                                                              Diluted
                                       Basic Earnings       Earnings Per
                                         Per Share             Share
                                    ----------------------------------------

        For the three months ended:

<S>                                        <C>                 <C>  
                 September 30, 1997        $0.24               $0.23
                 September 30, 1996        $0.04               $0.04

</TABLE>

The weighted  average number of shares of common stock used to compute the basic
earnings  per share was  increased  by 15,703 for the three month  period  ended
September 30, 1997, and by 1,860 for the three month period ended  September 30,
1996, for the assumed exercise of the stock options in computing the diluted per
share data.

                                       9


<PAGE>



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

General

GFSB  Bancorp,  Inc.,  is the 100% owner of Gallup  Federal  Savings  Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an  ownership  interest.  The Bank is  primarily  engaged in the business of
accepting  deposit  accounts  from the  general  public  and using such funds to
originate mortgage loans for the purchase and refinancing of  one-to-four-family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate,  construction,  consumer and commercial  business loans,
and purchases participations in one-to-four family mortgage loans. The Bank also
purchases  mortgage-backed and investment securities.  The largest components of
the Bank's net earnings are net interest income, which is the difference between
interest income and interest expense,  and noninterest  income derived primarily
from fees.  Consequently,  the Bank's  earnings are  dependent on its ability to
originate  loans,  and the  relative  amounts  of  interest-earning  assets  and
interest-bearing  liabilities.  The Bank's net earnings is also  affected by its
provision  for loan  losses  as well as the  amount  of other  expense,  such as
compensation  and benefit expense,  occupancy and equipment  expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive  conditions,  particularly changes in market
interest rates, government policies and actions of regulatory  authorities.  The
disparity  in  premiums  paid by BIF and SAIF  insured  institutions  have  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 at March 31, 1995.

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

Management Strategy

Management's  strategy  has been to monitor  interest  rate  risk,  by asset and
liability  management,  and maintain asset quality while enhancing  earnings and
profitability.   The  Bank's   strategy  has  been   primarily  to  make  loans,
secondarily,  to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase  participations in adjustable rate,  one-to-four family
mortgage loans primarily secured by one-to-four  family  residences.  The Bank's
purchase of  mortgage-backed  securities and  investment  securities is designed
primarily for safety of principal and secondarily for rate of return. The Bank's
lending  strategy has  historically  focused on the  origination  of traditional
one-to-four-family  mortgage  loans  primarily  secured by  one-to-four-  family
residences in the Bank's primary market area.  These loans  typically have fixed
rates. The Bank also invests a portion of its assets in construction,  consumer,
commercial business,  multi-family  and commercial real estate loans as a method
of enhancing earnings and profitability  while also reducing interest rate risk.
Since 1994,  the Bank has  actively  originated  commercial  business  loans and
increased  its  origination  of  commercial  real estate loans and  construction
loans. These loans typically have adjustable  interest rates and are for shorter
terms than  residential  first mortgage loans.  The Bank has limited  experience
with these types of loans, and this type of lending generally has more risk than
residential  lending.  The Bank's purchase of participations in adjustable rate,
one-to-four  family  mortgage loans is designed to increase  earnings and reduce
interest  rate risk.  These  loans have more risk than loans  originated  by the
Bank, therefore,  they have adjustable rates that are higher than standard.  The
Bank has recently begun purchasing  automobile  loans from dealers.  These loans
have risk and terms  comparable  to  automobile  loans  originated  in the Bank.
Investment  securities in the Bank's  portfolio  typically have shorter terms to
maturity than residential  first mortgage loans. As part of its  asset/liability
management  strategy,  the Bank sells its fixed rate  mortgage  loans with terms
over 15  years  into  the  secondary  market.  The Bank  has  sought  to  remain
competitive  in its market by offering a variety of products.  Automatic  Teller
Machine access and commercial and consumer credit life

                                       10

<PAGE>



insurance are additional products now offered by the 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
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.  (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.  Generally,  market
interest  rates  declined  between  1991 and 1993.  By the latter  part of 1993,
interest  rates on U.S.  treasury  bonds and home mortgage loans had declined to
lower  levels  than had been  experienced  in the prior ten years.  Following  a
substantial  increase in 1994 and a slight drop in 1995, general market interest
rates,  including  rates  charged in mortgage  loans and rates paid on deposits,
have remained relatively stable.

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  $16.1 million or 17.1% from $93.8 million at
June 30,  1997 to $109.9  million  at  September  30,  1997.  This  increase  is
primarily the result of a $7.7 million increase in  mortgage-backed  securities,
and a $6.6 million  increase in the Bank's net loan  portfolio.  The majority of
the  increases  are  directly  attributable  to  efforts of  Management  to take
advantage of the increased  capital  infusion made as a result of the conversion
from a mutual  to stock  form of  ownership  through  increased  investment  and
lending  activity and from FHLB  borrowings.  During the same  period,  deposits
increased  $2.4 million or 4.1% from $57.9  million at June 30,  1997,  to $60.3
million at September 30, 1997.  This increase is primarily due to an increase in
the  Bank's  volume  of  NOW  accounts,   business  checking   accounts,   local
(non-brokered)  Jumbo  Certificates  of  Deposit  and  Public  (state  and city)
Certificates  of Deposits.  Advances from the FHLB increased  $13.4 million from
$20.9  million at June 30, 1997 to $34.3  million at September  30, 1997.  These
additional  borrowings  funded purchases of loans,  securities and mortgage loan
participations.  The Bank had $583,000 and $557,000 in unrealized  gains (net of
deferred  taxes) at  September  30, 1997 and June 30,  1997,  respectively  from
market gains on the Bank's investment and mortgage-backed portfolios. Unrealized
gains and losses do not impact the Bank's earnings until they are realized.

                                       11

<PAGE>



RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS FOR QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1996

General

Net earnings  increased  $144,000 or 417.5% for the quarter ended  September 30,
1997 from the quarter ended  September 30, 1996.  This increase is primarily the
result of an  increase  in net  interest  earnings  of  $69,000,  an increase in
non-interest  earnings  of $5,000,  and a decrease  in  non-interest  expense of
$182,000,  offset by an increase in the provision for loan losses of $32,000 and
an increase in income taxes of $80,000.

Interest Earnings

Total  interest  income  increased  $452,000 or 30.9% from $1.5  million for the
quarter ended September 30, 1996 to $1.9 million for the quarter ended September
30, 1997.  This  increase was  primarily  due to a $7.7 million  increase in the
Bank's  mortgage-backed  securities portfolio, a $672,000 increase in investment
securities, and a $6.6 million increase in the Bank's net loan portfolio.

Interest Expense

Total interest expense increased $383,000 or 48.8% from $786,000 for the quarter
ended September 30, 1996 to $1,169,000 for the quarter ended September 30, 1997.
This  increase  was due to a  substantial  increase  in FHLB  borrowings  and an
increase in the deposit base,  including the increase in volume of NOW accounts,
business checking accounts,  local  (non-brokered) Jumbo Certificates of Deposit
and Public (state and city) Certificates of Deposits.

Provision for Losses on Loans

The Bank maintains an allowance for loan losses based upon management's periodic
evaluation  of  known  and  inherent  risks  in the loan  portfolio,  past  loss
experience,  adverse  situations that may affect the borrower's ability to repay
loans,  estimated  value of the  underlying  collateral and current and expected
market  conditions.  The  allowance for loan losses was $374,000 and $312,000 at
September 30, 1997 and 1996,  respectively.  The provision for loans was $37,000
and $5,000 for the quarters  ended  September  30, 1997 and 1996,  respectively.
Based on a historical  trend of limited losses on residential  loans, the amount
of the loan loss provision  allocated to residential  loans remained  relatively
stable for the two periods. While the Bank maintains its allowance for losses at
a level  which it  considers  to be  adequate,  there can be no  assurance  that
further  additions will not be made to the loss  allowances and that such losses
will  not  exceed  the  estimated  amounts.  The  establishment  of a loan  loss
provision each period adversely impacts the Bank's net earnings.

Non-Interest Expense

Total  non-interest  expense  decreased  $182,000 or 29.1% from $625,000 for the
quarter ended September 30, 1996 to $443,000 for the quarter ended September 30,
1997.  This  decrease was  primarily  due to a decrease in insurance  expense of
$266,000,  offset by an increase in compensation  and benefits costs of $44,000,
an increase in other costs of $7,000, an increase in occupancy costs of $8,000 ,
an increase in data processing of $7,000,  an increase in  professional  fees of
$10,000 and an increase in  advertising  of $7,000.  The  decrease in  insurance
expense was primarily due to the one-time  $250,000  assessment  paid during the
quarter  ended  September  30, 1996 for  resolution  of the  BIF/SAIF  insurance
premium  disparity and reduced SAIF insurance  premiums during the quarter ended
September 30, 1997 (See "General" under Item 2 discussed above). The increase in
compensation and benefits is due to an increase in staff,  some salary increases
and current year accruals for stock-based  compensation  plans.  The increase in
other expenses is primarily due to increased supplies,  charitable contributions
and automatic teller machine expenses. The increase in occupancy costs is due to
an increase in building repairs and small building improvements. The increase in
data processing is due to increased  transaction volume from growth in deposits.
The increase in  professional  services is the result of using more  services of
the Bank's  auditing firm. The increase in advertising is a result of efforts of
the Bank to achieve growth in deposits through attracting new customers.


                                       12

<PAGE>



Liquidity and Capital Resources

The Bank is required under applicable federal  regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S.  Government,  federal
agency and other investments  having  maturities of five years or less.  Current
OTS regulations require that a savings institution maintain liquid assets of not
less than 5% of its average daily balance of net  withdrawable  deposit accounts
and borrowings  payable in one year or less, of which  short-term  liquid assets
must consist of not less than 1%. At September 30, 1997,  the Bank's  liquidity,
as measured for regulatory  purposes,  was 5.03%. The Bank adjusts  liquidity as
appropriate to meet its asset/liability objectives.

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

The Bank's  most  liquid  assets are cash and cash  equivalents,  which  include
investments in highly liquid short-term  investments.  The level of these assets
are  dependent on the Bank's  operating,  financing,  and  investing  activities
during any given  period.  At  September  30,  1997,  cash and cash  equivalents
totaled  $3.2  million.  The Bank has other  sources of  liquidity if a need for
additional  funds  arises.  Additional  sources of funds  include FHLB of Dallas
advances and the ability to borrow against mortgage-backed and other securities.
At September 30, 1997, the Bank had $34.4 million in outstanding borrowings from
the  FHLB  of  Dallas.  These  outstanding  borrowings  were  used  to  purchase
additional  mortgage-backed  securities  and mortgage loan  participations  as a
means of enhancing earnings.

The  primary  investment  activity  of the  Bank is the  origination  of  loans,
primarily mortgage loans.  During the quarter ended September 30, 1997, the Bank
originated  $9.8  million in total loans,  of which $7.9  million were  mortgage
loans.  The Bank also  purchased  $1.3 million in mortgage loan  participations.
Another  investment  activity  of the  Bank is the  investment  of funds in U.S.
Government  Agency  securities,  mortgage-backed  securities,  federal funds and
FHLB-Dallas  overnight  funds.  During  periods  when the Bank's  loan demand is
limited,  the Bank may purchase  short-term  investment  securities  to obtain a
higher yield than otherwise available.

The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities,  investing activities and financing activities.  Cash
flows provided in operating activities,  consisting principally of net earnings,
provision  for loan losses,  amortization  of  investment  and  mortgage  backed
securities  premiums and discounts,  stock based  compensation  costs and income
taxes less  disbursements  of interest and dividends,  and loan origination fees
were $173,000 and ($159,000)for the three month periods ended September 30, 1997
and  1996  respectively.  Net  cash  used  for  investing  activities  consisted
primarily of loan  originations  and  purchases of  mortgage-backed  securities,
municipal  securities and FHLB Stock, offset by principal  collections on loans,
and principal  collections  and proceeds from the maturities of  mortgage-backed
securities  and  investment  securities.  Such uses were $15.9  million and $6.2
million  for the  three  month  periods  ended  September  30,  1997  and  1996,
respectively.  Net cash provided from financing activities  consisting primarily
of net activity in deposit and escrow accounts,  and new FHLB  borrowings,  were
$15.9 million and $6.5 million for the three month  periods ended  September 30,
1997 and 1996, respectively.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current commitments.  As of September 30, 1997, the Bank had commitments to fund
loans of $1.3 million.  Certificates of deposit  scheduled to mature in one year
or less totaled $30.9 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  September  30,  1997,  the  Bank  exceeded  each of the  three  OTS  capital
requirements on a fully-phased-in basis.





                                       13

<PAGE>



Stock Repurchase Program

In August,  1996, the Company repurchased 47,437 shares, or 5%, of the Company's
common stock. The Company retired these shares as authorized but unissued at the
advice of special counsel.

On October 11, 1996, 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 September 30, 1996, 62,105 of
these shares had been  repurchased.  The Company  retired  these shares also, as
authorized but unissued.  By June 28, 1997 an additional  38,500 shares had been
repurchased.

On  September  23,  1997,  the Company  issued a press  release  announcing  its
intention to repurchase up to 5% (40,035 shares) of the Company's  common stock.
On October 2, 1997, the Company received regulatory approval to repurchase these
shares of common stock before June 28, 1998. As of September  30, 1997,  none of
these shares have been repurchased.  If any shares are repurchased,  the Company
has decided to retire these shares also, as authorized but unissued. The Company
believes that it has sufficient  capital to complete the repurchase and that the
repurchase  will  not  cause  the Bank to fail to meet  its  regulatory  capital
requirements.

Impact of Inflation and Changing Prices

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

Recapture of Post 1987 Bad Debt Reserves

Thrift  institutions  are no longer  allowed a choice  between the percentage of
taxable  income method and the  experience  method in  determining  additions to
their bad debt reserves. Smaller thrifts with $500 million of assets or less are
only allowed to use the experience method.  Larger thrifts must use the specific
charge off method  regarding its bad debts. Any reserve amounts added after 1987
will be taxed  over a six year  period  beginning  in  1996;  however,  bad debt
reserves set aside through 1987 will  generally not be taxed.  Institutions  can
delay these taxes for two years if they meet a  residential  - lending  test. At
June 30,  1997,  the Bank had  $55,936 of post 1987  bad-debt  reserves of which
1/6th or $9,323 was  recaptured  into taxable income for the year ended June 30,
1997.  Future  recapture  of the Bank's  bad-debt  reserves  may have an adverse
effect on net earnings. Management does not believe such future recapture of the
Bank's  bad-debt  reserves will have a material  impact on the Bank's  financial
condition.

Impact of Certain Accounting Standards

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

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





                                       14

<PAGE>



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  purchased or sold loans,  therefore,  the adoption of this
Statement has not had and is not  anticipated  to have a material  impact on the
Bank's financial condition.

Accounting for Stock-Based Compensation

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

Transfer and Servicing of Financial Assets and Extinguishment of Liabilities

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

Earnings per Share

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

Disclosure of Information about an Entity's Capital Structure

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





                                       15

<PAGE>



Reporting Comprehensive Income

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

Disclosure About Segments of an Enterprise and Related Information

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

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

Item 6.  Exhibits and Reports on Form 8-K

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

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

                                       16

<PAGE>



SIGNATURES

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

                                          GFSB BANCORP, INC.


Date: November 14, 1997                   /s/Jerry R. Spurlin
                                          --------------------------------------
                                          Jerry R. Spurlin
                                          President
                                          (Duly Authorized Representative and
                                          Principal Financial Officer)


                                       17