**CONTENTS**





1
            Investor
                Information


3
            President’s
                Message


4
            Selected
                Consolidated Financial and Other
                Data


6
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations


21
            Consolidated
                Financial Statements


49
            Report
                of Independent Registered Public Accounting
                Firm


51
            Directors
                and Officers





**INVESTOR
      INFORMATION**





**COMMON** **STOCK
      PRICES & DIVIDENDS**





The
      common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is traded in
      the over-the-counter market and quoted on the NASDAQ National Market under
      the
      symbol “GFED”. As of March 16, 2007, there were approximately 1,709
      stockholders. At that date the Company had 6,677,591 shares of common stock
      issued and 2,880,315 shares of common stock outstanding.





During
      the year ended December 31, 2006, the Company paid dividends of (i) $0.165
      per
      share on April 14, 2006, to stockholders of record as of March 30, 2006, (ii)
      $0.165 per share on July 14, 2006 to stockholders of record as of July 3, 2006,
      and (iii) $0.17 per share on October 16, 2006, to stockholders of record as
      of
      October 2, 2006, and also declared a cash dividend of $0.17 per share on
      December 21, 2006, which was paid on January 19, 2007, to stockholders of record
      on January 5, 2007. During the year ended December 31, 2005, the Company paid
      dividends of (i) $0.16 per share on April 14, 2005, to stockholders of record
      as
      of March 30, 2005, (ii) $0.16 per share on July 15, 2005 to stockholders of
      record as of July 1, 2005, and (iii) $0.165 per share on October 14, 2005,
      to
      stockholders of record as of October 1, 2005, and also declared a cash dividend
      of $0.165 per share on December 22, 2005, which was paid on January 20, 2006,
      to
      stockholders of record on January 6, 2006. The Company’s Board of Directors
      anticipates paying dividends on comparable dates during fiscal year ended
      December 31, 2007 to the payment dates during the fiscal year ended December
      31,
      2006. Such future dividends, if any, will be at the discretion of the Company’s
      Board of Directors and will depend on, among other things, the Company’s results
      of operations, cash requirements and surplus, financial condition and other
      factors that the Company’s Board of Directors may consider relevant.





The
      table
      below reflects the range of common stock high and low closing prices per the
      NASDAQ Stock Market by quarter for the years ended December 31, 2006 and
      2005.




Year
                  ended
              
              Year
                  endedDecember
                  31, 2006
              
              December
                  31, 2005High
              
              Low
              
              High
              
              LowQuarter
                  ended:March
                  31
              
              $
              30.24
              
              
              27.68
              
              
              24.06
              
              
              22.55June
                  30
              
              
              29.71
              
              
              27.80
              
              
              23.73
              
              
              21.93September
                  30
              
              
              29.40
              
              
              27.51
              
              
              27.25
              
              
              23.00December
                  31
              
              
              28.75
              
              
              27.89
              
              
              28.25
              
              
              26.10




Set
        forth
        below is a stock performance graph comparing the cumulative total shareholder
        return on the Common Stock with (a) the cumulative total stockholder return
        on
        stocks included in The Nasdaq - Total U.S. Index and (b) the cumulative total
        stockholder return on stocks included in The Nasdaq Bank Index. All three
        investment comparisons assume the investment of $100 as of the close of business
        on December 31, 2001 and the hypothetical value of that investment as of
        the
        Company’s fiscal years ended December 31, 2002, 2003, 2004, 2005, and 2006,
        assuming that all dividends were reinvested. The graph reflects the historical
        performance of the Common Stock, and, as a result, may not be indicative
        of
        possible future performance of the Common Stock. The data used to compile
        this
        graph was obtained from NASDAQ.
  1
  
 
 ***Period
                  Ending******Index***
              **12/31/01**
              **12/31/02**
              **12/31/03**
              **12/31/04**
              **12/31/05**
              **12/31/06**Guaranty
                  Federal Bancshares, Inc.
              100.00
              118.40
              151.86
              196.01
              233.50
              245.96NASDAQ
                  - Total US
              100.00
              67.79
              109.46
              118.87
              121.87
              131.99NASDAQ
                  Bank Index
              100.00
              102.97
              129.01
              142.92
              141.12
              152.79
  **ANNUAL
        MEETING OF STOCKHOLDERS:** The
        Annual Meeting of Stockholders of the Company will be held Wednesday, May
        23,
        2007 at 6:00 p.m., local time, at the Clarion Hotel, 3333 S. Glenstone,
        Springfield, Missouri.
 **ANNUAL
        REPORT ON FORM 10-K:**  **Copies
        of the Company’s Annual Report on Form 10-K, including the financial statements,
        filed with the Securities and Exchange Commission are available without charge
        upon written request to:** Lorene
        Thomas, Secretary, Guaranty Federal Bancshares, Inc., 1341 W. Battlefield
        St.,
        Springfield, MO 65807-4181.
 **TRANSFER
        AGENT:** Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ
        07016
 **STOCK
        TRADING INFORMATION:** Over-the
        Counter Symbol: GFED
 **SPECIAL
        LEGAL COUNSEL:** Blackwell Sanders Peper Martin LLP, 901 St. Louis St., Suite 1900, Springfield,
        MO 65806
 **INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM:** BKD,
        LLP,
        901 St. Louis St., PO Box 1190, Springfield, MO 65801-1190
 **STOCKHOLDER
        AND FINANCIAL INFORMATION:** Carter
        Peters, Executive Vice President, Chief Financial Officer:
        417-520-0235
 
 2
 
 **GUARANTY
                  FEDERAL BANCSHARES, INC.**
              **PRESIDENT’S
                  MESSAGE**
 
 
 
 Dear
        Fellow Shareholders and Associates,
 
 The
        past
        year was one of substantial accomplishment. Financial results were strong
        and we
        completed a number of strategic initiatives that positions us to better serve
        our customers, grow our market share, and enhance shareholder value. I am
        pleased to report that your Company delivered a third consecutive year of
        record
        earnings in 2006. For the year ended December 31, 2006, net income was
        $6,509,000 or $2.25 diluted earnings per share, compared to $5,899,000 or
        $2.03
        diluted earnings per share for the year ended December 31, 2005. On a per
        share
        basis, 2006 earnings increased 10.8%, the third consecutive year of double-digit
        growth. This growth is particularly significant given the challenging interest
        rate environment that has produced a prolonged flat yield curve, and our
        highly
        competitive local market for banking services.
 
 We
        made
        important strides in changing the composition of our balance sheet which
        are
        consistent with our economic outlook and strategic focus. In 2006, we altered
        our loan portfolio mix: while commercial real estate and commercial loans
        increased to 49%, and construction loans increased to 17%, the residential
        component declined to 28%. These shifts reflect the continued focus on growing
        the commercial portfolio and the strategic decision to sell the majority
        of
        conforming single family residential loan production into the secondary market
        on a servicing released basis. In early 2006 the bank sold its mortgage
        servicing rights at a premium thus reducing loans serviced for others by
        $98
        million. Loans outstanding, net of allowances, at December 31, 2006 totaled
        $480.3 million, an increase of $44.8 million from $435.5 million for the
        same
        period last year. This 10.3% increase in loans is attributable primarily
        to
        increases in commercial and commercial real estate loans. This loan growth
        was
        supported by an increase in deposits of $32.1 million, up from $320.1 million
        at
        December 31, 2005 to $352.2 million at December 31, 2006. This increase was
        primarily in retail time deposits.
 
 Innovation
        and Investment - for the past three years our trademark has been to prudently
        evaluate and invest in those technological solutions that increase our
        competitive edge and enhance service to our customers. We completed a number
        of
        technology upgrades during the past year and greatly enhanced our product
        offerings. Many of these advances support our initiative to substantially
        grow
        our commercial deposit base. Our expanded Corporate Services team is gaining
        momentum and their success will be instrumental in improving liquidity and
        increasing the net interest margin and non-interest income. Our retail presence
        improved with the opening of our eighth full-service facility in Springfield,
        Missouri in May 2006. We also opened three new Loan Production Offices in
        markets contiguous to our current footprint. These facilities will help us
        continue to be a leading provider of residential loans in southern Missouri
        and
        will introduce Guaranty Bank to new markets.
 
 Our
        financial performance in 2006 enabled us to continue to deliver solid value
        for
        our shareholders. Return on average equity and return on average assets improved
        to 14.77% and 1.33%, respectively, in 2006 from 14.13% and 1.28%, respectively,
        in fiscal 2005. In 2006 we increased our annual common stock dividend to
        $0.67
        per share, representing the ninth consecutive year in which the dividend
        has
        increased.
  I
        am very
        proud of the company we have become over the past few years. I am even more
        proud of the foundation we have built for future growth. Just four short
        years
        ago we were a thrift focused almost exclusively on retail residential lending.
        We have made strong progress in moving to a diversified financial institution
        that is delivering solid financial results and shareholder value. We are
        excited
        and optimistic about our future. I thank you, our shareholders, for your
        continued confidence and support, and I look forward to sharing our future
        progress with you.
 
 
 Sincerely,/s/
                  Shaun A. BurkeShaun
                  A. BurkePresident
                  & Chief Executive Officer
                Guaranty
                  Federal Bancshares, Inc.
  3
 ***Guaranty
          Federal Bancshares, Inc.***
 ***Selected
          Consolidated Financial and Other Data***
 The
        following tables include certain information concerning the financial position
        and results of operations of Guaranty Federal Bancshares, Inc. (including
        consolidated data from operations of subsidiaries) as of the dates indicated.
        Dollar amounts are expressed in thousands except per share data.
  
 **Summary
                  Balance Sheet**
              
              **As
                  of December 31,**
              
              **As
                  of June 30,****2006**
              
              **2005**
              
              **2004**
              
              **2003
                  (1)**
              
              **2003**ASSETSCash
                  and cash equivalents
              
              $
              14,881
              
              
              20,506
              
              
              15,896
              
              
              22,657
              
              
              19,015Investment
                  securities
              
              
              8,669
              
              
              7,702
              
              
              21,553
              
              
              16,731
              
              
              15,522Loans
                  receivable, net
              
              
              480,269
              
              
              435,528
              
              
              392,333
              
              
              332,130
              
              
              336,838Accrued
                  interest receivable
              
              
              2,910
              
              
              2,089
              
              
              1,570
              
              
              1,306
              
              
              1,430Prepaids
                  and other assets
              
              
              10,075
              
              
              7,696
              
              
              1,977
              
              
              7,351
              
              
              10,455Foreclosed
                  assets
              
              
              173
              
              
              27
              
              
              78
              
              
              6
              
              
              182Premises
                  and equipment
              
              
              7,868
              
              
              7,453
              
              
              7,189
              
              
              6,576
              
              
              6,709$
              524,845
              
              
              481,001
              
              
              440,596
              
              
              386,757
              
              
              390,151LIABILITIESDeposits
              
              $
              352,230
              
              
              320,059
              
              
              296,388
              
              
              237,131
              
              
              235,677Federal
                  Home Loan Bank advances
              
              
              108,000
              
              
              100,000
              
              
              100,000
              
              
              108,837
              
              
              114,619Subordinated
                  debentures
              
              
              15,465
              
              
              15,465
              
              
              -
              
              
              -
              
              
              -Other
                  liabilities
              
              
              4,251
              
              
              3,385
              
              
              3,435
              
              
              2,811
              
              
              3,313479,946
              
              
              438,909
              
              
              399,823
              
              
              348,779
              
              
              353,609STOCKHOLDERS'
                  EQUITY
              
              
              44,899
              
              
              42,092
              
              
              40,773
              
              
              37,978
              
              
              36,542$
              524,845
              
              
              481,001
              
              
              440,596
              
              
              386,757
              
              
              390,151
  **Supplemental
                    Data**
                
                **As
                    of December 31,**
                
                **As
                    of June 30,****2006**
                
                **2005**
                
                **2004**
                
                **2003
                    (1)**
                
                **2003**Number
                    of full-service offices
                
                
                8
                
                
                7
                
                
                7
                
                
                9
                
                
                9Cash
                    dividends per share
                
                $
                0.67
                
                $
                0.65
                
                
                0.63
                
                
                0.31
                
                
                0.60
 (1)
        In
        2003, the Company determined to change its fiscal year end from June 30 to
        a
        calendar year end of December 31. As a result, the Company reported a six-month
        transition period ended December 31, 2003 in order to change to this new
        calendar year end.
 4
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Selected
          Consolidated Financial and Other Data***
  **Summary
                    Statement of Income**
                ****
                **Years
                    ended December 31,**
                ********
                ****
                **2006**
                ****
                **2005**
                ****
                **2004**Interest
                    income
                
                $
                35,066
                
                
                27,283
                
                
                20,539Interest
                    expense
                
                
                17,386
                
                
                11,860
                
                
                8,446Net
                    interest income
                
                
                17,680
                
                
                15,423
                
                
                12,093Provision
                    for loan losses
                
                
                750
                
                
                945
                
                
                864Net
                    interest income after provisionfor
                    loan losses
                
                
                16,930
                
                
                14,478
                
                
                11,229Noninterest
                    income
                
                
                3,798
                
                
                3,597
                
                
                3,616Noninterest
                    expense
                
                
                10,177
                
                
                8,670
                
                
                8,248Income
                    before income taxes
                
                
                10,551
                
                
                9,406
                
                
                6,597Provision
                    for income taxes
                
                
                4,042
                
                
                3,507
                
                
                2,313Net
                    income
                
                $
                6,509
                
                
                5,899
                
                
                4,284Basic
                
                $
                2.34
                
                
                2.12
                
                
                1.53Diluted
                
                $
                2.25
                
                
                2.03
                
                
                1.47
 
  **Six
                    months ended**
                ****
                **Year
                    ended**
                ********
                ****
                **December
                    31,**
                ****
                **June
                    30,**
                ********
                ****
                **2003**
                
                **2002**
                ****
                **2003**(Unaudited)Interest
                    income
                
                $
                9,846
                
                
                11,290
                
                
                21,782Interest
                    expense
                
                
                4,491
                
                
                6,086
                
                
                11,445Net
                    interest income
                
                
                5,355
                
                
                5,204
                
                
                10,337Provision
                    for loan losses
                
                
                1,162
                
                
                205
                
                
                610Net
                    interest income after provisionfor
                    loan losses
                
                
                4,193
                
                
                4,999
                
                
                9,727Noninterest
                    income
                
                
                2,089
                
                
                1,752
                
                
                3,688Noninterest
                    expense
                
                
                3,994
                
                
                4,060
                
                
                8,179Income
                    before income taxes
                
                
                2,288
                
                
                2,691
                
                
                5,236Provision
                    for income taxes
                
                
                788
                
                
                927
                
                
                1,656Net
                    income
                
                $
                1,500
                
                
                1,764
                
                
                3,580Basic
                
                $
                0.54
                
                
                0.63
                
                
                1.28Diluted
                
                $
                0.52
                
                
                0.62
                
                
                1.26
  5
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 *And
          Results of Operations*
 
 **GENERAL**
 
 Guaranty
          Federal Bancshares, Inc. (the “Company”) is a Delaware corporation organized on
          December 30, 1997 for the purpose of becoming the holding company of Guaranty
          Federal Savings Bank, a stock savings bank (the “Bank”). The Bank is a
          wholly-owned subsidiary of the Company.
  In
          April
          1995, Guaranty Federal Savings & Loan Association reorganized from a
          federally chartered mutual savings and loan association into a mutual holding
          company, Guaranty Federal Bancshares, M. H. C. (the “MHC”). Concurrent with the
          reorganization, the Bank was chartered. In December 1997, the Company completed
          the conversion and reorganization of the Bank and the former MHC by selling
          common stock to depositors of the Bank and a benefit plan of the Bank.
          In
          addition, all shares of common stock of the Bank held by public stockholders
          were exchanged for shares of common stock of the Company.
 
 On
          June
          27, 2003, the Bank converted to a state-chartered trust company with banking
          powers in Missouri, and the Company became a one-bank holding company.
          The name
          of the Bank was changed from Guaranty Federal Savings Bank to Guaranty
          Bank.
 
 The
          primary activity of the Company is to oversee its investment in the Bank.
          The
          Company engages in few other activities, and the Company has no significant
          assets other than its investment in the Bank. For this reason, unless otherwise
          specified, references to the Company include the operations of the Bank.
          The
          Company’s principal business consists of attracting deposits from the general
          public and using such deposits to originate mortgage loans secured by one-
          to
          four-family residences, multi-family, construction and commercial real
          estate
          loans and consumer and business loans. The Company also uses these funds
          to
          purchase mortgage-backed securities, US government and agency obligations,
          and
          other permissible securities. When cash outflows exceed inflows, the Company
          uses borrowings and brokered deposits as additional financing
          sources.
 
 The
          Company derives revenues principally from interest earned on loans and
          investments and, to a lesser extent, from fees charged for services. General
          economic conditions and policies of the financial institution regulatory
          agencies, including the Missouri Division of Finance and the Federal Deposit
          Insurance Corporation (“FDIC”) significantly influence the Company’s operations.
          Interest rates on competing investments and general market interest rates
          influence the Company’s cost of funds. Lending activities are affected by the
          interest rates at which such financing may be offered. The Company intends
          to
          focus on one- to four-family residential, consumer, and commercial real
          estate
          lending throughout southwestern Missouri.
 
 The
          Company has two wholly-owned subsidiaries other than the Bank, its principal
          subsidiary: (i) Guaranty Statutory Trust I, a Delaware statutory trust
          (“Trust
          I”); and (ii) Guaranty Statutory Trust II, a Delaware statutory trust. These
          Trusts were formed in December 2005 for the exclusive purpose of issuing
          trust
          preferred securities to acquire junior subordinated debentures issued by
          the
          Company. The Company’s banking operation conducted through the Bank is the
          Company’s only reportable segment. See also the discussion contained in the
          section captioned “Segment Information” in Note 1 of
          the
          Notes to Consolidated Financial Statements in this report .
 
 The
          discussion set forth below, and in any other portion of this report, may
          contain
          forward-looking statements. Such statements are based upon the information
          currently available to management of the Company and management’s perception
          thereof as of the date of this report. When used in this document, words
          such as
“anticipates,” “estimates,” “believes,” “expects,” and similar expressions are
          intended to identify forward-looking statements but are not the exclusive
          means
          of identifying such statements. Such statements are subject to risks and
          uncertainties. Actual results of the Company’s operations could materially
          differ from those forward-looking comments. The differences could be caused
          by a
          number of factors or combination of factors including, but not limited
          to:
          changes in demand for banking services; changes in portfolio composition;
          changes in management strategy; increased competition from both bank and
          non-bank companies; changes in the general level of interest rates; and
          other
          factors set forth in reports and other documents filed by the Company with
          the
          Securities and Exchange Commission from time to time including the risk
          factors
          of the Company set forth in Item 1A. of the Company’s Form 10-K.
 
 **FINANCIAL
          CONDITION**
 
 From
          December 31, 200 5
          to
          December 31, 2006, the Company’s total assets increased $43,844,327 (9%) to
          $524,844,995, liabilities increased $41,037,233 (9%) to $479,945,752, and
          stockholders' equity increased $2,807,094 (7%)
          to
          $44,899,243. The ratio of stockholders’ equity to total assets decreased
          slightly to 8.6% during this period, compared to 8.8% as of December 31,
          2005.
  6
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 From
          December 31, 2005 to December 31, 2006, securities available-for-sale increased
          $1,149,174 (17%).  The Company currently owns 36,600 shares of Federal Home
          Loan Mortgage Corporation (“FHLMC”) stock with an amortized cost of $35,847 in
          the securities available-for-sale category.  As of December 31, 2006, the
          gross unrealized gain on the stock is $2,449,293, a decrease of $679,122
          from
          the gross unrealized gain at December 31, 2005.  This decrease is primarily
          due to the sale of 12,000 shares of the FHLMC stock in 2006.  See also
          discussion under “Results of Operations - Comparison of Year Ended December 31,
          2006 and December 31, 2005 - Non-Interest Income.”
  From
          December 31, 2005 to December 31, 2006, securities held-to-maturity decreased
          $181,699 (19%) to $763,025 due to repayments received during the period.
          Stock
          of the Federal Home Loan Bank of Des Moines (“FHLB”) was increased by $403,900
          (8%) to $5,382,700 due to the purchase of stock necessary to meet FHLB
          borrowing
          requirements.  The Bank is required to own stock in the FHLB equal to 0.12%
          of assets plus 4.45% of advances.
 
 From
          December 31, 2005 to December 31, 2006, net loans receivable increased
          by
          $43,829,093 (10%) to $477,264,522. During this period, permanent loans
          secured
          by both owner and non-owner occupied one to four unit residential real
          estate
          decreased $14,794,803 (15%), consumer installment loans decreased $555,769
          (2%),
          multi-family permanent loans decreased $3,264,365 (6%), construction loans
          increased $13,577,073 (19%), permanent loans secured by commercial real
          estate
          increased $32,916,866 (27%) and other commercial loans increased $16,305,287
          (25%). During this period the Company continued to increase its emphasis
          on
          commercial lending, while selling the majority of conforming single family
          loan
          production on the secondary market. Loans sold on the secondary market
          are sold
          servicing released, whereby the third party who purchases the loan provides
          the
          servicing. In addition, during the year ended December 31, 2006, the Bank
          sold
          its mortgage servicing rights to a third party. As a result, loans serviced
          for
          others decreased $98,158,769 (86%).
 
 From
          December 31, 2005 to December 31, 2006, loans past due 90 days or more
          increased
          $1,291,937 to $2,013,477 (0.4% of net loans). As of December 31, 2006,
          management considers loans totaling $3,016,448 as impaired with a related
          allowance for loan losses of $298,311. One to four family homes collateralize
          the majority of the impaired loans. The Bank recognizes interest income
          on
          impaired loans as payments are received. Management believes the loss allowances
          recorded for these loans are sufficient to liquidate the collateral without
          further loss.
 
 From
          December 31, 2005 to December 31, 2006, the allowance for loan losses increased
          $383,823 to $5,783,477. In addition to the provision for loan loss of $750,000
          recorded by the Company during the year ended December 31, 2006, loan
          charge-offs exceeded recoveries by $366,177 for the twelve months ended
          December
          31, 2006. The allowance for loan losses as of December 31, 2006 and December
          31,
          2005 was 1.2% and 1.2% of net loans outstanding, respectively. As of December
          31, 2006, the allowance for loan losses was 192% of impaired loans versus
          117%
          as of December 31, 2005.
 
 As
          of
          December 31, 2006, foreclosed assets held for sale consisted of one single
          family residence and two building lots.
 
 From
          December 31, 2005 to December 31, 2006, premises and equipment increased
          $415,011 (6%) to $7,867,809. This increase is primarily due the addition
          of a
          new branch located in Springfield, Missouri, and new equipment.
 
 From
          December 31, 2005 to December 31, 2006, deposits increased $32,170,685
          (10%) to
          $352,229,636. During this period, core deposit accounts decreased by $1,259,419
          (1%) to 37% of total deposits and certificates of deposit increased by
          $33,430,104 (18%) to $223,236,422. Included in the certificates of deposit
          total
          is $29,146,308 in deposits placed by brokers, a decrease from $57,269,088
          as of
          December 31, 2005.
 
 From
          December 31, 2005 to December 31, 2006, the Company’s borrowings from the
          Federal Home Loan Bank (“FHLB”) increased $8,000,000 to $108,000,000, which
          satisfies the Company’s requirement to comply with the FHLB advances limitation
          of 35% of total assets.
  7
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
  As
          of
          December 31, 2006 and 2005, the Company had $15,465,000 of junior subordinated
          debentures that were comprised of $5,155,000 issued to Guaranty Statutory
          Trust
          I and $10,310,000 issued to Guaranty Statutory Trust II. On December 15,
          2005,
          the Company completed an offering of $15 million of trust preferred securities
          (”Trust Securities”). The Company formed Guaranty Statutory Trust I and Guaranty
          Statutory Trust II as wholly-owned subsidiaries and Delaware statutory
          trusts
          for the purpose of issuing the Trust Securities. The proceeds of the sale
          of
          Trust Securities issued by Guaranty Statutory Trust I, together with the
          proceeds of the Trust’s sale of its common securities issued to the Company,
          were used by the Trust to purchase 30-year junior subordinated deferrable
          interest debentures from the Company in the principal amount of $5,155,000
          (“Trust I Debentures”). The proceeds of the sale of Trust Securities issued by
          Guaranty Statutory Trust II, together with the proceeds of the Trust’s sale of
          its common securities issued to the Company, were used by the Trust to
          purchase
          30-year junior subordinated deferrable interest debentures from the Company
          in
          the principal amount of $10,310,000 (“Trust II Debentures”, and collectively
          with the Trust I Debentures, the “Debentures”). Both the Trust I Debentures and
          the Trust II Debentures were issued pursuant to the terms of Indentures
          dated
          December 15, 2005 by and between the Company and Wilmington Trust Company,
          as
          trustee. The Trust I Debentures bear interest at a fixed rate of 6.92%,
          payable
          quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47%
          for 5
          years, payable quarterly, after issuance and thereafter at a floating rate
          equal
          to the three month LIBOR plus 1.45%. The interest payments by the Company
          to the
          Trusts will be used to pay the dividends payable by the Trusts to the holders
          of
          the Trust Securities.
  The
          Debentures mature on February 23, 2036. Subject to prior approval by the
          Federal
          Reserve Board, the Debentures and the Trust Securities are each callable
          by the
          Company or the Trusts, respectively and as applicable, at its option after
          five
          years from issuance, and sooner in the case of a special redemption at
          a special
          redemption price ranging up to 103.2% of the principal amount thereof,
          and upon
          the occurrence of certain events, such as a change in the regulatory capital
          treatment of the Trust Securities, either Trust being deemed an investment
          company or the occurrence of certain adverse tax events. In addition, the
          Company and the Trusts may defer interest and dividend payments, respectively,
          for up to five consecutive years without resulting in a default. An event
          of
          default may occur if the Company declares bankruptcy, fails to make the
          required
          payments within 30 days or breaches certain covenants under the Debentures.
          The
          Debentures are subordinated to the prior payment of any other indebtedness
          of
          the Company.
  The
          Company invested the proceeds of the sale of the Trust Securities in its
          banking
          subsidiary, where the funds were used primarily to restructure the investment
          portfolio, fund loan growth and repay FHLB advances.
  Stockholders’
          equity (including unrealized appreciation on securities available-for-sale,
          net
          of tax) increased $2,807,094 (7%) to $44,899,243 as of December 31, 2006.
          Net
          income for the period ended December 31, 2006 exceeded cash dividends paid
          or
          declared by $4,649,668. The Company repurchased 125,066 shares as treasury
          stock
          at a cost of $3,593,081, at an average price of $28.73 per share. As of
          December
          31, 2006, 163,477 shares remain to be repurchased under the repurchase
          plan
          announced July 25, 2006. The decrease in unrealized appreciation on securities
          available-for-sale, net of tax, decreased stockholders’ equity by $437,377.
          Stockholders’ equity also increased as a result of exercises of stock options to
          purchase the Company’s Common Stock and the release of shares of the Company’s
          Common Stock held by the Bank sponsored Employee Stock Ownership Plan.
          On a per
          share basis, stockholders’ equity increased $1.13 (7%) from $15.17 as of
          December 31, 2005 to $16.30 as of December 31, 2006.
  8
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 **AVERAGE
          BALANCES, INTEREST AND AVERAGE YIELDS**
 
 The
          following table shows the balances as of December 31, 2006 of various categories
          of interest-earning assets and interest-bearing liabilities and the
          corresponding yields and costs, and, for the periods indicated: (1) the
          average
          balances of various categories of interest-earning assets and interest-bearing
          liabilities, (2) the total interest earned or paid thereon, and (3) the
          resulting weighted average yields and costs. In addition, the table shows
          the
          Company’s rate spreads and net yields. Average balances are based on daily
          balances. Tax-free income is not material; accordingly, interest income
          and
          related average yields have not been calculated on a tax equivalent basis.
          Average loan balances include non-accrual loans. Dollar amounts are expressed
          in
          thousands.
  As
                      of
                  
                  Year
                      Ended
                  
                  Year
                      Ended
                  
                  Year
                      EndedDecember
                      31, 2006
                  
                  December
                      31, 2006
                  
                  December
                      31, 2005
                  
                  December
                      31, 2004Balance
                  
                  Yield
                      / Cost
                  
                  Average
                      Balance
                  
                  Interest
                  
                  Yield
                      / Cost
                  
                  Average
                      Balance
                  
                  Interest
                  
                  Yield
                      / Cost
                  
                  Average
                      Balance
                  
                  Interest
                  
                  Yield
                      / Cost**ASSETS**Interest-earning:Loans
                  
                  $
                  480,269
                  
                  
                  7.78
                  %
                  $
                  452,348
                  
                  $
                  34,362
                  
                  
                  7.60
                  %
                  $
                  419,552
                  
                  $
                  26,553
                  
                  
                  6.33
                  %
                  $
                  366,696
                  
                  $
                  19,990
                  
                  
                  5.45
                  %Investment
                      securities
                  
                  
                  6,184
                  
                  
                  5.04
                  %
                  
                  7,262
                  
                  
                  451
                  
                  
                  6.21
                  %
                  
                  9,905
                  
                  
                  432
                  
                  
                  4.36
                  %
                  
                  10,076
                  
                  
                  289
                  
                  
                  2.87
                  %Other
                      assets
                  
                  
                  12,064
                  
                  
                  4.17
                  %
                  
                  9,843
                  
                  
                  253
                  
                  
                  2.57
                  %
                  
                  11,681
                  
                  
                  299
                  
                  
                  2.56
                  %
                  
                  14,508
                  
                  
                  260
                  
                  
                  1.79
                  %Total
                      interest-earning
                  
                  
                  498,517
                  
                  
                  7.66
                  %
                  
                  469,452
                  
                  
                  35,066
                  
                  
                  7.47
                  %
                  
                  441,138
                  
                  
                  27,284
                  
                  
                  6.18
                  %
                  
                  391,280
                  
                  
                  20,539
                  
                  
                  5.25
                  %Noninterest-earning
                  
                  
                  26,328
                  
                  
                  
                  
                  
                  20,914
                  
                  
                  
                  
                  
                  
                  
                  
                  20,205
                  
                  
                  
                  
                  
                  
                  
                  
                  20,812$
                  524,845
                  
                  
                  
                  
                  $
                  490,366
                  
                  
                  
                  
                  
                  
                  
                  $
                  461,343
                  
                  
                  
                  
                  
                  
                  
                  $
                  412,092**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**Interest-bearing:Savings
                      accounts
                  
                  $
                  14,316
                  
                  
                  2.67
                  %
                  $
                  14,830
                  
                  
                  365
                  
                  
                  2.46
                  %
                  $
                  14,931
                  
                  
                  201
                  
                  
                  1.35
                  %
                  $
                  16,607
                  
                  
                  140
                  
                  
                  0.84
                  %Transaction
                      accounts
                  
                  
                  87,782
                  
                  
                  2.55
                  %
                  
                  78,238
                  
                  
                  1,710
                  
                  
                  2.19
                  %
                  
                  84,776
                  
                  
                  1,300
                  
                  
                  1.53
                  %
                  
                  80,001
                  
                  
                  793
                  
                  
                  0.99
                  %Certificates
                      of deposit
                  
                  
                  223,236
                  
                  
                  4.86
                  %
                  
                  195,772
                  
                  
                  8,448
                  
                  
                  4.32
                  %
                  
                  178,301
                  
                  
                  5,788
                  
                  
                  3.25
                  %
                  
                  139,264
                  
                  
                  3,986
                  
                  
                  2.86
                  %FHLB
                      advances
                  
                  
                  108,000
                  
                  
                  5.35
                  %
                  
                  110,810
                  
                  
                  5,722
                  
                  
                  5.16
                  %
                  
                  111,104
                  
                  
                  4,494
                  
                  
                  4.04
                  %
                  
                  111,169
                  
                  
                  3,519
                  
                  
                  3.17
                  %Subordinated
                      debentures
                  
                  
                  15,465
                  
                  
                  6.62
                  %
                  
                  15,465
                  
                  
                  1,028
                  
                  
                  6.65
                  %
                  
                  701
                  
                  
                  47
                  
                  
                  6.70
                  %
                  
                  -
                  
                  
                  -Other
                      borrowed funds
                  
                  
                  1,703
                  
                  
                  2.75
                  %
                  
                  3,947
                  
                  
                  114
                  
                  
                  2.89
                  %
                  
                  1,395
                  
                  
                  31
                  
                  
                  2.22
                  %
                  
                  987
                  
                  
                  7
                  
                  
                  0.71
                  %Total
                      interest-bearing
                  
                  
                  450,502
                  
                  
                  4.51
                  %
                  
                  419,062
                  
                  
                  17,387
                  
                  
                  4.15
                  %
                  
                  391,208
                  
                  
                  11,861
                  
                  
                  3.03
                  %
                  
                  348,029
                  
                  
                  8,446
                  
                  
                  2.43
                  %Noninterest-bearing
                  
                  
                  29,444
                  
                  
                  
                  
                  
                  26,898
                  
                  
                  
                  
                  
                  
                  
                  
                  28,374
                  
                  
                  
                  
                  
                  
                  
                  
                  24,173Total
                      liabilities
                  
                  
                  479,946
                  
                  
                  
                  
                  
                  445,960
                  
                  
                  
                  
                  
                  
                  
                  
                  419,582
                  
                  
                  
                  
                  
                  
                  
                  
                  372,202Stockholders'
                      equity
                  
                  
                  44,899
                  
                  
                  
                  
                  
                  44,406
                  
                  
                  
                  
                  
                  
                  
                  
                  41,761
                  
                  
                  
                  
                  
                  
                  
                  
                  39,891$
                  524,845
                  
                  
                  
                  
                  $
                  490,366
                  
                  
                  
                  
                  
                  
                  
                  $
                  461,343
                  
                  
                  
                  
                  
                  
                  
                  $
                  412,092Net
                      earning balance
                  
                  $
                  48,015
                  
                  
                  
                  
                  $
                  50,390
                  
                  
                  
                  
                  
                  
                  
                  $
                  49,930
                  
                  
                  
                  
                  
                  
                  
                  $
                  43,252Earning
                      yield less costing rate
                  
                  
                  
                  
                  
                  3.15
                  %
                  
                  
                  
                  
                  
                  
                  
                  3.32
                  %
                  
                  
                  
                  
                  
                  
                  
                  3.15
                  %
                  
                  
                  
                  
                  
                  
                  
                  2.82
                  %Net
                      interest income, and net yield spread on interest-earning assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  17,679
                  
                  
                  3.77
                  %
                  
                  
                  
                  $
                  15,423
                  
                  
                  3.50
                  %
                  
                  
                  
                  $
                  12,094
                  
                  
                  3.09
                  %Ratio
                      of interest-earning assets tointerest-bearing
                      liabilities
                  
                  
                  111
                  %
                  
                  
                  
                  
                  112
                  %
                  
                  
                  
                  
                  
                  
                  
                  113
                  %
                  
                  
                  
                  
                  
                  
                  
                  112
                  %
  9
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 The
          following table sets forth information regarding changes in interest income
          and
          interest expense for the periods indicated resulting from changes in average
          balances and average rates shown in the previous table. For each category
          of
          interest-earning assets and interest-bearing liabilities information is
          provided
          with respect to changes attributable to: (i) changes in balance (change
          in
          balance multiplied by the old rate), (ii) changes in interest rates (change
          in
          rate multiplied by the old balance); and (iii) the combined effect of changes
          in
          balance and interest rates (change in balance multiplied by change in rate).
          Dollar amounts are expressed in thousands.
 
 Year
                    ended
                
                Year
                    endedDecember
                    31, 2006 versus December 31, 2005
                
                December
                    31, 2005 versus December 31, 2004Average
                    Balance
                
                Interest
                    Rate
                
                Rate
                    & Balance
                
                Total
                
                Average
                    Balance
                
                Interest
                    Rate
                
                Rate
                    & Balance
                
                TotalInterest
                    income:Loans
                
                $
                2,075
                
                
                5,318
                
                
                416
                
                
                7,809
                
                $
                2,881
                
                
                3,218
                
                
                464
                
                
                6,563Investment
                    securitites
                
                
                (115
                )
                
                183
                
                
                (49
                )
                
                19
                
                
                (5
                )
                
                150
                
                
                (2
                )
                
                143Other
                    assets
                
                
                (47
                )
                
                1
                
                
                -
                
                
                (46
                )
                
                (50
                )
                
                111
                
                
                (22
                )
                
                39Net
                    change in interest income
                
                
                1,913
                
                
                5,502
                
                
                367
                
                
                7,782
                
                
                2,826
                
                
                3,479
                
                
                440
                
                
                6,745Interest
                    expense:Savings
                    accounts
                
                
                (2
                )
                
                167
                
                
                (1
                )
                
                164
                
                
                (14
                )
                
                84
                
                
                (9
                )
                
                61Transaction
                    accounts
                
                
                (100
                )
                
                553
                
                
                (43
                )
                
                410
                
                
                47
                
                
                433
                
                
                26
                
                
                506Certificates
                    of deposit
                
                
                567
                
                
                1,907
                
                
                187
                
                
                2,661
                
                
                1,117
                
                
                535
                
                
                150
                
                
                1,802Advances
                
                
                (12
                )
                
                1,243
                
                
                (3
                )
                
                1,228
                
                
                (2
                )
                
                977
                
                
                (1
                )
                
                974Subordinated
                    debentures
                
                
                990
                
                
                -
                
                
                (9
                )
                
                981
                
                
                47
                
                
                -
                
                
                -
                
                
                47Other
                    borrowed funds
                
                
                57
                
                
                9
                
                
                17
                
                
                83
                
                
                3
                
                
                15
                
                
                6
                
                
                24Net
                    change in interest expense
                
                
                1,500
                
                
                3,879
                
                
                148
                
                
                5,527
                
                
                1,198
                
                
                2,044
                
                
                172
                
                
                3,414Change
                    in net interest income
                
                $
                413
                
                
                1,623
                
                
                219
                
                
                2,255
                
                $
                1,628
                
                
                1,435
                
                
                268
                
                
                3,331
 
 **RESULTS
          OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2006 AND DECEMBER
          31, 2005**
  Prime
                
                Ten-Year
                    Treasury
                
                One-Year
                    TreasuryDecember
                    31, 2006
                
                
                7.96
                %
                
                4.80
                %
                
                4.94
                %December
                    31, 2005
                
                
                6.19
                %
                
                4.29
                %
                
                3.62
                %Change
                    in rates
                
                
                1.77
                %
                
                0.51
                %
                
                1.32
                %
 
 Interest
          Rates .
          The
          Bank charges borrowers and pays depositors interest rates that are largely
          a
          function of the general level of interest rates. The above table sets forth
          the
          weekly average interest rates for the 52 weeks ending December 31, 2006
          and
          December 31, 2005 as reported by the Federal Reserve. The Bank typically
          indexes
          its adjustable rate commercial loans to prime and its adjustable rate mortgage
          loans to the one-year treasury rate. The ten-year treasury rate is a proxy
          for
          30-year fixed rate home mortgage loans.
 
 Rates
          trended upward during 2005 as the Federal Reserve Open Market Committee
          increased the discount rates 25 basis points after eight consecutive meetings
          from January 2005 to December 2005. As of year-end 2005 the prime rate
          was
          7.25%.This trend continued in 2006 as the Federal Reserve Open Market Committee
          increased the discount rates 25 basis points after four consecutive meetings
          from January 2006 to June 2006. As of year-end 2006 the prime rate was
          8.25%.
  10
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 Interest
          Income .
          Total
          interest income increased $7,782,911 (29%) as the average balance of
          interest-earning assets increased $28,314,000 (6%). In addition, the yield
          on
          average interest earning assets increased 129 basis points to
          7.47%.
 
 Interest
          on loans increased $7,809,604 (29%) and the average loan receivable balance
          increased $32,796,000 (8%) while the average yield increased 127 basis
          points to
          7.60%. The increase in loan yield is the result of the combination of new
          loans
          at higher rates, a reduction in prepayments, and an increase of interest
          rates
          on adjustable rate loans.
 
 Interest
          Expense .
          Total
          interest expense increased $5,526,189 (47%) as the average balance of
          interest-bearing liabilities increased $27,854,000 (7%). In addition, the
          average cost of interest-bearing liabilities increased 112 basis points
          to
          4.15%.
 
 Interest
          expense on deposits increased $3,235,130 (44%) as the average balance of
          interest bearing deposits increased $10,832,000 (4%) and the average interest
          rate paid to depositors increased 102 basis points to 3.64%. The average
          balance
          of interest bearing core deposit accounts decreased $6,639,000 (7%) and
          the
          average balance of certificates of deposit increased $17,471,000 (10%).
 
 The
          Company’s borrowings from the FHLB increased to $108,000,000, which remains in
          compliance with the FHLB limitation of advances to 35% of assets. The average
          cost of those advances increased 112 basis points to 5.16%. As a result,
          interest expense on these advances increased $1,227,976 (27%). As of December
          31, 2006 FHLB advances are 20% of total assets, compared to 21% of total
          assets
          as of December 31, 2005.
 
 Net
          Interest Income .
          The
          Company’s net interest income increased $2,256,722 (15%). During the year ended
          December 31, 2006, the average balance of interest-earning assets exceeded
          the
          average balance of interest-bearing liabilities by $50,390,000, resulting
          in an
          increase in the average net earning balance of $460,000 (1%). In addition,
          the
          Company’s spread between the average yield on interest-earning assets and the
          average cost of interest-bearing liabilities increased by 17 basis points
          from
          3.15% to 3.32%.
 
 Provision
          for Loan Losses .
          Provisions for loan losses are charged or credited to earnings to bring
          the
          total allowance for loan losses to a level considered adequate by the Company
          to
          provide for potential loan losses in the existing loan portfolio. When
          making
          its assessment, the Company considers prior loss experience, volume and
          type of
          lending, local banking trends and past due loans in the Company’s loan
          portfolio. In addition, the Company considers general economic conditions
          and
          other factors related to collectibility of the Company’s loan
          portfolio.
 
 During
          the year ended December 31, 2006, the Company experienced loan charge-offs,
          in
          excess of recoveries, of $366,177 and, based on a review as discussed above,
          elected to record a provision for loan loss of $750,000 to increase the
          allowance for loan losses to $5,783,477 as of December 31, 2006. The provision
          for loan losses recorded by the Company during year ended December 31,
          2005 was
          $945,000. Management of the Company anticipates the need to continue increasing
          the loan loss allowance in the future through charges to provision for
          loan
          losses based on the anticipated growth in its loan portfolio and the shift
          in
          the Company’s emphasis from primarily single-family loans to a mix of
          single-family and commercial loans.
 
 Non-Interest
          Income .
          Non-interest income increased $200,789 (6%). The gain on sale of loans
          of
          $692,276 for 2006, compared to $623,252 for 2005, was the result of mortgage
          banking activities related to the sale of single-family conforming residential
          loans in the secondary market. The Bank attempts to minimize its risk of
          price
          changes by committing to sell loans while the loans are in the origination
          process. The gain on sale of investments for the year ended December 31,
          2006
          was $750,869, compared to $743,335 for year ended December 31, 2005.  In
          2006, this gain was attributed to the sale of 12,000 shares of FHLMC stock.
          During 2006 the Bank sold its mortgage loan servicing rights to a third
          party,
          which resulted in a profit on the sale of $89,441. In addition the Bank
          had
          income from tax credits purchased of $191,678 during 2006. Deposit service
          charges decreased $241,709 (15%) due to decreases in insufficient funds
          and
          overdraft charges on the Bank’s checking accounts. In addition, late charges and
          other fees decreased $30,021 (11%) primarily due to a decrease in prepayment
          penalties collected during the year ended December 31, 2006.
  11
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 Non-Interest
          Expense .
          Non-interest expense increased $1,507,193 (17%). This increase was primarily
          due
          to increases in salaries and employee benefits of $1,226,893 (25%) and
          occupancy
          expense of $155,211 (11%). The increase in compensation was due to normal
          salary
          and benefits increases for the Bank’s employees, along with an increase in the
          number of employees. The staff increased from 125 full-time equivalent
          employees
          as of December 31, 2005 to 146 full-time equivalent employees as of December
          31,
          2006. In 2006, the Company opened a new full-service branch in Springfield,
          Missouri. In addition advertising expense increased $173,038 (75%). This
          increase was primarily due to the Bank’s decision to increase its exposure
          through the use of several different advertising mediums. Data processing
          expense decreased $160,222 (36%). This decrease was primarily due to the
          Bank’s
          decision to terminate its relationship with a third-party vendor that provided
          data processing services. This conversion was completed in January of
          2006.
 
 Income
          Taxes .
          The
          increase in income tax expense is a direct result of the increase in the
          Company’s taxable income for the period ended December 31, 2006 as compared to
          the period ended December 31, 2005.
 
 Cash
          Dividends Paid .
          The
          Company paid dividends of $0.165 per share on April 14, 2006, to stockholders’
of record as of March 30, 2006, and $0.165 per share on July 15, 2006 to
          stockholders’ of record as of July 1, 2006, and $0.17 per share on October 14,
          2006, to stockholders’ of record as of October 1, 2006. The Company declared a
          cash dividend of $0.17 per share on December 21, 2006, which was paid on
          January
          19, 2007, to stockholders of record on January 5, 2007.
 
 **RESULTS
          OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2005 AND DECEMBER
          31, 2004**
 
 Prime
                
                Ten-Year
                    Treasury
                
                One-Year
                    TreasuryDecember
                    31, 2005
                
                
                6.19
                %
                
                4.29
                %
                
                3.62
                %December
                    31, 2004
                
                
                4.34
                %
                
                4.27
                %
                
                1.88
                %Change
                    in rates
                
                
                1.85
                %
                
                0.02
                %
                
                1.74
                %
 
 Interest
          Rates .
          The
          Bank charges borrowers and pays depositors interest rates that are largely
          a
          function of the general level of interest rates. The above table sets forth
          the
          weekly average interest rates for the 52 weeks ending December 31, 2005
          and
          December 31, 2004 as reported by the Federal Reserve. The Bank typically
          indexes
          its adjustable rate commercial loans to prime and its adjustable rate mortgage
          loans to the one-year treasury rate. The ten-year treasury rate is a proxy
          for
          30-year fixed rate home mortgage loans.
 
 Rates
          trended upward during 2004 as the Federal Reserve Open Market Committee
          increased the discount rates 25 basis points after five consecutive meetings
          from June to December 2004. As of year-end 2004, the prime rate was 5.25%
          up
          from 4.00% where it was quoted from June 2003 to June 2004. This trend
          continued
          in 2005 as the Federal Reserve Open Market Committee increased the discount
          rates 25 basis points after eight consecutive meetings from January 2005
          to
          December 2005. As of year-end 2005 the prime rate was 7.25%.
 
 Interest
          Income .
          Total
          interest income increased $6,744,135 (33%) as the average balance of
          interest-earning assets increased $49,858,000 (12%). In addition, the yield
          on
          average interest earning assets increased 93 basis points to 6.18%.
 
 Interest
          on loans increased $6,562,743 (33%) and the average loan receivable balance
          increased $52,856,000 (14%) while the average yield increased 88 basis
          points to
          6.33%. The increase in loan yield is the result of the combination of new
          loans
          at higher rates, a reduction in prepayments, and an increase of interest
          rates
          on adjustable rate loans.
  12
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 Interest
          Expense .
          Total
          interest expense increased $3,414,774 (40%) as the average balance of
          interest-bearing liabilities increased $43,179,000 (12%). In addition,
          the
          average cost of interest-bearing liabilities increased 60 basis points
          to
          3.03%.
 
 Interest
          expense on deposits increased $2,368,909 (48%) as the average balance of
          interest bearing deposits increased $42,136,000 (18%) and the average interest
          rate paid to depositors increased 54 basis points to 2.62%. The average
          balance
          of interest bearing core deposit accounts increased $3,099,000 (3%) and
          the
          average balance of certificates of deposit increased $39,037,000 (28%).
 
 In
          compliance with the FHLB limitation of advances to 35% of assets, the Company’s
          borrowings from the FHLB remained the same at $100,000,000. The average
          cost of
          those advances increased 87 basis points to 4.04%. As a result, interest
          expense
          on these advances increased $974,604 (28%). As of December 31, 2005, FHLB
          advances are 21% of total assets, compared to 23% of total assets as of
          December
          31, 2004.
 
 Net
          Interest Income .
          The
          Company’s net interest income increased $3,329,361 (28%). During the year ended
          December 31, 2005, the average balance of interest-earning assets exceeded
          the
          average balance of interest-bearing liabilities by $49,930,000, resulting
          in an
          increase in the average net earning balance of $49,858,000 (12%). In addition,
          the Company’s spread between the average yield on interest-earning assets and
          the average cost of interest-bearing liabilities increased by 33 basis
          points
          from 2.82% to 3.15%.
 
 Provision
          for Loan Losses .
          Provisions for loan losses are charged or credited to earnings to bring
          the
          total allowance for loan losses to a level considered adequate by the Company
          to
          provide for potential loan losses in the existing loan portfolio. When
          making
          its assessment, the Company considers prior loss experience, volume and
          type of
          lending, local banking trends and past due loans in the Company’s loan
          portfolio. In addition, the Company considers general economic conditions
          and
          other factors related to collectibility of the Company’s loan
          portfolio.
 
 During
          year ended December 31, 2005, the Company experienced loan charge-offs
          in excess
          of recoveries of $82,000 and, based on a review as discussed above, elected
          to
          record a provision for loan loss of $945,000 to increase the allowance
          for loan
          losses to $5,399,654 as of December 31, 2005. The provision for loan losses
          recorded by the Company during year ended December 31, 2004 was $863,830.
          Management of the Company anticipates the need to continue increasing the
          loan
          loss allowance in the future through charges to provision for loan losses
          based
          on the anticipated growth in its loan portfolio and the shift in the Company’s
          emphasis from primarily single-family loans to a mix of single-family and
          commercial loans.
 
 Non-Interest
          Income .
          Non-interest income decreased $19,115 (1%). The gain on sale of loans of
          $623,252 for 2005, compared to $484,920 for 2004, was the result of mortgage
          banking activities related to the sale of single-family conforming residential
          loans in the secondary market. The Bank attempts to minimize its risk of
          price
          changes by committing to sell loans while the loans are in the origination
          process. The gain on sale of investments for year ended December 31, 2005
          was
          $743,335, compared to $742,608 for year ended December 31, 2004.  In 2005,
          this gain was primarily attributed to the gain of $1,210,672, arising from
          the
          sale of 19,400 shares of FHLMC stock, which was offset by the loss of $526,000
          incurred with the sale of all of its shares of Fannie Mae
          preferred.    Deposit service charges decreased $234,396 (12%)
          due to decreases in insufficient funds and overdraft charges on the Bank’s
          checking accounts. In addition, late charges and other fees decreased $89,239
          (25%) primarily due to a decrease in prepayment penalties collected during
          the
          year ended December 31, 2005.
 
 Non-Interest
          Expense .
          Non-interest expense increased $421,630 (5%). This increase was primarily
          due to
          increases in salaries and employee benefits of $313,328 (7%) and occupancy
          expense of $78,298 (6%). The increase in compensation was due to normal
          salary
          and benefits increases for the Bank’s employees, along with an increase in the
          number of employees. The staff increased from 115 full-time equivalent
          employees
          as of December 31, 2004 to 125 full-time equivalent employees as of December
          31, 2005.
          In
          August 2005, the Company opened a new full-service branch in Nixa, Missouri.
          In
          addition, the full-service branch located on West Kearney was in operation
          for
          the entire year of 2005.
  13
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 Income
          Taxes .
          The
          increase in income tax expense is a direct result of the increase in the
          Company’s taxable income for the period ended December 31, 2005 as compared to
          the period ended December 31, 2004.
 
 Cash
          Dividends Paid .
          The
          Company paid dividends of $0.16 per share on April 14, 2005, to stockholders’ of
          record as of March 30, 2005, and $0.16 per share on July 15, 2005 to
          stockholders’ of record as of July 1, 2005, and $0.165 per share on October 14,
          2005, to stockholders’ of record as of October 1, 2005. The Company declared a
          cash dividend of $0.165 per share on December 22, 2005, which was paid
          on
          January 20, 2006, to stockholders of record on January 6, 2006.
 
 **ASSET
          / LIABILITY MANAGEMENT**
 
 The
          goal
          of the Bank’s asset/liability policy is to manage interest rate risk so as to
          maximize net interest income over time in changing interest rate environments.
          Management monitors the Bank’s net interest spreads (the difference between
          yields received on assets and paid on liabilities) and, although constrained
          by
          market conditions, economic conditions, and prudent underwriting standards,
          it
          offers deposit rates and loan rates that maximize net interest income.
          Management also attempts to fund the Bank’s assets with liabilities of a
          comparable duration to minimize the impact of changing interest rates on
          the
          Bank’s net interest income. This matching is especially difficult because the
          residential mortgage loans that comprise a significant portion of the Bank’s
          assets give the borrower the right to prepay at any time. These borrowers
          act in
          their economic self-interest and refinance higher rate loans when rates
          are low.
          Since the relative spread between financial assets and liabilities is constantly
          changing, the Bank’s current net interest income may not be an indication of
          future net interest income.
 
 As
          a part
          of its asset and liability management strategy, the Bank implemented an
          adjustable rate mortgage loan (“ARM”) program beginning in the early 1980s.
          Throughout the past several years, the Bank has continued to emphasize
          the
          origination of adjustable-rate, one- to four-family residential loans and
          adjustable-rate or relatively short-term commercial real estate, construction,
          commercial business, home equity and consumer loans, while originating
          fixed-rate, one- to four-family residential loans primarily for immediate
          resale
          in the secondary market.
  The
          Bank
          is also managing interest rate risk by the origination of construction
          loans. As
          of December 31, 2006, such loans, net of loans in process, constitute 17%
          of the
          Bank’s loan portfolio. In general, these loans have higher yields, shorter
          maturities, and greater interest rate sensitivity than other real estate
          loans.
 
 The
          Bank
          constantly monitors its deposits in an effort to decrease their interest
          rate
          sensitivity. Rates of interest paid on deposits at the Bank are priced
          competitively in order to meet the Bank’s asset/liability management objectives
          and spread requirements. As of December 31, 2006 and December 31, 2005,
          the
          Bank’s savings accounts, checking accounts, and money market deposit accounts
          totaled $128,993,214 or 37% of its total deposits and $130,252,633 or 41%
          of
          total deposits, respectively. The weighted average rate paid on these accounts
          increased 87 basis points from 1.12% on December 31, 2005 to 1.99% on December
          31, 2006. The Bank believes, based on historical experience, that a substantial
          portion of such accounts represents non-interest rate sensitive, core deposits. During
          the year ending December 31, 2007, the FHLB has the option to call $9.0
          million
          of advances with a weighted average rate of 5.55% and a remaining life
          of 1.7
          years.
  14
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 **INTEREST
          RATE SENSITIVITY ANALYSIS**
 
 The
          following table sets forth as of December 31, 2006, management’s estimates of
          the projected changes in net portfolio value (“NPV”) in the event of 100, 200,
          and 300 basis point (“bp”) instantaneous and permanent increases and decreases
          in market interest rates. Dollar amounts are expressed in
          thousands.
 
 BP
                    Change
                
                Estimated
                    Net Portfolio Value
                
                NPV
                    as % of PV of Assetsin
                    Rates
                
                $
                    Amount
                
                $
                    Change
                
                %
                    Change
                
                NPV
                    Ratio
                
                Change+300
                
                
                41,364
                
                
                (1,646
                )
                
                -3
                %
                
                9.55
                %
                
                -3.61
                %+200
                
                
                42,650
                
                
                (360
                )
                
                -1
                %
                
                9.60
                %
                
                -3.56
                %+100
                
                
                43,321
                
                
                311
                
                
                1
                %
                
                9.53
                %
                
                -3.63
                %NC
                
                
                43,010
                
                
                
                
                
                
                
                
                9.25
                %-100
                
                
                41,982
                
                
                (1,028
                )
                
                -2
                %
                
                8.85
                %
                
                -4.31
                %-200
                
                
                40,409
                
                
                (2,601
                )
                
                -5
                %
                
                8.38
                %
                
                -4.78
                %-300
                
                
                38,284
                
                
                (4,726
                )
                
                -8
                %
                
                7.81
                %
                
                -5.35
                %
 
 Computations
          of prospective effects of hypothetical interest rate changes are based
          on an
          internally generated
          model using actual maturity and repricing schedules for the Bank’s loans and
          deposits, and are based on numerous assumptions, including relative levels
          of
          market interest rates, loan repayments and deposit run-offs, and should
          not be
          relied upon as indicative of actual results. Further, the computations
          do not
          contemplate any actions the Bank may undertake in response to changes in
          interest rates.
 
 Management
          cannot predict future interest rates or their effect on the Bank’s NPV in the
          future. Certain shortcomings are inherent in the method of analysis presented
          in
          the computation of NPV. For example, although certain assets and liabilities
          may
          have similar maturities or periods to repricing, they may react in differing
          degrees to changes in market interest rates. Additionally, certain assets,
          such
          as adjustable-rate loans, which represent the Bank’s primary loan product, have
          an initial fixed rate period typically from one to five years and over
          the
          remaining life of the asset changes in the interest rate are restricted.
          In
          addition, the proportion of adjustable-rate loans in the Bank’s loan portfolio
          could decrease in future periods due to refinancing activity if market
          interest
          rates remain constant or decrease in the future. Further, in the event
          of a
          change in interest rates, prepayment and early withdrawal levels could
          deviate
          significantly from those assumed in the table. Finally, the ability of
          many
          borrowers to service their adjustable-rate debt may decrease in the event
          of an
          interest rate increase.
 
 The
          Bank’s Board of Directors is responsible for reviewing the Bank’s asset and
          liability policies. The Bank’s management is responsible for administering the
          policies and determinations of the Board of Directors with respect to the
          Bank’s
          asset and liability goals and strategies. Management expects that the Bank’s
          asset and liability policies and strategies will continue as described
          above so
          long as competitive and regulatory conditions in the financial institution
          industry and market interest rates continue as they have in recent
          years.
 
 **LIQUIDITY
          AND CAPITAL RESOURCES**
 
 The
          Company’s principal sources of funds for investments and operations are net
          income from operations, deposits from its primary market area, FHLB advances,
          principal and interest payments on loans and mortgage-backed securities,
          proceeds from maturing investment securities, and the issuance of subordinated
          debentures. The Company considers deposits and FHLB advances as its primary
          sources of funds.
 
 The
          Company’s most liquid assets are cash and cash equivalents, which are cash on
          hand, amounts due from financial institutions, and certificates of deposit
          with
          other financial institutions that have an original maturity of three months
          or
          less. The levels of such assets are dependent on the Bank’s operating,
          financing, and
          investment activities at any given time. The Company’s cash and cash equivalents
          totaled $14,880,601 as of December 31, 2006 and $20,506,478 as of December
          31,
          2005, representing a decrease of $5,625,877. The variations in levels of
          cash
          and cash equivalents are influenced by deposit flows and anticipated future
          deposit flows, which are subject to, and influenced by, many
          factors.
  15
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 In
          addition to the capital necessary to meet the Company’s conditional commitments
          discussed under the caption “Off-Balance Sheet Arrangements” below, the Bank
          also has $173,499,700 in certificates of deposit that are scheduled to
          mature in
          one year or less. Management anticipates that the majority of these certificates
          will renew in the normal course of operations. Based on existing collateral
          as
          well as the FHLB’s limitation of advances to 35% of assets, the Bank has the
          ability to borrow an additional $40,645,000 from
          the
          FHLB, as of December 31, 2006. The Bank plans to maintain its FHLB borrowings
          to
          a level that will provide a borrowing capacity sufficient to provide for
          contingencies.
 
 The
          Company’s regulatory capital position of $57,820,000 is 11.0% of total assets as
          of December 31, 2006. The Company has an excess of $38,205,000, $38,589,000,
          and
          $26,790,000 of required regulatory levels of tangible, core, and risk-based
          capital, respectively. Under current regulatory guidelines, the Bank is
          classified as well capitalized. See also additional information provided
          under
          the caption “Regulatory Matters” in Note 1 of the Notes to Consolidated
          Financial Statements.
 
 During
          the year ended December 31, 2006, the Company declared dividends of $0.67
          per
          share and paid dividends of $0.665 per share, compared to dividends declared
          of
          $0.65 per share and paid of $0.645 per share during the year ended December
          31,
          2005. The Board of Directors of the Company meets regularly to consider
          the
          level and the timing of dividend payments. Dividends declared but unpaid
          at
          December 31, 2006 ($0.17 per share), were paid to shareholders on January
          19,
          2007.
 
 During
          the year ended December 31, 2005, the Company purchased 146,542 shares
          of common
          stock at an average price of $24.31 to place in the treasury account. During
          the
          year ended December 31, 2006, the Company purchased 125,066 shares of common
          stock at an average price of $28.73 to place in the treasury account. The
          Company intends to monitor the common stock price and, with regulatory
          approval,
          may from time to time initiate further stock repurchases in order to improve
          the
          Company’s long-term earnings per share while at the same time maintaining an
          adequate level of stockholders’ equity. The Company has a repurchase plan which
          was announced on July 25, 2006, and as of December 31, 2006, a total of
          163,477
          shares of the Company’s common stock may be purchased under this
          plan.
 
 On
          December 15, 2005, the Company issued $15 million of trust preferred securities
          (”Trust Securities”) in a private placement. The proceeds of the sale of Trust
          Securities issued by Guaranty Statutory Trust I and Guaranty Statutory
          Trust II,
          together with the proceeds of the Trust’s sale of their common securities issued
          to the Company, were used by the Trusts to purchase 30-year junior subordinated
          deferrable interest debentures from the Company in the principal amount
          of
          $5,155,000 (“Trust I Debentures”) and $10,310,000 (“Trust II Debentures”),
          respectively. The Trust I Debentures bear interest at a fixed rate of 6.92%,
          payable quarterly. The Trust II Debentures bear interest at a fixed rate
          of
          6.47% for 5 years, payable quarterly, after issuance and thereafter at
          a
          floating rate equal to the three month LIBOR plus 1.45%. The Company invested
          the proceeds of the sale of the Trust Securities in its banking subsidiary,
          where the funds were used primarily to restructure the investment portfolio,
          fund loan growth and repay FHLB advances.
  **OFF-BALANCE
          SHEET ARRANGEMENTS**
  Various
          commitments and contingent liabilities arise in the normal course of business,
          which are not required to be recorded on the balance sheet. The most significant
          of these are loan commitments, lines of credit and standby letters of credit.
          Commitments to extend credit are agreements to lend to a customer as long
          as
          there is no violation of any condition established in the contract. As
          of
          December 31, 2006 and 2005, the Bank had outstanding commitments to originate
          loans of approximately $3,991,000 and $2,285,000, respectively. Lines of
          credit
          are agreements to lend to a customer as long as there is no violation of
          any
          condition established in the contract. As of December 31, 2006 and 2005,
          unused
          lines of credit to borrowers aggregated approximately $64,370,000 and
          $77,725,000 for commercial lines and $19,790,000 and $18,180,000 for open-end
          consumer lines. Since a portion of the loan commitment and line of credit
          may
          expire without being drawn upon, the total unused commitments and lines
          do not
          necessarily represent future cash requirements.
  16
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And
          Results of Operations***
 
 Standby
          letters of credit are irrevocable conditional commitments issued by the
          Bank to
          guarantee the performance of a customer to a third party. The credit risk
          involved in issuing standby letters of credit is essentially the same
          a s
          that
          involved in extending loans to customers. The Bank had total outstanding
          standby
          letters of credit amounting to $9,182,000 and $9,731,000 as of December
          31, 2006
          and 2005, respectively. Forward commitments to sell mortgage loans are
          obligations to deliver loans at a specified price on or before a specified
          date.
          As of December 31, 2006 and 2005, the Bank had no outstanding forward
          commitments.
 
 In
          connection with the Company’s issuance of the Trust Securities and pursuant to
          two guarantee agreements by and between the Company and Wilmington Trust
          Company, the Company issued a limited, irrevocable guarantee of the obligations
          of each Trust under the Trust Securities whereby the Company has guaranteed
          any
          and all payment obligations of the Trusts related to the Trust Securities
          including distributions on, and the liquidation or redemption price of,
          the
          Trust Securities to the extent each Trust does not have funds
          available.
 
 **AGGREGATE
          CONTRACTUAL OBLIGATIONS**
 
 The
          following table summarizes the Company’s fixed and determinable contractual
          obligations by payment date as of December 31, 2006. Dollar amounts are
          expressed in thousands.
 
 Payments
                    Due By PeriodOne
                    Year
                
                One
                    to
                
                Three
                    to
                
                More
                    thanContractual
                    Obligations
                
                Total
                
                or
                    less
                
                Three
                    Years
                
                Five
                    Years
                
                Five
                    YearsDeposits
                    without stated maturity
                
                $
                128,993
                
                
                128,993
                
                
                -
                
                
                -
                
                
                -Time
                    and brokered certificates of deposit
                
                
                223,236
                
                
                173,500
                
                
                43,483
                
                
                5,353
                
                
                900Short-term
                    borrowings
                
                
                1,703
                
                
                1,703
                
                
                -
                
                
                -
                
                
                -Federal
                    Home Loan Bank advances
                
                
                108,000
                
                
                85,414
                
                
                14,036
                
                
                3,000
                
                
                5,550Subordinated
                    debentures
                
                
                15,465
                
                
                -
                
                
                -
                
                
                -
                
                
                15,465Operating
                    leases
                
                
                443
                
                
                108
                
                
                178
                
                
                115
                
                
                42Purchase
                    obligations
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    long term obligations
                
                
                110,984
                
                
                110,984
                
                
                -
                
                
                -
                
                
                -Total
                
                $
                588,825
                
                
                338,077
                
                
                69,716
                
                
                8,468
                
                
                21,957
 
 **IMPACT
          OF INFLATION AND CHANGING PRICES**
 
 The
          Company prepared the consolidated financial statements and related data
          presented herein in accordance with accounting principles generally accepted
          in
          the United States of America which require the measurement of financial
          position
          and operating results in terms of historical dollars, without considering
          changes in the relative purchasing power of money over time due to
          inflation.
 
 Unlike
          most companies, the assets and liabilities of a financial institution are
          primarily monetary in nature. As a result, interest rates have a more
          significant impact on a financial institution’s performance than the effects of
          general levels of inflation. Interest rates do not necessarily move in
          the same
          direction or in the same magnitude as the price of goods and services,
          since
          such prices are affected by inflation. In the current interest rate environment,
          liquidity and the maturity structure of the Bank’s assets and liabilities are
          critical to the maintenance of acceptable performance levels.
  17
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 **CRITICAL
          ACCOUNTING POLICIES**
  Management’s
          Discussion and Analysis of Financial Condition and Results of Operations
          is
          based upon the Company’s consolidated financial statements and the notes
          thereto, which have been prepared in accordance with accounting principles
          generally accepted in the United States of America. The preparation of
          these
          financial statements requires management to make estimates and judgments
          that
          affect the reported amounts of assets and liabilities and the disclosure
          of
          contingent assets and liabilities at the date of the financial statements
          and
          the reported amounts of revenues and expenses during the reported periods.
          On an
          on-going basis, management evaluates its estimates and judgments.
  Management
          bases its estimates and judgments on historical experience and on various
          other
          factors that are believed to be reasonable under the circumstances, the
          results
          of which form the basis for making judgments about the carrying values
          of assets
          and liabilities that are not readily apparent from other sources. There
          can be
          no assurance that actual results will not differ from those
          estimates . If
          actual
          results are different than management’s judgements and estimates, the Company’s
          financial results could change, and such change could be material to the
          Company.
 
 Material
          estimates and judgments that are particularly susceptible to significant
          change
          relate to the determination of the allowance for loan losses. In connection
          with
          the determination of the allowance for loan losses, management obtains
          independent appraisals for significant properties.
  The
          Company has identified the accounting policies for the allowance for loan
          losses
          and related significant estimates and judgments as critical to its business
          operations and the understanding of its results of operations. For a detailed
          discussion on the application of these significant estimates and judgments
          and
          our accounting policies, also see Note 1 of the notes to c onsolidated
          financial statements in this report.
 
 **IMPACT
          OF NEW ACCOUNTING PRONOUNCEMENTS**
 
 In
          July
          2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
          No. 48 (FIN 48), *Accounting
          for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 - Accounting
          for Income Taxes* .
          This
          interpretation addresses accounting for tax uncertainties that arise when
          a
          position that an entity takes on its tax return may be different from the
          position that the taxing authority may take, and provides guidance about
          the
          accounting for tax benefits associated with uncertain tax positions,
          classification of a liability recognized for those positions, and interim
          reporting considerations. This Interpretation requires that the Company
          recognize in its financial statements, the impact of a tax position, if
          that
          position is more likely than not of being sustained on audit. The provisions
          of
          FIN 48 are effective as of the beginning of the Company's 2007 fiscal year,
          with
          the cumulative effect of the change in accounting principle recorded as
          an
          adjustment to retained earnings. The Company is evaluating the requirements
          of
          the exposure draft to determine the impact, if any, on the financial condition
          or the results of operation of the Company.
 
 In
          March
          2006, the FASB issued Statement of Financial Accounting Standards (SFAS)
          No.
          156, *Accounting
          for Servicing of Financial Assets.* SFAS No.
          156 amends SFAS No. 140, *Accounting
          for Transfers and Servicing of Financial Assets and Extinguishments of
          Liabilities,* and
          specifies the accounting for certain servicing assets and liabilities,
          such as
          those common to mortgage servicing activities. SFAS No. 156 requires an
          entity
          to separately recognize servicing assets and servicing liabilities and
          to
          initially measure these servicing assets and servicing liabilities at fair
          value
          at inception. It also permits an entity with a separately recognized servicing
          asset or servicing liability to choose either the amortization method or
          fair
          value method for subsequent measurement. Adoption of SFAS No. 156 is required
          for transactions occurring in fiscal years beginning after September 15,
          2006,
          with early adoption permitted. The Company does not believe the adoption
          of this
          standard will have a material impact on the consolidated financial condition
          or
          results of operations of the Company.
 
 In
          September 2006, the FASB issued SFAS No. 157, *Fair
          Value Measurements* .
          This
          Statement defines fair value, establishes a framework for measuring fair
          value
          in generally accepted accounting principles and expands disclosure related
          to
          the use of fair value measures in financial statements. This Statement
          applies
          under other accounting pronouncements that require or permit fair value
          measurements, and does not expand the use of fair value measures in financial
          statements, but standardizes its definition and guidance in generally accepted
          accounting principles. SFAS No. 157 emphasizes that fair value is a
          market-based measurement based on an exchange transaction between market
          participants in which an entity sells an asset or transfers a liability.
          SFAS
          No. 157 also establishes a fair value hierarchy from observable market
          data as
          the highest level to fair value based on an entity's own fair value assumptions
          as the lowest level. The Statement is to be effective for financial statements
          issued for fiscal years beginning after November 15, 2007, with early
          adoption permitted. The Company is evaluating this Statement to determine
          the
          impact, if any, on certain of its financial assets and liabilities.
  18
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 In
          September 2006, the Securities and Exchange Commission issued Staff Accounting
          Bulletin (SAB) No. 108, *Considering
          the Effects of Prior Year Misstatements when Quantifying Misstatements
          in
          Current Year Financial Statements* .
          SAB
          No. 108 was issued to provide guidance on how the effects of prior year
          uncorrected misstatements should be considered when quantifying misstatements
          in
          current year financial statements. SAB No. 108 requires an entity to
          quantify misstatements using both a balance sheet and an income statement
          approach and to evaluate whether either approach results in quantifying
          an error
          that is material in light of the relevant quantitative and qualitative
          factors.
          SAB No. 108 is effective for fiscal years ending after November 15, 2006.
          The adoption of this standard did not have a material impact on the consolidated
          financial condition or results of operations of the Company.
  19
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Management’s
          Discussion and Analysis of Financial Condition***
 ***And Results of Operations***
 
 **SUMMARY
          OF UNAUDITED QUARTERLY OPERATING RESULTS**
 
 Year
                    Ended December 31, 2006, Quarter endedMar-06
                
                Jun-06
                
                Sep-06
                
                Dec-06Interest
                    income
                
                $
                8,077,915
                
                
                8,386,269
                
                
                9,054,605
                
                
                9,547,529Interest
                    expense
                
                
                3,769,423
                
                
                4,125,175
                
                
                4,543,095
                
                
                4,948,900Net
                    interest income
                
                
                4,308,492
                
                
                4,261,094
                
                
                4,511,510
                
                
                4,598,629Provision
                    for loan losses
                
                
                225,000
                
                
                225,000
                
                
                150,000
                
                
                150,000Gain
                    on sale of loans and investment securities
                
                
                317,997
                
                
                336,889
                
                
                349,425
                
                
                438,834Other
                    noninterest income, net
                
                
                503,823
                
                
                621,981
                
                
                571,626
                
                
                657,273Noninterest
                    expense
                
                
                2,367,394
                
                
                2,543,500
                
                
                2,630,195
                
                
                2,635,605Income
                    before income taxes
                
                
                2,537,918
                
                
                2,451,464
                
                
                2,652,366
                
                
                2,909,131Provision
                    for income taxes
                
                
                973,593
                
                
                870,074
                
                
                1,028,044
                
                
                1,170,084Net
                    income
                
                $
                1,564,325
                
                
                1,581,390
                
                
                1,624,322
                
                
                1,739,047Basic
                    earnings per share
                
                $
                0.56
                
                
                0.56
                
                
                0.58
                
                
                0.63Diluted
                    earnings per share
                
                $
                0.54
                
                
                0.54
                
                
                0.56
                
                
                0.61
 
 Year
                    Ended December 31, 2005, Quarter endedMar-05
                
                Jun-05
                
                Sep-05
                
                Dec-05Interest
                    income
                
                $
                5,900,919
                
                
                6,560,914
                
                
                7,091,488
                
                
                7,730,086Interest
                    expense
                
                
                2,457,208
                
                
                2,783,379
                
                
                3,129,687
                
                
                3,490,130Net
                    interest income
                
                
                3,443,711
                
                
                3,777,535
                
                
                3,961,801
                
                
                4,239,956Provision
                    for loan losses
                
                
                225,000
                
                
                240,000
                
                
                240,000
                
                
                240,000Gain
                    on sale of loans and investment securities
                
                
                337,736
                
                
                304,288
                
                
                390,684
                
                
                333,879Other
                    noninterest income, net
                
                
                546,174
                
                
                536,916
                
                
                567,108
                
                
                580,274Noninterest
                    expense
                
                
                2,180,393
                
                
                2,065,697
                
                
                2,157,256
                
                
                2,266,155Income
                    before income taxes
                
                
                1,922,228
                
                
                2,313,042
                
                
                2,522,337
                
                
                2,647,954Provision
                    for income taxes
                
                
                707,454
                
                
                864,327
                
                
                935,076
                
                
                999,734Net
                    income
                
                $
                1,214,774
                
                
                1,448,715
                
                
                1,587,261
                
                
                1,648,220Basic
                    earnings per share
                
                $
                0.43
                
                
                0.53
                
                
                0.57
                
                
                0.59Diluted
                    earnings per share
                
                $
                0.41
                
                
                0.50
                
                
                0.55
                
                
                0.57
  20
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Consolidated
          Balance Sheets***
 ***December
          31, 2006 and 2005***
 
 December
                      31,
                  
                  December
                      31,2006
                  
                  2005**ASSETS**Cash
                  
                  $
                  10,684,831
                  
                  
                  17,990,774Interest-bearing
                      deposits in other financial institutions
                  
                  
                  4,195,770
                  
                  
                  2,515,704Cash
                      and cash equivalents
                  
                  
                  14,880,601
                  
                  
                  20,506,478Available-for-sale
                      securities
                  
                  
                  7,906,321
                  
                  
                  6,757,147Held-to-maturity
                      securities
                  
                  
                  763,025
                  
                  
                  944,724Stock
                      in Federal Home Loan Bank, at cost
                  
                  
                  5,382,700
                  
                  
                  4,978,800Mortgage
                      loans held for sale
                  
                  
                  3,004,635
                  
                  
                  2,092,279Loans
                      receivable, net of allowance for loan losses of December 31,
                      2006 and 2005
                      - $5,783,477 and $5,399,654, respectively
                  
                  
                  477,264,522
                  
                  
                  433,435,429Accrued
                      interest receivable:Loans
                  
                  
                  2,830,811
                  
                  
                  2,040,872Investments
                  
                  
                  79,498
                  
                  
                  48,255Prepaid
                      expenses and other assets
                  
                  
                  2,955,483
                  
                  
                  2,604,425Foreclosed
                      assets held for sale
                  
                  
                  172,637
                  
                  
                  26,775Premises
                      and equipment
                  
                  
                  7,867,809
                  
                  
                  7,452,798Income
                      taxes receivable
                  
                  
                  774,469
                  
                  
                  -Deferred
                      income taxes
                  
                  
                  962,484
                  
                  
                  112,686$
                  524,844,995
                  
                  
                  481,000,668**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**LIABILITIESDeposits
                  
                  $
                  352,229,636
                  
                  
                  320,058,951Federal
                      Home Loan Bank advances
                  
                  
                  108,000,000
                  
                  
                  100,000,000Securities
                      sold under agreements to repurchase
                  
                  
                  1,703,221
                  
                  
                  1,594,258Subordinated
                      debentures
                  
                  
                  15,465,000
                  
                  
                  15,465,000Advances
                      from borrowers for taxes and insurance
                  
                  
                  222,869
                  
                  
                  212,320Accrued
                      expenses and other liabilities
                  
                  
                  441,890
                  
                  
                  288,587Accrued
                      interest payable
                  
                  
                  1,414,946
                  
                  
                  508,164Dividend
                      payable
                  
                  
                  468,190
                  
                  
                  459,074Income
                      taxes payable
                  
                  
                  -
                  
                  
                  322,165479,945,752
                  
                  
                  438,908,519STOCKHOLDERS'
                      EQUITYCommon
                      Stock:$0.10
                      par value; authorized 10,000,000 shares; issued; December 31,
                      2006 and
                      2005 - 6,653,527 and 6,571,348 shares, respectively
                  
                  
                  665,353
                  
                  
                  657,135Additional
                      paid-in capital
                  
                  
                  55,730,352
                  
                  
                  53,778,686Unearned
                      ESOP shares
                  
                  
                  (1,344,930
                  )
                  
                  (1,572,930
                  )Retained
                      earnings, substantially restricted
                  
                  
                  41,183,006
                  
                  
                  36,533,338Accumulated
                    other
                    comprehensive incomeUnrealized
                      appreciation on available-for-sale securities, net of income
                      taxes;
                      December 31, 2006 and 2005 - $901,243, and $1,158,114, respectively
                  
                  
                  1,534,548
                  
                  
                  1,971,92597,768,329
                  
                  
                  91,368,154Treasury
                      stock, at cost;December
                      31, 2006 and 2005 - 3,764,367 and 3,639,301 shares, respectively
                  
                  
                  (52,869,086
                  )
                  
                  (49,276,005
                  )44,899,243
                  
                  
                  42,092,149$
                  524,844,995
                  
                  
                  481,000,668
 *See
          Notes to Consolidated Financial Statements*
  21
  **Guaranty
          Federal Bancshares, Inc.**
 ***Consolidated
          Statements of Income***
 ***Years
          Ended December 31, 2006, 2005 and 2004***
 
 2006
                
                2005
                
                2004**INTEREST
                    INCOME**Loans
                
                $
                34,362,199
                
                
                26,552,595
                
                
                19,989,852Investment
                    securities
                
                
                450,919
                
                
                431,863
                
                
                289,335Other
                
                
                253,200
                
                
                298,949
                
                
                260,08535,066,318
                
                
                27,283,407
                
                
                20,539,272**INTEREST
                    EXPENSE**Deposits
                
                
                10,523,203
                
                
                7,288,073
                
                
                4,919,164Federal
                    Home Loan Bank advances
                
                
                5,721,973
                
                
                4,493,997
                
                
                3,519,393Subordinated
                    debentures
                
                
                1,027,526
                
                
                47,683
                
                
                -Other
                
                
                113,891
                
                
                30,651
                
                
                7,07317,386,593
                
                
                11,860,404
                
                
                8,445,630**NET
                    INTEREST INCOME**
                
                
                17,679,725
                
                
                15,423,003
                
                
                12,093,642**PROVISION
                    FOR LOAN LOSSES**
                
                
                750,000
                
                
                945,000
                
                
                863,830**NET
                    INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES**
                
                
                16,929,725
                
                
                14,478,003
                
                
                11,229,812**NONINTEREST
                    INCOME**Service
                    charges
                
                
                1,401,724
                
                
                1,643,433
                
                
                1,877,829Late
                    charges and other fees
                
                
                234,339
                
                
                264,360
                
                
                353,689Gain
                    on sale of investment securities
                
                
                750,869
                
                
                743,335
                
                
                742,608Gain
                    on sale of loans
                
                
                692,276
                
                
                623,252
                
                
                484,920Loss
                    on foreclosed assets
                
                
                (46,833
                )
                
                (1,617
                )
                
                (3,157
                )Other
                    income
                
                
                765,473
                
                
                324,296
                
                
                160,2853,797,848
                
                
                3,597,059
                
                
                3,616,174**NONINTEREST****EXPENSE**Salaries
                    and employee benefits
                
                
                6,111,762
                
                
                4,884,869
                
                
                4,571,541Occupancy
                
                
                1,520,770
                
                
                1,365,559
                
                
                1,287,261FDIC
                    deposit insurance premiums
                
                
                39,661
                
                
                39,796
                
                
                36,038Data
                    processing
                
                
                280,189
                
                
                440,411
                
                
                399,891Advertising
                
                
                403,292
                
                
                230,254
                
                
                287,594Other
                    expense
                
                
                1,821,020
                
                
                1,708,612
                
                
                1,665,54410,176,694
                
                
                8,669,501
                
                
                8,247,871**INCOME
                    BEFORE INCOME TAXES**
                
                
                10,550,879
                
                
                9,405,561
                
                
                6,598,115**PROVISION
                    FOR INCOME TAXES**
                
                
                4,041,795
                
                
                3,506,591
                
                
                2,313,342**NET
                    INCOME**
                
                $
                6,509,084
                
                
                5,898,970
                
                
                4,284,773**BASIC
                    EARNINGS PER SHARE**
                
                $
                2.34
                
                
                2.12
                
                
                1.53**DILUTED
                    EARNINGS PER SHARE**
                
                $
                2.25
                
                
                2.03
                
                
                1.47
  *See
          Notes to Consolidated Financial Statements*
  22
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Consolidated
          Statements of Cash Flows***
 ***Years
          Ended December 31, 2006, 2005 and 2004***
 
 2006
                
                2005
                
                2004**CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    income
                
                $
                6,509,084
                
                
                5,898,970
                
                
                4,284,773Items
                    not requiring (providing) cash:Deferred
                    income taxes
                
                
                (592,927
                )
                
                (249,519
                )
                
                (99,952
                )Depreciation
                
                
                814,150
                
                
                759,931
                
                
                670,096Provision
                    for loan losses
                
                
                750,000
                
                
                945,000
                
                
                863,830Gain
                    on sale of loans and investment securities
                
                
                (1,443,145
                )
                
                (1,366,587
                )
                
                (1,227,528
                )(Gain)
                    loss on sale of equipment and other assets
                
                
                (89,911
                )
                
                3,055
                
                
                11,517(Gain)
                    loss on sale of foreclosed assets
                
                
                46,833
                
                
                (1,323
                )
                
                (1,724
                )Amortization
                    of deferred income, premiums and discounts
                
                
                24,106
                
                
                (48,305
                )
                
                78,148Stock
                    award plan expense
                
                
                83,192
                
                
                45,694
                
                
                63,200Origination
                    of loans held for sale
                
                
                (51,685,484
                )
                
                (45,528,012
                )
                
                (30,561,273
                )Proceeds
                    from sale of loans held for sale
                
                
                51,465,404
                
                
                47,649,521
                
                
                28,723,721Release
                    of ESOP shares
                
                
                651,958
                
                
                564,980
                
                
                461,512Changes
                    in:Accrued
                    interest receivable
                
                
                (821,182
                )
                
                (519,112
                )
                
                (264,287
                )Prepaid
                    expenses and other assets
                
                
                400,043
                
                
                (628,141
                )
                
                80,912Accrued
                    expenses and other liabilities
                
                
                1,060,085
                
                
                200,417
                
                
                105,421Income
                    taxes payable
                
                
                (790,942
                )
                
                89,638
                
                
                7,484Net
                    cash provided by operating activities
                
                
                6,381,264
                
                
                7,816,207
                
                
                3,195,850**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Net
                    increase in loans
                
                
                (45,195,742
                )
                
                (45,967,115
                )
                
                (59,380,244
                )Principal
                    payments on held-to-maturity securities
                
                
                186,219
                
                
                358,395
                
                
                574,920Principal
                    payments on available-for-sale securities
                
                
                175,145
                
                
                -
                
                
                -Purchase
                    of available-for-sale securities
                
                
                (3,780,315
                )
                
                (10,516,958
                )
                
                (5,971,840
                )Purchase
                    of premises and equipment
                
                
                (719,094
                )
                
                (1,032,777
                )
                
                (1,300,977
                )Purchase
                    of tax credit investments
                
                
                (2,195,334
                )
                
                -
                
                
                -Proceeds
                    from sale of originated mortgage servicing rights
                
                
                1,023,608
                
                
                -
                
                
                -Proceeds
                    from sale of premises and equipment
                
                
                470
                
                
                5,860
                
                
                6,500Proceeds
                    from sales of available-for-sale securities
                
                
                762,617
                
                
                9,345,564
                
                
                754,355Proceeds
                    from maturities of available-for-sale securities
                
                
                1,750,000
                
                
                9,000,000
                
                
                6,000,000(Purchase)
                    redemption of FHLB stock
                
                
                (403,900
                )
                
                167,700
                
                
                147,700Proceeds
                    from sale of foreclosed assets
                
                
                395,327
                
                
                352,341
                
                
                434,161Net
                    cash used in investing activities
                
                
                (48,000,999
                )
                
                (38,286,990
                )
                
                (58,735,425
                )
  *See
          Notes to Consolidated Financial Statements*
  23
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Consolidated
          Statements of Cash Flows (continued)***
 ***Years
          Ended December 31, 2006, 2005 and 2004***
 
 2006
                
                2005
                
                2004**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Stock
                    options exercised
                
                
                1,147,042
                
                
                1,031,400
                
                
                751,274Cash
                    dividends paid
                
                
                (1,850,300
                )
                
                (1,794,557
                )
                
                (1,767,337
                )Cash
                    dividends received on RRP Stock
                
                
                -
                
                
                -
                
                
                217Net
                    increase (decrease) in demand deposits, NOW accounts and savings
                    accounts
                
                
                (1,259,419
                )
                
                2,901,337
                
                
                10,307,199Net
                    increase in certificates of deposit and securities sold under
                    agreements
                    to repurchase
                
                
                33,539,067
                
                
                21,100,110
                
                
                49,475,420Proceeds
                    from FHLB advances
                
                
                1,901,242,000
                
                
                1,322,664,000
                
                
                201,614,000Repayments
                    of FHLB advances
                
                
                (1,893,242,000
                )
                
                (1,322,664,000
                )
                
                (210,450,948
                )Proceeds
                    from issuance of subordinated debentures
                
                
                -
                
                
                15,465,000
                
                
                -Advances
                    from borrowers for taxes and insurance
                
                
                10,549
                
                
                (59,476
                )
                
                12,529Treasury
                    stock purchased
                
                
                (3,593,081
                )
                
                (3,563,011
                )
                
                (1,163,115
                )Net
                    cash provided by financing activities
                
                
                35,993,858
                
                
                35,080,803
                
                
                48,779,239**INCREASE
                    (DECREASE) IN CASH AND CASH EQUIVALENTS**
                
                
                (5,625,877
                )
                
                4,610,020
                
                
                (6,760,336
                )**CASH
                    AND CASH EQUIVALENTS, BEGINNING OF YEAR**
                
                
                20,506,478
                
                
                15,896,458
                
                
                22,656,794**CASH
                    AND CASH EQUIVALENTS, END OF YEAR**
                
                $
                14,880,601
                
                
                20,506,478
                
                
                15,896,458**Supplemental
                    Cash Flows Information**Real
                    estate acquired in settlement of loans
                
                $
                588,022
                
                
                299,643
                
                
                466,670Interest
                    paid
                
                $
                16,479,811
                
                
                11,713,756
                
                
                8,445,630Income
                    taxes paid
                
                $
                4,041,795
                
                
                3,506,591
                
                
                2,313,342Dividend
                    declared and unpaid
                
                $
                468,190
                
                
                459,074
                
                
                450,868
  *See
          Notes to Consolidated Financial Statements*
  24
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Consolidated
          Statements of Stockholders’ Equity***
 ***Years
          Ended December 31, 2006, 2005 and 2004***
 
 Common
                    Stock
                
                Additional
                    Paid-In Capital
                
                Unearned
                    ESOP Shares
                
                Treasury
                    Stock
                
                Retained
                    Earnings
                
                Accumulated
                    Other Comprehensive Income
                
                Total**Balance,
                    January 1, 2004**
                
                $
                642,890
                
                
                51,330,202
                
                
                (2,030,930
                )
                
                (44,549,879
                )
                
                29,919,695
                
                
                2,666,143
                
                
                37,978,121Comprehensive
                    incomeNet
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,284,773
                
                
                -
                
                
                4,284,773Change
                    in unrealized appreciation on available-for-sale securitites,
                    net of
                    income taxes of $87,911
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                149,685
                
                
                149,685Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,434,458Dividends
                    ($0.64 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,767,337
                )
                
                -
                
                
                (1,767,337
                )Stock
                    award plans
                
                
                -
                
                
                78,350
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                78,350Stock
                    options exercised
                
                
                6,496
                
                
                744,778
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                751,274Release
                    of ESOP shares
                
                
                -
                
                
                231,512
                
                
                230,000
                
                
                -
                
                
                -
                
                
                -
                
                
                461,512Treasury
                    stock purchased
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,163,115
                )
                
                -
                
                
                -
                
                
                (1,163,115
                )**Balance,
                    December 31, 2004**
                
                
                649,386
                
                
                52,384,842
                
                
                (1,800,930
                )
                
                (45,712,994
                )
                
                32,437,131
                
                
                2,815,828
                
                
                40,773,263Comprehensive
                    incomeNet
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                5,898,970
                
                
                -
                
                
                5,898,970Change
                    in unrealized appreciation on available-for-sale securitites,
                    net of
                    income taxes of ($495,626)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (843,903
                )
                
                (843,903
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,055,067Dividends
                    ($0.65 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,802,763
                )
                
                -
                
                
                (1,802,763
                )Stock
                    award plans
                
                
                -
                
                
                33,213
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                33,213Stock
                    options exercised
                
                
                7,749
                
                
                1,023,651
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,031,400Release
                    of ESOP shares
                
                
                -
                
                
                336,980
                
                
                228,000
                
                
                -
                
                
                -
                
                
                -
                
                
                564,980Treasury
                    stock purchased
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,563,011
                )
                
                -
                
                
                -
                
                
                (3,563,011
                )**Balance,
                    December 31, 2005**
                
                
                657,135
                
                
                53,778,686
                
                
                (1,572,930
                )
                
                (49,276,005
                )
                
                36,533,338
                
                
                1,971,925
                
                
                42,092,149Comprehensive
                    incomeNet
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,509,084
                
                
                -
                
                
                6,509,084Change
                    in unrealized appreciation on available-for-sale securitites,
                    net of
                    income taxes of ($256,871)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (437,377
                )
                
                (437,377
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,071,707Dividends
                    ($0.67 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,859,416
                )
                
                -
                
                
                (1,859,416
                )Stock
                    award plans
                
                
                -
                
                
                388,884
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                388,884Stock
                    options exercised
                
                
                8,218
                
                
                1,138,824
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,147,042Release
                    of ESOP shares
                
                
                -
                
                
                423,958
                
                
                228,000
                
                
                -
                
                
                -
                
                
                -
                
                
                651,958Treasury
                    stock purchased
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,593,081
                )
                
                -
                
                
                -
                
                
                (3,593,081
                )**Balance,
                    December 31, 2006**
                
                $
                665,353
                
                
                55,730,352
                
                
                (1,344,930
                )
                
                (52,869,086
                )
                
                41,183,006
                
                
                1,534,548
                
                
                44,899,243
 
 *See
          Notes to Consolidated Financial Statements*
  25
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   **NOTE
                    1:**
                **NATURE
                    OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
                    POLICIES**
  Organization
 In
          April
          1995, Guaranty Federal Savings & Loan Association reorganized from a
          federally chartered mutual savings and loan association into a mutual holding
          company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent
          with the
          reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings
          bank
          was chartered. The Bank issued 3,125,000 shares of common stock in connection
          with the reorganization, the majority of which were owned by the
          MHC.
 
 On
          December 30, 1997, the MHC converted to Guaranty Federal Bancshares, Inc.
          (the
“Company”), a Delaware-chartered stock corporation. In connection with the
          conversion and reorganization, the shares of the Bank held by the mutual
          holding
          company were extinguished along with the mutual holding company and the
          shares
          of the Bank held by the public were exchanged for 1,880,710 shares of the
          Company. Additional shares of the Company were sold to certain depositors
          of the
          Bank and to the trust of the employee stock ownership plan of the Bank
          as of
          December 30, 1997.
 
 On
          June
          27, 2003, the Bank converted to a state-chartered trust company with banking
          powers, and the Company became a one-bank holding company. The name of
          the Bank
          was changed from Guaranty Federal Savings Bank to Guaranty Bank.
 
 Nature
          of Operations
 The
          Company operates as a one-bank holding company. The Bank is primarily engaged
          in
          providing a full range of banking and mortgage services to individual and
          corporate customers in southwest Missouri. The Bank is subject to competition
          from other financial institutions. The Company and the Bank are also subject
          to
          the regulation of certain federal and state agencies and receive periodic
          examinations by those regulatory authorities.
 
 Principles
          of Consolidation
 The
          consolidated financial statements include the accounts of the Company and
          its
          wholly owned subsidiary, the Bank. All significant intercompany profits,
          transactions and balances have been eliminated in consolidation.
 
 Use
          of
          Estimates
 The
          preparation of financial statements in conformity with accounting principles
          generally accepted in the United States of America requires management
          to make
          estimates and assumptions that affect the reported amounts of assets and
          liabilities and disclosure of contingent assets and liabilities at the
          date of
          the financial statements and the reported amounts of revenues and expenses
          during the reporting period. Actual results could differ from those
          estimates.
 
 Material
          estimates that are particularly susceptible to significant change in the
          near
          term relate to the determination of the allowance for loan losses and the
          valuation of real estate acquired in connection with foreclosures or in
          satisfaction of loans. In connection with the determination of the allowance
          for
          loan losses and the valuation of foreclosed assets held for sale, management
          obtains independent appraisals for significant properties.
 
 Securities
 Available-for-sale
          securities, which include any security for which the Company or the Bank
          has no
          immediate plan to sell but which may be sold in the future, are carried
          at fair
          value. Unrealized gains and losses are recorded, net of related income
          tax
          effects, in other comprehensive income.
  26
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   Held-to-maturity
          securities, which include any security for which the Company or the Bank
          has the
          positive intent and ability to hold until maturity, are carried at historical
          cost adjusted for amortization of premiums and accretion of discounts.
 
 Amortization
          of premiums and accretion of discounts are recorded as interest income
          from
          securities. Realized gains and losses are recorded as interest income from
          securities. Realized gains and losses are recorded as net security gains
          (losses). Gains and losses on sales of securities are determined on the
          specific
          identification method.
  Mortgage
          Loans Held for Sale
 Mortgage
          loans held for sale are carried at the lower of cost or fair value, determined
          using an aggregate basis. Write-downs to fair value are recognized as a
          charge
          to earnings at the time the decline in value occurs. Forward commitments
          to sell
          mortgage loans are sometimes acquired to reduce market risk on mortgage
          loans in
          the process of origination and mortgage loans held for sale. Gains and
          losses
          resulting from sales of mortgage loans are recognized when the respective
          loans
          are sold to investors. Gains and losses are determined by the difference
          between
          the selling price plus the value of retained servicing rights and the carrying
          amount of the loans sold, net of discounts collected or paid and considering
          a
          normal servicing rate. Fees received from borrowers to guarantee the funding
          of
          mortgage loans held for sale and fees paid to investors to ensure the ultimate
          sale of such mortgage loans are recognized as income or expense when the
          loans
          are sold or when it becomes evident that the commitment will not be
          used.
 
 Loans
 Loans
          that management has the intent and ability to hold for the foreseeable
          future or
          until maturity or pay-offs are reported at their outstanding principal
          balances
          adjusted for any charge-offs, the allowance for loan losses, any deferred
          fees
          or costs on originated loans and unamortized premiums or discounts on purchased
          loans. Interest income is reported on the interest method, and includes
          amortization of net deferred loan fees and costs over the loan term. Generally,
          loans are placed on non-accrual status at ninety days past due and interest
          is
          considered a loss, unless the loan is well-secured and in the process of
          collection.
 
 Loan
          Servicing
 The
          cost
          of originated mortgage-servicing rights is amortized over the shorter of
          the
          actual or contractual loan life. Impairment of mortgage-servicing rights
          is
          assessed based on the fair value of those rights. Fair values are estimated
          by
          discounting expected cash flows. For purposes of measuring impairment,
          the
          rights are stratified based on the loan type, remaining term to maturity
          and
          interest rate. The key assumptions used in the valuation include discount
          rates,
          prepayment speeds and servicing costs. The amount of impairment recognized
          is
          the amount by which the capitalized mortgage servicing rights exceeds their
          fair
          value. During 2006, the Company sold its mortgage servicing rights to a
          third
          party.
 
 Allowance
          for Loan Losses
 The
          allowance for loan losses is established as losses are estimated to have
          occurred through a provision for loan losses charged to income. Loan losses
          are
          charged against the allowance when management believes the uncollectibility
          of a
          loan balance is confirmed. Subsequent recoveries, if any, are credited
          to the
          allowance.
  The
          allowance for loan losses is evaluated on a regular basis by management
          and is
          based upon management’s periodic review of the collectibility of the loans in
          light of historical experience, the nature and volume of the loan portfolio,
          adverse situations that may affect the borrower’s ability to repay, estimated
          value of any underlying collateral and prevailing economic conditions.
          This
          evaluation is inherently subjective as it requires estimates that are
          susceptible to significant revision as more information becomes
          available.
  27
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
 
  A
          loan is
          considered impaired when, based on current information and events, it is
          probable that the Bank will be unable to collect the scheduled payments
          of
          principal or interest when due according to the contractual terms of the
          loan
          agreement. Factors considered by management in determining impairment include
          payment status, collateral value and the probability of collecting scheduled
          principal and interest payments when due. Loans that experience insignificant
          payment delays and payment shortfalls generally are not classified as impaired.
          Management determines the significance of payment delays and payment shortfalls
          on a case-by-case basis, taking into consideration all of the circumstances
          surrounding the loan and the borrower, including the length of the delay,
          the
          reasons for the delay, the borrower’s prior payment record and the amount of the
          shortfall in relation to the principal and interest owed. Impairment is
          measured
          on a loan-by-loan basis for commercial and construction loans by either
          the
          present value of expected future cash flows discounted at the loan’s effective
          interest rate, the loan’s obtainable market price or the fair value of the
          collateral if the loan is collateral dependent.
  Foreclosed
          Assets Held for Sale
 Assets
          acquired through, or in lieu of, loan foreclosure are held for sale and
          are
          initially recorded at fair value at the date of foreclosure, establishing
          a new
          cost basis. Subsequent to foreclosure, valuations are periodically performed
          by
          management and the assets are carried at the lower of carrying amount or
          fair
          value less estimated cost to sell. Revenue and expenses from operations
          and
          changes in the valuation allowance are included in net expenses from foreclosed
          assets.
 
 Premises
          and Equipment
 Depreciable
          assets are stated at cost less accumulated depreciation. Depreciation is
          charged
          to expense using the straight-line and accelerated methods over the estimated
          useful lives of the assets.
 
 Income
          Taxes
 Deferred
          tax liabilities and assets are recognized for the tax effects of differences
          between the financial statement and tax bases of assets and liabilities.
          A
          valuation allowance is established to reduce deferred tax assets if it
          is more
          likely than not that a deferred tax asset will not be realized.
 
 Cash
          Equivalents
 The
          Company considers all highly liquid interest-bearing deposits in other
          financial
          institutions with an initial maturity of three months or less to be cash
          equivalents.
 
 Regulatory
          Matters
 The
          Company and the Bank are subject to various regulatory capital requirements
          administered by the federal banking agencies. Failure to meet minimum capital
          requirements can initiate certain mandatory and possibly additional
          discretionary actions by regulators that, if undertaken, could have a direct
          and
          material effect on the Company's financial statements. Under capital adequacy
          guidelines and the regulatory framework for prompt corrective action, the
          Company and the Bank must meet specific capital guidelines that involve
          quantitative measures of assets, liabilities and certain off-balance-sheet
          items
          as calculated under regulatory accounting practices. The capital amounts
          and
          classification are also subject to qualitative judgments by the regulators
          about
          components, risk weightings and other factors.
 
 Quantitative
          measures established by regulation to ensure capital adequacy require the
          Company and the Bank to maintain minimum amounts and ratios (set forth
          in the
          table below). Management believes, as of December 31, 2006, that the Company
          and
          the Bank meet all capital adequacy requirements to which they are
          subject.
 
 As
          of
          December 31, 2006, the most recent notification from the Missouri Division
          of
          Finance and the Federal Deposit Insurance Corporation categorized the Bank
          as
          well capitalized under the regulatory framework for prompt corrective action.
          To
          be categorized as well capitalized the Bank must maintain minimum total
          risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
          the
          following table. There are no conditions or events since that notification
          that
          management believes have changed the Company’s or the Bank’s
          category.
  28
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   The
          Company’s and the Bank's actual capital amounts and ratios are also presented in
          the table. No amount was deducted from capital for interest-rate risk.
          Dollar
          amounts are expressed in thousands.
 
 To
                    Be Well CapitalizedFor
                    Capital
                
                Under
                    Prompt CorrectiveActual
                
                Adequacy
                    Purposes
                
                Action
                    ProvisionsAmount
                
                Ratio
                
                Amount
                
                Ratio
                
                Amount
                
                RatioAs
                    of December 31, 2006Tier
                    1 (core) capital, and ratio to adjusted total assetsCompany
                
                $
                57,820
                
                
                11.8
                %
                $
                19,615
                
                
                4.0
                %
                
                n/a
                
                
                n/aBank
                
                $
                57,062
                
                
                11.2
                %
                $
                20,336
                
                
                4.0
                %
                $
                25,420
                
                
                5.0
                %Tier
                    1 (core) capital, and ratio to risk-weighted assetsCompany
                
                $
                57,820
                
                
                12.0
                %
                $
                19,231
                
                
                4.0
                %
                
                n/a
                
                
                n/aBank
                
                $
                57,062
                
                
                11.9
                %
                $
                19,231
                
                
                4.0
                %
                $
                28,846
                
                
                6.0
                %Total
                    risk-based capital, and ratio to risk-weighted assetsCompany
                
                $
                65,251
                
                
                13.6
                %
                $
                38,461
                
                
                8.0
                %
                
                n/a
                
                
                n/aBank
                
                $
                63,948
                
                
                13.3
                %
                $
                38,461
                
                
                8.0
                %
                $
                48,077
                
                
                10.0
                %
  29
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   To
                      Be Well CapitalizedFor
                      Capital
                  
                  Under
                      Prompt CorrectiveActual
                  
                  Adequacy
                      Purposes
                  
                  Action
                      ProvisionsAmount
                  
                  Ratio
                  
                  Amount
                  
                  Ratio
                  
                  Amount
                  
                  RatioAs
                      of December 31, 2005Tier
                      1 (core) capital, and ratio to adjusted total assetsCompany
                  
                  $
                  51,040
                  
                  
                  10.7
                  %
                  $
                  19,083
                  
                  
                  4.0
                  %
                  
                  n/a
                  
                  
                  n/aBank
                  
                  $
                  53,796
                  
                  
                  11.3
                  %
                  $
                  19,010
                  
                  
                  4.0
                  %
                  $
                  23,762
                  
                  
                  5.0
                  %Tier
                      1 (core) capital, and ratio to risk-weighted assetsCompany
                  
                  $
                  51,040
                  
                  
                  12.5
                  %
                  $
                  16,296
                  
                  
                  4.0
                  %
                  
                  n/a
                  
                  
                  n/aBank
                  
                  $
                  53,796
                  
                  
                  13.2
                  %
                  $
                  16,276
                  
                  
                  4.0
                  %
                  $
                  24,414
                  
                  
                  6.0
                  %Total
                      risk-based capital, and ratio to risk-weighted assetsCompany
                  
                  $
                  57,544
                  
                  
                  14.1
                  %
                  $
                  32,592
                  
                  
                  8.0
                  %
                  
                  n/a
                  
                  
                  n/aBank
                  
                  $
                  60,294
                  
                  
                  14.8
                  %
                  $
                  32,552
                  
                  
                  8.0
                  %
                  $
                  40,690
                  
                  
                  10.0
                  %
 
 The
          amount of dividends that the Bank may pay is subject to various regulatory
          limitations. As of December 31, 2006, 2005, and 2004, the Bank exceeded
          their
          minimum capital requirements. The Bank may not pay dividends which would
          reduce
          capital below the minimum requirements shown above.
 
 Earnings
          Per Share
 
 The
          computation for earnings per share for years ended December 31, 2006, 2005
          and
          2004 is as follows:
 
 Year
                    Ended
                
                Year
                    Ended
                
                Year
                    EndedDecember
                    31, 2006
                
                December
                    31, 2005
                
                December
                    31, 2004Net
                    income
                
                $
                6,509,084
                
                
                5,898,970
                
                
                4,284,773Average
                    common shares outstanding
                
                
                2,786,823
                
                
                2,780,249
                
                
                2,808,412Effect
                    of stock options outstanding
                
                
                109,200
                
                
                126,885
                
                
                113,425Average
                    diluted shares outstanding
                
                
                2,896,023
                
                
                2,907,134
                
                
                2,921,837Earnings
                    per share - basic
                
                $
                2.34
                
                
                2.12
                
                
                1.53Earnings
                    per share - diluted
                
                $
                2.25
                
                
                2.03
                
                
                1.47
 
 All
          outstanding options to purchase common stock were included in the computation
          of
          diluted earnings per share for the year ended December 31, 2006. Options
          to purchase
          21,500 and 10,000 shares of common stock were outstanding during the years
          ended
          December 31, 2005 and 2004, respectively, but were not included in the
          computation of diluted earnings per share because the options’ exercise price
          was greater than the average market price of the common shares.
  30
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   Stock
          Option Plans
 
 In
          December, 2004, the Financial Accounting Standards Board issued Statement
          of
          Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS
          123R). SFAS 123R requires companies to recognize the cost of employee services
          received in exchange for awards of equity instruments, such as stock options
          and
          restricted stock, based on the fair value of those awards at the date of
          grant
          and eliminates the choice to account for employee stock options under Accounting
          Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25), which is how the Company previously accounted for its stock options.
          The Company adopted SFAS 123R effective January 1, 2006 using the modified
          prospective method and, as such, results for prior periods have not been
          restated. Stock-based compensation expense will be recognized for all stock
          options granted or modified after January 1, 2006. In addition, unvested
          options
          existing at January 1, 2006, will be recognized in expense over the remaining
          vesting period. The fair value of all stock options has been estimated
          using the
          Black-Scholes option pricing model using various assumptions, some of which
          are
          highly subjective.
 
 As
          a
          result of adopting SFAS 123R on January 1, 2006, incremental stock-based
          compensation expense recognized was $64,655 during the year ended December
          31,
          2006. As of December 31, 2006, there was $178,484 of unrecognized compensation
          expense related to nonvested stock options, which will be recognized over
          the
          remaining vesting period.
 
 Prior
          to
          January 1, 2006, no compensation expense was recognized for stock option
          grants, as all such grants had an exercise price equal to the fair market
          value
          on the date of grant. The following illustrates the effect on net income
          and
          earnings per share if the Company had applied the fair value method of
          SFAS
          No. 123, “Accounting for Stock-Based Compensation,” prior to
          January 1, 2006:
  Year
                      Ended
                  
                  Year
                      EndedDecember
                      31, 2005
                  
                  December
                      31, 2004Net
                      income, as reported
                  
                  $
                  5,898,970
                  
                  
                  4,284,773Less:
                      Total stock-based employee compensation cost determined under
                      the fair
                      value-based method, net of income taxes
                  
                  
                  (51,516
                  )
                  
                  (35,949
                  )Pro
                      forma net income
                  
                  $
                  5,847,454
                  
                  
                  4,248,824Earnings
                      per share:Basic
                      - as reported
                  
                  $
                  2.12
                  
                  
                  1.53Basic
                      - pro forma
                  
                  $
                  2.10
                  
                  
                  1.51Diluted
                      - as reported
                  
                  $
                  2.03
                  
                  
                  1.47Diluted
                      - pro forma
                  
                  $
                  2.01
                  
                  
                  1.45
  Segment
          Information
 
 The
          principal business of the Company is overseeing the business of the Bank.
          The
          Company has no significant assets other than its investment in the Bank.
          The
          banking operation is the Company’s only reportable segment. The banking segment
          is principally engaged in the business of originating mortgage loans secured
          by
          one-to-four family residences, multi-family, construction, commercial and
          consumer loans. These loans are funded primarily through the attraction
          of
          deposits from the general public, borrowings from the Federal Home Loan
          Bank and
          brokered deposits. Selected information is not presented separately for
          the
          Company’s reportable segment, as there is no material difference between that
          information and the corresponding information in the consolidated financial
          statements.
  31
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   **NOTE
                    2:**
                **SECURITIES**
 
 The
          amortized cost and approximate fair values of securities classified as
          available-for-sale securities are as follows:
 
 Amortized
                    Cost
                
                Gross
                    Unrealized Gains
                
                Gross
                    Unrealized (Losses)
                
                Approximate
                    Fair Value**As
                    of December 31, 2006**Equity
                    Securities:FHLMC
                    stock
                
                $
                35,847
                
                
                2,449,293
                
                
                -
                
                
                2,485,140Debt
                    Securities:U.
                    S. government agencies
                
                
                4,870,979
                
                
                1,346
                
                
                (12,074
                )
                
                4,860,251Mortgage-backed
                    securities
                
                
                563,704
                
                
                -
                
                
                (2,774
                )
                
                560,930$
                5,470,530
                
                
                2,450,639
                
                
                (14,848
                )
                
                7,906,321**As
                    of December 31, 2005**Equity
                    Securities:FHLMC
                    stock
                
                $
                47,595
                
                
                3,128,415
                
                
                -
                
                
                3,176,010Debt
                    Securities:U.
                    S. government agencies
                
                
                3,579,513
                
                
                2,021
                
                
                (397
                )
                
                3,581,137$
                3,627,108
                
                
                3,130,436
                
                
                (397
                )
                
                6,757,147
 
 Maturities
          of available-for-sale debt securities as of December 31, 2006:
 
 Amortized
                    Cost
                
                Approximate
                    Fair ValueWithin
                    one year
                
                $
                996,506
                
                
                994,2192-5
                    years
                
                
                4,438,177
                
                
                4,426,962$
                5,434,683
                
                
                5,421,181
  32
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   The
          amortized cost and approximate fair values of securities classified as
          held to
          maturity are as follows:
  **Held-to-maturity**
 
 Amortized
                    Cost
                
                Gross
                    Unrealized Gains
                
                Gross
                    Unrealized (Losses)
                
                Approximate
                    Fair Value**As
                    of December 31, 2006**Debt
                    Securities:U.
                    S. government agencies
                
                $
                158,661
                
                
                -
                
                
                (481
                )
                
                158,180Mortgage-backed
                    securities
                
                
                604,364
                
                
                31,920
                
                
                -
                
                
                636,284$
                763,025
                
                
                31,920
                
                
                (481
                )
                
                794,464**As
                    of December 31, 2005**Debt
                    Securities:U.
                    S. government agencies
                
                $
                189,974
                
                
                -
                
                
                (2,478
                )
                
                187,496Mortgage-backed
                    securities
                
                
                754,750
                
                
                39,550
                
                
                -
                
                
                794,300$
                944,724
                
                
                39,550
                
                
                (2,478
                )
                
                981,796
 
 Maturities
          of held-to-maturity securities as of December 31, 2006:
 
 Amortized
                    Cost
                
                Approximate
                    Fair ValueAfter
                    ten years
                
                $
                158,661
                
                
                158,180Mortgage-backed
                    securities not due on a single maturity date
                
                
                604,364
                
                
                636,284$
                763,025
                
                
                794,464
  The
          book
          value of securities pledged as collateral, to secure public deposits and
          for
          other purposes, amounted to
          $1,803,181, $381,115 and $31,875 as of December 31, 2006, 2005 and 2004,
          respectively. The approximate fair value of pledged securities amounted
          to
          $1,805,148, $385,439 and $31,950 as of December 31, 2006, 2005 and 2004,
          respectively.
 
 Gross
          gains of $750,869, $1,269,396 and $742,608 and gross losses of $0, $526,061
          and
          $0 resulting from sale of available-for-sale securities were realized for
          the
          years ended December 31, 2006, 2005 and 2004, respectively.
 
 Certain
          investments in debt and marketable equity securities are reported in the
          financial statements at an amount less than their historical cost. Total
          fair
          value of these investments at December 31, 2006 and 2005, was $4,836,168
          and
          $1,186,612, respectively, which is approximately 56% and 15% of the Company’s
          investment portfolio, respectively. These declines primarily resulted from
          changes in market interest rates and failure of certain investments to
          meet
          projected earnings targets.
 
 Based
          on
          evaluation of available evidence including recent changes in interest rates
          and
          other information obtained from regulatory filings, management believes
          the
          declines in fair value for these securities are temporary.
  33
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   Should
          the impairment of any of these securities become other than temporary,
          the cost
          basis of the investment will be reduced and the resulting loss recognized
          in net
          income in the period the other-than-temporary impairment is
          identified.
 
 The
          following table shows gross unrealized losses and fair value, aggregated
          by
          investment category and length of time that individual securities have
          been in a
          continuous unrealized loss position at December 31, 2006 and 2005.
 
 December
                    31, 2006Less
                    than 12 Months
                
                12
                    Months or More
                
                TotalDescription
                    of Securities
                
                Fair
                    Value
                
                Unrealized
                    Losses
                
                Fair
                    Value
                
                Unrealized
                    Losses
                
                Fair
                    Value
                
                Unrealized
                    LossesU.
                    S. Government Agencies
                
                $
                2,869,948
                
                
                (9,183
                )
                
                1,405,290
                
                
                (3,372
                )
                
                4,275,238
                
                
                (12,555
                )Mortgage-backed
                    securities
                
                
                560,930
                
                
                (2,774
                )
                
                -
                
                
                -
                
                
                560,930
                
                
                (2,774
                )$
                3,430,878
                
                
                (11,957
                )
                
                1,405,290
                
                
                (3,372
                )
                
                4,836,168
                
                
                (15,329
                )
 
 December
                    31, 2005Less
                    than 12 Months
                
                12
                    Months or More
                
                TotalDescription
                    of Securities
                
                Fair
                    Value
                
                Unrealized
                    Losses
                
                Fair
                    Value
                
                Unrealized
                    Losses
                
                Fair
                    Value
                
                Unrealized
                    LossesU.
                    S. Government Agencies
                
                $
                1,186,612
                
                
                (2,875
                )
                
                -
                
                
                -
                
                
                1,186,612
                
                
                (2,875
                )
 
 **NOTE
                    3:**
                **LOANS
                    AND ALLOWANCE FOR LOAN LOSSES**
 
 Categories
          of loans at December 31, 2006 and 2005 include:
 
 2006
                
                2005Real
                    estate - residential mortgage:One
                    to four family units
                
                $
                86,645,458
                
                
                101,440,261Multi-family
                
                
                50,366,197
                
                
                53,630,562Real
                    estate - construction
                
                
                83,966,976
                
                
                70,389,903Real
                    estate - commercial
                
                
                155,800,918
                
                
                122,884,052Commercial
                    loans
                
                
                82,675,514
                
                
                66,370,227Installment
                    loans
                
                
                23,708,300
                
                
                24,264,069Total
                    loans
                
                
                483,163,363
                
                
                438,979,074Less:Allowance
                    for loan losses
                
                
                (5,783,477
                )
                
                (5,399,654
                )Unearned
                    discounts
                
                
                -
                
                
                (2,512
                )Deferred
                    loan fees/costs, net
                
                
                (115,364
                )
                
                (141,479
                )Net
                    loans
                
                $
                477,264,522
                
                
                433,435,429
  34
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   Impaired
          loans totaled $3,016,448 and $5,123,042 as of December 31, 2006 and 2005,
          respectively with a related allowance for loan losses of $298,311 and $532,810,
          respectively. As of December 31, 2006 and 2005, respectively, impaired
          loans of
          $991,398 and $3,404,200 had no related allowance for loan losses.
 
 Interest
          of $275,143, $615,928 and $686,939 was recognized on average impaired loans
          of
          $3,250,403, $4,805,205 and $7,659,179 for the years ended December 31,
          2006,
          2005 and 2004, respectively. Interest of $272,600, $600,288 and $694,169,
          was
          recognized on impaired loans on a cash basis during the years ended December
          31,
          2006, 2005 and 2004, respectively.
 
 At
          December 31, 2006 and 2005 there were no accruing loans delinquent 90 days
          or
          more. Non-accruing loans at December 31, 2006 and 2005 were $2,748,000
          and
          $722,000, respectively.
 
 Activity
          in the allowance for loan losses was as follows:
 Years
                      endedDecember
                      31,2006
                  
                  2005
                  
                  2004Balance,
                      beginning of period
                  
                  $
                  5,399,654
                  
                  $
                  4,536,654
                  
                  $
                  3,886,137Provision
                      charged to expense
                  
                  
                  750,000
                  
                  
                  945,000
                  
                  
                  863,830Losses
                      charged off, net of recoveries of $280,854, $71,385 and $17,761
                      for the
                      years ended December 31, 2006, 2005 and 2004 respectively
                  
                  
                  (366,177
                  )
                  
                  (82,000
                  )
                  
                  (213,313
                  )Balance,
                      end of period
                  
                  $
                  5,783,477
                  
                  $
                  5,399,654
                  
                  $
                  4,536,654
 
 The
          weighted average interest rate on loans as of December 31, 2006 and 2005,
          was
          7.78% and 6.88%, respectively.
 
 The
          Bank
          serviced mortgage loans for others amounting to $654,974 and $110,511,321
          as of
          December 31, 2006 and 2005, respectively. The Bank serviced commercial
          loans for
          others amounting to $15,847,746 and $4,149,438 as of December 31, 2006
          and 2005,
          respectively.
 
 **NOTE
                    4:**
                **PREMISES
                    AND EQUIPMENT**
 
 Major
          classifications of premises and equipment, stated at cost, are as
          follows:
 
 December
                    31,
                
                December
                    31,2006
                
                2005Land
                
                $
                1,250,789
                
                
                1,250,789Buildings
                    and improvements
                
                
                7,387,668
                
                
                7,349,536Furniture,
                    fixtures and equipment
                
                
                5,938,670
                
                
                4,913,877Leasehold
                    improvements
                
                
                271,799
                
                
                130,90514,848,926
                
                
                13,645,108Less
                    accumulated depreciation
                
                
                (6,981,117
                )
                
                (6,192,310
                )Net
                    premises and equipment
                
                $
                7,867,809
                
                
                7,452,798
 
 
 Depreciation
          expense was
          $814,150, $759,931 and $669,479 for the years ended December 31, 2006,
          2005, and
          2004, respectively.
  35
  **Guaranty
          Federal Bancshares, Inc.**
 ***Notes
          to Consolidated Financial Statements***
   **NOTE
                    5:**
                **OTHER
                    COMPREHENSIVE INCOME
                    (LOSS)**
 
 Other
          comprehensive income (loss) components and related taxes were as
          follows:
  Year
                      endedDecember
                      31,2006
                  
                  2005
                  
                  2004Unrealized
                      gains (losses) on available-for-sale securities
                  
                  $
                  56,521
                  
                  
                  (596,194
                  )
                  
                  980,204Less:
                      Reclassification adjustment for realized gains included in
                      income
                  
                  
                  (750,869
                  )
                  
                  (743,335
                  )
                  
                  (742,608
                  )Other
                      comprehensive income (loss), before tax effect
                  
                  
                  (694,248
                  )
                  
                  (1,339,529
                  )
                  
                  237,596Tax
                      expense (benefit)
                  
                  
                  (256,871
                  )
                  
                  (495,626
                  )
                  
                  87,911Other
                      comprehensive income (loss)
                  
                  $
                  (437,377
                  )
                  
                  (843,903
                  )
                  
                  149,685
  **NOTE
                    6:**
                **DEPOSITS**
 
 December
                    31, 2006
                
                December
                    31, 2005Weighted
                    Average Rate
                
                Balance
                
                Percentage
                    of Deposits
                
                Weighted
                    Average Rate
                
                Balance
                
                Percentage
                    of DepositsDemand
                
                
                0.00
                %
                $
                26,893,997
                
                
                7.6
                %
                
                0.00
                %
                
                36,193,467
                
                
                11.3
                %NOW
                
                
                1.18
                %
                
                35,468,920
                
                
                10.1
                %
                
                0.33
                %
                
                35,864,150
                
                
                11.2
                %Money
                    market
                
                
                3.38
                %
                
                52,313,962
                
                
                13.7
                %
                
                2.47
                %
                
                43,896,563
                
                
                13.7
                %Savings
                
                
                2.67
                %
                
                14,316,335
                
                
                4.1
                %
                
                1.80
                %
                
                14,298,452
                
                
                4.5
                %1.99
                %
                
                128,993,214
                
                
                36.6
                %
                
                1.12
                %
                
                130,252,633
                
                
                40.7
                %Certificates:0%
                    - 3.99%
                
                
                3.16
                %
                
                29,366,266
                
                
                8.3
                %
                
                3.25
                %
                
                121,299,785
                
                
                37.9
                %4.00%
                    - 5.99%
                
                
                5.12
                %
                
                193,446,432
                
                
                54.9
                %
                
                4.35
                %
                
                67,779,251
                
                
                21.2
                %6.00%
                    - 7.99%
                
                
                6.06
                %
                
                423,724
                
                
                0.1
                %
                
                6.17
                %
                
                727,283
                
                
                0.2
                %4.86
                %
                
                223,236,422
                
                
                63.4
                %
                
                3.66
                %
                
                189,806,318
                
                
                59.3
                %Total
                    Deposits
                
                
                3.81
                %
                $
                352,229,636
                
                
                100.0
                %
                
                2.62
                %
                
                320,058,951
                
                
                100.0
                %
 
 
 The
          aggregate amount of certificates of deposit with a minimum balance of $100,000
          was approximately
          $87,796,000 and $87,271,000, as of December 31, 2006 and 2005,
          respectively.
 
 A
          summary
          of certificates of deposit by maturity as of December 31, 2006, is as
          follows:
  36
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   2007
                
                $
                173,499,7002008
                
                
                34,355,4072009
                
                
                9,127,9482010
                
                
                2,173,7322011
                
                
                3,179,596Thereafter
                
                
                900,039$
                223,236,422
 
 A
          summary
          of interest expense on deposits is as follows:
 
 Years
                    endedDecember
                    31,2006
                
                2005
                
                2004NOW
                    and Money Market accounts
                
                $
                1,709,996
                
                
                1,299,800
                
                
                793,432Savings
                    accounts
                
                
                364,685
                
                
                200,509
                
                
                139,890Certificate
                    accounts
                
                
                8,493,705
                
                
                5,814,064
                
                
                4,012,780Early
                    withdrawal penalties
                
                
                (45,183
                )
                
                (26,300
                )
                
                (26,938
                )$
                10,523,203
                
                
                7,288,073
                
                
                4,919,164
  The
          Bank
          utilizes brokered deposits as an additional funding source. The aggregate
          amount
          of brokered deposits was approximately $29,146,000 and $57,629,000 as of
          December 31, 2006 and 2005, respectively.
 
 **NOTE
                    7:**
                **FEDERAL
                    HOME LOAN BANK ADVANCES**
 
 Federal
          Home Loan Bank advances consist of the following:
 
 December
                    31, 2006
                
                December
                    31, 2005Maturity
                    Date
                
                Amount
                
                Weighted
                    Average Rate
                
                Amount
                
                Weighted
                    Average Rate2006
                
                $
                -
                
                
                -
                
                
                72,414,000
                
                
                4.33
                %2007
                
                
                85,414,000
                
                
                5.32
                %
                
                3,000,000
                
                
                2.83
                %2008
                
                
                13,650,000
                
                
                5.30
                %
                
                16,650,000
                
                
                5.22
                %2009
                
                
                386,000
                
                
                7.21
                %
                
                386,000
                
                
                7.21
                %2010
                
                
                3,000,000
                
                
                6.37
                %
                
                3,000,000
                
                
                6.37
                %2011
                
                
                -
                
                
                -
                
                
                -
                
                
                -Thereafter
                
                
                5,550,000
                
                
                5.39
                %
                
                4,550,000
                
                
                5.39
                %$
                108,000,000
                
                
                5.35
                %
                
                100,000,000
                
                
                3.58
                %
 
 During the year
          ending December 31, 2007, the Bank has advances equal to $9,000,000 with
          a
          weighted average rate of 5.55% callable during 2007 at the FHLB’s option with a
          maturity date between July 30, 2008 and October 20, 2008.
  37
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   The
          FHLB
          requires the Bank to maintain collateral equal to outstanding balances
          of
          advances. For collateral purposes, the FHLB values mortgage loans free
          of other
          pledges, liens and encumbrances at 80% of their fair value, and investment
          securities free of other pledges, liens and encumbrances at 95% of their
          fair
          value.
 
 **NOTE
                    8:**
                **SUBORDINATED
                    DEBENTURES**
 
 During
          2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty
          Statutory Trust I and Guaranty Statutory Trust II,  to
          issue
          preferred securities representing undivided beneficial interests in the
          assets
          of the trusts and to invest the gross proceeds of the preferred securities
          in
          notes of the Company. Trust I issued $5,000,000 of preferred securities
          and
          Trust II issued $10,000,000 of preferred securities. The sole assets of
          Trust I
          were originally $5,155,000 aggregate principal amount of the Company’s fixed
          rate subordinated debenture notes due 2036, which are redeemable beginning
          in
          2011. The sole assets of Trust II were originally $10,310,000 aggregate
          principal amount of the Company’s fixed/variable rate subordinated debenture
          notes due 2036, which are redeemable beginning in 2011. Trust II subordinated
          debenture notes bear interest at a fixed rate for five years and thereafter
          at a
          floating rate based on LIBOR. The preferred securities qualify as either
          Tier I
          or Tier II capital for regulatory purposes, subject to certain
          limitations.
 
 **NOTE
                    9:**
                **INCOME
                    TAXES**
 
 As
          of
          December 31, 2006 and 2005, retained earnings included approximately $5,075,000
          for which no deferred income tax liability has been recognized. This amount
          represents an allocation of income to bad debt deductions for tax purposes
          only.
          Reduction of amounts so allocated for purposes other than tax bad debt
          losses or
          adjustments arising from carryback of net operating losses would create
          income
          for tax purposes only, which would be subject to the then current corporate
          income tax rate. The unrecorded deferred income tax liability on the above
          amount was approximately $1,878,000 as of December 31, 2006 and
          2005.
 
 The
          provision for income taxes consists of:
 
 Years
                    EndedDecember
                    31,2006
                
                2005
                
                2004Taxes
                    currently payable
                
                $
                4,634,722
                
                
                3,756,110
                
                
                2,413,294Deferred
                    income taxes
                
                
                (592,927
                )
                
                (249,519
                )
                
                (99,952
                )$
                4,041,795
                
                
                3,506,591
                
                
                2,313,342
  The
          tax
          effects of temporary differences related to deferred taxes shown on the
          December
          31, 2006 and 2005 balance sheets are:
  38
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   December
                    31,
                
                December
                    31,2006
                
                2005Deferred
                    tax assets:Allowances
                    for loan and foreclosed asset losses
                
                $
                2,139,886
                
                
                1,997,872Accrued
                    compensated absences and bonuses
                
                
                18,500
                
                
                14,538Unrealized
                    loss on loans held for sale
                
                
                -
                
                
                929RRP
                    expense
                
                
                -
                
                
                18,417Deferred
                    loan fees/costs
                
                
                42,684
                
                
                18,3932,201,070
                
                
                2,050,149Deferred
                    tax liabilities:FHLB
                    stock dividends
                
                
                (120,632
                )
                
                (124,683
                )Mortgage
                    servicing rights
                
                
                -
                
                
                (315,557
                )Unrealized
                    appreciation on available-for-sale securities
                
                
                (901,243
                )
                
                (1,158,114
                )Accumulated
                    depreciation
                
                
                (142,323
                )
                
                (253,373
                )Other
                
                
                (74,388
                )
                
                (85,736
                )(1,238,586
                )
                
                (1,937,463
                )Net
                    deferred tax asset
                
                $
                962,484
                
                
                112,686
  A
          reconciliation of income tax expense at the statutory rate to income tax
          expense
          at the Company’s effective rate is shown below:
 
 Years
                    endedDecember
                    31,2006
                
                2005
                
                2004Computed
                    at statutory rate
                
                
                34.0
                %
                
                34.0
                %
                
                34.0
                %Increase
                    (reduction) in taxes resulting from:State
                    financial institution tax
                
                
                2.7
                %
                
                1.8
                %
                
                1.0
                %ESOP
                
                
                2.6
                %
                
                1.2
                %
                
                1.2
                %Other
                
                
                -1.0
                %
                
                0.3
                %
                
                -1.1
                %Actual
                    tax provision
                
                
                38.3
                %
                
                37.3
                %
                
                35.1
                %
  Missouri
          law provides that banks will be taxed based on an annual privilege tax
          of 7% of
          net income. The privilege tax is included in provision for income
          taxes.
 
 **NOTE
                    10:**
                **DISCLOSURES
                    ABOUT FAIR VALUE OF FINANCIAL
                    INSTRUMENTS**
 
 The
          following table presents estimated fair values of the Company’s financial
          instruments. The fair values of certain of these instruments were calculated
          by
          discounting expected cash flows, which involves significant judgments by
          management and uncertainties. Fair value is the estimated amount at which
          financial assets or liabilities could be exchanged in a current transaction
          between willing parties, other than in a forced or liquidation sale. Because
          no
          market exists for certain of these financial instruments and because management
          does not intend to sell these financial instruments, the Company does not
          know
          whether the fair values shown below represent values at which the respective
          financial instruments could be sold individually or in the
          aggregate.
  39
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   December
                    31, 2006
                
                December
                    31, 2005Carrying
                    Amount
                
                Fair
                    Value
                
                Carrying
                    Amount
                
                Fair
                    ValueFinancial
                    assets:Cash
                    and cash equivalents
                
                $
                14,880,601
                
                
                14,880,601
                
                
                20,506,478
                
                
                20,506,478Available-for-sale
                    securities
                
                
                7,906,321
                
                
                7,906,321
                
                
                6,757,147
                
                
                6,757,147Held-to-maturity
                    securities
                
                
                763,025
                
                
                794,464
                
                
                944,724
                
                
                981,796Mortgage
                    loans held-for-sale
                
                
                3,004,635
                
                
                3,004,635
                
                
                2,092,279
                
                
                2,092,279Loans,
                    net
                
                
                477,264,522
                
                
                474,906,965
                
                
                433,435,429
                
                
                435,477,000Federal
                    Home Loan Bank stock
                
                
                5,382,700
                
                
                5,382,700
                
                
                4,978,800
                
                
                4,978,800Interest
                    receivable
                
                
                2,910,309
                
                
                2,910,309
                
                
                2,089,127
                
                
                2,089,127Financial
                    liabilities:Deposits
                
                
                352,229,636
                
                
                351,887,931
                
                
                320,058,951
                
                
                318,829,000Federal
                    Home Loan Bank advances
                
                
                108,000,000
                
                
                108,167,567
                
                
                100,000,000
                
                
                100,610,000Securities
                    sold under agreementsto
                    repurchase
                
                
                1,703,221
                
                
                1,703,221
                
                
                1,594,258
                
                
                1,594,258Subordinated
                    debentures
                
                
                15,465,000
                
                
                15,465,000
                
                
                15,465,000
                
                
                15,465,000Interest
                    payable
                
                
                1,414,946
                
                
                1,414,946
                
                
                508,164
                
                
                508,164Dividend
                    payable
                
                
                468,190
                
                
                468,190
                
                
                459,074
                
                
                459,074Unrecognized
                    financial instruments(net
                    of contractual value):Commitments
                    to extend credit
                
                
                -
                
                
                -
                
                
                -
                
                
                -Unused
                    lines of credit
                
                
                -
                
                
                -
                
                
                -
                
                
                -
 
 The
          following methods and assumptions were used to estimate the fair value
          of each
          class of financial instruments:
 
 Cash
          and Cash Equivalents and Federal Home Loan Bank stock
 The
          carrying amounts reported in the balance sheets for cash and cash equivalents
          approximate those assets' fair value.
 
 Investment
          Securities
 Fair
          values for investment securities equal quoted market prices, if available.
          If
          quoted market prices are not available, fair values are estimated based
          on
          quoted market prices of similar securities.
 
 Interest
          Receivable
 The
          carrying amount of interest receivable approximates its fair value.
 
 Mortgage
          Loans Held for Sale
 Fair
          value is estimated using the quoted market prices for securities backed
          by
          similar loans, adjusted for differences in loan characteristics.
 
 Loans
 The
          fair
          value of loans is estimated by discounting the future cash flows using
          the
          current rates at which similar loans would be made to borrowers with similar
          credit ratings and for the same remaining maturities. Loans with similar
          characteristics are aggregated for purposes of the calculations.
 
 Deposits
 The
          fair
          value of demand deposits and savings accounts is the amount payable on
          demand at
          the reporting date (i.e., their carrying amounts). The fair value of
          fixed-maturity certificates of deposit is estimated using a discounted
          cash flow
          calculation that applies the rates currently offered for deposits of similar
          remaining maturities.
  40
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   Federal
          Home Loan Bank Advances and Subordinated Debentures
 Rates
          currently available to the Bank for debt with similar terms and remaining
          maturities are used to estimate fair value of existing advances and subordinated
          debentures.
 
 Securities
          Sold under Agreements to Repurchase
 For
          these
          short-term instruments, the carrying amount is a reasonable estimate of
          fair
          value.
 
 Interest
          and Dividend Payable
 The
          carrying amounts of interest payable and dividend payable approximates
          their
          fair value.
 
 Commitments
          to Extend Credit, Letters of Credit and Lines of Credit
 The
          fair
          value of commitments is estimated using the fees currently charged to enter
          into
          similar agreements, taking into account the remaining terms of the agreements
          and the present credit worthiness of the counterparties. For fixed-rate
          loan
          commitments, fair value also considers the difference between current levels
          of
          interest rates and the committed rates. The fair value of letters of credit
          is
          based on fees currently charged for similar agreements or on the estimated
          cost
          to terminate them or otherwise settle the obligations with the counterparties
          at
          the reporting date.
 
 **NOTE
                    11:**
                **SIGNIFICANT
                    ESTIMATES AND
                    CONCENTRATIONS**
 
 Accounting
          principles generally accepted in the United States of America require disclosure
          of certain significant estimates and current vulnerabilities due to certain
          concentrations. Estimates related to the allowance for loan losses are
          reflected
          in the footnote regarding loans. Current vulnerabilities due to certain
          concentrations of credit risk are discussed in the footnote on commitments
          and
          credit risk. Other significant estimates and concentrations not discussed
          in
          those footnotes include:
 
 At
          December 31, 2006, approximately 13% of the Bank's total time deposits
          consisted
          of certificates of deposit which were issued through a broker and had minimum
          denominations in excess of $100,000.
 
 **NOTE
                    12:**
                **EMPLOYEE
                    BENEFIT PLANS**
 
 Stock
          Award Plans
 The
          Company has established four stock award plans for the benefit of certain
          directors, officers and employees of the Bank and its subsidiary. The plans
          provide a proprietary interest in the Company in a manner designed to encourage
          these individuals to remain with the Bank. A committee of the Bank’s Board of
          Directors administers the plans. The Company accounts for the cost of share
          purchases under the plans as a reduction of stockholders' equity. The awards
          vest at the rate of 20% per year over a five-year period. Compensation
          expense
          is recognized based on the Company’s stock price on the date the shares are
          awarded to employees.
 
 At
          the
          annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
          approved the Recognition and Retention Plan (the “RRP”). Following approval of
          the Plan, the Bank contributed $464,643 to a separate trust to purchase
          the
          75,106 shares of the Company’s common stock in the RRP. As of December 31, 2006
          all shares in this plan have vested.
 
 At
          a
          special stockholders’ meeting on July 22, 1998, the Company’s stockholders
          approved the Restricted Stock Plan (the “RSP”). Following approval of the Plan,
          the Company contributed $2,373,065 to a separate trust to purchase the
          173,632
          shares in the RSP. As of December 31, 2006 all shares in this plan have
          vested.
  41
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   During
          the year ended June 30, 2000, the directors of the Company established
          the Stock
          Compensation Plan (the “2000 SCP”) with both a stock award component and a stock
          option component. Under the stock award component of this plan, the Committee
          awarded 7,125 shares of the Company’s common stock. Following approval of the
          Plan, the Company contributed $85,945 to a separate trust to purchase the
          7,125
          shares in the SCP. As of December 31, 2006 all shares in this plan have
          vested.
 
 During
          the year ended June 30, 2001, the directors of the Company established
          the Stock
          Compensation Plan (the “2001 SCP”) with both a stock award component and a stock
          option component. Under the stock award component of this plan, the Committee
          awarded 10,239 shares of the Company’s common stock. The shares for this plan
          were taken from forfeited shares in the RSP. As of December 31, 2006 all
          shares
          in this plan have vested.
 
 The
          Bank
          recognized $18,537, $45,694 and $63,200 of expense under these stock award
          plans
          in the years ended December 31, 2006, 2005 and 2004, respectively.
 
 Stock
          Option Plans
 The
          Company has established four stock option plans for the benefit of certain
          directors, officers and employees of the Bank and its subsidiary. A committee
          of
          the Company’s Board of Directors administers the plans. The stock options under
          these plans may be either incentive stock options or nonqualified stock
          options.
          Incentive stock options can be granted only to participants who are employees
          of
          the Bank or its subsidiary. The option price must not be less than the
          market
          value of the Company stock on the date of grant. All options expire no
          later
          than ten years from the date of grant. The options vest at the rate of
          20% per
          year over a five-year period.
 
 At
          the
          annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
          approved the 1994 Stock Option and Incentive Plan for the benefit of certain
          directors, officers and employees of the Bank and its subsidiary. Under
          this
          Plan, the Committee may grant stock options for up to 187,764 shares of
          the
          Company’s common stock.
 
 At
          a
          special stockholders’ meeting on July 22, 1998, the Company’s stockholders
          approved the 1998 Stock Option and Incentive Plan. Under this plan, the
          Committee may grant stock options for up to 434,081 shares of the Company’s
          common stock.
 
 Under
          the
          stock option component of the 2000 SCP, the Committee granted nonqualified
          stock
          options for 17,875 shares of the Company’s common stock.
 
 Under
          the
          stock option component of the 2001 SCP, the Committee granted nonqualified
          stock
          options for 13,263 shares of the Company’s common stock.
 
 During
          the six months ended December 31, 2003, the directors of the Company authorized the issuance
          of 5,000 stock options as an employment inducement to a new officer
          of  the  Bank
          pursuant to a stock
          option  agreement .
          Stock
          options awarded under this  agreement are
          considered non-qualified for federal income tax purposes .
 
 During
          the year ended December 31, 2004, the directors of the Company authorized the issuance
          of 25,000 stock options as an employment inducement to a new officer of the Bank
          pursuant to a stock
          option agreement .
          Stock
          options awarded under this  agreement are
          considered non-qualified for federal income tax purposes.
 
 On
          May
          19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan
          (“2004 SOP”). The purpose of the plan is to attract and retain qualified
          personnel for positions of substantial responsibility. The aggregate number
          of
          shares with respect to options issued under this plan shall not exceed
          250,000
          shares. To date 40,000 stock options have been granted under this plan,
          with
          5,000 stock options cancelled.
  42
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   The
          table
          below summarizes transactions under the Company’s stock option plans:
 
 Number
                    of sharesIncentive
                    Stock Option
                
                Non-Incentive
                    Stock Option
                
                Weighted
                    Average Exercise PriceBalance
                    outstanding as of January 1, 2004
                
                
                235,308
                
                
                178,614
                
                $
                13.32Granted
                
                
                12,500
                
                
                25,000
                
                
                19.93Exercised
                
                
                (32,436
                )
                
                (32,523
                )
                
                11.57Forfeited
                
                
                (1,600
                )
                
                -
                
                
                10.02Balance
                    outstanding as of December 31, 2004
                
                
                213,772
                
                
                171,091
                
                
                14.27Granted
                
                
                42,500
                
                
                -
                
                
                25.11Exercised
                
                
                (66,487
                )
                
                (11,000
                )
                
                13.31Forfeited
                
                
                (10,000
                )
                
                -
                
                
                20.88Balance
                    outstanding as of December 31, 2005
                
                
                179,785
                
                
                160,091
                
                
                15.65Granted
                
                
                20,000
                
                
                -
                
                
                28.06Exercised
                
                
                (24,294
                )
                
                (57,885
                )
                
                13.96Forfeited
                
                
                (5,000
                )
                
                (2,000
                )
                
                24.84Balance
                    outstanding as of December 31, 2006
                
                
                170,491
                
                
                100,206
                
                
                17.30Options
                    exercisable as of December 31, 2006
                
                
                102,993
                
                
                75,206
                
                
                14.19
 
 The
          total
          intrinsic value of outstanding options and outstanding exercisable stock
          options
          was $3,087,638 and $2,587,449 at December 31, 2006, respectively. The total
          intrinsic value of stock options exercised was $1,177,399 in 2006. The
          total
          fair value of share awards vested was $1,053,858 during 2006.
 
 The
          fair
          value of each option granted is estimated on the date of the grant using
          the
          Black-Scholes pricing model with the following weighted-average
          assumptions:
 
 December
                    31, 2006
                
                December
                    31, 2005
                
                December
                    31, 2004Dividends
                    per share
                
                $
                0.66
                
                $
                0.64
                
                $
                0.64Risk-free
                    interest rate
                
                
                4.52
                %
                
                4.00
                %
                
                3.03
                %Expected
                    life of options
                
                
                5
                    years
                
                
                5
                    years
                
                
                5
                    yearsWeighted-average
                    fair value of options granted during year
                
                $
                3.41
                
                $
                3.30
                
                $
                1.84
 
 The
          following table summarizes information about stock options under the plans
          outstanding as of December 31, 2006:
  43
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
 
 Exercise
                    Price
                
                Number
                    Outstanding
                
                Number
                    Exercisable
                
                Remaining
                    Contractual Life$
                10.50
                
                
                10,875
                
                
                10,875
                
                
                3.1
                    years11.05
                
                
                400
                
                
                400
                
                
                4.5
                    years12.13
                
                
                3,000
                
                
                3,000
                
                
                4.2
                    years12.50
                
                
                3,829
                
                
                3,829
                
                
                4.6
                    years12.75
                
                
                5,500
                
                
                5,500
                
                
                4.1
                    years13.44
                
                
                122,593
                
                
                122,593
                
                
                1.6
                    years13.89
                
                
                3,000
                
                
                -
                
                
                5.1
                    years15.31
                
                
                4,000
                
                
                -
                
                
                6.1
                    years16.65
                
                
                42,500
                
                
                22,500
                
                
                6.6
                    years19.27
                
                
                2,500
                
                
                1,000
                
                
                7.7
                    years19.62
                
                
                15,000
                
                
                -
                
                
                7.1
                    years23.20
                
                
                10,000
                
                
                2,000
                
                
                8.2
                    years23.50
                
                
                11,000
                
                
                2,202
                
                
                8.1
                    years25.59
                
                
                10,000
                
                
                2,000
                
                
                8.6
                    years26.50
                
                
                1,500
                
                
                300
                
                
                8.6
                    years28.00
                
                
                10,000
                
                
                -
                
                
                9.5
                    years28.12
                
                
                10,000
                
                
                2,000
                
                
                9.0
                    years28.34
                
                
                5,000
                
                
                -
                
                
                9.1
                    years$
                16.85
                
                
                270,697
                
                
                178,199
 
 
 Employee
          Stock Ownership Plan
 The
          Bank
          sponsors an internally-leveraged Employee Stock Ownership Plan (ESOP).
          All
          employees are eligible to participate after they attain age twenty-one
          and
          complete twelve consecutive months of service during which they work at
          least
          1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased
          344,454
          shares of the common stock of the Company. The ESOP debt is secured by
          shares of
          the Company. The loan will be repaid from contributions to the ESOP as
          approved
          annually by the Bank’s Board of Directors. As the debt is repaid, shares are
          released from collateral and allocated to employees’ accounts. The shares
          pledged as collateral are reported as unearned ESOP shares in the consolidated
          balance sheet. When shares are committed for release, the shares become
          outstanding for earnings per share computations. Dividends on allocated
          ESOP
          shares are recorded as a reduction of retained earnings and may be paid
          directly
          to participants or credited to their account; dividends are not paid on
          unallocated ESOP shares. Compensation expense is recognized ratably based
          on the
          average fair value of shares committed to be released. Compensation expense
          attributed to the ESOP was $651,958, $564,980 and $461,512 for the years
          ended
          December 31, 2006, 2005 and 2004, respectively.
 
 The
          following is a summary of ESOP shares as of December 31, 2006:
 
 Beginning
                    ESOP shares
                
                
                344,454Released
                    shares
                
                
                (185,760
                )Shares
                    committed for release
                
                
                24,201Unreleased
                    shares
                
                
                134,493Fair
                    value of unreleased shares
                
                $
                3,861,294
  44
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   **NOTE
                    13:**
                **RELATED
                    PARTY TRANSACTIONS**
 
 Certain
          directors and executive officers of the Company and the Bank were customers
          of
          and had transactions with the Bank in the ordinary course of business.
          As of
          December 31, 2006 and 2005, loans outstanding to these directors and executive
          officers amounted to $3,508,387
          and $3,270,812, respectively.
 
 In
          management's opinion, such loans and other extensions of credit and deposits
          were made in the ordinary course of business and were made on substantially
          the
          same terms as those prevailing at the time for comparable transactions
          with
          other persons. Further, in management's opinion, these loans did not involve
          more than normal risk of collectability or present other unfavorable
          features.
 
 **NOTE
                    14:**
                **COMMITMENTS
                    AND CREDIT RISK**
 
 Commitments
          to extend credit are agreements to lend to a customer as long as there
          is no
          violation of any condition established in the contract. Commitments generally
          have fixed expiration dates or other termination clauses and may require
          payment
          of a fee. Since a portion of the commitments may expire without being drawn
          upon, the total commitment amounts do not necessarily represent future
          cash
          requirements. The Bank evaluates each customer's credit worthiness on a
          case-by-case basis. The amount of collateral obtained, if deemed necessary
          by
          the Bank upon extension of credit, is based on management's credit evaluation
          of
          the counterparty. Collateral held varies but may include accounts receivable,
          inventory, property and equipment, commercial real estate and residential
          real
          estate.
 
 As
          of
          December 31, 2006 and 2005, the Bank had outstanding commitments to originate
          mortgage loans of
          approximately $3,991,000 and $2,285,000, respectively. The commitments
          extend
          over varying periods of time with the majority being disbursed within a
          thirty-day period. As of December 31, 2006 and 2005, commitments of $3,991,000
          and $2,058,000, respectively, were at fixed rates and $0 and $227,000,
          respectively, were at floating market rates.
 
 Standby
          letters of credit are irrevocable conditional commitments issued by the
          Bank’s
          to guarantee the performance of a customer to a third party. Financial
          standby
          letters of credit are primarily issued to support public and private borrowing
          arrangements, including commercial paper, bond financing and similar
          transactions. Performance standby letters of credit are issued to guarantee
          performance of certain customers under non-financial contractual obligations.
          The credit risk involved in issuing standby letters of credit is essentially
          the
          same at that involved in extending loans to customers. Fees for letters
          of
          credit issued after December 31, 2002 are initially recorded by the Bank
          as
          deferred revenue and are included in earnings at the termination of the
          respective agreements. Should the Bank be obligated to perform under the
          standby
          letters of credit, the Bank may seek recourse from the customer for
          reimbursement of amounts paid.
 
 The
          Bank
          had total outstanding standby letters of credit amounting to $9,182,000
          and
          $9,731,000 as of December 31, 2006 and 2005, respectively, with terms ranging
          from 30 days to 2 years.
 
 Lines
          of
          credit are agreements to lend to a customer as long as there is no violation
          of
          any condition established in the contract. Lines of credit generally have
          fixed
          expiration dates. Since a portion of the line may expire without being
          drawn
          upon, the total unused lines do not necessarily represent future cash
          requirements. Each customer's credit worthiness is evaluated on a case-by-case
          basis. The amount of collateral obtained, if deemed necessary, is based
          on
          management's credit evaluation of the counterparty. Collateral held varies
          but
          may include accounts receivable, inventory, property and equipment, commercial
          real estate and residential real estate. Management uses the same credit
          policies in granting lines of credit as it does for on balance sheet
          instruments.
  45
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
   As
          of
          December 31, 2006 and 2005, unused lines of credit to borrowers aggregated
          approximately $64,370,000 and $77,725,000 for commercial lines and $19,790,000
          and $18,180,000 for open-end consumer lines.
 
 **NOTE
                    15:**
                **CONDENSED
                    PARENT COMPANY STATEMENTS**
 
 The
          condensed balance sheets as of December 31, 2006 and 2005, and statements
          of
          income and cash flows for the years ended December 31, 2006, 2005 and 2004,
          for
          the parent company, Guaranty Federal Bancshares, Inc., are as
          follows:
 
 **Balance
                    Sheets**2006
                
                2005**Assets**Cash
                
                $
                711,485
                
                
                1,128,911Due
                    from subsidiary
                
                
                28,895
                
                
                -Investment
                    in subsidiary
                
                
                58,597,264
                
                
                55,863,320Investment
                    in Capital Trust I & II
                
                
                468,420
                
                
                466,434Prepaid
                    expenses and other assets
                
                
                482,852
                
                
                476,029Refundable
                    income taxes
                
                
                820,225
                
                
                207,153$
                61,109,141
                
                
                58,141,847**Liabilities**Subordinated
                    debentures
                
                $
                15,465,000
                
                
                15,465,000Accrued
                    expenses and other liabilities
                
                
                276,708
                
                
                125,624Dividend
                    payable
                
                
                468,190
                
                
                459,074**Stockholders'
                    equity**Common
                    stock
                
                
                665,353
                
                
                657,135Additional
                    paid-in capital
                
                
                55,730,352
                
                
                53,778,686Unearned
                    ESOP shares
                
                
                (1,344,930
                )
                
                (1,572,930
                )Retained
                    earnings
                
                
                41,183,006
                
                
                36,533,338Unrealized
                    appreciation on available-for-sale securities, net
                
                
                1,534,548
                
                
                1,971,925Treasury
                    stock
                
                
                (52,869,086
                )
                
                (49,276,005
                )$
                61,109,141
                
                
                58,141,847
  46
  **Guaranty
          Federal Bancshares, Inc.**
 ***Notes
          to Consolidated Financial Statements***
   **Income
                    Statements**
                
                Years
                    ended December 31,2006
                
                2005
                
                2004IncomeDividends
                    from subsidiary bank
                
                $
                4,639,062
                
                
                3,540,000
                
                
                2,334,714Interest
                    income:Related
                    party
                
                
                150,308
                
                
                127,786
                
                
                100,275Other
                
                
                31,125
                
                
                3
                
                
                214,820,495
                
                
                3,667,789
                
                
                2,435,010ExpenseInterest
                    expense:Other
                
                
                963
                
                
                -
                
                
                -Related
                    party
                
                
                1,027,526
                
                
                47,683
                
                
                -Occupancy
                
                
                2,400
                
                
                2,400
                
                
                2,400Other
                
                
                879,484
                
                
                759,722
                
                
                581,5661,910,373
                
                
                809,805
                
                
                583,966Income
                    before income taxes and equity in undistributed earnings of subsidiaries
                
                
                2,910,122
                
                
                2,857,984
                
                
                1,851,044Credit
                    for income taxes
                
                
                (427,642
                )
                
                (117,312
                )
                
                (129,555
                )Income
                    before equity in undistributed earnings of subsidiaries
                
                
                3,337,764
                
                
                2,975,296
                
                
                1,980,599Equity
                    in undistributed earnings of subsidiaries
                
                
                3,171,320
                
                
                2,923,674
                
                
                2,304,174Net
                    income
                
                $
                6,509,084
                
                
                5,898,970
                
                
                4,284,773
  47
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Notes
          to Consolidated Financial Statements***
 
 **Statements
                    of Cash Flows**
                
                Years
                    ended December 31,2006
                
                2005
                
                2004**Cash
                    Flows From Operating Activities**Net
                    income
                
                $
                6,509,084
                
                
                5,898,970
                
                
                4,284,773Items
                    not requiring (providing) cash:Equity
                    in undistributed earnings of subsidiaries
                
                
                (3,171,320
                )
                
                (2,923,674
                )
                
                (2,304,174
                )Release
                    of ESOP shares
                
                
                651,958
                
                
                564,980
                
                
                461,512Stock
                    award plan expense
                
                
                83,192
                
                
                23,161
                
                
                -Changes
                    in:Prepaid
                    expenses and other assets
                
                
                (8,810
                )
                
                (36,407
                )
                
                8,990Income
                    taxes payable/refundable
                
                
                (307,380
                )
                
                17,707
                
                
                (129,957
                )Accrued
                    expenses
                
                
                151,084
                
                
                98,005
                
                
                27,619Net
                    cash provided by operating activities
                
                
                3,907,808
                
                
                3,642,742
                
                
                2,348,763**Cash
                    Flows From Investing Activities**Capital
                    contribution to subsidiary bank
                
                
                -
                
                
                (13,970,000
                )
                
                -Purchase
                    of investment in capital trusts
                
                
                -
                
                
                (465,000
                )
                
                -Net
                    (increase) decrease in advance to subsidiary
                
                
                (28,895
                )
                
                574,000
                
                
                (10,780
                )Net
                    cash used in investing activities
                
                
                (28,895
                )
                
                (13,861,000
                )
                
                (10,780
                )**Cash
                    Flows From Financing Activities**Stock
                    options exercised
                
                
                1,147,042
                
                
                1,031,400
                
                
                751,274Cash
                    dividends paid
                
                
                (1,850,300
                )
                
                (1,794,557
                )
                
                (1,748,982
                )Treasury
                    stock purchased
                
                
                (3,593,081
                )
                
                (3,563,011
                )
                
                (1,163,115
                )Proceeds
                    from issuance of subordinated debentures
                
                
                -
                
                
                15,465,000
                
                
                -Net
                    cash provided by (used in) financing activities
                
                
                (4,296,339
                )
                
                11,138,832
                
                
                (2,160,823
                )**Increase
                    (decrease) in cash**
                
                
                (417,426
                )
                
                920,574
                
                
                177,160**Cash,
                    beginning of year**
                
                
                1,128,911
                
                
                208,337
                
                
                31,177**Cash,
                    end of year**
                
                $
                711,485
                
                
                1,128,911
                
                
                208,337
  48
  **Report
          of Independent Registered Public Accounting Firm**
  
 Audit
          Committee, Board of Directors and Stockholders
 Guaranty
          Federal Bancshares, Inc.
 Springfield,
          Missouri
 
 
 We
          have
          audited the accompanying consolidated balance sheets of Guaranty Federal
          Bancshares, Inc. as of December 31, 2006 and 2005, and the related statements
          of
          income, stockholders’ equity and cash flows for each of the three years in the
          period ended December 31, 2006. These financial statements are the
          responsibility of the Company’s management. Our responsibility is to express an
          opinion on these financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Guaranty Federal Bancshares,
          Inc. as of December 31, 2006 and 2005, and the results of its operations
          and its
          cash flows for each of the three years in the period ended December 31,
          2006, in
          conformity with accounting principles generally accepted in the United
          States of
          America.
 
 
 **/s/BKD,
          LLP**
 
 Springfield,
          Missouri
 March
          27,
          2007
  49
  Notes
  50
  **Board
                    of Directors**
                ****
                **Guaranty****Guaranty
                    Federal Bancshares, Inc.**
                ****
                **Federal****and
                    Guaranty Bank**
                
                **Bancshares,
                    Inc.**Don
                    M. Gibson
                
                **Officers**Chairman
                    of the BoardGuaranty
                    Federal Bancshares and
                
                Shaun
                    A. BurkeGuaranty
                    Bank
                
                President,Chief
                    Executive OfficerJack
                    L. BarhamVice
                    Chairman of the Board
                
                Carter
                    M. PetersGuaranty
                    Federal Bancshares
                
                Executive
                    Vice President,Chief
                    Financial Officer/Chief Operations OfficerShaun
                    A. BurkePresident
                    and CEO
                
                H.
                    Michael MattsonGuaranty
                    Federal Bancshares and
                
                Executive
                    Vice President,Guaranty
                    Bank
                
                Chief
                    Lending OfficerWayne
                    V. Barnes
                
                E.
                    Lorene ThomasRetired
                
                Corporate
                    SecretaryJames
                    R. Batten, CPAInvestmentsKurt
                    D. HellwegPresident
                    and CEOInternational
                    Dehydrated Foods, Inc. andAmerican
                    Dehydrated Foods, Inc.Gregory
                    V. OstergrenChairman,
                    President and CEOAmerican
                    National Property and CasualtyInsurance
                    CompaniesTim
                    Rosenbury, AIAExecutive
                    Vice President and ChairmanButler,
                    Rosenbury and Partners, Inc.James
                    L. Sivils, III, JDPartner
                    - Morelock Ross Companies
   51