EXHIBIT 13


<PAGE>
<TABLE>
<CAPTION>
<S>                                                                   <C>
Contents                                                              Investor
2 Investor  information                                               Information 
                                                                     
   President's  Message                                               Annual  Meeting  of Shareholders: 
3 Financial Highlights                                                The Annual Meeting of
                                                                      Stockholders  will be held 
                                                                     
4  Selected  Consolidated  Financial  and Other  Data                 Wednesday, October 28,1998, 
                                                                     
   Management's Discussion and Analysis of Financial                  at 5:00 p.m., at the offices of the 
5  Condition  and Results of  Operations                              Bank, 1341 West Battlefield Street, 
                                                                      Springfield, Missouri.
                                                                     
17 Consolidated Financial Statements                                  Annual Report on Form 10-K:
                                                                     
                                                                      Copies of the Guaranty Federal
46 1ndependent Accountants' Report                                    Bancshares Form 10-K Report to the Securities and Exchange  
                                                                      Commission are available without
47 Directors and Officers                                             charge upon written  request to:
                                                                      Lorene Thomas, Secretary, 
                                                                      Guaranty  Federal Bancshares,
                                                                     
 Common Stock Prices                                                  1341 W. Battlefield St.,
 & Divdends                                                           Springfield, MO 65807-4181.

                                                                      Copies are also available via the
The common stock of Guaranty Federal Bancshares, Inc., is             Internet: http://wwwgfed.com
traded in the over-the-counter market and quoted on the               NAS- Transfer Agent: 
DAQ National Market.  As of August 12,1998,  there were 2,727         Registrar and Transfer Company  
stockholders of the 6,228,035 shares of common stock issued           10 Commerce Drive and outstanding. 
                                                                      Cranford, NJ 07016

Guaranty  Federal  Savings Bank paid cash  dividends of $0.22 per     Stock  Trading Information:
share on  October  18,  1997,  to  stockholders  of  record  as of    Over-the-Counter Symbol: GFED 
September 12,1997. The Company paid cash dividends of $0.15
per share on April 30,  1998,  to  stockholders  of record as of      Special  Legal Counsel: 
April 3,1998.                                                         Malizia, Spidi, Sloane & Fisch, RC.
                                                                      1301 K Street, Suite 700 East
The table  below  reflects  the  dividends  paid and the range of     Washington, D.C. 20005
N.W.,  Suite 700 East common stock closing prices' by quarter since  
conversion.
---------------------------------------------------------------       Independent  Certified Public Accountants:
Fiscal Year Ended June 30, 1998    HIGH     LOW      DIVIDENDS        Baird,  Kurtz & Dobson 
Quarter Ended June 30, 1998      $ 13.63   12.25        0.15          901 St. Louis St. 
Quarter Ended March 31, 1998       13.38   12.00           -          P.O. Box 1190
---------------------------------------------------------------       Springfield, MO 65801-1190

                                                                      Shareholder and Financial  
                                                                      Information:
                                                                      Bruce Winston, Vice  President,  
                                                                      Chief Financial Officer 
                                                                      417-520-0206
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                                        2
<PAGE>
GUARANTY
FEDERAL
BANCSHARES                                                   President's Message

Dear Shareholders,

This is the first annual report for Guaranty  Federal  Bancshares,  Inc.,  which
became the holding  company for Guaranty  Federal  Savings Bank through a public
offering  consummated  on  December  30,1997.  The  enclosed  reports  are  on a
consolidated  basis,  and comparison  with prior periods is difficult due to the
large  infusion  of capital  from the  offering,  and a  legislatively  mandated
assessment to  recapitalize  the FDIC deposit  insurance fund in the year ending
June 30,  1997.  

Nevertheless,  there are some notable  achievements  which are indicative of our
performance:

1.   Net income increased to $2.8 million.

2.   Net loans  receivable  increased by 35%, from  $152,232,000 at 6/30/97,  to
     $205,414,000 at 6/30/98.

3.   Core deposits increased by 28% from $28,629,000 at 6/30/97,  to $36,855,000
     at 6/30/98.

4.   Non-interest  income increased by 80% from $530,000 at 6/30/97, to $953,000
     at 6/30/98.

Loans  were  funded  by  advances  from the  Federal  Home  Loan Bank at a lower
marginal  cost  than  would  have  been  possible  by  maintaining   higher-cost
certificates  of deposit.  These advances also allow us to minimize  exposure to
shifts in interest rates, creating more stability in earnings.

In April,  the Company paid a semi-annual  dividend of $0.15 per share,  and has
just recently announced its second  semi-annual  dividend at $0.16 per share, to
be paid on October 15,1998.

The  Bank's  Year  2000  effort  is well  under  way  with  testing  of our core
processing  systems  currently in progress.  Peripheral  systems testing will be
completed by year end,  1998,  and all hardware has been tested and  replacement
needs identified. 
<TABLE>
<CAPTION>
                                             ---------------------------------------------------------------------- 
                                             Financial Highlights
<S>                                          <C>                                      <C>        <C>       <C>
We have accomplished much this
year in terms of growth, earnings,           For the Year Ended June 30,                  1998      1997      1996 
market share and service. Our                Net Interest Income (in thousands)          $8,453     6,401    5,463
people are top notch, and are                Net Income (in thousands)                   $2,841     1,162    1,753
dedicated to the tasks ahead of              Earnings per Common Share                    $0.29       n/a      n/a
us.  We appreciate your support                (since conversion in December, 1997)
and, with you, we look forward               Dividend Payout Ratio                           52%      n/a      n/a
to our future.                                 (since conversion in December, 1997)
                                             Return on Average Assets                      1.25%     0.60     0.96 
                                             Return on Average Equity                      5.81%     4.30     6.61

Respectfully,                                As of the Year Ended June 30,                1998      1997      1996
/s/James E. Haseltin                         Assets (in thousands)                     $260,042   199,465  185,167
James E. Haseltin                            Loans (in thousands)                      $206,220   158,135  135,029
President & CEO                              Stockholders'  Equity (in  thousands)     $ 70,690   27,490    26,586
                                             Stockholders' Equity per Common Share     $  12.01      n/a       n/a 
                                             Stock Price per Common Share              $  12.94      n/a       n/a
                                             Stockholders' Equity to Assets                27.2%    13.8      14.4
                                             ---------------------------------------------------------------------- 

</TABLE>

                                        3
<PAGE>
<TABLE>
<CAPTION>
 Summary Statement of Income                                                                    Years Ended
                                                                                                  June 30,
                                                           -------------------------------------------------------------------------
                                                                           1998         1997        1996         1995        1994
                                                                           ----         ----        ----         ----        ----
<S>                                                                  <C>             <C>         <C>          <C>         <C>   
 Interest income                                                      $  17,196       14,711      13,702       11,637      10,858
 Interest expense                                                         8,743        8,310       8,239        6,595       5,924
                                                                      ---------       ------      ------       ------      ------
 Net interest income                                                      8,453        6,401       5,463        5,042       4,934
 Provision (credit) for loan losses                                         123         --        (1,212)          16          14
                                                                      ---------       ------      ------       ------      ------
 Net interest income after provision (credit)
   for loan losses                                                        8,330        6,401       6,675        5,026       4,920
 Noninterest income (loss)                                                  953          530         221           71         (50)
 Noninterest expense                                                      4,823        5,105       4,117        3,077       2,815
                                                                      ---------       ------      ------       ------      ------
 Income before income taxes                                               4,460        1,826       2,779        2,020       2,055
 Provision for income taxes                                               1,619          664       1,026          690         637
                                                                      ---------       ------      ------       ------      ------
 Income before change in accounting principle                             2,841        1,162       1,753        1,330       1,418
 Change in accounting principle                                            --           --          --           --           628
                                                                      ---------       ------      ------       ------      ------
 Net income                                                           $   2,841        1,162       1,753        1,330       2,046
                                                                      =========        =====       =====        =====       =====
 Basic and diluted earnings per share, since conversion               $    0.29          n/a         n/a          n/a         n/a
                                                                      =========                                                  
 
</TABLE>
<TABLE>
<CAPTION>
Summary Balance Sheet                                                                           As of June 30,
                                                                      --------------------------------------------------------------

                                                                           1998         1997        1996         1995        1994
                                                                           ----         ----        ----         ----        ----
 ASSETS
<S>                                                                  <C>            <C>         <C>          <C>         <C>  
 Cash and cash equivalents                                            $   7,305        3,817       2,675        4,350       3,569
 Investment securities                                                   13,687       11,946      17,708       24,118      28,899
 Mortgage-backed securitites                                             21,004       15,814      20,067       13,855      14,138
 Loans receivable, net                                                  206,220      158,135     135,029      119,842     105,265
 Accrued interest receivable                                              1,604        1,312       1,381        1,274       1,124
 Prepaids and other assets                                                2,503        1,964       1,913        1,802       2,675
 Foreclosed assets                                                          286          210           2          656         805
 Premises and equipment                                                   7,433        6,267       6,392        4,987       2,375
                                                                      ---------      -------     -------      -------     -------
                                                                      $ 260,042      199,465     185,167      170,884     158,850
                                                                      =========      =======     =======      =======     =======
 LIABILITIES
 Deposits                                                             $ 140,975      151,246     157,008      139,595     141,017
 Federal Home Loan Bank advances                                         45,081       18,151        --          4,000        --
 Other liabilities                                                        3,296        2,578       1,573        1,245       1,271
                                                                      ---------      -------     -------      -------     -------
                                                                        189,352      171,975     158,581      144,840     142,288
                                                                      ---------      -------     -------      -------     -------
 STOCKHOLDERS' EQUITY
 Common stock                                                               623        3,125       3,125        3,125        --
 Additional paid-in capital                                              49,017        3,687       3,556        3,900        --
 Unearned ESOP shares                                                    (3,445)        --          --           --          --
 Retained earnings                                                       21,683       18,620      18,646       17,892      16,562
                                                                      ---------      -------     -------      -------     -------
                                                                         67,878       25,432      25,327       24,917      16,562
 Unrealized appreciation on available-for-
 sale securities, net                                                     2,812        2,058       1,259        1,127        --
                                                                      ---------      -------     -------      -------     -------
                                                                         70,690       27,490      26,586       26,044      16,562
                                                                      ---------      -------     -------      -------     -------
                                                                      $ 260,042      199,465     185,167      170,884     158,850
                                                                      =========      =======     =======      =======     =======
 Supplemental Data                                                                             As of June 30,
 -----------------                                                    --------------------------------------------------------------
                                                                           1998         1997        1996         1995        1994
                                                                           ----         ----        ----         ----        ----
 Number of full-service offices                                               5            4           4            3           3
 Cash dividends per share                                             $    0.15          n/a         n/a          n/a         n/a
</TABLE>


                                       4
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

GENERAL

         Guaranty  Federal  Bancshares,  Inc.  (and  with  its  subsidiary,  the
"Company")  is a Delaware  corporation  organized  on December  30, 1997 for the
purpose of becoming the holding  company of Guaranty  Federal  Savings Bank (the
"Bank").

         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.  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.  Per share data prior to December 30,
1997 is not presented herein as the information would not be meaningful.

         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  and,  to a  lesser  extent,  multi-family,
construction  and commercial  real estate loans and consumer and business loans.
The  Company  also  uses  these  funds  to  purchase  loans  secured  by one- to
four-family  residences,  mortgage-backed  securities,  US government and agency
obligations and other permissible securities. When cash outflows exceed inflows,
the Company uses borrowings as an additional financing source.

         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 Office of Thrift  Supervision  ("OTS") 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  continue  to focus on its  lending  programs  for both  one- to  four-family
lending and consumer lending throughout southwestern Missouri.

FINANCIAL CONDITION

         From  June 30,  1997 to June  30,  1998,  the  Company's  total  assets
increased  $60,577,520  (30%),   liabilities  increased  $17,377,577  (10%)  and
stockholders' equity increased $43,199,943 (157%).

         Securities   available-for-sale   increased   $1,405,021   (42%),  from
$3,360,000 as of June 30, 1997,  to $4,765,021 as of June 30, 1998.  The Company
continues  to hold  96,000  shares of  Federal  Home Loan  Mortgage  Corporation
("FHLMC")   stock  with  an  amortized   cost  of  $94,000  in  the   securities
available-for-sale  category.  As of June 30, 1998, the gross unrealized gain on
the  stock  was  $4,424,000,  an  increase  of  $1,158,000  over the  $3,266,000
unrealized  gain as of June  30,  1997.  Securities  held-to-maturity  decreased
$336,636 (4%), from $8,585,753 as of June 30, 1997, to $8,922,389 as of June 30,
1998.

         Mortgage-backed  securities,  held-to-maturity,   decreased  $3,865,236
(24%), from $15,813,890 as of June 30, 1997, to $11,948,654 as of June 30, 1998.
This decrease is attributable to repayments received during the year. During the
year ended June 30, 1998,  the Company  purchased  floating rate  collateralized
mortgage  obligations  ("CMOs") in an effort to replace the  refinancing  of the
Bank's  adjustable  rate  mortgage  loans.  The Bank  categorized  these CMOs as
available-for-sale. As of June 30, 1998, the balance of these CMOs classified as
available-for-sale was $9,055,658.

         Mortgage loans held-for-sale decreased $5,097,819 (86%) from $5,903,002
as of June 30, 1997 to $805,183 as of June 30, 1998. Due to the Bank's increased
lending  limit,  the Bank no longer needs to sell these loans and determined the
majority of these loans should be held in the portfolio.

                                       5
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

         Net loans receivable  increased by $53,182,266 (35%), from $152,232,295
as of June 30, 1997, to  $205,414,561  as of June 30, 1998.  During this period,
permanent  loans secured by both owner and  non-owner  occupied one to four unit
residential real estate increased by $37,052,555 (34%),  multi-family  permanent
loans increased by $6,079,221 (39%),  construction loans increased by $9,580,786
(38%) and permanent loans secured by commercial real estate increased $4,397,814
(53%).  Loans past maturity and past due 90 days or more decreased $828,000 from
$828,000 (0.5% of net loans) as of June 30, 1997 to $0 (0.0% of net loans) as of
June 30, 1998. As of June 30, 1998,  management considers $1,011,873 as impaired
with a related allowance for loan losses of $151,965. Growth in loans receivable
is anticipated to continue and represents a major part of the Company's  planned
asset growth.

         The Bank increased the allowance for loan losses $14,548 (1%) in fiscal
year 1998, and $68,950 (3%) in fiscal year 1997.  During fiscal year 1998,  loan
charge-offs exceeded recoveries by $108,804. During fiscal year 1997, recoveries
exceeded  charge-offs  by $68,950.  The allowance for loan losses as of June 30,
1998, was 1.06% of net loans outstanding versus 1.41% as of June 30, 1997. As of
June 30, 1998,  the allowance for loan losses was 217% of impaired  loans versus
173% as of June 30, 1997.

         Foreclosed  assets  held  for sale as of June 30,  1998  include  three
duplexes and a partially  constructed  single-family  residence  acquired in May
1998.  The Bank  carries  these  properties  at their  fair  value of  $286,000.
Subsequent to June 30, 1998, the Bank sold these properties at their book value.

         Premises and equipment  increased  $1,165,814 (19%), from $6,267,157 as
of June 30, 1997, to  $7,432,971  as of June 30, 1998.  During fiscal year 1998,
the MHC transferred the land at 4343 South National, Springfield Missouri to the
Bank. The Bank subsequently sold the land to the Company.

         Deposits  decreased  $10,271,146 (7%), from $151,246,482 as of June 30,
1997,  to  $140,975,336  as of June 30,  1998.  During this period core  deposit
accounts  increased by $8,226,054 (29%), while certificates of deposit decreased
by  $18,497,200  (15%).  The majority of this  increase in checking and passbook
accounts can be  attributed  to an aggressive  marketing  campaign  initiated in
early 1997  designed to attract  checking  deposit  customers.  The  decrease in
certificate  deposits can be attributed to  management's  decision to allow high
cost  accounts to run off and replace  these funds with FHLB advances at a lower
marginal cost.

         As a result of the  overall  decrease  in  deposits  and the  continued
increase in loan demand, the Company increased  borrowings from the Federal Home
Loan Bank ("FHLB") by $26,930,184 (148%) from $18,150,844 as of June 30, 1997 to
$45,081,028 as of June 30, 1998.  Based on existing  collateral the Bank has the
ability to borrow an additional $69,200,000 from the FHLB in the future.

         Stockholders' equity (including  unrealized  appreciation on securities
available-for-sale,  net of tax) increased  $43,199,943 (157%), from $27,490,155
as of June 30, 1997, to $70,690,098 as of June 30, 1998. Net income for the year
exceeded  cash  dividends  paid by  $1,219,749.  Net proceeds of the  conversion
contributed   $39,183,513  and  the  MHC  transferred   $1,842,982.   Unrealized
appreciation on securities available-for-sale,  net of tax, contributed $754,312
to the increase in  stockholders'  equity.  On a per share basis,  stockholders'
equity as of June 30, 1998, was $12.01.

                                        6
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

         The following  tables show (1) the average monthly  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.
<TABLE>
<CAPTION>

                          June 30, 1998    Year Ended June 30, 1998        Year Ended June 30, 1997      Year Ended June 30, 1996
                         --------------- -----------------------------   -----------------------------------------------------------
                                  Yield   Average     Interest  Yield    Average     Interest  Yield    Average     Interest  Yield
                         Balance / Cost   Balance              / Cost    Balance              / Cost    Balance              / Cost
                         --------------- -----------------------------   -----------------------------------------------------------
<S>                     <C>      <C>      <C>          <C>      <C>      <C>         <C>       <C>      <C>         <C>      <C>
 ASSETS                                  
 Interest-earning:
 Loans                  $206,220  7.95%    $177,361    $14,875   8.39%    $146,468    $12,347   8.43%    $127,485    $10,534  8.26%
 Investment
   securitites             8,922  6.83%       7,127        420   5.89%       8,879        552   6.22%      19,271      1,317  6.83%
 Mortgage-backed 
   securities             21,004  7.20%      14,996      1,109   7.40%      18,032      1,412   7.83%      18,522      1,371  7.40%
 Other assets             13,474  4.34%      17,010        792   4.66%       8,160        400   4.90%       9,494        480  5.06%
                         -------  ----      --------    ------   ----      -------     ------   ----      --------    ------  ----  
 Total interest-
   earning               249,620  7.65%     216,494     17,196   7.94%     181,539     14,711   8.10%     174,772     13,702  7.84%
                                  ----                  ------   -----                 ------   -------               ------  ---- 
 Noninterest-
   earning                10,422             11,334                          8,387                          8,137
                         --------           --------                       --------                       ------- 
                                                                                                       
                         260,042           $227,828                       $189,926                       $182,909
                         ========           ========                       ========                       ======= 
 LIABILITIES AND
 STOCKHOLDERS'
 EQUITY
 Interest-bearing:
 Savings accounts         $8,658  2.68%      $8,779        241   2.75%      $9,191        258   2.81%     $10,272        315  3.07%
 Transaction accounts     25,055  2.83%      21,950        616   2.81%      13,846        406   2.93%      10,355        276  2.67%
 Certificates of Deposit          5.44%     110,786      6,112   5.52%     122,219      6,807   5.57%     132,265      7,609  5.75%
                         104,120
 FHLB Advances            45,081  6.08%      27,630      1,695   6.13%      13,767        839   6.09%         690         39  5.65%
 Other Borrowed Funds          -  0.00%       2,897         79   2.73%           -          -   0.00%           -          -  0.00%
                         -------  ----      -------     ------   ----      -------     ------   ----      -------     ------  -----
 Total interest-bearing  182,914  5.11%     172,042      8,743   5.08%     159,023      8,310   5.23%     153,582      8,239  5.36%
                                 -------                ------   ----                  ------   ----                  ------  ----
 Noninterest-bearing       6,438              6,863                          4,122                          2,821
                         -------            -------                        -------                        -------      
 Total liabilities                          178,905                        163,145                        156,403
                         189,352
 Stockholders' equity     70,690             48,923                         26,781                         26,506
                         -------            -------                        -------                        ------- 
                                                                                                       
                         260,042           $227,828                       $189,926                       $182,909
                         =======            =======                        =======                        ======= 
 Net earning balance     $66,706            $44,452                       $ 22,516                       $ 21,190
                          ======             ======                        =======                        =======
 Earning yield less 
   costing  rate                  2.54%                          2.86%                          2.88%                         2.48%
                                  ====                           ====                           ====                          ==== 
 Net interest income, 
  and net yield spread 
  on interest-earning 
  assets                          3.91%                 $8,453   3.90%                 $6,401   3.53%                 $5,463  3.13%
                                  ====                  ======   ====                  ======   ====                  ======  ==== 
 Ratio of interest-
   earning assets to
   interest-bearing 
   liabilities               136%               126%                           114%                           114%
                             ===                ===                            ===                            === 
</TABLE>
 

                                       7

<PAGE>
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 above. 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).

<TABLE>
<CAPTION>
                                    Year Ended June 30, 1998 versus 1997         Year Ended June 30, 1997 versus 1996
                                -------------------------------------------  ---------------------------------------------
                                                        Rate &                                        Rate &
                                  Balance      Rate     Balance     Total     Balance      Rate       Balance    Total
                                  -------      ----     -------     -----     -------      ----       -------    -----
<S>                             <C>            <C>        <C>      <C>        <C>          <C>         <C>     <C>  
Interest income:
Loans                            $ 2,604        (63)       (13)     2,528      1,569        213         31      1,813
Investment securitites              (109)       (29)         6       (132)      (710)      (119)        64       (765)
Mortgage-backed securitites         (238)       (78)        13       (303)       (36)        79         (2)        41
Other assets                         434        (20)       (22)       392        (67)       (15)         2        (80)
                                 -------       ----        ---      -----        ---        ---          -      -----
Net change in interest income      2,691       (190)       (16)     2,485        756        158         95      1,009
                                 -------       ----        ---      -----        ---        ---          -      -----
Interest expense:
Savings accounts                     (12)        (6)         1        (17)       (33)       (27)         3        (57)
Transaction accounts                 238        (17)       (11)       210         93         28          9        130
Certificates of deposit             (637)       (64)         6       (695)      (578)      (242)        18       (802)
Advances                             845          6          5        856        739          3         58        800
Other borrowed funds                --         --           79         79       --         --         --         --
                                 -------       ----        ---      -----        ---        ---       ----      -----
Net change in interest expense       434        (81)        80        433        221       (238)        88         71
                                 -------       ----        ---      -----        ---        ---       ----      -----
Change in net interest income    $ 2,257       (109)       (96)     2,052        535        396          7        938
                                 =======       ====        ===      =====        ===        ===       ====      =====
</TABLE>

RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 1998 AND 1997

         Interest Rates. The Bank charges borrowers and pays depositors interest
rates that are largely a function of the general  level of interest  rates.  The
following  table sets forth the weekly average  interest rates on U.S.  Treasury
securities for the twelve months ending.

                                      Ten-Year       One-Year
                                      Maturity       Maturity        Spread
                                      --------       --------        ------

     June 30, 1998                      5.84%          5.44%          0.40%
     June 30, 1997                      6.60%          5.69%          0.91%
                                        ----           ----           ---- 
     Decline in interest rates         -0.76%         -0.25%         -0.51%
                                        ====           ====           ==== 

         The Bank's  principal  assets are single  family home  mortgage  loans.
Fixed rate mortgage loans are typically  priced at a spread over the ten-year US
Treasury  securities.  The 76 basis point  decline in the  ten-year  treasury is
indicative of the decline in the fixed-rates on single family mortgage loans. As
a result, borrowers preferred fixed rate mortgages over adjustable and they took
advantage of the relatively low rates to refinance their home mortgages.  During
the year,  the average yield on loans  decreased four basis points from 8.43% to
8.39% and the average yield on  interest-earning  assets decreased from 8.10% to
7.94%. This 16 basis point decline  translated to a $190,000 decline in interest
income.

         The Bank's  principal  retail  deposit is the  certificate  of deposit.
Management  attempts  to  price  certificates  so  that  the  marginal  cost  of
attracting deposits is equal to the marginal cost of FHLB advances on a duration
adjusted  basis.  The average cost of  certificates  decreased five basis points
from 5.57% to 5.52%.  During the year,  start-up  banks in the market  area paid
interest  rates on  certificates  of  deposit  well  above 

                                       8
<PAGE>

Management's Discussion and Analysis of Financial Condition
   and Results of Operations


comparable  maturity treasury rates. As a result,  the Bank was unable to reduce
the cost of  certificates  in line with the overall decline in the general level
of interest rates. The average cost of transaction  accounts  decreased 12 basis
points  from 2.93% to 2.81%.  In total,  the  average  cost of  interest-bearing
liabilities  decreased  from  5.23%  to  5.08%.  This  15  basis  point  decline
translated to a $81,000 decline in interest expense.

         The Bank's net  interest  income is  materially  impacted by the spread
between  yields  earned  on   longer-term   securities  and  the  cost  paid  on
shorter-term deposit accounts.  At the same time the spread between the ten-year
and  one-year  treasury  was  narrowing by 51 basis  points,  the Bank's  spread
between the average  yield on  interest-earning  assets and the average  cost of
interest-bearing  liabilities decreased by two basis points from 2.88% to 2.86%.
This spread narrowing reduced net interest margin by $109,000.

         Interest Income.  Total interest income  increased  $2,484,837 (17%) as
the average balance of interest-earning assets increased $34,955,000 (19%). This
increase  in  income  was due  primarily  to an  increase  in loan  interest  of
$2,527,977 (20%) as the average loan receivable  balance  increased  $30,893,000
(21%).  Average  balances of investment  securities  declined  $1,752,000  (20%)
during the year as the Company  replaced  securities with higher yielding loans.
To the  extent  possible,  subject to market  conditions  and  competition,  the
Company  intends to  emphasize  loan  production  and will  purchase  investment
securities or mortgage-backed securities only if spreads between the asset yield
and the  liability  cost  net an  arbitrage  profit  over a range  of  potential
interest rate scenarios.

         Interest Expense. Total interest expense increased $433,068 (5%) as the
average balance of interest-bearing  liabilities increased $13,019,000 (8%). The
average  balances of transaction  accounts  increased  $8,104,000  (59%) and the
average balances of certificates of deposit decreased $11,433,000 (9%). In order
to fund the increase in assets and decrease in  deposits,  the Company  borrowed
additional  funds from the FHLB. The average balance of FHLB advances  increased
by $13,863,000 (101%).

         Net  Interest  Income.  The  Company's  net interest  income  increased
$2,051,769  (32%) from $6,401,110 to $8,452,879.  During the year ended June 30,
1998,  the  average  balance of  interest-earning  assets  exceeded  the average
balance of  interest-bearing  liabilities  by  $44,452,000,  an  increase in the
average net earning balance of $21,936,000  (97%) due to the net proceeds of the
December 30, 1997 offering.

         Provision  for Loan Losses.  Provisions  for loan losses are charged or
credited to earnings to bring the total allowance to a level considered adequate
by the Company to provide for potential  loan losses in the existing  portfolio.
When making the assessment, the Company considers prior loss experience,  volume
and  type of  lending,  industry  standards  and past  due  loans in the  Bank's
portfolio.  In addition,  the Company considers general economic  conditions and
other factors related to collectability of the Bank's portfolio.

         During  fiscal year 1998,  the Bank  experienced  loan  charge-offs  in
excess of  recoveries  of  $108,804  and based on a review as  discussed  above,
elected to add $123,352 to the  allowance.  Management  anticipates  the need to
continue  adding to loss reserves  through  charges to provision for loan losses
based on the anticipated growth in the loan portfolio.

         Non-Interest  Income.  Non-interest  income,  which consists of service
charges and other fees,  income  from  foreclosed  assets and gains or losses on
sale of assets,  increased  $423,262  (80%) from  $529,801  to $953,  063.  This
increase is primarily due to the $340,275 (129%) increase in service charges due
to continued growth in the Bank's checking accounts.

         Non-Interest  Expense.  Non-interest  expense decreased  $282,132 (6%),
from  $5,104,631  to  $4,822,499.  This  decrease was primarily due to a special
one-time  assessment  in fiscal year 1997 of  $931,989  by the  Federal  Deposit
Insurance  Corporation ("FDIC") on all assessable deposits as of March 31, 1995.
Beginning  January 1, 1997  deposit  premiums  declined  from an average of 23.4
basis points to an average of 6.4 basis points.  Non-interest expense other than
this special assessment increased $649,857 (16%). In general,  this increase can
be attributed to the overall  increase in accounts  served,  the addition of 

                                       9
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

our fifth  location,  and the  expenses  associated  with the  December 30, 1997
offering.  Salaries and employee benefits  increased  $280,664 (14%).  Occupancy
expense  increased  $115,985  (18%) due primarily to the opening of a new branch
location in October 1997. Data processing expense increased $38,165 (11%) due to
the increased volume of transactions  handled.  Advertising  expenses  increased
$77,641  (24%) which  reflects a full year of  promoting  our  checking  account
programs. All other expenses increased $254,003 (42%). More specifically,  legal
expense increased $44,153 and office supplies increased $69,683.

         Income Taxes. The change in income tax is a direct result of changes in
the Company's taxable income.

         Cash Dividends Paid.  Guaranty Federal Savings Bank paid cash dividends
of $687,500  (3,125,000  shares at $0.22 per share) on October 18, 1997,  to the
stockholders of record as of September 12, 1997. The Company paid cash dividends
of  $933,842  (6,225,610  at  $0.15  per  share)  on  April  30,  1998,  to  the
stockholders of record as of April 3, 1998.

RESULTS OF OPERATIONS - COMPARISON OF YEARS ENDED JUNE 30, 1997 AND 1996

         Interest  Rates.  The  following  table sets  forth the weekly  average
interest rates on U.S. Treasury securities for the twelve months ending.

                                      Ten-Year       One-Year
                                      Maturity       Maturity        Spread
                                      --------       --------        ------

     June 30, 1997                      6.60%          5.69%          0.91%
     June 30, 1996                      6.26%          5.48%          0.78%
                                        ----           ----           ---- 
     Increase in interest rates         0.34%          0.21%          0.13%
                                        ====           ====           ==== 

         During  the  same  period  that  yields  on  U.S.  Treasury  securities
increased  from  21  to 34  basis  points,  the  average  yield  on  the  Bank's
interest-earning  assets  increased  26 basis points from 7.84% to 8.10% and the
average  yield on loans  increased  17 basis  points  from  8.26% to 8.43%.  The
average  cost of  interest-bearing  liabilities  decreased  13 basis points from
5.36% to 5.23%. The average cost of certificates  decreased 18 basis points from
5.75% to 5.57% due to the maturity of a promotional rate certificate  offered in
conjunction with the opening of the new home office  facility.  The average cost
of  transaction  accounts  increased  26 basis  points from 2.67% to 2.93%.  The
spread between the average yield on interest-earning assets and the average cost
of  interest-bearing  liabilities  increased  by 40 basis  points  from 2.48% to
2.88%.  This spread  widening  resulted in an improved  net  interest  margin of
$398,000.

         Interest Income. Total interest income increased $1,009,129 (7%) as the
average  balance of  interest-earning  assets  increased  $6,767,000  (4%). This
increase was due primarily to an increase in loan interest of $1,812,497  (17%).
During the year,  the average  loan  receivable  balance  increased  $18,983,000
(15%).  Average balances of investment  securities  declined  $10,392,000  (54%)
during the year as the Company replaced securities with higher yielding loans.

         Interest Expense.  Total interest expense increased $71,072 (1%) as the
average balance of interest-bearing  liabilities  increased $5,441,000 (4%). The
average  balance of  certificates  of deposit  decreased  $10,046,000  (8%). The
decrease in the average  balances of  certificates  was  partially  offset by an
increase in the average balance of transaction  accounts of $3,491,000 (34%). In
order to fund the increase in assets and decrease in deposits, the Bank borrowed
additional  funds from the FHLB. The average balance of FHLB advances  increased
by $13,077,000 from $690,000 to $13,767,000.

         Net  Interest  Income.  The  Company's  net interest  income  increased
$938,057  (17%) from  $5,463,053 to  $6,401,110.  During the year ended June 30,
1997,  the  average  balance of  interest-earning  assets  exceeded  the average
balance of  interest-bearing  liabilities  by  $22,516,000,  an  increase in the
average net earning balance of $1,326,000 (6%).

                                       10
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

         Provision for Loan Losses.  During fiscal year 1996 the Bank  recovered
$1,211,502 on a commercial loan which was previously  partially charged off. The
loan recovery  represents amounts recovered in excess of the carrying balance of
the loan as  reflected  by the  original  terms of the loan,  including  accrued
interest and previously charged-off principal. Consequently, the Bank determined
that the allowance  for loan losses was  sufficient  prior to the recovery,  and
credited the provision for loan losses.  During fiscal year 1997, the Bank again
experienced a net recovery and based on a review as discussed above,  elected to
make no further addition to the allowance.

         Non-Interest  Income.  Non-interest  income,  which consists of service
charges and other fees,  income  from  foreclosed  assets and gains or losses on
sale of assets,  increased  $308,398  (139%)  from  $221,403 to  $529,801.  This
increase is primarily  due to the $167,557  (172%)  increase in service  charges
generated by the Bank's new checking account promotion.

         Non-Interest  Expense.  Non-interest  expense increased $988,085 (24%),
from  $4,116,546  to  $5,104,631.  This  increase was primarily due to a special
one-time assessment by the Federal Deposit Insurance Corporation ("FDIC") on all
assessable deposits as of March 31, 1995. This assessment resulted in a $802,451
(237%) increase in Savings Association  Insurance Fund ("SAIF") premiums.  While
this special  assessment had a negative impact on earnings for fiscal year 1997,
deposit  premiums in the future may be materially  lower.  Beginning  January 1,
1997  deposit  premiums  declined  from an average  of 23.4  basis  points to an
average of 6.4 basis points.  Data processing  expense increased  $137,306 (62%)
due to the increased volume of transactions  handled.  Excluding the increase in
SAIF premiums, non-interest expense increased by $185,634 (5%).

         Income Taxes. The change in income tax is a direct result of changes in
the Bank's taxable income and allowable bad debt deduction.

         Cash Dividends  Paid.  The Bank paid cash dividends of $562,500  ($0.18
per share) on December 2, 1996, to the  stockholders of record as of November 1,
1996 and of $625,000  ($0.20 per share) on May 30, 1997, to the  stockholders of
record as of May 2, 1997.

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.  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.

         The  Bank's  initial  efforts  to manage  interest  rate risk  included
implementing an adjustable  rate mortgage loan ("ARM") program  beginning in the
early 1980s. The ARMs have met with excellent  customer  acceptance.  As of June
30, 1997, ARMs  constituted  75% of the Bank's mortgage loan portfolio.  However
during fiscal year 1998,  the general level of long term interest  rates dropped
and  borrowers  opted  for  fixed  rate  mortgages.  As of June 30,  1998,  ARMs
represent  71% of the loan  portfolio.  Of the ARMs  originated  during the year
ended June 30, 1998, borrower's preferred initial fixed rate periods of three or
five years. In response to this shift in customer preference, the Bank started a
program of borrowing longer-term funds from the FHLB.

         The Bank is also  managing  interest  rate risk by the  origination  of
construction  loans.  As of June 30, 1998,  such loans made up 16% 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.

                                       11
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

         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 June 30, 1997,  the Bank's  savings
accounts,   checking  accounts,   and  money  market  deposit  accounts  totaled
$28,629,148 or 19% of its total  deposits.  As of June 30, 1998,  these accounts
totaled  $36,855,202  or 26% of  total  deposits.  The Bank  believes,  based on
historical  experience,  that a substantial  portion of such accounts represents
non-interest rate sensitive, core deposits.

         The value of the Bank's loan  portfolio  will change as interest  rates
change.  Rising  interest  rates will decrease the Bank's net  portfolio  value,
while falling interest rates increase the value of that portfolio.

INTEREST RATE SENSITIVITY ANALYSIS

         The following table sets forth as of June 30, 1998, OTS estimate of the
projected  changes in net portfolio value ("NPV") in the event of 100, 200, 300,
and 400 basis point ("bp")  instantaneous and permanent  increases and decreases
in market interest rates. Dollar amounts are expressed in thousands.

<TABLE>
<CAPTION>

                                    Estimated Net Portfolio Value                            NPV as % of PV of Assets
BP Change              ------------------------------------------------------------     --------------------------------------
  in Rates               $ Amount             $ Change             % Change              NPV Ratio            BP Change
------------------     -------------       -------------        -------------------     ------------       -------------------
<S>                      <C>                 <C>                       <C>                 <C>                <C>    
+400 bp                   $49,632             $(7,222)                 -13%                 20.4%             -122  bp
+300                       52,616              (4,238)                  -7%                 21.2%               -48 bp
+200                       54,977              (1,877)                  -3%                 21.7%                 0 bp
+100                       56,440                (414)                  -1%                 21.8%               +18 bp
  NC                       56,854                                                           21.7%
-100                       56,296                (558)                  -1%                 21.2%               -48 bp
-200                       54,719              (2,135)                  -4%                 20.4%              -131 bp
-300                       53,423              (3,431)                  -6%                 19.6%              -206 bp
-400                       52,107              (4,747)                  -8%                 18.8%              -283 bp
</TABLE>

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are  calculated  by the OTS from data provided by the Bank 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  portfolio  could  decrease  in  future  periods  due  to
refinancing  activity if market interest rates remain 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 asset
and liability  policies.  The Board meets quarterly to review interest rate risk
and trends, as well as liquidity and capital ratios and requirements. 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.

                                       12
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

LIQUIDITY AND CAPITAL RESOURCES

         The Bank is required by OTS  regulations to maintain  minimum levels of
specified liquid assets equal to 4% of deposits and short-term  borrowings.  The
Bank's liquidity ratio as of June 30, 1998, was 10.6%.

         The Bank's  principal  sources of funds for  investments and operations
are net income,  deposits from its primary  market area,  principal and interest
payments on loans and  mortgage-backed  securities,  and proceeds  from maturing
investment securities.  The Bank considers deposits and FHLB advances as primary
sources of funds.

         The Bank'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 Bank's
cash and cash equivalents totaled $7,304,923 as of June 30, 1998. The variations
in levels of cash and cash  equivalents  are  influenced  by  deposit  flows and
anticipated future deposit flows.

         As of June 30, 1998,  the Bank had one  conditional  commitment  in the
form  of a  letter  of  credit  in  the  amount  of  $29,000.  Outstanding  loan
commitments were  $12,741,000.  As of June 30, 1998, the Bank had granted unused
lines of credit to borrowers aggregating  approximately  $173,000 and $5,247,000
for commercial lines and open-end consumer lines,  respectively.  As of June 30,
1998, the Bank had  $76,313,000 in  certificates of deposit which were scheduled
to mature in one year or less.  It is  anticipated  that the  majority  of these
certificates will be renewed in the normal course of operations.

         The Bank's capital position of $51,908,000 is 20% of total assets as of
June  30,  1998.  The  Bank  has an  excess  of  $45,304,000,  $38,950,000,  and
$38,262,000  of required  regulatory  levels of  tangible,  core and  risk-based
capital,  respectively.   Under  current  regulatory  guidelines,  the  Bank  is
classified as well-capitalized.

         During July and August 1998,  the Company  purchased  484,922 shares of
common stock in open market  transactions  with the intent to grant stock awards
for 173,632  shares of common  stock in  accordance  with the Bank's  Restricted
Stock Plan and to place 311,290 shares in a treasury stock account.  The Company
intends to monitor the common stock price and with regulatory  approval may from
time to time initiate  further  treasury stock  transactions in order to improve
the Company's long-term earnings per share while at the same time maintaining an
adequate level of stockholders' equity.

IMPACT OF INFLATION AND CHANGING PRICES

         The Company prepared the consolidated  financial statements and related
data  presented  herein  in  accordance  with  generally   accepted   accounting
principles  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.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

         The  Financial  Accounting  Standards  Board  (FASB)  recently  adopted
Statement of Financial  Accounting  Standards  (SFAS) No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This  Statement  was effective for  transactions  that occur after  December 31,

                                       13
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

1997, and imposes new rules for determining  when transfers of financial  assets
are  accounted  for  as  sales  versus  when  transfers  are  accounted  for  as
borrowings. Management believes that SFAS 125 does not have a material impact on
the Company's financial statements.

         The  FASB  recently  adopted  SFAS  128,  "Earnings  Per  Share."  This
Statement  replaces  the  presentation  of  primary  earnings  per share  with a
presentation  of basic  earnings per share.  The  Statement  also  requires dual
presentation  of basic and diluted  earnings per share by entities  with complex
capital   structures  and  requires  a  reconciliation  of  the  numerators  and
denominators between the two calculations.  SFAS 128 was effective for financial
statements issued for periods ending after December 15, 1997,  including interim
periods.  Management  believes that SFAS 128 does not have a material  impact on
the Company's financial statements.

         The FASB recently adopted SFAS 130, "Reporting  Comprehensive  Income".
This Statement  establishes standards for reporting and display of comprehensive
income and its  components  in a full set of financial  statements.  It does not
address issues of recognition or  measurement.  SFAS 130 is effective for fiscal
years  beginning  after  December  15,  1997.  The  adoption  of SFAS 130 is not
expected to have a material impact on the Company's financial statements.

         The FASB recently adopted SFAS 131,  "Disclosures  about Segments of an
Enterprise and Related  Information." This Statement  establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments. The Statement also establishes standards for related disclosures about
products  and  services,  geographic  areas  and  major  customers.  SFAS 131 is
effective  for years  beginning  after  December 15, 1997.  SFAS 131,  which the
Company  will  initially  adopt for fiscal year 1999,  is not expected to have a
material impact on the Company's financial statements.

         The  FASB  recently  adopted  SFAS  133,   "Accounting  for  Derivative
Financial  Instruments  and  Hedging  Activities."  This  Statement  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts,  and for hedging activities.
SFAS 133 is effective for all fiscal  quarters of fiscal years  beginning  after
June 15, 1999, may be adopted early for periods  beginning after issuance of the
Statement and may not be applied  retroactively.  The Company does not expect to
adopt SFAS 133 early.  Management is currently  unable to determine  whether the
effects of  adoption  of SFAS 133 will have a material  impact on the  Company's
financial statements.

Impact of Year 2000

         Rapid  and  accurate  data   processing  is  essential  to  the  Bank's
operations.  Many  computer  programs  that can only  distinguish  the final two
digits of the year  entered (a common  programming  practice in prior years) are
expected to read  entries for the year 2000 as the year 1900 or as the year 1980
and incorrectly  attempt to compute  payments,  interest,  delinquency and other
data.  The  Bank has  been  evaluating  both  information  technology  (computer
systems) and non-information  technology systems (e.g., telephone systems, vault
timers,  security systems and elevator controls).  We have evaluated our risk in
three  areas:  (1)  our own  computers,  (2)  computers  of  others  used by our
borrowers,  depositors,  and business partners,  and (3) computers of others who
provide us with data processing services.

         Our own  computers.  The Bank expects to spend  approximately  $175,000
($137,000  for  hardware  and $38,000  for  software)  through  June 30, 1999 to
upgrade our computer systems.  These upgrades are expected to eliminate the Year
2000 risk in our  computers.  We do not expect to have material costs to address
this risk area after  December 31, 1998. As of June 30, 1998, the Bank has spent
approximately $18,000 ($17,000 for hardware and $1,000 for software) to fix Year
2000 problems. We expect to be Year 2000 compliant in this risk area by June 30,
1999.

         Computers  of  others  used  by  borrowers,  depositors,  and  business
partners.  The Bank has evaluated most of our material  borrowers and depositors
and does not believe that the Year 2000 problem should,  on an aggregate  basis,
impact their  ability to make  payments or deposits to the Bank. We believe that
most of

                                       14
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

our  residential  customers are not dependent on their home computers for income
and that none of our commercial  customers are so large that a Year 2000 problem
would render them unable to collect revenue or rent and, in turn, continue to do
business  with the  Bank.  We have  solicited  our  material  business  partners
regarding  their  Year  2000  readiness  and  are  currently   evaluating  their
responses.

         Computers of others who provide us with data processing services.  This
risk is primarily  focused on one,  third party service bureau that provides all
of the Bank's  core data  processing.  This  service  bureau  tells us they have
completed  program changes required for Year 2000  processing.  If these program
changes  are not  correct  before  the year  2000,  we would  likely  experience
significant delays,  mistakes, or failures.  These delays, mistakes, or failures
could  have a  significant  impact on our  financial  condition  and  results of
operations.

         Contingency Plan. The Bank is monitoring our service bureau to evaluate
whether our data  processing  system will fail. We are serving as a "proxy" Year
2000 test site for other financial  institutions on the same system.  Such tests
are scheduled to end before October 31, 1998.  After our  experience  with these
tests,  we will develop a  contingency  plan  including a range of  alternatives
depending  on the  results  of the  tests.  The  alternatives  could  range from
shifting to a compliant  system to back-up for unforeseen  contingencies  on our
current system.  We currently  utilize many spreadsheet  programs to compute and
store  data.  Should  our core  system  fail,  we will  enter  deposit  and loan
transactions in spreadsheets in order to conduct  business until the core system
is corrected. If this labor-intensive approach is necessary,  management and our
employees will become much less efficient.  However, we believe that we would be
able to operate in this  manner  until our  existing  service  bureau,  or their
replacement,  is able to again  provide data  processing  services.  If very few
financial  institution  service  bureaus  are  operating  in the year 2000,  our
replacement costs, assuming we could negotiate an agreement, could be material.

         Five stages  have been  identified  as  necessary  to  implement a Year
2000-Compliant system. These stages are:

1.   Awareness  Stage - Encompasses  establishing  a budget and project plan for
     dealing with the Year 2000 issue.
2.   Assessment  Stage - When the  organization  begins  the  actual  process of
     identifying  all of its systems  and  individual  components  for Year 2000
     compliance or, through a risk analysis,  identifies  only  mission-critical
     systems to check for compliance.
3.   Remediation  Stage  - When  the  organization  actually  makes  changes  to
     systems. This stage deals primarily with the technical issues of converting
     existing  systems,  or switching to compliant  systems.  During this stage,
     decisions  are  made  on  how  to  make  the  systems  or  processes   Year
     2000-Compliant, and the required system changes are made.
4.   Validation/Testing  Stage - When the organization determines that no errors
     were introduced during the conversion process. The development of test data
     and test  scripts,  the  running  of test  scripts,  and the review of test
     results  are  crucial  for  this  stage  of the  conversion  process  to be
     successful. If the testing results show anomalies, the tested area needs to
     be corrected and retested.
5.   Implementation  Stage - When a tested Year  2000-Compliant  system is ready
     for use.

         The  following  chart  displays  the  current  status  of our Year 2000
project using the stages defined above:

       _________________________________________________________________
                      Year 2000 Series

            Service Bureau ----------------------------------

       Computers of Others -------------------

             Our Computers --------------------------
                             0       1       2       3       4       5
       _________________________________________________________________



                                       15
<PAGE>
Management's Discussion and Analysis of Financial Condition
   and Results of Operations

         The Company has not deferred any information technology projects due to
Year 2000 priorities.

Summary of Unaudited Operating Results
<TABLE>
<CAPTION>
                                                                           Fiscal Year 1998
                                                ----------------------------------------------------------------------------
                                                  September-97         December-97          March-98             June-98
                                                ----------------     ---------------       -------------        ------------
<S>                                                  <C>                <C>                 <C>                 <C>      
 Interest income                                     $3,939,502           4,210,294           4,383,799           4,662,527
 Interest expense                                     2,188,158           2,318,489           2,028,113           2,208,483
                                                      ---------           ---------           ---------          ----------
 Net interest income                                  1,751,344           1,891,805           2,355,686           2,454,044
 Provision for loan losses                               33,352              30,000              30,000              30,000
 Gain (loss) on loans, investment securities
 and mortgage-backed securities                          38,131              19,240              12,295                (799)
 Other noninterest income, net                          173,335             219,932             240,180             250,749
 Noninterest expense                                  1,120,763           1,138,416           1,245,480           1,317,840
                                                      ---------           ---------           ---------           ----------
 Income before income taxes                             808,695             962,561           1,332,681           1,356,154
 Provision for income taxes                             292,192             367,773             489,438             469,597
                                                      ---------           ---------           ---------          -----------
 Net income                                          $  516,503          $  594,788          $  843,243          $  886,557
                                                      =========           =========           =========          ===========
 Basic and diluted earnings
  per common share since conversion                       n/a                 n/a            $     0.14          $     0.15
                                                                                             ==========          ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                           Fiscal Year 1997
                                                ----------------------------------------------------------------------------
                                                  September-96         December-96          March-97             June-97
                                                ----------------     ---------------       -------------        ------------
<S>                                                 <C>                  <C>                 <C>                 <C>      
 Interest income                                     $3,498,091           3,683,502           3,682,392           3,847,300
 Interest expense                                     1,965,828           2,068,797           2,105,151           2,170,399
                                                ----------------------------------------------------------------------------
 Net interest income                                  1,532,263           1,614,705           1,577,241           1,676,901
 Provision for loan losses                                    -                   -                   -                   -
 Gain (loss) on loans, investment securities
 and mortgage-backed securities                          25,178               2,832              (5,736)             39,194
 Other noninterest income, net                           84,428              85,356             141,583             156,966
 SAIF special assessment                                931,989                   -                   -                   -
 Noninterest expense                                  1,128,611             982,281           1,007,475           1,054,275
                                                ----------------------------------------------------------------------------
 Income (loss) before income taxes                     (418,731)            720,612             705,613             818,786
 Provision (credit) for income taxes                   (169,331)            267,260             253,797             312,774
                                                ----------------------------------------------------------------------------
 Net income (loss)                                   $ (249,400)            453,352             451,816             506,012
                                                ============================================================================
 Basic and diluted earnings
  per common share since conversion                       n/a                 n/a                 n/a                 n/a

</TABLE>

                                       16
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Balance Sheets
June 30, 1998 and 1997

<TABLE>
<CAPTION>
                                 ASSETS
                                 ------
                                                                  1998              1997
                                                                  ----              ----
<S>                                                          <C>               <C>        
 Cash                                                        $     846,691          417,485
 Interest-bearing deposits in other financial institutions       6,458,232        3,399,866
                                                             -------------    -------------
 Cash and cash equivalents                                       7,304,923        3,817,351
                                                             -------------    -------------
 Available-for-sale securities                                   4,765,021        3,360,000
 Held-to-maturity securities                                     8,922,389        8,585,753
 Mortgage-backed securities, held-to-maturity                   11,948,654       15,813,890
 Mortgage-backed securities, available-for-sale                  9,055,658             --
 Mortgage loans held for sale                                      805,183        5,903,002
 Loans receivable, net                                         205,414,561      152,232,295
 Accrued interest receivable:
 Loans                                                           1,188,162          996,014
 Investments                                                       252,865          165,949
 Mortgage-backed securities                                        163,117          149,598
 Prepaid expenses and other assets                               2,503,055        1,963,875
 Foreclosed assets held for sale                                   286,000          210,155
 Premises and equipment                                          7,432,971        6,267,157
                                                             -------------    -------------
                                                             $ 260,042,559      199,465,039
                                                             =============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

 LIABILITIES
 Deposits                                                    $ 140,975,336      151,246,482
 Federal Home Loan Bank advances                                45,081,028       18,150,844
 Advances from borrowers for taxes and insurance                   870,476          674,618
 Accrued expenses and other liabilities                            513,943          666,427
 Accrued interest payable                                          256,975          131,245
 Income taxes payable                                              417,532          289,268
 Deferred income taxes                                           1,237,171          816,000
                                                             -------------    -------------
                                                               189,352,461      171,974,884
                                                             -------------    -------------

 STOCKHOLDERS' EQUITY
 Common Stock:
 1998-$0.10 par value; authorized 10,000,000 shares;
 issued and outstanding 6,228,035
 1997-$1.00 par value; authorized 8,000,000 shares;
 issued and outstanding 3,125,000                                  622,804        3,125,000
 Additional paid-in capital                                     49,016,992        3,687,356
 Unearned ESOP shares                                           (3,444,540)            --
 Retained earnings, substantially restricted                    21,682,950       18,620,219
                                                             -------------    -------------
                                                                67,878,206       25,432,575
 Unrealized appreciation on available-for-sale securities,
 net of income taxes 1998 - $1,651,429, 1997 - $1,208,000        2,811,892        2,057,580
                                                             -------------    -------------
                                                                70,690,098       27,490,155
                                                             -------------    -------------
                                                             $ 260,042,559      199,465,039
                                                             =============    =============
</TABLE>

See Notes to Consolidated Financial Statements

                                       17
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Income
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                 1998         1997         1996
                                                 ----         ----         ----
<S>                                        <C>            <C>           <C>       
INTEREST INCOME
Loans                                       $14,874,797    12,346,820    10,534,323
Investment securities                           419,887       551,741     1,317,152
Mortgage-backed securities                    1,109,042     1,412,302     1,370,770
Other                                           792,396       400,422       479,911
                                            -----------    ----------    ----------

                                             17,196,122    14,711,285    13,702,156
                                            -----------    ----------    ----------
INTEREST EXPENSE
Deposits                                      6,969,284     7,471,093     8,200,026
Federal Home Loan Bank advances               1,694,916       839,082        39,077
Other                                            79,043          --            --
                                            -----------    ----------    ----------
                                              8,743,243     8,310,175     8,239,103
                                            -----------    ----------    ----------
NET INTEREST INCOME                           8,452,879     6,401,110     5,463,053

PROVISION (CREDIT) FOR LOAN LOSSES              123,352          --      (1,211,502)
                                            -----------    ----------    ----------
NET INTEREST INCOME AFTER
    PROVISION FOR LOAN LOSSES                 8,329,527     6,401,110     6,674,555
                                            -----------    ----------    ----------
NONINTEREST INCOME
Service charges                                 604,924       264,649        97,092
Late charges and other fees                     109,200        85,673        69,754
Gain on loans, investment
securities and mortgage-backed securities        68,867        61,468        43,065
Income on foreclosed assets                      14,127        17,896          --
Other income                                    155,945       100,115        11,492
                                            -----------    ----------    ----------
                                                953,063       529,801       221,403
                                            -----------    ----------    ----------
NONINTEREST EXPENSE
Salaries and employee benefits                2,310,877     2,030,213     1,992,534
Occupancy                                       769,836       653,851       655,783
SAIF deposit insurance:
Special assessment                                 --         931,989          --
Insurance premiums                               92,558       209,159       338,697
Data processing                                 397,568       359,403       222,097
Advertising                                     396,803       319,162       316,556
Other expense                                   854,857       600,854       590,879
                                            -----------    ----------    ----------
                                              4,822,499     5,104,631     4,116,546
                                            -----------    ----------    ----------

INCOME BEFORE INCOME TAXES                    4,460,091     1,826,280     2,779,412

PROVISION FOR INCOME TAXES                    1,619,000       664,500     1,026,000
                                            -----------    ----------    ----------

NET INCOME                                  $ 2,841,091     1,161,780     1,753,412
                                            ===========     =========     =========
BASIC AND DILUTED
     EARNINGS PER COMMON SHARE
    Since conversion                        $      0.29           n/a           n/a
                                            ===========     =========     =========
</TABLE>
See Notes to Consolidated Financial Statements

                                       18

<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended June 30, 1998 and 1997


<TABLE>
<CAPTION>                     
                                                                                                          Unrealized
                                                                                                         Appreciation
                                                             Additional                                  on Available-
                                               Common         Paid-In         Unearned      Retained       for-Sale  
                                               Stock          Capital        ESOP Shares    Earnings     Securities, Net   Total
                                               -----          -------        -----------    --------     ---------------   -----
 <S>                                         <C>             <C>            <C>            <C>             <C>          <C>       
Balance, July 1, 1995                        $ 3,125,000      3,899,532           --       17,892,527      1,126,879    26,043,938
Net income                                          --             --             --        1,753,412           --       1,753,412
Dividends on common stock,
($0.32 per share on 3,125,000 shares)               --             --             --       (1,000,000)          --      (1,000,000)
Recognition and Retention Plan
(RRP) expense                                       --          120,925           --             --             --         120,925
Contributions to RRP Trust                          --         (464,643)          --             --             --        (464,643)
Change in unrealized appreciation on
available-for-sale securitites, net of
income taxes of $78,000                             --             --             --             --          132,532       132,532
                                             -----------     ----------     ----------     ----------      ---------    ----------

                                                                                                                       -----------
Balance, June 30, 1996                         3,125,000      3,555,814           --       18,645,939      1,259,411    26,586,164
Net income                                          --             --             --        1,161,780           --       1,161,780
Dividends on common stock,
($0.38 per share on 3,125,000 shares)               --             --             --       (1,187,500)          --      (1,187,500)
Dividends received on RRP stock                     --           11,987           --             --             --          11,987
Recognition and Retention Plan
(RRP) expense                                       --          106,197           --             --             --         106,197
Reduction of shares in RRP Trust                    --           13,358           --             --             --          13,358
Change in unrealized appreciation on
available-for-sale securitites, net of
income taxes of $468,000                            --             --             --             --          798,169       798,169
                                             -----------     ----------     ----------     ----------      ---------    ----------
                                                                                                                      -----------
Balance, June 30, 1997                         3,125,000      3,687,356           --       18,620,219      2,057,580    27,490,155
Net income                                          --             --             --        2,841,091           --       2,841,091
Dividends on common stock,                          
($.22 per share on 3,125,000 shares &
  $.15 per share on 6,225,610 shares)               --             --             --       (1,621,342)          --      (1,621,342)
Dividends received on RRP stock                     --           15,780           --             --             --          15,780
Recognition and Retention Plan                      --
(RRP) expense                                       --           92,407           --             --             --          92,407
Stock redeemed and stock issued under plan
of conversion to stock ownership, net         (2,502,868)    45,130,921     (3,444,540)          --             --      39,183,513
Transfer from MHC                                   --             --             --        1,842,982           --       1,842,982
Stock options exercised                              672         58,299           --             --             --          58,971
Tax benefit of RRP shares                           --           32,229           --             --             --          32,229
Change in unrealized appreciation on                --
available-for-sale securitites, net of              --
income taxes of $443,429                            --             --             --             --          754,312       754,312
                                             -----------     ----------     ----------     ----------      ---------    ----------

                                                                                                                       -----------
Balance, June 30, 1998                       $   622,804     49,016,992     (3,444,540)    21,682,950      2,811,892    70,690,098
                                             ===========     ==========     ==========     ==========      =========    ==========

</TABLE>                                                
See Notes to Consolidated Financial Statements

                                       19
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                                  1998           1997             1996
                                                                  ----           ----             ----
<S>                                                         <C>             <C>             <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                     2,841,091       1,161,780       1,753,412
Items not requiring (providing) cash:
Deferred income taxes                                            (22,258)         22,000         128,000
Depreciation                                                     469,532         441,367         384,988
Provision (credit)  for loan losses                              123,352            --        (1,211,502)
Gain on loans, investment securities
and mortgage-backed securities                                   (68,867)        (61,468)        (43,065)
(Gain) loss on sale of premises and equipment                       --            (5,169)         79,218
Gain on sale of foreclosed assets                                (15,231)         (9,921)           --
FHLB stock dividends received                                       --              --           (34,200)
Amortization of deferred income,
premiums and discounts                                           (77,945)       (220,135)       (102,016)
Origination of loans held for sale                            (6,152,677)     (6,626,148)     (6,364,845)
Proceeds from sale of loans held for sale                      6,364,053       4,134,389       5,361,589
RRP expense                                                       92,407         106,197         120,925
Changes in:
Accrued interest receivable                                     (292,583)         69,448        (107,366)
Prepaid expenses and other assets                               (539,181)        (11,357)        (76,843)
Accrued expenses and other liabilities                           (26,754)        283,466         102,140
Income taxes payable                                             113,685         131,141          51,567
                                                            ------------       ---------       ---------
Net cash provided by (used in) operating activities            2,808,624        (584,410)         42,002
                                                            ------------       ---------       ---------
</TABLE>

                                       20
<PAGE>
Guaranty Federal Bancshares, Inc.
Consolidated Statements of Cash Flows (continued)
Years Ended June 30, 198, 1997 and 1996

<TABLE>
<CAPTION>

                                                                  1998           1997             1996
                                                                  ----           ----             ----
<S>                                                         <C>             <C>             <C>      
                                                                                                    1998 
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans                                        (48,620,302)    (20,918,542)    (12,266,153)
Principal payments on mortgage-backed securities,
 held-to-maturity                                              3,881,091       4,300,576       4,627,722
Purchases of mortgage-backed securities,
 held-to-maturity                                                   --              --       (10,833,592)
Purchases of mortgage-backed securities,
 available-for-sale                                           (9,063,546)           --              --
Purchase of premises and equipment                              (406,548)       (337,112)     (2,132,191)
Proceeds from sale of premises and equipment                        --            25,500         262,941
Proceeds from sales of available-for-sale securities                --         5,318,175       2,348,454
Proceeds from maturities of available-for-sale securities           --              --         1,000,000
Purchase of available-for-sale securities                     (4,812,359)           --          (248,638)
Proceeds from maturitites of held-to-maturity securities       4,345,229       1,739,461       5,607,624
Purchases of held-to-maturity securities                            --              --        (2,002,500)
Proceeds from sale of foreclosed assets                          317,855         362,900            --
Capitalized costs on foreclosed assets                              --           (90,167)          2,227
                                                            ------------       ---------       ---------
 Net cash used in investing activities                       (54,358,580)     (9,599,209)    (13,634,106)
                                                            ------------       ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock, net                       39,216,426            --              --
Stock options exercised                                           58,971            --              --
Cash dividends paid                                           (1,621,342)     (1,187,500)     (1,000,000)
Cash dividends received on RRP Stock                              15,780          11,987            --
Net increase in demand deposits,
      NOW accounts and savings accounts                        8,738,851       4,944,356       3,314,286
Net increase (decrease) in certificates of deposit           (18,497,200)    (10,705,764)     14,098,895
Proceeds from FHLB advances                                   61,050,000      31,163,750            --
Repayments of FHLB advances                                  (34,119,816)    (13,012,906)     (4,000,000)
Advances from borrowers for taxes and insurance                  195,858          99,132         (32,101)
Contributions to RRP Trust                                          --              --          (464,643)
Reduction of shares in RRP Trust                                    --            13,358            --
                                                            ------------       ---------       ---------
 Net cash provided by financing activities                    55,037,528      11,326,413      11,916,437
                                                            ------------       ---------       ---------

INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                           3,487,572       1,142,794      (1,675,667)

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR                                              3,817,351       2,674,557       4,350,224
                                                            ------------       ---------       ---------

CASH AND CASH EQUIVALENTS,
END OF YEAR                                                 $  7,304,923       3,817,351       2,674,557
                                                            ============       =========       =========
</TABLE>

See Notes to Consolidated Financial Statements

                                       21
<PAGE>

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
(see Note 16).

         Guaranty  Federal  Bancshares,   Inc.  (the  "Company")  completed  the
conversion from a federally chartered mutual holding company, (formerly Guaranty
Federal  Bancshares,  M. H. C.) to a  Delaware-chartered  stock  corporation  on
December 30, 1997. 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 shares of the Company.  Additional shares of the Company were
issued as of December 30, 1997 (see Note 17).


Nature of Operations
--------------------
         The Company operates as a unitary savings and loan 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's
subsidiary provides other services, such as insurance, annuities, and securities
brokerage. The Bank is subject to competition from other financial institutions.
The Company and the Bank are also subject to the  regulation of certain  federal
agencies and undergo 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, and the Bank's  wholly-owned
subsidiary,  Guaranty  Financial  Services of Springfield,  Inc. All significant
intercompany  profits,   transactions  and  balances  have  been  eliminated  in
consolidation.


Use of Estimates
----------------
         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  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  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.

         Management  believes  that the  allowances  for  losses  on  loans  and
valuation of foreclosed assets held for sale are adequate. While management uses
available  information to recognize losses on loans and value foreclosed  assets
held for sale, changes in economic conditions may necessitate  revision of these
estimates in future  years.  In addition,  various  regulatory  agencies,  as an
integral  part of their  examination  process,  periodically  review  the Bank's
allowances for losses on loans and valuation of foreclosed assets held for sale.
Such agencies may require the Bank to recognize additional losses based on their
judgments of information available to them at the time of their examination.

                                       22
<PAGE>
Notes to Consolidated Financial Statements

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES (Continued)

Cash and Investments in Equity and Mortgage-Backed and Other Debt Securities
----------------------------------------------------------------------------
         Regulations  require the Bank to  maintain  an amount  equal to 4.0% of
savings deposits (net of loans on savings  deposits) plus short-term  borrowings
in cash and US government and other approved 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.  Realized  gains  and  losses,  based  on
specifically identified amortized cost of the specific security, are included in
other income.  Unrealized  gains and losses are recorded,  net of related income
tax effects, in stockholders'  equity.  Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield method over the
period to maturity.

         Held-to-maturity  securities,  which include any security for which 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.  Premiums and discounts are amortized and accreted,  respectively, to
interest income using the level-yield method over the period to maturity.

         Interest and dividends on investments in debt and equity securities are
included in income when earned.


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 for loans originated after the adoption of SFAS 122 on
July 1,  1996,  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  adjusted for any  charge-offs,  the  allowance  for loan
losses  and any  deferred  fees or costs on  originated  loans  and  unamortized
premiums or discounts on purchased loans.


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  using  discounted  cash flows  based on a current  market  rate.  For
purposes  of  measuring  impairment,  the  rights  are  stratified  based on the
prepayment  risk   characteristics  of  the  underlying  loan.  The  predominant
characteristic  currently used for stratification is type of loan. The amount of
impairment  recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.

                                       23
<PAGE>
Notes to Consolidated Financial Statements

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses
-------------------------
         The  allowance  for loan losses is increased by  provisions  charged to
expense and reduced by provisions credited to expense and loans charged off, net
of  recoveries.  The allowance is maintained at a level  considered  adequate to
provide for potential  loan losses,  based on the Bank's  evaluation of the loan
portfolio,  as well as on prevailing  and  anticipated  economic  conditions and
historical  losses by loan category.  General  allowances have been established,
based upon the  aforementioned  factors,  and allocated to the  individual  loan
categories.  Allowances are accrued on specific  loans  evaluated for impairment
for  which the basis of each  loan,  including  accrued  interest,  exceeds  the
discounted  amount of expected future  collections of interest and principal or,
alternatively, the fair value of loan collateral.

         A loan is  considered  impaired  when it is probable that the Bank will
not receive all amounts due according to the contractual terms of the loan. This
includes loans that are delinquent  ninety days or more  (nonaccrual  loans) and
certain  other  loans   identified  by   management.   Accrual  of  interest  is
discontinued,  and  interest  accrued  and unpaid is  removed,  at the time such
amounts are delinquent ninety days.  Interest is recognized for nonaccrual loans
only upon receipt.


Foreclosed Assets Held for Sale
-------------------------------
         Assets  acquired by  foreclosure  or in settlement of debt and held for
sale are valued at  estimated  fair value as of the date of  foreclosure,  and a
related valuation  allowance is provided for estimated costs to sell the assets.
Management  evaluates the value of foreclosed  assets held for sale periodically
and increases the valuation allowance for any subsequent declines in fair value.
Changes in the  valuation  allowance  and  gains/losses  on sales of  foreclosed
assets are included in noninterest income.


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.


Fee Income
----------
         Loan origination fees, net of direct  origination costs, are recognized
as income over the term of the loan using the level-yield method. Loan servicing
income  represents fees earned for servicing real estate mortgage loans owned by
various investors.


Income Taxes
------------
         Deferred tax  liabilities  and assets are recognized for the tax effect
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 Bank considers all highly liquid interest-bearing deposits in other
financial  institutions  with an initial  maturity of three months or less to be
cash equivalents.

                                       24
<PAGE>
Notes to Consolidated Financial Statements

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES (Continued)

Regulatory Matters
------------------
         The  Bank  is  subject  to  various  regulatory  capital   requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements    can    initiate    certain    mandatory--possibly     additional
discretionary--actions  by regulators  that, if undertaken,  could have a direct
and material effect on the Bank's financial  statements.  Under capital adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities  and certain  off-balance-sheet  items as calculated
under  regulatory   accounting   practices.   The  Bank's  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 Bank to maintain  minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the  regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to adjusted
tangible assets (as defined). Management believes, as of June 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.

         As of June 30, 1998,  the most recent  notification  from the Office of
Thrift Supervision 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
institution's category.

                                       25
<PAGE>
Notes to Consolidated Financial Statements

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES (Continued)

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.

<TABLE>
<CAPTION>
                                                                                             To Be Well
                                                                                          Capitalized Under
                                                                       For Capital        Prompt Corrective
                                                      Actual        Adequacy Purposes     Action Provisions
                                             -------------------    -----------------     -----------------
                                                Amount     Ratio     Amount    Ratio      Amount     Ratio
                                                ------     -----     ------    -----      ------     -----
<S>                                          <C>            <C>      <C>         <C>   <C>           <C>
As of June 30, 1998:
Stockholders equity,
        and ratio to total assets ........   $  51,908      20.1
Unrealized appreciation on
        available-for-sale securities ....      (2,792)
                                             ---------
Tangible capital,
        and ratio to adjusted total assets   $  49,116      19.3%    $ 3,812     1.5%
                                             =========      ====     =======     === 
Tier 1 (core) capital,
        and ratio to adjusted total assets   $  49,116      19.3%    $10,166     4.0%   $  12,707      5.0%
                                             =========      ====     =======     ===    =========      === 
Tier 1 (core) capital,
        and ratio to risk-weighted assets    $  49,116      30.5%                       $  15,249      6.0%
                                                                                        =========
Allowance for loan losses -
        Tier 2 capital ...................       2,010
                                                 -----
Total risk-based capital,
        and ratio to risk-weighted assets    $  51,126      31.8     $12,864     8.0%   $  16,080     10.0%
                                             =========      ====     =======     ===    =========     ==== 
Total assets .............................   $ 258,566
                                             =========
Adjusted total assets ....................   $ 254,142
                                             =========
Risk-weighted assets .....................   $ 160,804
                                             =========
</TABLE>


         The  amount of  dividends  that the Bank may pay is  subject to various
regulatory  limitations.  As of June 30,  1998,  approximately  $21,188,000  was
available from the Bank's retained earnings,  without regulatory  approval,  for
distribution as dividends.

                                       26
<PAGE>
Notes to Consolidated Financial Statements


NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES (Continued)

<TABLE>
<CAPTION>
                                                                                             To Be Well
                                                                                          Capitalized Under
                                                                       For Capital        Prompt Corrective
                                                      Actual        Adequacy Purposes     Action Provisions
                                             -------------------    -----------------     -----------------
                                                Amount     Ratio     Amount    Ratio      Amount     Ratio
                                                ------     -----     ------    -----      ------     -----
<S>                                          <C>            <C>      <C>         <C>   <C>           <C>
As of June 30, 1997:
Stockholders equity,
        and ratio to total assets ........   $  27,490      13.8
Unrealized appreciation on
        available-for-sale securities ....      (2,058)
                                             ---------
Tangible capital,
        and ratio to adjusted total assets   $  25,432      13.0%    $ 2,943     1.5%
                                             =========      ====     =======     === 
Tier 1 (core) capital,
        and ratio to adjusted total assets   $  25,432      13.0%    $ 5,886     3.0%   $   9,810      5.0%
                                             =========      ====     =======     ===    =========      === 
Tier 1 (core) capital,
        and ratio to risk-weighted assets    $  25,432      22.1%                       $   6,914      6.0%
                                                                                        =========
Allowance for loan losses -
        Tier 2 capital ...................       1,440
                                                 -----
Total risk-based capital,
        and ratio to risk-weighted assets    $  26,872      23.3     $ 9,218     8.0%   $  11,523     10.0%
                                             =========      ====     =======     ===    =========     ==== 
Total assets .............................   $ 199,465
                                             =========
Adjusted total assets ....................   $ 196,199
                                             =========
Risk-weighted assets .....................   $ 115,231
                                             =========
</TABLE>

Earnings Per Share
------------------
         As more fully  described in the Note 17, the Company had no  operations
prior to December  30, 1997 and earnings  per share  information  for the common
stock  of the Bank  prior  to this  date  has not  been  presented  because  the
information would not be meaningful.

         The  computation for earnings per share for the six-month period ended
June 30, 1998 since conversion is as follows:

                                            For six months ended June 30, 1998
                                            ----------------------------------
                                            Income       Shares        Per-share

Basic EPS                    
Income available to common shareholders  $ 1,729,800    5,879,791      $    0.29
                                                                       =========

Effect of Dilutive Securities
Stock Options                                              73,341
RRP shares                                                 22,976
                                         -----------    ---------
Income available to common stockholders  $ 1,729,800    5,976,108      $    0.29
                                         ===========    =========      =========

         As  discussed  in Note  13,  subsequent  to  year  end,  the  Company's
shareholders  approved a stock option plan and a restricted  stock plan.  Shares
granted  under these two plans may increase  outstanding  shares for purposes of
diluted earnings per share in future periods. In addition,  ESOP shares released
from  collateral  will  increase  outstanding  shares for  purposes of basic and
diluted earnings per share calculations as discussed in Note 13.

                                       27
<PAGE>
Notes to Consolidated Financial Statements

NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES (Continued)

Reclassifications
-----------------
         Certain 1997 and 1996 amounts have been  reclassified to conform to the
1998 financial statements presentation. These reclassifications had no effect on
net income.


Impact of Recent Accounting Pronouncements
------------------------------------------
         The  Financial  Accounting  Standards  Board  (FASB)  recently  adopted
Statement of Financial  Accounting  Standards  (SFAS) No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This  Statement  was effective for  transactions  that occur after  December 31,
1997, and imposes new rules for determining  when transfers of financial  assets
are  accounted  for  as  sales  versus  when  transfers  are  accounted  for  as
borrowings. Management believes that SFAS 125 does not have a material impact on
the Company's financial statements.

         The  FASB  recently  adopted  SFAS  128,  "Earnings  Per  Share."  This
Statement  replaces  the  presentation  of  primary  earnings  per share  with a
presentation  of basic  earnings per share.  The  Statement  also  requires dual
presentation  of basic and diluted  earnings per share by entities  with complex
capital   structures  and  requires  a  reconciliation  of  the  numerators  and
denominators between the two calculations.  SFAS 128 was effective for financial
statements issued for periods ending after December 15, 1997,  including interim
periods.  Management  believes that SFAS 128 does not have a material  impact on
the Company's financial statements.

         The FASB recently adopted SFAS 130, "Reporting  Comprehensive  Income".
This Statement  establishes standards for reporting and display of comprehensive
income and its  components  in a full set of financial  statements.  It does not
address issues of recognition or  measurement.  SFAS 130 is effective for fiscal
years  beginning  after  December  15,  1997.  The  adoption  of SFAS 130 is not
expected to have a material impact on the Company's financial statements.

         The FASB recently adopted SFAS 131,  "Disclosures  about Segments of an
Enterprise and Related  Information." This Statement  establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments. The Statement also establishes standards for related disclosures about
products  and  services,  geographic  areas  and  major  customers.  SFAS 131 is
effective  for years  beginning  after  December 15, 1997.  SFAS 131,  which the
Company  will  initially  adopt for fiscal year 1999,  is not expected to have a
material impact on the Company's financial statements.

         The  FASB  recently  adopted  SFAS  133,   "Accounting  for  Derivative
Financial  Instruments  and  Hedging  Activities."  This  Statement  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts,  and for hedging activities.
SFAS 133 is effective for all fiscal  quarters of fiscal years  beginning  after
June 15, 1999, may be adopted early for periods  beginning after issuance of the
Statement and may not be applied  retroactively.  The Company does not expect to
adopt SFAS 133 early.  Management is currently  unable to determine  whether the
effects of  adoption  of SFAS 133 will have a material  impact on the  Company's
financial statements.

                                       28
<PAGE>
Notes to Consolidated Financial Statements

NOTE 2:  INVESTMENTS IN DEBT AND EQUITY SECURITIES

         The amortized cost and  approximate  fair values of  available-for-sale
securities are as follows:

<TABLE>
<CAPTION>
                                                                         Gross                   Gross                Approximate
                                                   Amortized           Unrealized              Unrealized                  Fair
                                                     Cost                 Gains                 (Losses)                   Value
                                                     ----                 -----                 --------                   -----
<S>                                             <C>                     <C>                    <C>                      <C>      
As of June 30, 1998:
Equity Securities:
        FHLMC stock                             $       94,000          4,424,000                       --              4,518,000
        Other stock                                    215,697             32,522                   (1,198)               247,021
                                                --------------          ---------              -----------              ---------
                                                $      309,697          4,456,522                   (1,198)             4,765,021
                                                ==============          =========              ===========              =========
As of June 30, 1997:
Equity Securities:
        FHLMC stock                             $       94,000          3,266,000                       --              3,360,000
                                                --------------          ---------              -----------              ---------
                                                $       94,000          3,266,000                       --              3,360,000
                                                ==============          =========              ===========              =========
</TABLE>

         The  amortized  cost and  approximate  fair values of  held-to-maturity
securities are as follows:

<TABLE>
<CAPTION>

                                                                         Gross                   Gross                Approximate
                                                   Amortized           Unrealized              Unrealized                  Fair
                                                     Cost                 Gains                 (Losses)                   Value
                                                     ----                 -----                 --------                   -----
<S>                                             <C>                     <C>                    <C>                      <C>      
As of June 30, 1998:
Debt Securities:
        US government agencies                  $      8,922,389           14,358                  (75,747)             8,861,000
                                                ================           ======                  =======              =========

As of June 30, 1997
Debt Securities:
        US government agencies                  $      8,585,753            5,143                 (217,896)             8,373,000
                                                ================            =====                 ========              =========

</TABLE>

         Maturities of held-to maturity securities as of June 30, 1998:

<TABLE>
<CAPTION>
                                                                            Amortized     Approximate
                                                                               Cost       Fair Value
                                                                               ----       ----------
<S>                                                                        <C>             <C>      
        Due in one through five years ..................................   $ 7,784,213     7,718,100
        Due after ten years ............................................     1,138,176     1,142,900
                                                                           -----------     ---------
                                                                           $ 8,922,389     8,861,000
                                                                           ===========     =========
</TABLE>

         There were no sales of available-for-sale securities for the year ended
June 30,  1998.  Proceeds  from  sales  of  available-for-sale  securities  were
$5,318,175  for the year ended June 30,  1997,  with  resultant  gross  gains of
$27,897  and gross  losses of $102.  Proceeds  from sales of  available-for-sale
securities  were  $2,348,454  for the year ended June 30, 1996,  with  resultant
gross gains of $106,677 and gross losses of $21,484. There were no sales of debt
securities  from the  "held-to-maturity"  portfolio for the years ended June 30,
1998, 1997, or 1996.

                                       29
<PAGE>
Notes to Consolidated Financial Statements

NOTE 3:  MORTGAGE-BACKED SECURITIES

         The amortized cost and  approximate  fair values of  available-for-sale
mortgage-backed securities are as follows:

                                     Gross          Gross      Approximate
                   Amortized       Unrealized     Unrealized      Fair
                      Cost           Gains         (Losses)      Value
                      ----           -----         --------      -----
As of June 30, 1998
        FNMA       $ 9,047,661         7,997             --      9,055,658
                   -----------       -------        -------     ----------
                   $ 9,047,661         7,997             --      9,055,658
                   ===========       =======       ========     ==========


The   amortized   cost  and   approximate   fair   values  of   held-to-maturity
mortgage-backed securities are as follows:

                                     Gross          Gross      Approximate
                   Amortized       Unrealized     Unrealized      Fair
                      Cost           Gains         (Losses)      Value
                      ----           -----         --------      -----
As of June 30, 1998
Certificates:
        GNMA ....  $ 4,749,948       333,052           --        5,083,000
        FHLMC ...    6,111,639       130,248        (11,887)     6,230,000
        FNMA ....    1,087,067        58,816         (9,883)     1,136,000
                   -----------       -------        -------     ----------
                   $11,948,654       522,116        (21,770)    12,449,000
                   ===========       =======       ========     ==========

As of June 30, 1997:
Certificates:
        GNMA ....  $ 5,941,453       370,547           --        6,312,000
        FHLMC ...    8,189,400       105,212       (234,612)     8,060,000
        FNMA ....    1,683,037        35,963           --        1,719,000
                   -----------       -------        -------     ----------
                   $15,813,890       511,722       (234,612)    16,091,000
                   ===========       =======       ========     ==========


         Included in mortgage-backed securities at June 30, 1998, are certain U.
S. Government agency derivative  securities with an amortized cost of $9,048,000
and an  approximate  fair  value of  $9,056,000.  The yield on these  derivative
securities  varies  with  the  level  of  certain   published   interest  rates,
principally LIBOR.

         There were no sales of  mortgage-backed  securities for the years ended
June 30, 1998, 1997, and 1996.

                                       30
<PAGE>
Notes to Consolidated Financial Statements

NOTE 4:  LOANS AND ALLOWANCE FOR LOAN LOSSES

         Categories of loans at June 30, 1998 and 1997, include:

<TABLE>
<CAPTION>
                                                                      1997               1996
                                                                      ----               ----
<S>                                                              <C>                 <C>       
Real estate - residential mortgage
        One to four family units .............................   $ 147,590,286       110,537,731 
        Multi-family .........................................      21,535,948        15,456,727 
Real estate - construction ...................................      34,729,329        25,148,543 
Real estate - commercial .....................................      12,721,393         8,323,579 
Commercial loans .............................................         646,156           383,116 
Installment loans ............................................       5,268,955         4,492,833 
Loans on savings accounts ....................................         622,916           719,657 
                                                                 -------------     ------------- 
                                                                   223,114,983       165,062,186 
Undisbursed portion of                                                                          
        loansinprocess .......................................     (15,234,620)      (10,475,789 
Allowance for loan losses ....................................      (2,191,557)       (2,177,009 
Unearned discounts ...........................................        (190,594)         (216,141 
Deferred loan costs, net .....................................         (83,651)           39,048 
                                                                 -------------     ------------- 
                                                                 $ 205,414,561       152,232,295 
                                                                 =============     ============= 
</TABLE>
                                                                         
         Transactions in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                        1998           1997             1996
                                                        ----           ----             ----
<S>                                                 <C>              <C>            <C>      
Balance, beginning of year ......................   $ 2,177,009    $ 2,108,059      1,718,316  
        Provision (credit) charged to operations        123,352           --       (1,211,502) 
        Loans charged off .......................      (150,649)       (62,768)        (4,648) 
        Recoveries ..............................        41,845        131,718      1,406,860  
        Allowances reclassified to loans which                                                
                were previously classified as in-                                             
                substance foreclosures (Note 5) .          --             --          199,033  
                                                    -----------    -----------      ---------  
Balance, end of year ............................   $ 2,191,557    $ 2,177,009      2,108,059  
                                                    ===========    ===========      =========  
</TABLE>                                                           

         The weighted  average  interest rate on loans at June 30, 1998 and 1997
was 7.95% and 8.43%, respectively.

         The Bank serviced  mortgage loans for others  amounting to $15,970,974,
$14,165,126 and $11,290,426 as of June 30, 1998, 1997 and 1996 respectively.

         Impaired  loans totaled  $1,011,873 as of June 30, 1998, and $1,257,352
as of June 30, 1997 with a related  allowance  for loan  losses of $151,965  and
$206,897,  respectively.  As of June 30, 1998 and 1997,  respectively,  impaired
loans of $220,488 and $75,956 had no related allowance for loan losses.

         Interest  of  $111,950,  $66,676  and $995 was  recognized  on  average
impaired  loans of $1,290,853,  $1,342,217 and $157,574 for 1998,  1997 and 1996
respectively.  Interest of $96,622 was  recognized  on impaired  loans on a cash
basis during 1998. No interest was  recognized on impaired loans on a cash basis
during 1997 and 1996.

                                       31
<PAGE>
Notes to Consolidated Financial Statements

NOTE 5:  FORECLOSED ASSETS HELD FOR SALE

         Foreclosed assets held for sale consist of the following: 

                                         1998                    1997
                                         ----                    ----

Foreclosed real estate                $286,000                $210,155 
Valuation allowance                         --                      -- 
                                      --------                -------- 
                                      $286,000                $210,155 
                                      ========                ======== 
                                                              

        Changes in the valuation allowance on foreclosed assets were as follows:


                                       1998       1997       1996  
                                       ----       ----      ----   
                                                           
Balance, beginning of year          $   --     $   --      45,637  
Valuation allowance related to                             
        in-substance foreclosures       --         --     (45,637) 
                                    ------     ------     -------  
Balance, end of year                $   --     $   --        --    
                                    ======     ======     =======  
                                                       

         As of July  1,  1995,  the  Bank  implemented  Statement  of  Financial
Standards  No.  114.  In  accordance  with  the  pronouncement,  loans  totaling
$851,818,  net of  valuation  allowance,  which were  previously  classified  as
in-substance  foreclosures  and reported as part of  foreclosed  assets held for
sale have been  reclassified to loans along with $199,033 of related  allowances
for collectability.


NOTE 6:  PREMISES AND EQUIPMENT

         Major classifications of premises and equipment, stated at cost, are as
follows:


                                         1998            1997   
                                         ----            ----   
                                                                
Land                                $ 2,222,243     $   993,445 
Buildings and improvements            5,357,027       5,244,129 
Furniture, fixtures and equipment     1,607,647       1,330,275 
Automobiles                              20,243          20,243 
                                    -----------     ----------- 
                                      9,207,160       7,588,092 
Accumulated depreciation             (1,774,189)     (1,320,935)
                                    -----------     ----------- 
                                    $ 7,432,971     $ 6,267,157 
                                    ===========     =========== 
                                                    

         Depreciation expense was $469,532,  $441,367 and $384,988 for the years
ended June 30, 1998, 1997 and 1996, respectively.

                                       32
<PAGE>
Notes to Consolidated Financial Statements

NOTE 7:  DEPOSITS

<TABLE>
<CAPTION>
                                June 30, 1998                           June 30, 1997                 
                     -------------------------------------   -------------------------------------    
                      Weighted                  Percentage    Weighted                  Percentage    
                      Average                       of        Average                       of        
                       Rate        Balance       Deposits      Rate        Balance       Deposits     
                       ----        -------       --------      ----        -------       --------     
<S>                    <C>      <C>               <C>          <C>      <C>               <C>         
Core Deposits:                                                                                        
Demand                 0.00%    $  3,142,007        2.2%       0.00%    $  2,334,159        1.5%      
NOW                    2.24       14,468,104       10.3        2.34        9,385,517        6.2       
Money market           3.64       10,587,222        7.5        3.62        8,288,164        5.5       
Passbook savings       2.68        8,657,869        6.1        2.76        8,621,308        5.7       
                                 -----------       ----                  -----------       ----       
                       2.55       36,855,202       26.1        2.64       28,629,148       18.9       
                                 -----------       ----                  -----------       ----       
Certificates:                                                                                         
      0% - 3.99%       5.35                -        0.0        2.75            5,928        0.0       
   4.00% - 5.99%       6.35       95,138,774       67.5        5.47      108,383,612       71.7       
   6.00% - 7.99%       5.44        8,981,360        6.4        6.40       14,227,794        9.4       
                                 -----------       ----                  -----------       ----       
                       4.68      104,120,134       73.9        5.58      122,617,334       81.1       
                                 -----------       ----                  -----------       ----       
Total Deposits         5.02     $140,975,336      100.0%       5.02     $151,246,482      100.0%      
                                ============      =====                 ============      =====       
</TABLE>                                                                   
                                                          
         The aggregate  amount of certificates of deposit with a minimum balance
of $100,000 was approximately  $5,872,000 and $8,000,000 as of June 30, 1998 and
1997, respectively.

         A summary of  certificates  of deposit by maturity as of June 30, 1998,
is as follows:

               Fiscal year ending:
                June 30, 1999             $  76,313,219
                June 30, 2000                15,624,451
                June 30, 2001                 7,110,399
                June 30, 2002                 3,511,276
                June 30, 2003                 1,545,691
                Thereafter                       15,098
                                          -------------
                                          $ 104,120,134
                                          =============


         A summary of interest expense on deposits is as follows: 
 
                                    1998           1997           1996     
                                     ----           ----           ----    
                                                                           
NOW and Money Market accounts   $   615,928    $   406,025        276,460  
Savings accounts                    241,176        258,143        314,557  
Certificate accounts              6,131,573      6,823,212      7,633,893  
Early withdrawal penalties          (19,393)       (16,287)       (24,884) 
                                -----------    -----------      ---------  
                                $ 6,969,284    $ 7,471,093      8,200,026  
                                ===========    ===========      =========  
                                               


                                       33
<PAGE>
Notes to Consolidated Financial Statements

NOTE 8:  FEDERAL HOME LOAN BANK ADVANCES

         Federal Home Loan Bank advances consist of the following: 

<TABLE>
<CAPTION>
            
                                       Weighted                              Weighted  
                                       Average                               Average
             Maturity Date              Rate           Amount            Rate         Amount
             -------------              ----           ------            ----         ------
<S>                                    <C>         <C>                  <C>       <C>        
      Fiscal Year 1998                  0.00%       $        --          5.90%     $ 5,000,000
      Fiscal Year 1999                  6.20          3,972,255          6.22        3,000,000
      Fiscal Year 2000                  6.11          8,561,864          6.11        7,528,750
      Fiscal Year 2001                  6.05          2,098,240           --                --
      Fiscal Year 2002                  6.15%         3,102,475          6.21        1,635,000
      Fiscal Year 2003                  6.03%         1,641,079           --                --
      Thereafter                        6.05%        25,705,115          6.84          987,094
                                        ----        -----------          ----      -----------
                                        6.08%       $45,081,028          6.12      $18,150,844
                                        ====        ===========          ====      ===========
</TABLE>
                                                                     
         The FHLB requires the Bank to maintain  collateral equal to outstanding
balances of  advances.  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 9:  INCOME TAXES

         The  Company  files  a  consolidated  federal  income  tax  return.  In
computing federal income taxes for taxable years prior to July 1, 1996, the Bank
has been allowed an 8% deduction  from  otherwise  taxable income as a statutory
bad debt deduction,  subject to limitations based on aggregate loans and savings
balances.  In August 1996 this  statutory bad debt deduction was repealed and is
no longer  available for thrifts.  In addition,  bad debt  reserves  accumulated
after 1987, which are presently  included as a component of the net deferred tax
liability,  must be recaptured  over a six-year  period  beginning in 1999.  The
amount of the deferred tax liability  which must be recaptured is $338,000 as of
June 30, 1998 and 1997.

         As of June 30, 1998, and 1997, 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 at June 30, 1998 and 1997.

         The provision for income taxes consists of: 

                                         1998               1997         1996 
                                         ----               ----         ---- 
                                                                                
        Taxes currently payable     $1,641,258         $  642,500        898,000
        Deferred income taxes          (22,258)            22,000        128,000
                                    ----------         ----------      ---------
                                    $1,619,000         $  664,500      1,026,000
                                    ==========         ==========      =========
                                                                                
                                                       
                                       34



<PAGE>
Notes to Consolidated Financial Statements

NOTE 9:  INCOME TAXES (Continued)

         The tax effects of  temporary  differences  related to  deferred  taxes
shown on the June 30, 1998 and 1997, balance sheets are: 

<TABLE>
<CAPTION>
                                                                        1998          1997     
                                                                        ----          ----     
<S>                                                                <C>           <C>           
Deferred tax assets:                                                                         
        Allowance for loan and foreclosed asset losses             $   783,885   $   778,000   
        Accrued compensated absences                                    23,945        19,000   
        Accrued retirement plan costs                                     --          33,000   
        Unrealized loss on loans held for sale                          69,942        80,000   
        Accrued ESOP expense                                            52,379          --
        RRP expense                                                     30,365        57,000   
        Deferred loan fees/costs                                        30,951          --
                                                                   -----------   -----------   
                                                                       991,467       967,000   
                                                                   -----------   -----------   
Deferred tax liabilities:                                                                    
        FHLB stock dividends                                          (206,867)     (207,000)  
        Deferred loan fees/costs                                          --         (15,000)  
        Tax bad debt reserves in excess of base year                  (337,633)     (338,000)  
        Mortgage servicing rights                                      (32,709)      (15,000)  
        Unrealized appreciation on available-for-sale securities    (1,651,429)   (1,208,000)  
                                                                   -----------   -----------   
                                                                    (2,228,638)   (1,783,000)  
                                                                   -----------   -----------   
Net deferred tax liability                                         $(1,237,171)  $  (816,000)  
                                                                   ===========   ===========   
</TABLE>                                                          
                                                                        
         A reconciliation  of income tax expense at the statutory rate to income
tax expense at the Company's effective rate is shown below: 

                                                       1997     1997     1996 
                                                       ----     ----     ---- 
                                                                              
Computed at statutory rate                             34.0%    34.0%    34.0%
Increase (reduction) in taxes resulting from:                                 
        State financial institution tax                 3.1      3.3      4.5 
        Taxexempt interest                               --       --      (.5)
        Change in deferred tax valuation allowance       --       --       -- 
        Other                                           (.8)     (.9)    (1.1)
                                                       ----     ----     ---- 
                Actual tax provision                   36.3%    36.4%    36.9%
                                                       ====     ====     ==== 
                                                                              
                                                               
         State legislation provides that savings 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.

         Deferred income taxes related to the change in unrealized  appreciation
on   available-for-sale   securities,   shown  in  stockholders'   equity,  were
approximately   $443,429,   $468,000  and  $78,000  for  1998,  1997  and  1996,
respectively.

                                       35
<PAGE>
Notes to Consolidated Financial Statements

NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following  methods and  assumptions  were used to estimate the fair
value of each class of financial instruments:

Cash and Cash Equivalents
-------------------------

         The carrying  amounts  reported in the balance sheets for cash and cash
equivalents approximate those assets' fair value.


Available-For-Sale   and   Held-To-Maturity   Securities   and   Mortgage-Backed
--------------------------------------------------------------------------------
Securities
----------
         Fair values for investment and mortgage-backed  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.  The
carrying amount of accrued interest 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.  The
carrying amount of accrued interest approximates its fair value.


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.  The carrying amount of accrued interest payable
approximates its fair value.


Federal Home Loan Bank Advances
-------------------------------
         Rates  currently  available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing advances.


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.

                                       36
<PAGE>
Notes to Consolidated Financial Statements

NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

         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 method 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.

<TABLE>
<CAPTION>
                                                                        June 30, 1998                    June 30, 1997         
                                                                 -------------------------        -------------------------    
                                                                    Carrying        Fair             Carrying        Fair      
                                                                     Amount         Value             Amount         Value     
                                                                     ------         -----             ------         -----     
<S>                                                              <C>               <C>            <C>               <C>        
Financial assets:                                                                                                              
        Cash and cash equivalents                                $  7,304,923      7,304,923      $  3,817,351      3,871,351  
        Available-for-sale securities                               4,765,021      4,765,021         3,360,000      3,360,000  
        Held-to-maturity securities                                 8,922,389      8,861,000         8,585,753      8,373,000  
        Mortgage-backed securities, available-for-sale              9,055,658      9,055,658              --             --
        Mortgage-backed securities, held-to-maturity               11,948,654     12,449,000        15,813,890     16,091,000  
        Mortgage loans held-for-sale                                  805,183        805,183         5,903,002      5,903,002  
        Loans, net                                                205,414,561    208,964,000       152,232,295    155,505,000  
        Interest receivable                                         1,604,144      1,604,144         1,311,561      1,311,561  
Financial liabilities:                                                                                                         
        Deposits                                                  140,975,336    141,230,000       151,246,482    150,926,000  
        Federal Home Loan Bank advances                            45,081,028     45,348,000        18,150,844     18,180,000  
        Interest payable                                              256,975        256,975           131,245        131,245
Unrecognized financial instruments                                                                                             
        (net of contractual value):                                                                                            
                Commitments to extend credit                             --             --                --             --    
                Unused lines of credit                                   --             --                --             --    
</TABLE>                                                                   
                                                                          

NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

         Generally accepted accounting  principles 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.


Service Bureau
--------------
         The  Bank  utilizes  a  commercial   service  bureau  to  provide  data
processing  services  for its core  system  (deposit,  loan and  general  ledger
applications).  There are a limited  number of  providers  of these  services to
financial  institutions.  The  existing  service  bureau  is in the  process  of
revising  and  testing  its  computer  equipment  and  software  to be Year 2000
compliant and currently  expects to successfully  complete this process in early
1999.

         However, if the service bureau's efforts are not successful on a timely
basis, the Bank could experience  significant delays,  mistakes or failures that
could have a material impact on the Company's financial condition and results in
operations.

                                       37
<PAGE>
Notes to Consolidated Financial Statements

NOTE 12: ADDITIONAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>

                                                                   1998        1997        1996
                                                                   ----        ----        ----
<S>                                                           <C>          <C>         <C>      
Noncash Investing and Financing Activities
        Transfer of insubstance foreclosed assets to loans    $     --           --        652,785
        Loans held-for-sale transferred to            
          loans receivable portfolio                           4,950,891         --        708,700
        Loans receivable transferred to 
          foreclosed assets held-for-sale                        689,550      471,440         --  
        Foreclosed assets held for sale transferred
          to loans receivable                                    311,500         --           --
Additional Cash Payment Information
        Interest paid                                          8,632,457    8,198,629    8,266,794
        Income taxes paid                                      1,497,087      582,319      845,682
</TABLE>

NOTE 13: EMPLOYEE BENEFIT PLANS

Pension Plan
------------
         The Bank has participated in a multi-employer pension plan covering all
employees who met minimum service requirements.  As a member of a multi-employer
pension  plan,  disclosures  of  plan  assets  and  liabilities  for  individual
employers  are not  required or  practicable.  Pension  plan expense was $5,063,
$128,785  and  $156,013  for the  years  ended  June  30,  1998,  1997  and 1996
respectively. This plan was terminated effective December 12, 1997.


Recognition and Retention Plan
------------------------------
         In conjunction with the  reorganization  discussed in Note 16, the Bank
has  established  a  Recognition  and  Retention  Plan (RRP) for the  benefit of
directors,  officers  and  employees  of the  Bank and its  subsidiary.  The RRP
provides  directors,  officers  and  employees  of the Bank  with a  proprietary
interest in the Company in a manner designed to encourage  these  individuals to
remain with the Bank.

         A  Committee  consisting  of members of the Bank's  Board of  Directors
administers  the  Plan.  Under the Plan,  the  Committee  can award up to 75,106
shares  of the  Company's  common  stock to  selected  directors,  officers  and
employees. As of June 30, 1998, all shares have been awarded. 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  were
awarded to  employees.  The Bank  recognized  $92,407,  $106,197 and $120,925 of
expense under the RRP in 1998, 1997 and 1996, respectively.  Shares to be issued
under the RRP were  purchased  on the open market by a separate  RRP Trust.  The
Bank contributed $464,643 to the Trust for stock purchases during the year ended
June 30, 1996.  These  contributions  have been  accounted for as a reduction of
stockholders' equity.


Stock Option and Incentive Plan
-------------------------------
         In  conjunction  with the  reorganization  discussed  in Note  16,  the
Company has established the 1994 Stock Option and Incentive Plan for the benefit
of certain directors, officers and employees of the Bank and its subsidiary. The
Plan is  administered  by the Company's  Option  Committee.  Under the Plan, the
Option  Committee may grant stock  options or awards of up to 187,764  shares of
the Company's common stock.

         The stock options 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.

                                       38
<PAGE>
Notes to Consolidated Financial Statements

NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)

         The table  below  summarizes  transactions  under the  Company's  stock
option plan: 


<TABLE>
<CAPTION>
                                            June 30, 1998                 June 30, 1997                   June 30, 1996
                                       ------------------------------------------------------------   --------------------------
                                                    Weighted Average              Weighted Average              Weighted Average
                                        Shares      Exercise Price    Shares      Exercise Price      Shares    Exercise Price
                                        ------      ----------------- ------      -----------------   ------    ----------------
Outstanding,                                                         
<S>                                    <C>            <C>            <C>            <C>              <C>           <C>    
Outstanding, Beginning of Year         151,990 (1)     $  6.02        84,375         $ 11.62              --        $    --
        Granted                          5,000           12.63         6,640           11.55          97,237          11.62
        Exercised                       (9,794)           6.02            --              --              --             --
        Forfeited                       (3,196)           6.02       (12,305)          11.62         (12,862)            --
                                        ------         -------        ------         -------          ------        -------
Outstanding, End of Year               144,000         $  6.25        78,710         $ 11.61          84,375        $ 11.62
                                        ======         =======        ======         =======          ======        =======
Options Exercisable, End of Year        48,642                        14,383                              -- 
                                        ======                        ======                          ======
</TABLE>                               



         Stock options were  originally for Bank stock.  This Plan was converted
to Company stock at the exchange ratio of 1.931. See Note 17.

         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:

<TABLE>
<CAPTION>

                                                                 June 30, 1998           June 30, 1997           June 30, 1996
                                                                 -------------           -------------           -------------
<S>                                                                  <C>                     <C>                    <C> 
    Dividends per share                                              $0.30                   $0.33                  0.32
    Risk-Free Interest Rate                                           5.46%                   6.36%                 5.54
    Expected Life of Options                                          5 years                 5 years               5 years
                                                                                        
    Weighted-Average Fair Value of Options Granted During Year       $2.07                   $2.51                  2.46
</TABLE>                                                       
                                                                     
                                                                
         The following table  summarizes  information  about stock options under
the Plan outstanding at June 30, 1998:


                      Options Outstanding            Options Exercisable
                -------------------------------     ----------------------
    Range of        Number        Remaining           Number      Exercise
Exercise Prices  Outstanding   Contractual Life     Exercisable     Price
---------------  -----------   ----------------     -----------     -----

   $  5.83           5,098         8.5 years          1,020        $  5.83
   $  6.02         126,178         7.5 years         46,077        $  6.02
   $  6.08           7,724         8.0 years          1,545        $  6.12
   $ 12.63           5,000         9.7 years            --         $ 12.63

         The  Company  applies APB  Opinion 25 and  related  Interpretations  in
accounting for its plans,  and no compensation  cost has been recognized for the
Plan. Had compensation cost for the Plan been determined based on the fair value
at the dates using  Statement of  Financial  Accounting  Standards  No. 123, the
Company's  net income would have  decreased by $33,007,  $32,187 and $16,083 for
1998, 1997 and 1996, respectively.  Earnings per share since conversion would be
unchanged  for  1998.   The  effects  of  applying  this  Statement  for  either
recognizing  compensation cost or providing pro forma disclosures are not likely
to be  representative  of the  effects on reported  net income for future  years
because options vest over several years and additional awards generally are made
each year.

                                       39
<PAGE>
Notes to Consolidated Financial Statements

NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)

Employee Stock Ownership Plan
-----------------------------
         In  conjunction  with the  conversion  discussed  in Note 17,  the Bank
established an  internally-leveraged  Employee Stock Ownership Plan (ESOP).  All
employees are eligible to  participate  after they attain age 21 and complete 12
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 released from collateral,  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 on unallocated ESOP shares
are recorded as a reduction of the  unearned  ESOP shares and accrued  interest.
Compensation  expense is  recognized  ratably based on the average fair value of
shares committed to be released. Compensation expense attributed to the ESOP was
$141,566  for the year ended June 30, 1998.  The  following is a summary of ESOP
shares at June 30, 1998: 

     Allocated shares                             -
     Shares released for allocation               -
     Unreleased for allocation              344,454
                                         ----------

     Total ESOP shares                      344,454
                                         ==========

     Fair value of unreleased shares     $4,456,374
                                         ==========

Employment Agreements
---------------------
         The  Bank  has  entered  into  employment   agreements  with  James  E.
Haseltine,  President and Chief  Executive  Officer and certain other  executive
officers of the Bank. Mr. Haseltine's  employment agreement covers a term of two
years. The agreements will be terminable by the Bank for "just cause" as defined
in the agreements.  If the Bank terminates the employee  without just cause, the
employee will be entitled to a continuation  of the  employee's  salary from the
date of termination through the remaining term of the agreement. Mr. Haseltine's
employee  agreement  contains  a  provision  stating  that in the  event  of the
termination of employment in connection with any future change in control of the
Bank, as defined in the agreement,  Mr.  Haseltine will be paid in a lump sum as
amount  equal to 1.99 times Mr.  Haseltine's  five year average  annual  taxable
compensation.  In addition, the Bank has entered into employment agreements with
eight other officers,  which will provide a severance  payment upon  termination
without  just  cause in the  event of a change in  control,  as  defined  in the
agreements.  The  agreements  may be renewed  annually by the Board of Directors
upon a  determination  of  satisfactory  performance  within  the  Board's  sole
discretion.


1998 Stock Option and Incentive Plan
------------------------------------
         In conjunction  with the  conversion  discussed in Note 17, the Company
has  established  the 1998 Stock  Option and  Incentive  Plan for the benefit of
certain  directors,  officers and employees of the Bank and its subsidiary.  The
Plan was voted on and approved by  stockholders  at the July 22,  1998,  special
stockholders'  meeting.  The Company's  Option  Committee  administers the Plan.
Under the Plan, the Option  Committee may grant stock options or awards of up to
434,081 shares of the Company's  common stock.  Following  approval of the Plan,
402,377 shares were granted.

         The stock options 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.

                                       40
<PAGE>
Notes to Consolidated Financial Statements

NOTE 13: EMPLOYEE BENEFIT PLANS (Continued)

1998 Restricted Stock Plan
--------------------------
         In conjunction  with the conversion  discussed in Note 17, the Bank has
established a Restricted Stock Plan (RSP) for the benefit of directors, officers
and employees of the Bank and its subsidiary.  The RSP was voted on and approved
by the  Company's  stockholders  at the July  22,  1998,  special  stockholders'
meeting.  The RSP provides directors,  officers and employees of the Bank with a
proprietary  interest in the Company in a manner  designed  to  encourage  these
individuals to remain with the Bank.

         A  Committee  consisting  of members of the Bank's  Board of  Directors
administers  the Plan.  Under the Plan,  the  Committee  can award up to 173,632
shares  of the  Company's  common  stock to  selected  directors,  officers  and
employees.  Following  approval of the Plan,  164,950  shares were granted.  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 Plan
was ratified by  stockholders,  which was $13.44 per share.  Shares to be issued
under the RSP are  purchased  on the open  market by a separate  RSP Trust.  The
Company  contributed  $2,373,065  to the  Trust for  stock  purchased  following
approval of the Plan. These contributions have been accounted for as a reduction
of stockholders' equity subsequent to the year ended June 30, 1998.


NOTE 14: TRANSACTION WITH RELATED PARTIES

         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 June 30, 1998 and 1997, loans outstanding to these directors and
executive  officers  amounted  to  $485,224  and  $281,000,   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 (including  interest rates and collateral) 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 15: 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 June 30, 1998 and 1997, the Bank had  outstanding  commitments to
originate loans of approximately $12,741,000 and $2,084,000,  respectively.  The
commitments  extend  over  varying  periods  of time  with  the  majority  being
disbursed within a thirty-day period. As of June 30, 1998 and 1997,  commitments
of $11,568,000  and $395,000,  respectively,  were at fixed rates and $1,173,000
and $1,689,000, respectively, were at floating market rates.

         Forward  commitments to sell mortgage loans are  obligations to deliver
loans at a specified price on or before a specified date. The Bank acquires such
commitments  to  reduce  market  risk  on  mortgage  loans  in  the  process  of
origination  and mortgage loans held for sale.  Related  forward  commitments to
sell mortgage loans amounted to approximately $1,069,000 as of June 30, 1997. As
of June 30, 1998, there were no such commitments outstanding.

                                       41
<PAGE>
Notes to Consolidated Financial Statements

NOTE 15: COMMITMENTS AND CREDIT RISK (Continued)

         Letters of credit  are  conditional  commitments  issued by the Bank to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper and similar  transactions.  The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers.  The Bank had an outstanding  letter of credit as of June 30, 1998 in
the amount of $29,000 and no outstanding letters of credit as of June 30, 1997.

         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.

         As of June 30, 1998,  unused  lines of credit to  borrowers  aggregated
approximately $173,000 for commercial lines and $5,247,000 for open-end consumer
lines.  As of June 30,  1997,  unused  lines of credit to  borrowers  aggregated
approximately $266,000 for commercial lines and $2,275,000 for open-end consumer
lines.

         Although  the Bank  grants  consumer  loans,  the  majority of its loan
originations are single or multi-family  residential real estate in Springfield,
Missouri,  and the surrounding  area. As of June 30, 1998, the Bank had eighteen
borrowers with balances in excess of $1,000,000 each,  aggregating  $49,304,000,
for which the collateral is primarily single-family and multi-family residential
rental real estate and commercial real estate. As of June 30, 1997, the Bank had
eighteen  borrowers  with  balances in excess of  $1,000,000  each,  aggregating
$35,171,000,   for  which  the   collateral  is  primarily   single-family   and
multi-family residential rental real estate and commercial real estate. Also, as
of  June  30,  1998  and  1997,  the  Bank  had  $25,848,000  and   $19,340,000,
respectively,  in  construction  loans to or guaranteed by builders of primarily
residential property.


NOTE 16: REORGANIZATION TO A MUTUAL HOLDING COMPANY

         In connection with the  Reorganization in April 1995,  Guaranty Federal
Savings and Loan  Association (the  "Association")  reorganized from a federally
chartered  mutual  savings and loan  association  into a federal  mutual holding
company,  Guaranty  Federal  Bancshares,  M. H. C. (the  "MHC").  As part of the
reorganization, the Association incorporated a de novo federally chartered stock
savings bank, Guaranty Federal Savings Bank (the "Bank") and transferred most of
its assets and all its liabilities to the Bank. The Bank issued 3,125,000 shares
of its common  stock  (par value  $1.00) of which  972,365  shares  were sold to
parties other than the MHC, thus creating a minority  ownership  interest in the
Bank. The shares had an initial public offering price of $8 per share, resulting
in gross sales  proceeds of  $7,778,920.  Costs  related to the stock  issuance,
which have been  applied  to reduce  the gross  proceeds,  were  $654,388.  Also
$100,000 was  transferred  to the MHC for initial  capitalization  in connection
with  Reorganization.  The net proceeds of  $7,024,532  were  included in common
stock and capital surplus of the Bank.

         As long as they remain depositors of the Bank, persons who prior to the
reorganization  had  liquidation  rights with  respect to the  Association  will
continue to have such rights with respect to the Bank.

                                       42
<PAGE>
Notes to Consolidated Financial Statements

NOTE 17: CONVERSION TO STOCK FORM OF OWNERSHIP

         On December 30, 1997, Guaranty Federal  Bancshares,  Inc. completed the
conversion and  reorganization  of Guaranty  Federal Savings Bank and its former
mutual holding  company by selling  4,340,812  shares of common stock to certain
depositors  of the Bank and a benefit  plan of the Bank at a price of $10.00 per
share.  In  addition  all  shares  of  common  stock of the Bank  held by public
stockholders  were exchanged for 1,880,710 shares of common stock of the Company
at an exchange ratio of 1.931. The only class of securities  registered pursuant
to the offering was common stock,  par value $0.10 per share,  and all 6,221,522
shares registered were issued.

         Of the 6,221,522  shares  registered and issued:  (1) 3,996,358  shares
were sold (at $10.00 per share),  resulting  in cash  proceeds to the Company of
$39,963,580,  (2) 344,454 shares were sold (at $10.00 per share) to the trust of
the  employee  stock  ownership  plan of the Bank (the  "ESOP")  and funded by a
direct  loan (with  proceeds  used from the  offering)  from the  Company to the
trust,  an  affiliate  of the  Company,  in the  amount of  $3,444,540,  and (3)
1,880,710  shares (minus a certain de minimus  number of  fractional  shares for
which cash was paid) were issued in exchange for the common stock of the Bank.

         The expenses for the offering were  $780,067  resulting in net proceeds
of $42,628,053 of which  $19,943,834  was directly  contributed to the Bank, and
$22,684,219  was retained by the Company.  The proceeds  retained by the Company
were used for various investments,  including  interest-bearing  advances to the
Bank.

                                       43
<PAGE>
Notes to Consolidated Financial Statements

NOTE 18: CONDENSED PARENT COMPANY STATEMENTS

         The  condensed  balance  sheet as of June 30, 1998,  and  statements of
income and cash flows for the period December 30, 1997 to June 30, 1998, for the
parent company, Guaranty Federal Bancshares, Inc., are as follows:

Balance Sheet
-------------
Assets                                                         $     51,587     
  Cash                                                           17,523,918
  Due from subsidiary                                            51,908,392
  Investment in subsidiary                                        1,228,799
  Land                                                              247,021
  Available-for sale securities                                       9,471
                                                               ------------
  Deferred income taxes                                        $ 70,969,188
                                                               ============
                                                               
Liabilities and Stockholder's Equity                           
  Accrued expenses and                                         
    other liabilities                                          $      7,090
  Income taxes payable                                              272,000
Stockholders' equity                                           
  Common stock                                                      622,804
  Additional paid-in capital                                     49,016,992
  Unearned ESOP shares                                           (3,444,540)
  Retained earnings                                              21,682,950
  Unrealized appreciation on                                   
    available-for-sale securities, net                            2,811,892
                                                               ------------

                                                               $ 70,969,188
                                                               ============
                                                               
Statement of Income                                            
-------------------                                            
Income                                                         
  Interest income:                                             
    Related party                                              $    734,464
    Other                                                               508
  Other                                                                 550
                                                               ------------
       Total income                                                 735,522
                                                               ------------
                                                               
Expense                                                        
  Occupancy                                                           4,500
  Other                                                              17,355
                                                               ------------
       Total expense                                                 21,855
                                                               ------------
Income before income taxes and equity in                       
  undistributed earnings of subsidiary                              713,667
Provision for income taxes                                          272,000
                                                               ------------
Income before equity                                           
  in undistributed earnings subsidiary                              441,667
Equity in undistributed                                        
  earnings of subsidiary                                          1,288,133
                                                               ------------
Net income                                                     $  1,729,800
                                                               ============
                                           


                                                   
                                        
                                       44
<PAGE>
Notes to Consolidated Financial Statements

NOTE 18: CONDENSED PARENT COMPANY STATEMENTS (Continued)
<TABLE>
<CAPTION>
Statements of Cash Flows
------------------------
<S>                                                                      <C>         
Cash Flows From Operating Activities
  Net income                                                              $  1,729,800
  Item not requiring providing cash:
    Undistributed earnings of net income
      of subsidiary                                                         (1,288,133)
  Changes in:
    Income taxes payable                                                       272,000
    Accrued expenses                                                             7,090
                                                                          ------------
        Net cash provided by operating activities                              720,757
                                                                          ------------
Cash FLows From Investing Activities
  Investment in subsidiary                                                 (19,943,834)
  Loan to ESOP                                                              (3,444,540)
  Purchase of land                                                          (1,228,799)
  Purchase of available-for-sale securities                                   (272,619)
  Net increase in advance to subsidiary                                    (17,523,918)
                                                                          ------------
        Net cash used in investing activities                              (42,413,710)
                                                                          ------------
Cash Flows From Financing Activities
  Proceeds from sale of common stock, net                                   42,628,053
  Stock options exercised                                                       40,454
  Cash dividends received on RRP shares                                          9,875
  Cash dividends paid                                                         (933,842)
                                                                          ------------
        Net cash provided by financing activities                           41,744,540
                                                                          ------------
Increase in cash                                                                51,587

Cash, beginning of period                                                         --
                                                                          ------------

Cash, end of period                                                       $     51,587
                                                                          ============

Noncash Investing and Financing Activities
  Acquisition of Guaranty Federal Savings Bank through stock conversion   $ 30,316,999

</TABLE>

                                       45

<PAGE>
<TABLE>
<CAPTION>
<S>                           <C>                                    <C>                               <C>
Baird                          Hammons Tower
Kurtz &                        901 E. St. Louis Street, Suite 1000    1034 W. Main Street
Dobson                         P.O. Box 1190                          P.O. Box 1277                     http://www.bkd.com
Certified Public Accountants   Springfield, MO 65801-1190             Branson, MO 65615-1277   
                               417 865-8701      Fax: 417 865-0682    417 334-5165   Fax: 417 334-3823  Member of
                                                                                                        Moores Rowland International
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                        Independent Accountants' Report




     We have audited the  accompanying  consolidated  balance sheets of GUARANTY
FEDERAL  BANCSHARES,  INC.  as of June  30,  1998  and  1997,  and  the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the three  years in the  period  ended  June 30,  1998.  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  generally  accepted  auditing
standards.  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 financial statements referred to above present fairly,
in all material respects, the financial position of GUARANTY FEDERAL BANCSHARES,
INC. as of June 30, 1998 and 1997,  and the  results of its  operations  and its
cash  flows for each of the three  years in the period  ended June 30, 1998,  in
conformity with generally accepted accounting principles.

                                   
                              /s/Baird, Kutz & Dobson

July 27, 1998
Springfield, Missouri

                                                                          BKD 75
                                                                      We Deliver
                                                                         Results
                                                                  --------------
                                                                       1923-1998