**CONTENTS**
 1  Investor
          Information
 2  President’s
          Message
 3  Selected
          Consolidated Financial and Other Data
 5  Management’s
          Discussion and Analysis of Financial Condition and
          Results of Operations
 23  Consolidated
          Financial Statements
 55  Report
          of Independent Registered Public Accounting
          Firm
 
 **INVESTOR
        INFORMATION**
 
 **COMMON** **STOCK
        PRICES & DIVIDENDS**
 
 The
        common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is traded in
        the over-the-counter market and quoted on the NASDAQ National Market under
        the
        symbol “GFED”. As of March 8, 2006, there were approximately 1,668 stockholders.
        At that date the Company had 6,607,250 shares of common stock issued and
        2,954,728 shares of common stock outstanding.
 
 During
        the year ended December 31, 2005, the Company paid dividends of (i) $0.16
        per
        share on April 14, 2005, to stockholders of record as of March 30, 2005,
        (ii)
        $0.16 per share on July 15, 2005 to stockholders of record as of July 1,
        2005,
        and (iii) $0.165 per share on October 14, 2005, to stockholders of record
        as of
        October 1, 2005, and also declared a cash dividend of $0.165 per share on
        December 22, 2005, which was paid on January 20, 2006, to stockholders of
        record
        on January 6, 2006. During the year ended December 31, 2004, the Company
        paid
        dividends of (i) $0.155 per share on April 14, 2004, to stockholders of record
        as of March 30, 2004, (ii) $0.155 per share on July 15, 2004 to stockholders
        of
        record as of July 1, 2004, and (iii) $0.16 per share on October 15, 2004,
        to
        stockholders of record as of October 1, 2004, and also declared a cash dividend
        of $0.16 per share on December 16, 2004, which was paid on January 21, 2005,
        to
        stockholders of record on January 7, 2005. The Company also paid a cash dividend
        of $0.155 per share on January 23, 2004 to stockholders of record on January
        9,
        2004. The Company’s Board of Directors anticipates paying dividends on
        comparable dates during fiscal year ended December 31, 2006 to the payment
        dates
        during the fiscal year ended December 31, 2005. Such future dividends, if
        any,
        will be at the discretion of the Company’s Board of Directors and will depend
        on, among other things, the Company’s results of operations, cash requirements
        and surplus, financial condition and other factors that the Company’s Board of
        Directors may consider relevant.
 
 The
        table
        below reflects the range of common stock high and low closing prices per
        the
        NASDAQ Stock Market by quarter for the years ended December 31, 2005 and
        2004.
 Year
                    ended
                
                Year
                    endedDecember
                    31, 2005
                
                December
                    31, 2004High
                
                Low
                
                High
                
                LowQuarter
                    ended:March
                    31
                $24.06
                
                22.55
                
                19.95
                
                18.70June
                    30
                23.73
                
                21.93
                
                19.95
                
                18.81September
                    30
                27.25
                
                23.00
                
                20.01
                
                19.11December
                    31
                28.25
                
                26.10
                
                24.15
                
                20.00
 
 **ANNUAL
        MEETING OF STOCKHOLDERS:** The
        Annual Meeting of Stockholders of the Company will be held Wednesday, May
        24,
        2006 at 6:00 p.m., local time, at the Clarion Hotel, 3333 S. Glenstone,
        Springfield, Missouri.
 **ANNUAL
        REPORT ON FORM 10-K:**  Copies
        of
        the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
        Commission are available without charge upon written request
        to**:** Lorene
        Thomas, Secretary, Guaranty Federal Bancshares, Inc., 1341 W. Battlefield
        St.,
        Springfield, MO 65807-4181.
 **TRANSFER
        AGENT:** Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ
        07016
 **STOCK
        TRADING INFORMATION:** Over-the
        Counter Symbol: GFED
 **SPECIAL
        LEGAL COUNSEL:** Blackwell Sanders Peper Martin, LLP, 901 St. Louis St., Suite 1900, Springfield,
        MO 65806
 **INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM:** BKD,
        LLP,
        901 St. Louis St., PO Box 1190, Springfield, MO 65801-1190
 **STOCKHOLDER
        AND FINANCIAL INFORMATION:** Bruce
        Winston, Senior Vice President, Chief Financial Officer:
        417-520-0206
 
 1
 
 *Guaranty
        Federal Bancshares,
        Inc.                                                                                                                                   
President's Message*
  Dear
          Shareholders and Associates,
 
 We
          are
          pleased to present in this 2005 Annual Report another record year of operating
          results for Guaranty Federal Bancshares, Inc.
 
 The
          Company continued its steady growth ending the year with assets totaling
          $481.0
          million, up $40.4 million or 9.1% from the prior year. Fueling this growth
          is
          the Company’s focus in the commercial lending area. Strong loan demand in
          construction and commercial real estate resulted in loans outstanding at
          year
          end of $435.5 million, an increase of $43.2 million or 11.0% from the prior
          year. While experiencing this growth, Guaranty maintained its high standard
          of
          credit quality.
 
 Our
          positive earnings trend continued with net income for 2005 totaling $5.9
          million
          or $2.03 per diluted share compared to $1.47 per diluted share for the
          previous
          year, a 38.1% increase. The two-year improvement raised the Company’s return on
          assets and return on equity ratios to 1.28% and 14.12%, respectively, at
          December 31, 2005. Quality asset growth and improvement in our net interest
          margin were keys to our strong increase in earnings in 2005.
 
 The
          performance of our stock continued to increase, beginning the year at $24.06
          per
          share and reaching a high during the year of $28.25 on November 29, 2005,
          while
          closing at $27.90 on December 31, 2005. The closing price on March 29,
          2006 was
          another record high at $30.24, an increase of 8.4% from December 31, 2005.
          More
          significantly, over the past five years the price of our stock has increased
          over 140%. Since inception of the Company, the annual dividend per share
          has
          increased from $0.31 per share in 1998 to $0.645 per share in 2005. This
          was the
          eighth consecutive year in which the annual dividend payment has increased.
 
 The
          financial improvements achieved during the past two years are the result
          of our
          associates focusing on the positive aspects of the many changes at Guaranty
          Bank. The Board of Directors and new management team have made significant
          investments in people, products, facilities and technology. These investments
          combined with the dedication and commitment of our associates to deliver
          exemplary service,  have resulted in a substantial increase in shareholder
          value.
 
 On
          behalf
          of the management, staff and Board of Directors, I want to express my heartfelt
          thanks to Gary Lipscomb for his service to the Company. After 15 years
          of
          dedicated service as a member of our Board of Directors, Gary will retire
          at the
          expiration of his current term later this year. We sincerely appreciate
          his
          valuable advice and counsel and wish him the very best in his retirement.
 
 We
          are
          excited about our future, and on behalf of everyone at Guaranty, I want
          to thank
          you, our shareholders, for your confidence and support.
 
 Sincerely,
 
 
  /s/
          Shaun
          A. Burke
 President
          & CEO
 Guaranty
          Federal Bancshares, Inc.
 
 
 2
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Selected
              Consolidated Financial and Other Data***
  The
        following tables include certain information concerning
        the financial position of Guaranty Federal Bancshares, Inc. (including
        consolidated data from operations of subsidiaries) as of the dates indicated.
        Dollar amounts are expressed in thousands except per share data.
  **Summary
                      Statement of Income**
                  
                  **Year
                      ended**
                  
                  **Year
                      ended**
                  
                  **Six
                      months ended****December
                      31,**
                  
                  
                  **December
                      31,**
                  
                  
                  **December
                      31,****2005**
                  
                  
                  **2004**
                  
                  
                  **2003**Interest
                      income
                  
                  $
                  27,283
                  
                  
                  20,539
                  
                  
                  9,846Interest
                      expense
                  
                  
                  11,860
                  
                  
                  8,446
                  
                  
                  4,491Net
                      interest income
                  
                  
                  15,423
                  
                  
                  12,093
                  
                  
                  5,355Provision
                      for loan losses
                  
                  
                  945
                  
                  
                  864
                  
                  
                  1,162Net
                      interest income after provisionfor
                      loan losses
                  
                  
                  14,478
                  
                  
                  11,229
                  
                  
                  4,193Noninterest
                      income
                  
                  
                  3,597
                  
                  
                  3,616
                  
                  
                  2,089Noninterest
                      expense
                  
                  
                  8,670
                  
                  
                  8,248
                  
                  
                  3,994Income
                      before income taxes
                  
                  
                  9,406
                  
                  
                  6,597
                  
                  
                  2,288Provision
                      for income taxes
                  
                  
                  3,507
                  
                  
                  2,313
                  
                  
                  788Net
                      income
                  
                  $
                  5,899
                  
                  
                  4,284
                  
                  
                  1,500Basic
                  
                  $
                  2.12
                  
                  
                  1.53
                  
                  
                  0.54Diluted
                  
                  $
                  2.03
                  
                  
                  1.47
                  
                  
                  0.52**Six
                      months ended**
                  
                  
                  **Year
                      ended****December
                      31,**
                  
                  
                  **June
                      30,****2002**
                  
                  
                  **2003**(Unaudited)Interest
                      income
                  
                  $
                  11,290
                  
                  
                  21,782Interest
                      expense
                  
                  
                  6,086
                  
                  
                  11,445Net
                      interest income
                  
                  
                  5,204
                  
                  
                  10,337Provision
                      for loan losses
                  
                  
                  205
                  
                  
                  610Net
                      interest income after provisionfor
                      loan losses
                  
                  
                  4,999
                  
                  
                  9,727Noninterest
                      income
                  
                  
                  1,752
                  
                  
                  3,688Noninterest
                      expense
                  
                  
                  4,060
                  
                  
                  8,179Income
                      before income taxes
                  
                  
                  2,691
                  
                  
                  5,236Provision
                      for income taxes
                  
                  
                  927
                  
                  
                  1,656Net
                      income
                  
                  $
                  1,764
                  
                  
                  3,580Basic
                  
                  $
                  0.63
                  
                  
                  1.28Diluted
                  
                  $
                  0.62
                  
                  
                  1.26
 3
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Selected
              Consolidated Financial and Other Data***
  **Summary
                      Balance Sheet**
                  **As
                      of December 31,**
                  **As
                      of June 30,****2005**
                  
                  **2004**
                  
                  **2003
                      (1)**
                  
                  **2003****ASSETS**Cash
                      and cash equivalents
                  $
                  20,506
                  
                  15,896
                  
                  22,657
                  
                  19,015Investment
                      securities
                  
                  12,681
                  
                  21,553
                  
                  16,731
                  
                  15,522Loans
                      receivable, net
                  
                  435,528
                  
                  392,333
                  
                  332,130
                  
                  336,838Accrued
                      interest receivable
                  
                  2,089
                  
                  1,570
                  
                  1,306
                  
                  1,430Prepaids
                      and other assets
                  
                  2,717
                  
                  1,976
                  
                  7,351
                  
                  10,455Foreclosed
                      assets
                  
                  27
                  
                  78
                  
                  6
                  
                  182Premises
                      and equipment
                  
                  7,453
                  
                  7,189
                  
                  6,576
                  
                  6,709$
                  481,001
                  
                  440,597
                  
                  386,757
                  
                  390,151**LIABILITIES**Deposits
                  $
                  320,059
                  
                  296,388
                  
                  237,131
                  
                  235,677Federal
                      Home Loan Bank advances
                  
                  100,000
                  
                  100,000
                  
                  108,837
                  
                  114,619Subordinated
                      debentures
                  
                  15,465
                  
                  -
                  
                  -
                  
                  -Other
                      liabilities
                  
                  3,385
                  
                  3,436
                  
                  2,811
                  
                  3,313438,909
                  
                  399,824
                  
                  348,779
                  
                  353,609**STOCKHOLDERS'
                      EQUITY**
                  
                  42,092
                  
                  40,773
                  
                  37,978
                  
                  36,542$
                  481,001
                  
                  440,597
                  
                  386,757
                  
                  390,151**Supplemental
                      Data**
                  
                  **As
                      of December 31,**
                  
                  **As
                      of June 30,****2005**
                  
                  **2004**
                  
                  **2003
                      (1**
                  **)**
                  **2003**Number
                      of full-service offices
                  
                  7
                  
                  7
                  
                  9
                  
                  9Cash
                      dividends per share
                  $
                  0.65
                  
                  0.63
                  
                  0.31
                  
                  0.60
  ( 1)
          In
          2003, the Company determined to change its fiscal year end from June 30
          to a
          calendar year end of December 31. As a result, the Company reported a six-month
          transition period ended December 31, 2003 in order to change to this new
          calendar year end.
 4
 ***Guaranty
                    Federal Bancshares, Inc.***
 ***Management’s
                    Discussion and Analysis of Financial Condition***
 ***And
                    Results of
                    Operations***
 **GENERAL**
 
 Guaranty
        Federal Bancshares, Inc. (the “Company”) is a Delaware corporation organized on
        December 30, 1997 for the purpose of becoming the holding company of Guaranty
        Federal Savings Bank, a stock savings bank (the “Bank”). The Bank is a
        wholly-owned subsidiary of the Company.
  In
        April
        1995, Guaranty Federal Savings & Loan Association reorganized from a
        federally chartered mutual savings and loan association into a mutual holding
        company, Guaranty Federal Bancshares, M. H. C. (the “MHC”). Concurrent with the
        reorganization, the Bank was chartered. In December 1997, the Company completed
        the conversion and reorganization of the Bank and the former MHC by selling
        common stock to depositors of the Bank and a benefit plan of the Bank. In
        addition, all shares of common stock of the Bank held by public stockholders
        were exchanged for shares of common stock of the Company.
 
 On
        June
        27, 2003, the Bank converted to a state-chartered trust company with banking
        powers in Missouri, and the Company became a one-bank holding company. The
        name
        of the Bank was changed from Guaranty Federal Savings Bank to Guaranty
        Bank.
 
 In
        2003,
        the Company also determined to change its fiscal year end from June 30 to
        a
        calendar year end of December 31. The six-month period ended December 31,
        2003,
        transitions between the Company’s old and new fiscal year ends. As a result, the
        Company reported a six-month transition period ended December 31, 2003 in
        order
        to change to this new calendar year end.
 
 The
        primary activity of the Company is to oversee its investment in the Bank.
        The
        Company engages in few other activities, and the Company has no significant
        assets other than its investment in the Bank. For this reason, unless otherwise
        specified, references to the Company include the operations of the Bank.
        The
        Company’s principal business consists of attracting deposits from the general
        public and using such deposits to originate mortgage loans secured by one-
        to
        four-family residences, multi-family, construction and commercial real estate
        loans and consumer and business loans. The Company also uses these funds
        to
        purchase 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
        and
        brokered deposits as additional financing sources.
 
 The
        Company derives revenues principally from interest earned on loans and
        investments and, to a lesser extent, from fees charged for services. General
        economic conditions and policies of the financial institution regulatory
        agencies, including the Missouri Division of Finance and the Federal Deposit
        Insurance Corporation (“FDIC”) significantly influence the Company’s operations.
        Interest rates on competing investments and general market interest rates
        influence the Company’s cost of funds. Lending activities are affected by the
        interest rates at which such financing may be offered. The Company intends
        to
        focus on one- to four-family residential, consumer, and commercial real estate
        lending throughout southwestern Missouri.
  The
        Company
        has two wholly-owned subsidiaries other than the Bank, its principal subsidiary:
        (i) Guaranty Statutory Trust I, a Delaware statutory trust (“Trust I”); and (ii)
        Guaranty Statutory Trust II, a Delaware statutory trust. These Trusts were
        formed in December 2005 for the exclusive purpose of issuing trust preferred
        securities to acquire junior subordinated debentures issued by the Company.
        The
        Company’s banking operation conducted through the Bank is the Company’s only
        reportable segment. See also the discussion contained in the
        section captioned “Segment Information” in Note 1 to the Consolidated Financial
        Statements in this report .
 
 The
        discussion set forth below, and in any other portion of this report, may
        contain
        forward-looking statements. Such statements are based upon the information
        currently available to management of the Company and management’s perception
        thereof as of the date of this report. When used in this document, words
        such as
“anticipates,” “estimates,” “believes,” “expects,” and similar expressions are
        intended to identify forward-looking statements but are not the exclusive
        means
        of identifying such statements. Such statements are subject to risks and
        uncertainties. Actual results of the Company’s operations could materially
        differ from those forward-looking comments. The differences could be caused
        by a
        number of factors or combination of factors including, but not limited to:
        changes in demand for banking services; changes in portfolio composition;
        changes in management strategy; increased competition from both bank and
        non-bank companies; changes in the general level of interest rates; and other
        factors set forth in reports and other documents filed by the Company with
        the
        Securities and Exchange Commission from time to time.
 
 5
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 **FINANCIAL
        CONDITION**
 
 From
        December 31, 2004 to December 31, 2005, the Company’s total assets increased
        $40,404,140 (9%) to $481,000,668, liabilities increased $39,085,254 (10%)
        to
        $438,908,519, and stockholders' equity increased $1,318,886 (3%) to $42,092,149.
        The ratio of stockholders’ equity to total assets decreased to 8.8% during this
        period, compared to 9% as of December 31, 2004.
 
 From
        December 31, 2004 to December 31, 2005, securities available-for-sale decreased
        $8,344,621 (55%).  During December 2005 the Company restructured
        its investment portfolio by selling its 40,000 shares in Fannie Mae
        preferred stock, at a loss of $526,000 and investments in trust
        preferred securities totaling $6.6 million at a gain of
        $58,663.  The net loss from these sales was offset with sales of
        shares of FHLMC stock as discussed further below. The Company currently owns
        48,600 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) stock with an
        amortized cost of $47,595 in the securities available-for-sale category. 
As of December 31, 2005, the gross unrealized gain on the stock is $3,176,010,
        a
        decrease of $1,209,020 from the gross unrealized gain at December 31,
        2004.  This decrease is primarily due to the sale of 19,400 shares of the
        FHLMC stock in 2005.  In addition the stock price of FHLMC stock decreased
        from $73.70 per share as of December 31, 2004 to $66.35 per share as of December
        31, 2005.  See also discussion under “Results of Operations -
        Comparison of Year Ended December 31, 2005 and December 31, 2004 - Non-Interest
        Income.”
  From
        December 31, 2004 to December 31, 2005, securities held-to-maturity decreased
        $360,434 (28%) to $944,724 due to repayments received during the period,
        and
        stock of the Federal Home Loan Bank of Des Moines (“FHLB”) was reduced by
        $167,700 (3%) to $4,978,800 due to the sale of stock which exceeded the FHLB
        requirements.  The Bank is required to own stock in the FHLB equal to 0.12%
        of assets plus 4.45% of advances.
 
 From
        December 31, 2004 to December 31, 2005, net loans receivable increased by
        $44,692,637 (11%) to $433,435,429. During this period, permanent loans secured
        by both owner and non-owner occupied one to four unit residential real estate
        decreased $16,275,648 (14%), consumer installment loans decreased $908,546
        (4%),
        multi-family permanent loans increased $1,371,702 (3%), construction loans
        increased $25,299,646 (56%), permanent loans secured by commercial real estate
        increased $25,334,281 (26%) and other commercial loans increased $10,764,037
        (19%). During this period the Company continued to increase its emphasis
        on
        commercial lending, while selling the majority of conforming single family
        loan
        production on the secondary market. Loans sold on the secondary market are
        sold
        both servicing retained, whereby the Bank continues to service the loan and
        servicing released, whereby the third party who purchases the loan provides
        the
        servicing. Recently, the majority of the loans sold on the secondary market
        have
        been sold servicing released. As a result of these loan sales, loans serviced
        for others decreased $10,543,585 (8%).
 
 From
        December 31, 2004 to December 31, 2005, loans past due 90 days or more increased
        $302,075 to $721,540 (0.2% of net loans). As of December 31, 2005, management
        considers loans totaling $4,626,260 as impaired with a related allowance
        for
        loan losses of $532,811. Single-family homes collateralize the majority of
        the
        impaired loans. The Bank recognizes interest income on impaired loans as
        payments are received. Management believes the loss allowances recorded for
        these loans are sufficient to liquidate the collateral without further
        loss.
 
 From
        December 31, 2004 to December 31, 2005, the allowance for loan losses increased
        $863,000 to $5,399,654. In addition to the provision for loan loss of $945,000
        recorded by the Company during year ended December 31, 2005 loan charge-offs
        exceeded recoveries by $82,000 for the twelve months ended December 31, 2005.
        The allowance for loan losses as of December 31, 2005 and December 31, 2004
        was
        1.2% and 1.2% of net loans outstanding, respectively. As of December 31,2005,
        the allowance for loan losses was 117% of impaired loans versus 75% as of
        December 31, 2004.
 
 As
        of
        December 31, 2005, foreclosed assets held for sale consisted of four vehicles.
        This represents a decrease from December 31, 2004 primarily resulting from
        the
        Company’s sale during 2005 of the single family residence which was held for
        sale as of December 31, 2004.
 
 From
        December 31, 2004 to December 31, 2005, premises and equipment increased
        $263,931 (4%) to $7,452,798. This increase is primarily due the addition
        of a
        new branch location and new equipment.
 
 6
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
  From
        December 31, 2004 to December 31, 2005, deposits increased $23,671,209 (8%)
        to
        $320,058,951. During this period, core deposit accounts increased by $2,901,337
        (2%) to 41% of total deposits and certificates of deposit increased by
        $20,769,872 (12%) to $189,806,318. Included in the certificates of deposit
        total
        is $57,629,088 in deposits placed by brokers, a decrease from $68,374,919
        as of
        December 31, 2004. Management considers brokered deposits to be an effective
        source of funds that cost less at the margin than increasing rates on retail
        deposits in our local market.
 
 From
        December 31, 2004 to December 31, 2005, the Company’s borrowings from the
        Federal Home Loan Bank (“FHLB”) remained the same, at $100,000,000, which
        satisfies the Company’s requirement to comply with the FHLB advances limitation
        of 35% of total assets.
 
 As
        of
        December 31, 2005, the Company had $15,465,000 of junior subordinated debentures
        that were comprised of $5,155,000 issued to Guaranty Statutory Trust I and
        $10,310,000 issued to Guaranty Statutory Trust II. During the year ended
        December 31, 2004, the Company did not issue or have outstanding any
        subordinated debentures. On December 15, 2005, the Company completed an offering
        of $15 million of trust preferred securities (”Trust Securities”). The Company
        formed Guaranty Statutory Trust I and Guaranty Statutory Trust II as
        wholly-owned subsidiaries and Delaware statutory trusts for the purpose of
        issuing the Trust Securities. The proceeds of the sale of Trust Securities
        issued by Guaranty Statutory Trust I, together with the proceeds of the Trust’s
        sale of its common securities issued to the Company, were used by the Trust
        to
        purchase 30-year junior subordinated deferrable interest debentures from
        the
        Company in the principal amount of $5,155,000 (“Trust I Debentures”). The
        proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust
        II,
        together with the proceeds of the Trust’s sale of its common securities issued
        to the Company, were used by the Trust to purchase 30-year junior subordinated
        deferrable interest debentures from the Company in the principal amount of
        $10,310,000 (“Trust II Debentures”, and collectively with the Trust I
        Debentures, the “Debentures”). Both the Trust I Debentures and the Trust II
        Debentures were issued pursuant to the terms of Indentures dated December
        15,
        2005 by and between the Company and Wilmington Trust Company, as trustee.
        The
        Trust I Debentures bear interest at a fixed rate of 6.92%, payable quarterly.
        The Trust II Debentures bear interest at a fixed rate of 6.47% for 5 years,
        payable quarterly, after issuance and thereafter at a floating rate equal
        to the
        three month LIBOR plus 1.45%. The interest payments by the Company to the
        Trusts
        will be used to pay the dividends payable by the Trusts to the holders of
        the
        Trust Securities.
  The
        Debentures mature on February 23, 2036. Subject to prior approval by the
        Federal
        Reserve Board, the Debentures and the Trust Securities are each callable
        by the
        Company or the Trusts, respectively and as applicable, at its option after
        five
        years from issuance, and sooner in the case of a special redemption at a
        special
        redemption price ranging up to 103.2% of the principal amount thereof, and
        upon
        the occurrence of certain events, such as a change in the regulatory capital
        treatment of the Trust Securities, either Trust being deemed an investment
        company or the occurrence of certain adverse tax events. In addition, the
        Company and the Trusts may defer interest and dividend payments, respectively,
        for up to five consecutive years without resulting in a default. An event
        of
        default may occur if the Company declares bankruptcy, fails to make the required
        payments within 30 days or breaches certain covenants under the Debentures.
        The
        Debentures are subordinated to the prior payment of any other indebtedness
        of
        the Company.
  The
        Company invested $13,970,000 from the proceeds of the sale of the trust
        preferred securities in its banking subsidiary, where the funds were used
        primarily to restructure the investment portfolio, fund loan growth and repay
        FHLB advances.
  Stockholders’
        equity (including unrealized appreciation on securities available-for-sale,
        net
        of tax) increased $1,318,886 (3%) to $42,092,149 as of December 31, 2005.
        Net
        income for the period ended December 31, 2005 exceeded cash dividends paid
        or
        declared by $4,096,207. The Company repurchased 146,542 shares as treasury
        stock
        at a cost of $3,563,011, at an average price of $24.31 per share. As of December
        31, 2005, 38,543 shares remain to be repurchased under the repurchase plan
        announced November 22, 2002. The decrease in unrealized appreciation on
        securities available-for-sale, net of tax, decreased stockholders’ equity by
        $843,903. Stockholders’ equity also increased as a result of exercises of stock
        options to purchase the Company’s Common Stock and the release of shares of the
        Company’s Common Stock held by the Bank sponsored Employee Stock Ownership Plan.
        On a per share basis, stockholders’ equity increased $0.72 (5%) from $14.45 as
        of December 31, 2004 to $15.17 as of December 31, 2005.
  7
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
  **AVERAGE
        BALANCES, INTEREST AND AVERAGE YIELDS**
 
 The
        following table shows the balances as of December 31, 2005 of various categories
        of interest-earning assets and interest-bearing liabilities and the
        corresponding yields and costs, and, for the periods indicated: (1) the average
        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.
  As
                    of
                
                
                Year
                    Ended
                
                
                Year
                    EndedDecember
                    31, 2005
                
                
                December
                    31, 2005
                
                
                December
                    31, 2004Balance
                
                
                Yield
                    / Cost
                
                
                Average
                    Balance
                
                
                Interest
                
                Yield
                    / Cost
                
                
                Average
                    Balance
                
                Interest
                
                Yield
                    / Cost**ASSETS**Interest-earning:Loans
                $
                435,528
                
                
                6.88
                %
                $
                419,552
                
                $
                26,553
                
                6.33
                %
                $
                366,696
                
                19,990
                
                5.45
                %Investment
                    securities
                
                4,526
                
                
                5.23
                %
                
                9,905
                
                
                432
                
                4.36
                %
                
                10,076
                
                289
                
                2.87
                %Other
                    assets
                
                10,670
                
                
                3.04
                %
                
                11,681
                
                
                299
                
                2.56
                %
                
                14,508
                
                260
                
                1.79
                %Total
                    interest-earning
                
                450,724
                
                
                6.77
                %
                
                441,138
                
                
                27,284
                
                6.18
                %
                
                391,280
                
                20,539
                
                5.25
                %Noninterest-earning
                
                30,277
                
                
                
                
                
                20,205
                
                
                
                
                
                
                
                20,812$
                481,001
                
                
                
                
                $
                461,343
                
                
                
                
                
                
                $
                412,092**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Interest-bearing:Savings
                    accounts
                $
                14,298
                
                
                1.80
                %
                $
                14,931
                
                
                201
                
                1.35
                %
                $
                16,607
                
                140
                
                0.84
                %Transaction
                    accounts
                
                79,761
                
                
                1.24
                %
                
                84,776
                
                
                1,300
                
                1.53
                %
                
                80,001
                
                793
                
                0.99
                %Certificates
                    of deposit
                
                189,807
                
                
                3.66
                %
                
                178,301
                
                
                5,788
                
                3.25
                %
                
                139,264
                
                3,986
                
                2.86
                %FHLB
                    advances
                
                100,000
                
                
                4.55
                %
                
                111,104
                
                
                4,494
                
                4.04
                %
                
                111,169
                
                3,519
                
                3.17
                %Subordinated
                    debentures
                
                15,465
                
                
                6.62
                %
                
                701
                
                
                47
                
                6.70
                %
                
                -
                
                -
                
                -Other
                    borrowed funds
                
                1,594
                
                
                2.55
                %
                
                1,395
                
                
                31
                
                2.22
                %
                
                987
                
                7
                
                0.71
                %Total
                    interest-bearing
                
                400,925
                
                
                3.44
                %
                
                391,208
                
                
                11,861
                
                3.03
                %
                
                348,029
                
                8,446
                
                2.43
                %Noninterest-bearing
                
                37,984
                
                
                
                
                
                28,374
                
                
                
                
                
                
                
                24,173Total
                    liabilities
                
                438,909
                
                
                
                
                
                419,582
                
                
                
                
                
                
                
                372,202Stockholders'
                    equity
                
                42,092
                
                
                
                
                
                41,761
                
                
                
                
                
                
                
                39,891$
                481,001
                
                
                
                
                $
                461,343
                
                
                
                
                
                
                $
                412,092Net
                    earning balance
                $
                49,799
                
                
                
                
                $
                49,930
                
                
                
                
                
                
                $
                43,252Earning
                    yield less costing rate
                
                
                
                
                3.33
                %
                
                
                
                
                
                
                3.15
                %
                
                
                
                
                
                2.82
                %Net
                    interest income, andnet
                    yield spread oninterest-earning
                    assets
                
                
                
                
                
                
                
                
                
                $
                15,423
                
                3.50
                %
                
                
                
                12,094
                
                3.09
                %Ratio
                    of interest-earning assets tointerest-bearing
                    liabilities
                
                112
                %
                
                
                
                
                113
                %
                
                
                
                
                
                
                112
                %
  8
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 Six
                    Months Ended
                
                Six
                    Months Ended
                
                Year
                    EndedDecember
                    31, 2003
                
                December
                    31, 2002
                
                June
                    30, 2003(Unaudited)Average
                    Balance
                
                
                Interest
                
                Yield
                    / Cost
                
                
                Average
                    Balance
                
                Interest
                
                Yield
                    / Cost
                
                
                Average
                    Balance
                
                Interest
                
                Yield
                    / Cost**ASSETS**Interest-earning:Loans
                $
                334,071
                
                $
                9,567
                
                5.73
                %
                $
                323,292
                
                10,827
                
                6.70
                %
                $
                326,441
                
                20,928
                
                6.41
                %Investment
                    securities
                
                9,899
                
                
                135
                
                2.73
                %
                
                11,988
                
                231
                
                3.85
                %
                
                11,103
                
                419
                
                3.77
                %Other
                    assets
                
                13,867
                
                
                144
                
                2.08
                %
                
                24,800
                
                232
                
                1.87
                %
                
                18,864
                
                434
                
                2.30
                %Total
                    interest-earning
                
                357,837
                
                
                9,846
                
                5.50
                %
                
                360,080
                
                11,290
                
                6.27
                %
                
                356,408
                
                21,781
                
                6.11
                %Noninterest-earning
                
                20,821
                
                
                
                
                
                
                
                13,990
                
                
                
                
                
                
                19,368$
                378,658
                
                
                
                
                
                
                $
                374,070
                
                
                
                
                
                $
                375,776**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Interest-bearing:Savings
                    accounts
                $
                17,483
                
                
                70
                
                0.80
                %
                $
                17,507
                
                132
                
                1.51
                %
                $
                17,390
                
                221
                
                1.27
                %Transaction
                    accounts
                
                74,578
                
                
                327
                
                0.88
                %
                
                67,002
                
                460
                
                1.37
                %
                
                67,614
                
                814
                
                1.20
                %Certificates
                    of deposit
                
                121,926
                
                
                1,971
                
                3.23
                %
                
                127,218
                
                2,530
                
                3.98
                %
                
                126,376
                
                4,768
                
                3.77
                %FHLB
                    advances
                
                101,841
                
                
                2,121
                
                4.17
                %
                
                107,612
                
                2,959
                
                5.50
                %
                
                108,020
                
                5,634
                
                5.22
                %Other
                    borrowed funds
                
                907
                
                
                2
                
                0.44
                %
                
                971
                
                5
                
                1.03
                %
                
                832
                
                7
                
                0.84
                %Total
                    interest-bearing
                
                316,735
                
                
                4,491
                
                2.84
                %
                
                320,310
                
                6,086
                
                3.80
                %
                
                320,232
                
                11,444
                
                3.57
                %Noninterest-bearing
                
                24,038
                
                
                
                
                
                
                
                17,390
                
                
                
                
                
                
                18,946Total
                    liabilities
                
                340,773
                
                
                
                
                
                
                
                337,700
                
                
                
                
                
                
                339,178Stockholders'
                    equity
                
                37,885
                
                
                
                
                
                
                
                36,370
                
                
                
                
                
                
                36,598$
                378,658
                
                
                
                
                
                
                $
                374,070
                
                
                
                
                
                $
                375,776Net
                    earning balance
                $
                41,102
                
                
                
                
                
                
                $
                39,770
                
                
                
                
                
                $
                36,176Earning
                    yield less costing rate
                
                
                
                
                
                
                2.66
                %
                
                
                
                
                
                2.47
                %
                
                
                
                
                
                2.54
                %Net
                    interest income, andnet
                    yield spread oninterest-earning
                    assets
                
                
                
                $
                5,355
                
                2.99
                %
                
                
                
                5,204
                
                2.89
                %
                
                
                
                10,337
                
                2.90
                %Ratio
                    of interest-earning assets tointerest-bearing
                    liabilities
                
                113
                %
                
                
                
                
                
                
                112
                %
                
                
                
                
                
                111
                %
 9
 ***Guaranty
                Federal Bancshares, Inc.***
 ***Management’s
                Discussion and Analysis of Financial Condition***
 ***And
                Results of Operations***
 The
        following table sets forth information regarding changes in interest income
        and
        interest expense for the periods indicated resulting from changes in average
        balances and average rates shown in the previous table. For each category
        of
        interest-earning assets and interest-bearing liabilities information is provided
        with respect to changes attributable to: (i) changes in balance (change in
        balance multiplied by the old rate), (ii) changes in interest rates (change
        in
        rate multiplied by the old balance); and (iii) the combined effect of changes
        in
        balance and interest rates (change in balance multiplied by change in rate).
        Dollar amounts are expressed in thousands.
 
 Year
                    ended
                
                
                Year
                    endedDecember
                    31, 2005 versus December 31, 2004
                
                
                December
                    31, 2004 versus June 30, 2003Average
                    Balance
                
                
                Interest
                    Rate
                
                Rate
                    & Balance
                
                Total
                
                
                Average
                    Balance
                
                Interest
                    Rate
                
                Rate
                    & Balance
                
                TotalInterest
                    income:Loans
                $
                2,881
                
                
                3,218
                
                464
                
                6,563
                
                $
                2,581
                
                (3,133
                )
                (386
                )
                (938
                )Investment
                    securitites
                
                (5
                )
                
                150
                
                (2
                )
                143
                
                
                (39
                )
                (100
                )
                9
                
                (130
                )Other
                    assets
                
                (50
                )
                
                111
                
                (22
                )
                39
                
                
                (100
                )
                (96
                )
                22
                
                (174
                )Net
                    change in interest income
                
                2,826
                
                
                3,479
                
                440
                
                6,745
                
                
                2,442
                
                (3,329
                )
                (355
                )
                (1,242
                )Interest
                    expense:Savings
                    accounts
                
                (14
                )
                
                84
                
                (9
                )
                61
                
                
                (10
                )
                (75
                )
                4
                
                (81
                )Transaction
                    accounts
                
                47
                
                
                433
                
                26
                
                506
                
                
                149
                
                (143
                )
                (27
                )
                (21
                )Certificates
                    of deposit
                
                1,117
                
                
                535
                
                150
                
                1,802
                
                
                486
                
                (1,151
                )
                (117
                )
                (782
                )Advances
                
                (2
                )
                
                977
                
                (1
                )
                974
                
                
                164
                
                (2,214
                )
                (65
                )
                (2,115
                )Subordinated
                    debentures
                
                47
                
                
                -
                
                -
                
                47
                
                
                -
                
                -
                
                -
                
                -Other
                    borrowed funds
                
                3
                
                
                15
                
                6
                
                24
                
                
                1
                
                (1
                )
                -
                
                -Net
                    change in interest expense
                
                1,198
                
                
                2,044
                
                172
                
                3,414
                
                
                790
                
                (3,584
                )
                (205
                )
                (2,999
                )Change
                    in net interest income
                $
                1,628
                
                
                1,435
                
                268
                
                3,331
                
                $
                1,652
                
                255
                
                (150
                )
                1,757
 **RESULTS
        OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2005 AND DECEMBER 31,
        2004**
 
 Prime
                  
                  Ten-Year
                      Treasury
                  
                  One-Year
                      TreasuryDecember
                      31, 2005
                  
                  6.19
                  %
                  
                  4.29
                  %
                  
                  3.62
                  %December
                      31, 2004
                  
                  4.34
                  %
                  
                  4.27
                  %
                  
                  1.88
                  %Change
                      in rates
                  
                  1.85
                  %
                  
                  0.02
                  %
                  
                  1.74
                  %
 Interest
        Rates .
        The
        Bank charges borrowers and pays depositors interest rates that are largely
        a
        function of the general level of interest rates. The above table sets forth
        the
        weekly average interest rates for the 52 weeks ending December 31, 2005 and
        December 31, 2004 as reported by the Federal Reserve. The Bank typically
        indexes
        its adjustable rate commercial loans to prime and its adjustable rate mortgage
        loans to the one-year treasury rate. The ten-year treasury rate is a proxy
        for
        30-year fixed rate home mortgage loans.
 
 Rates
        trended upward during 2004 as the FOMC increased the discount rates 25 basis
        points after five consecutive meetings from June to December 2004. As of
        year-end 2004, the prime rate was 5.25% up from 4.00% where it was quoted
        from
        June 2003 to June 2004. This trend continued in 2005 as the FOMC increased
        the
        discount rates 25 basis points after eight consecutive meetings from January
        2005 to December 2005. As of year-end 2005 the prime rate was
        7.25%.
 
 10
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 
 
 Interest
        Income .
        Total
        interest income increased $6,744,135 (33%) as the average balance of
        interest-earning assets increased $49,858,000 (12%). In addition, the yield
        on
        average interest earning assets increased 93 basis points to 6.18%.
 
 Interest
        on loans increased $6,562,743 (33%) and the average loan receivable balance
        increased $52,856,000 (14%) while the average yield increased 88 basis points
        to
        6.33%. The increase in loan yield is the result of the combination of new
        loans
        at higher rates, a reduction in prepayments, and an increase of interest
        rates
        on adjustable rate loans.
 
 Interest
        Expense .
        Total
        interest expense increased $3,414,774 (40%) as the average balance of
        interest-bearing liabilities increased $43,179,000 (12%). In addition, the
        average cost of interest-bearing liabilities increased 60 basis points to
        3.03%.
 
 Interest
        expense on deposits increased $2,368,909 (48%) as the average balance of
        interest bearing deposits increased $42,136,000 (18%) and the average interest
        rate paid to depositors increased 54 basis points to 2.62%. The average balance
        of interest bearing core deposit accounts increased $3,099,000 (3%) and the
        average balance of certificates of deposit increased $39,037,000 (28%).
 
 In
        compliance with the FHLB limitation of advances to 35% of assets, the Company’s
        borrowings from the FHLB remained the same at $100,000,000. The average cost
        of
        those advances increased 87 basis points to 4.04%. As a result, interest
        expense on these advances increased $974,604 (28%). As of December 31, 2005
        FHLB
        advances are 21% of total assets, compared to 23% of total assets as of December
        31, 2004.
 
 Net
        Interest Income .
        The
        Company’s net interest income increased $3,329,361 (28%). During the year ended
        December 31, 2005, the average balance of interest-earning assets exceeded
        the
        average balance of interest-bearing liabilities by $49,930,000, resulting
        in an
        increase in the average net earning balance of $49,858,000 (12%). In addition,
        the Company’s spread between the average yield on interest-earning assets and
        the average cost of interest-bearing liabilities increased by 33 basis points
        from 2.82% to 3.15%.
 
 Provision
        for Loan Losses .
        Provisions for loan losses are charged or credited to earnings to bring the
        total allowance for loan losses to a level considered adequate by the Company
        to
        provide for potential loan losses in the existing loan portfolio. When making
        its assessment, the Company considers prior loss experience, volume and type
        of
        lending, local banking trends and past due loans in the Company’s loan
        portfolio. In addition, the Company considers general economic conditions
        and
        other factors related to collectiability of the Company’s loan
        portfolio.
 
 During
        year ended December 31, 2005, the Company experienced loan charge-offs in
        excess
        of recoveries of $82,000 and, based on a review as discussed above, elected
        to
        record a provision for loan loss of $945,000 to increase the allowance for
        loan
        losses to $5,399,654 as of December 31, 2005. The provision for loan losses
        recorded by the Company during year ended December 31, 2004 was $863,830.
        Management of the Company anticipates the need to continue increasing the
        loan
        loss allowance in the future through charges to provision for loan losses
        based
        on the anticipated growth in its loan portfolio and the shift in the Company’s
        emphasis from primarily single-family loans to a mix of single-family and
        commercial loans.
 
 Non-Interest
        Income .
        Non-interest income decreased $19,115 (1%). The gain on sale of loans of
        $623,252 for 2005, compared to $484,920 for 2004, was the result of mortgage
        banking activities related to the sale of single-family conforming residential
        loans in the secondary market. The Bank attempts to minimize its risk of
        price
        changes by committing to sell loans while the loans are in the origination
        process. The gain on sale of investments for year ended December 31, 2005
        was
        $743,335, compared to $742,608 for year ended December 31, 2004.  In 2005,
        this gain was primarily attributed to the gain of $1,210,672, arising from
        the
        sale of 19,400 shares of FHLMC stock, which was offset by the loss of $526,000
        incurred with the sale of all of its shares of Fannie Mae
        preferred.    Deposit service charges decreased $234,396 (12%)
        due to decreases in insufficient funds and overdraft charges on the Bank’s
        checking accounts. In addition,
        late charges and other fees decreased $89,239 (25%) primarily due to a decrease
        in prepayment penalties collected during the year ended December 31,
        2005. 
 11
 ***Guaranty
                Federal Bancshares, Inc.***
 ***Management’s
                Discussion and Analysis of Financial Condition***
 ***And
                Results of Operations***
  Non-Interest
        Expense .
        Non-interest expense increased $421,630 (5%). This increase was primarily
        due to
        increases in salaries and employee benefits of $313,328 (7%) and occupancy
        expense of $78,298 (6%). The increase in compensation was due to normal salary
        and benefits increases for the Bank’s employees, along with an increase in the
        number of employees. The staff increased from 115 full-time equivalent employees
        as of December 31, 2004 to 125 full-time equivalent employees as of December
        31,
        2005. In August 2005, the Company opened a new full-service branch in Nixa,
        Missouri. In addition, the full-service branch located on West Kearney was
        in
        operation for the entire year of 2005.
 
 Income
        Taxes .
        The
        increase in income tax expense is a direct result of the increase in the
        Company’s taxable income for the period ended December 31, 2005 as compared to
        the period ended December 31, 2004.
 
 Cash
        Dividends Paid .
        The
        Company paid dividends of $0.16 per share on April 14, 2005, to stockholders’ of
        record as of March 30, 2005, and $0.16 per share on July 15, 2005 to
        stockholders’ of record as of July 1, 2005, and $0.165 per share on October 14,
        2005, to stockholders’ of record as of October 1, 2005. The Company declared a
        cash dividend of $0.165 per share on December 22, 2005, which was paid on
        January 20, 2006, to stockholders of record on January 6, 2006.
 
 **RESULTS
        OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2004 AND FISCAL YEAR
        ENDED
        JUNE 30, 2003**
 Prime
                
                Ten-Year
                    Treasury
                
                One-Year
                    TreasuryDecember
                    31, 2004
                
                4.34
                %
                
                4.27
                %
                
                1.88
                %June
                    30, 2003
                
                4.43
                %
                
                3.96
                %
                
                1.46
                %Change
                    in rates
                
                -0.09
                %
                
                0.31
                %
                
                0.42
                %
 Interest
        Rates .
        The
        Bank charges borrowers and pays depositors interest rates that are largely
        a
        function of the general level of interest rates. The above table sets forth
        the
        weekly average interest rates for the 52 weeks ending December 31, 2004 and
        June
        30, 2003 as reported by the Federal Reserve. The Bank typically indexes its
        adjustable rate commercial loans to prime and its adjustable rate mortgage
        loans
        to the one-year treasury rate. The ten-year treasury rate is a proxy for
        30-year
        fixed rate home mortgage loans.
 
 During
        2003, interest rates were relatively stable achieving cycle low in June 2003
        when the Federal Reserve Open Market Committee (“FOMC”) reduced the discount
        rate 25 basis points. After that rate cut, longer-term interest rates began
        to
        increase and the mortgage loan refinancing activity began to slow. Rates
        trended
        upward during 2004 as the FOMC increased the discount rates 25 basis points
        after five consecutive meetings from June to December 2004. As of year-end
        2004,
        the prime rate was 5.25% up from 4.00% where it was quoted from June 2003
        to
        June 2004.
 
 Interest
        Income .
        Total
        interest income decreased $1,242,447 (11%) as the average balance of
        interest-earning assets increased $34,872,000 (10%). The yield on average
        interest earning assets, however, decreased 85 basis points to 5.46%, which,
        despite the increase in interest-earning assets, resulted in the overall
        decrease in interest income.
 
 Interest
        on loans decreased $938,539 (9%) as the average loan receivable balance
        increased $40,255,000 (12%) while the average yield decreased 96 basis points
        to
        5.45%. The decrease in loan yield is the result of the combination of new
        loans
        at lower rates, repayments of higher yielding loans, and the roll down of
        adjustable rate loans. Interest on investment securities decreased $129,810
        (31%) as the average balance decreased $1,027,000 (9%) and the average yield
        decreased 90 basis points to 2.87.
 
 
 12
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
  Interest
        Expense .
        Total
        interest expense decreased $2,998,783 (26%) as the average balance of
        interest-bearing liabilities increased $27,797,000 (9%). In addition, the
        average cost of interest-bearing liabilities decreased 114 basis points to
        2.43%.
 
 Interest
        expense on deposits decreased $883,281 (15%) as the average balance of interest
        bearing deposits increased $24,492,000 (7%) while the average interest rate
        paid
        to depositors decreased 66 basis points to 2.09%. The average balance of
        interest bearing core deposit accounts increased $11,604,000 (13%) and the
        average balance of certificates of deposit increased $12,888,000 (10%).
 
 In
        order
        to comply with the FHLB limitation of advances to 35% of assets, the Company
        decreased its borrowings from the FHLB. The average balance of FHLB advances
        decreased by $3,149,000 (2%) and the average cost of those advances decreased
        205 basis points to 3.17%. As a result, interest expense on advances decreased
        $2,115,091 (38%). As of December 31, 2004, FHLB advances are 23% of total
        assets, compared to 29% of total assets as of June 30, 2003.
 
 Net
        Interest Income .
        The
        Company’s net interest income increased $1,756,335 (17%). During the year ended
        December 31, 2004, the average balance of interest-earning assets exceeded
        the
        average balance of interest-bearing liabilities by $43,251,000, resulting
        in a
        increase in the average net earning balance of $34,872,000 (10%). The Company’s
        spread between the average yield on interest-earning assets and the average
        cost
        of interest-bearing liabilities increased by 28 basis points from 2.54% to
        2.82%.
 
 Provision
        for Loan Losses .
        Provisions for loan losses are charged or credited to earnings to bring the
        total allowance for loan losses to a level considered adequate by the Company
        to
        provide for potential loan losses in the Company’s existing loan portfolio. When
        making its assessment, the Company considers prior loss experience, volume
        and
        type of lending, local banking trends and past due loans in the Company’s loan
        portfolio. In addition, the Company considers general economic conditions
        and
        other factors related to collectability of the Company’s loan
        portfolio.
 
 During
        year ended December 31, 2004, the Company experienced loan charge-offs in
        excess
        of recoveries of $213,312 and, based on a review as discussed above, elected
        to
        record a provision for loan loss of $863,830 to increase the allowance for
        loan
        losses to $4,536,654 as of December 31, 2004. The provision for loan losses
        recorded by the Company during year ended June 30, 2003 was $610,000. Management
        of the Company anticipates the need to continue increasing the loan loss
        allowance in the future through charges to provision for loan losses based
        on
        the anticipated growth in its loan portfolio and the shift in the Company’s
        emphasis from primarily single-family loans to a mix of single-family and
        commercial loans.
 
 Non-Interest
        Income .
        Non-interest income decreased $72,155 (2%). The gain on sale of loans of
        $1,544,037 for fiscal year 2003 was the result of mortgage banking activities
        related to the sale of single-family conforming residential loans in the
        secondary market. Due to increases in interest rates and a decrease in
        refinances, gain on sale of loans decreased by $1,059,117 (158%) for the
        year
        ended December 31, 2004. The Bank attempts to minimize its risk of price
        changes
        by committing to sell loans while the loans are in the origination process.
        The
        gain on sale of investments for year ended December 31, 2004 was $742,608.
        This
        was a result of the sale of 1,000 shares of FHLMC stock each month in 2004.
        There were no profits on sale of investments for fiscal year ended June 30,
        2003. Deposit service charges increased $99,563 (6%) due to increases in
        insufficient funds and overdraft changes on the Bank’s checking accounts. In
        addition, late charges and other fees increased $163,576 (86%) primarily
        due to
        an increase in prepayment penalties collected during the year ended December
        31,
        2004.
 
 Non-Interest
        Expense .
        Non-interest expense increased $67,884 (1%). There were slight increases
        in
        salaries, employee benefits and advertising. These increases were offset
        by
        decreases in occupancy and data processing expense.
 
 Income
        Taxes .
        The
        increase in income tax expense is a direct result of the increase in the
        Company’s taxable income for the period ended December 31, 2004, as compared to
        period ended June 30, 2003.
 
 
 13
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 Cash
        Dividends Paid .
        The
        Company paid dividends of $0.155 per share on April 14, 2004, to stockholders’
of record as of March 30, 2004, and $0.155 per share on July 15, 2004 to
        stockholders’ of record as of July 1, 2004, and $0.16 per share on October 15,
        2004, to stockholders’ of record as of October 1, 2004. The Company declared a
        cash dividend of $0.16 per share on December 16, 2004, which was paid on
        January
        21, 2005, to stockholders of record on January 7, 2005.
 
 **RESULTS
        OF OPERATIONS - TRANSITION PERIOD - COMPARISON OF SIX MONTHS ENDED DECEMBER
        31,
        2003 (AUDITED) AND 2002 (UNAUDITED)**
 Prime
                
                Ten-Year
                    Treasury
                
                One-Year
                    TreasuryDecember
                    31, 2003
                
                4.12
                %
                
                4.01
                %
                
                1.25
                %December
                    31, 2002
                
                4.68
                %
                
                4.63
                %
                
                2.01
                %Change
                    in rates
                
                -0.56
                %
                
                -0.62
                %
                
                -0.76
                %
 Interest
        Rates .
        The
        above table sets forth the weekly average interest rates for the 26 weeks
        for
        the six month periods ending December 31, 2003 and 2002 as reported by the
        Federal Reserve. As stated previously, the Bank charges borrowers and pays
        depositors interest rates that are largely a function of the general level
        of
        interest rates, and the Bank typically indexes its adjustable rate commercial
        loans to prime and its adjustable rate mortgage loans to the one-year treasury
        rate. The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage
        loans.
 
 Interest
        rates continued their cyclical decline though out 2002. The FOMC reduced
        the
        discount rate 50 basis points in November 2002 and 25 basis points in June
        2003.
        The prime rate began 2002 at 4.75%, cut to 4.25% in November 2002 and cut
        again
        to 4.00% in June 2003 where it stayed for the remainder of the year.
 
 Interest
        Income .
        Total
        interest income decreased $1,444,518 (13%) as the average balance of
        interest-earning assets decreased $2,243,000 (1%). In addition, the yield
        on
        average interest earning assets decreased 77 basis points to 5.50%.
 
 Interest
        on loans decreased $1,260,103 (12%) as the average loan receivable balance
        increased $10,779,000 (3%) while the average yield decreased 97 basis points
        to
        5.73%. The decrease in loan yield is the result of the combination of new
        loans
        at lower rates, repayments of higher yielding loans, and the roll down of
        adjustable rate loans. Interest on investment securities decreased $95,970
        (42%)
        as the average balance decreased $2,089,000 (17%) and the average yield
        decreased 112 basis points to 2.73%. As long as interest rates remain at
        historical low levels, our customers will benefit from loan rates adjusting
        downward and from refinancing to fixed-rate mortgages to lock-in the lower
        rates. These adjustments and refinances will negatively impact portfolio
        loan
        yields in future quarters.
 
 Interest
        Expense .
        Total
        interest expense decreased $1,594,531 (26%) as the average balance of
        interest-bearing liabilities decreased $3,575,000 (1%). In addition, the
        average
        cost of interest-bearing liabilities decreased 96 basis points to
        2.84%.
 
 Interest
        expense on deposits decreased $752,975 (24%) despite the average balance
        of
        interest bearing deposits increasing $2,260,000 (1%) because the average
        interest rate paid to depositors decreased 74 basis points to 2.21%. The
        average
        balance of interest bearing core deposit accounts increased $7,552,000 (9%)
        and
        the average balance of certificates of deposit decreased $5,292,000 (4%).
 
 Interest
        expense on FHLB advances decreased $838,337 (28%). In order to comply with
        the
        FHLB limitation of advances to 35% of assets, the Company decreased its
        borrowings from the FHLB. The average balance of FHLB advances decreased
        by
        $5,771,000 (5%) and the average cost of those advances decreased 133 basis
        points to 4.17%. As of December 31, 2003, FHLB advances are 28% of total
        assets.
 
 14
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 
 
 Net
        Interest Income .
        The
        Company’s net interest income increased $150,013 (3%). During the six months
        ended December 31, 2003 and December 31, 2002, the average balance of
        interest-earning assets exceeded the average balance of interest-bearing
        liabilities by $41,102,000 and $39,770,000, respectively, resulting in an
        increase in the average net earning balance of $1,332,000 (3%). The Company’s
        spread between the average yield on interest-earning assets and the average
        cost
        of interest-bearing liabilities increased by 19 basis points from 2.47% to
        2.66%.
 
 Provision
        for Loan Losses .
        Provisions for loan losses are charged or credited to earnings to bring the
        total allowance for loan losses to a level considered adequate by the Company
        to
        provide for potential loan losses in the Company’s existing loan portfolio. When
        making its assessment, the Company considers prior loss experience, volume
        and
        type of lending, local banking trends and past due loans in the Company’s loan
        portfolio. In addition, the Company considers general economic conditions
        and
        other factors related to collectability of the Company’s loan
        portfolio.
 
 During
        the six month period ended December 31, 2003, the Company experienced loan
        charge-offs in excess of recoveries of only $51,183. However, as of December
        31,
        2003, the Bank classified a group of approximately 150 loans totaling
        approximately $9 million. These loans were classified because, pursuant to
        a
        normal regulatory examination, it was deemed that the loan files relating
        to
        these loans did not contain sufficient information to effectively evaluate
        the
        credits. With the addition of these loans to classified assets, the Company
        determined to increase the provision for loan losses by $800,000. Prior to
        this
        increase, the Company had recorded a provision for loan loss during the
        six-month transition period ended December 31, 2003 of $362,000 (resulting
        in an
        aggregate provision for loan losses during this period of $1,162,000) based
        on
        the growth in its loan portfolio and the shift in the Company’s emphasis from
        primarily single-family loans to a mix of single-family and commercial loans.
        The provision for loan loss recorded during the six month period ended December
        31, 2002 was $205,000. Management of the Company anticipates the need to
        continue increasing the loan loss allowance in the future through charges
        to
        provision for loan losses based on the factors described in the previous
        sentence.
 
 Non-Interest
        Income .
        Non-interest income increased $337,137 (19%). The gain on sale of loans
        increased by $88,842 as a result of mortgage banking activities related to
        the
        sale of single-family conforming residential loans in the secondary market.
        The
        Bank attempts to minimize its risk of price changes by committing to sell
        loans
        while the loans are in the origination process. Gain on sale of investments
        increased by $105,461. This was a result of the sale of 2,000 shares of FHLMC
        stock during the six months ended December 31, 2003. There were no profits
        on
        sale of investments for the same period in 2002. Deposit service charges
        increased $67,392 (8%) due to the continued growth in the Bank’s checking
        accounts. The amortization expense on originated mortgage servicing rights
        increased $90,616. The Bank recaptured $271,406 in loss on impairment of
        these
        rights based on the Bank’s fair value assessment of such rights.
 
 Non-Interest
        Expense .
        Non-interest expense decreased $66,523 (2%). Data processing expense decreased
        $161, 541, primarily due to the full amortization prior to or during the
        six
        months ended December 31, 2003 of start up expenses in connection with the
        conversion to an “in-house” computer system that was completed in September of
        2000. In addition, occupancy expense decreased by $69,579. This was partially
        offset by an increase in advertising of $116,023.
 
 Income
        Taxes .
        The
        decrease in income tax expense is a direct result of the decrease in the
        Company’s taxable income for the six month period ended December 31, 2003, as
        compared to the six month period ended December 31, 2002.
 
 Cash
        Dividends Paid. The
        Company paid cash dividends of $0.15 per share on July 15, 2003, to the
        stockholders of record on July 1, 2003 (as declared on June 27, 2003), and
        $0.155 per share on October 17, 2003, to the stockholders of record as of
        October 3, 2003. The Company declared a cash dividend of $0.155 per share
        on
        December 19, 2003, to be paid on January 23, 2004, to stockholders of record
        on
        January 9, 2004.
 
 15
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 
 **ASSET
        / LIABILITY MANAGEMENT**
 
 The
        goal
        of the Bank’s asset/liability policy is to manage interest rate risk so as to
        maximize net interest income over time in changing interest rate environments.
        Management monitors the Bank’s net interest spreads (the difference between
        yields received on assets and paid on liabilities) and, although constrained
        by
        market conditions, economic conditions, and prudent underwriting standards,
        it
        offers deposit rates and loan rates that maximize net interest income.
        Management also attempts to fund the Bank’s assets with liabilities of a
        comparable duration to minimize the impact of changing interest rates on
        the
        Bank’s net interest income. This matching is especially difficult because the
        residential mortgage loans that comprise a significant portion of the Bank’s
        assets give the borrower the right to prepay at any time. These borrowers
        act in
        their economic self-interest and refinance higher rate loans when rates are
        low.
        Since the relative spread between financial assets and liabilities is constantly
        changing, the Bank’s current net interest income may not be an indication of
        future net interest income.
 
 As
        a part
        of its asset and liability management strategy, the Bank implemented an
        adjustable rate mortgage loan (“ARM”) program beginning in the early 1980s.
        Throughout the past several years, the Bank has continued to emphasize the
        origination of adjustable-rate, one- to four-family residential loans and
        adjustable-rate or relatively short-term commercial real estate, construction,
        commercial business, home equity and consumer loans, while originating
        fixed-rate, one- to four-family residential loans primarily for immediate
        resale
        in the secondary market.
 The
        Bank
        is also managing interest rate risk by the origination of construction loans.
        As
        of December 31, 2005, such loans, net of loans in process, constitute 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.
 
 The
        Bank
        constantly monitors its deposits in an effort to decrease their interest
        rate
        sensitivity. Rates of interest paid on deposits at the Bank are priced
        competitively in order to meet the Bank’s asset/liability management objectives
        and spread requirements. As of December 31, 2005 and December 31, 2004, the
        Bank’s savings accounts, checking accounts, and money market deposit accounts
        totaled $130,252,633 or 41% of its total deposits and $127,351,296 or 43%
        of
        total deposits, respectively. The weighted average rate paid on these accounts
        increased 11 basis points from 1.01% on December 31, 2004 to 1.12% on December
        31, 2005. The Bank believes, based on historical experience, that a substantial
        portion of such accounts represents non-interest rate sensitive, core deposits.
        During the year ending December 31, 2006, the FHLB has the option to call
        $11.0
        million of advances with a weighted average rate of 5.43% and a remaining
        life
        of 2.7 years.
 
 16
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 
 **INTEREST
        RATE SENSITIVITY ANALYSIS**
 
 The
        following table sets forth as of December 31, 2005, management’s estimates of
        the projected changes in net portfolio value (“NPV”) in the event of 100, 200,
        and 300 basis point (“bp”) instantaneous and permanent increases and decreases
        in market interest rates. Dollar amounts are expressed in
        thousands.
 
 BP
                    Change
                
                Estimated
                    Net Portfolio Value
                
                
                NPV
                    as % of PV of Assetsin
                    Rates
                $
                Amount
                
                $
                Change
                
                
                %
                    Change
                
                
                NPV
                    Ratio
                
                
                Change+300
                
                52,322
                
                
                (3,595
                )
                
                -6
                %
                
                12.55
                %
                
                -0.61
                %+200
                
                54,356
                
                
                (1,561
                )
                
                -3
                %
                
                12.96
                %
                
                -0.20
                %+100
                
                55,803
                
                
                (114
                )
                
                0
                %
                
                13.22
                %
                
                0.06
                %NC
                
                55,917
                
                
                
                
                
                
                
                
                13.16
                %-100
                
                55,218
                
                
                (699
                )
                
                -1
                %
                
                12.90
                %
                
                -0.26
                %-200
                
                53,941
                
                
                (1,976
                )
                
                -4
                %
                
                12.50
                %
                
                -0.66
                %-300
                
                52,252
                
                
                (3,665
                )
                
                -7
                %
                
                12.00
                %
                
                -1.16
                %
  Computations
        of prospective effects of hypothetical interest rate changes are based on
        an
        internally generated model using actual maturity and repricing schedules
        for the
        Bank’s loans and deposits, and are based on numerous assumptions, including
        relative levels of market interest rates, loan repayments and deposit run-offs,
        and should not be relied upon as indicative of actual results. Further, the
        computations do not contemplate any actions the Bank may undertake in response
        to changes in interest rates.
 
 Management
        cannot predict future interest rates or their effect on the Bank’s NPV in the
        future. Certain shortcomings are inherent in the method of analysis presented
        in
        the computation of NPV. For example, although certain assets and liabilities
        may
        have similar maturities or periods to repricing, they may react in differing
        degrees to changes in market interest rates. Additionally, certain assets,
        such
        as adjustable-rate loans, which represent the Bank’s primary loan product, have
        an initial fixed rate period typically from one to five years and over the
        remaining life of the asset changes in the interest rate are restricted.
        In
        addition, the proportion of adjustable-rate loans in the Bank’s loan portfolio
        could decrease in future periods due to refinancing activity if market interest
        rates remain constant or decrease in the future. Further, in the event of
        a
        change in interest rates, prepayment and early withdrawal levels could deviate
        significantly from those assumed in the table. Finally, the ability of many
        borrowers to service their adjustable-rate debt may decrease in the event
        of an
        interest rate increase.
 
 The
        Bank’s Board of Directors is responsible for reviewing the Bank’s asset and
        liability policies. The Bank’s management is responsible for administering the
        policies and determinations of the Board of Directors with respect to the
        Bank’s
        asset and liability goals and strategies. Management expects that the Bank’s
        asset and liability policies and strategies will continue as described above
        so
        long as competitive and regulatory conditions in the financial institution
        industry and market interest rates continue as they have in recent
        years.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 The
        Company’s principal sources of funds for investments and operations are net
        income from operations, deposits from its primary market area, FHLB advances,
        principal and interest payments on loans and mortgage-backed securities,
        proceeds from maturing investment securities, and the issuance of subordinated
        debentures. The Company considers deposits and FHLB advances as its primary
        sources of funds.
 
 The
        Company’s most liquid assets are cash and cash equivalents, which are cash on
        hand, amounts due from financial institutions, and certificates of deposit
        with
        other financial institutions that have an original maturity of three months
        or
        less. The levels of such assets are dependent on the Bank’s operating,
        financing, and investment activities at any given time. The Company’s cash and
        cash equivalents totaled $20,506,478 as of December 31, 2005 and $15,896,458
        as
        of December 31, 2004, representing an increase of
 
 17
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
  $4,610,020.
        The variations in levels of cash and cash equivalents are influenced by deposit
        flows and anticipated future deposit flows, which are subject to, and influenced
        by, many factors.
  In
        addition to the capital necessary to meet the Company’s conditional commitments
        discussed under the caption “Off-Balance Sheet Arrangements” below, the Bank
        also has $133,708,307 in certificates of deposit that are scheduled to mature
        in
        one year or less. Management anticipates that the majority of these certificates
        will renew in the normal course of operations. Based on existing collateral
        as
        well as the FHLB’s limitation of advances to 35% of assets, the Bank has the
        ability to borrow an additional $34,772,000 from the FHLB, as of December
        31,
        2005. The Bank plans to maintain its FHLB borrowings to a level that will
        provide a borrowing capacity sufficient to provide for
        contingencies.
 
 The
        Company’s regulatory capital position of $51,040,000 is 10.6% of total assets as
        of December 31, 2005. The Company has an excess of $31,957,000, $34,744,000,
        and
        $28,809,000 of required regulatory levels of tangible, core, and risk-based
        capital, respectively. Under current regulatory guidelines, the Bank is
        classified as well capitalized. See also additional information provided
        under
        the caption “Regulatory Matters” in Note 1 of the Notes to Consolidated
        Financial Statements.
 
 During
        the year ended December 31, 2005, the Company declared dividends of $0.65
        per
        share and paid dividends of $0.645 per share, compared to dividends declared
        of
        $0.63 per share and paid of $0.625 per share during the year ended December
        31,
        2004. The Board of Directors of the Company meets regularly to consider the
        level and the timing of dividend payments. Dividends declared but unpaid
        at
        December 31, 2005 ($0.165 per share), were paid to shareholders on January
        20,
        2006.
 
 During
        the year ended December 31, 2004, the Company purchased 51,333 shares of
        common
        stock in open market transactions and 4,776 from the Company’s Recognition and
        Retention Plan at an average price of $20.73 to place in the treasury account.
        During the year ended December 31, 2005, the Company purchased 146,542 shares
        of
        common stock in open market transactions at an average price of $24.31 to
        place
        in the treasury account. The Company intends to monitor the common stock
        price
        and, with regulatory approval, may from time to time initiate further stock
        repurchases in order to improve the Company’s long-term earnings per share while
        at the same time maintaining an adequate level of stockholders’ equity. The
        Company has a repurchase plan which was announced on November 22, 2002, and
        as
        of December 31, 2005, a total of 38,543 shares of the Company’s common stock may
        be purchased under this plan.
 
 On
        December 15, 2005, the Company issued $15 million of trust preferred securities
        (”Trust Securities”) in a private placement. The proceeds of the sale of Trust
        Securities issued by Guaranty Statutory Trust I and Guaranty Statutory Trust
        II,
        together with the proceeds of the Trust’s sale of their common securities issued
        to the Company, were used by the Trusts to purchase 30-year junior subordinated
        deferrable interest debentures from the Company in the principal amount of
        $5,155,000 (“Trust I Debentures”) and $10,310,000 (“Trust II Debentures”),
        respectively. The Trust I Debentures bear interest at a fixed rate of 6.92%,
        payable quarterly. The Trust II Debentures bear interest at a fixed rate
        of
        6.47% for 5 years, payable quarterly, after issuance and thereafter at a
        floating rate equal to the three month LIBOR plus 1.45%. The Company intends
        to
        use the proceeds of the sale of the Trust Securities for general corporate
        purposes which may include investment in the Bank (including funding of the
        Bank’s loan portfolio growth), acquisitions, investments, payment of dividends
        and repurchases of its outstanding Common Stock.
 
  **OFF-BALANCE
        SHEET ARRANGEMENTS**
  Various
        commitments and contingent liabilities arise in the normal course of business,
        which are not required to be recorded on the balance sheet. The most significant
        of these are loan commitments, lines of credit and standby letters of credit.
        Commitments to extend credit are agreements to lend to a customer as long
        as
        there is no violation of any condition established in the contract. As of
        December 31, 2005 and 2004, the Bank had outstanding commitments to originate
        loans of approximately $2,285,000 and $15,712,000, respectively. Lines of
        credit
        are agreements to lend to a customer as long as there is no violation of
        any
        condition established in the contract. As of December 31, 2005 and 2004,
        unused
        lines of credit to borrowers aggregated approximately $77,725,000 and
        $64,051,000 for commercial lines and $18,180,000 and $16,578,000
        for open-end consumer lines. Since a portion of the loan commitment and line
        of
        credit may expire without being drawn upon, the total unused commitments
        and
        lines do not necessarily represent future cash requirements.
 
 18
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 
  Standby
        letters of credit are irrevocable conditional commitments issued by the Bank
        to
        guarantee the performance of a customer to a third party. The credit risk
        involved in issuing standby letters of credit is essentially the same at
        that
        involved in extending loans to customers. The Bank had total outstanding
        standby
        letters of credit amounting to $9,731,000 and $1,314,000 as of December 31,
        2005
        and 2004, respectively. Forward commitments to sell mortgage loans are
        obligations to deliver loans at a specified price on or before a specified
        date.
        As of December 31, 2005 and 2004, the Bank had approximately $0 and $2,695,000,
        respectively, of forward commitments outstanding.
 
 In
        connection with the Company’s issuance of the Trust Securities and pursuant to
        two guarantee agreements by and between the Company and Wilmington Trust
        Company, the Company issued a limited, irrevocable guarantee of the obligations
        of each Trust under the Trust Securities whereby the Company has guaranteed
        any
        and all payment obligations of the Trusts related to the Trust Securities
        including distributions on, and the liquidation or redemption price of, the
        Trust Securities to the extent each Trust does not have funds
        available.
 
 **AGGREGATE
        CONTRACTUAL OBLIGATIONS**
 
 The
        following table summarizes the Company’s fixed and determinable contractual
        obligations by payment date as of December 31, 2005. Dollar amounts are
        expressed in thousands.
 
 Payments
                    Due By PeriodOne
                    Year
                
                One
                    to
                
                Three
                    to
                
                More
                    thanContractual
                    Obligations
                
                
                Total
                
                or
                    less
                
                
                Three
                    Years
                
                
                Five
                    Years
                
                
                Five
                    YearsDeposits
                    without stated maturity
                
                $
                130,253
                
                130,253
                
                
                -
                
                
                -
                
                
                -Time
                    and brokered certificates of deposit
                
                
                189,806
                
                133,708
                
                
                49,834
                
                
                5,786
                
                
                478Short-term
                    borrowings
                
                
                1,594
                
                1,594
                
                
                -
                
                
                -
                
                
                -Federal
                    Home Loan Bank advances
                
                
                100,000
                
                72,414
                
                
                19,650
                
                
                3,386
                
                
                4,550Subordinated
                    debentures
                
                
                15,465
                
                -
                
                
                -
                
                
                -
                
                
                15,465Operating
                    leases
                
                
                553
                
                96
                
                
                207
                
                
                167
                
                
                83Purchase
                    obligations
                
                
                -
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    long term obligations
                
                
                62
                
                12
                
                
                25
                
                
                25
                
                
                -Total
                
                $
                437,733
                
                338,077
                
                
                69,716
                
                
                9,364
                
                
                20,576
 **IMPACT
        OF INFLATION AND CHANGING PRICES**
 
 The
        Company prepared the consolidated financial statements and related data
        presented herein in accordance with accounting principles generally accepted
        in
        the United States of America which require the measurement of financial position
        and operating results in terms of historical dollars, without considering
        changes in the relative purchasing power of money over time due to
        inflation.
 
 Unlike
        most companies, the assets and liabilities of a financial institution are
        primarily monetary in nature. As a result, interest rates have a more
        significant impact on a financial institution’s performance than the effects of
        general levels of inflation. Interest rates do not necessarily move in the
        same
        direction or in the same magnitude as the price of goods and services, since
        such prices are affected by inflation. In the current interest rate environment,
        liquidity and the maturity structure of the Bank’s assets and liabilities are
        critical to the maintenance of acceptable performance levels.
 
 
 
 19
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
 **CRITICAL
        ACCOUNTING POLICIES**
 “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations” is
        based upon the Company’s consolidated financial statements and the notes
        thereto, which have been prepared in accordance with accounting principles
        generally accepted in the United States of America. The preparation of these
        financial statements requires management to make estimates and judgments
        that
        affect the reported amounts of assets and liabilities and the disclosure
        of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reported periods.
        On an
        on-going basis, management evaluates its estimates and judgments.
 
 Management
        bases its estimates and judgments on historical experience and on various
        other
        factors that are believed to be reasonable under the circumstances, the results
        of which form the basis for making judgments about the carrying values of
        assets
        and liabilities that are not readily apparent from other sources. There can
        be
        no assurance that actual results will not differ from those
        estimates . If
        actual
        results are different than management’s judgements and estimates, the Company’s
        financial results could change, and such change could be material to the
        Company.
 
 Material
        estimates and judgments that are particularly susceptible to significant
        change
        relate to the determination of the allowance for loan losses. In connection
        with
        the determination of the allowance for loan losses, management obtains
        independent appraisals for significant properties.
  The
        Company has identified the accounting policies for the allowance for loan
        losses
        and related significant estimates and judgments as critical to its business
        operations and the understanding of its results of operations. For a detailed
        discussion on the application of these significant estimates and judgments
        and
        our accounting policies, also see Note 1 of the notes to c onsolidated
        financial statements in this report.
 
 **IMPACT
        OF NEW ACCOUNTING PRONOUNCEMENTS**
  The
        Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board
        (FASB) previously issued EITF Issue 03-1, *The
        Meaning of Other-Than-Temporary Impairment and its Application to Certain
        Investments.* EITF
        Issue 03-1 provides guidance on the meaning of the phrase “other-than-temporary
        impairment” and its application to several types of investments, including debt
        securities classified as held-to-maturity and available-for-sale under FASB
        Statement No. 115, *Accounting
        for Certain Investments in Debt and Equity Securities.* EITF
        Issue 03-1 provides guidance on whether impairment losses should be recognized
        on available-for-sale securities prior to sale of the securities. It provides
        guidance for evaluating whether and when unrealized losses should be deemed
        “other-than-temporary”, requiring immediate recognition of those losses through
        earnings. In addition, EITF Issue 03-1 requires financial statement disclosure
        for impaired securities on which an impairment loss has not been recognized,
        including the amount of unrealized loss and the term of that impairment.
        The
        portions of EITF Issue 03-1 dealing with determining when losses are
        other-than-temporary have been delayed in order for the FASB staff to provide
        implementation guidance and reconsider issues that were raised by interested
        parties during the public comment period.
 
 FASB
        issued Staff Position (FSP) FAS 115-1 and FAS 124-1, *The
        Meaning of Other-Than-Temporary Impairment and its Application to Certain
        Investments,* in
        November 2005. This FSP provides guidance on determining when investments
        in
        certain debt and equity securities are considered impaired, whether the
        impairment is “other-than-temporary” and the measurement of the impairment loss.
        This FSP also includes accounting for investments subsequent to the recognition
        of an impairment loss and requires certain disclosures about unrealized losses
        that have not been recognized. The FSP is effective for reporting periods
        beginning after December 15, 2005, with earlier application permitted. The
        Company does not believe that adoption of the FSP will have a material impact
        on
        the financial condition or operating results of the Company.
 
 
 
 20
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
  In
        December 2004, the FASB issued a revision to FASB Statement No. 123, *Accounting
        for Stock Based Compensation* (SFAS
        123). FASB Statement No. 123R, *Share
        Based Payment* (SFAS
        123R), supersedes Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* (APB
        25),
        and its related implementation guidance. SFAS 123R established standards
        for the
        accounting for transactions in which an entity exchanges its equity instruments
        for goods or services that are based on the fair value of the entity’s equity
        instruments or that may be settled by the issuance of the equity instruments.
        The impact to the Company of SFAS 123R focuses primarily on accounting for
        transactions in which a company obtains employee services in share-based
        payment
        transactions. The Company currently accounts for its stock-based compensation
        using the intrinsic method as defined in APB 25 and, accordingly, has not
        recognized any expense for stock option plans in the Consolidated Financial
        Statements (See *Note
        1* and *Note
        12* of the
        Notes to Consolidated Financial Statements for additional information regarding
        the Company’s accounting for stock-based compensation). The SEC delayed the
        original required implementation date of SFAS 123R for public companies.
        Implementation of SFAS 123R is now required for the Company beginning in
        the
        interim period ending March 31, 2006. The Company does not believe the impact
        of
        applying the new statement will be material to the financial statements. *Note
        1* of
        the
        Notes to Consolidated Financial Statements discloses the effect on net income
        and earnings per share if the Company had applied the fair value provisions
        of
        SFAS 123.
 
 
 The
        FASB
        issued an exposure draft in January 2006, *The
        Fair Value Option for Financial Assets and Financial Liabilities - Including
        an
        amendment of FASB Statement No. 115.* The
        purpose of the exposure draft is to reduce the complexity of accounting for
        financial assets and liabilities and to reduce the volatility in earnings
        caused
        by the existing accounting rules. Under the provisions in the exposure draft,
        companies would have the option to report certain financial assets and
        liabilities at fair value with the
 changes
        in fair value included in earnings. Entities would be able to measure at
        fair
        value financial assets and liabilities selected on a contract-by-contract
        basis.
        Any contracts measured under these provisions would be shown separately than
        those measured under different attributes on the face of the balance sheet.
        The
        exposure draft also would require more disclosure information to help users
        of
        the financial statements more easily understand the effect on earnings. The
        Company is evaluating the exposure draft to determine the impact, if adopted,
        on
        its financial statements.
 
 
 21
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Management’s
              Discussion and Analysis of Financial Condition***
 ***And
              Results of Operations***
  **SUMMARY
        OF UNAUDITED QUARTERLY OPERATING RESULTS**
 
 Year
                      Ended December 31, 2005, Quarter endedMar-05
                  
                  Jun-05
                  
                  Sep-05
                  
                  Dec-05Interest
                      income
                  $
                  5,900,919
                  
                  6,560,914
                  
                  7,091,488
                  
                  7,730,086Interest
                      expense
                  
                  2,457,208
                  
                  2,783,379
                  
                  3,129,687
                  
                  3,490,130Net
                      interest income
                  
                  3,443,711
                  
                  3,777,535
                  
                  3,961,801
                  
                  4,239,956Provision
                      for loan losses
                  
                  225,000
                  
                  240,000
                  
                  240,000
                  
                  240,000Gain
                      on sale of loans and investment securities
                  
                  337,736
                  
                  304,288
                  
                  390,684
                  
                  333,879Other
                      noninterest income, net
                  
                  546,174
                  
                  536,916
                  
                  567,108
                  
                  580,274Noninterest
                      expense
                  
                  2,180,393
                  
                  2,065,697
                  
                  2,157,256
                  
                  2,266,155Income
                      before income taxes
                  
                  1,922,228
                  
                  2,313,042
                  
                  2,522,337
                  
                  2,647,954Provision
                      for income taxes
                  
                  707,454
                  
                  864,327
                  
                  935,076
                  
                  999,734Net
                      income
                  $
                  1,214,774
                  
                  1,448,715
                  
                  1,587,261
                  
                  1,648,220Basic
                      earnings per share
                  $
                  0.43
                  
                  0.53
                  
                  0.57
                  
                  0.59Diluted
                      earnings per share
                  $
                  0.41
                  
                  0.50
                  
                  0.55
                  
                  0.57Year
                      Ended December 31, 2004, Quarter endedMar-04
                  
                  Jun-04
                  
                  Sep-04
                  
                  Dec-04Interest
                      income
                  $
                  4,841,117
                  
                  4,872,149
                  
                  5,192,334
                  
                  5,633,673Interest
                      expense
                  
                  2,050,298
                  
                  1,934,800
                  
                  2,123,222
                  
                  2,337,309Net
                      interest income
                  
                  2,790,819
                  
                  2,937,349
                  
                  3,069,111
                  
                  3,296,363Provision
                      for loan losses
                  
                  188,830
                  
                  225,000
                  
                  225,000
                  
                  225,000Gain
                      on sale of loans and investment securities
                  
                  299,569
                  
                  247,956
                  
                  309,109
                  
                  370,894Other
                      noninterest income, net
                  
                  550,694
                  
                  628,678
                  
                  648,125
                  
                  561,150Noninterest
                      expense
                  
                  2,042,996
                  
                  2,079,394
                  
                  2,043,422
                  
                  2,082,059Income
                      before income taxes
                  
                  1,409,256
                  
                  1,509,589
                  
                  1,757,923
                  
                  1,921,348Provision
                      for income taxes
                  
                  439,880
                  
                  494,797
                  
                  601,549
                  
                  777,117Net
                      income
                  $
                  969,376
                  
                  1,014,792
                  
                  1,156,374
                  
                  1,144,231Basic
                      earnings per share
                  $
                  0.35
                  
                  0.36
                  
                  0.41
                  
                  0.41Diluted
                      earnings per share
                  $
                  0.33
                  
                  0.35
                  
                  0.40
                  
                  0.39
  22
 
  ***Guaranty
          Federal Bancshares, Inc.***
 ***Consolidated
          Balance Sheets***
 ***December
          31, 2005, 2004 and 2003***
   December
                    31,
                
                December
                    31,
                
                December
                    31,2005
                
                2004
                
                2003**ASSETS**Cash
                $
                17,990,774
                
                14,087,915
                
                20,686,276Interest-bearing
                    deposits in other financial institutions
                
                2,515,704
                
                1,808,543
                
                1,970,518Cash
                    and cash equivalents
                
                20,506,478
                
                15,896,458
                
                22,656,794Available-for-sale
                    securities
                
                6,757,147
                
                15,101,768
                
                14,863,826Held-to-maturity
                    securities
                
                944,724
                
                1,305,158
                
                1,867,594Stock
                    in Federal Home Loan Bank, at cost
                
                4,978,800
                
                5,146,500
                
                5,294,200Mortgage
                    loans held for sale
                
                2,092,279
                
                3,590,536
                
                1,268,064Loans
                    receivable, net of allowance for loan losses ofDecember
                    31, 2005, 2004 and 2003, $5,399,654, $4,536,654and
                    $3,886,137, respectively
                
                433,435,429
                
                388,742,792
                
                330,861,875Accrued
                    interest receivable:Loans
                
                2,040,872
                
                1,500,170
                
                1,242,683Investments
                
                48,255
                
                69,845
                
                63,045Prepaid
                    expenses and other assets
                
                2,604,425
                
                1,976,284
                
                2,057,195Foreclosed
                    assets held for sale
                
                26,775
                
                78,150
                
                5,975Premises
                    and equipment
                
                7,452,798
                
                7,188,867
                
                6,576,003Deferred
                    income taxes
                
                112,686
                
                -
                
                -$
                481,000,668
                
                440,596,528
                
                386,757,254**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****LIABILITIES**Deposits
                $
                320,058,951
                
                296,387,742
                
                237,130,744Federal
                    Home Loan Bank advances
                
                100,000,000
                
                100,000,000
                
                108,836,948Securities
                    sold under agreements to repurchase
                
                1,594,258
                
                1,264,020
                
                738,399Subordinated
                    debentures
                
                15,465,000
                
                -
                
                -Advances
                    from borrowers for taxes and insurance
                
                212,320
                
                271,796
                
                259,267Accrued
                    expenses and other liabilities
                
                288,587
                
                234,818
                
                308,497Accrued
                    interest payable
                
                508,164
                
                361,516
                
                200,770Dividend
                    payable
                
                459,074
                
                450,868
                
                432,513Income
                    taxes payable
                
                322,165
                
                220,046
                
                227,495Deferred
                    income taxes
                
                -
                
                632,459
                
                644,500438,908,519
                
                399,823,265
                
                348,779,133**STOCKHOLDERS'
                    EQUITY**Common
                    Stock:$0.10
                    par value; authorized 10,000,000 shares; issued;December
                    31, 2005, 2004 and 2003 - 6,571,348, 6,493,861and
                    6,462,902 shares, respectively
                
                657,135
                
                649,386
                
                642,890Additional
                    paid-in capital
                
                53,778,686
                
                52,384,842
                
                51,330,202Unearned
                    ESOP shares
                
                (1,572,930
                )
                (1,800,930
                )
                (2,030,930
                )Retained
                    earnings, substantially restricted
                
                36,533,338
                
                32,437,131
                
                29,919,695Accumulated
                    other comprehensive incomeUnrealized
                    appreciation on available-for-sale securities,net
                    of income taxes; December 31, 2005, 2004 and 2003 - $1,158,114,$1,653,740
                    and $1,565,830, respectively
                
                1,971,925
                
                2,815,828
                
                2,666,14391,368,154
                
                86,486,257
                
                82,528,000Treasury
                    stock, at cost;December
                    31, 2005, 2004 and 2003 - 3,639,301, 3,492,759and
                    3,436,650 shares, respectively
                
                (49,276,005
                )
                (45,712,994
                )
                (44,549,879
                )42,092,149
                
                40,773,263
                
                37,978,121$
                481,000,668
                
                440,596,528
                
                386,757,254
 *See
              Notes to Consolidated Financial Statements*
 23
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Consolidated
              Statements of Income***
 ***Years
              Ended December 31, 2005 and 2004 and June 30, 2003 and***
 ***Six
              Months Ended December 31, 2003 and 2002***
 Years
                    ended
                Six
                    months ended
                Year
                    endedDecember
                    31,
                December
                    31,
                June
                    30,2005
                
                2004
                2003
                2002
                2003(Unaudited)**INTEREST
                    INCOME**Loans
                $
                26,552,595
                
                19,989,852
                
                9,566,716
                
                10,826,819
                
                20,928,391Investment
                    securities
                
                431,863
                
                289,335
                
                135,100
                
                231,070
                
                419,145Other
                
                298,949
                
                260,085
                
                143,862
                
                232,307
                
                434,18427,283,407
                
                20,539,272
                
                9,845,678
                
                11,290,196
                
                21,781,720**INTEREST
                    EXPENSE**Deposits
                
                7,288,073
                
                4,919,164
                
                2,368,200
                
                3,121,175
                
                5,802,445Federal
                    Home Loan Bank advances
                
                4,493,997
                
                3,519,393
                
                2,120,876
                
                2,959,213
                
                5,634,484Subordinated
                    debentures
                
                47,683
                
                -
                
                -
                
                -
                
                -Other
                
                30,651
                
                7,073
                
                1,969
                
                5,188
                
                7,48411,860,404
                
                8,445,630
                
                4,491,045
                
                6,085,576
                
                11,444,413**NET
                    INTEREST INCOME**
                
                15,423,003
                
                12,093,642
                
                5,354,633
                
                5,204,620
                
                10,337,307**PROVISION
                    FOR LOAN LOSSES**
                
                945,000
                
                863,830
                
                1,162,000
                
                205,000
                
                610,000**NET
                    INTEREST INCOME AFTER****PROVISION
                    FOR LOAN LOSSES**
                
                14,478,003
                
                11,229,812
                
                4,192,633
                
                4,999,620
                
                9,727,307**NONINTEREST
                    INCOME**Service
                    charges
                
                1,643,433
                
                1,877,829
                
                951,524
                
                884,132
                
                1,778,267Late
                    charges and other fees
                
                264,360
                
                353,689
                
                187,407
                
                65,238
                
                190,113Gain
                    on sale of investment securities
                
                743,335
                
                742,608
                
                105,461
                
                -
                
                -Gain
                    on sale of loans
                
                623,252
                
                484,920
                
                758,062
                
                669,220
                
                1,544,037Income
                    (loss) on foreclosed assets
                
                (1,617
                )
                (3,157
                )
                5,726
                
                19,865
                
                10,830Other
                    income
                
                324,296
                
                160,285
                
                80,691
                
                113,279
                
                165,0823,597,059
                
                3,616,174
                
                2,088,871
                
                1,751,734
                
                3,688,329**NONINTEREST
                    EXPENSE**Salaries
                    and employee benefits
                
                4,884,869
                
                4,571,541
                
                2,246,993
                
                2,238,783
                
                4,557,376Occupancy
                
                1,365,559
                
                1,287,261
                
                604,268
                
                673,847
                
                1,322,790FDIC
                    deposit insurance premiums
                
                39,796
                
                36,038
                
                17,928
                
                19,416
                
                37,950Data
                    processing
                
                440,411
                
                399,891
                
                133,435
                
                294,976
                
                487,786Advertising
                
                230,254
                
                287,594
                
                220,233
                
                104,210
                
                217,066Other
                    expense
                
                1,708,612
                
                1,665,544
                
                770,486
                
                729,092
                
                1,557,0198,669,501
                
                8,247,871
                
                3,993,343
                
                4,060,324
                
                8,179,987**INCOME
                    BEFORE INCOME TAXES**
                
                9,405,561
                
                6,598,115
                
                2,288,161
                
                2,691,030
                
                5,235,649**PROVISION
                    FOR INCOME TAXES**
                
                3,506,591
                
                2,313,342
                
                788,000
                
                927,000
                
                1,656,000**NET
                    INCOME**
                $
                5,898,970
                
                4,284,773
                
                1,500,161
                
                1,764,030
                
                3,579,649**BASIC
                    EARNINGS PER SHARE**
                $
                2.12
                
                1.53
                
                0.54
                
                0.63
                
                1.28**DILUTED
                    EARNINGS PER SHARE**
                $
                2.03
                
                1.47
                
                0.52
                
                0.62
                
                1.26
  *See
              Notes to Consolidated Financial Statements*
 24
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Consolidated
              Statements of Cash Flows***
 ***Years
              Ended December 31, 2005 and 2004 and June 30, 2003***
 ***Six
              Months Ended December 31, 2003 and 2002***
   Year
                    ended
                Six
                    months ended
                Year
                    endedDecember
                    31,
                December
                    31,
                June
                    30,2005
                
                2004
                2003
                2002
                2003(Unaudited)**CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    income
                $
                5,898,970
                
                4,284,773
                
                1,500,161
                
                1,764,030
                
                3,579,649Items
                    not requiring (providing) cash:Deferred
                    income taxes
                
                (249,519
                )
                (99,952
                )
                (267,750
                )
                168,917
                
                (154,815
                )Depreciation
                
                759,931
                
                670,096
                
                339,101
                
                404,498
                
                783,933Provision
                    for loan losses
                
                945,000
                
                863,830
                
                1,162,000
                
                205,000
                
                610,000Gain
                    on sale of loans and investment securities
                
                (1,366,587
                )
                (1,227,528
                )
                (863,524
                )
                (669,220
                )
                (1,544,037
                )Loss
                    on sale of premises and equipment
                
                3,055
                
                11,517
                
                -
                
                -
                
                37,761Gain
                    on sale of foreclosed assets
                
                (1,323
                )
                (1,724
                )
                (13,226
                )
                (26,218
                )
                (12,310
                )Amortization
                    of deferred income,premiums
                    and discounts
                
                (48,305
                )
                78,148
                
                (18,862
                )
                (80,575
                )
                (99,192
                )Stock
                    award plan expense
                
                45,694
                
                63,200
                
                30,952
                
                177,810
                
                353,004Origination
                    of loans held for sale
                
                (45,528,012
                )
                (30,561,273
                )
                (31,454,990
                )
                (34,910,348
                )
                (77,775,788
                )Proceeds
                    from sale of loans held for sale
                
                47,649,521
                
                28,723,721
                
                40,700,091
                
                33,444,629
                
                72,695,861Release
                    of ESOP shares
                
                564,980
                
                461,512
                
                225,154
                
                180,244
                
                373,724Changes
                    in:Accrued
                    interest receivable
                
                (519,112
                )
                (264,287
                )
                124,397
                
                219,733
                
                224,386Prepaid
                    expenses and other assets
                
                (628,141
                )
                80,912
                
                (201,927
                )
                (181,342
                )
                (55,508
                )Accrued
                    expenses and other liabilities
                
                200,417
                
                105,421
                
                (5,666
                )
                (67,971
                )
                (348,159
                )Income
                    taxes payable
                
                89,638
                
                7,484
                
                34,578
                
                205,676
                
                69,278Net
                    cash provided by (used in) operating activities
                
                7,816,207
                
                3,195,850
                
                11,290,489
                
                834,863
                
                (1,262,213
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Net
                    increase in loans
                
                (45,967,115
                )
                (59,380,244
                )
                (5,060,371
                )
                (3,172,569
                )
                (11,171,690
                )Principal
                    payments on held-to-maturity securities
                
                358,395
                
                574,920
                
                379,245
                
                406,222
                
                995,693Principal
                    payments on available-for-sale securities
                
                -
                
                -
                
                -
                
                172,835
                
                172,835Purchase
                    of available-for-sale securities
                
                (10,516,958
                )
                (5,971,840
                )
                (1,989,685
                )
                (2,978,928
                )
                (4,968,371
                )Purchase
                    of premises and equipment
                
                (1,032,777
                )
                (1,300,977
                )
                (206,108
                )
                (138,129
                )
                (174,592
                )Proceeds
                    from sale of premises and equipment
                
                5,860
                
                6,500
                
                -
                
                -
                
                -Proceeds
                    from sales of available-for-sale securities
                
                9,345,564
                
                754,355
                
                107,419
                
                -
                
                -Proceeds
                    from maturities of available-for-sale securities
                
                9,000,000
                
                6,000,000
                
                1,500,000
                
                4,000,000
                
                6,500,000Proceeds
                    from sale of FHLB stock
                
                167,700
                
                147,700
                
                3,306,200
                
                -
                
                -Proceeds
                    from sale of foreclosed assets
                
                352,341
                
                434,161
                
                315,291
                
                863,367
                
                801,677Purchase
                    of other investments
                
                -
                
                -
                
                -
                
                -
                
                (106,000
                )Net
                    cash used in investing activities
                
                (38,286,990
                )
                (58,735,425
                )
                (1,648,009
                )
                (847,202
                )
                (7,950,448
                )
  *See
              Notes to Consolidated Financial Statements*
 25
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Consolidated
              Statements of Cash Flows (continued)***
 ***Years
              Ended December 31, 2005 and 2004, and June 30, 2003 and***
 ***Six
              Months Ended December 31, 2003 and 2002***
   December
                    31,
                December
                    31,
                
                June
                    30,2005
                
                2004
                2003
                
                2002
                
                2003(Unaudited)**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Stock
                    options exercised
                
                1,031,400
                
                751,274
                
                107,638
                
                
                113,554
                
                
                556,869Cash
                    dividends paid
                
                (1,794,557
                )
                (1,767,337
                )
                (844,151
                )
                
                (764,854
                )
                
                (1,604,042
                )Cash
                    dividends received on RRP Stock
                
                -
                
                217
                
                292
                
                
                1,322
                
                
                2,387Net
                    increase in demand deposits,NOW
                    accounts and savings accounts
                
                2,901,337
                
                10,307,199
                
                4,617,104
                
                
                8,403,811
                
                
                18,725,158Net
                    increase (decrease) in certificates of deposit andsecurities
                    sold under agreements to repurchase
                
                21,100,110
                
                49,475,420
                
                (3,127,182
                )
                
                (3,819,504
                )
                
                (8,723,005
                )Proceeds
                    from FHLB advances
                
                1,322,664,000
                
                201,614,000
                
                124,500,000
                
                
                12,000,000
                
                
                121,500,000Repayments
                    of FHLB advances
                
                (1,322,664,000
                )
                (210,450,948
                )
                (130,281,946
                )
                
                (18,714,871
                )
                
                (117,964,269
                )Proceeds
                    from issuance of subordinated debentures
                
                15,465,000
                
                -
                
                -
                
                
                -
                
                
                -Advances
                    from borrowers for taxes and insurance
                
                (59,476
                )
                12,529
                
                (691,411
                )
                
                (724,015
                )
                
                (97,619
                )Treasury
                    stock purchased
                
                (3,563,011
                )
                (1,163,115
                )
                (280,558
                )
                
                (235,770
                )
                
                (1,131,792
                )Net
                    cash provided by (used in) financing activities
                
                35,080,803
                
                48,779,239
                
                (6,000,214
                )
                
                (3,740,327
                )
                
                11,263,687**INCREASE
                    (DECREASE) IN CASH****AND
                    CASH EQUIVALENTS**
                
                4,610,020
                
                (6,760,336
                )
                3,642,266
                
                
                (3,752,666
                )
                
                2,051,026**CASH
                    AND CASH EQUIVALENTS,****BEGINNING
                    OF PERIOD**
                
                15,896,458
                
                22,656,794
                
                19,014,528
                
                
                16,963,502
                
                
                16,963,502**CASH
                    AND CASH EQUIVALENTS,****END
                    OF PERIOD**
                $
                20,506,478
                
                15,896,458
                
                22,656,794
                
                
                13,210,836
                
                
                19,014,528**Supplemental
                    Cash Flows Information**Real
                    estate acquired in settlement of loans
                $
                299,643
                
                466,670
                
                120,000
                
                
                153,820
                
                
                368,296Interest
                    paid
                $
                11,713,756
                
                8,445,630
                
                4,493,513
                
                
                6,102,303
                
                
                12,000,275Income
                    taxes paid
                $
                3,506,591
                
                2,313,342
                
                1,026,224
                
                
                672,466
                
                
                1,742,466Dividend
                    declared and unpaid
                $
                459,074
                
                450,868
                
                432,513
                
                
                420,430
                
                
                415,414
  *See
                Notes to Consolidated Financial Statements*
 26
 ***Guaranty
                Federal Bancshares, Inc.***
 ***Consolidated
                Statements of Stockholders’ Equity***
 ***Years
                Ended December 31, 2005 and 2004 and June 30, 2003
                and***
 ***Six
                Months Ended December 31, 2003***
   Common
                    Stock
                
                Additional
                    Paid-In Capital
                Unearned
                    ESOP Shares
                Treasury
                    Stock
                Retained
                    Earnings
                Accumulated
                    Other Comprehensive Income
                Total**Balance,
                    July 1, 2002**
                
                636,540
                
                49,842,032
                
                (2,406,070
                )
                (42,958,147
                )
                27,372,935
                
                2,947,587
                
                35,434,877Comprehensive
                    incomeNet
                    income
                
                -
                
                -
                
                -
                
                -
                
                3,579,649
                
                -
                
                3,579,649Change
                    in unrealized appreciationon
                    available-for-sale securitites, netof
                    income taxes of ($568,257)
                
                -
                
                -
                
                -
                
                -
                
                -
                
                (967,574
                )
                (967,574
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,612,075Dividends
                    ($0.60 per share)
                
                -
                
                -
                
                -
                
                -
                
                (1,671,800
                )
                -
                
                (1,671,800
                )Stock
                    award plans
                
                -
                
                547,241
                
                -
                
                -
                
                -
                
                -
                
                547,241Stock
                    options exercised
                
                5,145
                
                551,724
                
                -
                
                -
                
                -
                
                -
                
                556,869Release
                    of ESOP shares
                
                -
                
                124,584
                
                249,140
                
                -
                
                -
                
                -
                
                373,724Treasury
                    stock purchased
                
                -
                
                -
                
                -
                
                (1,311,174
                )
                -
                
                -
                
                (1,311,174
                )**Balance,
                    June 30, 2003**
                
                641,685
                
                51,065,581
                
                (2,156,930
                )
                (44,269,321
                )
                29,280,784
                
                1,980,013
                
                36,541,812Comprehensive
                    incomeNet
                    income
                
                -
                
                -
                
                -
                
                -
                
                1,500,161
                
                -
                
                1,500,161Change
                    in unrealized appreciationon
                    available-for-sale securitites, netof
                    income taxes of $402,965
                
                -
                
                -
                
                -
                
                -
                
                -
                
                686,130
                
                686,130Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,186,291Dividends
                    ($0.31 per share)
                
                -
                
                -
                
                -
                
                -
                
                (861,250
                )
                -
                
                (861,250
                )Stock
                    award plans
                
                -
                
                59,034
                
                -
                
                -
                
                -
                
                -
                
                59,034Stock
                    options exercised
                
                1,205
                
                106,433
                
                -
                
                -
                
                -
                
                -
                
                107,638Release
                    of ESOP shares
                
                -
                
                99,154
                
                126,000
                
                -
                
                -
                
                -
                
                225,154Treasury
                    stock purchased
                
                -
                
                -
                
                -
                
                (280,558
                )
                -
                
                -
                
                (280,558
                )**Balance,
                    December 31, 2003**
                
                642,890
                
                51,330,202
                
                (2,030,930
                )
                (44,549,879
                )
                29,919,695
                
                2,666,143
                
                37,978,121Comprehensive
                    incomeNet
                    income
                
                -
                
                -
                
                -
                
                -
                
                4,284,773
                
                -
                
                4,284,773Change
                    in unrealized appreciationon
                    available-for-sale securitites, netof
                    income taxes of $87,911
                
                -
                
                -
                
                -
                
                -
                
                -
                
                149,685
                
                149,685Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,434,458Dividends
                    ($0.64 per share)
                
                -
                
                -
                
                -
                
                -
                
                (1,767,337
                )
                -
                
                (1,767,337
                )Stock
                    award plans
                
                -
                
                78,350
                
                -
                
                -
                
                -
                
                -
                
                78,350Stock
                    options exercised
                
                6,496
                
                744,778
                
                -
                
                -
                
                -
                
                -
                
                751,274Release
                    of ESOP shares
                
                -
                
                231,512
                
                230,000
                
                -
                
                -
                
                -
                
                461,512Treasury
                    stock purchased
                
                -
                
                -
                
                -
                
                (1,163,115
                )
                -
                
                -
                
                (1,163,115
                )**Balance,
                    December 31, 2004**
                
                649,386
                
                52,384,842
                
                (1,800,930
                )
                (45,712,994
                )
                32,437,131
                
                2,815,828
                
                40,773,263Comprehensive
                    incomeNet
                    income
                
                -
                
                -
                
                -
                
                -
                
                5,898,970
                
                -
                
                5,898,970Change
                    in unrealized appreciationon
                    available-for-sale securitites, netof
                    income taxes of ($495,626)
                
                -
                
                -
                
                -
                
                -
                
                -
                
                (843,903
                )
                (843,903
                )Total
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,055,067Dividends
                    ($0.65 per share)
                
                -
                
                -
                
                -
                
                -
                
                (1,802,763
                )
                -
                
                (1,802,763
                )Stock
                    award plans
                
                -
                
                33,213
                
                -
                
                -
                
                -
                
                -
                
                33,213Stock
                    options exercised
                
                7,749
                
                1,023,651
                
                -
                
                -
                
                -
                
                -
                
                1,031,400Release
                    of ESOP shares
                
                -
                
                336,980
                
                228,000
                
                -
                
                -
                
                -
                
                564,980Treasury
                    stock purchased
                
                -
                
                -
                
                -
                
                (3,563,011
                )
                -
                
                -
                
                (3,563,011
                )**Balance,
                    December 31, 2005**
                $
                657,135
                
                53,778,686
                
                (1,572,930
                )
                (49,276,005
                )
                36,533,338
                
                1,971,925
                
                42,092,149
 *See
                Notes to Consolidated Financial Statements*
 27
 ***Guaranty
                Federal Bancshares, Inc.***
 ***Notes
                to Consolidated Financial Statements***
 **NOTE
        1:**  **NATURE
        OF OPERATIONS AND SUMMARY OF SIGNIFICANT**
 **ACCOUNTING
        POLICIES**
 
 Organization
 In
        April
        1995, Guaranty Federal Savings & Loan Association reorganized from a
        federally chartered mutual savings and loan association into a mutual holding
        company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with
        the
        reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings
        bank
        was chartered. The Bank issued 3,125,000 shares of common stock in connection
        with the reorganization, the majority of which were owned by the
        MHC.
 
 On
        December 30, 1997, the MHC converted to Guaranty Federal Bancshares, Inc.
        (the
“Company”), a Delaware-chartered stock corporation. In connection with the
        conversion and reorganization, the shares of the Bank held by the mutual
        holding
        company were extinguished along with the mutual holding company and the shares
        of the Bank held by the public were exchanged for 1,880,710 shares of the
        Company. Additional shares of the Company were sold to certain depositors
        of the
        Bank and to the trust of the employee stock ownership plan of the Bank as
        of
        December 30, 1997.
 
 On
        June
        27, 2003, the Bank converted to a state-chartered trust company with banking
        powers, and the Company became a one-bank holding company. The name of the
        Bank
        was changed from Guaranty Federal Savings Bank to Guaranty Bank.
 
 Fiscal
        Year Change
 In
        2003,
        the Company changed its fiscal year ended June 30 to a fiscal year ended
        December 31. The six-month period ended December 31, 2003, transitions between
        the Company’s old and new fiscal year ends.
 
 Nature
        of Operations
 The
        Company operates as a one-bank holding company. The Bank is primarily engaged
        in
        providing a full range of banking and mortgage services to individual and
        corporate customers in southwest Missouri. The Bank is subject to competition
        from other financial institutions. The Company and the Bank are also subject
        to
        the regulation of certain federal and state agencies and receive periodic
        examinations by those regulatory authorities.
 
 Principles
        of Consolidation
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiary, the Bank. All significant intercompany profits,
        transactions and balances have been eliminated in consolidation.
 
 Use
        of
        Estimates
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.
 
 Material
        estimates that are particularly susceptible to significant change in the
        near
        term relate to the determination of the allowance for loan losses and the
        valuation of real estate acquired in connection with foreclosures or in
        satisfaction of loans. In connection with the determination of the allowance
        for
        loan losses and the valuation of foreclosed assets held for sale, management
        obtains independent appraisals for significant properties.
 
 28
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 Securities
 Available-for-sale
        securities, which include any security for which the Company or the Bank
        has no
        immediate plan to sell but which may be sold in the future, are carried at
        fair
        value. Unrealized gains and losses are recorded, net of related income tax
        effects, in other comprehensive income
 
 Held-to-maturity
        securities, which include any security for which the Company or the Bank
        has the
        positive intent and ability to hold until maturity, are carried at historical
        cost adjusted for amortization of premiums and accretion of discounts.
  Amortization
        of premiums and accretion of discounts are recorded as interest income from
        securities. Realized gains and losses are recorded as interest income from
        securities. Realized gains and losses are recorded as net security gains
        (losses). Gains and losses on sales of securities are determined on the specific
        identification method.
  Mortgage
        Loans Held for Sale
 Mortgage
        loans held for sale are carried at the lower of cost or fair value, determined
        using an aggregate basis. Write-downs to fair value are recognized as a charge
        to earnings at the time the decline in value occurs. Forward commitments
        to sell
        mortgage loans are sometimes acquired to reduce market risk on mortgage loans
        in
        the process of origination and mortgage loans held for sale. Gains and losses
        resulting from sales of mortgage loans are recognized when the respective
        loans
        are sold to investors. Gains and losses are determined by the difference
        between
        the selling price plus the value of retained servicing rights and the carrying
        amount of the loans sold, net of discounts collected or paid and considering
        a
        normal servicing rate. Fees received from borrowers to guarantee the funding
        of
        mortgage loans held for sale and fees paid to investors to ensure the ultimate
        sale of such mortgage loans are recognized as income or expense when the
        loans
        are sold or when it becomes evident that the commitment will not be
        used.
 
 Loans
 Loans
        that management has the intent and ability to hold for the foreseeable future
        or
        until maturity or pay-offs are reported at their outstanding principal balances
        adjusted for any charge-offs, the allowance for loan losses, any deferred
        fees
        or costs on originated loans and unamortized premiums or discounts on purchased
        loans. Interest income is reported on the interest method, and includes
        amortization of net deferred loan fees and costs over the loan term. Generally,
        loans are placed on non-accrual status at ninety days past due and interest
        is
        considered a loss, unless the loan is well-secured and in the process of
        collection.
 
 Loan
        Servicing
 The
        cost
        of originated mortgage-servicing rights is amortized over the shorter of
        the
        actual or contractual loan life. Impairment of mortgage-servicing rights
        is
        assessed based on the fair value of those rights. Fair values are estimated
        by
        discounting expected cash flows. For purposes of measuring impairment, the
        rights are stratified based on the loan type, remaining term to maturity
        and
        interest rate. The key assumptions used in the valuation include discount
        rates,
        prepayment speeds and servicing costs. The amount of impairment recognized
        is
        the amount by which the capitalized mortgage servicing rights exceeds their
        fair
        value.
 
 Allowance
        for Loan Losses
 The
        allowance for loan losses is established as losses are estimated to have
        occurred through a provision for loan losses charged to income. Loan losses
        are
        charged against the allowance when management believes the uncollectibility
        of a
        loan balance is confirmed. Subsequent recoveries, if any, are credited to
        the
        allowance.
  The
        allowance for loan losses is evaluated on a regular basis by management and
        is
        based upon management’s periodic review of the collectibility of the loans in
        light of historical experience, the nature and volume of the loan portfolio,
        adverse situations that may affect the borrower’s ability to repay, estimated
        value of any underlying collateral and prevailing economic conditions. This
        evaluation is inherently subjective as it requires estimates that are
        susceptible to significant revision as more information becomes
        available.
  29
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  A
        loan is
        considered impaired when, based on current information and events, it is
        probable that the Bank will be unable to collect the scheduled payments of
        principal or interest when due according to the contractual terms of the
        loan
        agreement. Factors considered by management in determining impairment include
        payment status, collateral value and the probability of collecting scheduled
        principal and interest payments when due. Loans that experience insignificant
        payment delays and payment shortfalls generally are not classified as impaired.
        Management determines the significance of payment delays and payment shortfalls
        on a case-by-case basis, taking into consideration all of the circumstances
        surrounding the loan and the borrower, including the length of the delay,
        the
        reasons for the delay, the borrower’s prior payment record and the amount of the
        shortfall in relation to the principal and interest owed. Impairment is measured
        on a loan-by-loan basis for commercial and construction loans by either the
        present value of expected future cash flows discounted at the loan’s effective
        interest rate, the loan’s obtainable market price or the fair value of the
        collateral if the loan is collateral dependent.
  Foreclosed
        Assets Held for Sale
 Assets
        acquired through, or in lieu of, loan foreclosure are held for sale and are
        initially recorded at fair value at the date of foreclosure, establishing
        a new
        cost basis. Subsequent to foreclosure, valuations are periodically performed
        by
        management and the assets are carried at the lower of carrying amount or
        fair
        value less estimated cost to sell. Revenue and expenses from operations and
        changes in the valuation allowance are included in net expenses from foreclosed
        assets.
 
 Premises
        and Equipment
 Depreciable
        assets are stated at cost less accumulated depreciation. Depreciation is
        charged
        to expense using the straight-line and accelerated methods over the estimated
        useful lives of the assets.
 
 Income
        Taxes
 Deferred
        tax liabilities and assets are recognized for the tax effects of differences
        between the financial statement and tax bases of assets and liabilities.
        A
        valuation allowance is established to reduce deferred tax assets if it is
        more
        likely than not that a deferred tax asset will not be realized.
 
 Cash
        Equivalents
 The
        Company considers all highly liquid interest-bearing deposits in other financial
        institutions with an initial maturity of three months or less to be cash
        equivalents.
 
 Regulatory
        Matters
 The
        Company and the Bank are subject to various regulatory capital requirements
        administered by the federal banking agencies. Failure to meet minimum capital
        requirements can initiate certain mandatory and possibly additional
        discretionary actions by regulators that, if undertaken, could have a direct
        and
        material effect on the Company's financial statements. Under capital adequacy
        guidelines and the regulatory framework for prompt corrective action, the
        Company and the Bank must meet specific capital guidelines that involve
        quantitative measures of assets, liabilities and certain off-balance-sheet
        items
        as calculated under regulatory accounting practices. The capital amounts
        and
        classification are also subject to qualitative judgments by the regulators
        about
        components, risk weightings and other factors.
 
 Quantitative
        measures established by regulation to ensure capital adequacy require the
        Company and the Bank to maintain minimum amounts and ratios (set forth in
        the
        table below). Management believes, as of December 31, 2005, that the Company
        and
        the Bank meet all capital adequacy requirements to which they are
        subject.
 
 As
        of
        December 31, 2005, the most recent notification from the Missouri Division
        of
        Finance categorized the Bank as well capitalized under the regulatory framework
        for prompt corrective action. To be categorized as well capitalized the Bank
        must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
        ratios as set forth in the following table. There are no conditions or events
        since that notification that management believes have changed the Company’s or
        the Bank’s category.
 
 30
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 The
        Company’s and the Bank's actual capital amounts and ratios are also presented in
        the table. No amount was deducted from capital for interest-rate risk. Dollar
        amounts are expressed in thousands.
 
 To
                    Be Well CapitalizedFor
                    Capital
                
                Under
                    Prompt CorrectiveActual
                
                Adequacy
                    Purposes
                
                Action
                    ProvisionsAmount
                
                Ratio
                
                Amount
                Ratio
                
                Amount
                Ratio**As
                    of December 31, 2005**Tier
                    1 (core) capital, andratio
                    to adjusted total assetsCompany
                $
                51,040
                
                10.7
                %
                $
                19,083
                
                4.0
                %
                
                n/a
                
                n/aBank
                $
                53,796
                
                11.3
                %
                $
                19,010
                
                4.0
                %
                $
                23,762
                
                5.0
                %Tier
                    1 (core) capital, andratio
                    to risk-weighted assetsCompany
                $
                51,040
                
                12.5
                %
                $
                16,296
                
                4.0
                %
                
                n/a
                
                n/aBank
                $
                53,796
                
                13.2
                %
                $
                16,276
                
                4.0
                %
                $
                24,414
                
                6.0
                %Total
                    risk-based capital, andratio
                    to risk-weighted assetsCompany
                $
                57,544
                
                14.1
                %
                $
                32,592
                
                8.0
                %
                
                n/a
                
                n/aBank
                $
                60,294
                
                14.8
                %
                $
                32,552
                
                8.0
                %
                $
                40,690
                
                10.0
                %
 
 
 31
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 
 
 To
                  Be Well CapitalizedFor
                  Capital
              
              Under
                  Prompt CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              Ratio
              
              Amount
              Ratio**As
                  of December 31, 2004**Tier
                  1 (core) capital, andratio
                  to adjusted total assetsCompany
              $
              37,938
              
              8.7
              %
              $
              17,485
              
              4.0
              %
              
              n/a
              
              n/aBank
              $
              36,869
              
              8.4
              %
              $
              17,470
              
              4.0
              %
              $
              21,838
              
              5.0
              %Tier
                  1 (core) capital, andratio
                  to risk-weighted assetsCompany
              $
              37,938
              
              10.6
              %
              $
              14,367
              
              4.0
              %
              
              n/a
              
              n/aBank
              $
              36,869
              
              10.3
              %
              $
              14,371
              
              4.0
              %
              $
              21,556
              
              6.0
              %Total
                  risk-based capital, andratio
                  to risk-weighted assetsCompany
              $
              44,401
              
              12.4
              %
              $
              28,735
              
              8.0
              %
              
              n/a
              
              n/aBank
              $
              43,253
              
              12.0
              %
              $
              28,742
              
              8.0
              %
              $
              35,927
              
              10.0
              %To
                  Be Well
                  CapitalizedFor
                  Capital
              
              
              Under
                  Prompt CorrectiveActual
              
              
              Adequacy
                  Purposes
              
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              
              Amount
              
              Ratio
              
              
              Amount
              
              Ratio**As
                  of December 31, 2003**Tier
                  1 (core) capital, andratio
                  to adjusted total assetsCompany
              $
              35,181
              
              9.4
              %
              $
              15,108
              
              4.0
              %
              
              n/a
              
              n/aBank
              $
              34,476
              
              9.2
              %
              $
              15,045
              
              4.0
              %
              $
              18,807
              
              5.0
              %Tier
                  1 (core) capital, andratio
                  to risk-weighted assetsCompany
              $
              35,181
              
              12.2
              %
              $
              11,624
              
              4.0
              %
              
              n/a
              
              n/aBank
              $
              34,476
              
              11.9
              %
              $
              11,570
              
              4.0
              %
              $
              17,355
              
              6.0
              %Total
                  risk-based capital, andratio
                  to risk-weighted assetsCompany
              $
              40,185
              
              13.9
              %
              $
              23,248
              
              8.0
              %
              
              n/a
              
              n/aBank
              $
              39,480
              
              13.6
              %
              $
              23,141
              
              8.0
              %
              $
              28,926
              
              10.0
              %
  The
        amount of dividends that the Bank may pay is subject to various regulatory
        limitations. As of December 31, 2005, 2004, and 2003, the Bank exceeded their
        minimum capital requirements. The Bank may not pay dividends which would
        reduce
        capital below the minimum requirements shown above.
 
 32
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 
 Earnings
        Per Share
 
 The
        computation for earnings per share for years ended December 31, 2005 and
        2004
        and six months ended December 31, 2003 and 2002, and year ended June 30,
        2003 is
        as follows:
 
 
 Year
                  Ended
              
              Year
                  Ended
              
              Six
                  Months EndedDecember
                  31, 2005
              
              December
                  31, 2004
              
              December
                  31, 2003Net
                  income
              $
              5,898,970
              
              4,284,773
              
              1,500,161Average
                  common shares outstanding
              
              2,780,249
              
              2,808,412
              
              2,782,788Effect
                  of stock options outstanding
              
              126,885
              
              113,425
              
              103,555Average
                  diluted shares outstanding
              
              2,907,134
              
              2,921,837
              
              2,886,343Earnings
                  per share - basic
              $
              2.12
              
              1.53
              
              0.54Earnings
                  per share - diluted
              $
              2.03
              
              1.47
              
              0.52Six
                  Months Ended
              
              Year
                  EndedDecember
                  31, 2002
              
              June
                  30, 2003(unaudited)Net
                  income
              $
              1,764,030
              
              3,579,649Average
                  common shares outstanding
              
              2,797,202
              
              2,794,032Effect
                  of stock options outstanding
              
              51,446
              
              57,525Average
                  diluted shares outstanding
              
              2,848,648
              
              2,851,557Earnings
                  per share - basic
              $
              0.63
              
              1.28Earnings
                  per share - diluted
              $
              0.62
              
              1.26
  All
        outstanding options to purchase common stock were included in the computation
        of
        diluted earning per share for the six months ended December 31, 2003 and
        December 31, 2002. Options to purchase 21,500, 10,000, and 10,000 shares
        of
        common stock were outstanding during the years ended December 31, 2005 and
        2004,
        and June 30, 2003, respectively, but were not included in the computation
        of
        diluted earnings per share because the options’ exercise price was greater than
        the average market price of the common shares.
 
 33
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  Stock
        Option Plans
 
 The
        Company accounts for its stock option plan under the recognition and measurement
        principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”,
        and related Interpretations. No stock-based employee compensation cost is
        reflected in net income, as all options granted under those plans had an
        exercise price equal to the market value of the underlying common stock on
        the
        grant date. The following table illustrates the effect on net income and
        earnings per share if the Company had applied the fair value provisions of
        FASB
        Statement No. 123, ”Accounting for Stock-Based Compensation”, to stock-based
        employee compensation.
 
 Year
                    Ended
                
                Year
                    Ended
                
                Six
                    MonthsDecember
                    31, 2005
                
                December
                    31, 2004
                
                December
                    31, 2003Net
                    income, as reported
                $
                5,898,970
                
                4,284,773
                
                1,500,161Less:
                    Total stock-based employeecompensation
                    cost determinedunder
                    the fair value-basedmethod,
                    net of income taxes
                
                (51,516
                )
                (35,949
                )
                (18,085
                )Pro
                    forma net income
                $
                5,847,454
                
                4,248,824
                
                1,482,076Earnings
                    per share:Basic
                    - as reported
                $
                2.12
                
                1.53
                
                0.54Basic
                    - pro forma
                $
                2.10
                
                1.51
                
                0.53Diluted
                    - as reported
                $
                2.03
                
                1.47
                
                0.52Diluted
                    - pro forma
                $
                2.01
                
                1.45
                
                0.51Six
                    Months
                
                Year
                    EndedDecember
                    31, 2002
                
                June
                    30, 2003(Unaudited)Net
                    income, as reported
                $
                1,764,030
                
                3,579,649Less:
                    Total stock-based employeecompensation
                    cost determinedunder
                    the fair value-basedmethod,
                    net of income taxes
                
                (89,950
                )
                (174,412
                )Pro
                    forma net income
                $
                1,674,080
                
                3,405,237Earnings
                    per share:Basic
                    - as reported
                $
                0.63
                
                1.28Basic
                    - pro forma
                $
                0.60
                
                1.22Diluted
                    - as reported
                $
                0.62
                
                1.26Diluted
                    - pro forma
                $
                0.59
                
                1.19
  34
 ***Guaranty
                Federal Bancshares, Inc.***
 ***Notes
                to Consolidated Financial Statements***
 Segment
        Information
 
 The
        principal business of the Company is overseeing the business of the Bank.
        The
        Company has no significant assets other than its investment in the Bank.
        The
        banking operation is the Company’s only reportable segment. The banking segment
        is principally engaged in the business of originating mortgage loans secured
        by
        one-to-four family residences, multi-family, construction, commercial and
        consumer loans. These loans are funded primarily through the attraction of
        deposits from the general public, borrowings from the Federal Home Loan Bank
        and
        brokered deposits. Selected information is not presented separately for the
        Company’s reportable segment, as there is no material difference between that
        information and the corresponding information in the consolidated financial
        statements.
 
 **NOTE
        2:**  **SECURITIES**
 
 The
        amortized cost and approximate fair values of securities classified as
        available-for-sale securities are as follows:
 
 
 Amortized
                    Cost
                
                Gross
                    Unrealized Gains
                
                Gross
                    Unrealized (Losses)
                
                Approximate
                    Fair Value**As
                    of December 31, 2005**Equity
                    Securities:FHLMC
                    stock
                
                $
                47,595
                
                
                3,128,415
                
                
                -
                
                
                3,176,010Debt
                    Securities:U.
                    S. government agencies
                
                
                3,579,513
                
                
                2,021
                
                
                (397
                )
                
                3,581,137$
                3,627,108
                
                
                3,130,436
                
                
                (397
                )
                
                6,757,147**As
                    of December 31, 2004**Equity
                    Securities:FHLMC
                    stock
                
                $
                66,588
                
                
                4,945,012
                
                
                -
                
                
                5,011,600Other
                    stock
                
                
                2,000,000
                
                
                -
                
                
                (560,000
                )
                
                1,440,000Debt
                    Securities:Trust
                    preferred securities
                
                
                6,570,814
                
                
                84,468
                
                
                -
                
                
                6,655,282U.
                    S. government agencies
                
                
                1,994,798
                
                
                88
                
                
                -
                
                
                1,994,886$
                10,632,200
                
                
                5,029,568
                
                
                (560,000
                )
                
                15,101,768**As
                    of December 31, 2003**Equity
                    Securities:FHLMC
                    stock
                
                $
                78,336
                
                
                4,587,264
                
                
                -
                
                
                4,665,600Other
                    stock
                
                
                2,000,000
                
                
                -
                
                
                (326,000
                )
                
                1,674,000Debt
                    Securities:Trust
                    preferred securities
                
                
                6,557,201
                
                
                11,071
                
                
                (40,840
                )
                
                6,527,432U.
                    S. government agencies
                
                
                1,996,317
                
                
                477
                
                
                -
                
                
                1,996,794$
                10,631,854
                
                
                4,598,812
                
                
                (366,840
                )
                
                14,863,826
 35
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 
 
 Maturities
        of available-for-sale debt securities as of December 31, 2005:
 
 Amortized
                    Cost
                
                Approximate
                    Fair ValueWithin
                    one year
                $
                499,512
                
                
                499,4292-5
                    years
                
                3,080,001
                
                
                3,081,708$
                3,579,513
                
                
                3,581,137
 The
        amortized cost and approximate fair values of securities classified as held
        to
        maturity are as follows:
 
 Amortized
                    Cost
                
                Gross
                    Unrealized Gains
                Gross
                    Unrealized (Losses)
                Approximate
                    Fair Value**As
                    of December 31, 2005**Debt
                    Securities:U.
                    S. government agencies
                $
                189,974
                
                -
                
                (2,478
                )
                187,496Mortgage-backed
                    securities
                
                754,750
                
                39,550
                
                -
                
                794,300$
                944,724
                
                39,550
                
                (2,478
                )
                981,796**As
                    of December 31, 2004**Debt
                    Securities:U.
                    S. government agencies
                $
                228,807
                
                375
                
                -
                
                229,182Mortgage-backed
                    securities
                
                1,076,351
                
                77,737
                
                -
                
                1,154,088$
                1,305,158
                
                78,112
                
                -
                
                1,383,270**As
                    of December 31, 2003**Debt
                    Securities:U.
                    S. government agencies
                $
                256,142
                
                78
                
                -
                
                256,220Mortgage-backed
                    securities
                
                1,611,452
                
                81,240
                
                -
                
                1,692,692$
                1,867,594
                
                81,318
                
                -
                
                1,948,912
 Maturities
        of held-to-maturity securities as of December 31, 2005:
 
 Amortized
                    Cost
                
                Approximate
                    Fair ValueAfter
                    ten years
                $
                189,974
                
                187,496Mortgage-backed
                    securities not due on asingle
                    maturity date
                
                754,750
                
                794,300$
                944,724
                
                981,796
 The
        book
        value of securities pledged as collateral, to secure public deposits and
        for
        other purposes, amounted to $381,115, $31,875 and $42,096 as of December
        31,
        2005, 2004 and 2003, respectively. The approximate fair value of pledged
        securities amounted to $385,439, $31,950 and $41,061 as of December 31, 2005,
        2004 and 2003, respectively.
 
 Gross
        gains of $1,269,396, $742,608, $105,461, $0 and $0 and gross losses of $526,061,
        $0, $0, $0 and $0 resulting from sale of available-for-sale securities were
        realized for the years ended December 31, 2005 and 2004, the six months ended
        December 31, 2003 and 2002, and the year ended June 30, 2003,
        respectively.
 
 36
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  Certain
        investments in debt and marketable equity securities are reported in the
        financial statements at an amount less than their historical cost. Total
        fair
        value of these investments at December 31, 2005, 2004 and 2003, was $1,186,612,
        $1,440,000 and $6,379,261, which is approximately 15%, 9% and 38% of the
        Company’s investment portfolio, respectively. These declines primarily resulted
        from changes in market interest rates and failure of certain investments
        to meet
        projected earnings targets.
 
 Based
        of
        evaluation of available evidence including recent changes in interest rates
        and
        other information obtained from regulatory filings, management believes the
        declines in fair value for these securities are temporary.
 
 Should
        the impairment of any of these securities become other than temporary, the
        cost
        basis of the investment will be reduced and the resulting loss recognized
        in net
        income in the period the other-than-temporary impairment is
        identified.
 
 The
        following table shows our investments’ gross unrealized losses and fair value,
        aggregated by investment category and length of time that individual securities
        have been in a continuous unrealized loss position at December 31, 2005,
        2004
        and 2003.
 
 December
                    31, 2005Less
                    than 12 Months
                12
                    Months or More
                TotalDescription
                    of Securities
                Fair
                    Value
                
                Unrealized
                    Losses
                Fair
                    Value
                Unrealized
                    Losses
                Fair
                    Value
                Unrealized
                    LossesU.
                    S. Government Agencies
                $
                1,186,612
                
                (2,875
                )
                -
                
                -
                
                1,186,612
                
                (2,875
                )December
                    31, 2004Less
                    than 12 Months
                
                12
                    Months or More
                
                TotalDescription
                    of Securities
                
                Fair
                    Value
                
                Unrealized
                    Losses
                Fair
                    Value
                
                Unrealized
                    Losses
                Fair
                    Value
                
                Unrealized
                    LossesEquity
                    Securities
                $
                -
                
                -
                
                1,440,000
                
                (560,000
                )
                1,440,000
                
                (560,000
                )December
                    31, 2003Less
                    than 12 Months
                12
                    Months or More
                
                TotalDescription
                    of Securities
                
                Fair
                    Value
                
                Unrealized
                    Losses
                Fair
                    Value
                
                Unrealized
                    Losses
                Fair
                    Value
                
                Unrealized
                    LossesEquity
                    Securities
                $
                -
                
                -
                
                1,674,000
                
                (326,000
                )
                1,674,000
                
                (326,000
                )Debt
                    Securities
                
                -
                
                -
                
                4,705,261
                
                (40,840
                )
                4,705,261
                
                (40,840
                )$
                -
                
                -
                
                6,379,261
                
                (366,840
                )
                6,379,261
                
                (366,840
                )
 37
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 **NOTE
        3:**  **LOANS
        AND ALLOWANCE FOR LOAN LOSSES**
 
 Categories
        of loans at December 31, 2005, 2004 and 2003 include:
 
 December
                    31,2005
                
                2004
                
                2003Real
                    estate - residential mortgage:One
                    to four family units
                $
                101,440,261
                
                117,715,909
                
                128,209,462Multi-family
                
                53,630,562
                
                52,258,859
                
                44,241,683Real
                    estate - construction
                
                70,389,903
                
                45,090,258
                
                49,814,316Real
                    estate - commercial
                
                122,884,052
                
                97,549,770
                
                72,104,911Commercial
                    loans
                
                66,370,227
                
                55,606,190
                
                24,618,265Installment
                    loans
                
                24,264,069
                
                25,172,615
                
                25,441,295Total
                    loans
                
                438,979,074
                
                393,393,601
                
                344,429,932Less:Undisbursed
                    portion of loans-in-process
                
                -
                
                -
                
                (9,425,318
                )Allowance
                    for loan losses
                
                (5,399,654
                )
                (4,536,654
                )
                (3,886,137
                )Unearned
                    discounts
                
                (2,512
                )
                (7,734
                )
                (19,296
                )Deferred
                    loan fees/costs, net
                
                (141,479
                )
                (106,421
                )
                (237,306
                )Net
                    loans
                $
                433,435,429
                
                388,742,792
                
                330,861,875
 Impaired
        loans totaled $5,123,042, $6,083,635 and $7,159,100 as of December 31, 2005,
        2004 and 2003, respectively with a related allowance for loan losses of
        $532,810, $928,857 and $1,110,130 respectively. As of December 31, 2005,
        2004
        and 2003, respectively, impaired loans of $3,404,200, $1,995,593 and $736,542
        had no related allowance for loan losses.
 
 Interest
        of $615,628, $686,939, $153,685 and $198,196 was recognized on average impaired
        loans of $4,805,205, $7,659,179, $4,748,587 and $661,746 for the year ended
        December 31, 2005 and 2004, the six months ended December 31, 2003 and the
        year
        ended June 30, 2003, respectively. Interest of $600,288, $694,169, $143,948
        and
        $191,040 was recognized on impaired loans on a cash basis during the years
        ended
        December 31, 2005 and 2004 and six months ended December 31, 2003 and the
        year
        ended June 30, 2003, respectively.
 
 At
        December 31, 2005, 2004 and 2003 there were no accruing loans delinquent
        90 days
        or more. Non-accruing loans at December 31, 2005, 2004 and 2003 were $722,000,
        $419,000 and $743,000, respectively.
 
 
 38
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 
  Activity
        in the allowance for loan losses was as follows:
 
 
 Years
                  ended
              
              Six
                  months ended
              
              Year
                  endedDecember
                  31,
              
              December
                  31,
              
              June
                  30,2005
              
              2004
              
              2003
              
              2002
              
              2003(Unaudited)Balance,
                  beginning of period
              $
              4,536,654
              
              3,886,137
              
              
              2,775,320
              
              
              2,649,872
              
              
              2,649,872Provision
                  charged to expense
              
              945,000
              
              863,830
              
              
              1,162,000
              
              
              205,000
              
              
              610,000Losses
                  charged off net of recoveriesof
                  $71,385 and $17,761 for the years endedDecember
                  31, 2005 and 2004 and $3,323 and$150
                  for the six months ended December 31,2003
                  and 2002, and $52,015 for year endedJune
                  30, 2003
              
              (82,000
              )
              (213,313
              )
              
              (51,183
              )
              
              (215,320
              )
              
              (484,552
              )Balance,
                  end of period
              $
              5,399,654
              
              4,536,654
              
              
              3,886,137
              
              
              2,639,552
              
              
              2,775,320
  The
        weighted
        average interest rate on loans as of December 31, 2005, 2004 and 2003, was
        6.88%
        and 5.64%, and 5.39%, respectively.
 
 The
        Bank
        serviced mortgage loans for others amounting to $110,511,321, $123,466,113,
        and
        $128,875,871 as of December 31, 2005, 2004 and 2003, respectively. The Bank
        serviced commercial loans for others amounting to $4,149,438, $1,738,961
        and
        $1,072,449 as of December 31, 2005, 2004 and 2003, respectively.
 
 **NOTE
        4:**  **PREMISES
        AND EQUIPMENT**
 
 Major
        classifications of premises and equipment, stated at cost, are as
        follows:
 
 December
                      31,
                  
                  
                  December
                      31,
                  
                  
                  December
                      31,2005
                  
                  
                  2004
                  
                  
                  2003Land
                  $
                  1,250,789
                  
                  
                  1,250,789
                  
                  
                  1,250,789Buildings
                      and improvements
                  
                  7,349,536
                  
                  
                  6,748,579
                  
                  
                  6,468,609Furniture,
                      fixtures and equipment
                  
                  4,913,877
                  
                  
                  4,658,904
                  
                  
                  3,672,063Leasehold
                      improvements
                  
                  130,905
                  
                  
                  157,905
                  
                  
                  217,94813,645,108
                  
                  
                  12,816,177
                  
                  
                  11,609,409Less
                      accumulated depreciation
                  
                  (6,192,310
                  )
                  
                  (5,627,298
                  )
                  
                  (5,033,406
                  )Net
                      premises and equipment
                  $
                  7,452,798
                  
                  
                  7,188,879
                  
                  
                  6,576,003
 Depreciation
        expense was $759,931 and $669,479 for the years ended December 31, 2005 and
        2004, $339,101 and $404,498, for the six months ended December 31, 2003 and
        2002
        and $783,933 for the year ended June 30, 2003, respectively.
 
 39
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  **NOTE
        5:**  **OTHER
        COMPREHENSIVE INCOME (LOSS)**
 
 Other
        comprehensive income (loss) components and related taxes were as
        follows:
 
 Year
                    ended
                
                Six
                    months ended
                
                Year
                    endedDecember
                    31,
                
                December
                    31,
                
                June
                    30,2005
                
                2004
                
                2003
                
                2002
                
                2003(Unaudited)Unrealized
                    gains (losses) onavailable-for-sale
                    securities
                $
                (596,194
                )
                980,204
                
                1,194,556
                
                (536,987
                )
                (1,535,831
                )Less:
                    Reclassification adjustment forrealized
                    gains included in income
                
                (743,335
                )
                (742,608
                )
                (105,461
                )
                -
                
                -Other
                    comprehensive income (loss),before
                    tax effect
                
                (1,339,529
                )
                237,596
                
                1,089,095
                
                (536,987
                )
                (1,535,831
                )Tax
                    expense (benefit)
                
                (495,626
                )
                87,911
                
                402,965
                
                (198,685
                )
                (568,257
                )Other
                    comprehensive income (loss)
                $
                (843,903
                )
                149,685
                
                686,130
                
                (338,302
                )
                (967,574
                )
 **NOTE
        6:**  **DEPOSITS**
 
 
 December
                  31, 2005
              
              December
                  31, 2004
              
              December
                  31, 2003Weighted
                  Average Rate
              
              
              Balance
              
              Percentage
                  of Deposits
              
              Weighted
                  Average Rate
              
              Balance
              
              Percentage
                  of Deposits
              
              Weighted
                  Average Rate
              
              Balance
              
              Percentage
                  of DepositsDemand
              0.00
              %
              $
              36,193,467
              
              11.3
              %
              0.00
              %
              25,583,803
              
              8.6
              %
              0.00
              %
              23,335,707
              
              9.8
              %NOW
              0.33
              %
              
              35,864,150
              
              11.2
              %
              0.53
              %
              34,604,789
              
              11.7
              %
              0.30
              %
              34,256,771
              
              14.5
              %Money
                  market
              2.47
              %
              
              43,896,563
              
              13.7
              %
              1.81
              %
              52,009,761
              
              17.6
              %
              1.34
              %
              42,231,015
              
              17.8
              %Savings
              1.80
              %
              
              14,298,452
              
              4.5
              %
              1.08
              %
              15,152,943
              
              5.1
              %
              0.81
              %
              17,220,605
              
              7.3
              %1.12
              %
              
              130,252,633
              
              40.7
              %
              1.01
              %
              127,351,296
              
              43.0
              %
              0.69
              %
              117,044,097
              
              49.4
              %Certificates:0%
                  - 3.99%
              3.25
              %
              
              121,299,785
              
              37.9
              %
              2.46
              %
              151,753,139
              
              51.2
              %
              2.21
              %
              85,237,827
              
              35.9
              %4.00%
                  - 5.99%
              4.35
              %
              
              67,779,251
              
              21.2
              %
              4.95
              %
              14,934,483
              
              5.0
              %
              5.07
              %
              31,062,415
              
              13.1
              %6.00%
                  - 7.99%
              6.17
              %
              
              727,283
              
              0.2
              %
              6.51
              %
              2,348,823
              
              0.8
              %
              6.46
              %
              3,786,404
              
              1.6
              %3.66
              %
              
              189,806,318
              
              59.3
              %
              2.74
              %
              169,036,446
              
              57.0
              %
              3.08
              %
              120,086,647
              
              50.6
              %Total
                  Deposits
              2.62
              %
              $
              320,058,951
              
              100.0
              %
              2.00
              %
              296,387,742
              
              100.0
              %
              1.90
              %
              237,130,744
              
              100.0
              %
  The
        aggregate
        amount of certificates of deposit with a minimum balance of $100,000 was
        approximately $30,305,000, $12,070,000, and $11,841,000, as of December 31,
        2005, 2004 and 2003, respectively.
 
 40
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 
 A
        summary
        of certificates of deposit by maturity as of December 31, 2005, is as
        follows:
 
 2006
                $
                133,708,3072007
                
                41,846,2442008
                
                7,987,4432009
                
                4,264,4902010
                
                1,521,871Thereafter
                
                477,964$
                189,806,318
 A
        summary
        of interest expense on deposits is as follows:
 
 
 Years
                  ended
              Six
                  months ended
              Year
                  endedDecember
                  31,
              December
                  31,
              June
                  30,2005
              
              2004
              
              2003
              
              2002
              
              2003(Unaudited)NOW
                  and Money Market accounts
              $
              1,299,800
              
              793,432
              
              327,245
              
              459,869
              
              813,619Savings
                  accounts
              
              200,509
              
              139,890
              
              70,339
              
              131,337
              
              221,264Certificate
                  accounts
              
              5,814,064
              
              4,012,780
              
              1,981,806
              
              2,546,358
              
              4,792,812Early
                  withdrawal penalties
              
              (26,300
              )
              (26,938
              )
              (11,190
              )
              (16,389
              )
              (25,250
              )$
              7,288,073
              
              4,919,164
              
              2,368,200
              
              3,121,175
              
              5,802,445
  The
        Bank
        utilizes brokered deposits as an additional funding source. The aggregate
        amount
        of brokered deposits was approximately $ 57,629,000, $68,375,000 and $24,505,000
        as of December 31, 2005, 2004 and 2003, respectively.
 
 
 41
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  **NOTE
        7:**  **FEDERAL
        HOME LOAN BANK ADVANCES**
 
 Federal
        Home Loan Bank advances consist of the following:
 
 
 December
                  31, 2005
              
              December
                  31, 2004Maturity
                  Date
              
              
              Amount
              
              
              Weighted
                  Average Rate
              
              
              Amount
              
              Weighted
                  Average Rate2005
              
              $
              -
              
              
              -
              
              $
              61,264,000
              
              2.73
              %2006
              
              
              72,414,000
              
              
              4.33
              %
              
              12,500,000
              
              4.62
              %2007
              
              
              3,000,000
              
              
              2.83
              %
              
              3,000,000
              
              2.83
              %2008
              
              
              16,650,000
              
              
              5.22
              %
              
              16,650,000
              
              5.22
              %2009
              
              
              386,000
              
              
              7.21
              %
              
              386,000
              
              7.21
              %2010
              
              
              3,000,000
              
              
              6.37
              %
              
              3,000,000
              
              6.37
              %Thereafter
              
              
              4,550,000
              
              
              5.39
              %
              
              3,200,000
              
              5.96
              %$
              100,000,000
              
              
              4.55
              %
              $
              100,000,000
              
              3.58
              %December
                  31, 2003Maturity
                  Date
              
              
              Amount
              
              
              Weighted
                  Average Rate2004
              
              $
              63,290,000
              
              
              2.34
              %2005
              
              
              7,850,000
              
              
              4.51
              %2006
              
              
              10,500,000
              
              
              5.12
              %2007
              
              
              1,000,000
              
              
              3.47
              %2008
              
              
              14,950,000
              
              
              5.54
              %2009
              
              
              386,000
              
              
              7.21
              %Thereafter
              
              
              10,860,948
              
              
              5.78
              %$
              108,836,948
              
              
              3.58
              %
  In
        the year
        ending December 31, 2006, the Bank has advances equal to $11,000,000 with
        a
        weighted average rate of 5.43% callable between January 20, 2006 and January
        30,
        2006 at the FHLB’s option with a maturity date between July 30, 2008 and October
        20, 2008.
 
 The
        FHLB
        requires the Bank to maintain collateral equal to outstanding balances of
        advances. For collateral purposes, the FHLB values mortgage loans free of
        other
        pledges, liens and encumbrances at 80% of their fair value, and investment
        securities free of other pledges, liens and encumbrances at 95% of their
        fair
        value.
 
 
 42
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  **NOTE
        8:**  **SUBORDINATED
        DEBENTURES**
 
 During
        2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty
        Statutory Trust I and Guaranty Statutory Trust II,  to
        issue
        preferred securities representing undivided beneficial interests in the assets
        of the trusts and to invest the gross proceeds of the preferred securities
        in
        notes of the Company. Trust I issued $5,000,000 of preferred securities and
        Trust II issued $10,000,000 of preferred securities. The sole assets of Trust
        I
        were originally $5,155,000 aggregate principal amount of the Company’s fixed
        rate subordinated debenture notes due 2036, which are redeemable beginning
        in
        2011. The sole assets of Trust II were originally $10,310,000 aggregate
        principal amount of the Company’s fixed/variable rate subordinated debenture
        notes due 2036, which are redeemable beginning in 2011. Trust II subordinated
        debenture notes bear interest at a fixed rate for five years and thereafter
        at a
        floating rate based on LIBOR. The preferred securities qualify as either
        Tier I
        or Tier II capital for regulatory purposes, subject to certain
        limitations.
 
 **NOTE
        9:**  **INCOME
        TAXES**
 
 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.
 
 As
        of
        December 31, 2005, 2004 and 2003, retained earnings included approximately
        $5,075,000 for which no deferred income tax liability has been recognized.
        This
        amount represents an allocation of income to bad debt deductions for tax
        purposes only. Reduction of amounts so allocated for purposes other than
        tax bad
        debt losses or adjustments arising from carryback of net operating losses
        would
        create income for tax purposes only, which would be subject to the then current
        corporate income tax rate. The unrecorded deferred income tax liability on
        the
        above amount was approximately $1,878,000 as of December 31, 2005, 2004 and
        2003.
 
 The
        provision for income taxes consists of:
 
 Years
                    Ended
                Six
                    Months Ended
                Year
                    EndedDecember
                    31,
                
                December
                    31,
                
                June
                    30,2005
                
                2004
                
                2003
                
                2002
                
                2003(Unaudited)Taxes
                    currently payable
                $
                3,756,110
                
                2,413,294
                
                1,055,750
                
                758,083
                
                1,810,815Deferred
                    income taxes
                
                (249,519
                )
                (99,952
                )
                (267,750
                )
                168,917
                
                (154,815
                )$
                3,506,591
                
                2,313,342
                
                788,000
                
                927,000
                
                1,656,000
 43
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 The
        tax
        effects of temporary differences related to deferred taxes shown on the December
        31, 2005, 2004 and 2003 balance sheets are:
 
 
 December
                  31,
              
              December
                  31,
              
              December
                  31,2005
              
              2004
              
              2003Deferred
                  tax assets:Allowances
                  for loan and foreclosed asset losses
              
              $
              1,997,872
              
              
              1,678,562
              
              
              1,441,871Accrued
                  compensated absences and bonuses
              
              
              14,538
              
              
              12,524
              
              
              11,749Unrealized
                  loss on loans held for sale
              
              
              929
              
              
              2,862
              
              
              7,140RRP
                  expense
              
              
              18,417
              
              
              13,450
              
              
              11,559Deferred
                  loan fees/costs
              
              
              18,393
              
              
              39,376
              
              
              87,803State
                  tax credits
              
              
              -
              
              
              -
              
              
              64,049Other
              
              
              -
              
              
              -
              
              
              20,1272,050,149
              
              
              1,746,774
              
              
              1,644,298Deferred
                  tax liabilities:FHLB
                  stock dividends
              
              
              (124,683
              )
              
              (128,262
              )
              
              (128,262
              )Mortgage
                  servicing rights
              
              
              (315,557
              )
              
              (365,768
              )
              
              (365,110
              )Unrealized
                  appreciation on available-for-sale securities
              
              
              (1,158,114
              )
              
              (1,653,740
              )
              
              (1,565,830
              )Accumulated
                  depreciation
              
              
              (253,373
              )
              
              (163,879
              )
              
              (173,592
              )Other
              
              
              (85,736
              )
              
              (67,584
              )
              
              (56,004
              )(1,937,463
              )
              
              (2,379,233
              )
              
              (2,288,798
              )Net
                  deferred tax asset (liability)
              
              $
              112,686
              
              
              (632,459
              )
              
              (644,500
              )
  A
        reconciliation of income tax expense at the statutory rate to income tax
        expense
        at the Company’s effective rate is shown below:
 
 Years
                    ended
                Six
                    months ended
                Year
                    endedDecember
                    31,
                December
                    31,
                June
                    30,(Unaudited)2005
                
                2004
                
                2003
                
                2002
                
                2003Computed
                    at statutory rate
                
                
                34.0
                %
                34.0
                %
                34.0
                %
                34.0
                %
                34.0
                %Increase
                    (reduction) in taxes resulting from:State
                    financial institution tax
                
                
                1.8
                %
                1.0
                %
                2.2
                %
                3.9
                %
                -2.4
                %ESOP
                
                
                1.2
                %
                1.2
                %
                1.2
                %
                1.0
                %
                1.0
                %Other
                
                
                0.3
                %
                -1.1
                %
                -2.2
                %
                -4.4
                %
                -1.0
                %Actual
                    tax provision
                
                
                37.3
                %
                35.1
                %
                35.2
                %
                34.5
                %
                31.6
                %
 Missouri
        law provides that banks will be taxed based on an annual privilege tax of
        7% of
        net income. The privilege tax is included in provision for income
        taxes.
 
 
 44
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  **NOTE
        10:**  **DISCLOSURES
        ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 The
        following table presents estimated fair values of the Company’s financial
        instruments. The fair values of certain of these instruments were calculated
        by
        discounting expected cash flows, which involves significant judgments by
        management and uncertainties. Fair value is the estimated amount at which
        financial assets or liabilities could be exchanged in a current transaction
        between willing parties, other than in a forced or liquidation sale. Because
        no
        market exists for certain of these financial instruments and because management
        does not intend to sell these financial instruments, the Company does not
        know
        whether the fair values shown below represent values at which the respective
        financial instruments could be sold individually or in the
        aggregate.
 
 
 December
                  31, 2005
              
              December
                  31, 2004
              
              December
                  31, 2003Carrying
                  Amount
              
              Fair
                  Value
              
              Carrying
                  Amount
              
              Fair
                  Value
              
              Carrying
                  Amount
              
              Fair
                  ValueFinancial
                  assets:Cash
                  and cash equivalents
              $
              20,506,478
              
              
              20,506,478
              
              
              15,896,458
              
              
              15,896,458
              
              
              22,656,794
              
              
              22,656,794Available-for-sale
                  securities
              
              6,757,147
              
              
              6,757,147
              
              
              15,101,768
              
              
              15,101,768
              
              
              14,863,826
              
              
              14,863,826Held-to-maturity
                  securities
              
              944,724
              
              
              981,796
              
              
              1,305,158
              
              
              1,383,270
              
              
              1,867,594
              
              
              1,948,912Mortgage
                  loans held-for-sale
              
              2,092,279
              
              
              2,092,279
              
              
              3,590,536
              
              
              3,590,536
              
              
              1,268,064
              
              
              1,268,064Loans,
                  net
              
              433,435,429
              
              
              435,477,000
              
              
              388,742,792
              
              
              389,853,000
              
              
              330,861,875
              
              
              334,344,000Federal
                  Home Loan Bank stock
              
              4,978,800
              
              
              4,978,800
              
              
              5,146,500
              
              
              5,146,500
              
              
              5,294,200
              
              
              5,294,200Interest
                  receivable
              
              2,089,127
              
              
              2,089,127
              
              
              1,570,015
              
              
              1,570,015
              
              
              1,305,728
              
              
              1,305,728Financial
                  liabilities:Deposits
              
              320,058,951
              
              
              318,829,000
              
              
              296,387,742
              
              
              295,760,000
              
              
              237,130,744
              
              
              237,500,000Federal
                  Home Loan Bank advances
              
              100,000,000
              
              
              100,610,000
              
              
              100,000,000
              
              
              101,962,000
              
              
              108,836,948
              
              
              113,099,000Securities
                  sold under agreementsto
                  repurchase
              
              1,594,258
              
              
              1,594,258
              
              
              1,264,020
              
              
              1,264,020
              
              
              738,399
              
              
              738,399Subordinated
                  debentures
              
              15,465,000
              
              
              15,465,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -Interest
                  payable
              
              508,164
              
              
              508,164
              
              
              361,516
              
              
              361,516
              
              
              200,770
              
              
              200,770Dividend
                  payable
              
              459,074
              
              
              459,074
              
              
              450,868
              
              
              450,868
              
              
              432,513
              
              
              432,513Unrecognized
                  financial instruments(net
                  of contractual value):Commitments
                  to extend credit
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Unused
                  lines of credit
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
  The
        following
        methods and assumptions were used to estimate the fair value of each class
        of
        financial instruments:
 
 Cash
        and Cash Equivalents and Federal Home Loan Bank stock
 The
        carrying amounts reported in the balance sheets for cash and cash equivalents
        approximate those assets' fair value.
 
 Investment
        Securities
 Fair
        values for investment securities equal quoted market prices, if available.
        If
        quoted market prices are not available, fair values are estimated based on
        quoted market prices of similar securities.
 
 Interest
        Receivable
 The
        carrying amount of interest receivable approximates its fair value.
 
 45
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  Mortgage
        Loans Held for Sale
 Fair
        value is estimated using the quoted market prices for securities backed by
        similar loans, adjusted for differences in loan characteristics.
  Loans
 The
        fair
        value of loans is estimated by discounting the future cash flows using the
        current rates at which similar loans would be made to borrowers with similar
        credit ratings and for the same remaining maturities. Loans with similar
        characteristics are aggregated for purposes of the calculations.
 
 Deposits
 The
        fair
        value of demand deposits and savings accounts is the amount payable on demand
        at
        the reporting date (i.e., their carrying amounts). The fair value of
        fixed-maturity certificates of deposit is estimated using a discounted cash
        flow
        calculation that applies the rates currently offered for deposits of similar
        remaining maturities.
  Federal
        Home Loan Bank Advances and Subordinated Debentures
 Rates
        currently available to the Bank for debt with similar terms and remaining
        maturities are used to estimate fair value of existing advances and subordinated
        debentures.
 
 Securities
        Sold under Agreements to Repurchase
 For
        these
        short-term instruments, the carrying amount is a reasonable estimate of fair
        value.
 
 Interest
        and Dividend Payable
 The
        carrying amounts of interest payable and dividend payable approximates their
        fair value.
 
 Commitments
        to Extend Credit, Letters of Credit and Lines of Credit
 The
        fair
        value of commitments is estimated using the fees currently charged to enter
        into
        similar agreements, taking into account the remaining terms of the agreements
        and the present credit worthiness of the counterparties. For fixed-rate loan
        commitments, fair value also considers the difference between current levels
        of
        interest rates and the committed rates. The fair value of letters of credit
        is
        based on fees currently charged for similar agreements or on the estimated
        cost
        to terminate them or otherwise settle the obligations with the counterparties
        at
        the reporting date.
 
 **NOTE
        11:**  **SIGNIFICANT
        ESTIMATES AND CONCENTRATIONS**
 
 Accounting
        principles generally accepted in the United States of America require disclosure
        of certain significant estimates and current vulnerabilities due to certain
        concentrations. Estimates related to the allowance for loan losses are reflected
        in the footnote regarding loans. Current vulnerabilities due to certain
        concentrations of credit risk are discussed in the footnote on commitments
        and
        credit risk. Other significant estimates and concentrations not discussed
        in
        those footnotes include:
 
 At
        December 31, 2005, approximately 30% of the Bank's total time deposits consisted
        of certificates of deposit which were issued through a broker and had minimum
        denominations in excess of $100,000.
 
 **NOTE
        12:**  **EMPLOYEE
        BENEFIT PLANS**
 
 Stock
        Award Plans
 The
        Company has established four stock award plans for the benefit of certain
        directors, officers and employees of the Bank and its subsidiary. The plans
        provide a proprietary interest in the Company in a manner designed to encourage
        these individuals to remain with the Bank. A committee of the Bank’s Board of
        Directors administers the plans. The Company accounts for the cost of share
        purchases under the plans as a reduction of stockholders' equity. The awards
        vest at the rate of 20% per year over a five-year period. Compensation expense
        is recognized based on the Company’s stock price on the date the shares are
        awarded to employees.
 At
        the
        annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
        approved the Recognition and Retention Plan (the “RRP”). Following approval of
        the Plan, the Bank contributed $464,643 to a separate trust to purchase the
        75,106 shares of the Company’s common stock in the RRP. As of December 31, 2005
        all shares in this plan have vested.
 
 46
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  At
        a
        special stockholders’ meeting on July 22, 1998, the Company’s stockholders
        approved the Restricted Stock Plan (the “RSP”). Following approval of the Plan,
        the Company contributed $2,373,065 to a separate trust to purchase the 173,632
        shares in the RSP. As of December 31, 2005 there are 1,400 shares in this
        plan
        that are not vested.
 
 During
        the year ended June 30, 2000, the directors of the Company established the
        Stock
        Compensation Plan (the “2000 SCP”) with both a stock award component and a stock
        option component. Under the stock award component of this plan, the Committee
        awarded 7,125 shares of the Company’s common stock. Following approval of the
        Plan, the Company contributed $85,945 to a separate trust to purchase the
        7,125
        shares in the SCP. As of December 31, 2005 all shares in this plan have vested.
 
 During
        the year ended June 30, 2001, the directors of the Company established the
        Stock
        Compensation Plan (the “2001 SCP”) with both a stock award component and a stock
        option component. Under the stock award component of this plan, the Committee
        awarded 10,239 shares of the Company’s common stock. The shares for this plan
        were taken from forfeited shares in the RSP. As of December 31, 2005 there
        are
        2,047 shares in this plan that are not vested.
 
 The
        Bank
        recognized $45,694, $63,200, $30,952, $177,810 and $353,004 of expense under
        these stock award plans in the years ended December 31, 2005 and 2004, the
        six
        months ended December 31, 2003 and 2002 and the year ended June 30, 2003,
        respectively.
 
 Stock
        Option Plans
 The
        Company has established four stock option plans for the benefit of certain
        directors, officers and employees of the Bank and its subsidiary. A committee
        of
        the Company’s Board of Directors administers the plans. The stock options under
        these plans may be either incentive stock options or nonqualified stock options.
        Incentive stock options can be granted only to participants who are employees
        of
        the Bank or its subsidiary. The option price must not be less than the market
        value of the Company stock on the date of grant. All options expire no later
        than ten years from the date of grant. The options vest at the rate of 20%
        per
        year over a five-year period.
 
 At
        the
        annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders
        approved the 1994 Stock Option and Incentive Plan for the benefit of certain
        directors, officers and employees of the Bank and its subsidiary. Under this
        Plan, the Committee may grant stock options for up to 187,764 shares of the
        Company’s common stock.
 
 At
        a
        special stockholders’ meeting on July 22, 1998, the Company’s stockholders
        approved the 1998 Stock Option and Incentive Plan. Under this plan, the
        Committee may grant stock options for up to 434,081 shares of the Company’s
        common stock.
 
 Under
        the
        stock option component of the 2000 SCP, the Committee granted nonqualified
        stock
        options for 17,875 shares of the Company’s common stock.
 
 Under
        the
        stock option component of the 2001 SCP, the Committee had granted no
        nonqualified stock options as of December 31, 2003.
  During
        the six
        months ended December 31, 2003, the directors of the Company authorized the issuance
        of 5,000 stock options as an employment inducement to a new officer
        of  the  Bank
        pursuant to a stock
        option  agreement .
        Stock
        options awarded under this  agreement are
        considered non-qualified for federal income tax purposes .
   47
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  During
        the year ended December 31, 2004, the directors of the Company authorized the issuance
        of 25,000 stock options as an employment inducement to a new officer of the Bank
        pursuant to a stock
        option agreement .
        Stock
        options awarded under this  agreement are
        considered non-qualified for federal income tax purposes.
 
 On
        May
        19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan
        (“2004 SOP”). The purpose of the plan is to attract and retain qualified
        personnel for positions of substantial responsibility. The aggregate number
        of
        shares with respect to options issued under this plan shall not exceed 250,000
        shares. To date 20,000 stock options have been granted under this plan.
 
 The
        table
        below summarizes transactions under the Company’s stock option plans:
 
 
 Number
                  of sharesIncentive
                  Stock Option
              
              Non-Incentive
                  Stock Option
              
              Weighted
                  Average Exercise PriceBalance
                  outstanding as of July 1, 2002
              
              
              271,337
              
              
              158,720
              
              
              12.39Granted
              
              
              -
              
              
              10,000
              
              
              15.31Exercised
              
              
              (19,698
              )
              
              (31,746
              )
              
              10.82Forfeited
              
              
              (4,277
              )
              
              (13,360
              )
              
              12.47Balance
                  outstanding as of June 30, 2003
              
              
              247,362
              
              
              123,614
              
              
              12.68Granted
              
              
              -
              
              
              55,000
              
              
              16.70Exercised
              
              
              (12,054
              )
              
              -
              
              
              8.93Forfeited
              
              
              -
              
              
              -
              
              
              -Balance
                  outstanding as of December 31, 2003
              
              
              235,308
              
              
              178,614
              
              
              13.32Granted
              
              
              12,500
              
              
              25,000
              
              
              19.93Exercised
              
              
              (32,436
              )
              
              (32,523
              )
              
              11.57Forfeited
              
              
              (1,600
              )
              
              -
              
              
              10.02Balance
                  outstanding as of December 31, 2004
              
              
              213,772
              
              
              171,091
              
              
              14.27Granted
              
              
              42,500
              
              
              -
              
              
              25.11Exercised
              
              
              (66,487
              )
              
              (11,000
              )
              
              13.31Forfeited
              
              
              (10,000
              )
              
              -
              
              
              20.88Balance
                  outstanding as of December 31, 2005
              
              
              179,785
              
              
              160,091
              
              
              15.65Options
                  exercisable as of December 31, 2005
              
              
              129,560
              
              
              93,111
              
              
              13.48
  
 48
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 The
          fair
          value of each option granted is estimated on the date of the grant using
          the
          Black-Scholes pricing model with the following weighted-average
          assumptions:
 
 December
                    31, 2005
                
                
                December
                    31, 2004
                
                
                December
                    31, 2003Dividends
                    per share
                
                $
                0.64
                
                $
                0.64
                
                $
                0.31Risk-free
                    interest rate
                
                
                4.00
                %
                
                3.03
                %
                
                2.73
                %Expected
                    life of options
                
                
                5
                    years
                
                
                5
                    years
                
                
                5
                    yearsWeighted-average
                    fair valueof
                    options granted during year
                
                $
                3.30
                
                $
                1.84
                
                $
                0.64
 The
        following table summarizes information about stock options under the plans
        outstanding as of December 31, 2005:
 
 Exercise
                    Price
                
                Number
                    Outstanding
                
                Number
                    Exercisable
                
                Remaining
                    Contractual Life$
                    6.08
                
                2,170
                
                
                2,170
                
                
                0.5
                    years10.50
                
                10,875
                
                
                10,875
                
                
                4.1
                    years11.05
                
                400
                
                
                -
                
                
                5.5
                    years12.13
                
                3,000
                
                
                2,400
                
                
                5.2
                    years12.50
                
                12,510
                
                
                7,405
                
                
                5.6
                    years12.75
                
                6,800
                
                
                5,200
                
                
                5.1
                    years13.44
                
                173,121
                
                
                173,121
                
                
                2.6
                    years13.89
                
                6,000
                
                
                -
                
                
                6.1
                    years15.31
                
                6,000
                
                
                -
                
                
                7.1
                    years16.65
                
                50,000
                
                
                20,000
                
                
                7.6
                    years17.20
                
                4,000
                
                
                1,000
                
                
                7.7
                    years19.27
                
                2,500
                
                
                500
                
                
                8.7
                    years19.62
                
                20,000
                
                
                -
                
                
                8.1
                    years23.20
                
                10,000
                
                
                -
                
                
                9.2
                    years23.50
                
                11,000
                
                
                -
                
                
                9.1
                    years25.59
                
                10,000
                
                
                -
                
                
                9.6
                    years26.50
                
                1,500
                
                
                -
                
                
                9.6
                    years28.12
                
                10,000
                
                
                -
                
                
                10.0
                    years$
                    15.66
                
                339,876
                
                
                222,671
 Employee
        Stock Ownership Plan
 The
        Bank
        sponsors an internally-leveraged Employee Stock Ownership Plan (ESOP). All
        employees are eligible to participate after they attain age twenty-one and
        complete twelve consecutive months of service during which they work at least
        1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased
        344,454
        shares of the common stock of the Company. The ESOP debt is secured by shares
        of
        the Company. The loan will be repaid from contributions to the ESOP as approved
        annually by the Bank’s Board of Directors. As the debt is repaid, shares are
        released from collateral and allocated to employees’ accounts. The shares
        pledged as collateral are reported as unearned ESOP shares in the consolidated
        balance sheet. When shares are committed for release, the shares become
        outstanding for earnings per share computations. Dividends on allocated ESOP
        shares are recorded as a reduction of retained earnings and may be paid directly
        to participants or credited to their account; dividends are not paid on
        unallocated ESOP shares. Compensation expense is recognized ratably based
        on the
        average fair value of shares committed to be released. Compensation expense
        attributed to the ESOP was $564,980, $461,512, $225,154, $180,244 and $373,724
        for the years ended December 31, 2005 and 2004, six months ended December
        31,
        2003 and 2002 and the year ended June 30, 2003, respectively.
 
 49
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 The
        following is a summary of ESOP shares as of December 31, 2005:
 
 Beginning
                    ESOP shares
                
                
                344,454Released
                    shares
                
                
                (162,525
                )Shares
                    committed for release
                
                
                (24,636
                )Unreleased
                    shares
                
                
                157,293Fair
                    value of unreleased shares
                
                $
                4,388,475
  **NOTE
        13:**  **RELATED
        PARTY TRANSACTIONS**
 
 Certain
        directors and executive officers of the Company and the Bank were customers
        of
        and had transactions with the Bank in the ordinary course of business. As
        of
        December 31, 2005, 2004 and 2003, loans outstanding to these directors and
        executive officers amounted to $3,270,812, $747,903, and $565,066, respectively.
 
 In
        management's opinion, such loans and other extensions of credit and deposits
        were made in the ordinary course of business and were made on substantially
        the
        same terms  as those prevailing at the time for comparable transactions
        with other persons. Further, in management's opinion, these loans did not
        involve more than normal risk of collectability or present other unfavorable
        features.
 
 **NOTE
        14:**  **COMMITMENTS
        AND CREDIT RISK**
 
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Since a portion of the commitments may expire without being drawn
        upon, the total commitment amounts do not necessarily represent future cash
        requirements. The Bank evaluates each customer's credit worthiness on a
        case-by-case basis. The amount of collateral obtained, if deemed necessary
        by
        the Bank upon extension of credit, is based on management's credit evaluation
        of
        the counterparty. Collateral held varies but may include accounts receivable,
        inventory, property and equipment, commercial real estate and residential
        real
        estate.
 
 As
        of
        December 31, 2005, 2004 and 2003, the Bank had outstanding commitments to
        originate loans of approximately $2,285,000, $15,712,000 and $24,414,000,
        respectively. The commitments extend over varying periods of time with the
        majority being disbursed within a thirty-day period. As of December 31, 2005,
        2004 and 2003, commitments of $2,058,000, $4,879,000 and $721,000, respectively,
        were at fixed rates and $227,000, $10,833,000 and $23,693,000, 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. As of December 31, 2005, 2004
        and
        2003, the Bank had approximately $0, $2,695,000, and $0, respectively, of
        commitments outstanding.
 
 Standby
        letters of credit are irrevocable conditional commitments issued by the Bank’s
        to guarantee the performance of a customer to a third party. Financial standby
        letters of credit are primarily issued to support public and private borrowing
        arrangements, including commercial paper, bond financing and similar
        transactions. Performance standby letters of credit are issued to guarantee
        performance of certain customers under non-financial contractual obligations.
        The credit risk involved in issuing standby letters of credit is essentially
        the
        same at that involved in extending loans to customers. Fees for letters of
        credit issued after December 31, 2002 are initially recorded by the Bank
        as
        deferred revenue and are included in earnings at the termination of the
        respective agreements. Should the Bank be obligated to perform under the
        standby
        letters of credit, the Bank may seek recourse from the customer for
        reimbursement of amounts paid.
 
 50
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 The
        Bank
        had total outstanding standby letters of credit amounting to $9,731,000,
        $1,314,000 and $1,189,000 as of December 31, 2005, 2004 and 2003, respectively,
        with terms ranging from 30 days to 2 years.
 
 Lines
        of
        credit are agreements to lend to a customer as long as there is no violation
        of
        any condition established in the contract. Lines of credit generally have
        fixed
        expiration dates. Since a portion of the line may expire without being drawn
        upon, the total unused lines do not necessarily represent future cash
        requirements. Each customer's credit worthiness is evaluated on a case-by-case
        basis. The amount of collateral obtained, if deemed necessary, is based on
        management's credit evaluation of the counterparty. Collateral held varies
        but
        may include accounts receivable, inventory, property and equipment, commercial
        real estate and residential real estate. Management uses the same credit
        policies in granting lines of credit as it does for on balance sheet
        instruments.
 
 As
        of
        December 31, 2005, 2004 and 2003, unused lines of credit to borrowers aggregated
        approximately $77,725,000, $64,051,000 and $50,941,000 for commercial lines
        and
        $18,180,000, $16,578,000 and $13,245,000 for open-end consumer lines.
 
 **NOTE
        15:**  **FUTURE
        CHANGE IN ACCOUNTING PRINCIPLE**
 
 In
        December 2004, the FASB issued a revision to FASB Statement No. 123, *Accounting
        for Stock Based Compensation* (SFAS
        123). FASB Statement No. 123R, *Share
        Based Payment* (SFAS
        123R), supersedes Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* (APB
        25),
        and its related implementation guidance. SFAS 123R established standards
        for the
        accounting for transactions in which an entity exchanges its equity instruments
        for goods or services that are based on the fair value of the entity’s equity
        instruments or that may be settled by the issuance of the equity instruments.
        The impact to the Company of SFAS 123R focuses primarily on accounting for
        transactions in which a company obtains employee services in share-based
        payment
        transactions. The Company currently accounts for its stock-based compensation
        using the intrinsic method as defined in APB 25 and, accordingly, has not
        recognized any expense for stock option plans in the Consolidated Financial
        Statements (See *Note
        1* and *Note
        12* of the
        Notes to Consolidated Financial Statements for additional information regarding
        the Company’s accounting for stock-based compensation). The SEC delayed the
        original required implementation date of SFAS 123R for public companies.
        Implementation of SFAS 123R is now required for the Company beginning in
        the
        interim period ending March 31, 2006. The Company does not believe the impact
        of
        applying the new statement will be material to the financial statements.
 
 51
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
  **NOTE
        16:**  **CONDENSED
        PARENT COMPANY STATEMENTS**
 
 The
        condensed balance sheets as of December 31, 2005, 2004 and 2003, and statements
        of income and cash flows for the years ended December 31, 2005 and 2004,
        the six
        months ended December 31, 2003 and 2002, and the year ended June 30, 2003,
        for
        the parent company, Guaranty Federal Bancshares, Inc., are as
        follows:
 
 **Balance
                    Sheets**
                
                As
                    of
                
                As
                    of
                
                As
                    ofDecember
                    31,
                
                December
                    31,
                
                December
                    31,2005
                
                2004
                
                2003**Assets**Cash
                
                $
                1,128,911
                
                
                208,337
                
                
                31,177Due
                    from subsidiary
                
                
                -
                
                
                574,000
                
                
                563,219Investment
                    in subsidiary
                
                
                55,863,320
                
                
                39,804,931
                
                
                37,272,723Investment
                    in Capital Trust I & II
                
                
                466,434
                
                
                -
                
                
                -Prepaid
                    expenses and other assets
                
                
                476,029
                
                
                439,622
                
                
                448,612Refundable
                    income taxes
                
                
                207,153
                
                
                224,860
                
                
                94,903$
                58,141,847
                
                
                41,251,750
                
                
                38,410,634**Liabilities**Subordinated
                    debentures
                
                $
                15,465,000
                
                
                -
                
                
                -Accrued
                    expenses and other liabilities
                
                
                125,624
                
                
                27,619
                
                
                -Dividend
                    payable
                
                
                459,074
                
                
                450,868
                
                
                432,513**Stockholders'
                    equity**Common
                    stock
                
                
                657,135
                
                
                649,386
                
                
                642,890Additional
                    paid-in capital
                
                
                53,778,686
                
                
                52,384,842
                
                
                51,330,202Unearned
                    ESOP shares
                
                
                (1,572,930
                )
                
                (1,800,930
                )
                
                (2,030,930
                )Retained
                    earnings
                
                
                36,533,338
                
                
                32,437,131
                
                
                29,919,695Unrealized
                    appreciation onavailable-for-sale
                    securities, net
                
                
                1,971,925
                
                
                2,815,828
                
                
                2,666,143Treasury
                    stock
                
                
                (49,276,005
                )
                
                (45,712,994
                )
                
                (44,549,879
                )$
                58,141,847
                
                
                41,251,750
                
                
                38,410,634
 
 52
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 
 **Income
                    Statements**
                
                Years
                    ended
                
                For
                    the six months ended
                
                Year
                    endedDecember
                    31,
                
                December
                    31,
                
                June
                    30,2005
                
                2004
                
                2003
                
                2002
                
                2003(Unaudited)IncomeDividends
                    from subsidiary bank
                
                $
                3,540,000
                
                
                2,334,714
                
                
                1,099,000
                
                
                452,291
                
                
                1,750,468Interest
                    income:Related
                    party
                
                
                127,786
                
                
                100,275
                
                
                50,703
                
                
                66,491
                
                
                121,542Other
                
                
                3
                
                
                21
                
                
                -
                
                
                -
                
                
                -3,667,789
                
                
                2,435,010
                
                
                1,149,703
                
                
                518,782
                
                
                1,872,010ExpenseInterest
                    expense:Related
                    party
                
                
                47,683
                
                
                -
                
                
                -
                
                
                -
                
                
                -Occupancy
                
                
                2,400
                
                
                2,400
                
                
                1,200
                
                
                1,200
                
                
                2,400Other
                
                
                759,722
                
                
                581,566
                
                
                219,947
                
                
                84,731
                
                
                190,491809,805
                
                
                583,966
                
                
                221,147
                
                
                85,931
                
                
                192,891Income
                    before income taxesand
                    equity in undistributedearnings
                    of subsidiaries
                
                
                2,857,984
                
                
                1,851,044
                
                
                928,556
                
                
                432,851
                
                
                1,679,119Provision
                    (credit) for income taxes
                
                
                (117,312
                )
                
                (129,555
                )
                
                (63,274
                )
                
                (7,217
                )
                
                (26,487
                )Income
                    before equity in undistributedearnings
                    of subsidiaries
                
                
                2,975,296
                
                
                1,980,599
                
                
                991,830
                
                
                440,068
                
                
                1,705,606Equity
                    in undistributedearnings
                    of subsidiaries
                
                
                2,923,674
                
                
                2,304,174
                
                
                508,331
                
                
                1,323,962
                
                
                1,874,043Net
                    income
                
                $
                5,898,970
                
                
                4,284,773
                
                
                1,500,161
                
                
                1,764,030
                
                
                3,579,649
   53
 ***Guaranty
              Federal Bancshares, Inc.***
 ***Notes
              to Consolidated Financial Statements***
 **Statements
                      of Cash Flows**
                  
                  For
                      the
                  
                  For
                      the
                  
                  For
                      theyears
                      ended
                  
                  six
                      months ended
                  
                  year
                      endedDecember
                      31,
                  
                  December
                      31,
                  
                  June
                      30,2005
                  
                  2004
                  
                  2003
                  
                  2002
                  
                  2003(Unaudited)**Cash
                      Flows From Operating Activities**Net
                      income
                  
                  $
                  5,898,970
                  
                  
                  4,284,773
                  
                  
                  1,500,161
                  
                  
                  1,764,030
                  
                  
                  3,579,649Items
                      not requiring (providing) cash:Equity
                      in undistributed earnings of subsidiaries
                  
                  
                  (2,923,674
                  )
                  
                  (2,304,174
                  )
                  
                  (508,331
                  )
                  
                  (1,323,962
                  )
                  
                  (1,874,043
                  )Release
                      of ESOP shares
                  
                  
                  564,980
                  
                  
                  461,512
                  
                  
                  225,154
                  
                  
                  125,000
                  
                  
                  249,140Stock
                      award plan expense
                  
                  
                  23,161
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Changes
                      in:Accrued
                      interest receivable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,377
                  
                  
                  3,377Prepaid
                      expenses and other assets
                  
                  
                  (36,407
                  )
                  
                  8,990
                  
                  
                  (11,226
                  )
                  
                  409,266
                  
                  
                  (18,944
                  )Income
                      taxes payable/refundable
                  
                  
                  17,707
                  
                  
                  (129,957
                  )
                  
                  (57,708
                  )
                  
                  98,685
                  
                  
                  79,014Accrued
                      expenses
                  
                  
                  98,005
                  
                  
                  27,619
                  
                  
                  (11,338
                  )
                  
                  (46,062
                  )
                  
                  (34,724
                  )Net
                      cash provided by operating activities
                  
                  
                  3,642,742
                  
                  
                  2,348,763
                  
                  
                  1,136,712
                  
                  
                  1,030,334
                  
                  
                  1,983,469**Cash
                      Flows From Investing Activities**Capital
                      contribution to subsidiary bank
                  
                  
                  (13,970,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Purchase
                      of loans
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  291,402
                  
                  
                  -Purchase
                      of investment in capital trusts
                  
                  
                  (465,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Net
                      collections of loans
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (822
                  )
                  
                  -Proceeds
                      from sale of loans
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  290,580Net
                      (increase) decrease in advance to subsidiary
                  
                  
                  574,000
                  
                  
                  (10,780
                  )
                  
                  (553,814
                  )
                  
                  (421,463
                  )
                  
                  8,079Net
                      cash provided by (used in) investing activities
                  
                  
                  (13,861,000
                  )
                  
                  (10,780
                  )
                  
                  (553,814
                  )
                  
                  (130,883
                  )
                  
                  298,659**Cash
                      Flows From Financing Activities**Stock
                      options exercised
                  
                  
                  1,031,400
                  
                  
                  751,274
                  
                  
                  107,638
                  
                  
                  113,554
                  
                  
                  556,869Cash
                      dividends paid
                  
                  
                  (1,794,557
                  )
                  
                  (1,748,982
                  )
                  
                  (844,151
                  )
                  
                  (764,854
                  )
                  
                  (1,604,042
                  )Treasury
                      stock purchased
                  
                  
                  (3,563,011
                  )
                  
                  (1,163,115
                  )
                  
                  (280,558
                  )
                  
                  (235,770
                  )
                  
                  (1,131,792
                  )Proceeds
                      from issuance of subordinated debentures
                  
                  
                  15,465,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Net
                      cash provided by (used in) financing activities
                  
                  
                  11,138,832
                  
                  
                  (2,160,823
                  )
                  
                  (1,017,071
                  )
                  
                  (887,070
                  )
                  
                  (2,178,965
                  )**Increase
                      (decrease) in cash**
                  
                  
                  920,574
                  
                  
                  177,160
                  
                  
                  (434,173
                  )
                  
                  12,381
                  
                  
                  103,163**Cash,
                      beginning of period**
                  
                  
                  208,337
                  
                  
                  31,177
                  
                  
                  465,350
                  
                  
                  362,187
                  
                  
                  362,187**Cash,
                      end of period**
                  
                  $
                  1,128,911
                  
                  
                  208,337
                  
                  
                  31,177
                  
                  
                  374,568
                  
                  
                  465,350
    54
 **Report
          of Independent Registered Public Accounting
          Firm**
 
 
 
 Audit
          Committee, Board of Directors
 and
          Stockholders
 Guaranty
          Federal Bancshares, Inc.
 Springfield,
          Missouri
 
 
 We
          have
          audited the accompanying consolidated balance sheets of Guaranty Federal
          Bancshares, Inc. as of December 31, 2005, 2004 and 2003, and the related
          statements of income, stockholders’ equity and cash flows for the years ended
          December 31, 2005 and 2004, the six-month period ended December 31, 2003,
          and
          for the year ended June 30, 2003. These financial statements are the
          responsibility of the Company’s management. Our responsibility is to express an
          opinion on these financial statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Guaranty Federal Bancshares,
          Inc. as of December 31, 2005, 2004 and 2003, and the results of its operations
          and its cash flows for the years ended December 31, 2005 and 2004, the
          six-month
          period ended December 31, 2003, and for the year ended June 30, 2003, in
          conformity with accounting principles generally accepted in the United
          States of
          America.
 
 
 **/s/BKD,
          LLP**
 
 
 February
          3, 2006
 Springfield,
          Missouri
 55