<PAGE>

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

                                    FORM 10-Q

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

                For the quarterly period ended December 31, 2006

                                       OR

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

              For the transition period from ________ to _________.

                         Commission file number: 0-26467


                        GREATER ATLANTIC FINANCIAL CORP.
             (Exact Name of Registrant as Specified in its Charter)

            Delaware                                          54-1873112
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                             Identification No.)

10700 Parkridge Boulevard, Suite P50, Reston, Virginia                 20191
   (Address of Principal Executive Offices)                          (Zip Code)

                                 (703) 391-1300
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                Yes [ X ] No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [__] Accelerated filer [__] Non- accelerated filer [ X ]

Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
                                Yes [__] No [ X ]

     At December 31, 2006, there were 3,023,506 shares of the registrant's
              Common Stock, par value $0.01 per share outstanding



<PAGE>
<TABLE>
<CAPTION>

                                        GREATER ATLANTIC FINANCIAL CORP.
                                          QUARTERLY REPORT ON FORM 10-Q
                                     FOR THE QUARTER ENDED DECEMBER 31, 2006

                                                TABLE OF CONTENTS


PART I.  FINANCIAL INFORMATION                                                                                    PAGE NO.
------------------------------                                                                                    --------

<S>  <C>                                                                                                               <C>
Item 1. Condensed Financial Statements (Unaudited)

      Consolidated Statements of Financial Condition at December 31, 2006 and September 30, 2006........................3

      Consolidated Statements of Operations
      for the three months ended December 31, 2006 and December 31, 2005 (restated).....................................4

      Consolidated Statements of Comprehensive Income (Loss)
      for the three months ended December 31, 2006 and December 31, 2005 (restated).....................................5

      Consolidated Statements of Changes in Stockholders' Equity
      for the three months ended December 31, 2006 and December 31, 2005 (restated).....................................5

      Consolidated Statements of Cash Flows
      for the three months ended December 31, 2006 and December 31, 2005 (restated).....................................6

      Notes to Consolidated Financial Statements........................................................................8

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.........................14
Item 3.  Quantitative and Qualitative Disclosures about Market Risk....................................................22
Item 4.  Controls and Procedures.......................................................................................23

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

Item 1.    Legal Proceedings...........................................................................................25
Item 1A.   Risk Factors................................................................................................25
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.................................................27
Item 3.    Defaults Upon Senior Securities.............................................................................27
Item 4.    Submission of Matters to a Vote of Security Holders.........................................................27
Item 5.    Other Information...........................................................................................27
Item 6.    Exhibits....................................................................................................27

SIGNATURES.............................................................................................................28

CERTIFICATIONS.........................................................................................................29

</TABLE>

                                                        2

<PAGE>
<TABLE>
<CAPTION>

                                        GREATER ATLANTIC FINANCIAL CORP.
                           CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

                                                                             December 31,      September 30,
                                                                            ----------------------------------
                                                                                 2006               2006
  ------------------------------------------------------------------------------------------------------------
  (Dollars in Thousands)
  <S>                                                                           <C>               <C>
  Assets
  Cash and cash equivalents                                                     $  2,975          $  2,516
  Interest bearing deposits at banks                                               3,836            17,288
  Investment securities
     Available-for-sale                                                           68,921            75,461
     Held-to-maturity                                                              4,176             4,696
  Loans receivable, net                                                          195,172           193,307
  Accrued interest and dividends receivable                                        2,022             2,073
  Deferred income taxes                                                            1,857             1,928
  Federal Home Loan Bank stock, at cost                                            2,433             2,388
  Other real estate owned                                                              -                 -
  Premises and equipment, net                                                      2,660             2,764
  Goodwill                                                                           956               956
  Prepaid expenses and other assets                                                1,606             1,842
  ------------------------------------------------------------------------------------------------------------
  Total assets                                                                  $286,614          $305,219
  ============================================================================================================
  Liabilities and stockholders' equity
  Liabilities
  Deposits                                                                      $217,880          $230,174
  Advance payments from borrowers for taxes and insurance                            266               270
  Accrued expenses and other liabilities                                           2,032             1,963
  Advances from the FHLB and other borrowings                                     48,972            54,574
  Junior subordinated debt securities                                              9,390             9,388
  ------------------------------------------------------------------------------------------------------------
  Total liabilities                                                              278,540           296,369
  ------------------------------------------------------------------------------------------------------------
  Commitments and contingencies
  ------------------------------------------------------------------------------------------------------------
  Stockholders' Equity
     Preferred stock $.01 par value - 2,500,000 shares authorized,
         none outstanding                                                              -                 -
     Common stock, $.01 par value - 10,000,000
         shares authorized; 3,023,506 shares outstanding                              30                30
     Additional paid-in capital                                                   25,228            25,228
     Accumulated deficit                                                         (16,251)          (15,359)
     Accumulated other comprehensive loss                                           (933)           (1,049)
  ------------------------------------------------------------------------------------------------------------
  Total stockholders' equity                                                       8,074             8,850
  ------------------------------------------------------------------------------------------------------------
  Total liabilities and stockholders' equity                                    $286,614          $305,219
  ============================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements

                                                         3

<PAGE>
<TABLE>
<CAPTION>

                                        GREATER ATLANTIC FINANCIAL CORP.
                                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

                                                                     Three Months Ended
                                                                        December 31,
                                                                ------------------------------
(Dollars in Thousands, Except Per Share Data)                        2006           2005
----------------------------------------------------------------------------------------------
                                                                                 (Restated)
<S>                                                              <C>            <C>
Interest income
  Loans                                                          $    3,670     $    3,391
  Investments                                                         1,135          1,199
----------------------------------------------------------------------------------------------
Total interest income                                                 4,805          4,590
----------------------------------------------------------------------------------------------
Interest expense
  Deposits                                                            2,239          1,765
  Borrowed money                                                        794            976
----------------------------------------------------------------------------------------------
Total interest expense                                                3,033          2,741
----------------------------------------------------------------------------------------------
Net interest income                                                   1,772          1,849
Provision for loan losses                                               148             71
----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                   1,624          1,778
----------------------------------------------------------------------------------------------
Noninterest income
  Fees and service charges                                              152            151
  Gain on derivatives                                                    13             71
  Gain on sale of foreclosed real estate                                  -             65
  Other operating income                                                  5             15
----------------------------------------------------------------------------------------------
Total noninterest income                                                170            302
----------------------------------------------------------------------------------------------
Noninterest expense
  Compensation and employee benefits                                  1,266          1,093
  Occupancy                                                             343            317
  Professional services                                                 400            257
  Advertising                                                            24            173
  Deposit insurance premium                                              23             27
  Furniture, fixtures and equipment                                     130            137

  Data processing                                                       220            243
  Other operating expenses                                              280            273
----------------------------------------------------------------------------------------------
Total noninterest expense                                             2,686          2,520
----------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes                    (892)          (440)
Provision for income taxes                                                -              -
----------------------------------------------------------------------------------------------
    Loss from continuing operations                                    (892)          (440)
Discontinued operations:
  Income (loss) from operations                                           -         (1,782)
----------------------------------------------------------------------------------------------
Net loss                                                         $     (892)    $   (2,222)
==============================================================================================
Earnings (loss) per common share BASIC AND DILUTED:
  Continuing operations                                          $    (0.30)    $    (0.15)
  Discontinued operations                                                 -          (0.59)
----------------------------------------------------------------------------------------------
    Net income (loss)                                            $    (0.30)    $    (0.74)
==============================================================================================
Weighted average common shares outstanding
Basic and diluted                                                 3,021,297      3,020,934

</TABLE>

See accompanying notes to consolidated financial statements

                                                 4
<PAGE>
<TABLE>
<CAPTION>

                        GREATER ATLANTIC FINANCIAL CORP.
       CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

                                                          Three months ended
                                                    ------------------------------
                                                             December 31,
----------------------------------------------------------------------------------
(In Thousands)                                          2006           2005
                                                                   (Restated)
----------------------------------------------------------------------------------
<S>                                                    <C>            <C>
Net loss                                               $ (892)        $ (2,222)
----------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
   Unrealized gain (loss) on securities                   116             (172)
----------------------------------------------------------------------------------
Other comprehensive income (loss)                         116             (172)
----------------------------------------------------------------------------------
Comprehensive loss                                     $ (776)        $ (2,394)
==================================================================================
</TABLE>

<TABLE>
<CAPTION>

                                        GREATER ATLANTIC FINANCIAL CORP.
                     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
                        FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005 (RESTATED)
----------------------------------------------------------------------------------------------------------------------------
                                                                                              Accumulated
                                                                Additional   Accumulated         Other           Total
                                        Preferred     Common     Paid-in      Earnings      Comprehensive    Stockholders'
                                         Stock        Stock      Capital     (Deficit)      Income (Loss)        Equity
----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S>                                        <C>        <C>     <C>            <C>               <C>               <C>
Balance at September 30, 2005 (as
restated)                                  $-         $ 30    $ 25,228       $  (9,788)        $ (1,095)         $ 14,375

Other comprehensive loss                    -            -           -               -             (172)             (172)

Net loss for the period (as restated)       -            -           -          (2,222)               -            (2,222)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 (as           $-         $ 30    $ 25,228       $ (12,010)        $ (1,267)         $ 11,981
restated)
============================================================================================================================
Balance at September 30, 2006              $-         $ 30    $ 25,228       $ (15,359)        $ (1,049)         $  8,850

Other comprehensive income                  -            -           -               -              116               116

Net loss for the period                     -            -           -            (892)               -              (892)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006               $-         $ 30    $ 25,228       $ (16,251)        $   (933)         $  8,074
============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements


                                                        5
<PAGE>
<TABLE>
<CAPTION>

                                        GREATER ATLANTIC FINANCIAL CORP.
                                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                                                                                        Three months ended
                                                                                           December 31,
                                                                                  ------------------------------
                                                                                      2006           2005
                                                                                                  (Restated)
----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S>                                                                                   <C>            <C>
Cash flow from operating activities
Net loss                                                                              $ (892)        $(2,222)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
  Provision for loan loss                                                                148              71
  Amortization of loan acquisition adjustment                                             (7)            (16)
  Depreciation and amortization                                                          115             211
  (Gain) loss on derivatives                                                             (13)            (71)
  Amortization of investment security premiums                                           155             187
  Amortization of mortgage-backed securities premiums                                    106             209
  Amortization of deferred fees                                                          (99)           (158)
  Discount accretion net of premium amortization                                         (72)            (65)
  Amortization of convertible preferred stock costs                                        2               2
  Gain on sale of loans held for sale                                                      -            (809)
  Gain on sale of foreclosed real estate                                                   -            (65)
  Gain on sale of fixed assets                                                           (26)              -
(Increase) decrease in assets
  Disbursements for origination of loans held for sale                                     -         (49,513)
  Proceeds from sales of loans                                                             -          54,634
  Accrued interest and dividend receivable                                                51            (236)
  Prepaid expenses and other assets                                                      236             677
  Deferred loan fees collected, net of deferred costs incurred                           163              51
  Impairment of premises and equipment                                                     -             868
Increase (decrease) in liabilities
  Accrued expenses and other liabilities                                                  82              10
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                                      (51)          3,765
----------------------------------------------------------------------------------------------------------------
</TABLE>

Continued

                                                    6
<PAGE>
<TABLE>
<CAPTION>

                                        GREATER ATLANTIC FINANCIAL CORP.
                         CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED)

                                                                                    Three months ended
                                                                                       December 31,
                                                                                ---------------------------
                                                                                    2006          2005
                                                                                               (Restated)
-----------------------------------------------------------------------------------------------------------
(In Thousands)
<S>                                                                              <C>           <C>
Cash flow from investing activities
  Net  increase in loans                                                         $ (1,997)     $ (1,542)
  Disposal  of premises and equipment                                                  15           (86)
  Purchases of investment securities                                                    -        (7,707)

  Proceeds from repayments of investment securities                                  2,895        4,939
  Proceeds from repayments of mortgage-backed securities                             4,090        7,961
  Proceeds from the sale of foreclosed assets                                            -          297
  Purchases of FHLB stock                                                             (225)      (1,350)
  Proceeds from sale of FHLB stock                                                     180          855
-----------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                                            4,958        3,367
-----------------------------------------------------------------------------------------------------------
Cash flow from financing activities
  Net decrease in deposits                                                         (12,294)      (6,206)
  Net advances from FHLB                                                              3,000      11,000
  Net decrease in borrowings on reverse repurchase agreements                       (8,602)      (5,736)
  Increase (decrease) in advance payments by borrowers
    for taxes and insurance                                                             (4)         (30)
-----------------------------------------------------------------------------------------------------------
Net cash used in financing activities                                              (17,900)        (972)
-----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                                   (12,993)       6,160
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at beginning of period                                   19,804        4,709
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period                                      $   6,811     $ 10,869
===========================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements


                                                        7

<PAGE>

                        GREATER ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            INFORMATION AS OF DECEMBER 31, 2006 AND THE THREE MONTHS
                  ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)

(1) BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements, which
include the accounts of Greater Atlantic Financial Corp. (the "company") and its
wholly owned subsidiary, Greater Atlantic Bank (the "bank") have been prepared
in accordance with the instructions for Form 10-Q. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") with respect to interim financial reporting. It is
recommended that these consolidated financial statements be read in conjunction
with the company's Annual Report on Form 10-K for the year ended September 30,
2006. The results of operations for the three months ended December 31, 2006 are
not necessarily indicative of the results of operations that may be expected for
the year ending September 30, 2007 or any future periods. In addition to
reclassifications related to discontinued operations, other reclassifications
have been made to prior periods to place them on a basis comparable with the
current period presentation.

(2) RESTATEMENT

         During 2006, the company restated its historical financial statements
to reflect the accounting treatment for non-cash losses discovered in an
unreconciled inter-company account in its subsidiary, Greater Atlantic Mortgage
Corporation ("GAMC"). The losses were discovered as the bank discontinued the
operations of the subsidiary. The loss in any given year did not reach a
material amount such as to require restatement. However, the bank determined to
provide the restatements because the cumulative amount of the losses aggregated
$1.4 million. The revisions had no impact on the cash flows of the bank. The
table below includes the effect of the restatement and the presentation of GAMC
as discontinued operations.
<TABLE>
<CAPTION>
                                        As originally                         Discontinued
                                           reported         Restatement        operations         As restated
                                        ---------------    --------------    ---------------     -------------
<S>                                        <C>                <C>              <C>                <C>
Three months ended December 31, 2005
Interest income                            $ 4,739            $    -           $    149           $  4,590
Interest expense                             2,863                 -                122              2,741
Net interest income                          1,876                 -                 27              1,849
Noninterest income                           1,449               (92)             1,055                302
Noninterest expense                          5,384                 -              2,864              2,520
Discontinued operations                          -                 -             (1,782)            (1,782)
Net income (loss)                           (2,130)              (92)                 -             (2,222)
Earnings per share - continuing              (0.71)            (0.03)              0.59              (0.15)
Earnings per share - discontinued            (0.00)             0.00              (0.59)             (0.59)
</TABLE>

         The $92,000 adjustment to noninterest income relate to gains on sale of
loans. In addition, the September 30, 2005 retained earnings balance was reduced
by $1.3 million to reflect the cumulative effect of the restatement of all
periods prior to those reflected in this form 10-Q.

(3) Discontinued operations

         On March 29, 2006, we began the process of discontinuing the operations
of the bank's mortgage company subsidiary, GAMC. It was determined that this
business no longer fit our strategy.

         As a result of the above action, we applied discontinued operations
accounting in the third quarter of 2006, as we completed the closing of the GAMC
business. Accordingly, the income statements for all periods have been adjusted.
The reclassification of GAMC's results to discontinued operations primarily
resulted in a reduction to previously reported levels of net interest income, a
reduction in noninterest income and a reduction in noninterest expense. The
table below summarizes GAMC's results which were treated as discontinued
operations for the periods indicated.

                                       8

<PAGE>

                        GREATER ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            INFORMATION AS OF DECEMBER 31, 2006 AND THE THREE MONTHS
                  ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)

                                                     Three months
                                                         ended
                                                     December 31,
                                                   ------------------
                                                         2005
---------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data
Interest income                                             $    149
Interest expense                                                 122
---------------------------------------------------------------------
Net interest income                                               27
Noninterest income                                             1,055
Noninterest expense                                            2,864
---------------------------------------------------------------------
Net income (loss)                                           $ (1,782)
=====================================================================
Earnings (loss) per share - basic                           $  (0.59)
Earnings (loss) per share - diluted                            (0.59)

(4) LOAN IMPAIRMENT AND LOAN LOSSES

         In accordance with guidance in the Statements of Financial Accounting
Standards Nos. 114 and 118, the company prepares a quarterly review to determine
the adequacy of the allowance for loan losses and to identify and value impaired
loans. An analysis of the change in the allowance for loan losses follows (also
see page 20 for discussion of non-performing loans):
<TABLE>
<CAPTION>
                                                             At or for the three months
                                                                 ended December 31,
                                                         ------------------------------------
                                                                2006             2005
---------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                                           <C>               <C>
Balance at beginning of period                                $ 1,330           $ 1,212
Provisions                                                        148                71
Total charge-offs                                                (325)              (52)
Total recoveries                                                    5                14
---------------------------------------------------------------------------------------------
Net charge-offs                                                  (320)              (38)
---------------------------------------------------------------------------------------------
Balance at end of period                                      $ 1,158           $ 1,245
=============================================================================================
Ratio of net charge-offs during the period
   to average loans outstanding during the period                0.17%             0.02%
=============================================================================================
Allowance for loan losses to total non-performing
   loans at end of period                                      247.44%            63.68%
=============================================================================================
Allowance for loan losses to total loans                         0.58%             0.59%
=============================================================================================
</TABLE>

(5) REGULATORY MATTERS

         The capital distribution regulation of the OTS requires that the bank
provide the applicable OTS Regional Director with a 30-day advance written
notice of all proposed capital distributions whether or not advance approval is
required. The bank paid dividends of $655,000 to the company during the year
ended September 30, 2006.

         On December 19, 2006, the company issued a news release announcing that
the first quarter distribution of Greater Atlantic Capital Trust I 6.50%
Cumulative Convertible Trust Preferred Securities scheduled for December 31,
2006, as well as future distributions on the Trust Preferred Securities, will be
deferred. The announcement by the company followed advice received by the bank
from the Office of Thrift Supervision that it would not approve the bank's
application to pay a cash dividend to the company. Accordingly, the company
exercised its right to defer the payment of interest on its 6.50% Convertible
Junior Subordinated Debentures Due 2031 related to the Trust Preferred
Securities, for an indefinite period (which can be no longer than 20 consecutive
quarterly periods).

                                       9

<PAGE>

                        GREATER ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            INFORMATION AS OF DECEMBER 31, 2006 AND THE THREE MONTHS
                  ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)

         The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) created five categories of financial institutions based on the adequacy
of their regulatory capital levels: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.

         Under FDICIA, a well-capitalized financial institution is one with Tier
1 leverage capital of 5%, Tier 1 risk-based capital of 6% and total risk-based
capital of 10%. At December 31, 2006, the bank was classified as an
adequately-capitalized financial institution.
<TABLE>
<CAPTION>
         The following presents the bank's capital position at December 31, 2006:

--------------------------------------------------------------------------------------------------------
                                        Required      Required     Actual       Actual      Surplus/
                                         Balance      Percent      Balance      Percent    (Shortfall)
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                       <C>           <C>        <C>             <C>       <C>
Leverage                                  $14,260        5.00%     $16,041         5.62%     $ 1,781
Tier 1 Risk-based                         $11,192        6.00%     $15,951         8.55%     $ 4,759
Total Risk-based                          $18,654       10.00%     $17,109         9.17%     $(1,545)
========================================================================================================
</TABLE>
(6) STOCK OPTIONS

         Effective November 14, 1998, the company established the 1997 Stock
Option and Warrant Plan (the "Plan"). The Plan reserves options for 76,667
shares to employees and warrants for 94,685 shares to stockholders. The Plan was
amended effective March 14, 2000, to increase the number of options available
for grant to employees from 76,667 to 225,000 shares and amended again effective
March 15, 2002, to increase the number of options available for grant to
employees from 225,000 to 350,000 shares and to limit its application to
officers and employees. The stock options and warrants vest immediately upon
issuance and carry a maximum term of 10 years. The exercise price for the stock
options and warrants is the fair market value at grant date. As of December 31,
2006, 94,685 warrants were issued.
<TABLE>
<CAPTION>
         The following summary represents the activity under the Plan:
  ---------------------------------------------------------------------------------------------------------------
                                                                         Number of    Exercise      Expiration
                                                                           Shares       Price          Date
  ---------------------------------------------------------------------------------------------------------------
  <S>                                                                      <C>           <C>         <C>
  Balance outstanding and exercisable at September 30, 2004                226,000
  Options granted                                                          104,000       $ 6.75      10-6-2014
  Options exercised                                                         (8,500)      $ 4.00
  Options expired                                                          (55,500)      $ 6.52
  ---------------------------------------------------------------------------------------------------------------
  Balance outstanding and exercisable at September 30, 2005                266,000       $ 6.91
  Options granted                                                           12,000       $ 6.00      3-31-2016
  Options expired                                                          (25,000)      $ 8.37
  ---------------------------------------------------------------------------------------------------------------
  Balance outstanding and exercisable at September 30, 2006                253,000       $ 6.72
  Options granted                                                                -
  ---------------------------------------------------------------------------------------------------------------
  Balance outstanding and exercisable at December 31, 2006                 253,000       $ 6.72
  ===============================================================================================================
</TABLE>

                                                       10

<PAGE>

                        GREATER ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            INFORMATION AS OF DECEMBER 31, 2006 AND THE THREE MONTHS
                  ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)


         The company has adopted the provisions of Statement of Financial
Accounting Standards No. 123R, "Accounting for Stock-Based Compensation" ("SFAS
123R"), to measure compensation cost for stock options effective after October
1, 2005. Prior to its adoption, the company accounted for its options under APB
25 "Accounting for Stock Issued to Employees" with pro forma disclosed. As
allowable under SFAS 123R, the company used the Black-Scholes method to measure
the compensation cost of stock options granted in 2006 with the following
assumptions: risk-free interest rate of 4.88%, a dividend payout rate of zero,
and an expected option life of nine years. The volatility is 32%. Using these
assumptions, the fair value of stock options granted during fiscal 2006 was
$2.92. The company estimates the fair value of each option on the date of grant
using the Black-Scholes option-pricing model. There were no options granted
during the three months ended December 31, 2006 and December 31, 2005,
respectively..

(7) EARNINGS PER SHARE

         Earnings per share is based on the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity. The weighted average
shares outstanding for basic and diluted earnings per share for the three months
ended December 31, 2006 and 2005 were the same as the effect of the conversion
of preferred securities and the impact of stock options were antidilutive for
the periods ended December 31, 2006 and 2005. The effect of the conversion of
the preferred securities would result in an increase of 1,373,969 in common
shares outstanding.

(8) SEGMENT REPORTING

          The company had two reportable segments, banking and mortgage banking.
However, the mortgage-banking activities conducted in GAMC, to which the
mortgage-banking segment applied, were discontinued effective March 29, 2006.
The bank operates retail deposit branches in the greater Washington,
D.C./Baltimore metropolitan area. The banking segment provides retail consumers
and small businesses with deposit products such as demand, transaction, and
savings accounts and certificates of deposit and lending products, such as
residential and commercial real estate, construction and development, consumer
and commercial business loans. Further, the banking segment invests in
residential real estate loans purchased from GAMC and others, and also invests
in mortgage-backed and other securities. The mortgage banking activities, which
were conducted principally through GAMC, included the origination of residential
real estate loans either for sale into the secondary market, with servicing
released or for retention in the bank's portfolio.

         On March 29, 2006, we began the process of discontinuing the operations
of the bank's subsidiary, GAMC. Because it was unprofitable, it was determined
that this business no longer fit our strategy.

         In the third quarter of 2006, we applied discontinued operations
accounting for GAMC. Accordingly, the income statements for all periods have
been restated. The restatements primarily resulted in a reduction to previously
reported levels of net interest income, a reduction in noninterest income and a
reduction in noninterest expense.

         Due to the unprofitable operations of GAMC, the company recognized an
operating loss of $693,000 for the three months ended December 31, 2005. In
addition to the loss from operations, a non-recurring pre-tax impairment charge
for long-lived assets of $996,000 was recorded and included in discontinued
operations in the consolidated statements of operations.


                                       11

<PAGE>

                        GREATER ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            INFORMATION AS OF DECEMBER 31, 2006 AND THE THREE MONTHS
                  ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)

(9) RECENT ACCOUNTING STANDARDS

         The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 123 (Revised 2004) ("SFAS No. 123R"),
"Share-Based Payment," in December 2004. SFAS No. 123R is a revision of FASB
Statement 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. The Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award. This statement is effective as of the
beginning of the first annual reporting period that begins after June 15, 2005
and the company adopted the standard in the first quarter of fiscal 2006. The
adoption of this statement did not have a material impact on its consolidated
financial position or results of operations.

         In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS 154 generally requires retrospective application to prior periods'
financial statements of all voluntary changes in accounting principle and
changes required when a new pronouncement does not include specific transition
provisions. This standard was effective for the company beginning October 1,
2006.

         In July 2006, the FASB issued Interpretation (FIN) No. 48, "Accounting
for Uncertainty in Income Taxes" - an Interpretation of SFAS No. 109,
"Accounting for Income Taxes." FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
"more-likely-than-not" to be sustained by a taxing authority. The term
"more-likely-than-not" means a likelihood of more than 50 percent. FIN 48 is
effective for fiscal years beginning after December 15, 2006, with early
application permitted. Any impact from the adoption of FIN 48 will be recorded
directly to the beginning balance of retained earnings and reported as a change
in accounting principle. We are currently evaluating the impact of this
Interpretation, but do not expect it to be material.

         On October 1, 2006, we adopted SFAS 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No.140." SFAS 156 was issued
in March 2006 and requires all newly recognized servicing rights and obligations
to be initially measured at fair value. For each class of separately recognized
servicing rights and obligations retained, we have elected to continue to
account for each under the amortization method which requires us to amortize
servicing assets or liabilities in proportion to and over the periods of
estimated net servicing income or net servicing loss.

         In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among
registrants, SAB 108 expresses the SEC staff views regarding the process by
which misstatements in financials statements are evaluated for purposes of
determining whether financial statement restatement is necessary. SAB 108 is
effective for fiscal years ending after November 15, 2006, and early application
is encouraged. The company does not believe SAB 108 will have a material impact
on its consolidated financials statements.

         In September 2006, the Financial Accounting Standards Board released
Statement No. 157, "Fair Value Measurements" which defines fair value,
establishes a framework for measuring fair value in GAAP, and enhances
disclosures about fair value measurements. This Statement applies when other
accounting pronouncements require fair value measurements; it does not require
new fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those years. While we are currently evaluating the effect
of the guidance contained in this Statement, we do not expect the implementation
to have a material impact on our consolidated financial statements.

                                       12

<PAGE>

                        GREATER ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            INFORMATION AS OF DECEMBER 31, 2006 AND THE THREE MONTHS
                  ENDED DECEMBER 31, 2006 AND 2005 (UNAUDITED)

(10) JUNIOR SUBORDINATED DEBT SECURITIES

         On March 20, 2002, Greater Atlantic Capital Trust I (the, "Trust"), a
Delaware statutory business trust and a wholly owned Trust subsidiary of the
company, issued $9.6 million aggregate liquidation amount (963,038 shares) of
6.50% cumulative preferred securities maturing on December 31, 2031, retaining
an option to call the securities on or after December 31, 2003. Conversion of
the preferred securities into the company's common stock may occur at any time
on or after 60 days after the closing of the offering. The company may redeem
the preferred securities, in whole or in part, at any time on or after December
31, 2003. Distributions on the preferred securities are payable quarterly on
March 31, June 30, September 30 and December 31 of each year beginning on June
30, 2002. The Trust also issued 29,762 common securities to the company for
$297,620. The proceeds from the sale of the preferred securities and the
proceeds from the sale of the trust's common securities were utilized to
purchase from the company junior subordinated debt securities of $9,928,000
bearing interest of 6.50% and maturing December 31, 2031.

         The Trust was formed for the sole purpose of investing the proceeds
from the sale of the convertible preferred securities in the corresponding
convertible debentures. The company has fully and unconditionally guaranteed the
preferred securities along with all obligations of the trust related thereto.
The sale of the preferred securities yielded $9.3 million after deducting
offering expenses. The company retained approximately $1.3 million of the
proceeds for general corporate purposes, investing the retained funds in
short-term investments. The remaining $8.0 million of the proceeds was invested
in the bank to increase its capital position (also see Note 5 Regulatory
Matters).

(11) DERIVATIVE FINANCIAL INSTRUMENTS

         The bank has entered into various interest rate caps during fiscal year
2003 and 2002 that total $25 million in notional principal with terms between
five and ten years that limit the float between a floor of 2.00%, and are capped
between 5.00% - 8.00%. The bank accounts for these derivatives, under the
guidelines of SFAS 133, as amended.

         Realized and unrealized gains and losses on those derivatives which
meet hedge accounting requirements are deferred and recognized when the hedge
transaction occurs. In the event hedge accounting requirements are not met gains
and losses on such instruments are included currently in the statement of
operations. During the three months ended December 31, 2006 and 2005 the
instruments did not meet hedge accounting requirements. The statements of
operations include net gains of $13,000 and $71,000 for the three months ended
December 31, 2006 and 2005, respectively.


                                       13

<PAGE>


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

         The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes presented elsewhere in this
report.

         This report contains forward-looking statements. When used in this 10-Q
report and in future filings by the company with the Securities and Exchange
Commission (the "SEC"), in the company's press releases or other public or
shareholder communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the company's market area and competition that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The company wishes to advise readers that the factors
listed above could affect the company's financial performance and could cause
the company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.

         The company does not undertake and specifically declines any obligation
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.

         The matters discussed in management's discussion and analysis of
financial condition and results of operations reflects continuing operations, as
adjusted for the Restatement discussed in Note 2 of the financial statements,
unless otherwise noted.

MORTGAGE BANKING ACTIVITIES

         The bank's mortgage banking activities primarily consist of originating
mortgage loans secured by single-family properties. However, the
mortgage-banking activities conducted in GAMC were discontinued effective March
29, 2006 as it was determined that, because it was unprofitable, this business
no longer fit our strategy. Mortgage banking involves the origination and sale
of mortgage loans for the purpose of generating gains on sale of loans and fee
income on the origination of loans, in addition to loan interest income. In
recent years, the volume of GAMC's originations had been declining, resulting in
losses from mortgage banking operations, which, pursuant to an agreement, the
manager had agreed to fund (see Item 1. Legal Proceedings).

         In the third quarter of 2006, we applied discontinued operations
accounting for GAMC as we completed closing those operations during the quarter.
This business no longer fit our strategy because it was unprofitable.
Accordingly, the income statements for all periods have been adjusted. The
reclassifications primarily resulted in a reduction to previously reported
levels of net interest income, a reduction in noninterest income and a reduction
in noninterest expense.

         Due to the unprofitable operations of GAMC, the company recognized an
operating loss of $693,000 for the three months ended December 31, 2005. In
addition to the loss from operations, a non-recurring pre-tax impairment charge
on long-lived assets of $996,000 was recorded for the three months ended
December 31, 2005 and included in discontinued operations in the consolidated
statements of operations.

GENERAL

         We are a savings and loan holding company, which was organized in June
1997. We conduct substantially all of our business through our wholly owned
subsidiary, Greater Atlantic Bank, a federally chartered savings bank. The bank
is a member of the Federal Home Loan Bank system and its deposits are insured up
to applicable limits by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation. We offer traditional banking services to
customers through the six branches of the bank located throughout the greater
Washington, D.C./Baltimore metropolitan area.

                                       14

<PAGE>


         The profitability of the company depends primarily on its non-interest
income and net interest income. Net interest income is the difference between
the interest income it earns on its loans and investment portfolio, and the
interest it pays on interest-bearing liabilities, which consist mainly of
interest paid on deposits and borrowings. Non-interest income consists primarily
of gain on sales of loans, derivatives and available-for-sale investments and
service charge fees for deposits and loans.

         The level of its operating expenses also affects the company's
profitability. Operating expenses consist primarily of salaries and employee
benefits, occupancy-related expenses, equipment and technology-related expenses
and other general operating expenses.

         At December 31, 2006 the company's total assets were $286.6 million,
compared to the $305.2 million held at September 30, 2006, representing a
decrease of 6.10%. This resulted primarily from a decrease in interest-bearing
deposits in the bank. Both the bank's overall asset size and customer base
decreased during the period and that decline is reflected in the consolidated
statements of financial condition and statements of operations. Net loans
receivable at December 31, 2006 were $195.2 million, an increase of $1.9 million
or 0.96% from the $193.3 million held at September 30, 2006. The increase in
loans consisted primarily of $3.2 million in multifamily, $3.7 million in
commercial real estate and $1.1 million construction and land loans. That
increase was offset in part by decreases in single family, commercial business
and consumer loans totaling $6.3 million. At December 31, 2006, investment
securities were $73.1 million, a decrease of $7.1 million or 8.81% from the
$80.2 million held at September 30, 2006. Deposits at December 31, 2006 were
$217.9 million, a decrease of $12.3 million from the $230.2 million held at
September 30, 2006.

         On February 22, 2006, the company announced that it had engaged Sandler
O'Neill & Partners, L.P. to advise and assist the company in evaluating the
financial aspects of all strategic alternatives available, including remaining
independent.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS

         The company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of those financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses as well as the disclosure of contingent liabilities. Management
continually evaluates its estimates and judgments including those related to the
allowance for loan losses and income taxes. Management bases its estimates and
judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from those
estimates under different assumptions or conditions. The company believes that,
of its significant accounting policies, the most critical accounting policies we
apply are those related to the evaluation of the adequacy of the allowance for
loan losses.

         A variety of factors impact the carrying value of the loan portfolio
including the calculation of the allowance for loan losses, valuation of
underlying collateral, the timing of loan charge-offs and the amount and
amortization of loan fees and deferred origination costs. The allowance for loan
losses is the most difficult and subjective judgment. The allowance is
established and maintained at a level that we believe is adequate to cover
losses resulting from the inability of borrowers to make required payments on
loans. Estimates for loan losses are arrived at by analyzing risks associated
with specific loans and the loan portfolio, current trends in delinquencies and
charge-offs, the views of our regulators, changes in the size and composition of
the loan portfolio and peer comparisons. The analysis also requires
consideration of the economic climate and direction, change in the interest rate
environment, which may impact a borrower's ability to pay, legislation impacting
the banking industry and economic conditions specific to our service area.
Because the calculation of the allowance for loan losses relies on estimates and
judgments relating to inherently uncertain events, results may differ from our
estimates.

                                       15

<PAGE>
         COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
                     DECEMBER 31, 2006 AND DECEMBER 31, 2005

         NET INCOME. For the three months ended December 31, 2006, the company
had net loss of $892,000 or $0.30 per diluted share, compared to a net loss from
continuing operations of $440,000 or $0.15 per diluted share for the three
months ended December 31, 2005. The increase in the net loss of $452,000 over
the comparable period one-year ago was primarily the result of an increase in
non-interest expense and provision for loan losses and decreases in net interest
income and noninterest income.

         NET INTEREST INCOME. An important source of our earnings is net
interest income, which is the difference between income earned on
interest-earning assets, such as loans, investment securities and
mortgage-backed securities, and interest paid on interest-bearing liabilities
such as deposits and borrowings. The level of net interest income is determined
primarily by the relative average balances of interest-earning assets and
interest-bearing liabilities in combination with the yields earned and rates
paid upon them. The correlation between the re-pricing of interest rates on
assets and on liabilities also influences net interest income.

         The following table presents a comparison of the components of interest
income and expense and net interest income.
<TABLE>
<CAPTION>
                                                                                                Difference
Net interest income from continuing operations                                        -------------------------------
Three Months Ended December 31,                         2006              2005           Amount             %
---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                                    <C>               <C>              <C>             <C>
Interest income:
   Loans                                               $ 3,670           $ 3,391          $ 279            8.23%
   Investments                                           1,135             1,199            (64)          (5.34)
---------------------------------------------------------------------------------------------------------------------
Total                                                    4,805             4,590            215            4.68
---------------------------------------------------------------------------------------------------------------------

Interest expense:
   Deposits                                              2,239             1,765            474           26.86
   Borrowings                                              794               976           (182)         (18.65)
---------------------------------------------------------------------------------------------------------------------
Total                                                    3,033             2,741            292           10.65
---------------------------------------------------------------------------------------------------------------------
Net interest income                                    $ 1,772           $ 1,849          $ (77)          (4.16)%
=====================================================================================================================
</TABLE>

         The decrease in net interest income during the three months ended
December 31, 2006, resulted primarily from a $48.4 million decrease in the
bank's interest-earning assets coupled with average interest-earning assets
declining by $4.5 million more than the decline in average interest-bearing
liabilities and was offset in part by a 28 basis point increase in net interest
margin (net interest income divided by average interest-earning assets) from
2.26% for the three months ended December 31, 2005 to 2.54% for the three months
ended December 31, 2006. That increase in net interest margin was offset by an
increase of $33,000 in interest expense in the 2006 period compared to a
reduction of $41,000 in interest expense in the year ago period resulting from
payments made on certain interest rate swap and cap agreements to the comparable
period one year ago. That increase in net interest margin also resulted from
increasing the average yield on interest-earning assets by 26 basis points more
than the increase in the average cost on interest-bearing liabilities.

         INTEREST INCOME. Interest income for the three months ended December
31, 2006 increased $215,000 compared to the three months ended December 31,
2005, primarily as a result of an increase of 128 basis points in the average
yield earned on interest earning assets. That increase was partially offset by a
decrease of $48.4 million in the average outstanding balances of loans and
investment securities.

                                       16

<PAGE>


         INTEREST EXPENSE. The $292,000 increase in interest expense for the
three months ended December 31, 2006 compared to the 2005 period was principally
the result of a 102 basis point increase in the cost of funds on average
deposits and borrowings. That increase in the cost of funds was partially offset
by a $43.9 million decrease in average deposits and borrowings. The increase in
interest expense on deposits was primarily due to a 98 basis point increase in
rates paid on deposits. The increase in expense was primarily due to higher
rates paid on interest-bearing demand deposits, savings accounts and
certificates and elevated pricing on new and renewed time deposits. That
increase was partially offset by a decrease of $5.2 million in average deposits
from $215.7 million for the three months ended December 31, 2005 to $210.5
million for the three months ended December 31, 2006.

         The decrease in interest expense on borrowings for the three months
ended December 31, 2006, when compared to the 2005 period, was principally the
result of a $38.7 million decrease in average borrowed funds, partially offset
by a 151 basis point increase in the cost of borrowed funds. The components
accountable for the decrease of $182,000 in interest expense on borrowings were
a $369,000 decrease relating to average volume, partially offset by a $187,000
increase relating to average cost.



                                       17
<PAGE>
<TABLE>
<CAPTION>

         COMPARATIVE AVERAGE BALANCES AND INTEREST INCOME ANALYSIS. The
following table presents the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
annualized rates. No tax-equivalent adjustments were made and all average
balances are average daily balances. Non-accruing loans have been included in
the tables as loans carrying a zero yield.

                                                         FOR THE THREE MONTHS ENDED DECEMBER 31,
                                     --------------------------------------------------------------------------------
                                                      2006                               2005 (RESTATED)
                                     ------------------------------------- ------------------------------------------
                                                     INTEREST    AVERAGE                    INTEREST      AVERAGE
                                        AVERAGE      INCOME/      YIELD/      AVERAGE       INCOME/        YIELD/
                                        BALANCE      EXPENSE      RATE        BALANCE       EXPENSE        RATE
                                     ------------------------------------- ------------------------------------------
ASSETS:                                                          (DOLLARS IN THOUSANDS)
<S>                                  <C>         <C>                <C>    <C>           <C>                <C>
Interest-earning assets:
   Real estate loans                 $   93,132  $    1,717         7.37%  $   102,866   $     1,660        6.45%
   Consumer loans                        59,504       1,180         7.93        68,646         1,116        6.50
   Commercial business loans             39,550         773         7.82        35,891           615        6.85
                                     ----------- -----------   ----------- ------------  -------------  -------------
      Total loans                       192,186       3,670         7.64       207,403         3,391        6.54

Investment securities                    57,168         800         5.60        66,191           780        4.71
Mortgage-backed securities               29,704         335         4.51        53,847           419        3.11
                                     ----------- -----------   ----------- ------------  -------------  -------------
      Total interest-earning assets     279,058       4,805         6.89       327,441         4,590        5.61
                                                 -----------   -----------               -------------  -------------
Non-earning assets                       11,672                                 16,668
                                     -----------                           ------------
  Total assets                       $  290,730                            $   344,109
                                     ===========                           ============

LIABILITIES AND STOCKHOLDERS'
   EQUITY:
Interest-bearing liabilities:
   Savings accounts                  $    3,154           7         0.89   $     6,749            15        0.89
   Now and money market accounts         79,378         711         3.58        69,223           524        3.03
   Certificates of deposit              127,998       1,521         4.75       139,723         1,226        3.51
                                     ----------- -----------   ----------- ------------  -------------  -------------
      Total deposits                    210,530       2,239         4.25       215,695         1,765        3.27

   FHLB advances                         36,839         496         5.39        50,727           614        4.84
   Other borrowings                      20,019         298         5.95        44,860           362        3.23
                                     ----------- -----------   ----------- ------------  -------------  -------------
  Total interest-bearing
   liabilities                          267,388       3,033         4.54       311,282         2,741        3.52
                                                 -----------   -----------               -------------  -------------

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits      12,330                                 15,668
Other liabilities                         2,266                                  4,065
                                     -----------                           ------------
  Total liabilities                     281,984                                331,015
Stockholders' equity                      8,746                                 13,094
                                     -----------                           ------------
  Total liabilities and
   stockholders' equity              $  290,730                            $   344,109
                                     ===========                           ============

Net interest income                              $    1,772                              $     1,849
                                                 ===========                             =============
Interest rate spread                                                2.35%                                   2.09%
                                                               ============                             =============
Net interest margin                                                 2.54%                                   2.26%
                                                               ============                             =============

</TABLE>

                                                        18

<PAGE>

         RATE/VOLUME ANALYSIS. The following table presents certain information
regarding changes in interest income and interest expense attributable to
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities for the periods indicated. The change in interest
attributable to both rate and volume has been allocated to the changes in rate
and volume on a pro rata basis.
<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                  DECEMBER 31, 2006 COMPARED TO
                                                        DECEMBER 31, 2005
                                          -----------------------------------------------
                                                     CHANGE ATTRIBUTABLE TO
                                          -----------------------------------------------
                                                        VOLUME RATE TOTAL
                                          -----------------------------------------------
                                                         (IN THOUSANDS)
<S>                                            <C>             <C>             <C>
Real estate loans                              $ (157)         $  214          $  57
Consumer loans                                   (149)            213             64
Commercial business loans                          63              95            158
                                          ----------------  -------------- --------------
      Total loans                                (243)            522            279
Investments                                      (106)            126             20
Mortgage-backed securities                       (188)            104            (84)
                                          ----------------  -------------- --------------
Total interest-earning assets                  $ (537)         $  752          $ 215
                                          ================  ============== ==============

Savings accounts                               $   (8)         $    -          $  (8)
Now and money market accounts                      77             110            187
Certificates of deposit                          (103)            398            295
                                          ----------------  -------------- --------------
  Total deposits                                  (34)            508            474
FHLB advances                                    (168)             50           (118)
Other borrowings                                 (200)            136            (64)
                                          ----------------  -------------- --------------
Total interest-bearing liabilities               (402)            694            292
                                          ================  ============== ==============
Change in net interest income                  $ (135)         $   58          $ (77)
                                          ================  ============== ==============
</TABLE>

          PROVISION FOR LOAN LOSSES. The allowance for loan losses, which is
established through provisions for losses charged to expense, is increased by
recoveries on loans previously charged off and is reduced by charge-offs on
loans. Determining the proper reserve level or allowance involves management's
judgment based upon a review of factors, including the company's internal review
process, which segments the loan portfolio into groups, based on loan type and
assigns to them a reserve percentage that reflects the industry standard.
Management then looks at its classified assets, which are loans 30 days or more
delinquent, and classifies those loans as special mention, substandard, doubtful
or loss based on the performance of the loans. Those classified loans are then
individually evaluated for impairment and measured by either the present value
of expected future cash flows, the loan's observable market price, or the fair
value of the collateral. They are then segmented by type and assigned a reserve
percentage that reflects the underlying quality of the loan. Although management
utilizes its best judgment in providing for probable losses, there can be no
assurance that the bank will not have to increase its provisions for loan losses
in the future. An increase in provision may result from an adverse market for
real estate and economic conditions generally in the company's primary market
area, future increases in non-performing assets or for other reasons which would
adversely affect the company's results of operations. On an annual basis, or
more often if deemed necessary, the bank has contracted with an independent
outside third party to have its loan portfolio reviewed. The focus of their
review is to identify the extent of potential and actual risk in the bank's
commercial loan portfolio, in addition to the underwriting and processing
practices. Observations made regarding the bank's portfolio risk are based upon
review evaluations, portfolio profiles and discussion with the operational
staff, including the line lenders and senior management.

                                       19

<PAGE>

         Non-performing assets were $468,000 or 0.16% of total assets at
December 31, 2006, with all classified as substandard, no assets were classified
as doubtful or as loss. Non-performing assets decreased $1.5 million from the
$2.0 million or 0.58% of total assets classified as non-performing at December
31, 2005. The $1.5 million decrease in non-performing loans does not reflect
$1.8 million of loans classified as special mention and is reflected in the
$77,000 increase in the provision for loan losses for the December 31, 2006
quarter when compared to the provision made in the year ago quarter. The
increase in the provision for loan losses from the year ago period also resulted
from increases in the outstanding balance of the bank's commercial real estate,
construction and land loans. Those increases were offset by decreases in the
outstanding balance of the bank's commercial business and second trust loans.
The increase in provision resulted primarily from the increase in the required
provision for those loans and the overall increase in the size of the bank's
loan portfolio.

         NON-INTEREST INCOME. Non-interest income decreased $132,000 during the
quarter ended December 31, 2006, over the comparable period one year ago. That
decrease was primarily the result of a decrease of $123,000 in gains on
derivatives and gains on sale of foreclosed real estate.
<TABLE>
<CAPTION>
         The following table presents a comparison of the components of non-interest income.

Non-interest income from continuing operations                                             Difference
                                                                               ------------------------------------
Three Months Ended December 31,                       2006          2005           Amount                %
-------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                                   <C>           <C>              <C>               <C>
Non-interest income:
   Service fees on loans                              $  42         $  47            $   (5)           (10.64)%
   Service fees on deposits                             110           104                 6              5.77
   Gain on derivatives                                   13            71               (58)           (81.69)
  Gain on sale of foreclosed real estate                  -            65               (65)          (100.00)
   Other operating income                                 5            15               (10)           (66.67)
-------------------------------------------------------------------------------------------------------------------
      Total non-interest income                       $ 170         $ 302            $ (132)           (43.71)%
===================================================================================================================
</TABLE>
         NON-INTEREST EXPENSE. Non-interest expense increased $166,000 from $2.5
million for the three months ended December 31, 2005 to $2.7 million for the
three months ended December 31 in the current year. The increase was distributed
over various non-interest expense categories with the primary contributors being
compensation, professional services and occupancy and was partially offset by
decreases totaling $183,000 in advertising, deposit insurance premium, furniture
fixtures and equipment and data processing.
<TABLE>
<CAPTION>
         The following table presents a comparison of the components of non-interest expense.

Non-interest expense from continuing operations                                                Difference
                                                                                    ---------------------------------
Three Months Ended December 31,                            2006            2005         Amount             %
---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S>                                                       <C>            <C>               <C>            <C>
Non-interest expense:
   Compensation and employee benefits                     $ 1,266        $ 1,093           $ 173           15.83%
   Occupancy                                                  343            317              26            8.20
   Professional services                                      400            257             143           55.64
   Advertising                                                 24            173            (149)         (86.13)
   Deposit insurance premium                                   23             27              (4)         (14.81)
   Furniture, fixtures and equipment                          130            137              (7)          (5.11)
   Data processing                                            220            243             (23)          (9.47)
   Other operating expense                                    280            273               7            2.56
---------------------------------------------------------------------------------------------------------------------
Total non-interest expense                                $ 2,686        $ 2,520           $ 166            6.59%
=====================================================================================================================
</TABLE>
         INCOME TAXES. The company files a consolidated federal income tax
return with its subsidiaries and computes its income tax provision or benefit on
a consolidated basis. We did not record a provision for income taxes for the
three months ended December 31, 2006 and 2005 due to our operating losses. The
company believes that it will generate future taxable income to assure
utilization of a certain portion of the existing net operating losses.

                                       20

<PAGE>

Contractual Obligations and Off-Balance Sheet Financing Arrangements

         The following table summarizes the bank's contractual obligations at
December 31, 2006 and the effect those obligations are expected to have on the
bank's liquidity and cash flows in future periods.
<TABLE>
<CAPTION>
   -----------------------------------------------------------------------------------------------------------------
                                                       Less Than       Two - Three     Four - Five     After Five
                                           Total        One Year          Years           Years          Years
   -----------------------------------------------------------------------------------------------------------------
   (In thousands)
   <S>                                   <C>             <C>            <C>            <C>             <C>
   FHLB Advances (1)                     $  39,000       $   9,000       $     -        $ 30,000        $      -
   Reverse repurchase agreements             9,972           9,972             -               -               -
   Subordinated debt securities             29,038             655         1,310           1,310          25,763
   Operating leases                          4,604           1,097         2,050             992             465
   -----------------------------------------------------------------------------------------------------------------
        Total obligations                $  82,614       $  20,724       $ 3,360        $ 32,302        $ 26,228
   =================================================================================================================

   (1) The company expects to refinance these short and medium-term obligations under substantially the same terms and conditions.

   Other Commercial Commitments

   -----------------------------------------------------------------------------------------------------------------
                                                        Less Than        Two - Three    Four - Five     After Five
                                            Total        One Year           Years          Years          Years
   -----------------------------------------------------------------------------------------------------------------
   (In Thousands)

   Certificate of deposit maturities (1) $ 125,627       $ 106,710       $14,934        $  3,890        $     93
   Loan originations                         8,944           8,944             -               -               -
   Unfunded lines of credit                113,122         113,122             -               -               -
   Standby letters of credit                   155             155             -               -               -
   -----------------------------------------------------------------------------------------------------------------
        Total                            $ 247,848       $ 228,931       $14,934        $  3,890        $     93
   =================================================================================================================
</TABLE>
   (1) The company expects to retain maturing deposits or replace amounts
   maturing with comparable certificates of deposits based on current market
   interest rates.

         LIQUIDITY AND CAPITAL RESOURCES. The bank's primary sources of funds
are deposits, principal and interest payments on loans, mortgage-backed and
investment securities and borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. The bank continues to maintain the levels of liquid
assets previously required by OTS regulations. The bank manages its liquidity
position and demands for funding primarily by investing excess funds in
short-term investments and utilizing FHLB advances and reverse repurchase
agreements in periods when the bank's demands for liquidity exceed funding from
deposit inflows.

         The bank's most liquid assets are cash and cash equivalents and
securities available-for-sale. The levels of those assets are dependent on the
bank's operating, financing, lending and investing activities during any given
period. At December 31, 2006, cash and cash equivalents, interest bearing
deposits and securities available-for-sale totaled $75.7 million or 26.42% of
total assets.

        The primary investing activities of the bank are the origination of
consumer loans, residential one- to four-family loans, commercial business
loans, commercial real estate loans, and real estate construction and
development loans and the purchase of United States Treasury and agency
securities, mortgage-backed and mortgage-related securities and other investment
securities. During the three months ended December 31, 2006, the bank's loan
purchases and originations totaled $21.3 million. The bank did not purchase any
United States Treasury or agency securities, mortgage-backed or mortgage related
securities or other investment securities during the three months ended December
31, 2006. The investments for the period ended December 31, 2006 are all
considered temporary impaired.

         The bank has other sources of liquidity if a need for additional funds
arises. At December 31, 2006, the bank had $39.0 million in advances outstanding
from the FHLB and had an additional overall borrowing capacity from the FHLB of
$12.6 million. Depending on market conditions, the pricing of deposit products
and the pricing of FHLB advances, the bank may continue to rely on FHLB
borrowings to fund asset growth.

                                       21

<PAGE>

         At December 31, 2006, the bank had commitments to fund loans of $5.7
million, unused outstanding lines of credit of $113.1 million, unused standby
letters of credit of $155,000 and undisbursed proceeds of construction mortgages
of $3.3 million. Unfunded lines of credit have remained relatively constant and
have actually declined during the three months ended December 31, 2006. The bank
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificate accounts, including IRA and Keogh
accounts, which are scheduled to mature in less than one year from December 31,
2006, totaled $106.7 million. Based upon experience, management believes the
majority of maturing deposits will remain with the bank. In addition, management
of the bank believes that it can adjust the rates offered on certificates of
deposit to retain deposits in changing interest rate environments. In the event
that a significant portion of those deposits are not retained by the bank, the
bank would be able to utilize FHLB advances and reverse repurchase agreements to
fund deposit withdrawals, which would result in an increase in interest expense
to the extent that the average rate paid on such borrowings exceeds the average
rate paid on deposits of similar duration.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Market risk is the risk of loss from adverse changes in market prices
and rates. The company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. The company has little or
no risk related to trading accounts, commodities or foreign exchange. In
general, market risk reflects the sensitivity of income to variations in
interest rates and other relevant market rates or prices. The company's market
rate sensitive instruments include interest-earning assets and interest-bearing
liabilities. The company enters into market rate sensitive instruments in
connection with its various business operations, particularly its mortgage
banking activities. Loans originated, and the related commitments to originate
loans that will be sold, represent market risk that is realized in a short
period of time, generally two or three months.

         The company's primary source of market risk exposure arises from
changes in United States interest rates and the effects thereof on mortgage
prepayment and closing behavior, as well as depositors' choices ("interest rate
risk"). Changes in those interest rates will result in changes in the company's
earnings and the market value of its assets and liabilities. We expect to
continue to realize income from the differential or "spread" between the
interest earned on loans, securities and other interest-earning assets, and the
interest paid on deposits, borrowings and other interest-bearing liabilities.
That spread is affected by the difference between the maturities and re-pricing
characteristics of interest-earnings assets and interest-bearing liabilities.
Loan volume and yields are affected by market interest rates on loans, and
rising interest rates generally are associated with fewer loan originations.
Management expects that a substantial portion of our assets will continue to be
indexed to changes in market interest rates and we intend to attract a greater
proportion of short-term liabilities, which will help us address our interest
rate risk. The lag in implementation of re-pricing terms on our adjustable-rate
assets may result in a decline in net interest income in a rising interest rate
environment. There can be no assurance that our interest rate risk will be
minimized or eliminated. Further, an increase in the general level of interest
rates may adversely affect the ability of certain borrowers to pay the interest
on and principal of their obligations. Accordingly, changes in levels of market
interest rates, (primarily increases in market interest rates), could materially
adversely affect our interest rate spread, asset quality, loan origination
volume and overall financial condition and results of operations.

         To mitigate the impact of changes in market interest rates on our
interest-earning assets and interest-bearing liabilities, we actively manage the
amounts and maturities of these assets and liabilities. A key component of this
strategy is the origination and retention of short-term and adjustable-rate
assets and the origination and sale of fixed-rate loans. We retain short-term
and adjustable-rate assets because they have re-pricing characteristics that
more closely match the re-pricing characteristics of our liabilities.

         To further mitigate the risk of timing differences in the re-pricing of
assets and liabilities, our interest-earning assets are matched with
interest-bearing liabilities that have similar re-pricing characteristics. For
example, the interest rate risk of holding fixed-rate loans is managed with
long-term deposits and borrowings, and the risk of holding ARMs is managed with
short-term deposits and borrowings. Periodically, mismatches are identified and
managed by adjusting the re-pricing characteristics of our interest-bearing
liabilities with derivatives, such as interest rate caps and interest rate
swaps.

         Through the use of these derivative instruments, management attempts to
reduce or offset increases in interest expense related to deposits and
borrowings. We use interest rate caps and pay-fixed interest rate swaps to
protect against rising interest rates.

                                       22

<PAGE>
         The interest rate caps and the pay-fixed interest rate swaps are
designed to provide an additional layer of protection, should interest rates on
deposits and borrowings rise, by effectively lengthening the re-pricing period.
At December 31, 2006, we held an aggregate notional value of $25 million of. One
of the interest rate caps had strike rates that were in effect at December 31,
2006, as current LIBOR rates were above the strike rate.

         We are also striving to increase the proportion of transaction deposits
to total deposits to diminish our exposure to adverse changes in interest rates.
In particular, non-interest-bearing checking accounts and custodial accounts are
less sensitive to interest rate fluctuations and provide a growing source of
non-interest income through depositor and other retail banking fees.

         The following table, which is based on information that we provide to
the Office of Thrift Supervision, presents the change in our net portfolio value
at September 30, 2006 that would occur in the event of an immediate change in
interest rates based on Office of Thrift Supervision assumptions, with no effect
given to any steps that we might take to counteract that change.
<TABLE>
<CAPTION>
                                        Net Portfolio Value                   Net Portfolio Value as % of
                                       (Dollars in thousands)                  Portfolio Value of Assets
                           ----------------------------------------------- ----------------------------------
Basic Point ("bp")
Change in Rates               $Amount         $Change         % Change        NPV Ratio        Change (bp)
-------------------------- -------------- ----------------- -------------- ----------------  ----------------
    <S>                        <C>               <C>            <C>              <C>               <C>
    +300                       25,916            -2,864         -10%             8.75%             -68bp
    +200                       27,380            -1,401          -5%             9.15%             -29bp
    +100                       28,302              -479          -2%             9.36%              -7bp
       0                       28,781                 -           -              9.44%               -
    -100                       28,384              -396          -1%             9.25%             -19bp
    -200                       27,268            -1,512          -5%             8.85%             -59bp
</TABLE>

         The Office of Thrift Supervision uses various assumptions in assessing
interest rate risk. Those assumptions relate to interest rates, loan prepayment
rates, deposit decay rates and the market values of certain assets under
differing interest rate scenarios, among others. As with any method of measuring
interest rate risk, certain shortcomings are inherent in the methods of analyses
presented in the foregoing tables. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could deviate significantly from those
assumed in calculating the table. Prepayment rates can have a significant impact
on interest income. Because of the large percentage of loans and mortgage-backed
securities we hold, rising or falling interest rates have a significant impact
on the prepayment speeds of our earning assets that in turn affect the rate
sensitivity position. When interest rates rise, prepayments tend to slow. When
interest rates fall, prepayments tend to rise. Our asset sensitivity would be
reduced if prepayments slow and vice versa. While we believe these assumptions
to be reasonable, there can be no assurance that assumed prepayment rates will
approximate actual future mortgage-backed security and loan repayment activity.

ITEM 4. CONTROLS AND PROCEDURES. Pursuant to an investigation being conducted
under the supervision of the company's Audit Committee, management discovered a
$2.1 million difference in inter-company accounts between the company and its
subsidiary, GAMC. The company discovered the un-reconciled inter-company account
at GAMC during its review of the closing entries to the accounts of GAMC in
connection with the preparation of the company's consolidated financial
statements for the quarterly period ended June 30, 2006. The investigation
resulted in a determination that the warehouse payable account maintained at
GAMC had not been properly reconciled.

                                       23

<PAGE>


         The extensive investigation revealed numerous errors in the
reconciliation of the warehouse payable account of GAMC over a period of five
(5) years. As a result of the investigation, the company determined that it has
sustained losses aggregating approximately $1.4 million. To date, the company
has identified claims of $738,000, primarily for duplicate checks issued and
paid on the same loan. Of that sum, $422,000 has been collected and the company
believes that the balance is recoverable. The investigation regarding this
matter is ongoing and the company has retained legal and accounting personnel to
assist in the company's investigation. Costs associated with engaging personnel
to provide those professional services are being treated as period costs.

         The company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and regulations and that such
information is accumulated and communicated to the company's management,
including the company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that the company's disclosure controls and procedures
will detect or uncover every situation involving the failure of persons within
the company or its subsidiary to disclose material information otherwise
required to be set forth in the company's periodic reports.

         The company, under the supervision and with the participation of the
company's management, including the company's Chief Executive Officer and the
Chief Financial Officer, has evaluated the effectiveness of the company's
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that the company's disclosure controls and
procedures were not effective as of June 30, 2006 due to the override of certain
internal control procedures relating to preparation and review of certain
reconciliations. The override of those internal control procedures enabled the
differences in the reconciliations performed at GAMC to go un-detected over a
long period of time. While the bank had outsourced its internal audit function
to an independent CPA firm, neither their review of the reconciliations or that
of the company's then controller uncovered any errors that were brought to the
attention of senior management. The person responsible for the reconciliations
at GAMC is no longer employed by GAMC, and the then controller of the bank, who
was responsible for review of the reconciliations at GAMC, is no longer employed
by the bank.

         While the problem was isolated to one unique account with a subsidiary
that is no longer in business, and was the responsibility of individuals who are
no longer employed by subsidiaries of the company, the company has enhanced
controls in similar situations going forward by:

    o    Strengthening the procedures for reconciling the intercompany accounts.
         Those procedures include having an outside party perform
         reconciliations semi-annually instead of merely reviewing
         reconciliations performed by parties with account responsibility; and

    o    The company has strengthened the accounting staff at the controller
         position.


         In connection with this Form 10-Q, the company's management, with the
participation of its Chief Executive Officer and Chief Financial Officer,
evaluated the company's disclosure controls and procedures as currently in
effect, including the changes discussed above, and such officers have concluded
that, as of this date, the company's disclosure controls and procedures are
effective.

         Management of the company is also responsible for establishing and
maintaining adequate internal control over financial reporting and control of
the company's assets to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America. There were no changes in the company's internal
control over financial reporting during the company's quarter ended December 31,
2006 that have materially affected, or are reasonably likely to materially
affect, the company's internal control over financial reporting.

                                       24

<PAGE>


PART II.   OTHER INFORMATION

ITEM 1.    Legal Proceedings

         As previously reported in a Form 8-K filed on September 8, 2006, the
company announced that a Demand for Arbitration before the American Arbitration
Association was filed against the company, the bank, GAMC, and Carroll E. Amos,
President and Chief Executive Officer of the company and the bank. The Demand
for Arbitration was filed by Stamm Mortgage Management, Inc. ("Stamm Mortgage")
and T. Mark Stamm, President of Stamm Mortgage in connection with the Management
Agreement among Stamm Mortgage, the bank, and GAMC that governed the management
of GAMC by Stamm Mortgage before the bank terminated the operations of GAMC
earlier this year, and certain aspects of the company's public disclosures of
that event.

         The Demand for Arbitration alleges three counts: rescission, breach of
contract, and defamation. As against the bank and GAMC, Stamm Mortgage alleges
that the Management Agreement is unenforceable and should be rescinded,
requiring the bank and GAMC, jointly and severally, to return $1.77 million that
Stamm Mortgage paid to the bank and GAMC under the Management Agreement. As an
alternative to rescission, Stamm Mortgage alleges that the bank and GAMC
breached the Management Agreement by terminating it contrary to its terms,
resulting in $9.6 million in lost profits to Stamm Mortgage. Stamm Mortgage and
Mr. Stamm both allege that the company, the bank, GAMC, and Mr. Amos, acting in
his official capacity, defamed Stamm Mortgage and Mr. Stamm through certain
public statements made in press releases and in public securities filings by the
company and seek $1.0 million in compensatory damages and $350,000 in punitive
damages.

         On December 29, 2006, counsel for the company, the bank, GAMC and Mr.
Amos filed an Answering Statement and Counterclaim in Arbitration. In, January
2007, the parties entered into negotiations looking toward a mutually acceptable
and amicable resolution of their claims. In the event that the claims cannot be
resolved through negotiations, the company intends to defend its position
vigorously.

        On February 9, 2007, the parties entered into a mutual release resolving
any and all related claims and controversies between the parties and obviating
the need for all further arbitration and legal proceedings. The resolution of
the arbitration should not be construed as an assertion or admission of
liability on the part of any of the parties, as all parties expressly deny any
and all liability, improper conduct or wrongdoing.


ITEM 1A.   Risk Factors

OUR INCREASED EMPHASIS ON COMMERCIAL AND CONSTRUCTION LENDING MAY EXPOSE US TO
INCREASED LENDING RISKS.

         At December 31, 2006, our loan portfolio consisted of $32.1 million, or
16.02% of commercial real estate loans, $26.0 million, or 12.95% of construction
and land development loans and $39.2 million, or 19.56% of commercial business
loans. We intend to increase our emphasis on these types of loans. These types
of loans generally expose a lender to greater risk of non-payment and loss than
one-to-four-family residential mortgage loans because repayment of the loans
often depends on the successful operation of the property, the income stream of
the borrowers and, for construction loans, the accuracy of the estimate of the
property's value at completion of construction and the estimated cost of
construction. Such loans typically involve larger loan balances to single
borrowers or groups of related borrowers compared to one- to four-family
residential mortgage loans. Commercial business loans expose us to additional
risks since they typically are made on the basis of the borrower's ability to
make repayments from the cash flow of the borrower's business and are secured by
non-real estate collateral that may depreciate over time. In addition, since
such loans generally entail greater risk than one- to four-family residential
mortgage loans, we may need to increase our allowance for loan losses in the
future to account for the likely increase in probable incurred credit losses
associated with the growth of such loans. Also, many of our commercial and
construction borrowers have more than one loan outstanding with us.
Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to a significantly greater risk of loss compared to
an adverse development with respect to a one- to four-family residential
mortgage loan.

STRONG COMPETITION WITHIN OUR MARKET AREA COULD HURT OUR ABILITY TO COMPETE AND
COULD SLOW OUR GROWTH.

         We face intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make new loans
and has occasionally forced us to offer higher deposit rates. Price competition
for loans and deposits might result in us earning less on our loans and paying
more on our deposits, which would reduce net interest income. Some of the
institutions with which we compete have substantially greater resources and


                                       25


<PAGE>


lending limits than we have and may offer services that we do not provide. We
expect competition to increase in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation
in the financial services industry. Our profitability depends upon our continued
ability to compete successfully in our market area.

AN INCREASE IN LOAN PREPAYMENTS AND ON PREPAYMENT OF LOANS UNDERLYING
MORTGAGE-BACKED SECURITIES AND SMALL BUSINESS ADMINISTRATION CERTIFICATES MAY
ADVERSELY AFFECT OUR PROFITABILITY.

         Prepayment rates are affected by consumer behavior, conditions in the
housing and financial markets, general economic conditions and the relative
interest rates on fixed-rate and adjustable-rate mortgage loans. Although
changes in prepayment rates are, therefore, difficult for us to predict,
prepayment rates tend to increase when market interest rates decline relative to
the rates on the prepaid instruments.

         We recognize our deferred loan origination costs and premiums paid on
originating these loans by adjusting our interest income over the contractual
life of the individual loans. As prepayments occur, the rate at which net
deferred loan origination costs and premiums are expensed accelerates. The
effect of the acceleration of deferred costs and premium amortization may be
mitigated by prepayment penalties paid by the borrower when the loan is paid in
full within a certain period of time, which varies between loans. If prepayment
occurs after the period of time when the loan is subject to a prepayment
penalty, the effect of the acceleration of premium and deferred cost
amortization is no longer mitigated.

         We recognize premiums we pay on mortgage-backed securities and Small
Business Administration Certificates as an adjustment to interest income over
the life of the security based on the rate of repayment of the securities.
Acceleration of prepayment on the loans underlying a mortgage-backed security or
Small Business Administration Certificate shortens the life of the security,
increases the rate at which premiums are expensed and further reduces interest
income.

         We may not be able to reinvest loan and security prepayments at rates
comparable to the prepaid instruments particularly in periods of declining
interest rates.

WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT AND WE MAY BE ADVERSELY AFFECTED BY
CHANGES IN LAWS AND REGULATIONS.

         The bank is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision and by the Federal Deposit
Insurance Corporation, as insurer of its deposits. Such regulation and
supervision govern the activities in which the bank and the company may engage,
and are intended primarily for the protection of the insurance fund and for the
depositors and borrowers of the bank. The regulation and supervision by the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation are
not intended to protect the interests of investors in the common stock of the
company. Regulatory authorities have extensive discretion in their supervisory
and enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in such regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or
supervisory action, may have a material impact on our operations.

A BREACH OF INFORMATION SECURITY COULD NEGATIVELY AFFECT OUR EARNINGS.

         Increasingly, we depend upon data processing, communication and
information exchange on a variety of computing platforms and networks and over
the Internet. We cannot be certain all our systems are entirely free from
vulnerability to attack, despite safeguards we have instituted. In addition, we
rely on the services of a variety of vendors to meet data processing and
communication needs. If information security is breached, information can be
lost or misappropriated, resulting in financial loss or costs to us or damages
to others. These costs or losses could materially exceed the amount of insurance
coverage, if any, which would adversely affect our earnings.

                                       26

<PAGE>


WE ARE SUBJECT TO HEIGHTENED REGULATORY SCRUTINY WITH RESPECT TO BANK SECRECY
AND ANTI-MONEY LAUNDERING STATUTES AND REGULATIONS.

         Recently, regulators have intensified their focus on the USA PATRIOT
Act's anti-money laundering and Bank Secrecy Act compliance requirements. There
is also increased scrutiny of our compliance with the rules enforced by the
Office of Foreign Assets Control. In order to comply with regulations,
guidelines and examination procedures in this area, we have been required to
adopt new policies and procedures and to install new systems. We cannot be
certain that the policies, procedures and systems we have in place are flawless.
Therefore, there is no assurance that in every instance we are in full
compliance with these requirements.

FAILURE TO PAY INTEREST ON OUR DEBT MAY ADVERSELY IMPACT US.

         Deferral of interest payments where allowed on our convertible
preferred securities may affect our ability to issue additional debt.

FAILURE TO REMAIN A WELL CAPITALIZED INSTITUTION.

          As a result of recording losses of $5.6 million during the year ended
September 30, 2006, the bank ceased to be considered a well capitalized
institution and is now considered to be an adequately capitalized institution.
As an adequately capitalized institution, the bank cannot issue brokered
certificates of deposit without OTS or FDIC permission, and the OTS can limit
the payment of dividends from the bank to the company. Without the payment of a
dividend from the bank, the company is unable to make a distribution on the
cumulative convertible trust preferred securities. On December 13, 2006, the
bank was advised by the OTS that the OTS would not approve the bank's
application to pay a cash dividend to the company, and the company exercised its
right to defer the next scheduled quarterly distribution on the cumulative
convertible trust preferred securities.

ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

ITEM 3.    Defaults Upon Senior Securities

Not applicable.

ITEM 4.    Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 5.    Other Information

Not applicable.

ITEM 6.    Exhibits

           (a)   Exhibits
            31.1    Certification of Chief Executive Officer pursuant to Section
                    302 of Sarbanes-Oxley Act of 2002
            31.2    Certification of Chief Financial Officer pursuant to Section
                    302 of Sarbanes-Oxley Act of 2002
            32.1    Certification of Chief Executive Officer pursuant to Section
                    906 of Sarbanes-Oxley Act of 2002
            32.2    Certification of Chief Financial Officer pursuant to Section
                    906 of Sarbanes-Oxley Act of 2002

                                       27

<PAGE>


                        GREATER ATLANTIC FINANCIAL CORP.

                                   SIGNATURES

Pursuant to the requirement of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                           GREATER ATLANTIC FINANCIAL CORP.
                           --------------------------------
                                   (Registrant)


                           By: /s/ Carroll E. Amos
                               -------------------
                               Carroll E. Amos
                               President and Chief Executive Officer



                           By: /s/ David E. Ritter
                               -------------------
                               David E. Ritter
                               Senior Vice President and Chief Financial Officer


                           Date: February 13, 2007




                                       28