U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

For the fiscal year                               Commission file number
ended December 31, 1998                                  333-47291

                         SOUTHERN HERITAGE BANCORP, INC.
                 (Name of small business issuer in its charter)

       Georgia                                                   58-2352014
(State of Incorporation)                                      (I.R.S. Employer
                                                             Identification No.)
3461 Atlanta Highway
P. O. Box 907
Oakwood, Georgia                                                     30566
(Address of principal executive offices)                           (Zip Code)

                                 (770) 531-1240
                           (Issuer's telephone number)

Securities Registered pursuant to Section 12(b) of the Exchange Act:  None
Securities Registered pursuant to Section 12(g) of the Exchange Act:  None

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

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive Proxy or
Information Statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.  [X]

Registrant's revenues for its fiscal year ended December 31, 1998 were $122,226.

The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 1999 was $7,199,340 based on the offering price
of $10.00 per share, since there is no established trading market.  The
Registrant completed its offering by January, 1999.

The number of shares  outstanding of Registrant's class of common stock at March
15, 1999 was 878,344 shares of common stock.

Documents Incorporated by Reference:  None

Transitional Small Business Disclosure Format (check one):
Yes     No X 
                                  Page 1 of 47
                            Exhibit Index on Page 29


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                                TABLE OF CONTENTS

                                     PART I                             Page


ITEM 1.           DESCRIPTION OF BUSINESS .........................       3

ITEM 2.           DESCRIPTION OF PROPERTIES........................      12

ITEM 3.           LEGAL PROCEEDINGS................................      13

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF
                  SECURITY HOLDERS.................................      13


                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS......................      13

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OR PLAN OF OPERATION ............................      14

ITEM 7.           FINANCIAL STATEMENTS ............................      15

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH
                  ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE ............................      16


                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
                  AND CONTROL PERSONS .............................      16

ITEM 10.          EXECUTIVE COMPENSATION ..........................      23

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN
                  BENEFICIAL OWNERS AND MANAGEMENT ................      25

ITEM 12.          CERTAIN RELATIONSHIPS AND
                  RELATED TRANSACTIONS ............................      28

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K ................      29

SIGNATURES ........................................................      30




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                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS

(a)      Business Development

Southern  Heritage  Bancorp,  Inc.  (the  "Company"),   Oakwood,   Georgia,  was
incorporated  as a Georgia  business  corporation  for the purpose of becoming a
bank holding  company by acquiring all of the common stock of Southern  Heritage
Bank,  Oakwood,  Georgia  (the  "Bank") upon its  formation.  The Company  filed
applications  to the Board of  Governors  of the  Federal  Reserve  System  (the
"Board") and the Georgia Department of Banking and Finance (the "DBF") for prior
approval to become a bank holding  company.  The Company received Board approval
on April 30, 1998,  and the DBF approval on April 28, 1998. The Company became a
bank holding  company within the meaning of the federal Bank Holding Company Act
(the "Act") and the Georgia bank holding  company law (the  "Georgia  Act") upon
the  acquisition  of all of the  Common  Stock of the Bank,  which  occurred  in
January, 1999.

The Bank is the sole operating  subsidiary of the Company.  On October 31, 1997,
the Bank  received the approval of its Articles of  Incorporation  from the DBF.
Its permit to begin  business  has been  issued,  and it opened for  business on
January 4, 1999.  The  deposits at the Bank are  insured by the Federal  Deposit
Insurance  Corporation  (the "FDIC"),  initial  approval by the FDIC having been
obtained on March 19, 1998.

In April, 1998, the Company registered 1,000,000 shares of its common stock with
the  Securities  and Exchange  Commission  under the Securities Act of 1933. The
registration statement became effective on April 29, 1998, and the Company began
its stock  offering  a few days  later.  The stock  offering  was  completed  by
January,  1999 and the shares were issued as of January 4, 1999.  878,344 shares
were sold in the offering, raising total capital of $8,783,440.

(b)      Business of Issuer

The Bank conducts a general  commercial  banking business in its primary service
area,  emphasizing  the banking needs of individuals  and small to  medium-sized
businesses.  The  Company  conducts  business  from its  office  located at 3461
Atlanta Highway, Flowery Branch, Georgia 30542.

The Company is authorized to engage in any activity permitted by
law to a corporation, subject to applicable Federal regulatory
restrictions on the activities of bank holding companies.  The
Company was formed for the purpose of becoming a holding company to
own 100% of the stock of the Bank.  The holding company structure
provides the Company with greater flexibility than the Bank.  While

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the Company has no present plans to engage  actively in any nonbanking  business
activities,  management  anticipates studying the feasibility of establishing or
acquiring  subsidiaries  to engage in other  business  activities  to the extent
permitted by law.

The principal  business of the Bank is to accept deposits from the public and to
make loans and other investments in and around Hall County,  Georgia, as well as
the geographically adjacent counties, its primary service area.

The Bank offers a full range of deposit  services that are  typically  available
from  financial  institutions.  The Bank offers  personal and business  checking
accounts,  interest-bearing  checking accounts,  savings accounts,  money market
funds and  various  types of  certificates  of  deposit.  The Bank  also  offers
installment  loans, real estate loans,  second mortgage loans,  commercial loans
and home equity lines of credit. In addition, the Bank provides such services as
official bank checks and money orders,  Mastercard  and VISA credit cards,  safe
deposit boxes,  traveler's  checks,  bank by mail, direct deposit of payroll and
social security  checks,  and US Savings Bonds. All deposit accounts are insured
by the FDIC up to the maximum amount currently permitted by law.

The Bank's lending  philosophy is to make loans,  taking into  consideration the
safety  of  the  Bank's  depositors'  funds,  the  preservation  of  the  Bank's
liquidity,  the interest of the Company's  shareholders,  and the welfare of the
community.  Interest  income  from the  Bank's  lending  operations  will be the
principal  component of the Bank's income,  so therefore prudent lending will be
essential for the prosperity of the Bank.

The principal sources of income for the Bank will be interest and fees collected
on loans,  interest and dividends  collected on other investments,  and mortgage
brokerage  fees.  The  principal  expenses of the Bank will be interest  paid on
deposits, employee compensation, office expenses, and other overhead expenses.

The Bank's business plan for its initial years of operation  relies  principally
upon local  advertising and promotional  activity and upon personal  contacts by
its directors,  officers and  shareholders  to attract  business and to acquaint
potential customers with the Bank's personalized services. The Bank emphasizes a
high degree of  personalized  client  service in order to be able to provide for
each customer's  banking needs.  The Bank's  marketing  approach  emphasizes the
advantages  of dealing  with an  independent,  locally-owned  and managed  state
chartered bank to meet the particular  needs of individuals,  professionals  and
small-to-medium-size  businesses  in the  community.  All banking  services  are
continually  evaluated  with regard to their  profitability  and efforts will be
made to modify the Bank's  business plan if the Bank does not prove  successful.
The Bank does not presently offer trust or permissible securities services.

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Supervision and Regulation

Regulation  of the Bank.  The  operations  of the Bank are  subject to state and
federal statutes  applicable to state chartered banks whose deposits are insured
by the FDIC and the  regulations  of the DBF and the  FDIC.  Such  statutes  and
regulations  relate to,  among other  things,  required  reserves,  investments,
loans,  mergers  and  consolidations,   issuances  of  securities,   payment  of
dividends, establishment of branches and other aspects of the Bank's operations.
Under the provisions of the Federal  Reserve Act, the Bank is subject to certain
restrictions  on any  extensions  of  credit to the  Company  or,  with  certain
exceptions,  other affiliates,  and on the taking of such stock or securities as
collateral on loans to any borrower.  In addition,  the Bank is prohibited  from
engaging in certain  tie-in  arrangements  in  connection  with any extension of
credit or the providing of any property or service.

The Bank, as a state  chartered  bank, is permitted to branch only to the extent
that banks are  permitted to branch  under  Georgia  law. In January  1996,  the
Georgia  legislature  passed a bill  designed  to  eliminate  Georgia's  current
intra-county branching restrictions. The new legislation provides that effective
after July 1, 1996,  banks in Georgia,  with prior  approval of the DBF (and the
appropriate federal regulatory authority),  may establish additional branches in
up to three new counties in the state per year. On July 1, 1998,  full statewide
branching went into effect permitting Georgia banks to establish new branches in
any  county in the state  with  prior  approval  of the  appropriate  regulatory
authorities.

The FDIC adopted final risk-based  capital guidelines for all FDIC insured state
chartered  banks that are not members of the Federal  Reserve  System  effective
December 31, 1990. As of December 31, 1992, all banks are required to maintain a
minimum ratio of total capital to risk weighted assets of 8 percent (of which at
least 4  percent  must  consist  of Tier 1  capital).  Tier 1  capital  of state
chartered  banks (as defined in  regulations)  generally  consists of (i) common
stockholders  equity;  (ii) noncumulative  perpetual preferred stock and related
surplus;  and (iii) minority  interests in the equity  accounts of  consolidated
subsidiaries.

In addition,  the FDIC adopted a minimum ratio of Tier 1 capital to total assets
of banks. This capital measure is generally  referred to as the leverage capital
ratio. The FDIC has established a minimum leverage capital ratio of 3 percent if
the FDIC  determines  that the  institution is not  anticipating or experiencing
significant growth and has  well-diversified  risk,  including no undue interest
rate exposure,  excellent asset quality,  high liquidity,  good earnings and, in
general,  is considered a strong banking  organization,  rated Composite 1 under
the Uniform Financial  Institutions Rating System. Other financial  institutions
are expected to maintain leverage capital at least 100 to 200 basis points above
the minimum level. Management intends to operate the

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Bank so as to exceed the minimum Tier 1, risk-based and leverage capital ratios.

Bank regulators continue to indicate their desire to raise capital  requirements
applicable  to banking  organizations,  including  a proposal to add an interest
rate risk component to risk-based capital requirements.

The Federal Deposit Insurance  Corporation  Improvement Act of 1991,  enacted in
December 1991  ("FDICIA"),  specifies,  among other things,  the following  five
capital standard categories for depository  institutions:  (i) well capitalized,
(ii)  adequately  capitalized,   (iii)   undercapitalized,   (iv)  significantly
under-capitalized   and  (v)   critically   undercapitalized.   FDICIA   imposes
progressively more restrictive constraints on operations, management and capital
distributions  depending on the category in which an  institution is classified.
Each of the federal banking  agencies has issued final uniform  regulations that
became  effective  December  19, 1992,  which,  among other  things,  define the
capital  levels  described  above.  Under  the  final  regulations,  a  bank  is
considered "well  capitalized" if it (i) has a total risk-based capital ratio of
10% or greater,  (ii) has a Tier 1  risk-based  capital  ratio of 6% or greater,
(iii) has a  leverage  ratio of 5% or  greater,  and (iv) is not  subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total  risk-based  capital  ratio of 8% or greater,  (ii) a Tier 1  risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater,  and
an  "undercapitalized"  bank is defined  as one that has (i) a total  risk-based
capital  ratio of less than 8%, (ii) a Tier 1 risk-based  capital  ratio of less
than  4%,  and  (iii) a  leverage  ratio of less  than 4%. A bank is  considered
"significantly  undercapitalized" if the bank has (i) a total risk-based capital
ratio of less than 6%, (ii) a Tier 1 risk-based  capital  ratio of less than 3%,
and (iii) a leverage ratio of less than 3%, and "critically undercapitalized" if
the bank has a ratio of tangible  equity to total  assets  equal to or less than
2%.  The  applicable  federal  regulatory  agency  for  a  bank  that  is  "well
capitalized"   may   reclassify   it   as   an   "adequately   capitalized"   or
"undercapitalized"  institution  and  subject  it  to  the  supervisory  actions
applicable to the next lower capital category, if it determines that the Bank is
in an unsafe or unsound  condition  or deems the bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency.

"Undercapitalized"  depository institutions,  among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions,  are limited in their  ability to obtain  funding  from a Federal
Reserve Bank and are required to submit a capital  restoration plan. The federal
banking agencies may not accept a capital plan without determining,  among other
things, that the plan is based on realistic assumptions and

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is likely to succeed in  restoring  the  depository  institution's  capital.  In
addition,  for a  capital  restoration  plan to be  acceptable,  the  depository
institution's  parent holding company must guarantee that the  institution  will
comply with such capital restoration plan and provide appropriate  assurances of
performance.  If a depository  institution  fails to submit an acceptable  plan,
including  if the  holding  company  refuses or is unable to make the  guarantee
described in the  previous  sentence,  it is treated as if it is  "significantly
undercapitalized".  Failure to submit or  implement an  acceptable  capital plan
also  is  grounds  for  the   appointment   of  a  conservator  or  a  receiver.
"Significantly  undercapitalized"  depository  institutions  may be subject to a
number of additional requirements or restrictions,  including the requirement to
issue additional voting stock to become adequately  capitalized and requirements
to reduce total assets and cessation of receipt of deposits  from  correspondent
banks.  "Critically  undercapitalized"  institutions,  among other  things,  are
prohibited  from making any payments of principal  and interest on  subordinated
debt, and are subject to the appointment of a receiver or conservator.

Under  FDICIA,  the FDIC is  permitted  to provide  financial  assistance  to an
insured bank before  appointment  of a conservator  or receiver only if (i) such
assistance  would be the least  costly  method of meeting  the FDIC's  insurance
obligations,  (ii) grounds for  appointment of a conservator or a receiver exist
or are likely to exist,  (iii) it is unlikely that the bank can meet all capital
standards without  assistance and (iv) the bank's management has been competent,
has complied with applicable laws, regulations, rules and supervisory directives
and has not  engaged  in any  insider  dealing,  speculative  practice  or other
abusive activity.

The Bank is subject to FDIC deposit insurance assessments for the Bank Insurance
Fund ("BIF").  The FDIC has implemented a risk-based  assessment  system whereby
banks are  assessed on a sliding  scale  depending  on their  placement  in nine
separate  supervisory  categories.  Recent legislation provides that BIF insured
institutions,  such as the Bank, will share the Financial  Corporation  ("FICO")
bond service obligation.  Previously,  only Savings  Association  Insurance Fund
("SAIF")  insured  institutions  were  obligated to  contribute to the FICO bond
service.  The BIF deposit  insurance premium for the Bank is presently 4.3 cents
per $100 of BIF insured deposits.

On April  19,  1995,  the  federal  bank  regulatory  agencies  adopted  uniform
revisions to the regulations  promulgated pursuant to the Community Reinvestment
Act (the "CRA"), which are intended to set standards for financial institutions.
The revised regulation contains three evaluation tests: (a) a lending test which
will compare the institution's  market share of loans in low and moderate income
areas to its market share of loans in its entire service area and the percentage
of a bank's outstanding loans to low and

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moderate  income areas or  individuals,  (b) a services test which will evaluate
the  provision of services  that promote the  availability  of credit to low and
moderate  income  areas,  and (c) an  investment  test,  which will  evaluate an
institution's  record  of  investments  in  organizations   designed  to  foster
community  development,  small and  minority  owned  businesses  and  affordable
housing lending,  including state and local government housing or revenue bonds.
The regulation is designed to reduce the paperwork  requirements  of the current
regulations and provide regulatory agencies,  institutions, and community groups
with a more  objective  and  predictable  manner with which to evaluate  the CRA
performance of financial  institutions.  The rule became effective on January 1,
1996 when evaluation under  streamlined  procedures began for institutions  with
total assets of less than $250 million that are owned by a holding  company with
total assets of less than $1 billion.

Congress  and  various  federal  agencies  (including,  in  addition to the bank
regulatory  agencies,  the  Department  of Housing  and Urban  Development,  the
Federal  Trade  Commission  and the  Department  of Justice  (collectively,  the
"Federal Agencies")  responsible for implementing the nation's fair lending laws
have  been  increasingly  concerned  that  prospective  home  buyers  and  other
borrowers are experiencing  discrimination in their efforts to obtain loans. The
Department  of Justice has filed suit against  financial  institutions  which it
determined had  discriminated,  seeking fines and  restitution for borrowers who
allegedly  suffered from  discriminatory  practices.  Most, if not all, of these
suits have been settled (some for substantial  sums) without a full adjudication
on the merits.

On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes
discrimination  in lending and to specify the factors the agencies will consider
in  determining  if lending  discrimination  exists,  announced  a joint  policy
statement detailing specific discriminatory practices prohibited under the Equal
Credit Opportunity Act and the Fair Housing Act. In the policy statement,  three
methods of establishing  discrimination  in lending were  identified:  (a) overt
evidence  of  discrimination,   when  a  lender  blatantly  discriminates  on  a
prohibited  basis,  or (b) where  there is no  showing  that the  treatment  was
motivated  by intent to  discriminate  against a  person,  and (c)  evidence  of
disparate impact,  when a lender applies a practice uniformly to all applicants,
but the practice has a discriminatory  effect on a protected  class,  even where
such  practices  are neutral on their face and are applied  equally,  unless the
practice can be justified on the basis of business necessity.

Regulation  of the  Company.  The Company is a bank holding  company  within the
meaning of the Federal Bank Holding Company Act (the "Act") and the Georgia bank
holding company law (the "Georgia Act"). As a bank holding company,  the Company
is required to file

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with  the  Federal  Reserve  Board  (the  "Board")  an  annual  report  and such
additional  information as the Board may require  pursuant to the Act. The Board
may also make  examinations  of the Company and each of its  subsidiaries.  Bank
holding  companies  are  required by the Act to obtain  approval  from the Board
prior to acquiring, directly or indirectly, ownership or control of more than 5%
of the voting shares of a bank.

The Act also prohibits bank holding  companies,  with certain  exceptions,  from
acquiring  more than 5% of the voting  shares of any company  that is not a bank
and from  engaging in any  nonbanking  business  (other than a business  closely
related to banking as determined  by the Board) or from managing or  controlling
banks and other subsidiaries authorized by the Act or furnishing services to, or
performing  services  for, its  subsidiaries  without the prior  approval of the
Board.  The Board is  empowered to  differentiate  between  activities  that are
initiated  de novo by a bank  holding  company or a  subsidiary  and  activities
commenced  by  acquisition  of a  going  concern.  The  Company  has no  present
intention to engage in nonbanking activities.

As a bank holding company, the Company is subject to capital adequacy guidelines
as established by the Board. The Board established risk based capital guidelines
for bank holding companies  effective March 15, 1989.  Beginning on December 31,
1992,  the minimum  required  ratio for total  capital to risk  weighted  assets
became 8 percent (of which at least 4 percent  must  consist of Tier 1 capital).
Tier 1 capital (as defined in regulations  of the Board)  consists of common and
qualifying  preferred  stock  and  minority  interests  in  equity  accounts  of
consolidated subsidiaries, less goodwill and other intangible assets required to
be deducted  under the Board's  guidelines.  The Board's  guidelines  apply on a
consolidated basis to bank holding companies with total  consolidated  assets of
$150 million or more. For bank holding  companies with less than $150 million in
total consolidated assets (such as the Company),  the guidelines will be applied
on a bank only basis,  unless the bank holding  company is engaged in nonbanking
activity  involving  significant  leverage  or has  significant  amount  of debt
outstanding  that is held by the general public.  The Board has stated that risk
based  capital  guidelines  establish  minimum  standards  and that bank holding
companies generally are expected to operate well above the minimum standards.

The  Company is also a bank  holding  company  within the meaning of the Georgia
Act, which provides that,  without the prior written  approval of the DBF, it is
unlawful  (i) for any  bank  holding  company  to  acquire  direct  or  indirect
ownership or control of more than 5% of the voting shares of any bank,  (ii) for
any bank holding  company or subsidiary  thereof,  other than a bank, to acquire
all or substantially  all of the assets of a bank, or (iii) for any bank holding
company to merge or consolidate with any other bank holding company.

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It is also unlawful for any company to acquire  direct or indirect  ownership or
control of more than 5% of the voting shares of any bank in Georgia  unless such
bank has been in existence and continuously  operating or incorporated as a bank
for a period of five years or more prior to the date of  application  to the DBF
for  approval  of  such  acquisition.  Bank  holding  companies  themselves  are
prohibited  from  acquiring  another  bank  until the  initial  bank in the bank
holding company has been incorporated for a period of twenty-four months.

The  Reigle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994 (the
"Interstate Banking Act"),  subject to certain  restrictions,  allows adequately
capitalized and managed bank holding  companies to acquire existing banks across
state lines,  regardless of state statutes that would prohibit  acquisitions  by
out-of-state  institutions.  Further,  effective  June 1, 1998,  a bank  holding
company may consolidate  interstate bank  subsidiaries  into branches and a bank
may merge with an  unaffiliated  bank across  state lines to the extent that the
applicable  states have not "opted out" of  interstate  branching  prior to such
effective date. Some states may elect to permit interstate mergers prior to June
1,  1998.  The  Interstate   Banking  Act  generally   prohibits  an  interstate
acquisition  (other  than  the  initial  entry  into a state  by a bank  holding
company)  that would  result in either  the  control of more than (i) 10% of the
total amount of insured deposits in the United States,  or (ii) 30% of the total
insured  deposits  in the  home  state  of the  target  bank,  unless  such  30%
limitation  is waived by the home state on a basis  which does not  discriminate
against out-of-state institutions.  As a result of this legislation, the Company
may  become a  candidate  for  acquisition  by, or may itself  seek to  acquire,
banking organizations located in other states.

The Reigle  Community  Development  and Regulatory  Improvement Act of 1994 (the
"Improvement  Act")  provides  for  the  creation  of  a  community  development
financial  institutions'  fund to promote economic  revitalization  in community
development.  Banks and thrift  institutions  are allowed to participate in such
community  development  banks.  The Improvement Act also contains (i) provisions
designed to enhance small business capital  formation and to enhance  disclosure
with regard to high cost  mortgages for the  protection  of consumers,  and (ii)
more  than 50  regulatory  relief  provisions  that  apply to banks  and  thrift
institutions,  including the  coordination  of  examinations  by various federal
agencies,  coordination of frequency and types of reports financial institutions
are  required  to file  and  reduction  of  examinations  for  well  capitalized
institutions.

Bank holding companies may be compelled by bank regulatory authorities to invest
additional capital in the event a subsidiary bank experiences either significant
loan losses or rapid growth of loans or deposits.  In addition,  the Company may
be required to provide additional capital to any additional banks it acquires as

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a condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.

The Company and the Bank are subject to the Federal  Reserve  Act,  Section 23A,
which  limits a bank's  "covered  transactions"  (generally,  any  extension  of
credit) with any single  affiliate  to no more than 10% of a bank's  capital and
surplus.  Covered  transactions  with all affiliates  combined are limited to no
more  than  20%  of a  bank's  capital  and  surplus.  All  covered  and  exempt
transactions  between a bank and its affiliates  must be on terms and conditions
consistent  with  safe  and  sound  banking  practices,   and  a  bank  and  its
subsidiaries  are prohibited  from purchasing low quality assets from the bank's
affiliates.  Finally,  Section 23A requires  that all of a bank's  extensions of
credit to an affiliate be appropriately  secured by collateral.  The Company and
the Bank are also  subject to Section  23B of the  Federal  Reserve  Act,  which
further limits  transactions  among affiliates.  Sections 22(b) and 22(h) of the
Federal Reserve Act and  implementing  regulations  also prohibit  extensions of
credit by a state non-member bank (such as the Bank) to its directors,  officers
and  controlling  shareholders  on terms  which are more  favorable  than  those
afforded  other  borrowers,  and  impose  limits  on the  amounts  of  loans  to
individual affiliates and all affiliates as a group.

The  United  States  Congress  and the  Georgia  General  Assembly  periodically
consider and adopt  legislation  that results in, and could  further  result in,
deregulation,  among other matters,  of banks and other financial  institutions.
Such legislation could modify or eliminate geographic  restrictions on banks and
bank holding  companies and current  prohibitions  restricting  competition with
other  financial  institutions,  including  mutual funds,  securities  brokerage
firms,  insurance  companies,  banks from other  states and  investment  banking
firms.  The effect of any such legislation on the business of the Company or the
Bank cannot be accurately predicted. The Company cannot predict what legislation
might be enacted or what other implementing regulations might be adopted, and if
enacted or adopted, the effect thereof.


Competition

The  banking  business  is highly  competitive.  The Bank  competes  with  other
commercial banks in its primary service area.

Banks generally  compete with other financial  institutions  through the banking
products and  services  offered,  the pricing of services,  the level of service
provided,  the  convenience  and  availability  of  services,  and the degree of
expertise and the personal  manner in which  services are offered.  The Bank has
encountered  strong  competition from most of the financial  institutions in the
Bank's  primary  service  area.  In the conduct of certain  areas of its banking
business, the Bank also competes with credit unions,

                                       11

<PAGE>



consumer finance companies,  insurance companies,  money market mutual funds and
other financial  institutions,  some of which are not subject to the same degree
of regulation and restrictions  imposed upon the Bank. Many of these competitors
have  substantially  greater  resources and lending limits than the Bank has and
offer certain services,  such as trust services,  that the Bank does not provide
presently. Management believes that competitive pricing and personalized service
provides it with a method to compete effectively in the primary service area.

Employees

As of  March 1,  1999,  the Bank had 10  full-time  employees  and no  part-time
employees. The Company does not have any employees who are not also employees of
the Bank. The Company and the Bank are not parties to any collective  bargaining
agreement,  and  management  believes  the  Bank  has  good  relations  with its
employees.


ITEM 2.           DESCRIPTION OF PROPERTIES

         On February 4, 1998,  the Company  entered  into a ground lease with M.
Milton Robson, one of the Company's directors,  for a 40- year ground lease of a
1.3359  acre  tract  of land  located  at 3461  Atlanta  Highway  in the City of
Oakwood,  Georgia.  The tract of land is the site where the Company and the Bank
intend to construct the main office of the Bank.  Upon  termination of the lease
due to certain defaults by the lessees or normal  expiration,  the real property
improvements  (the  building)  will  revert to and  become the  property  of the
lessor.  Final termination is expected to occur in Summer, 2038, but could occur
earlier if lessees default in the payment of rent for three  consecutive  months
or fail to exercise the extension options.

         The  directors  of the Company  have  obtained  two  appraisals  of the
proposed  site of the bank  building and of the ground  lease.  Both  appraisals
determined  that the rental under the ground lease was  reasonable and at market
rental rate for comparable  ground leases.  Copies of the  appraisals,  together
with the ground lease  agreement,  were filed with the Department of Banking and
the FDIC.

         The Company and the Bank plan to have a 10,000  square foot,  two-story
building  constructed  on the property  for the Bank.  There will be four teller
stations  inside  and  four  drive  through  stations.  There  will  also  be  a
stand-alone  automatic  teller  machine  accessible  by  automobile.  Management
estimates that the cost of  construction  of the building will be  approximately
$1,389,874. The furniture, fixtures and equipment necessary for operation of the
Bank are projected to cost approximately $350,000.  Construction,  equipping and
occupancy of the bank  building is projected to occur by September 1, 1999.  The
Bank opened for

                                       12

<PAGE>



business on January 4, 1999, in a temporary building located on a portion of the
site of the permanent bank building.


ITEM 3.           LEGAL PROCEEDINGS

The Company is not a party to any pending  legal  proceedings  which  management
believes would have a material effect upon the operations or financial condition
of the Company. The Bank commenced banking activities on January 4, 1999.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was  submitted  to a vote of  security  holders  during the  Company's
fourth quarter of the fiscal year ended December 31, 1998.


                                     PART II

ITEM 5.           MARKET FOR ISSUER'S COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS

As of  December  31,  1998,  there  was only one  shareholder  of  record of the
Company's  common stock.  As of January 4, 1999,  878,344  shares were issued to
approximately 1,316 shareholders. There is no established trading market for the
Company's  common  stock.  The  Company  had  one  share  of  its  common  stock
outstanding as of December 31, 1998 and 878,344 shares outstanding as of January
4, 1999.  The Company has not paid and does not anticipate  paying  dividends on
its common stock in the immediate future.  At present,  the only source of funds
from  which the  Company  could pay  dividends  would be  dividends  paid to the
Company by the Bank.  Certain  regulatory  requirements  restrict  the amount of
dividends  that can be paid to the  Company by the Bank  without  obtaining  the
prior  approval of the DBF. No  assurance  can be given that  dividends  will be
declared by the Company,  or if declared,  what the amount of the dividends will
be or whether such dividends, once declared, would continue.

         The Company completed its initial stock offering by January,  1999, and
878,344  shares were sold in the offering,  raising total capital of $8,783,440.
From the capital raised,  the Company paid the  organizational  debt incurred by
the organizers,  as well as the $85,000  originally loaned to the Company by the
organizers.  This debt  repayment  represented  the  payment of $51,735 of stock
offering expenses,  $49,975 of organization costs for the Company,  and $552,869
of pre-opening  operating  expenses  allocated to the Company.  The  pre-opening
expenses were offset by $122,226 of income earned on stock subscriptions held in
escrow during the stock offering. In addition,  the Company capitalized the bank
on

                                       13

<PAGE>



January 4, 1999 with  $8,000,000 in return for 800,000 shares of common stock of
the Bank, which is all of the Bank's outstanding stock.

         The Bank expended a portion of its capital to pay organizational  costs
and  expenses  incurred by the Company on behalf of the Bank prior to January 4,
1999.  These  expenses  represented  the  payment of  $35,620 of  organizational
expenses of the Bank, $185,724 for construction in process of the bank building,
$44,016  for the  purchase of  equipment,  and $9,422 of  pre-opening  operating
expenses  allocated to the Bank.  Since opening in January,  1999,  the bank has
used the remainder of its capital in its normal banking operations.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The Company was  incorporated  on February 13, 1998, for the purpose of
becoming a bank holding company for the Bank. The Company filed  applications to
the Board of  Governors  of the Federal  Reserve  System (the  "Board")  and the
Georgia  Department  of Banking  and Finance  (the "DBF") for prior  approval to
become a bank holding company.  The Company received Board approval on April 30,
1998,  and DBF  approval on April 28,  1998.  The Company  became a bank holding
company  within the  meaning of the  federal  Bank  Holding  Company Act and the
Georgia bank holding company law upon the acquisition of all of the Common Stock
of the Bank. The Bank opened for business on January 4, 1999. The Company's plan
of operation for 1999 consists  primarily of gaining  market share in the Bank's
primary service area.

         During 1999, the Bank will continue to offer a full range of commercial
banking  services to  individual,  professional  and  business  customers in its
primary service area. These services will include personal and business checking
accounts and savings and other time  certificates  of deposit.  The  transaction
accounts and time  certificates  will be at rates competitive with those offered
in the Bank's  primary  service  area.  Customer  deposits with the Bank will be
insured to the maximum  extent  provided by law through the FDIC.  The Bank will
continue to issue credit cards to act as a merchant  depository  for  cardholder
drafts  under both Visa and  Mastercard.  The Bank will  continue to offer night
depository and bank-by-mail services and to sell traveler's checks (issued by an
independent  entity) and cashier's checks. The Bank does not anticipate offering
trust and  fiduciary  services  during 1999 and will rely on trust and fiduciary
services  offered by  correspondent  banks until the Bank  determines that it is
profitable to offer such services directly.

During 1999, the Bank anticipates  deriving its income principally from interest
charged on loans and, to a lesser extent,  from interest  earned on investments,
from fees received in connection  with the  origination  of loans and from other
services. The Bank's

                                       14

<PAGE>



principal  expenses  are  anticipated  to be interest  expense on  deposits  and
operating expenses.

Management  believes the Company and Bank can satisfy  future cash  requirements
indefinitely,  and will not have to raise  additional  capital during 1999 or in
the  foreseeable  future.  The Bank  will  accept  deposits  and make  loans and
investments in accordance with an asset and liability  management framework that
emphasizes appropriate levels of liquidity and interest rate risk.

The Bank expects to complete  construction of its banking  facility by September
1,  1999.  Construction  costs  are  expected  to be  $1,389,874.  In  addition,
furnishings and equipment cost are expected to be approximately  $350,000. As of
December 31, 1998,  construction in process amounted to $186,000 which consisted
primarily of architect fees and site preparation costs.

At December 31, 1998,  the Company had completed an initial  stock  offering and
had received $8,734,000 in stock subscriptions.  These funds were held in escrow
during the offering period.  During this period,  the Company earned $122,000 in
interest on the escrow deposits.

During  1998,  the Company  incurred  expenses of  $603,000 in  connection  with
issuing  stock,  obtaining  regulatory  approvals,   organizing  the  Bank,  and
preparing Bank policies and procedures.  All organization  costs and pre-opening
expenses were expensed during 1998 in accordance  with the new accounting  rules
which require  immediate  recognition of such costs.  The Bank began  organizing
their staff in the third and fourth  quarters of 1998 in anticipation of opening
the Bank.  Salaries  and benefits  totaling  $343,000  accounted  for 57% of the
expenses incurred in 1998. Other significant  expenses included interest expense
of $40,000,  total lease expense of $93,000,  and organization costs of $50,000.
The accumulated deficit since inception is $537,000.

The Bank presently  employs 10 full-time  employees and no part-time  employees.
Management expects the Bank to employ approximately 13 employees and 1 part-time
employee by the end of 1999.  Significant  increases  in the number of employees
above this level are not expected in the foreseeable future.


ITEM 7.           FINANCIAL STATEMENTS

The consolidated  financial statements,  notes thereto and independent auditors'
report thereon are attached  hereto as Exhibit 99.1 and  incorporated  herein by
reference.




                                       15

<PAGE>



ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

There  are  no  disagreements  with  accountants  on  accounting  and  financial
disclosure.


                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS

The following  table sets forth the name of each director and Executive  Officer
of the  Company,  his or her age,  and a brief  description  of their  principal
occupation  and business  experience  for the  preceding  five years.  Except as
otherwise indicated, each director has been or was engaged in his or her present
or last  occupation,  in the same or similar  position for more than five years.
Listed below are the  directors  and  executive  officers of the  Company.  Each
director  has served as a director of the  Company  since the  formation  of the
Company on February 13, 1998, except C. Talmadge Garrison who was elected to the
Board of Directors of the Company and the Board of Directors of the Bank on July
9, 1998.  The  Company's  Bylaws  provide that the Board of Directors is divided
into three classes, with each class being as nearly equal in number as possible,
and the directors  serve for  staggered  three-year  terms.  The present term of
office of each  director  in Class One will  expire at the  annual  shareholders
meeting of the Company to be held on June 9, 1999; the present term of office of
each director in Class Two will expire at the annual shareholders meeting of the
Company  to be held in  April,  2000;  and the  present  term of  office of each
director in Class Three will  expire at the annual  shareholders  meeting of the
Company to be held in April, 2001. These persons will also serve as directors of
the Bank for the same staggered  terms. The Class in which each director belongs
is indicated  below.  The effect of the Company's  having a classified  Board of
Directors is that only  approximately  one-third of the members of the Board are
elected  each year,  which  effectively  requires  two annual  meetings  for the
Company's  shareholders  to  change a  majority  of the  members  of the  Board.
Executive  Officers of the Company and the Bank who serve at the pleasure of the
Board of  Directors of the Company and the Bank,  respectively,  will be elected
annually by the respective Boards of Directors.


Name [Class]                                Age      Principal Occupation
Gary H. Anderson                            47       Director;  Class 3. Mr.
                                                     Anderson is President and
                                                     C.E.O. of the Company and
                                                     holds the same  positions
                                                     with the Bank. He has been
                                                     a resident of Oakwood,
                                                     Hall County, Georgia since

                                       16

<PAGE>



                                                     1963. Mr. Anderson was born
                                                     in Clarkesville, Georgia in
                                                     1951. Mr. Anderson has over
                                                     23 years banking experience
                                                     in  Hall  County,  Georgia.
                                                     Mr. Anderson served as City
                                                     Vice-President for SunTrust
                                                     Bank of Northeast  Georgia,
                                                     Gainesville,  Georgia  from
                                                     1981  through   1996.   Mr.
                                                     Anderson  is a graduate  of
                                                     Gainesville College and C&S
                                                     Commercial  Lending School.
                                                     Mr.   Anderson   has   also
                                                     attended     the    Georgia
                                                     Banking   School   at   the
                                                     University  of Georgia.  He
                                                     is a member of the  Oakwood
                                                     Rotary Club,  Councilman of
                                                     the City of Oakwood,  and a
                                                     member of the Greater  Hall
                                                     Chamber  of  Commerce.  Mr.
                                                     Anderson   has   previously
                                                     served   on   many   civic,
                                                     social    and     community
                                                     organizations,    including
                                                     Hall County Boys Club Board
                                                     of  Directors,  Gainesville
                                                     College Foundation,  United
                                                     Way of Hall County, Oakwood
                                                     Development Authority.

Lowell S. (Casey)
 Cagle                                      33       Director; Class 3.  Mr.
                                                     Cagle is a native of Hall
                                                     County, Georgia, a seventh
                                                     generation resident.  Mr.
                                                     Cagle graduated from 
                                                     Johnson High School and
                                                     attended Gainesville
                                                     College and Georgia
                                                     Southern University.  A 
                                                     self-employed businessman,
                                                     Mr. Cagle is President
                                                     and co-owner of Strateia
                                                     Group Atlanta, Inc., a 
                                                     management and business 
                                                     consulting firm, which he
                                                     co-founded in July, 1996.
                                                     He is Tux of Class, which
                                                     he has operated for at 
                                                     least the last five years.
                                                     Mr. Cagle is a member of
                                                     Westside Baptist Church,
                                                     Gainesville, Georgia.  
                                                     Since 1994, Mr. Cagle has
                                                     been a Georgia State 
                                                     Senator for the 49th 
                                                     District, which includes
                                                     Hall County and portions
                                                     of Forsyth County.

Earl C. Gilleland                           53       Director; Class 2.  Mr.
                                                     Gilleland is a native of
                                                     Hall County, having

                                       17

<PAGE>
                                                     lived  his  entire  life in
                                                     South  Hall   County.   His
                                                     entire  business career has
                                                     been     with     Gilleland
                                                     Concrete   Company  and  in
                                                     1968 he became  sole  owner
                                                     and    President   of   the
                                                     company.   In   1997,   Mr.
                                                     Gilleland   sold  Gilleland
                                                     Concrete   to   a   Florida
                                                     company,  and he remains as
                                                     manager    of   the   local
                                                     company.  He is a member of
                                                     Poplar   Springs    Baptist
                                                     Church.

A. Terry Hayes                              45       Director; Class 2.  Mr.
                                                     Hayes has been a resident
                                                     of Jackson County, Georgia
                                                     for over 12 years.  Mr.
                                                     Hayes was born in DeKalb
                                                     County.  He is Manager of
                                                     Hayes Chrysler-Plymouth-
                                                     Dodge-Jeep in Oakwood,
                                                     Georgia.  Mr. Hayes has 
                                                     worked in the family
                                                     business of Hayes Chrysler-
                                                     Plymouth-Dodge-Jeep in
                                                     Gwinnett County and Hall
                                                     County for over 25 years.
                                                     Mr. Hayes is a member of 
                                                     the South Hall Rotary Club
                                                     and the Georgia Cattlemen's
                                                     Association.

Wm. David  Merritt                          49       Director;  Class 2. Mr.
                                                     Merritt is a long-time  (40
                                                     year)  resident of Hall
                                                     County,  Georgia.  Mr.
                                                     Merritt is  President/Owner
                                                     of Merritt Contracting,
                                                     Inc. since 1982;  President
                                                     /Owner of Lanier Leasing,
                                                     Inc. (leasing  construction
                                                     equipment and commercial
                                                     properties);  President of
                                                     MCI Management Company
                                                     since 1989;  Owner/Operator
                                                     of Paradise Springs Farm,
                                                     Inc. (a cattle farm in Hall
                                                     County).  Mr. Merritt is
                                                     also  Vice-President of
                                                     Gilleland & Merritt,  LLC,
                                                     a real  estate  development
                                                     company  and  developer  of
                                                     Windmill Subdivision  near
                                                     Clermont,  Georgia.  Mr.
                                                     Merritt is a member of the
                                                     Georgia Utility Contractors
                                                     Association and the Georgia
                                                     Highway Contractors
                                                     Association.  He is a 
                                                     member of the Greater Hall
                                                     Chamber of Commerce.

Harold D. Nichols                           56       Director; Class 1.  Mr.
                                                     Nichols is a 38-year 
                                                     resident of Hall County,

                                       18

<PAGE>



                                                     Georgia.  He has  been  the
                                                     Engineered  Products  Sales
                                                     Manager                  of
                                                     Macklanburg-Duncan,
                                                     Gainesville,  Georgia since
                                                     1969. He serves on the Hall
                                                     County  Parks  and  Leisure
                                                     Services  Board  and  is an
                                                     honorary deacon of Chestnut
                                                     Mountain Baptist Church. He
                                                     is   also   a   member   of
                                                     Gainesville  Masonic  Lodge
                                                     #219   and   is    actively
                                                     involved      in      youth
                                                     activities   in  the  local
                                                     schools.

James E. Palmour III                       62        Director; Class 3.  Mr.
                                                     Palmour was born in and is
                                                     a resident of Gainesville,
                                                     Hall County, Georgia,
                                                     and has been a resident for
                                                     all but four years of his
                                                     life.  He  graduated  from
                                                     Gainesville  High  School,
                                                     University  of Georgia and
                                                     Atlanta Law School.  Mr.
                                                     Palmour  has been an
                                                     attorney  at law since 1964
                                                     and has  practiced  general
                                                     law since that time with
                                                     the  exception  of the 
                                                     period of 1976  through 
                                                     1984 during which he was
                                                     Judge of the Superior Court
                                                     of the Northeastern  
                                                     Judicial  Circuit.  Mr.
                                                     Palmour's  major field of 
                                                     law is government  law and
                                                     he is attorney for the
                                                     City of  Gainesville,
                                                     Georgia,  White  County,
                                                     Georgia,  and the Barrow
                                                     County Airport Authority.
                                                     He is a member of the
                                                     Rotary Club of Gainesville,
                                                     State Bar of Georgia,
                                                     Gainesville- Northeastern
                                                     Bar Association, and has
                                                     previously served as a
                                                     member of the Lanier Area
                                                     Technical School Board.

Dr. Edward R. Quillian                      43       Director; Class 1.  Dr.
                                                     Quillian  is a  native  of
                                                     Hall  County,  Georgia.  He
                                                     graduated  from the
                                                     University of Georgia
                                                     School of Veterinary 
                                                     Medicine in 1983. Dr.
                                                     Quillian was a partner in
                                                     the  Cumming  Veterinary  
                                                     Clinic  from  1983 to 1987.
                                                     He has  been CEO/Owner of
                                                     Quillian Family Pet Clinic
                                                     in Oakwood,  Georgia since
                                                     1987. He is a Trustee of 
                                                     the  Gainesville College 
                                                     Foundation.  He is also a
                                                     member  of the American 
                                                     Animal Hospital Association
                                      19

<PAGE>



                                                     Georgia Veterinary Medical 
                                                     Association, American 
                                                     Veterinary Medical
                                                     Association, and the
                                                     Georgia Academy of 
                                                     Veterinary Practice.

M. Milton Robson                            56       Director; Class 1.  Mr. 
                                                     Robson has been a resident
                                                     of Hall  County,  Georgia
                                                     for over 50 years.  He
                                                     has resided in south Hall
                                                     County for over 25 years.
                                                     Mr. Robson founded Milton's
                                                     Institutional Foods in
                                                     1962, which he sold in 1995
                                                     to Progressive Food 
                                                     Services.  Mr. Robson is 
                                                     the owner of Mule Camp 
                                                     Springs,  a commercial 
                                                     retail  center,  in
                                                     Gainesville,  Georgia and
                                                     is the  owner/developer of
                                                     Robson  Crossing  Shopping
                                                     Center in Oakwood, Georgia.
                                                     He is Vice-President  of
                                                     Prime Pak Foods,  Inc., a
                                                     wholesale frozen meat
                                                     distributor, which he 
                                                     founded in 1975.

Donald W. Smith                             45       Director; Class 3.  Mr.
                                                     Smith is a native of Hall
                                                     County,  Georgia.  He is a
                                                     1975  graduate of West
                                                     Georgia  College.  Mr.
                                                     Smith is President and 
                                                     Owner of Arrow Auto Sales,
                                                     and he has over 19 years
                                                     experience  in retail auto
                                                     sales.  He is  President
                                                     of Arrow Mitsubishi  in
                                                     Gainesville,  Georgia,  and
                                                     he also has served as 
                                                     President  of Oakwood Arrow
                                                     Auto Auction since 1990.
                                                     Mr. Smith is a past
                                                     President and serves on the
                                                     Board of Directors of the
                                                     Georgia  Automobile Dealers
                                                     Association.  Mr. Smith is
                                                     a member of the Gainesville
                                                     Jaycees and the Greater
                                                     Hall  Chamber of Commerce.

C. Talmadge Garrison                        66       Director; Class 2.  Mr.
                                                     Garrison,  a native of Hall
                                                     County and a graduate of
                                                     The  University  of
                                                     Georgia, has been in the
                                                     banking industry for over
                                                     33 years. Prior to his
                                                     recent retirement he was
                                                     associated  with  First
                                                     National  Bank and  First
                                                     National Bancorp,  Inc. 
                                                     of  Gainesville,  Georgia.
                                                     He is an honor graduate of
                                                     the Bank Administration 
                                                     Institute held at the

                                       20

<PAGE>



                                              University of Wisconsin and has
                                              passed the Uniform Examination of
                                              Certified Public  Accountants.  As
                                              a member of Lakewood  Baptist
                                              Church he has served as a
                                              deacon  and on the  Board of 
                                              Trustees.  Mr.  Garrison  has been
                                              a member of the Gainesville and
                                              Lakeside Civitan Clubs where he
                                              held numerous offices.

Jeanie Bridges                       51       Ms. Bridges serves as Treasurer,
                                              Chief Accounting Officer and Chief
                                              Financial Officer of the Company.
                                              She also serves as Senior Vice
                                              President/Chief Operations Officer
                                              of the Bank.  Ms. Bridges was born
                                              in Guilford County, North Carolina
                                              but has lived in Georgia since her
                                              teens.  She resided in the metro
                                              Atlanta area for 20 years, Hall
                                              County for 10 years and now lives 
                                              in White County.  She attended
                                              Gainesville College and the 
                                              Georgia Banking School at the
                                              University of Georgia.  She served
                                              on the Gainesville Planning 
                                              Commission and the Gainesville 
                                              Park and Recreation Board of 
                                              Directors.  Until resigning
                                              to take her position with the
                                              Company, Ms. Bridges was employed
                                              with SunTrust Bank, Northeast
                                              Georgia, N.A. since March, 1986 in
                                              many capacities, from lender of
                                              consumer and mortgage loans to
                                              Branch Administrator. Prior to her
                                              resignation, she was First Vice
                                              President, Security Officer, and
                                              Compliance Officer. Ms. Bridges is
                                              a member of the First Baptist 
                                              Church of Cleveland and the Truth
                                              Seekers Sunday School Class.  She
                                              is also a member of the Georgia
                                              Department of Labor Advisory
                                              Council and is involved in 
                                              Financial Women International
                                              (formerly NABW) and the White
                                              County League of Women
                                              Voters.

Christopher D. England               41       Mr. England serves as Senior Vice
                                              President and Chief Lending 
                                              Officer of the Bank.  Mr. England 
                                              is a native of South Hall County,
                                              
                                       21

<PAGE>



                                               born in Gainesville in 1958.
                                               He has
                                               over 13  years  of  banking
                                               and lending  experience  in
                                               Hall County,  Georgia.  Mr.
                                               England  has served as Vice
                                               President     of     Lanier
                                               National     Bank     since
                                               February, 1992. His lending
                                               experience   includes  both
                                               commercial   and   consumer
                                               loans.    Before    joining
                                               Lanier  National  Bank,  he
                                               was    employed    by   The
                                               Citizens Bank, Gainesville,
                                               Georgia, from 1984 to 1992.
                                               He    progressed    through
                                               management          serving
                                               initially  as  a  collector
                                               before being  promoted into
                                               lending.  His  last  duties
                                               there  were Vice  President
                                               and  Branch  Manager of the
                                               Main Office. Mr. England is
                                               a 1980  graduate of Georgia
                                               Tech,     receiving     his
                                               Bachelor of Science degree.
                                               He is  also a  graduate  of
                                               the  C&S  Consumer  Lending
                                               School,     the     Georgia
                                               Banker's   School   at  the
                                               University of Georgia,  and
                                               the   Graduate   School  of
                                               Banking  of  the  South  at
                                               LSU.    His    civic    and
                                               community       involvement
                                               include  serving  or having
                                               served on the boards of the
                                               Gainesville College Foundation,
                                               the Gainesville-Hall County
                                               Neighborhood Revitalization,
                                               Inc.,  the Gainesville-Hall
                                               County Board  of   Realtors, the
                                               Greens     Committee     of
                                               Chicopee Woods Golf Course,
                                               and the Hall  County  March
                                               of   Dimes.   He  has  also
                                               served as McEver Elementary
                                               School PTO Treasurer and is
                                               a member of the Gainesville
                                               Lions Club.

There are no arrangements or  understandings  between the Company and any person
pursuant  to which  any of the  above  persons  have  been or will be  elected a
director.  There  are no  family  relations  between  any of  the  directors  or
executive  officers.  No director is a director of another  bank or bank holding
company.  James E. Palmour,  III provided  legal  services to the Company during
1998, and it is anticipated he will provide legal services to the Company during
1999.



                                       22

<PAGE>



ITEM 10.          EXECUTIVE COMPENSATION

Executive Compensation

The Company does not  separately  compensate  any of its  directors or executive
officers,  except for executive  officers that were to serve also as officers of
the Bank. After the Bank commenced operations,  the Company no longer separately
compensated   such  executive   officers.   The  following  sets  forth  certain
information concerning the compensation of the Company's chief executive officer
during fiscal year 1998. No other  executive  officer  received  compensation in
excess of $100,000.
<TABLE>
<CAPTION>

                           Summary Compensation Table

                               Annual Compensation


                                                                       Long Term
                                                                      Compensation
                                                                         Awards

Name and                                             Other Annual      Securities        All Other
Principal         Fiscal                             Compensation      Underlying      Compensation
Position          Year    Salary ($) Bonus ($)             ($)         Options (#)          ($)     
---------         ------  ---------- ---------       ------------      -----------     ------------
<S>               <C>     <C>        <C>             <C>               <C>             <C>
Gary H.
  Anderson        1998    105,000           0              --(1)                           3120(2)
</TABLE>

(1)      Compensation  does not  include  any  perquisites  and  other  personal
         benefits which may be derived from  business-related  expenditures that
         in the  aggregate  do not  exceed  the  lesser of $50,000 or 10% of the
         total annual salary and bonus reported for such person.
(2)      The Company  provided Mr.  Anderson with a $500,000 term life insurance
         policy;  the  premium  paid by the  Company  in  1998  was  $3,120.  In
         addition, pursuant to Mr. Anderson's employment agreement, Mr. Anderson
         will be  entitled  to  severance  pay equal to one month's pay for each
         year  employed  by  the  Bank  in  the  event  of  termination  of  his
         employment.




                                       23

<PAGE>


<TABLE>
<CAPTION>

    Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

                                                        Number of
                                                        Securities       Value of
                                                        Underlying       Unexercised
                                                        Unexercised      In-the-Money
                                                        Options at       Options at
                                                        FY-End(#)        FY-End($)
                  Shares Acquired                       Exercisable/     Exercisable/
Name              on Exercise (#)  Value Realized($)    Unexercisable    Unexercisable
<S>               <C>              <C>                  <C>              <C>
Gary H. Anderson         0                -             15,000/0          0/-
President and
Chief Executive
Officer
</TABLE>



Employment Agreement

         Gary H. Anderson has an employment  agreement  with the Company and the
Bank  under  which he serves as  President  and Chief  Executive  Officer of the
Company and of the Bank. The employment  agreement  provides for an initial term
of three years and can be  extended  annually by the Company and the Bank at the
end of each year of the term for an additional  year, so that the remaining term
shall  continue to be three  years.  Mr.  Anderson  is paid an annual  salary of
$105,000.  Once the Bank begins  operations  he will also be entitled to certain
performance  bonuses.  The  criteria  for earning  performance  bonuses  will be
established by the Board of Directors.

         Under Mr. Anderson's employment agreement, he also has been granted, at
no cost to him for the option  grant,  the option to purchase  15,000  shares of
Common  Stock of the  Company at the price of the lesser of $10.00 or book value
of the stock during the first five (5) years of operation of the Bank.

         Mr.  Anderson also receives health  insurance with dependents  coverage
and disability  insurance paid in full by the Bank. The Company maintains a term
life insurance policy on Mr. Anderson providing for death benefits in the amount
of  $500,000  payable to the  Company  and  $500,000  payable to Mr.  Anderson's
family.  He receives a mid-size  automobile  to be used  primarily  for business
purposes,  and the Bank pays operating,  maintenance and insurance  expenses for
the  automobile.  The Bank pays monthly  membership dues for Mr. Anderson at all
service organizations and professional associations.

     If the Company  terminates Mr. Anderson's  employment,  the Company will be
obligated to pay him severance pay equal to one year's base salary and insurance
benefits.  If Mr.  Anderson's  employment is terminated due to a sale, merger or

                                       24

<PAGE>



other  change of  control  of the  Company  or the  Bank,  the  Company  will be
obligated to pay him severance  pay equal to two times his then existing  annual
base  salary.   Furthermore,   the  Company  must  remove  any  restrictions  on
outstanding incentive awards so that all such awards vest immediately.

         In  addition,   Mr.  Anderson's   employment  agreement  provides  that
following termination of his employment with the Bank and for a period of twelve
months  thereafter  if  terminated  without cause and for a period of six months
thereafter if terminated for cause, Mr. Anderson may not: (i) be employed in the
banking  business  or any  related  field  thereto in  Oakwood,  Georgia or Hall
County, Georgia, (ii) solicit customers of the Bank for the purpose of providing
financial  services;  (ii) solicit  employees of the Bank for  employment;  (iv)
furnish anyone or use any list of customers of the Bank for banking purposes; or
(v) furnish,  use or divulge to anyone any information  acquired by him from the
Bank relating to the Bank's methods of doing business.

     Mr. Anderson also receives other  employment  benefits under his employment
agreement  with  the  Company  and the  Bank as  spelled  out in his  employment
agreement.

Director Compensation

         The  Company  and the Bank  presently  do not  compensate  any of their
directors for their services as directors.  The directors of the Company and the
Bank presently do not receive a fee for attending Board meetings.


ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

                             PRINCIPAL SHAREHOLDERS

         The following table sets forth certain information regarding the shares
of  voting  common  stock  of the  Company,  which  is the  only  class of stock
outstanding,  beneficially  owned as of March 15,  1999,(i)  by each  person who
beneficially owns more than 5% of shares of common stock of the Company, (ii) by
each of the Company's  directors and named  executive  officers and (iii) by all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>

                                   Amount and
                                    Nature of
Name and Address                    Beneficial                  Percentage
of Beneficial Owner                 Ownership                   Ownership
<S>                                <C>                          <C>
Gary H. Anderson                    21,010(1)                       2.35%(2)
Director/President
and C.E.O.
4006 Covey Trail
Oakwood, GA  30566

                                       25

<PAGE>



Lowell S. (Casey)                    5,000                           .57%
  Cagle
Director/Chairman
4615 Hunters Court
Gainesville, GA  30507

Earl C. Gilleland                   40,000                          4.55%
Director
3997 Sloan Mill Road
Gainesville, GA  30507

A. Terry Hayes                       5,200(3)                        .59%
Director
Highway 332
P. O. Box 357
Hoschton, GA  30548

Wm. David Merritt                   20,000(4)                       2.28%
Director
6620 Stringer Road
Clermont, GA  30527

Harold D. Nichols                    2,000                           .23%
Director
4431 Benefield Road
Braselton, GA  30517

James E. Palmour III                 6,500(5)                        .74%
Director/Secretary
255 Sorrento Circle, N.W.
Gainesville, GA  30506

Dr. Edward R. Quillian               4,200(6)                        .49%
Director
4207 Bob White Lane
Oakwood, GA  30566

M. Milton Robson                    36,200(7)                       4.12%
Director
3509 Tanners Mill Circle
Gainesville, GA  30507

Donald W. Smith                     10,500(8)                       1.20%
Director/Vice Chairman
4129 Cherokee Trail
Gainesville, GA  30504

C. Talmadge Garrison                12,000(9)                       1.37%
4074 Cochran Road
Gainesville, GA  30506



                                       26

<PAGE>



Jeanie Bridges                      10,000(10)                 1.13%(11)
Treasurer, C.A.O. and
  C.F.O.
100 Sang Road
Cleveland, GA  30528

Christopher D. England               5,800(12)                  .66%(13)
Senior Vice President and
  Chief Lending Officer
5506 Stone Trace
Gainesville, GA  30504

All current directors              178,410                    19.86%(2)(11)(13)
and executive officers as
a group (13 persons)
</TABLE>

------------------------
(1)      Includes 450 shares owned jointly by Mr. Anderson and his spouse,  over
         which  shares  Mr.  Anderson  has  investment  and voting  power;  also
         includes 15,000 shares that are subject to options granted Mr. Anderson
         under his employment agreement.

(2)      In calculating percentage ownership,  includes 15,000 shares subject to
         options granted Mr. Anderson in calculating  total outstanding stock of
         the Company and number of shares beneficially owned by Mr. Anderson.

(3)      Includes 5,100 shares held in Mr. Hayes' IRA and 100 shares held in the
         IRA of Mr.  Hayes'  wife,  over  all of  which  shares  Mr.  Hayes  has
         investment and voting power.

(4)      Includes  800 shares held in Mr.  Merritt's  IRA and 800 shares held in
         the IRA of Mr. Merritt's wife, over all of which shares Mr. Merritt has
         investment and voting power.

(5)      Includes 500 shares owned by Mr.  Palmour's wife, over which shares Mr.
         Palmour has investment and voting power.

(6)      Includes  2,000  shares owned  jointly by Dr.  Quillian and his mother,
         2,000 shares owned jointly by Dr. Quillian and his wife, and 200 shares
         owned by Dr. Quillian as custodian for his minor children,  over all of
         which shares Dr. Quillian has investment and voting power.

(7)      Includes 1,200 shares owned by Mr. Robson's wife, over which
         shares Mr. Robson has investment and voting power.  Does not
         include: 3,000 shares owned by Mr. Robson's adult children;
         2,000 shares owned by Mr. Robson's adult son-in-law, 2,000
         shares owned by Mr. Robson's adult daughter-in-law, 4,500
         shares owned by Mr. Robson's adult  daughter, as custodian for
         his minor grandchildren, and 4,500 shares owned by Mr.
         Robson's adult son as custodian for his minor grandchildren,
         over all of which shares Mr. Robson asserts no voting or
         investment power.


                                       27

<PAGE>



(8)      Includes  1,000 shares held in Mr. Smith's IRA, 200 shares owned by Mr.
         Smith's minor  daughter,  and 300 shares owned by Oakwood's  Arrow Auto
         Auction,  over all of which shares Mr. Smith has  investment and voting
         power.  Does  not  include  400  shares  owned  by  Mr.  Smith's  adult
         daughters, over which Mr. Smith asserts no voting or investment power.

(9)      Includes  2,000  shares  owned  jointly by Mr.  Garrison  and his adult
         children,  over which  shares Mr.  Garrison has  investment  and voting
         power.  Does not  include  500  shares  owned by Mr.  Garrison's  adult
         children, over which shares he asserts no voting or investment power.

(10)     Includes  5,000 shares held in Ms.  Bridges' IRA, over which shares Ms.
         Bridges has  investment  and voting power;  also includes  5,000 shares
         that are subject to options  granted Ms.  Bridges under her  employment
         agreement.

(11)     In calculating  percentage ownership,  includes 5,000 shares subject to
         options granted Ms. Bridges in calculating  total  outstanding stock of
         the Company and number of shares beneficially owned by Ms. Bridges.

(12)     800 shares are held in Mr. England's IRA, over which shares Mr. England
         has  investment  and voting power;  also includes 5,000 shares that are
         subject to options granted Mr. England under his employment agreement.

(13)     In calculating  percentage ownership,  includes 5,000 shares subject to
         options granted Mr. England in calculating  total  outstanding stock of
         the Company and number of shares beneficially owned by Mr. England.


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain  executive  officers  and  directors  of the Company  and the Bank,  and
principal  shareholders of the Company and affiliates of such persons have, from
time to time, engaged in banking  transactions with the Bank. All loans or other
extensions of credit were made by the Bank to such  individuals  in the ordinary
course of business on substantially the same terms, including interest rates and
collateral,  as those  prevailing at the time for comparable  transactions  with
unaffiliated parties and are believed by management to not involve more than the
normal risk of collectibility or present other unfavorable  features.  Since the
Bank did not begin doing business until January 4, 1999, as of December 31, 1998
there were no loans to executive  officers and  directors of the Company and the
Bank, principal shareholders of the Company, and affiliates of such persons.




                                       28

<PAGE>



ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

(a)      1.       Financial Statements/

         The consolidated  financial  statements,  notes thereto and independent
         auditors' report thereon,  are filed as Exhibit 99.1 hereto, and made a
         part hereof.

         2.       Exhibits

         Exhibit Numbers

                                                                    Sequential
                                                                    Page Number

         3.1*         Articles of Incorporation                          --
         3.2*         Bylaws                                             --
         10.1*+       Employment Contract between Gary H.
                      Anderson and the Company                           --
         21.1         Subsidiaries of the Company.  The
                      sole subsidiary of the Company is
                      Southern Heritage Bank,
                      Oakwood, Georgia, which is
                      wholly-owned by the Company                        --
         27.1         Financial Data Schedule                            32
         99.1         Consolidated Financial Statements
                      of the Company                                     47

------------------------
                  *Items 3.1 through  10.1,  as listed  above,  were  previously
                  filed by the  Company as  Exhibits  (with the same  respective
                  Exhibit   Numbers  as  indicated   herein)  to  the  Company's
                  Registration  Statement  (Registration  No. 33-47291) and such
                  documents are incorporated herein by reference.

                  +Item 10.1 is an employment-compensatory agreement.


(b)      Reports on Form 8-K

         No Reports on Form 8-K have been filed during the fourth quarter of the
         year ended December 31, 1998.


                                       29

<PAGE>



                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1999.


SOUTHERN HERITAGE BANCORP, INC.


By:  s/Gary H. Anderson
         Gary H. Anderson
         President and C.E.O.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on March 31, 1999.

         Signature                                            Title


s/Gary H. Anderson                                Director; President and C.E.O.
Gary H. Anderson


s/Jeanie Bridges                                  Treasurer; C.A.O. and C.F.O
Jeanie Bridges


s/Lowell S. (Casey) Cagle                         Director; Chairman
Lowell S. (Casey) Cagle


s/C. Talmadge Garrison                            Director
C. Talmadge Garrison


s/Earl C. Gilleland                               Director
Earl C. Gilleland


s/A. Terry Hayes                                  Director
A. Terry Hayes


s/Wm. David Merritt                               Director
Wm. David Merritt


s/Harold D. Nichols                               Director
Harold D. Nichols

                       [SIGNATURES CONTINUED ON NEXT PAGE]

                                       30

<PAGE>


s/James E. Palmour III                               Director; Secretary
James E. Palmour III


_______________________                              Director
Dr. Edward R. Quillian


s/Milton Robson                                      Director
M. Milton Robson


________________________                             Director
Donald W. Smith



Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Exchange Act by Non-reporting
Issuers:

No annual report to security holders covering the registrant's  1998 fiscal year
or proxy material with respect to an annual meeting of security holders for 1999
has  been or will be sent to  security  holders  of the  registrant,  since  the
registrant  is not  presently  required  to provide  security  holders an annual
report or proxy material. The registrant does intend in May, 1999 to furnish its
security  holders  summary  financial  information  for its  fiscal  year  ended
December  31, 1998 and the notice of its annual  meeting of  shareholders  to be
held on June 9, 1999.





                                       31

<PAGE>
                                                                    EXHIBIT 99.1


                           SOUTHERN HERITAGE
                                BANCORP

                     (A Development Stage Company)

                            FINANCIAL REPORT

                           DECEMBER 31, 1998











                                       32
<PAGE>




                            SOUTHERN HERITAGE BANCORP
                          (A Development Stage Company)

                              FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

--------------------------------------------------------------------------------

                                TABLE OF CONTENTS


                                                                            Page

INDEPENDENT AUDITOR'S REPORT..................................................1

FINANCIAL STATEMENTS

     Balance sheet............................................................2
     Statement of loss for year ended
       December 31, 1998 and period
       from February 24, 1997, date
       of inception, to December 31, 1998.....................................3
     Statement of stockholders' equity 
       (deficit) for year ended December 31, 1998
        and period from February 24, 1997, date of
        inception, to December 31, 1998.......................................4
     Statement of cash flows for year ended
        December 31, 1998 and period
        from February 24, 1997, date of
        inception, to December 31, 1998.......................................5
     Notes to financial statements.........................................6-12




                                       33
<PAGE>












                          INDEPENDENT AUDITOR'S REPORT

-------------------------------------------------------------------------------


To the Board of Directors
Southern Heritage Bancorp
Oakwood, Georgia


     We have  audited  the  accompanying  balance  sheet  of  Southern  Heritage
Bancorp,  a development stage company,  as of December 31, 1998, and the related
statements of loss,  stockholders' equity (deficit), and cash flows for the year
ended  December  31,  1998  and the  period  from  February  24,  1997,  date of
inception,   to  December  31,  1998.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Heritage Bancorp as
of December 31, 1998,  and the results of its  operations and its cash flows for
the year ended December 31, 1998 and the period from February 24, 1997,  date of
inception,   to  December  31,  1998,  in  conformity  with  generally  accepted
accounting principles.

     As described in Note 1 to the financial statements, the Company changed its
method of accounting for organization costs.

                                             s/MAULDIN & JENKINS, LLC


Atlanta, Georgia
March 16, 1999


                                       34
<PAGE>
                            SOUTHERN HERITAGE BANCORP
                          (A Development Stage Company)

                                  BALANCE SHEET
                                DECEMBER 31, 1998

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                     Assets
<S>                                                        <C>
Cash                                                       $              3,640
Interest-bearing deposits                                             7,977,209
Premises and equipment                                                  229,740
Other receivables                                                       189,422
Deferred organization costs                                              35,620
                                                         ----------------------

         Total assets                                     $           8,435,631
                                                         ======================

                   Liabilities and Stockholders' Equity

Accounts payable                                          $             240,888
                                                         ----------------------

Commitments and contingent liabilities
Stokholders' equity
    Common stock, $5.00 par value; 1,000,000 shares
        authorized; 878,344 subscribed                    $           4,391,720
    Capital surplus                                                   4,339,985
    Deficit accumulated during the development stage                   (536,962)
                                                         ----------------------

          Total stockholders' equity                                  8,194,743
                                                         ----------------------

          Total liabilities and stockholders' equity     $           8,435,631
                                                         ======================
</TABLE>



See Notes to Financial Statements.

                                       35
<PAGE>
                            SOUTHERN HERITAGE BANCORP
                          (A Development Stage Company)

                               STATEMENTS OF LOSS
            FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM
           FEBRUARY 24, 1997, DATE OF INCEPTION, TO DECEMBER 31, 1998

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                  Period from
                                                              February 24, 1997,
                                                                   Date of
                                    For Year Ended              Inception, to
                                   December 31, 1998           December 31, 1998
                                 -----------------------     -------------------
<S>                              <C>                         <C>
Income                           $            122,226        $          122,226
                                 -----------------------     ------------------

Expenses
    Interest expense             $             40,157        $           44,750
    Salaries and employee
       benefits                               342,913                   360,413
    Other expenses                            156,599                   190,850
                                 -----------------------     ------------------
                                              539,669                   596,013
                                 -----------------------     ------------------

Net loss before cumulative
effect of change in accounting
principle                        $           (417,443)       $         (473,787)

Cumulative effect of a change
in accounting principle                       (63,175)                  (63,175)
                                 -----------------------     -------------------

Net loss                         $           (480,618)       $         (536,962)
                                 =======================     ===================
</TABLE>



See Notes to Financial Statements.

                                       36
<PAGE>
                            SOUTHERN HERITAGE BANCORP
                          (A Development Stage Company)

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
                         PERIOD FROM FEBRUARY 24, 1997,
                     DATE OF INCEPTION, TO DECEMBER 31, 1998

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                      Deficit
                                                                                     Accumulated
                                                                                      During the              Total
                                 Common Stock Subscribed           Capital           Development          Stockholders'
                            -----------------------------------
                               Shares           Par Value          Surplus              Stage            Equity (Deficit)
                            -------------   -----------------  -----------------   -----------------     -----------------
<S>                         <C>             <C>                <C>                 <C>                   <C>
Balance, February 24, 1997,
(date of inception)                  --    $            --   $             --    $           --        $            --
    Net loss                         --                 --                 --           (56,344)               (56,344)
                           -------------   -----------------  -----------------   -----------------     -----------------
Balance, December 31,
  1997                               --                 --                  --          (56,344)               (56,344)
Common stock subscriptions      878,344          4,391,720           4,391,720               --              8,783,440
Stock offering cost                  --                 --             (51,735)              --                (51,735)
Net loss                             --                 --                  --          (480,618)             (480,618)
                           -------------   -----------------  -----------------   -----------------     -----------------
Balance, December 31,
  1998                          878,344    $     4,391,720   $       4,339,985    $     (536,962)      $     8,194,743
                           =============   =================  =================   =================     =================

</TABLE>




See Notes to Financial Statements.

                                       37
<PAGE>
                            SOUTHERN HERITAGE BANCORP
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS
                  FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
                         PERIOD FROM FEBRUARY 24, 1997,
                     DATE OF INCEPTION, TO DECEMBER 31, 1998

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                  Period from
                                                               February 24, 1997,
                                                                    Date of
                                         For Year Ended         Inception, to
                                        December 31, 1998      December 31, 1998

                                        ------------------    ------------------
<S>                                    <C>                    <C>
OPERATING ACTIVITIES
   Net loss                            $         (480,618)    $        (536,962)
   Adjustments to reconcile net
   loss to net cash
   used in operating activities:
   Depreciation                                     9,107                 9,422
   Increase in other receivables                 (143,281)             (189,422)
   Increase in accounts payable                   219,748               240,888
                                       ------------------     ------------------

Net cash used in operating activities            (395,044)             (476,074)
                                       ------------------     ------------------

INVESTING ACTIVITIES
Increase) decrease in deferred
  organization costs                               27,555               (35,620)
Purchase of premises and equipment               (170,840)             (239,162)
Increase in interest-bearing deposits          (7,977,209)           (7,977,209)
                                       ------------------     ------------------

Net cash used in investing activities          (8,120,494)           (8,251,991)
                                       ------------------     ------------------

FINANCING ACTIVITIES
Proceeds from line of credit                      622,539               849,954
Repayment of line of credit                      (849,954)             (849,954)
Proceeds from organizers                               --                85,000
Repayment to organizers                                --               (85,000)
Proceeds from common stock subscriptions        8,783,440             8,783,440
Stock offering cost                               (49,490)              (51,735)
                                       ------------------     ------------------

Net cash provided by
 financing activities                           8,506,535             8,731,705
                                       ------------------     ------------------

Net increase (decrease) in cash                    (9,003)                3,640

Cash at beginning  of period                       12,643                    --
                                       ------------------     ------------------

Cash at end of year                    $            3,640     $           3,640
                                       ==================     ==================

</TABLE>


See Notes to Financial Statements.

                                       38
<PAGE>

                            SOUTHERN HERITAGE BANCORP
                          (A Development Stage Company)

                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization

                     Southern Heritage Bancorp,  Inc. (the "Company") was formed
                     on  February  13,  1998 for the  purpose of becoming a bank
                     holding   company.   The  Company   acquired  100%  of  the
                     outstanding  common  stock of Southern  Heritage  Bank (the
                     "Bank") on January  4, 1999,  which will  operate as a full
                     service  community  bank  in  Oakwood,  Georgia.  The  Bank
                     received  final  regulatory   approvals  from  the  Georgia
                     Department  of Banking and Finance and the Federal  Deposit
                     Insurance Corporation on December 23, 1998 to begin banking
                     operations.

                     Activities  since inception have consisted of the Company's
                     and the Bank's organizers  engaging in  organizational  and
                     preopening   activities   necessary  to  obtain  regulatory
                     approvals  and  to  prepare  to  commence   business  as  a
                     financial institution.

                     Significant Accounting Policies

                    Basis of Presentation

                     The  statements  have been prepared on the accrual basis in
                     accordance with generally accepted accounting principles.

                     The preparation of financial  statements in conformity with
                     generally   accepted    accounting    principles   requires
                     management to make  estimates and  assumptions  that affect
                     the  reported   amounts  of  assets  and   liabilities  and
                     disclosures  of contingent  assets and  liabilities  at the
                     date of the financial  statements and the reported  amounts
                     of  revenues  and  expenses  during the  reporting  period.
                     Actual results could differ from those estimates.

                    Premises and Equipment

                     Premises and equipment are carried at cost less accumulated
                     depreciation  computed by the straight-line method over the
                     estimated life of the assets.


                                       39
<PAGE>




                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                 (Continued)

                  Significant Accounting Policies (Continued)

                    Deferred Organization Costs

                     Costs incurred for the  organization  of the Bank are shown
                     as  deferred  organization  costs in the  balance  sheet at
                     December  31, 1998,  and will be included in the  operating
                     results  of  the  Bank.   These   costs  will  be  expensed
                     immediately upon capitalization of the Bank.

                     Stock  offering  costs,  consisting of direct,  incremental
                     costs of the stock  offering  incurred  to date,  have been
                     charged to capital surplus.

                    Income Taxes

                     The  Company  will be subject to Federal  and State  income
                     taxes when  taxable  income is  generated.  No income taxes
                     have been  accrued  because of  operating  losses  incurred
                     during the pre-opening period.

                    Losses Per Common Share

                     Losses per common  share are  computed by dividing  the net
                     loss  by the  weighted  average  number  of  common  shares
                     outstanding.  There were no shares  issued and  outstanding
                     for the period from  inception  through  December 31, 1998.
                     The net loss per common share,  assuming all 878,344 shares
                     were  outstanding  for the period  from  inception  through
                     December 31, 1998, would be $.61 per share.

                    Fiscal Year

                     The Company has adopted a calendar year for both  financial
reporting and tax reporting purposes.

                                       40
<PAGE>






                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                 (Continued)
 
                  Cumulative Effect of a Change in Accounting Principle

                     In  April  of  1998,  the  Accounting  Standards  Executive
                     Committee   issued  Statement  of  Position  ("SOP")  98-5,
                     "Reporting on the Costs of Start Up  Activities".  SOP 98-5
                     requires that costs of start-up activities and organization
                     costs be expensed as incurred.  SOP 98-5 becomes  effective
                     for financial  statements for fiscal years  beginning after
                     December 15, 1998.  However,  early  adoption is encouraged
                     for fiscal  years in which  financial  statements  have not
                     been issued.  During 1998, the Company wrote off $63,175 of
                     unamortized  organization  costs upon adoption of SOP 98-5.
                     As of December 31, 1997,  the Company had  capitalized  all
                     organization  costs with the intent of amortizing the costs
                     over  a five  year  period  upon  commencement  of  banking
                     operations.

                  Recent Accounting Pronouncements

                     In June 1998,  the  Financial  Accounting  Standards  Board
                     issued SFAS No. 133, "Accounting for Derivative Instruments
                     and Hedging  Activities".  This statement is required to be
                     adopted for fiscal  years  beginning  after June 15,  1999.
                     However,  the statement  permits  early  adoption as of the
                     beginning of any fiscal  quarter  after its  issuance.  The
                     Company expects to adopt this statement  effective  January
                     1, 2000. SFAS No. 133 requires the Company to recognize all
                     derivatives  as either assets or liabilities in the balance
                     sheet  at  fair  value.   For  derivatives   that  are  not
                     designated  as hedges,  the gain or loss must be recognized
                     in earnings in the period of change.  For derivatives  that
                     are designated as hedges,  changes in the fair value of the
                     hedged assets,  liabilities,  or firm  commitments  must be
                     recognized in earnings or recognized in other comprehensive
                     income  until the hedged item is  recognized  in  earnings,
                     depending  on the  nature  of the  hedge.  The  ineffective
                     portion  of a  derivative's  change in fair  value  must be
                     recognized in earnings immediately.

                     Management has not yet determined  what effect the adoption
                     of SFAS No. 133 will have on the  Company's  operations  or
                     financial position.

                                       41
<PAGE>






                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 2.  OTHER RECEIVABLES AND ACCOUNTS PAYABLE

                     Other  receivables at December 31, 1998 consists of prepaid
                     expenses  of  $1,154,  stock  subscriptions  receivable  of
                     $49,500, and expenditures  totaling $138,768 to be recorded
                     in the Bank upon capitalization. These expenditures include
                     premises,  equipment,  and  prepaid  amounts  which will be
                     capitalized  and  amortized  over the expected  life of the
                     assets,  and  expenses  directly  related to the Bank which
                     will be expensed immediately upon capitalization.  Accounts
                     payable at  December  31,  1998  includes  the  $138,768 of
                     expenditures  payable by the Company on behalf of the Bank,
                     $100,000 subscription cancellation, and $2,120 escrow agent
                     fees.


NOTE 3.  PREMISES AND EQUIPMENT

                     Premises  and  equipment  consisted  of  the  following  at
December 31, 1998:

<TABLE>
       <S>                                                     <C>
       Leasehold improvements                                  $         11,390
       Furniture and equipment                                           42,048
       Construction in progress                                         185,724
                                                              -----------------
                                                                        239,162
       Less accumulated depreciation                                     (9,422)
                                                               -----------------
                                                               $        229,740
                                                               =================
</TABLE>

                     Depreciation  expense  for the  period  from  inception  to
                     December 31, 1997 and for the year ended  December 31, 1998
                     was $315 and $9,107, respectively.

                     The  Company  plans to build the main  office  building  at
                     their current location. Expenses have been incurred related
                     to  architectural  fees for the design of this building and
                     for  site   preparation,   and  have  been  capitalized  as
                     construction  in  progress.  Upon final  completion  of the
                     building,  the amounts  will be  included  in premises  and
                     equipment and will be depreciated over the estimated useful
                     life of the building.

                                       42
<PAGE>





                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 4.  LINE OF CREDIT

                     Pre-opening expenses were funded by proceeds from a line of
                     credit  with  a  third  party  financial  institution.   At
                     December 31, 1998,  there was no outstanding  balance under
                     the line of  credit.  The line of credit  in the  amount of
                     $850,000 was paid in full during 1998.


NOTE 5.  COMMITMENTS AND CONTINGENT LIABILITIES

                     Employee Agreements

                     The Bank  entered  into an  employment  agreement  with the
                     President/Chief  Executive Officer on November 5, 1997. The
                     employment  agreement provides for a three year term and is
                     annually renewable  thereafter.  The President will be paid
                     an initial base annual  salary of  $105,000.  Once the Bank
                     begins  operations,  he will also be  entitled  to  certain
                     performance bonuses based on regulatory ratings of the Bank
                     and deposit growth,  return on average assets ("ROA"),  and
                     return on average  equity ("ROE") of the Bank for the year.
                     Based on these factors, the calculated bonus may range from
                     0 to 50% of the base salary.

                     Further, the employment agreement requires the President to
                     purchase  6,000  shares of the  initial  offering of Common
                     Stock of the Company at the same time as the other  initial
                     directors.  The  President  will  also  have  the  right to
                     purchase  an  additional  15,000  shares  at book  value or
                     $10.00 per  share,  whichever  is less,  for the first five
                     years of employment,  and if not extended by the Board, not
                     to exceed ten years.

                     The Bank also entered into an employment agreement with the
                     Senior Vice President/Chief  Lending Officer of the Bank on
                     January 1, 1998.  The employment  agreement  provides for a
                     two year term and is  annually  renewable  thereafter.  The
                     Senior Vice President/Chief Lending Officer will be paid an
                     initial base annual salary of $63,500. Once the Bank begins
                     operations,  the employee  will also be entitled to certain
                     performance  bonuses based upon mutually  agreed upon goals
                     such as a pre-determined  formula  consisting of regulatory
                     compliance,  deposit  growth,  and other factors.  Based on
                     these factors, the calculated bonus may range from 0 to 15%
                     of the base salary.  Further, the contract gives the Senior
                     Vice  President/Chief  Lending Officer the right and option
                     to purchase  5,000 shares of the Company's  common stock at
                     book value or $10.00 per share,  whichever is less, for the
                     first  five  years of  employment  and if  extended  by the
                     Board, not to exceed ten years.

                                       43
<PAGE>





                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 5.  COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

                     On January 7, 1998,  the Bank  entered  into an  employment
                     agreement with the Senior Vice  President/Chief  Operations
                     Officer of the Bank.  The  agreement  provides  for a three
                     year term and is annually renewable thereafter.  The Senior
                     Vice  President/Chief  Operations  Officer  will receive an
                     annual  salary  of  $65,000  for the first  twelve  months.
                     Thereafter,  annual performance  reviews will determine the
                     amount of  increase in the initial  base  salary.  Once the
                     Bank begins  operations,  the employee  will be entitled to
                     performance  bonuses  ranging  from 0 to 15% of the  annual
                     base salary. In addition, the employee shall have the right
                     and option to purchase 5,000 shares of the Company's common
                     stock at book value or $10.00 per share, whichever is less,
                     for the first five years of employment  and, if extended by
                     the Board, not to exceed ten years.

                     Leases

                     On June 1, 1997,  the Bank entered  into a lease  agreement
                     with Bank and Business Systems, Inc. for a temporary office
                     facility.  The lease  called for monthly rent in the amount
                     of $3,800  plus taxes for a twelve  month  term  payable in
                     advance  ($45,600).  This amount was paid by the Company in
                     1997.

                     At the end of the twelve months, the Company had the option
                     to lease the temporary  facility on a month-to-month  basis
                     for $3,800 plus taxes of $266.

                     Total  rental  expense  for the period  from  inception  to
                     December 31, 1997 and for the year ended  December 31, 1998
                     was $69,768.

                     In  addition,  the lease  requires  the Company to maintain
                     insurance  on the  temporary  facility  as  well  as on its
                     contents.

                     On February 4, 1998, the Company  entered into a lease with
                     a  related  party  (an  organizer  and a  director  of  the
                     Company)  for  the  land  which  will  be the  site  of the
                     permanent facility.  The lease calls for a twenty year term
                     (beginning  on the rent  commencement  date)  which  can be
                     extended  for four  additional  periods of five years each.
                     The  base  annual  rent  is  $40,000,  payable  in  monthly
                     installments of $3,333.33 each.  Beginning on the first day
                     of the fourth Lease Year and on the first day of each Lease
                     Year thereafter ("Change Date"), Rent shall increase by the
                     percentage by which the Average CPI for the previous  Lease
                     Year  exceeds the Average  CPI for the year  preceding  the
                     previous Change Date, but not to exceed 5% in any event. In
                     no event shall Rent be less than it was for the prior Lease
                     Year.  For  this  lease,  the  "Average  CPI"  shall be the
                     average  monthly  Consumer  Price Index for the  particular
                     Lease Year in question  during the Term of this Lease.  The
                     Company is responsible for all property taxes.

                                       44
<PAGE>





                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 5.  COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

                     Leases (Continued)

                     Total land lease  expense for the year ended  December  31,
                     1998 and the period from inception to December 31, 1998 was
                     $23,000.

                     The total minimum rental commitment at December 31, 1998 is
due as follows:
<TABLE>
               <S>                                             <C>
               During the year ending December 31,
                1999                                           $          40,000
                2000                                                      40,000
                2001                                                      40,000
                2002                                                      40,000
                2003                                                      40,000
                Due thereafter                                           577,000
                                                              ------------------
                                                               $         777,000
                                                              ==================
</TABLE>


NOTE 6.  YEAR 2000 DISCLOSURES

                   The Year 2000 issue is the result of computer  programs being
                   written  using two  digits  rather  than  four to define  the
                   applicable year.  Systems that do not properly  recognize the
                   year "2000" could generate erroneous data or cause systems to
                   fail. The Company is heavily dependent on computer processing
                   and  telecommunication   systems  in  the  daily  conduct  of
                   business  activities.  In addition,  the Company must rely on
                   intermediaries, vendors and customers to appropriately modify
                   their   systems  in  order  that  all  may  continue   normal
                   operations and operate without significant  disruptions.  The
                   Company  has  conducted a review of its  computer  systems to
                   identify  the systems that could be affected by the Year 2000
                   issue.  The  Company  presently  believes  that the Year 2000
                   issue will not pose significant  operational problems for the
                   Company or have a material adverse effect on future operating
                   results.  However,  absolute  assurance cannot be given that;
                   (1) failure of any of the  Company's  systems will not have a
                   material  impact on  operations,  or (2) failure of any other
                   companies'  systems with whom the Company  conducts  business
                   will not have a material impact on operations.



                                       45
<PAGE>





                          NOTES TO FINANCIAL STATEMENTS


--------------------------------------------------------------------------------



NOTE 7.  COMMON STOCK OFFERING

                     The Company  filed a  Registration  Statement  on Form SB-2
                     with the  Securities and Exchange  Commission  offering for
                     sale a minimum of 800,000 and a maximum of 1,000,000 shares
                     of the  Company's  $5.00 par value  common stock at $10 per
                     share.  As of December 31,  1998,  the Company had received
                     subscriptions  to  purchase  878,344  shares of its  common
                     stock for an aggregate  purchase price of  $8,783,440.  The
                     offering  was  completed  on  December  31,  1998  and  all
                     proceeds were disbursed from escrow on January 4, 1999.



                                       46