<PAGE> 1


                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                ---------------

                                  FORM 10-QSB

(Mark One)

 X  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
---
    EXCHANGE ACT OF 1934
    For the quarterly period ended December 31, 1998
                                   -----------------

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
    SECURITIES EXCHANGE ACT OF 1934
    For the transition period from            to
                                   ----------    ----------


                       COMMISSION FILE NUMBER 1-5735


                       UNION FINANCIAL BANCSHARES, INC.
                       --------------------------------


Delaware                                                         57-1001177
--------------------------------------------------------------------------------
(Jurisdiction of Incorporation)             (I.R.S. Employer Identification No.)

203 West Main Street, Union, South Carolina                            29379
-------------------------------------------                         ------------
(Address of Principal Executive Offices)                             (Zip Code)

Registrant's telephone number, including area code (864)429-1864

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

State the number of shares outstanding of each of the issuer's classes of common
stock,  as of the  latest  practicable  date:  The  Corporation  had  issued and
outstanding  1,281,400 shares, $0.01 par value, common stock  as of December 31,
1998.




<PAGE> 2



                       UNION FINANCIAL BANCSHARES, INC.


                                    INDEX

PART I.           FINANCIAL INFORMATION                                     PAGE
                  ---------------------                                     ----

            Item 1.  Consolidated Financial Statements (unaudited)

            Consolidated Balance Sheets as of December 31, 1998
             and September 30, 1998                                            3

            Consolidated Statements of Income for the three months
             ended December 31, 1998 and 1997                                  4

            Consolidated Statements of Cash Flows for the three
             months ended December 31, 1998 and 1997                           5

            Consolidated Statements of Shareholders' Equity for the
            three months ended December 31, 1998 and 1997                      6

            Notes to Consolidated Financial Statements                       7-9

            Item 2.  Management's Discussion and Analysis of
             Financial Condition and Results of Operations                 10-13


PART II.    OTHER INFORMATION                                              14-15
            -----------------


            Signatures                                                        16


<PAGE> 3

<TABLE>
<CAPTION>

ITEM 1.  FINANCIAL STATEMENTS
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1998

                                                                       
                                                                                       DECEMBER 31,                 SEPTEMBER 30,  
ASSETS                                                                                     1998                         1998
                                                                                    -------------------           -----------------
                                                                                                  (DOLLARS IN THOUSANDS)

<S>                                                                                <C>                           <C>               
Cash                                                                               $             1,483           $            2,469
Short term interest-bearing deposits                                                             3,248                        1,124
                                                                                    -------------------           -----------------
Total cash and cash equivalents                                                                  4,731                        3,593
                                                                                    -------------------           -----------------
Investment and mortgage-backed securities:
  Held to maturity                                                                               2,534                        2,699
  Available for sale                                                                            33,099                       26,856
                                                                                    -------------------           -----------------
Total investment and mortgage-backed securities                                                 35,633                       29,555
Loans , net
  Held for sale                                                                                 34,511                       37,584
  Held for investment                                                                          100,148                      104,618
                                                                                    -------------------           -----------------
Total loans receivable, net                                                                    134,659                      142,202
Office properties and equipment, net                                                             4,101                        4,020
Federal Home Loan Bank Stock, at cost                                                            2,053                        2,023
Accrued interest receivable                                                                      1,246                        1,197
Mortgage servicing rights                                                                        3,955                        3,270
Other assets                                                                                     3,025                        3,426
                                                                                    -------------------           -----------------
TOTAL ASSETS                                                                       $           189,403           $          189,286
                                                                                    ===================           =================

LIABILITIES

Deposit accounts                                                                   $           134,028           $          129,873
Securities sold under repurchase agreements                                                      2,788                          895
Advances from the Federal Home Loan Bank and other borrowings                                   36,546                       41,441
Accrued interest on deposits                                                                       292                          336
Advances from borrowers for taxes and insurance                                                    148                          496
Other liabilities                                                                                  238                          945
                                                                                    -------------------           -----------------
TOTAL LIABILITIES                                                                              174,040                      173,986
                                                                                    -------------------           -----------------

SHAREHOLDERS' EQUITY

Serial preferred stock, no par value,
  authorized - 500,000 shares, issued
  and outstanding - None                                                                             0                            0
Common stock - $0.01 par value,
  authorized - 2,500,000 shares,
   issued and outstanding - 1,281,400 shares at 12/31/98 and 1,278,250 at 9/30/98                   13                           13
Additional paid-in capital                                                                       4,408                        4,471
Accumulated other comprehensive income                                                             (79)                         148
Retained earnings, substantially restricted                                                     11,021                       10,668
                                                                                    -------------------           -----------------
TOTAL SHAREHOLDERS' EQUITY                                                                      15,363                       15,300
                                                                                    -------------------           -----------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                         $           189,403           $          189,286
                                                                                    ===================           =================

See notes to consolidated financial statements.

</TABLE>

                                                                3


<PAGE> 4    

<TABLE>
<CAPTION>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) AND 1997 (UNAUDITED)


                                                                    THREE MONTHS ENDED   
                                                            DECEMBER 31,           DECEMBER 31, 
                                                                1998                   1997   
                                                         -------------------    -------------------
                                                                   (DOLLARS IN THOUSANDS)

<S>                                                     <C>                    <C>
INTEREST INCOME:
  Loans                                                 $             2,938    $              2,892   
  Deposits and federal funds sold                                        19                      27     
  Mortgage-backed securities                                            356                     122      
  Interest and dividends on
   investment securities                                                208                     227 
                                                         -------------------    --------------------
TOTAL INTEREST INCOME                                                 3,521                   3,268 
                                                         -------------------    -------------------- 

INTEREST EXPENSE:
  Deposit accounts                                                    1,414                   1,304 
  Advances from the FHLB and other borrowings                           560                     507 
                                                         -------------------    --------------------
TOTAL INTEREST EXPENSE                                                1,974                   1,811
                                                         -------------------    --------------------

NET INTEREST INCOME                                                   1,547                   1,457
  Provision for loan losses                                              15                      45 
                                                         -------------------    --------------------
NET INTEREST INCOME AFTER
   PROVISION FOR LOAN LOSSES                                          1,532                   1,412
                                                         -------------------    --------------------

NON INTEREST INCOME:
  Fees for financial services                                           196                     189
  Loan servicing fees (costs)                                           (86)                      6
  Net gains (losses) on sale of loans                                   143                      75
  Net gains on sale of investments                                        0                       0       
                                                         -------------------    --------------------
TOTAL NON INTEREST INCOME                                               253                     270
                                                         -------------------    --------------------

NON INTEREST EXPENSE:
  Compensation and employee benefits                                    582                     555         
  Occupancy and equipment                                               283                     224 
  Deposit insurance premiums                                             25                      16      
  Professional services                                                  75                      89    
  Real estate operations                                                  5                       3             
  Other                                                                 239                     222       
                                                         -------------------    --------------------
TOTAL NON INTEREST EXPENSE                                            1,209                   1,109  
                                                         -------------------    --------------------        

INCOME BEFORE INCOME TAXES                                              576                     573 
Income tax expense                                                      208                     213
                                                         -------------------    --------------------
NET INCOME                                              $               368    $                360
                                                         ===================    ====================

BASIC NET INCOME PER COMMON SHARE                       $              0.29    $               0.29
                                                         ===================    ====================

DILUTED NET INCOME PER COMMON SHARE                     $              0.27    $               0.27
                                                         ===================    ====================

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING

BASIC                                                             1,280,347               1,249,060

DILUTED                                                           1,369,323               1,338,036

See notes to consolidated financial statements.


</TABLE>


                                                 50



<PAGE> 5
<TABLE>
<CAPTION>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED ) AND 1997 (UNAUDITED)
                                                                                                     THREE MONTHS ENDED
                                                                                             DECEMBER 31,            DECEMBER 31,
                                                                                                 1998                    1998
                                                                                          ----------------        ---------------
                                                                                                        (IN THOUSANDS)
OPERATING ACTIVITIES:

<S>                                                                                              <C>                    <C> 
Net income                                                                                       $368                   $360
Adjustments to reconcile net income to
  net cash provided by operating activities:
  Provision for loan losses                                                                        15                     45
  Amortization of intangibles                                                                      53                     53
  Depreciation of deferred income, net of costs                                                    79                     55
  Recognition of deferred income, net of costs                                                    (25)                    (8)
  Deferral of fee income, net of costs                                                              4                     98
  Loans originated for sale                                                                    40,119                 23,094
  Sale of loans                                                                               (40,119)               (23,094)
  (Gain) loss on sale of loans                                                                    143                     75
  Changes in operaing assets and liabilities:
  Decrease (increase) in accrued interest receivable                                              (49)                   231
  Decrease (increase) in other assets                                                            (401)                  (260)
  Increase (decrease) in other liabilities                                                     (1,055)                  (177)
  Increase (decrease) in accrued interest payable                                                 (44)                   (41)
                                                                                  --------------------    -------------------
                                                                                                 (912)                   431

INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
  Available for sale                                                                          (11,022)                (1,148)
Proceeds from sale of investment and mortgage-
  backed securities                                                                             2,090                      0
Proceeds from maturity of investment and mortgage-
  backed securiites:
  Available for sale                                                                            1,374                  6,724
Principal repayments on morgage-backed securities:
  Held to maturity                                                                                165                     40
  Available for sale                                                                            1,315                    389
Loan originations                                                                              (7,385)               (19,707)
Principal repayments of loans                                                                  15,309                  8,300 
Proceeds from sale of real estate acquired in settlement of loans                                   4                      0
Purchase of mortage servicing rights                                                             (685)                     0
Purchase of FHLB stock                                                                            (30)                     0
Redemption of FHLB stock                                                                            0                    255
Purchase of office properties and equipment                                                      (161)                  (171)
                                                                                  --------------------    -------------------
Net cash provided by (used by) investing activities                                              $974                ($5,318)
                                                                                  --------------------    -------------------
FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan                                                       19                    151
Dividends paid in cash ($0.093  per share - 1998
  and $0.082 per share - 1997)                                                                    (96)                  (102)
Proceeds from FHLB advances and other borrowings                                                    0                 26,100
Repayment of FHLB advances and other borrowings                                                (4,895)               (24,106)
Increase (Decrease) in securities sold under repurchase agreements                              1,893                    688
Increase (Decrease) in deposit accounts                                                         4,155                 (2,015)
                                                                                  --------------------    -------------------

Net cash (used by) provided by financing activities                                             1,076                    716
                                                                                  --------------------    -------------------

NET  DECREASE \ INCREASE IN CASH
   AND CASH EQUIVALENTS                                                                         1,138                 (4,171)

CASH AND CASH EQUIVALENTS
   AT BEGINNING OF PERIOD                                                                       3,593                  7,821
                                                                                  --------------------    -------------------

CASH AND CASH EQUIVALENTS
   AT END OF PERIOD                                                                            $4,731                 $3,650
                                                                                  ====================    ===================

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
  Income taxes                                                                                   $443                   $437
  Interest                                                                                      1,974                  1,811

Non-cash transactions:
  Loans foreclosed                                                                                  0                      0

See notes to consolidated financial statements.
</TABLE>
                                                          5
<PAGE> 6


<TABLE>
<CAPTION>

                                                          UNION FINANCIAL BANSHARES, INC.
                                                 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
                                           THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)


<S>                                                  <C>               <C>         <C>           <C>         <C>         <C>   
BALANCE AT SEPTEMER 30, 1997                          1,241,550         12          3,989         9,589       (63)        13,527

Net income                                                                                         359                      359

Other comprehensive income
  Unrealized gains on securities:
    Unrealized holding gains arising during
    period                                                                                                     5
                                                                                                               -
  Other comprehensive income                                                                                   5             5
                                                                                                                             -
Comprehensive income                                                                                                       364

Dividend reinvestment plan contributions               11,237           0            151                                   151
                                                                        -

Cash dividend ($.09 per share)                                                                     (99)                    (99)

                                                  -----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                        1,252,787          12          4,140         9,849       (58)       13,943
                                                  =============================================================================
BALANCE AT SEPTEMBER 30, 1997                       1,278,250          13          4,475        10,664       148        15,300
                                                                                                  

Net income                                                                                         368                     368

  Other comprehensive income
    Unrealized losses on securities:
      Unrealized holding losses arising during
      period                                                                                                (227)
                                                                                                             ---
    Other comprehensive income                                                                              (227)         (227)
                                                                                                                           ---
  Comprehensive income                                                                                                     141

Dividend reinvestment plan contributions                3,150           0             18                                    18  
                                                                        -

Cash dividend ($.093 per share)                                                                    (96)                    (96)

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

BALANCE AT DECEMBER 31, 1998                        1,281,400          13          4,493        10,936       (79)       15,363
                                                  =============================================================================




                                                               6

</TABLE>

                                                      



<PAGE> 7




                       UNION FINANCIAL BANCSHARES, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


1.    Presentation of Consolidated Financial Statements
      -------------------------------------------------

      The  accompanying  unaudited  consolidated  financial  statements of Union
      Financial Bancshares, Inc. (the "Corporation") were prepared in accordance
      with  instructions  for Form  10-QSB  and,  therefore,  do not include all
      disclosures   necessary  for  a  complete   presentation  of  consolidated
      financial condition,  results of operations,  and cash flows in conformity
      with generally accepted accounting  principles.  However,  all adjustments
      which  are,  in  the  opinion  of  management,   necessary  for  the  fair
      presentation of the interim  consolidated  financial  statements have been
      included.  All such adjustments are of a normal and recurring nature.  The
      consolidated  financial  statements include the Corporation's wholly owned
      subsidiary,   Provident  Community  Bank  (the  "Bank").  The  results  of
      operations   for  the  three  months  ended  December  31,  1998  are  not
      necessarily indicative of the results which may be expected for the entire
      fiscal year. The consolidated  balance sheet as of September 30, 1998  has
      been derived from the Company's audited financial  statements presented in
      the annual  report to  shareholders.  Certain  amounts in the prior year's
      financial statements have been reclassified  to conform  with current year
      classifications.

      In March 1998, the Accounting  Standards  Executive Committee of the AICPA
      issued  Statement of Position 98-1,  "Accounting  for the Cost of Computer
      Software  Developed  or  Obtained  for  Internal  Use" (SOP  98-1),  which
      provided guidance as to when it is or is not appropriate to capitalize the
      cost of software  developed  or obtained  for  internal  use.  SOP 98-1 is
      effective  for  financial  statements  for fiscal  years  beginning  after
      December 15, 1998 with early adoption encouraged. The Corporation does not
      anticipate  the  adoption  of SOP 98-1 will have a material  effect on its
      financial statements.

      SFAS No.  131,  Disclosure  about  Segments of an  Enterprise  and Related
                      ----------------------------------------------------------
      Information-  This  statement  establishes  standards  for the way  public
      -----------
      enterprises are to report  information about operating  segments in annual
      financial  statements  and requires those  enterprises to report  selected
      information  about operating  segments in interim financial reports issued
      to shareholders.  Statement 131 is effective for financial  statements for
      periods  beginning  after  December  15,  1997.  In the  initial  year  of
      application,  interim  disclosures  will not be needed.  The Company  will
      adopt this standard in its September 30, 1999 financial statements.



                                        7


<PAGE> 8



      SFAS  No.  132,   Employers'   Disclosures   about   Pensions   and  other
                        --------------------------------------------------------
      Post-Retirement Benefits- This statement deals principally with employers'
      ------------------------
      disclosures about defined benefit plans and other post-retirement  benefit
      plans.  This  statement  is  effective  for the Bank for the  fiscal  year
      beginning October 1, 1998. The adoption of SFAS 132 will not have a impact
      on the  financial  statements  of the  Corporation  due to the  disclosure
      requirements only.

      SFAS  No.  133,   Accounting  for  Derivative   Instruments   and  Hedging
                        --------------------------------------------------------
      Activities-This  statement establishes  accounting and reporting standards
      ----------
      for derivative instruments and for hedging activities. It requires that an
      entity  recognize all  derivatives  as either assets or liabilities in the
      balance sheet and measure those  instruments at fair value. The accounting
      for changes in the fair value of a derivative  depends on the intended use
      of the derivative.  The statement is effective for the Bank for the fiscal
      year beginning October 1, 1999 and may not be applied retroactively.

      SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
                    ------------------------------------------------------------
      Securitization  of  Mortgage  Loans  Held for Sale by a  Mortgage  Banking
      --------------------------------------------------------------------------
      Enterprise-This  statement is effective  for the first  quarter  beginning
      ----------
      after December 15, 1998. This statement conforms the subsequent accounting
      for securities  retained after the  securitization  of mortgage loans by a
      mortgage banking enterprise with the subsequent  accounting for securities
      retained  after  the  securitization  of other  types of  assets  by a non
      mortgage banking enterprise. The adoption of this standard is not expected
      to have a material effect on the Bank's financial statements.

2.    Income Per Share
      ----------------

      Effective January 29, 1998, the Corporation declared a three-for-two stock
      split in the form of a 50%  stock  dividend  of the  Corporation's  common
      stock. The weighted average number of shares and all other share data have
      been restated for all periods presented to reflect this stock split.

      Income per share amounts for the three months ended  December 31, 1998 and
      1997 were computed  based on the weighted  average number of common shares
      outstanding  adjusted for the dilutive effect of outstanding  common stock
      options during the periods.

3.    Assets Pledged
      --------------

      Approximately  $10,686,000  and $10,383,000 of debt securities at December
      31, 1998 and September 30, 1998, respectively, were pledged by the Bank as
      collateral  to secure  deposits  of the State of South  Carolina,  Laurens
      County and certain  other  liabilities.  The Bank pledges as collateral to
      Federal Home Loan Bank  advances  the Bank's  Federal Home Loan Bank stock
      and has entered into a blanket collateral  agreement with the Federal Home
      Loan  Bank  whereby  the  Bank  maintains,  free  of  other  encumbrances,
      qualifying mortgages (as defined) with unpaid principal balances equal to,
      when  discounted at 75% of the unpaid  principal  balances,  100% of total
      advances.

                                          8

<PAGE> 9



4.    Contingencies and Loan Commitments
      ----------------------------------

      The Bank is a party to financial instruments with  off-balance-sheet  risk
      in the  normal  course  of  business  to meet the  financing  needs of its
      customers.  These instruments  expose the Bank to credit risk in excess of
      the amount recognized in the balance sheet.

      The Bank's exposure to credit loss in the event of  nonperformance  by the
      other party to the financial  instrument for  commitments to extend credit
      is represented by the contractual  amount of those  instruments.  The Bank
      uses the same  credit  policies  in  making  commitments  and  conditional
      obligations  as it does for  on-balance-sheet  instruments.  Total  credit
      exposure at December 31, 1998 related to these items is summarized below:
<TABLE>
<CAPTION>

      Loan Commitments:                                      Contract Amount
      ----------------                                       ---------------
            <S>                                             <C>
            Approved loan commitments                       $    757,000
            Unadvanced portions of loans                       6,007,000
                                                            ------------
            Total loan commitments                          $  6,764,000
                                                            ------------ 
</TABLE>

      Loan  commitments to extend credit are agreements to lend to a customer as
      long  as  there  is no  violation  of  any  condition  established  in the
      contract.  Loan commitments generally have fixed expiration dates or other
      termination  clauses and may require  payment of a fee. The Bank evaluates
      each customer's  creditworthiness  on a case-by-case  basis. The amount of
      collateral  obtained  upon  extension  of credit is based on  management's
      credit  evaluation  of the counter  party.  Collateral  held is  primarily
      residential property. Interest rates on loan commitments are a combination
      of fixed and variable.

      Commitments  outstanding  at  December  31,  1998  consist  of  fixed  and
      adjustable rate loans of approximately $6,764,000 at rates ranging from 7%
      to 9%.  Commitments to originate  loans  generally  expire within 30 to 60
      days.

      Commitments  to fund credit lines  (principally  variable  rate,  consumer
      lines   secured  by  real  estate  and   overdraft   protection)   totaled
      approximately  $14,361,000.  Of these lines, the outstanding loan balances
      totaled  approximately  $8,354,000.  The Bank also has commitments to fund
      warehouse lines of credit for various mortgage banking companies  totaling
      $750,000,  which  had an  outstanding  balance  at  December  31,  1998 of
      approximately   $192,000.   At  December  31,  1998,  the  Bank  had  loan
      commitments to sell $34,000,000 in fixed rate residential  loans which had
      not been closed to Freddie Mac for the months of January-March, 1999.

      On October 5, 1998, the  Corporation,  through its  subsidiary,  Provident
      Community Bank,  entered into a definitive  agreement with CCB Financial's
      wholly-owned  subsidiary,  American  Federal  Bank,  FSB to  purchase  the
      deposits of American  Federal's Union,  South Carolina banking center.  At
      September  30,  1998,  this  branch  had  $14,756,000  in  deposits.  This
      transaction is expected to close in February, 1999.

                                      9

<PAGE> 10



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

      Financial Condition
      -------------------

      At December 31, 1998 total assets of the Corporation increased $117,000 or
      .06% to $189,403,000 from $189,286,000 at September 30, 1998.  Investments
      and  mortgage-backed  securities  increased  approximately  $6,078,000  or
      20.57% during the three months ended  December 31, 1998.  The increase was
      due  primarily to increased  loan  prepayments  of  fixed-rate  loans that
      resulted  in a  $7,543,000  reduction  in loans.  This  decrease  in loans
      receivable   funded  the  increase  in  investments  and   mortgage-backed
      securities. Deposits increased $4,155,000 or 3.20% to $134,028,000 for the
      three  months  ended  December  31,  1998.  The  increase  was a result of
      additions in certificate deposit balances due to the Bank adopting a focus
      product concept whereby  speciality  products are advertised on a frequent
      basis.   These  funds  were  used  to  repay  borrowings  which  decreased
      $4,895,000 or 3.98% from  $41,441,000 at September 30, 1998 to $36,546,000
      at December 31, 1998.  At December 31,  1998,  mortgage  servicing  rights
      increased  $685,000 or 20.95% to $3,955,000  from  $3,270,000 at September
      30, 1998. In  conjunction  with this  increase,  loans serviced for others
      increased  from  $164,396,000  at September  30, 1998 to  $202,305,000  at
      December 31, 1998.

      Liquidity
      ---------

      Liquidity  is the ability to meet demand for loan  disbursements,  deposit
      withdrawals,  repayment of debt, payment of interest on deposits and other
      operating expenses. The primary sources of liquidity are savings deposits,
      loan repayments, borrowings and interest payments.

      The OTS  imposes  a  minimum  level  of  liquidity  on the  Bank  which is
      currently 4% of  withdrawable  deposits plus  short-term  borrowings.  The
      liquidity level of the Bank as measured for regulatory purposes was 17.78%
      as of December 31, 1998. As in the past,  management expects that the Bank
      can meet its obligations to fund  outstanding  mortgage loan  commitments,
      which  were  approximately  $757,000,  as  described  in  Note  4  to  the
      Consolidated  Financial  Statements,  and  other  loan  commitments  as of
      December 31, 1998,  while  maintaining  liquidity in excess of  regulatory
      requirements.

      Capital Resources
      -----------------

      The capital  requirement  of the Bank  consists of three  components:  (1)
      tangible  capital,  (2) core capital and (3) risk based capital.  Tangible
      capital must equal or exceed 1.5% of adjusted  total assets.  Core capital
      must be a minimum of 4% of adjusted  total  assets and risk based  capital
      must be a minimum of 8% of risk weighted assets.



                                      10

<PAGE> 11



      As of December 31, 1998, the Bank's capital position,  as calculated under
      regulatory  guidelines,  exceeds  these  minimum  requirements  as follows
      (dollars in thousands):
<TABLE>
<CAPTION>
                                                      REQUIREMENT  ACTUAL    EXCESS
    -----------------------------------------------------------------------------------

      <S>                                               <C>       <C>         <C>    
      Tangible capital                                  $2,818    $13,361     $10,543
      Tangible capital to adjusted total assets           1.50%      7.11%       5.61%

      Core capital                                      $7,516    $13,361      $5,845
      Core capital to adjusted total assets               4.00%       7.1%       3.11%

      Risk based capital                                $8,342    $14,187      $5,845
      Risk based capital to risk weighted assets          8.00%     13.61%       5.61%

</TABLE>

      The reported capital requirements are based on information reported in the
      OTS December 31, 1998 quarterly thrift financial report.

      RESULTS OF  OPERATIONS FOR  THE  THREE MONTHS  ENDED DECEMBER 31, 1998 AND
      1997

      General
      -------

      Net income  increased  $8,000 or 2.22% to  $368,000  for the three  months
      ended  December  31,  1998 as  compared  to the same  period in 1997.  Non
      interest income  decreased  $17,000 or 6.30% and net interest income after
      provision for loan losses increased $120,000 or 8.50%.

      Interest Income
      ---------------

      Interest  income  increased  $253,000 or 7.74% for the three  months ended
      December 31, 1998 as compared to the same period in 1997.  Interest income
      on loans  increased  1.59% or $46,000 to  $2,938,000  for the three months
      ended  December  31,  1998  from  $2,892,000  for the three  months  ended
      December 31, 1997. Interest income on overnight deposits and federal funds
      sold had a net decrease of $8,000 for the three months ended  December 31,
      1998 as  compared to the same  period in the prior year due  primarily  to
      lower balances.  Interest and dividends on investment and  mortgage-backed
      securities  increased  $215,000  or  61.60%  for the  three  months  ended
      December  31, 1998 to  $564,000  from  $349,000  during the same period in
      1997.  The  increase  was due  primarily  to an  increase  in the level of
      purchases in investment  and  mortgage-backed  securities  made during the
      first quarter of the fiscal year.

      Interest Expense
      ----------------

      The  Corporation  experienced an overall  increase of $163,000 or 9.00% in
      interest  expense for the three months ended December 31, 1998 as compared
      to the three months ended December 31, 1997 due primarily to the growth in
      the deposit base. Interest expense on


                                       11

<PAGE> 12



      deposit accounts  increased  $110,000 or 8.44% to $1,414,000 for the three
      months ended December 31, 1998 from  $1,304,000  during the same period in
      1997.  Interest expense on borrowings  increased $53,000 or 10.45% for the
      three months ended December 31, 1998 as compared to the three months ended
      December 31, 1997. The increase was due to higher volumes in FHLB advances
      during the period which were required to fund higher loan originations.

      Provision for Loan Loss
      -----------------------

      During the three months  ended  December  31,  1998,  provisions  for loan
      losses  were  $15,000 as  compared  to $45,000  for the same period in the
      previous  year.  The decrease in loan loss  provisions  are due to the low
      volume of loan  charge  offs along with low level of  delinquent  loans to
      total  loans.  Management  believes  the Bank's loan loss  allowances  are
      adequate  to absorb  estimated  future loan  losses.  The Bank's loan loss
      allowances  at  December  31, 1998 were  approximately  .82% of the Bank's
      outstanding  loan  portfolio,  net of loans held for sale compared to .84%
      for the same period in the previous year.

      The  following  table sets forth  information  with  respect to the Bank's
      non-performing assets at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
                                         DECEMBER 31, 1998   SEPTEMBER 30, 1998
                                         -----------------   ------------------

      <S>                                     <C>                  <C>
      Non-accruing loans which are
      contractually past due 90 days
       or more:

      Real Estate:
       Residential                            $ 592                $ 581
       Commercial                                --                   --
       Construction                              --                   --
      Non-mortgage                              165                  115
                                                ---                -----
      Total                                   $ 757                $ 696
                                              =====                =====

      Percentage of loans receivable, net      0.56%                0.49%
                                               -----                =====

      Allowance for loan losses                $826                 $827
                                               ====                 ====

      Real estate acquired through
       foreclosure and repossessed
       assets, net of allowances                $79                 $ 10
                                                ===                 ====
</TABLE>




                                        12

<PAGE> 13



      Non Interest Income and Expense
      -------------------------------

      Total non interest income  decreased  $17,000 or 6.30% to $253,000 for the
      three months ended  December 31, 1998 from $270,000 for the same period in
      the previous year. The reduction in non-interest  income from the previous
      year was due to increased  amortization  expense as part of the  servicing
      income as a result of increased  prepayments on loans serviced for others.
      Gross service fee income for the current year was $152,000 compared to the
      previous year income of $61,000. The increased income was offset by higher
      premium  amortization  on purchased  loans of $198,000 in the current year
      compared to $34,000 in the previous  year.  The current year also included
      $32,000 in servicing  portfolio  provision  for mark to market  valuation.
      Gains on sale of loans was $143,000  for the three  months ended  December
      31, 1998 as  compared to a gain on sale of loans of $75,000 for  the three
      months ended December 31, 1997.

      For the three months ended December 31, 1998,  total non-interest  expense
      increased  $73,000 or 6.58% to  $1,209,000  from  $1,109,000  for the same
      period in 1997.  Compensation and employee  benefits  increased $27,000 or
      4.86% to $582,000 for the three months period ended December 31, 1998 from
      $555,000  for the same period in 1997.  Occupancy  and  equipment  expense
      increased  $59,000  or  26.34% to  $283,000  for the  three  months  ended
      December 31, 1998 from $224,000 for the same period in 1997.  Professional
      services  expenses  decreased  $14,000 or 15.73% to $75,000  for the three
      month period ended  December 31, 1998 from $896,000 for the same period in
      1997. The increase in compensation and employee benefits was due primarily
      to cost of living increases along with additional  staffing for the growth
      in the  mortgage  operation.  The  increase  in  occupancy  and  equipment
      expenses  was due to  higher  data  processing  costs  along  with  higher
      depreciation  expense.  Deposit  insurance  premiums  for the three months
      ended December 31, 1998  increased  $9,000 to $25,000 from $16,000 for the
      same period in 19997 due to an increase in the deposit base.










                                      13

<PAGE> 14




                         PART II - OTHER INFORMATION

ITEM 1.     Legal Proceedings
            -----------------

                  The  Corporation  is  involved  in  various  claims  and legal
                  actions  arising in the normal course of business.  Management
                  believes that these  proceedings will not result in a material
                  loss to the Corporation.

ITEM 2.     Changes in Securities
            ---------------------

                  Not applicable.

ITEM 3.     Defaults upon Senior Securities
            -------------------------------

                  Not applicable.

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

                  None

ITEM 5.     Other Information
            -----------------

YEAR 2000
---------

The approach of the year 2000 ("Year 2000") presents significant issues for many
financial,  information,  and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999,  appropriately,  because
such systems allow only two digits to indicate the year in a date. The Year 2000
problems  may occur in  computer  programs,  computer  hardware,  or  electronic
devices that utilize  computer  chips to process any  information  that contains
dates. Therefore,  the issue is not limited to dates in computer programs but is
a complex  combination  of problems  that may exist in computer  programs,  data
files,  computer  hardware,  and other devices essential to the operation of the
business.  Further,  companies must consider the potential impact that Year 2000
may have on services provided by third parties.

Substantially all of the Year 2000 risk is related to the Bank's activities. The
Bank has a formal Year 2000 Plan which includes a Year 2000 Task Force. The Plan
has been reviewed by the senior management and the Board of Directors.  Included
in the Plan is a listing of all systems (whether in-house or  provided/supported
by third parties) which may be impacted by Year 2000 and a categorization of the
systems  by their  potential  impact  on Bank  operations.  The Task  Force  has
received Year 2000 plans from third  parties  identified  during the  assessment
phase of the Year 2000 Plan.  For systems that have been  classified as critical
to  the  operations  of  the  Bank,   contingency  plans  have  been  developed.
Contingency  plans may include  utilization  of alternate  third party  vendors,
alternate processing methods and software, or manual processing. To date,

                                      14

<PAGE> 15



no critical  problems are anticipated.  The plans have various  activation dates
(e.g.,  the date on which a third  party  processor  fails to meet its Year 2000
compliance  deadline).  In addition to addressing its own Year 2000 issues,  the
Bank is in the process of assessing  the impact of the Year 2000 on  significant
commercial borrowers. The Bank will continue discussing the Year 2000 compliance
activities with commercial borrowers and will not lend to borrowers who have not
addressed Year 2000  procedures.  The Bank's Year 2000 readiness is reviewed and
monitored by the Office of Thrift Supervision ("OTS").

The Bank's core  processing  systems are outsourced  through a contract with The
BISYS Group, Inc.  ("BISYS").  BISYS has developed a Year 2000 Plan and provides
the Bank with periodic updates.  BISYS also has held Year 2000 workshops,  whose
objectives  have been to  assist  the Bank in the  development  of its Year 2000
Plan, to provide updates on the BISYS Year 2000 plan, and training on the use of
the BISYS Year 2000 test  facility,  whose function is to allow BISYS clients to
test their systems'  compatibility  with the BISYS system.  BISYS  completed all
program  maintenance  associated  with Year 2000 prior to October 31, 1998.  The
Bank began completed its initial testing phase of the BISYS system for Year 2000
compliance.  During the testing phase, no significant  problems were found.  The
Bank will  continue  testing the BISYS system during their next testing phase to
ensure  overall  compliance  for Year  2000.  Like the  Bank,  BISYS  Year  2000
activities are subject to OTS oversight.

The incremental  cost  associated  with the Bank's  compliance is expected to be
less than  $50,000.  The  majority of all hardware  upgrades  began in 1995 as a
result of the Bank's plan to increase efficiencies and eliminate obsolescence of
some  system  components.  Should  the Bank or any of its  third  party  service
providers  fail to  complete  Year 2000  measures in a timely  manner,  it would
likely  have a  material  adverse  effect,  whose  amount  cannot be  reasonably
estimated at this time.

ITEM 6.     Exhibits and Reports on Form 8-K
            --------------------------------

                  Exhibits
                  --------

                  27    Financial Data Schedule













                                      15

<PAGE> 16







                                  SIGNATURES
                                  ----------

Pursuant  to the  requirements  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.


                       UNION FINANCIAL BANCSHARES, INC.
                       --------------------------------
                                 (REGISTRANT)



Date:      2/5/99                   By: /s/ Dwight V. Neese, CEO
       ---------------
                                       ----------------------------    
                                       Dwight V. Neese, CEO


Date:      2/5/99                   By: /s/ Richard H. Flake, CFO
      ----------------                  ----------------------------
                                        Richard H. Flake, CFO























                                      16