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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



Commission file number 0-30753



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FIRST FEDERAL BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 37-1397683                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



109 East Depot
Street, Colchester, Illinois 62326

(Address of principal executive offices) (Zip Code)



(309) 776-3225

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



State the number of shares outstanding of each
of the issuers classes of common equity as of the latest practicable date.



As of July 29, 2004 the Registrant had outstanding 1,309,886 shares of common stock.



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##### Table of Contents

FIRST FEDERAL BANCSHARES, INC.



Form 10-Q Quarterly Report



Index



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|PART I -
Financial Information |  |                                                                                      
|                               |  |                                                                                      
|Item 1                         |  | Financial Statements                                                                  |  | 1   
|                               |  |                                                                                      
|Item 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 7   
|                               |  |                                                                                      
|Item 3                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 10  
|                               |  |                                                                                      
|Item 4                         |  | Controls and Procedures                                                               |  | 12  
|                               | 
|PART II -
Other Information    |  |                                                                                      
|                               |  |                                                                                      
|Item 1                         |  | Legal Proceedings                                                                     |  | 13  
|                               |  |                                                                                      
|Item 2                         |  | Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities     |  | 13  
|                               |  |                                                                                      
|Item 3                         |  | Defaults Upon Senior Securities                                                       |  | 13  
|                               |  |                                                                                      
|Item 4                         |  | Submission of Matters to a Vote of Securities Holders                                 |  | 13  
|                               |  |                                                                                      
|Item 5                         |  | Other Information                                                                     |  | 13  
|                               |  |                                                                                      
|Item 6                         |  | Exhibits and Reports on Form 8-K                                                      |  | 14  
|                               | 
|SIGNATURES                     |  | 16                                                                                   



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##### Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



First Federal
Bancshares, Inc. and Subsidiary

Consolidated Statements of Financial Condition

(in thousands of dollars, except share data)

(unaudited)



|                                                                                         |  |              |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                         |  | June 30,2004 |         |   | December 31,2003 |  
|ASSETS                                                                                   |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                |  | $            | 11,714  |   |                  | $ | 29,124  |  
|Time deposits in other financial institutions                                            |  |              | 295     |   |                  |   | 295     |  
|Securities available-for-sale                                                            |  |              | 153,481 |   |                  |   | 160,337 |  
|Loans receivable, net                                                                    |  |              | 133,209 |   |                  |   | 131,935 |  
|Real estate owned, net                                                                   |  |              | 83      |   |                  |   | 149     |  
|Premises and equipment                                                                   |  |              | 3,515   |   |                  |   | 3,535   |  
|Accrued interest receivable                                                              |  |              | 1,387   |   |                  |   | 1,489   |  
|Goodwill                                                                                 |  |              | 1,340   |   |                  |   | 1,340   |  
|Core deposits and other intangibles                                                      |  |              | 268     |   |                  |   | 288     |  
|Other assets                                                                             |  |              | 2,431   |   |                  |   | 238     |  
|                                                                                         |  |              |         |   |                  |   |         |  
|TOTAL ASSETS                                                                             |  | $            | 307,723 |   |                  | $ | 328,730 |  
|                                                                                         |  |              |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                     |  |              |         |   |                  |   |         |  
|LIABILITIES                                                                              |  |              |         |   |                  |   |         |  
|Deposits                                                                                 |  | $            | 271,913 |   |                  | $ | 271,850 |  
|Advances from borrowers for taxes and insurance                                          |  |              | 281     |   |                  |   | 137     |  
|Federal Home Loan Bank advances                                                          |  |              | 6,000   |   |                  |   | 6,000   |  
|Accrued interest payable                                                                 |  |              | 547     |   |                  |   | 484     |  
|Other liabilities                                                                        |  |              | 238     |   |                  |   | 8,866   |  
|Subordinated debt                                                                        |  |              | 7,217   |   |                  |   |        |  
|                                                                                         |  |              |         |   |                  |   |         |  
|Total liabilities                                                                        |  |              | 286,196 |   |                  |   | 287,337 |  
|                                                                                         |  |             
|SHAREHOLDERS EQUITY                                                                     |  |              |         |   |                  |   |         |  
|Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued or outstanding |  |              |        |   |                  |   |        |  
|Common stock, $.01 par value, 4,000,000 shares authorized; 2,242,500 shares issued       |  |              | 22      |   |                  |   | 22      |  
|Additional paid-in capital                                                               |  |              | 22,975  |   |                  |   | 22,852  |  
|Unearned ESOP shares                                                                     |  |              | (1,121  | ) |                  |   | (1,211  | )
|Unearned stock awards                                                                    |  |              | (609    | ) |                  |   | (745    | )
|Treasury stock (June 30  932,614 shares, December 31  388,313)                         |  |              | (28,415 | ) |                  |   | (9,902  | )
|Retained earnings                                                                        |  |              | 30,673  |   |                  |   | 30,180  |  
|Accumulated other comprehensive income (loss)                                            |  |              | (1,998  | ) |                  |   | 197     |  
|                                                                                         |  |              |         |   |                  |   |         |  
|Total shareholders equity                                                               |  |              | 21,527  |   |                  |   | 41,393  |  
|                                                                                         |  |              |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                               |  | $            | 307,723 |   |                  | $ | 328,730 |  
|                                                                                         |  |              |         |   |                  |   |         |  



See notes to
consolidated financial statements.



1



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##### Table of Contents

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

(in thousands of dollars, except share data)

(unaudited)



|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|--------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | ---- | - | --------- |  | - | --------- | - |  | - | ---------
|                                                    |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                                                    |  | 2004                        |           |                           | 2003 |   | 2004      |  |   | 2003     
|Interest income                                     |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Loans                                               |  | $                           | 2,084     |                           |      | $ | 2,313     |  | $ | 4,156     |   |  | $ | 4,941    
|Securities                                          |  |                             | 1,487     |                           |      |   | 1,346     |  |   | 2,955     |   |  |   | 2,683    
|Other interest income                               |  |                             | 41        |                           |      |   | 109       |  |   | 90        |   |  |   | 176      
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total interest income                               |  |                             | 3,612     |                           |      |   | 3,768     |  |   | 7,201     |   |  |   | 7,800    
|                                                    |  |                             |           |                          
|Interest expense                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Deposits                                            |  |                             | 1,353     |                           |      |   | 1,707     |  |   | 2,761     |   |  |   | 3,483    
|Federal Home Loan Bank advances                     |  |                             | 39        |                           |      |   | 39        |  |   | 77        |   |  |   | 78       
|Note Payable                                        |  |                             | 112       |                           |      |   |          |  |   | 112       |   |  |   |         
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total interest expense                              |  |                             | 1,504     |                           |      |   | 1,746     |  |   | 2,950     |   |  |   | 3,561    
|                                                    |  |                             |           |                          
|Net interest income                                 |  |                             | 2,108     |                           |      |   | 2,022     |  |   | 4,251     |   |  |   | 4,239    
|                                                    |  |                             |           |                          
|Provision for loan losses                           |  |                             |          |                           |      |   |          |  |   |          |   |  |   |         
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Net interest income after provision for loan losses |  |                             | 2,108     |                           |      |   | 2,022     |  |   | 4,251     |   |  |   | 4,239    
|                                                    |  |                             |           |                          
|Noninterest income                                  |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Service charges and other fee income                |  |                             | 113       |                           |      |   | 111       |  |   | 204       |   |  |   | 206      
|Loan origination and servicing fees                 |  |                             | 57        |                           |      |   | 146       |  |   | 116       |   |  |   | 257      
|Net gain on sale of securities                      |  |                             | 4         |                           |      |   | 247       |  |   | 384       |   |  |   | 312      
|Recovery of impairment loss                         |  |                             |          |                           |      |   | 355       |  |   | 25        |   |  |   | 355      
|Other income                                        |  |                             | 12        |                           |      |   | 17        |  |   | 27        |   |  |   | 55       
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total noninterest income                            |  |                             | 186       |                           |      |   | 876       |  |   | 756       |   |  |   | 1,185    
|                                                    |  |                             |           |                          
|Noninterest expense                                 |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Compensation and benefits                           |  |                             | 1,170     |                           |      |   | 1,017     |  |   | 2,202     |   |  |   | 1,874    
|Occupancy and equipment                             |  |                             | 131       |                           |      |   | 124       |  |   | 271       |   |  |   | 267      
|Data processing                                     |  |                             | 149       |                           |      |   | 165       |  |   | 315       |   |  |   | 352      
|Federal insurance premiums                          |  |                             | 30        |                           |      |   | 33        |  |   | 59        |   |  |   | 66       
|Advertising                                         |  |                             | 36        |                           |      |   | 35        |  |   | 75        |   |  |   | 77       
|Professional fees                                   |  |                             | 85        |                           |      |   | 90        |  |   | 178       |   |  |   | 169      
|Other noninterest expenses                          |  |                             | 210       |                           |      |   | 154       |  |   | 438       |   |  |   | 347      
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total noninterest expense                           |  |                             | 1,811     |                           |      |   | 1,618     |  |   | 3,538     |   |  |   | 3,152    
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Income before income taxes                          |  |                             | 483       |                           |      |   | 1,280     |  |   | 1,469     |   |  |   | 2,272    
|                                                    |  |                             |           |                          
|Provision for income taxes                          |  |                             | 235       |                           |      |   | 492       |  |   | 653       |   |  |   | 867      
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Net income                                          |  | $                           | 248       |                           |      | $ | 788       |  | $ | 816       |   |  |   | 1,405    
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Earnings per share                                  |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Basic                                               |  | $                           | .16       |                           |      | $ | .42       |  | $ | .51       |   |  | $ | .75      
|Diluted                                             |  | $                           | .15       |                           |      | $ | .40       |  | $ | .48       |   |  | $ | .72      
|                                                    |  |                             |           |                          
|Weighted average shares                             |  |                             | 1,512,589 |                           |      |   | 1,869,251 |  |   | 1,602,184 |   |  |   | 1,864,335
|                                                    |  |                             |           |                          
|Comprehensive income (loss)                         |  | $                           | (2,629    | )                         |      | $ | 955       |  | $ | (1,379    | ) |  | $ | 1,560    
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          



See notes to
consolidated financial statements.



2



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##### Table of Contents

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Shareholders Equity

Six months ended June 30, 2003 and 2004

(in thousands of dollars, except share data)

(unaudited)



|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------ | -- | ------------------------ | - | ------ | ------------------ |  | - | ------------------- | - |  | ------------- | ------ | - | ---------------- | - | ------- | -------------------------------------------- |  | - | --------------------------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                             |  | Common Stock |    | AdditionalPaid-inCapital |   |        | UnearnedESOPShares |  |   | UnearnedStockAwards |   |  | TreasuryStock |        |   | RetainedEarnings |   |         | AccumulatedOther Compre- hensiveIncome(loss) |  |   | Total Stock- holdersEquity |  
|Balance at December 31, 2002                                                                                 |  | $            | 22 |                          | $ | 22,629 |                    |  | $ | (1,390              | ) |  | $             | (1,016 | ) |                  | $ | (3,272  | )                                            |  | $ | 28,090                      |   |  | $ | 1,968  |   |  | $ | 47,031  |  
|Purchase of 10,225 shares of treasury stock                                                                  |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   | (223    | )                                            |  |   |                            |   |  |   |       |   |  |   | (223    | )
|Options exercised (12,176 shares)                                                                            |  |              |    |                          |   | (75    | )                  |  |   |                    |   |  |               |       |   |                  |   | 212     |                                              |  |   |                             |   |  |   |       |   |  |   | 137     |  
|ESOP shares earned                                                                                           |  |              |   |                          |   | 101    |                    |  |   | 90                  |   |  |               |       |   |                  |   |        |                                              |  |   |                            |   |  |   |       |   |  |   | 191     |  
|Stock awards earned                                                                                          |  |              |   |                          |   |       |                    |  |   |                    |   |  |               | 136    |   |                  |   |        |                                              |  |   |                            |   |  |   |       |   |  |   | 136     |  
|Dividends declared ($.19 per share)                                                                          |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   |        |                                              |  |   | (366                        | ) |  |   |       |   |  |   | (366    | )
|Comprehensive income                                                                                         |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   |        |                                              |  |   | 1,405                       |   |  |   |        |   |  |   | 1,405   |  
|Change in fair value of securities classified as available-for-sale, net of reclassification and tax effects |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   |        |                                              |  |   |                            |   |  |   | 155    |   |  |   | 155     |  
|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   | 1,560   |  
|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Balance at June 30, 2003                                                                                     |  | $            | 22 |                          | $ | 22,655 |                    |  | $ | (1,300              | ) |  | $             | (880   | ) |                  | $ | (3,283  | )                                            |  | $ | 29,129                      |   |  | $ | 2,123  |   |  | $ | 48,466  |  
|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2003                                                                                 |  | $            | 22 |                          | $ | 22,852 |                    |  | $ | (1,211              | ) |  | $             | (745   | ) |                  | $ | (9,902  | )                                            |  | $ | 30,180                      |   |  | $ | 197    |   |  | $ | 41,393  |  
|Purchase of 559,993 shares of treasury stock                                                                 |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   | (18,917 | )                                            |  |   |                            |   |  |   |       |   |  |   | (18,917 | )
|Options exercised (15,692 shares)                                                                            |  |              |   |                          |   | (79    | )                  |  |   |                    |   |  |               |       |   |                  |   | 404     |                                              |  |   |                            |   |  |   |       |   |  |   | 325     |  
|ESOP shares earned                                                                                           |  |              |   |                          |   | 202    |                    |  |   | 90                  |   |  |               |       |   |                  |   |        |                                              |  |   |                            |   |  |   |       |   |  |   | 292     |  
|Stock awards earned                                                                                          |  |              |   |                          |   |       |                    |  |   |                    |   |  |               | 136    |   |                  |   |        |                                              |  |   |                            |   |  |   |       |   |  |   | 136     |  
|Dividends declared ($.22 per share)                                                                          |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   |        |                                              |  |   | (323                        | ) |  |   |       |   |  |   | (323    | )
|Comprehensive income                                                                                         |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   |        |                                              |  |   | 816                         |   |  |   |       |   |  |   | 816     |  
|Change in fair value of securities classified as available-for-sale, net of reclassification and tax effects |  |              |   |                          |   |       |                    |  |   |                    |   |  |               |       |   |                  |   |        |                                              |  |   |                            |   |  |   | (2,195 | ) |  |   | (2,195  | )
|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Total comprehensive income (loss)                                                                            |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   | (1,379  | )
|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  
|Balance at June 30, 2004                                                                                     |  | $            | 22 |                          | $ | 22,975 |                    |  | $ | (1,121              | ) |  | $             | (609   | ) |                  | $ | (28,415 | )                                            |  | $ | 30,673                      |   |  | $ | (1,998 | ) |  | $ | 21,527  |  
|                                                                                                             |  |              |    |                          |   |        |                    |  |   |                     |   |  |               |        |   |                  |   |         |                                              |  |   |                             |   |  |   |        |   |  |   |         |  



See notes to
consolidated financial statements.



3



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##### Table of Contents

First Federal Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(in thousands of dollars)

(unaudited)



|                                                                                                     |  |                           |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                     |  | Six Months Ended June 30, |        
|                                                                                                     |  | 2004                      |         |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                 |  |                           |         |   |      |   |         |  
|Net income                                                                                           |  | $                         | 816     |   |      | $ | 1,405   |  
|Adjustments to reconcile net income to net cash provided by operating activities                     |  |                           |         |   |      |   |         |  
|Provision for depreciation                                                                           |  |                           | 130     |   |      |   | 110     |  
|Loss (gain) on sale of real estate owned                                                             |  |                           | (3      | ) |      |   | (8      | )
|Net amortization of premiums and discounts                                                           |  |                           | 105     |   |      |   | 6       |  
|ESOP compensation expense                                                                            |  |                           | 292     |   |      |   | 191     |  
|Stock award compensation expense                                                                     |  |                           | 136     |   |      |   | 136     |  
|Amortization of intangible assets                                                                    |  |                           | 20      |   |      |   | 20      |  
|Provision for loan losses                                                                            |  |                           |        |   |      |   |        |  
|Dividend reinvestments                                                                               |  |                           | (498    | ) |      |   | (459    | )
|Federal Home Loan Bank stock dividends                                                               |  |                           | (44     | ) |      |   | (50     | )
|Gain on sale of securities                                                                           |  |                           | (384    | ) |      |   | (312    | )
|Net changes in                                                                                       |  |                           |         |   |      |   |         |  
|Accrued interest receivable and other assets                                                         |  |                           | (2,066  | ) |      |   | (263    | )
|Deferred loan costs                                                                                  |  |                           | 169     |   |      |   | (77     | )
|Accrued interest payable and other liabilities                                                       |  |                           | 1,827   |   |      |   | 501     |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net cash from operating activities                                                                   |  |                           | 500     |   |      |   | 1,200   |  
|                                                                                                     |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                 |  |                           |         |   |      |   |         |  
|Purchase of securities available-for-sale                                                            |  |                           | (50,045 | ) |      |   | (87,434 | )
|Purchase of securities held-to-maturity                                                              |  |                           |        |   |      |   | (2,000  | )
|Principal paydowns on mortgage-backed securities                                                     |  |                           | 9,425   |   |      |   | 7,432   |  
|Purchase of Federal Home Loan Bank stock                                                             |  |                           | (65     | ) |      |   | (175    | )
|Proceeds from maturities of securities                                                               |  |                           | 8,275   |   |      |   | 30,500  |  
|Proceeds from sale of securities available-for-sale                                                  |  |                           | 27,500  |   |      |   | 23,064  |  
|Purchase of loans                                                                                    |  |                           | (1,457  | ) |      |   | (3,569  | )
|Net decrease (increase) in loans receivable                                                          |  |                           | (106    | ) |      |   | 17,321  |  
|Proceeds from sale of real estate owned                                                              |  |                           | 189     |   |      |   | 362     |  
|Purchase of property and equipment                                                                   |  |                           | (110    | ) |      |   | (311    | )
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net cash from investing activities                                                                   |  |                           | (6,394  | ) |      |   | (14,810 | )
|                                                                                                     |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                 |  |                           |         |   |      |   |         |  
|Net increase in deposits                                                                             |  |                           | 63      |   |      |   | 6,819   |  
|Net change in advances from borrowers for taxes and insurance                                        |  |                           | 144     |   |      |   | 113     |  
|Purchase of treasury stock                                                                           |  |                           | (18,917 | ) |      |   | (223    | )
|Proceeds from subordinated debt                                                                      |  |                           | 7,217   |   |      |   |        |  
|Dividends paid                                                                                       |  |                           | (348    | ) |      |   | (330    | )
|Options exercised                                                                                    |  |                           | 325     |   |      |   | 137     |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net cash from financing activities                                                                   |  |                           | (11,516 | ) |      |   | 6,516   |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Net change in cash and cash equivalents                                                              |  |                           | (17,410 | ) |      |   | (7,094  | )
|                                                                                                     |  |                          
|Cash and cash equivalents                                                                            |  |                           |         |   |      |   |         |  
|Beginning of period                                                                                  |  |                           | 29,124  |   |      |   | 42,827  |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|End of period                                                                                        |  | $                         | 11,714  |   |      | $ | 35,733  |  
|                                                                                                     |  |                           |         |   |      |   |         |  
|Supplemental disclosures of cash flow information                                                    |  |                           |         |   |      |   |         |  
|Cash paid during the period for                                                                      |  |                           |         |   |      |   |         |  
|Interest                                                                                             |  | $                         | 2,887   |   |      | $ | 3,625   |  
|Taxes, net of refunds                                                                                |  |                           | 452     |   |      |   | 530     |  
|Transfers to real estate owned                                                                       |  |                           | 120     |   |      |   | 223     |  
|Transfer of securities to available-for-sale from held-to-maturity on January 24, 2003 at fair value |  |                           |        |   |      |   | 24,407  |  
|Due to broker                                                                                        |  |                           | 9,000   |   |      |   | 12,064  |  



See notes to
consolidated financial statements.



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##### Table of Contents

FIRST FEDERAL BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

(table amounts in thousands of dollars, except share data)



Note 1 - Basis of Presentation



The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles
generally accepted in the United States of America are not included herein. These interim statements should be read in conjunction with First Federal Bancshares, Inc.s (First Federal Bancshares or the Company) Annual
Report on Form 10-K. The December 31, 2003 balance sheet presented herein has been derived from the audited financial statements included in the Companys Annual Report on Form 10-K, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.



Interim
statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2004. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the full year.



Note 2  Subordinated Debt and Trust Preferred Securities



On
March 25, 2004, FFBI Capital Trust I (the Trust), a Delaware statutory trust sponsored by the Company, issued $7.0 million in the form of fixed/floating rate capital securities through a pooled trust preferred securities offering. The
proceeds from this issuance, along with the Companys $217,000 capital contribution for the Trusts common securities, were used to acquire $7.2 million aggregate principal amount of the Companys fixed/floating rate junior
subordinated deferrable interest debentures due 2034 (the Debentures), which constitute the sole asset of the Trust. Prior to April 7, 2009 the interest rate on the Debentures and the capital securities is fixed at a rate of 5.838% and
on or after April 7, 2009 the interest rate on the Debentures is variable and adjustable quarterly at 2.80% over the three-month LIBOR.The stated maturity of the Debentures is April 6, 2034. In addition, the Debentures are subject to
redemption at par at the option of the Company, subject to prior regulatory approval, in whole or in part on any interest payment date on or after April 7, 2009.



Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003, the trust is not consolidated with the Company.
Accordingly, the Company does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the trust, as these are no longer eliminated in
consolidation.



Note 3 Tender Offer



On April 16, 2004, the Company commenced a self-tender offer for up to 560,000 shares of its
common stock. On May 28, 2004, the Company purchased 559,993 of its common shares at $33.50 per share pursuant to its self tender offer, which expired May 21, 2004. The tender offer was in the form of a modified Dutch auction tender.
Under this procedure, stockholders were given the opportunity to sell part or all of their shares to the Company at a price of not less than $31.00 per



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share and not more than $34.00 per share. Upon the expiration of the offer, the Company selected the lowest purchase
price that allowed it to buy 560,000 shares. All shares purchased in this offering received the same price. According to the final report from the depositary for the offer, the number of shares that were properly tendered and not withdrawn prior to
the expiration of the offer exceeded the number of shares that the Company had offered to purchase. Therefore, the Company purchased, in most cases, 66.41% of the shares tendered by each of its stockholders.



The aggregate cost of the purchase totaled $18.9 million, including fees and expenses of
approximately $157,000. The tender offer was financed with proceeds of the trust preferred securities issued by the Company in a pooled offering, cash on hand and a $6.0 million capital distribution from First Federal Bank.



Note 4  Earnings Per Share



For purposes of per share calculations, the Company had 1,309,886 and 2,063,421 shares of
common stock outstanding at June 30, 2004 and 2003. Basic earnings per share for the three months and six months ended June 30, 2004 and 2003 were computed by dividing net income by the weighted average number of shares outstanding. Diluted earnings
per share for the three months and six months ended June 30, 2004 and 2003 were computed by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of the outstanding stock options and stock awards.
Computations for basic and diluted earnings per share are provided below.



|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|------------------------------------------ |  | ------------------------------------- | ----- | -------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                           |  | For the three monthsEnded June 30,    |       | For the six monthsEnded June 30,
|                                           |  | 2004                                  |       | 2003                             |   | 2004  |  | 2003
|                                           |  | (in thousands, except per share data)
|Basic                                      |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Net income                                 |  | $                                     | 248   |                                  | $ | 788   |  | $    | 816   |  | $ | 1,405
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Weighted average common shares outstanding |  |                                       | 1,513 |                                  |   | 1,869 |  |      | 1,602 |  |   | 1,864
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Basic earnings per common share            |  | $                                     | .16   |                                  | $ | .42   |  | $    | .51   |  | $ | .75  
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Diluted                                    |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Net income                                 |  | $                                     | 248   |                                  | $ | 788   |  | $    | 816   |  | $ | 1,405
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Weighted average common shares outstanding |  |                                       | 1,513 |                                  |   | 1,869 |  |      | 1,602 |  |   | 1,864
|Dilutive effect of stock options           |  |                                       | 96    |                                  |   | 79    |  |      | 94    |  |   | 74   
|Dilutive effect of stock awards            |  |                                       | 13    |                                  |   | 12    |  |      | 15    |  |   | 11   
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Diluted average common shares              |  |                                       | 1,622 |                                  |   | 1,960 |  |      | 1,711 |  |   | 1,949
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      
|Diluted earnings per common share          |  | $                                     | .15   |                                  | $ | .40   |  | $    | .48   |  | $ | .72  
|                                           |  |                                       |       |                                  |   |       |  |      |       |  |   |      



Note 5  Stock Options



The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized at the date of grant. Had compensation cost been determined based on the fair value at the grant



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dates for awards under the plan consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Companys net income and earnings per share would have been reduced to the pro forma amounts in the table below. For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options vesting period.



|                               |  |                                       |     |                                  |   |      |  |      |     |  |   |      
|------------------------------ |  | ------------------------------------- | --- | -------------------------------- | - | ---- |  | ---- | --- |  | - | -----
|                               |  | For the three monthsEnded June 30,    |     | For the six monthsEnded June 30,
|                               |  | 2004                                  |     | 2003                             |   | 2004 |  | 2003
|                               |  | (in thousands, except per share data)
|Net income as reported         |  | $                                     | 248 |                                  | $ | 788  |  | $    | 816 |  | $ | 1,405
|Pro forma net income           |  |                                       | 226 |                                  |   | 766  |  |      | 771 |  |   | 1,362
|Earnings per share as reported |  |                                       |     |                                  |   |      |  |      |     |  |   |      
|Basic                          |  |                                       | .16 |                                  |   | .42  |  |      | .51 |  |   | .75  
|Diluted                        |  |                                       | .15 |                                  |   | .40  |  |      | .48 |  |   | .72  
|Pro forma earnings per share   |  |                                       |     |                                  |   |      |  |      |     |  |   |      
|Basic                          |  |                                       | .15 |                                  |   | .41  |  |      | .48 |  |   | .73  
|Diluted                        |  |                                       | .14 |                                  |   | .39  |  |      | .45 |  |   | .71  



Pursuant to its 2001 stock-based
incentive plan, the Company awarded 89,700 shares of restricted stock during 2001. These shares vest over a five-year period. The unamortized cost of shares not yet earned (vested) is reported as a reduction of shareholders equity.



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



SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995



This report contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995 as amended, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies
and expectations of the Company, are generally identifiable by use of the words such as believe, expect, intend, anticipate, estimate, project, or similar expressions. The
Companys ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and its wholly-owned
subsidiaries include, but are not limited to, changes in: interest rates; general economic conditions; legislative/regulatory provisions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Companys market area; and accounting principles, policies, and
guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional
factors that could materially affect the Companys financial results, is included in the Companys filings with the Securities and Exchange Commission.



The following discussion compares the financial condition of First Federal Bancshares and its wholly owned subsidiary, First Federal, at
June 30, 2004 to its financial condition at December 31, 2003 and the results of its operations for the three-month and six-month periods ended June 30, 2004 to the same periods in 2003. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.



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FINANCIAL CONDITION



Total assets were $307.7 million at June 30, 2004 and $328.7 million at December 31, 2003. During the six months ended June 30, 2004, cash and cash equivalents decreased
$17.4 million to $11.7 million and securities available-for-sale decreased $6.9 million to $153.5 million as excess funds were used primarily for the tender offer. Loans increased $1.3 million as a result of a shift away from loan originations
through the Federal Home Loan Bank Mortgage Partnership Finance Program loans and toward adjustable rate portfolio loans.



The allowance for loan losses was $928,000 at June 30, 2004 and $963,000 at December 31, 2003. There were no impaired loans at either date. The allowance for loan losses
represented .70% of total loans and 59.23% of nonperforming loans at June 30, 2004 compared to .72% of total loans and 83.52% of nonperforming loans at December 31, 2003. Nonperforming assets totaled $1.7 million and $1.4 million at June 30, 2004
and December 31, 2003, respectively. The ratio of non-performing assets to total assets at June 30, 2004 was .56% compared to .42% at December 31, 2003.



Total liabilities at June 30, 2004 were $286.2 million compared to $287.3 million at December 31, 2003, a decrease of $1.1 million. The decrease in total liabilities
primarily reflects the addition of $7.2 million of subordinated debt in connection with the issuance of trust preferred securities, offset by a decrease in other liabilities of $8.6 million primarily due to the payment and settlement of amounts due
to broker for the purchase of securities available-for-sale.



Shareholders equity at June 30, 2004 was $21.5 million compared to $41.4 million at December 31, 2003, a decrease of $19.9 million. The decrease in equity primarily reflects the repurchase of 559,993 shares of stock totaling $18.9
million through the tender offer previously discussed and a decrease in the fair value of securities available-for-sale, net of tax of $2.2 million, offset by net income of $816,000.



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2004 AND JUNE 30, 2003



Net income decreased $540,000 to $248,000 for the
quarter ended June 30, 2004 compared to the same period in 2003. The decrease in net income was primarily a result of a decrease in noninterest income associated with gains on sales of securities and recovery of impairment losses recognized in the
prior period. In addition non-interest expense increased and was partially offset by a slight increase in net interest income.



Net interest income was $2.1 million for the quarter ended June 30, 2004 compared to $2.0 million for the same prior year period. The increase in net interest income was
primarily a result of an increase in the net interest spread and the net interest margin to 2.52% and 2.69%, respectively, for the quarter ended June 30, 2004 from 2.27% and 2.58%, respectively, for the same periods in 2003. The increase in the
spread and margin was due largely to the decrease in the cost of funds exceeding the decrease in the yield on interest-earning assets as interest-earning assets and interest-bearing liabilities repriced downward in reaction to the decreased interest
rate environment. The average yield on interest-earning assets decreased to 4.61% for the quarter ended June 30, 2004 from 4.81% for the same quarter in 2003, while the average yield on interest-bearing liabilities decreased to 2.09% for the quarter
ended June 30, 2004 from 2.54% for the same period in 2003. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 108.97% from 114.05% for the three-month periods, respectively.



The provision for loan losses was zero for both quarters ended June 30, 2004 and 2003.
Management considered the allowance for loan losses to be adequate during both periods due relatively stable delinquency trends.



On a quarterly basis, management of the Company meets to review the allowance for loan losses. Management classifies loans in compliance with regulatory classifications.
Classified loans are individually reviewed to arrive at specific reserves for those loans. Once the specific portion of the allowance is calculated,



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management calculates a historical portion for each loan category based on loan loss history, peer data, current economic
conditions and trends in the portfolio, including delinquencies and impairments, as well as changes in the composition of the loan portfolio. Although management believes that the allowance for loan losses reflected probable incurred losses on
existing loans at June 30, 2004, there can be no assurance that such losses will not exceed estimated amounts. Future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond the
Companys control. The allowance for loan losses as of June 30, 2004 was maintained at a level that represents managements best estimate of losses in the loan portfolio and such losses were both probable and reasonably estimatable.



Noninterest income was $186,000 for the three-month period ended June 30, 2004
compared to $876,000 for the same period in 2003. The decrease in noninterest income was primarily a result of a $243,000 decrease in net gains on the sale of securities and a $355,000 decrease on the recovery from an impairment loss related to
certificates of deposit purchased through a broker who was charged by the SEC with securities fraud in relation to these certificates.



Noninterest expense was $1.8 million and $1.6 million for the quarters ended June 30, 2004 and 2003. The increase in noninterest expense primarily reflects increased
compensation and benefits expense of $153,000 associated with an increase in employee benefits including health insurance premiums and retirement funds. Occupancy and equipment expense and other noninterest expenses also experienced increases during
the period, while data processing and professional fees decreased slightly.



The Companys federal income tax expense decreased $257,000 to $235,000 for the quarter ended June 30, 2004 compared to $492,000 during the same period in 2003. Income tax expense was approximately 49% and 38% of pretax income in June
2004 and 2003, respectively. The increase in the effective tax rate is a result of the net losses incurred at the holding company throughout 2004 for which a valuation allowance has been established.



RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
AND JUNE 30, 2003



Net income decreased $589,000 to $816,000 for the six
months ended June 30, 2004 compared to the same period in 2003. The decrease in net income was primarily a result of a decrease in non-interest income associated with the recovery of impairment losses recognized in 2003. The Company also experienced
an increase in noninterest expense, offset by a slight increase in net interest income and a decrease in the income tax provision.



Net interest income was $4.3 million for the six months ended June 30, 2004 compared to $4.2 million for the same period in 2003. The increase in net interest
income was primarily a result of an increase in net interest spread to 2.48% for the six months ended June 30, 2004 from 2.41% for the same previous year period, offset by a slight decrease in the net interest margin to 2.69% from 2.74% for the same
period in 2003. The increase in the spread was due largely to the decrease in the cost of funds exceeding the decrease in the yield on interest-earning assets as interest-earning assets and interest-bearing liabilities repriced downward in reaction
to the decreased interest rate environment. The average yield on interest-earning assets decreased 48 basis points to 4.56% for the six months ended June 30, 2004 from 5.04% for the same period in 2003, while the average yield on interest-bearing
liabilities decreased 55 basis points to 2.08% for the six months ended June 30, 2004 from 2.63% for the same period in 2003. The ratio of average interest-earning assets to average interest-bearing liabilities was 111.16% from 114.16% for the
six-month periods ended June 30, 2004 and June 30, 2003.



The provision for
loan losses was zero for both six-month periods ended June 30, 2004 and 2003. Management considered the allowance for loan losses to be adequate during both periods due to relatively stable delinquency trends.



Noninterest income was $756,000 for the six-month period ended June 30, 2004 compared to $1.2
million for the same period in 2003. The decrease in noninterest income was primarily a result of a decrease of $330,000 in the recovery from an impairment loss related to certificates of deposit purchased through a broker who



9



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##### Table of Contents

was charged by the SEC with securities fraud in relationship to these certificates, a decrease of $141,000 in loan
origination and servicing fees due to decreased loan originations through the Federal Home Loan Bank Mortgage Partnership Finance program, and a decrease of $28,000 in other income, offset by an increase of $72,000 in net gain on the sale of
securities.



Noninterest expense was $3.5 million and $3.2 million for the
six-months ended June 30, 2004 and 2003. The increase in noninterest expense primarily reflects increased compensation and benefits expense of $328,000 associated with an increase in employee benefits including health insurance premiums and
retirement funds, and an increase of $91,000 in other noninterest expenses. Occupancy and equipment expense and professional fees also experienced slight increases during the period, offset by slight decreases in data processing, federal insurance
premiums, and advertising expense.



The Companys federal income tax
expense decreased $214,000 to $653,000 for the six-months ended June 30, 2004 compared to the same period in 2003. Income tax expense was approximately 44% of pretax income in 2004 compared to 38% of pretax income in 2003. The increase in the
effective tax rate is a result of the net losses incurred at the holding company throughout 2004 for which a valuation allowance has been established.



LIQUIDITY



The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments, and to take advantage
of investment opportunities. The Company invests excess funds in overnight deposits and other short-term interest-bearing assets to provide liquidity to meet these needs. At June 30, 2004, cash and cash equivalents totaled $11.7 million. At June 30,
2004, the Company had commitments to fund loans of $582,000. At the same time, certificates of deposit which are scheduled to mature in one year or less totaled $108.0 million. Management believes, based on past experience that a significant portion
of those deposits will remain with the Company. Based on the foregoing, in addition to the Companys high level of core deposits and capital, the Company considers its liquidity and capital resources sufficient to meet its outstanding
short-term and long-term needs.



CAPITAL RESOURCES



The Bank is subject to capital-to-asset requirements in accordance with bank regulations.
The following table summarizes the Banks regulatory capital requirements versus actual capital as of June 30, 2004:



|                                              |  |        |        |   |          |   |        |        |        |  |      |        |  |   |        |  |       |  
|--------------------------------------------- |  | ------ | ------ | - | -------- | - | ------ | ------ | ------ |  | ---- | ------ |  | - | ------ |  | ----- | -
|                                              |  | ACTUAL |        |   | REQUIRED |   |        | EXCESS |       
|                                              |  | AMOUNT |        | % |          |   | AMOUNT |        | %      |  |      | AMOUNT |  | % |       
|Core capital (to adjusted total assets)       |  | $      | 22,998 |   | 7.58     | % |        | $      | 12,136 |  | 4.00 | %      |  | $ | 10,862 |  | 3.58  | %
|Tangible capital (to adjusted total assets)   |  |        | 22,998 |   | 7.58     |   |        |        | 4,551  |  | 1.50 |        |  |   | 18,447 |  | 6.08  |  
|Risk-based capital (to adjusted total assets) |  |        | 23,795 |   | 19.04    |   |        |        | 9,998  |  | 8.00 |        |  |   | 13,797 |  | 11.04 |  



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Qualitative Aspects of Market Risk. The Companys most significant form of market risk is interest rate risk. The principal objectives of the Companys interest rate risk management are to
evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given the Companys



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business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board of Directors approved guidelines. The Company has an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets monthly and reports trends and
interest rate risk position to the Board of Directors quarterly. The extent of the movement of interest rates is uncertainty that could have a negative impact on the earnings of the Company.



The Company has used the following strategies to manage interest rate risk: (1) emphasizing
the origination of adjustable-rate and balloon loans and not originating long-term, fixed-rate loans for retention in its portfolio; (2) emphasizing shorter term consumer loans; (3) introducing floating-rate commercial business loans tied to the
prime rate; (4) maintaining a high quality securities portfolio that provides adequate liquidity and flexibility to take advantage of opportunities that may arise from fluctuations in market interest rates, the overall maturity of which is monitored
in relation to the repricing of its loan portfolio; and (5) using Federal Home Loan Bank advances to better structure maturities of its interest rate sensitive liabilities. The Company currently does not participate in hedging programs, interest
rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.



Quantitative Aspects of Market Risk. The Company primarily utilizes an interest sensitivity analysis prepared by the Office of Thrift Supervision to review the level of interest rate risk of the Bank.
This analysis measures interest rate risk by computing changes in the net portfolio value of the Banks cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net
portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market
risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or decrease in market interest rates with no effect given to any steps that management might take to counter the effect of that interest rate movement.
The following table, which is based on information provided to the Bank by the Office of Thrift Supervision, presents the change in the Banks net portfolio value at March 31, 2004, the latest date for which information is available, that would
occur upon an immediate change in interest rates based on Office of Thrift Supervision assumptions, but without giving effect to any steps that management might take to counteract that change. The Company expects Junes net portfolio value to
be similar to that of March 31, 2004 as shown below. All model outputs associated with the 300 and 200 bp scenarios are not applicable because of the abnormally low prevailing interest rate environment.



|                                                     |        |                        |          |  |                                       |          |  |     |           |  |       |                    |  |      |     
|---------------------------------------------------- | ------ | ---------------------- | -------- |  | ------------------------------------- | -------- |  | --- | --------- |  | ----- | ------------------ |  | ---- | ----
|Change in Interest Rates
inBasis Points (Rate Shock) |        | Net Portfolio Value    |          |  | NPV as % of Portfolio Value of Assets |         
|                                                     | Amount |                        | $ Change |  |                                       | % Change |  |     | NPV Ratio |  |       | Basis Point Change | 
|                                                     |        | (Dollars in thousands) |          |  |                                       |          |  |     |          
|300                                                  |        | $                      | 25,913   |  | (12,879                               | )        |  | (33 | )%        |  | 8.47  | %                  |  | (349 | ) bp
|200                                                  |        |                        | 31,086   |  | (7,706                                | )        |  | (20 | )         |  | 9.94  |                    |  | (202 | ) bp
|100                                                  |        |                        | 35,377   |  | (3,415                                | )        |  | (9  | )         |  | 11.09 |                    |  | (87  | ) bp
|Static                                               |        |                        | 38,792   |  |                                      |          |  |    |           |  | 11.96 |                    |  |     |     
|(100)                                                |        |                        | 40,598   |  | 1,806                                 |          |  | 5   |           |  | 12.37 |                    |  | 41   | bp  
|(200)                                                |        |                        | N/A      |  | N/A                                   |          |  | N/A |           |  | N/A   |                    |  | N/A  |     
|(300)                                                |        |                        | N/A      |  | N/A                                   |          |  | N/A |           |  | N/A   |                    |  | N/A  |     



The Office of Thrift Supervision uses
certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios,
among others.



As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have



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##### Table of Contents

similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from
certificates could deviate significantly from those assumed in calculating the table.



ITEM 4: CONTROLS AND PROCEDURES



The
Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act
with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.



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##### Table of Contents

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------



Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties
in which the Company holds security interest, claims involving the making and servicing of real property loans and other issues incident to the Companys business. In the opinion of management, after consultation with the Companys legal
counsel, no significant loss is expected from any of such pending claims or lawsuits. The Company is not a party to any material pending legal proceedings.



|ITEM 2. | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUERS PURCHASES OF EQUITY SECURITIES.
|------- | ----------------------------------------------------------------------------------



The following table provides certain information with regards to shares repurchased by the Company in the second quarter of
2004.



|                                     |  |                                 |  |                             |       |                                                   |        
|------------------------------------ |  | ------------------------------- |  | --------------------------- | ----- | ------------------------------------------------- | -------
|Period                               |  | Total Number ofShares Purchased |  | Average Price PaidPer Share |       | Total NumberPurchased asPubliclyAnnouncedPrograms
|April 1, 2004 through April 30, 2004 |  |                                |  |                             |      |                                                   |       
|May 1, 2004 through May 31, 2004 (1) |  | 559,993                         |  | $                           | 33.50 |                                                   | 559,993
|June 1, 2004 through June 30, 2004   |  |                                |  |                             |      |                                                   |       
|                                     |  |                                 |  |                             |       |                                                   |        
|Total                                |  | 559,993                         |  | $                           | 33.50 |                                                   | 559,993
|                                     |  |                                 |  |                             |       |                                                   |        

---

|(1) | On April 16, 2004, the Company commenced a self-tender offer for up to 560,000 shares of its common stock. On May 28, 2004, the Company announced the completion of the self-tender
offer, which expired May 21, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------



None



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
|------- | ------------------------------------------------------



None



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------



None



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|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K.
|------- | ---------------------------------



| | (a) | Exhibits
| | --- | --------



|     |  |                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation of First Federal Bancshares, Inc. (1)                               
|     | 
|3.2  |  | Bylaws of First Federal Bancshares, Inc. (2)                                                     
|     | 
|4.0  |  | Specimen Stock Certificate of First Federal Bancshares, Inc. (1)                                 
|     | 
|10.1 |  | Employment Agreement between First Federal Bancshares, Inc. and James J. Stebor (3)              
|     | 
|10.2 |  | Employment Agreement between First Federal Bank and James J. Stebor (3)                          
|     | 
|10.3 |  | First Federal Bank Supplemental Executive Retirement Plan (3)                                    
|     | 
|10.4 |  | First Federal Bank Employee Severance Compensation Plan (3)                                      
|     | 
|10.5 |  | First Federal Bancshares, Inc. 2001 Stock-Based Incentive Plan (4)                               
|     | 
|10.6 |  | Non-Competition and Consulting Agreement by and between First Federal Bank and Eldon R. Mette (5)
|     | 
|10.7 |  | PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan (6)                                           
|     | 
|31.1 |  | Rule 13a  14(a)/15d  14(a) Certification of the Chief Executive Officer.                       
|     | 
|31.2 |  | Rule 13a  14(a)/15d  14(a) Certification of the Chief Financial Officer.                       
|     | 
|32.1 |  | Section 1350 Certification of the Chief Executive Officer.                                       
|     | 
|32.2 |  | Section 1350 Certification of the Chief Financial Officer.                                       

---

|(1) | Incorporated herein by reference from the Exhibits to Form SB-2, Registration Statement and amendments thereto, initially filed on May 5, 2000, Registration No. 333-36368.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-KSB, filed on March 28, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on November 14, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-QSB filed on August 13, 2001.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-K, filed on April 11, 2003.
|--- | --------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to PFSB Bancorp, Inc.s Registration Statement on Form S-8 (SEC No. 333-35020) filed on April 18, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



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| | (b) | Reports on Form 8-K
| | --- | -------------------



The Company furnished a Current Report on Form 8-K on May 13, 2004 announcing financial results for the quarter ended March 31, 2004. The press release
was included as an exhibit to the Form 8-K.



The Company
furnished a Current Report on Form 8-K on June 4, 2004 announcing the new date of its annual meeting of stockholders. The press release was included as an exhibit to the Form 8-K.



The Company furnished a Current Report on Form 8-K on June 22, 2004 announcing withdrawal of certain nominees to the Board
of Directors for the 2004 annual meeting of stockholders.



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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.



|                     |  |                                      
|-------------------- |  | -------------------------------------
|                     |  | FIRST FEDERAL BANCSHARES, INC.       
|                     | 
|Date: August 4, 2004 |  | /s/ James J. Stebor                  
|                     |  | James J. Stebor                      
|                     |  | President and Chief Executive Officer
|                     | 
|Date: August 4, 2004 |  | /s/ Cathy D. Pendell                 
|                     |  | Cathy D. Pendell                     
|                     |  | Treasurer                            



16