UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

                     For the quarter ended December 31, 1998
                                           -----------------

                                       OR

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

                For the transition period from _______ to _______

Commission number 0-23325
                  -------

                        Guaranty Federal Bancshares, Inc.
                        ---------------------------------
             (Exact name of registrant as specified in its charter)

       Delaware                                         43-1792717             .
-------------------------------                ---------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)

    1341 West Battlefield                                 65807
-------------------------------                 -----------------------
  Springfield, Missouri                                 (Zip Code)             .
(Address of principal executive offices)           


                        Telephone Number: (417) 889-2494
                                          --------------

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date.


                  Class                     Outstanding at February 12, 1999
                  -----                     --------------------------------

         Common Stock, Par Value $0.10                5,742,138 Shares
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC

                                    Form 10-Q

                                TABLE OF CONTENTS
Item                                                                       Page
----                                                                       ----
                          PART I. Financial Information
                          -----------------------------

1.  Consolidated Financial Statements (Unaudited):
         Statements of Financial Condition                                   3

         Statements of Income                                                4

         Statements of Changes in Stockholders' Equity                       5
         Statements of Cash Flow                                             7

         Notes to Consolidated Financial Statements                          8

2.  Management's Discussion and Analysis of Financial Condition and         11
         Results of Operations

3.  Quantitative and Qualitative Disclosures about Market Risk              20

                           PART II. Other Information
                           --------------------------

1.  Legal Proceedings                                                        24

2.  Changes in Securities and Use of Proceeds                                24

3.  Defaults Upon Senior Securities                                          24

4.  Submission of Matters to Vote of Security-holders                        24

5.  Other Information                                                        25

6.  Exhibits and Reports on Form 8-K                                         25

    Signatures                                                               26





                                       2

<PAGE>

PART I

Item 1.  Financial Statements
         --------------------

                        GUARANTY FEDERAL BANCSHARES, INC.

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                 DECEMBER 31, 1998 (UNAUDITED) AND JUNE 30, 1998

                                     ASSETS
                                     ------
<TABLE>
<CAPTION>
                                                                                 December 31,       June 30,
                                                                                      1998            1998 
                                                                                -------------    -------------
                                                                                   (Unaudited)
<S>                                                                            <C>              <C>          
Cash                                                                            $   1,031,468    $     846,691
Interest-bearing deposits in other financial institutions                           7,429,930        6,458,232
                                                                                -------------    -------------
         Cash and cash equivalents                                                  8,461,398        7,304,923

Available-for-sale securities                                                       6,803,988        4,765,021
Held-to-maturity securities                                                         7,736,251        8,922,389
Mortgage-backed securities, held-to-maturity                                        9,657,993       11,948,654
Mortgage-backed securities, available-for-sale                                      8,299,848        9,055,658
Mortgage loans held for sale                                                        3,276,101          805,183
Loans receivable, net                                                             230,800,228      205,414,561
Accrued interest receivable
         Loans                                                                      1,287,459        1,188,162
         Investments                                                                  205,864          252,865
         Mortgage-backed securities                                                   136,880          163,117
Prepaid expenses and other assets                                                   4,455,798        2,503,055
Foreclosed assets held for sale                                                        31,236          286,000
Premises and equipment                                                              7,284,911        7,432,971
                                                                                -------------    -------------
                                                                                $ 288,437,955    $ 260,042,559
                                                                                =============    =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
LIABILITIES
Deposits                                                                        $ 136,809,516    $ 140,975,336
Federal Home Loan Bank advances                                                    81,827,988       45,081,028
Advances from borrowers for taxes and insurance                                       369,325          870,476
Accrued expenses and other liabilities                                                626,922          513,943
Accrued interest payable                                                              425,195          256,975
Income taxes payable                                                                  180,823          417,532
Deferred income taxes                                                               1,769,221        1,237,171
                                                                                -------------    -------------
         Total Liabilities                                                        222,008,990      189,352,461
                                                                                -------------    -------------

STOCKHOLDERS' EQUITY
Capital Stock
        Common stock, $0.10 par value;  authorized 10,000,000 shares;
         issued and outstanding 6,228,698 shares - December 31;
         issued and outstanding 6,228,035 shares - June 30                            622,870          622,804
Additional paid-in capital                                                         46,995,257       49,016,992
Unearned ESOP shares                                                               (3,214,900)      (3,444,540)
Retained earnings, substantially restricted`                                       22,461,583       21,682,950
Accumulated other comprehensive income
         Unrealized appreciation on available-for-sale securities,
         net of income taxes of $2,257,818 and $1,651,429
         at December 31, 1998 and June 30, 1998, respectively                       3,844,393        2,811,892
                                                                                -------------    -------------
                                                                                   70,709,203       70,690,098
Treasury stock, at cost,  - 311,390 shares                                         (4,280,238)            --
                                                                                -------------    -------------
         Total Stockholders' Equity                                                66,428,965       70,690,098
                                                                                -------------    -------------
                                                                                $ 288,437,955    $ 260,042,559
                                                                                =============    =============
</TABLE>

See Notes to Consolidated Financial Statements

                                       3


<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
        THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997(UNAUDITED)

<TABLE>
<CAPTION>

                                                    Three Months Ending             Six Months Ending
                                                    -------------------             -----------------
                                                   12/31/98        12/31/97       12/31/98        12/31/97
                                                   --------        --------       --------        --------

<S>                                            <C>                <C>         <C>                <C>      
INTEREST INCOME
Loans                                           $  4,590,813       3,646,258   $  8,974,029       7,097,589
Investment securities                                123,535          96,043        207,981         193,293
Mortgage-backed securities                           318,438         267,442        666,595         565,340
Other                                                150,205         200,551        268,275         293,574
                                                ------------    ------------   ------------    ------------
       Total Interest Income                       5,182,991       4,210,294     10,116,880       8,149,796
                                                ------------    ------------   ------------    ------------
                                                                             
INTEREST EXPENSE
Deposits                                           1,516,084       1,776,873      3,102,268       3,607,586
Federal Home Loan Bank advances                    1,173,633         462,573      2,089,612         820,018
Other borrowed funds                                    --            79,043           --            79,043
                                                ------------    ------------   ------------    ------------
       Total Interest Expense                      2,689,717       2,318,489      5,191,880       4,506,647
                                                                ------------   ------------    ------------
Net Interest Income                                2,493,274       1,891,805      4,925,000       3,643,149
Provision for Loan Losses                             45,000          30,000         90,000          63,352
                                                ------------    ------------   ------------    ------------
Net Interest Income after
       Provision for Loan Losses                   2,448,274       1,861,805      4,835,000       3,579,797
                                                                ------------   ------------    ------------

NONINTEREST INCOME (LOSS)
Service charges                                      221,252         153,730        427,152         274,625
Late charges and other fees                           25,909          28,224         51,297          53,486
Gain on loans, investment
    securities and mortgage-backed securities         28,953          19,240         38,703          57,371
Income (expense) on foreclosed assets                   (820)          2,178         (6,990)          2,086
Other income                                          28,126          35,800         64,166          63,070
                                                ------------    ------------   ------------    ------------
Total Noninterest Income                             303,420         239,172        574,328         450,638
                                                ------------    ------------   ------------    ------------

NONINTEREST EXPENSE
Salaries and employee benefits                       711,315         501,791      1,485,160       1,083,065
Occupancy                                            198,175         185,607        372,505         348,863
SAIF deposit insurance premiums                       20,702          23,982         43,076          46,952
Data processing fees                                 128,099         109,990        244,417         197,302
Advertising                                          116,955         101,704        224,851         188,746
Other expense                                        329,857         215,342        544,891         394,251
                                                ------------    ------------   ------------    ------------
       Total Noninterest Expense                   1,505,103       1,138,416      2,914,900       2,259,179
                                                ------------    ------------   ------------    ------------
Income before Income Taxes                         1,246,591         962,561      2,494,428       1,771,256
Provision for Income Taxes                           426,162         367,773        875,896         659,965
                                                ------------    ------------   ------------    ------------
NET INCOME                                           820,429         594,788      1,618,532       1,111,291

OTHER COMPREHENSIVE INCOME
       Unrealized appreciation on available-
            for-sale securities                      919,135         440,321      1,032,501         455,441
                                                ------------    ------------   ------------    ------------
COMPREHENSIVE INCOME                            $  1,739,564    $  1,035,109   $  2,651,033    $  1,566,732
                                                ============    ============   ============    ============

BASIC EARNINGS PER SHARE                        $        .15             n/a   $        .29             n/a
                                                ============    ============   ============    ============
DILUTED EARNINGS PER SHARE                      $        .14             n/a   $        .28             n/a
                                                ============    ============   ============    ============
</TABLE>

See Notes to Consolidated Financial Statement

                                       4

<PAGE>


                        GUARANTY FEDERAL BANCSHARES, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                     Accumulated
                                                                                                        Other
                                                                                                     Comprehensive
                                                                                                        Income    
                                                                                                       Unrealized
                                                                                                      Appreciation
                                          Additional         Unearned                                 on Available-
                                  Common   Paid-In            ESOP         Treasury       Retained      for-Sale
                                   Stock   Capital           Shares          Stock        Earnings    Securities, Net      Total
                               --------   ------------    ------------  ------------    ------------   -------------   ------------
<S>                           <C>        <C>             <C>           <C>             <C>            <C>             <C>         
Balance, June 30, 1998         $622,804   $ 49,016,992    ($ 3,444,540)         --      $ 21,682,950    $  2,811,892   $ 70,690,098
Net Income                         --             --              --            --         1,618,532            --        1,618,532
Dividends on common stock,
($0.16 per share)                  --             --              --            --          (839,899)           --         (839,899)
Dividends on RRP stock             --            7,500            --            --              --              --            7,500
Recognition and Retention Plan
   (RRP) expense & 
    Restricted Stock
    Plan (RSP) expense             --          263,534            --            --              --              --          263,534
Stock options exercised              66          3,925            --            --              --              --            3,991
RSP stock purchased                --       (2,373,065)           --            --              --              --       (2,373,065)
Treasury stock purchased           --             --              --      (4,280,238)           --              --       (4,280,238)
Release of ESOP shares             --           52,817         229,640          --              --              --          282,457
Tax benefit of RRP/RSP shares      --           23,554            --            --              --              --           23,554
Change in unrealized 
   appreciation on
   available-for-sale 
   securities, net of
   income taxes of $606,389        --             --              --            --              --         1,032,501      1,032,501
                               --------   ------------    ------------  ------------    ------------   -------------   ------------
Balance, December 31, 1998     $622,870   $ 46,995,257    ($ 3,214,900) ($ 4,280,238)   $ 22,461,583   $   3,844,393   $ 66,428,965
                               ========   ============    ============  ============    ============   =============   ============

</TABLE>

                                       5
<PAGE>



                        GUARANTY FEDERAL BANCSHARES, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                                                           Other
                                                                                                       Comprehensive
                                                                                                         Income    
                                                                                                        Unrealized
                                                                                                       Appreciation
                                                          Additional     Unearned                      on Available-
                                           Common           Paid-In        ESOP           Retained       for-Sale
                                            Stock           Capital       Shares          Earnings    Securities, Net    Total
                                        ------------    ------------   ------------    ------------    ------------   -----------
<S>                                   <C>             <C>            <C>             <C>             <C>            <C>         
Balance, June 30, 1997                  $  3,125,000    $  3,687,356           --      $ 18,620,219    $  2,057,580   $ 27,490,155
Net Income                                      --              --             --         1,111,291            --        1,111,291
Dividends on common stock,
($0.22 per share on 3,125,000 shares)           --              --             --          (687,500)           --         (687,500)
Dividends on RRP stock                          --             5,905           --              --              --            5,905
Recognition and Retention Plan
   (RRP) expense                                --            47,979           --              --              --           47,979
Stock options exercised                         --            18,516           --              --              --           18,516
Transfer from MHC                               --              --             --         1,842,981            --        1,842,981
Stock redeemed and stock issued under
    plan of conversion to stock
    ownership, net                        (2,502,848)     45,170,969     (3,444,540)           --              --       39,223,581
Tax benefit of RRP/RSP shares                   --            32,229           --              --              --           32,229
Change in unrealized appreciation on
   available-for-sale securities, net 
   of income taxes of $267,481                  --              --             --              --           455,441        455,441
                                        ------------    ------------   ------------    ------------    ------------   ------------
Balance, December 31, 1997              $    622,152    $ 48,962,954   ($ 3,444,540)   $ 20,886,991    $  2,513,021   $ 69,540,578
                                        ============    ============   ============    ============    ============   ============

</TABLE>




                                       6
<PAGE>
                        GUARANTY FEDERAL BANCSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
             SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)

<TABLE>
<CAPTION>

                                                                      1998            1997
                                                                 ------------    ------------
<S>                                                            <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                    $  1,618,532    $  1,111,291
   Items not requiring (providing) cash:
       Deferred income taxes                                          (74,339)         87,606
       Depreciation                                                   200,386         217,149
       Provision for loan losses                                       90,000          63,352
       Gain on loans, investment securities
         and mortgage-backed securities                               (38,703)        (57,371)
       Gain on sale of foreclosed assets                                 (138)           --
       Amortization of deferred income, premiums and discounts         67,416         (21,765)
       RRP/RSP expense                                                263,534          47,979
   Origination of loans held for sale                              (8,443,733)     (4,920,734)
   Proceeds from sale of loans held for sale                        6,011,518       4,511,679
   Changes in:
       Accrued interest receivable                                    (26,059)        (35,437)
       Prepaid expenses and other assets                             (115,443)        (26,361)
       Accounts payable and accrued expenses                          281,199         (41,024)
       Income taxes payable                                          (236,709)        (43,094)
                                                                 ------------    ------------
         Net cash provided by (used in) operating activities         (402,539)        893,270
                                                                 ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Net increase in loans                                          (25,536,974)    (14,947,877)
   Principal payments on mortgage-backed securities,
       Available-for-sale                                             737,963            --
   Principal payments on mortgage-backed securities,
       held-to-maturity                                             2,290,661       1,693,448
   Purchase of premises and equipment                                 (52,326)       (259,788)
   Purchase of available-for-sale securities                         (394,554)           --
   Proceeds from maturities or calls of
       held-to-maturity securities                                  1,144,371       2,044,433
   Purchase of FHLB stock                                          (1,837,300)           --
   Proceeds from sale of foreclosed assets                            302,562            --
   Capitalized costs on foreclosed assets                                 322            --
                                                                 ------------    ------------
Net cash used in investing activities                             (23,345,275)    (11,469,784)
                                                                 ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Tax benefit of vested RRP shares                                    23,554          32,229
   Proceeds from sale of common stock, net                               --        42,668,120
   Release of ESOP shares                                             282,457      (3,444,540)
   Stock options exercised                                              3,991          18,516
   Cash dividends paid                                               (839,899)       (687,500)
   Cash dividends received on RRP Stock                                 7,500           5,905
   Net increase in demand deposits,
       NOW accounts and savings accounts                            4,924,655       5,384,078
   Net decrease in certificates of deposit                         (9,090,475)    (12,516,420)
   Proceeds from FHLB advances                                     40,302,500      30,000,000
   Repayments of FHLB advances                                     (3,555,540)    (33,019,918)
   Advances from borrowers for taxes and insurance                   (501,151)       (463,393)
   RSP stock purchased                                             (2,373,065)           --
   Treasury stock purchased                                        (4,280,238)           --
                                                                 ------------    ------------
       Net cash provided by financing activities                   24,904,289      27,977,077
                                                                 ------------    ------------

INCREASE  IN CASH AND CASH EQUIVALENTS                              1,156,475      17,400,563
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      7,304,923       3,817,351
                                                                 ------------    ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $  8,461,398    $ 21,217,914
                                                                 ============    ============

</TABLE>

See Notes to Consolidated Financial Statements

                                       7

<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 1:  Conversion, Reorganization and Stock Issuance
         ---------------------------------------------

     On December 30, 1997,  Guaranty  Federal  Bancshares,  Inc.  completed  the
conversion from a federally chartered mutual holding company, (formerly Guaranty
Federal  Bancshares,  M.  H.  C.)  to a  Delaware-chartered  stock  corporation.
Stockholders'  equity increased to $69.5 million primarily due to the conversion
in which Guaranty Federal  Bancshares,  Inc.  exchanged  1,880,710 shares of its
common  stock  for all the  Bank's  common  stock not held by  Guaranty  Federal
Bancshares, M. H. C. This exchange ratio was 1.931. In addition 4,340,812 shares
at $10.00 per share were sold in the stock offering, including 344,454 shares to
the employee stock  ownership  plan ( the "ESOP").  Total shares of common stock
outstanding following the offering and exchange was 6,221,522.

     In  April  1995  Guaranty   Federal  Savings  and  Loan   Association  (the
"Association")  reorganized  from a federally  chartered mutual savings and loan
association into a federal mutual holding company,  Guaranty Federal Bancshares,
M.  H.  C.  (the  "MHC").  As  part  of  the  reorganization,   the  Association
incorporated a de novo federally  chartered stock savings bank, Guaranty Federal
Savings  Bank  (the  "Bank")  and  transferred  most of its  assets  and all its
liabilities  to the Bank. The Bank issued  3,125,000  shares of its common stock
(par value $1.00) of which  972,365  shares were sold to parties  other than the
MHC, thus creating a minority  ownership interest in the Bank. The shares had an
initial public offering price of $8 per share, resulting in gross sales proceeds
of  $7,778,920.  Costs related to the stock issuance of $654,388 were applied to
reduce the gross  proceeds.  Also  $100,000 was  transferred  to the MHC for the
initial capitalization in connection with reorganization.

Note 2:  Basis of Presentation
         ---------------------

         The accompanying  unaudited interim  consolidated  financial statements
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information  and with the  instructions to Form 10-Q and
Rule  10-01 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by generally accepted  accounting  principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals)  considered  necessary for a fair
presentation have been included.




                                       8
<PAGE>


                        GUARANTY FEDERAL BANCSHARES, INC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 2:  Basis of Presentation, continued
         --------------------------------

           Operating  results for the  three-month  and six-month  periods ended
December 31, 1998 and 1997, are not  necessarily  indicative of the results that
may be  expected  for the full  year.  The  Company  engaged  in no  significant
business  activity other than formation  activities  prior to December 30, 1997.
Between  December  30, 1997 and December  31,  1998,  the company  engaged in no
significant  business  activity  other than ownership of the common stock of the
Bank.  Accordingly,  all consolidated  financial statements for periods prior to
December 30, 1997,  relate solely to the Bank and Guaranty  Financial  Services,
Inc. of Springfield, a wholly owned subsidiary of the Bank.

Note 3:  Principles of Consolidation
         ---------------------------

         As more fully described in Note 1, the Company is a  Delaware-chartered
stock corporation organized to facilitate the conversion from the mutual holding
company  form of  ownership  of the Bank to the stock  holding  company  form of
ownership  of the  Bank  and  hold all of the  capital  stock  of the  Bank.  In
connection with the conversion, Guaranty Federal Bancshares, M. H. C., which had
owned 69% of the common  stock of the Bank,  was merged  with and into the Bank,
and its shares of the Bank were canceled.

         The  consolidated  financial  statements  include  the  accounts of the
Company,  its wholly -owned  subsidiary,  Guaranty  Federal Savings Bank and the
wholly-owned subsidiary of the Bank, Guaranty Financial Services of Springfield,
Inc. Significant  intercompany accounts and transactions have been eliminated in
consolidation.

Note 4:  Earnings Per Share
         ------------------

         As more fully  described  in the  preceding  Notes,  the Company had no
operations prior to December 30, 1997 and earnings per share information for the
common stock of the Company for the three  months and six months ended  December
31, 1997 has not been  presented  because the  information  is not  available or
would not be meaningful.



                                       9
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 4:  Earnings Per Share, continued

<TABLE>
<CAPTION>
                                                  Three months ended                      Six months ended
                                                  December 31, 1998                       December 31, 1998
                                                  -----------------                       -----------------
                                            Income      Shares  Per-share     Income       Shares    Per-share
                                            ------      ------  ---------     ------       ------    ---------
Basic EPS
<S>                                       <C>         <C>         <C>      <C>           <C>           <C>  
Income available to common stockholders    $820,429    5,572,548   $0.15    $1,618,532    5,628,249     $0.29
                                                                   =====                                =====

Effect of Dilutive Securities
Stock Options                                             66,226                             68,289
Income available to common stockholders    $820,429    5,638,774   $0.14    $1,618,532    5,696,538     $0.28
                                           ========    =========   =====    ==========    =========     =====
</TABLE>

         Options to purchase  5,000 shares and 436,347 shares of common stock at
$12.63 per share and $13.44 per share,  respectively were outstanding during the
three  months and six months ended  December 31, 1998,  but were not included in
the  computation of diluted EPS because the options'  exercise price was greater
than the average market price of the common shares.

Note 5:  Benefit Plans
         -------------

         On October 18, 1995,  the Bank's  stockholders  voted to approve both a
Recognition and Retention Plan ("RRP") and a Stock Option Plan ("SOP").  On July
22, 1998, the Company's  stockholders voted to approve the 1998 Restricted Stock
Plan  ("  RSP")  and  1998  Stock  Option  Plan  ("1998  SOP").  The RRP and RSP
authorized shares to be issued to directors, officers and employees of the Bank.
As of December 31, 1998,  all of the RRP and RSP shares have been  purchased and
all except 9,338 shares have been awarded.  The Bank is  amortizing  the RRP and
RSP expense over each participant's  vesting period and the financial statements
reflect RRP and RSP expense of  $263,534  and $47,979 for the six month  periods
ended December 31, 1998 and 1997, respectively.  The SOP and 1998 SOP authorized
stock  options on shares to be issued to officers and  employees of the Bank. As
of December  31,  1998,  all  options  except  those on 33,995  shares have been
granted.  The RRP,  RSP, SOP and 1998 SOP vest over a five year period.  The RRP
and SOP have been adjusted to reflect the conversion,  reorganization  and stock
issuance  described in Note 1 with all vesting periods remaining  unchanged.  At
December 31, 1998, there were 577,393 unexercised options that have been granted
at prices  ranging from $5.83 to $13.44 per share and 200,351 RRP and RSP shares
were unvested.

Note 6:  New Accounting Pronouncements
         -----------------------------

         During the quarter ending  September 30, 1998, the Company adopted SFAS
130, "Reporting  Comprehensive Income." This Statement establishes standards for
reporting  and display of  comprehensive  income and its  components in a set of
financial statements.



                                       10
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC

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

General
-------

         The accompanying Consolidated Financial Statements include the accounts
of Guaranty Federal  Bancshares,  Inc. (the "Company"),  and all accounts of its
wholly  owned  subsidiary,  Guaranty  Federal  Savings Bank (the "Bank") and all
accounts of the wholly-owned subsidiary of the Bank, Guaranty Financial Services
of Springfield, Inc. All significant intercompany transactions and balances have
been eliminated in consolidation.

         However,  because the conversion,  reorganization and stock issuance of
the  Company,  the Bank and related  entities  did not occur until  December 30,
1997,  all results  prior to that date  reflect the accounts of the Bank and its
subsidiary.  The Company  realized  approximately  $39.2 million in net proceeds
from the stock issuance of which the Company  provided $19.9 million to the Bank
as capital and the Company provided a loan of $3.44 million to fund the purchase
of stock for the  employee  stock  ownership  plan.  Other than the loan for the
ESOP, most of the funds received have been invested in loans.

         The primary  function of the Company has been to monitor its investment
in the Bank,  as a result,  the results of  operation of the Company are derived
primarily  from  operations of the Bank.  The Bank's  results of operations  are
primarily  dependent on net interest  margin,  which is the  difference  between
interest   income  on   interest-earning   assets   and   interest   expense  on
interest-bearing liabilities. The Bank's income is also affected by the level of
its  noninterest  expenses,  such as  employee  salary and  benefits,  occupancy
expenses and other  expenses.  The  following  discussion  reviews the financial
condition at December 31, 1998,  and the results of operations for the three and
six months ended December 31, 1998 and 1997.

         The discussion set forth below,  as well as other portions of this Form
10-Q,  may contain  forward-looking  comments.  Such comments are based upon the
information  currently  available to management of the Company and  management's
perception  thereof  as of the  date of the Form  10-Q.  Actual  results  of the
Company's   operations  could  materially  differ  from  those   forward-looking
comments.  The differences could be caused by a number of factors or combination
of factors  including,  but limited to; changes in demand for banking  services;
changes in portfolio  composition;  changes in  management  strategy;  increased
competition from both bank and non-bank  companies;  and the ability to discover
and correct potential Year 2000 problem, which is discussed later.


                                       11
<PAGE>


                        GUARANTY FEDERAL BANCSHARES, INC

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

         The  Bank's  total  assets  increased   $28,395,396,   or  10.9%,  from
$260,042,559 as of June 30, 1998, to $288,437,955 as of December 31, 1998.

         Cash  and  cash  equivalents  increased   $1,156,475,   or  15.8%  from
$7,304,923 as of June 30, 1998, to $8,461,398 as of December 31, 1998.

         Securities  available-for-sale  increased  $2,038,967,  or  42.8%  from
$4,765,021 as of June 30, 1998,  to $6,803,988 as of December 31, 1998,  this is
primarily  due to the  increase  in  value  of  Federal  Home  Loan  Corporation
("FHLMC")  stock. The Bank continues to hold 96,000 shares of FHLMC stock with a
amortized cost of $94,000 in the available-for-sale category. As of December 31,
1998,  the gross  unrealized  gain on the stock was  $6,092,000 an increase from
$4,424,000  as of June 30, 1998.  Securities  held-to-maturity  decreased due to
principal  repayments,  by $1,186,138,  or 13.3%, from $8,922,389 as of June 30,
1998 to $7,736,251 as of December 31, 1998.

         Mortgage-backed securities, held-to-maturity,  decreased $2,290,661, or
19.2%,  from $11,948,654 as of June 30, 1998, to $9,657,993,  as of December 31,
1998. The decrease is attributable  to prepayments  received on various pools of
mortgage-backed  securities  during the three months  ending  December 31, 1998.
Mortgage-backed securities, available-for-sale, decreased $755,810, or 8.3% from
$9,055,658  as if June 30, 1998,  to  $8,299,848  as of December  31, 1998.  The
decrease is attributable  to a decrease in the market value of these  securities
during this period, as well as prepayments.

         Net  loans  receivable   increased  by  $25,385,667,   or  12.4%,  from
$205,414,561, as of June 30, 1998, to $230,800,228, as of December 31, 1998, and
loans held-for-sale increased by $2,470,918, or 306.9%, from $805,183 as of June
30, 1998 to $3,276,101 as of December 31, 1998.  Growth  consisted  primarily of
loans  secured by both owner and  non-owner  occupied  residential  real estate,
which  increased by  $23,472,000.  Growth in loans  receivable is anticipated to
continue and represents a major part of the Bank's planned assets growth.

         Allowance for loan losses increased  $98,489 or 4.5% from $2,191,557 as
of June 30, 1998, to $2,290,046 as of December 31, 1998. The allowance increased
due to an increase in the  provision  for loan losses,  as well as  experiencing
recoveries  in excess of  charge-offs  for the period.  The  allowance  for loan
losses  as  of  December  31,  1998  and  June  30,  1998  was  1.0%,  and  1.1%
respectively,  of net loans outstanding.  As of December 31, 1998, the allowance
for loan losses was 231.8% of  nonperforming  loans versus 216.6% as of June 30,
1998.


                                       12
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.

Financial Condition, continued
------------------------------

         Fair value of foreclosed  assets  held-for-sale  decreased  $254,764 or
89.1% from  $286,000 as of June 30,  1998,  to $31,236 as of December  31, 1998.
This decrease was due to the sale of three duplexes and a partially  constructed
single-family residence. These properties were sold at their book value.

         Premises and equipment decreased $148,060,  or 2.0%, from $7,432,971 as
of June 30, 1998, to  $7,284,911  as of December 31, 1998,  primarily due to the
depreciation recorded for the period ended December 31, 1998.

         Deposits  decreased  $4,165,820,  or 3.0%, from $140,975,336 as of June
30, 1998,  to  $136,809,516  as of December 31, 1998.  For the six months ending
December 31, 1998,  checking and passbook accounts  increased by $4,924,655,  or
13.4%,  while  certificates  of deposits  decreased by $9,090,475,  or 8.7%. The
majority of this increase in checking and passbook accounts can be attributed to
an  aggressive  marketing  campaign  initiated in early 1997 designed to attract
checking  deposit  customers.  The  decrease in  certificates  of deposit can be
attributed to management's  decision to allow high cost  certificates of deposit
accounts  to run off and replace  these  funds with FHLB  advances at an overall
lower marginal cost.

         As a result of the decrease in deposits,  and the continued increase in
loan demand,  FHLB advances increased  $36,746,960 or 81.5%, from $45,081,028 as
of June 30, 1998,  to  $81,827,988  as of December 31, 1998.  As of December 31,
1998,  the Bank had the ability to borrow an  additional  $67.9 million from the
FHLB.

         Stockholders' equity (including  unrealized  appreciation on securities
available-for-sale,  net of tax) decreased $4,261,133, or 6.0%, from $70,690,098
as of June 30, 1998, to $66,428,965  as of December 31, 1998.  This decrease was
due to several factors.  In connection with the RSP,  $2,373,065 was contributed
to  purchase  173,632  shares of Company  stock,  which was  accounted  for as a
reduction of  stockholders'  equity.  In addition,  a total of 311,290 shares of
treasury  stock  were  purchased  in the open  market  at a cost of  $4,280,238.
Finally,  dividends in the amount of $839,899 ($0.16 per share) were declared as
discussed  above.  On a per share basis,  stockholders'  equity  decreased  from
$12.01 as of June 30, 1998 to $11.87 as of December 31, 1998.




                                       13
<PAGE>


                        GUARANTY FEDERAL BANCSHARES, INC

Analysis of core earnings

          The Company's  profitability is primarily  dependent upon net interest
income,  which  represents  the difference  between  interest and fees earned on
loans,  MBSs and debt  and  equity  securities,  and the  cost of  deposits  and
borrowings.  Net  interest  income is dependent  on the  difference  between the
average  balances  and rates earned on  interest-earning  assets and the average
balances and rates paid on interest-bearing  liabilities.  Net income is further
affected by non-interest income, non-interest expense and income taxes.

The  following  table sets forth certain  information  relating to the Company's
average consolidated  statements of financial condition and reflects the average
yield on assets and average cost of liabilities for the periods indicated.  Such
yields and costs are derived by  dividing  income or expense  annualized  by the
average balance of assets or liabilities,  respectively,  for the periods shown.
Average  balances were derived from average daily balances.  The average balance
of loans includes loans on which the Company has discontinued accruing interest.
The yields and costs include fees which are considered adjustments to yields.

<TABLE>
<CAPTION>


                                       Six months ended                        Six months ended
                                       December 31, 1998                      December 31, 1997
                                       -----------------                      -----------------
                                Average                 Yield/         Average                  Yield/
                                Balance    Interest     Cost           Balance     Interest     Cost
                                -------    --------     ----           -------     --------     ----

<S>                           <C>         <C>            <C>         <C>           <C>          <C>  
ASSETS
Interest-earning:
Loans                          $222,614    $8,974         8.06%       $166,163      $7,098       8.54%
Investment securities             8,422       208         4.39%          6,575         193       5.30%
Mortgage-backed Securities       19,595       667         6.80%         14,901         565       7.59%
Other assets                     13,208       268         2.91%         12,792         294       2.77%
                               --------    ------         -----         ------      ------       -----
Total interest-earning          263,839    10,117         7.67%        200,431       8,150       8.13%
Noninterest-earning               7,468                                  6,557
                               --------                                -------
                               $271,307                               $206,988
                               ========                               ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts                 $8,371       110         2.63%         $8,883         124       2.79%
Transaction accounts             26,892       378         2.81%         20,602         301       2.92%
Certificates of Deposit          96,884     2,614         5.40%        114,361       3,182       5.57%
FHLB Advances                    69,274     2,090         6.03%         26,797         820       6.12%
Other Borrowed Funds                 --        --            --          5,747          79       2.75%
                               --------    ------       -------        -------      ------      ------
Total interest-bearing          201,421     5,192         5.16%        176,390       4,507       5.11%
Noninterest-bearing               3,618                                  2,503
                               --------                                -------
Total liabilities               205,039                                178,893
Stockholders' equity             66,268                                 28,095
                               --------                                -------
                               $271,307                               $206,988
                               ========                               ========
Net earning balance            $ 62,418                                $ 24,041 
                               ========                                =========
Earning yield less costing rate                           2.51%                                  3.02%
                                                          ====                                   ==== 
Net interest income, and
     net yield spread on
     interest earning assets               $4,925         3.73%                     $3,643       3.64%
                                           ======       =======                     ======      ======
Ratio on interest-earning assets to
     interest-bearing liabilities             131%                                    114%
                                              ====                                    ===

</TABLE>
                                       14
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.

              Results of Operations - Comparison of Three Month and
               Six Month Periods Ended December 31, 1998 and 1997

         Net income for the three months and six months ended  December 31, 1998
was $820,429 and  $1,618,532,  as compared to $594,788  and  $1,111,291  for the
three months and six months ended December 31, 1997 which represents an increase
in earnings of $225,641 or 37.9% for the three month  period,  and a increase in
earnings of $507,241 or 45.6% for the six month period.

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

         Total  interest  income  for the  three  months  and six  months  ended
December  31,  1998,  increased  $972,697  or 23.1% and  $1,967,084  or 24.1% as
compared to the three months and six months ended December 31, 1997. For the six
month period ended  December 31, 1998  compared to the same period in 1997,  the
average  yield on interest  earning  assets  decreased 46 basis points to 7.67%,
while the average balance of interest earnings assets increased $63,400,000 over
the same period one year ago.

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

         Total  interest  expense  for the three  months  and six  months  ended
December  31,  1998,  increased  $371,228  or 16.0% and  $685,233  or 15.2% when
compared to the three months and six months ended December 31, 1997. For the six
month period  ended  December  31,  1998,  the average cost of interest  bearing
liabilities  increased  5 basis  points  to  5.16%  while  the  average  balance
increased $25,031,000, when compared to the same period in 1997.

Net Interest Income
-------------------

         Net interest  income for the three months and six months ended December
31, 1998, increased $601,469, or 31.8% and $1,281,851, or 35.2% when compared to
the same period in 1997. The increase in net interest  income for the six months
ended December 31, 1998 was the result of a $38,377,000  increase in average net
interest  earnings  assets  offset by a 51 basis point  decrease in net interest
margin  compared  to the same  period in 1997.  This  increase  in net  interest
earning  assets  was  primarily  due  to the  inflow  of  cash  from  the  stock
conversion,  which was converted to interest  earning  assets,  primarily in the
form of loans  originated  by the Bank.  This  resulted  in an  increase  in net
interest income for the six month period ended December 31, 1998 even though the
yield on interest  earning assets  decreased by 46 basis points,  compared to an
increase of 6 basis points on interest bearing liabilities, when compared to the
same period in 1997.



                                       15
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC

Provision for Loan Losses
-------------------------

         Based  primarily  on  the  continued   growth  of  the  loan  portfolio
management  decided to increase the  allowance  for loan loss reserve  through a
provision  for loan loss of $45,000  and  $90,000  for the three  months and six
months ended  December 31, 1998,  respectively,  compared to $30,000 and $63,352
for the same period in 1997. The Bank will continue to monitor its allowance for
loan  losses  and  make  future  additions  based  on  economic  and  regulatory
conditions. Although the Bank maintains its allowance for loan losses at a level
which it considers to be sufficient to provide for potential  losses,  there can
be no  assurance  that future  losses  will not exceed  internal  estimates.  In
addition,  the amount of the  allowance  for loan losses is subject to review by
regulatory  agencies  which can  order  the  establishment  of  additional  loss
provisions.

Noninterest Income
------------------

         Noninterest income increased $64,248,  or 26.9% and $123,690,  or 27.4%
for the three months and six months ended  December 31, 1998,  when  compared to
the three  months and six months  ended  December  31,  1997.  The  increase was
primarily due to a increase in checking account service charges, which increased
$67,522 or 43.9% and $152,527 or 55.5% for the three months and six months ended
December 31, 1998, when compared to the same period in 1997.

Noninterest Expense
-------------------

         Noninterest expense increased  $366,687,  or 32.2% for the three months
ended  December 31, 1998,  and  increased  $655,721,  or 29.0% for the six month
period ending December 31, 1998 when compared to the three months and six months
ended  December 31,  1997.  In general this  increase can be  attributed  to the
overall increase in accounts  served,  in addition to the added costs associated
with the ESOP and RSP that were formed in connection with the conversion.

         Salaries and employee  benefits  increased  $209,524,  or 41.8% for the
three months ended December 31, 1998, and increased  $402,095,  or 37.1% for the
six months ended  December 31, 1998,  when  compared to the same period in 1997.
This included an increase in RRP/RSP expense of $77,233, or 374.0% for the three
months ended December 31, 1998,  and an increase of $161,978,  or 549.6% for the
six months ended December 31, 1998, when compared to the same period in 1997, as
well as the addition of $65,896 for the three  months  ended  December 31, 1998,
and $136,306 for the six months ended  December 31, 1998,  for the ESOP expense.
There was no ESOP expense for the same period in 1997.

                                       16
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC

Noninterest Expense, continued
------------------------------

         Advertising  expense increased  $15,251,  or 15.0% for the three months
ended  December 31, 1998,  and  increased  $36,105,  or 19.1% for the six months
ended  December 31, 1998,  when compared to the same period in 1997. The primary
reason for this  increase  was the  additional  expense in  connection  with the
marketing campaign designed to attract checking accounts.

         Data processing fees increased $18,109,  or 16.5%, for the three months
ended  December 31, 1998,  and  increased  $47,115,  or 23.9% for the six months
ended  December  31,  1998,  when  compared  to the same  period in 1997.  These
increases in data  processing  were  primarily  due to the increases in accounts
serviced and the volume of transactions handled.

Provision for Income Taxes
--------------------------

         There was a $58,389 and $215,931  increase in the  provision for income
taxes for the three months and six months ended  December 31, 1998,  as compared
to the same period in 1997.  This increase was due to the increase in before tax
income for the three months and six months ended December 31, 1998,  compared to
the same period in 1997.

Nonperforming Assets
--------------------

         The allowance for loan losses is calculated based upon an evaluation of
pertinent  factors  underlying  the  various  types and  quality  of the  loans.
Management  considers  such  factors  as the  repayment  status  of a loan,  the
estimated net  realizable  value of the  underlying  collateral,  the borrower's
intent and ability to repay the loan,  local economic  conditions and the Bank's
historical loss ratios.  The Bank's allowance for loan losses as of December 31,
1998, was  $2,290,046 or 1.0% of loans  receivable.  Total assets  classified as
substandard  or loss as of December 31, 1998,  were  $1,345,671 or 0.5% of total
assets.  Management has considered  nonperforming and total classified assets in
evaluating the adequacy of the Bank's allowance for loan losses.

The ratio of  nonperforming  assets to total  assets is another  useful  tool in
evaluating  exposure to credit  risk.  Nonperforming  assets of the Bank include
nonperforming loans (nonaccruing loans) and assets which have been acquired as a
result of foreclosure or deed-in-lieu of foreclosure.

                                       17
<PAGE>





                        GUARANTY FEDERAL BANCSHARES, INC.

Nonperforming Assets, continued
-------------------------------
<TABLE>
<CAPTION>
                                                   12/31/98         6/30/98            6/30/97
                                                            (Dollars In Thousands)
<S>                                              <C>             <C>                 <C>        
   Nonperforming loans                           $      988      $     1,012         $     1,257
   Real estate acquired in
   settlement of loans                                   31              286                 210
                                                 ----------      -----------            --------

   Total Nonperforming Assets                     $   1,019      $     1,298          $    1,467
                                                   ========       ==========           =========
   Total Nonperforming Assets
   as a Percentage of Total
   Assets                                              0.35%            0.50%                .74%
   Allowance for loan losses                      $   2,290      $     2,191          $    2,177
   Allowance for loan losses as a
   Percentage of average loans, net                    1.03%            1.24%               1.49%
</TABLE>

Asset/Liability Management
--------------------------

         The goal of the  Bank's  asset/liability  policy is to manage  interest
rate risk so as to maximize net interest  income over time in changing  interest
rate  environments.  Management  monitors the Bank's net  interest  spreads (the
difference  between  yields  received  on assets and paid on  liabilities)  and,
although  constrained by market  conditions,  economic  conditions,  and prudent
underwriting standards, it offers deposit rates and loan rates that maximize net
interest  income.  Management  also  attempts  to fund the  Bank's  assets  with
liabilities of a comparable duration to minimize the impact of changing interest
rates on the Bank's net  interest  income.  Since the  relative  spread  between
financial assets and liabilities is constantly changing,  the Bank's current net
interest income may not be an indication of future net interest income.

         The  Bank's  initial  efforts  to manage  interest  rate risk  included
implementing an adjustable  rate mortgage loan ("ARM") program  beginning in the
early 1980s. The ARMs have met with excellent  customer  acceptance.  As of June
30, 1998, ARMs constituted 71.0% of the Bank's mortgage loan portfolio.  However
during the first and second  quarter of fiscal year 1999,  the general  level of
long-term  interest rates dropped and borrowers  opted for fixed rate mortgages.
As of December 31, 1998, ARMs represent 61.6% of the loan portfolio. Of the ARMs
originated  during the first and second  quarter of fiscal year 1999,  borrowers
preferred initial fixed rate periods of three or five years. In response to this
shift in customer  preference,  the Bank has  continued  a program of  borrowing
longer-term funds from the FHLB.


                                       18
<PAGE>


                       GUARANTY FEDERAL BANCSHARES, INC..

         The Bank is also  managing  interest  rate risk by the  origination  of
construction  loans.  As of December  31,  1998,  such loans made up 9.5% of the
Bank's loan  portfolio.  In general,  these  loans have higher  yields,  shorter
maturities and greater interest rate sensitivity than other real estate loans.

         The Bank  constantly  monitors  its  deposits  in an effort to decrease
their interest rate sensitivity.  Rates of interest paid on deposits at the Bank
are priced competitively in order to meet the Bank's asset/liability  management
objectives  and spread  requirements.  As of June 30, 1998,  the Bank's  savings
accounts,   checking  accounts,   and  money  market  deposit  accounts  totaled
$36,855,202  or 26.1% of its total  deposits.  As of December  31,  1998,  these
accounts  totaled  $41,779,857  or 29.6% of total  deposits.  The Bank believes,
based on  historical  experience,  that a  substantial  portion of such accounts
represents non-interest rate sensitive, core deposits.

         The value of the Bank's loan  portfolio  will change as interest  rates
change.  Rising  interest  rates will decrease the Bank's net  portfolio  value,
while falling interest rates increase the value of that portfolio.




                                       19

<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.

Interest Rate Sensitivity Analysis
----------------------------------

         The  following  table sets  forth as of  September  30,  1998 (the most
recent available),  OTS estimate of the projected changes in net portfolio value
("NPV") in the event of 100, 200, 300, and 400 basis point ("bp")  instantaneous
and permanent  increases and decreases in market interest rates.  Dollar amounts
are expressed in thousands.

                  Estimated Net Portfolio Value          NPV as % of PV Assets
BP Change         -----------------------------          ---------------------
 in Rates        $ Amount      $ Change  % Change        NPV Ratio  BP Change
--------------   --------      --------  --------        ---------  ---------

+400 bp          $ 53,455      $ (1,793)    -3%            20.6%       +80 bp
+300               55,548           300     +1%            21.0%      +114 bp
+200               56,722         1,474     +3%            21.0%      +116 bp
+100               56,616         1,368     +2%            20.6%       +78 bp
NC                 55,248                                  19.8%
-100               52,607        (2,641)    -5%            18.7%      -115 bp
-200               49,805        (5,443)   -10%            17.5%      -237 bp
-300               47,113        (8,135)   -15%            16.3%      -355 bp
-400               44,176       (11,072)   -20%            15.0%      -481 bp

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are  calculated  by the OTS from data provided by the Bank and are based
on numerous  assumptions,  including  relative  levels of market interest rates,
loan  repayments  and  deposit  run-offs,  and  should  not be  relied  upon  as
indicative of actual results.  Further,  the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.

         Management  cannot predict future interest rates or their effect on the
Bank's NPV in the future.  Certain  shortcomings  are  inherent in the method of
analysis  presented in the  computation  of NPV. For example,  although  certain
assets and liabilities may have similar maturities or periods to repricing, they
may  react  in  differing   degrees  to  changes  in  market   interest   rates.
Additionally, certain assets, such as adjustable rate loans, which represent the
Bank's  primary loan product,  have an initial fixed rate period  typically from
one to five  years  and over the  remaining  life of the  asset  changes  in the
interest rate are  restricted.  In addition,  the proportion of adjustable  rate
loans  in  the  Bank's  portfolio  could  decrease  in  future  periods  due  to
refinancing  activity if market interest rates remain or decrease in the future.
Further,  in the  event of a change  in  interest  rates,  prepayment  and early
withdrawal levels could deviate  significantly  from those assumed in the table.
Finally, the ability of many borrowers to service their adjustable-rate debt may
decrease in the event of an interest rate increase.

                                       20
<PAGE>


                        GUARANTY FEDERAL BANCSHARES, INC.

Interest Rate Sensitivity Analysis, continued
---------------------------------------------

         The Bank's Board of Directors is  responsible  for  reviewing the asset
and liability  policies.  The Board meets quarterly to review interest rate risk
and trends, as well as liquidity and capital ratios and requirements. The Bank's
management is responsible for administering  the policies and  determinations of
the Board of Directors with respect to the Bank's asset and liability  goals and
strategies.  Management expects that the Bank's asset and liability policies and
strategies  will  continue  as  described  above  so  long  as  competitive  and
regulatory  conditions in the financial institution industry and market interest
rates continue as they have in recent years.

         The  Bank's  primary  sources  of funds  are  deposits,  principal  and
interest  payments on loans,  and  securities  and extensions of credit from the
Federal  Home  Loan  Bank of Des  Moines.  While  scheduled  loan  and  security
repayments and the maturity of short-term  investments are somewhat  predictable
sources of funding,  deposit  flows are  influenced  by many factors  which make
their  cash  flows  difficult  to  anticipate.   Office  of  Thrift  Supervision
regulations  require the Bank to maintain  cash and eligible  investments  in an
amount equal to at least 4% of customer  accounts and  short-term  borrowings to
assure its ability to meet demands for  withdrawals  and repayment of short-term
borrowings. As of December 31, 1998, the Bank's liquidity ratio was 23.4%, which
exceeded the minimum regulatory requirement.

         The Bank  uses its  liquidity  resources  principally  to  satisfy  its
ongoing  commitments  which include funding loan  commitments,  funding maturing
certificates of deposit as well as deposit withdrawals,  maintaining  liquidity,
purchasing investments, and meeting operating expenses. As of December 31, 1998,
the Bank had approximately $4,382,000 in commitments to originate mortgage loans
and $13,375,000 in loans-in-process on mortgage loans. These commitments will be
funded  through  existing  cash  balances,  cash flow from  operations  and,  if
required,  FHLB advances . Management  believes that  anticipated cash flows and
deposit growth will be adequate to meet the Bank's liquidity needs.



                                       21
<PAGE>

                        GUARANTY FEDERAL BANCSHARES, INC.

Impact of Year 2000
-------------------

         Rapid  and  accurate  data   processing  is  essential  to  the  Bank's
operations.  Many  computer  programs  that can only  distinguish  the final two
digits of the year  entered (a common  programming  practice in prior years) are
expected to read  entries for the year 2000 as the year 1900 or as the year 1980
and incorrectly  attempt to compute  payments,  interest,  delinquency and other
data.  The  Bank has  been  evaluating  both  information  technology  (computer
systems) and non-information  technology systems (e.g., telephone systems, vault
timers,  security systems and elevator controls).  We have evaluated our risk in
three  areas:  (1)  our own  computers,  (2)  computers  of  others  used by our
borrowers,  depositors,  and business partners,  and (3) computers of others who
provide us with data processing services.

         Our own  computers.  The Bank expects to spend  approximately  $205,000
($111,000  for hardware,  $74,000 for software and $20,000 in  consulting  fees)
through  June 30, 1999 to upgrade  our  computer  systems.  These  upgrades  are
expected to eliminate the Year 2000 risk in our  computers.  We do not expect to
have  material  costs to  address  this  risk area  after  June30,  1999.  As of
December31,  1998,  the  Bank  has  spent  approximately  $55,000  ($41,200  for
hardware,  $10,000 for software,  and $3,800 for  consultants)  to fix Year 2000
problems.  We  expect to be Year  2000  compliant  in this risk area by June 30,
1999.

         Computers  of  others  used  by  borrowers,  depositors,  and  business
partners.  The Bank has evaluated most of our material  borrowers and depositors
and does not believe that the Year 2000 problem should,  on an aggregate  basis,
impact their  ability to make  payments or deposits to the Bank. We believe that
most of our residential  customers are not dependent on their home computers for
income and that none of our  commercial  customers are so large that a Year 2000
problem  would  render  them  unable to collect  revenue  or rent and,  in turn,
continue to do business with the Bank. We have  solicited our material  business
partners regarding their Year 2000 readiness and are currently  evaluating their
responses.

         Computers of others who provide us with data processing services.  This
risk is primarily focused on one third-party service bureau that provides all of
the  Bank's  core data  processing.  This  service  bureau  advises  that it has
completed  program changes required for Year 2000  processing.  If these program
changes are not correct before the year 2000,  the Bank would likely  experience
significant delays,  mistakes, or failures.  These delays, mistakes, or failures
could have a significant impact on the Bank's financial condition and results of
operations.

                                       22
<PAGE>



                        GUARANTY FEDERAL BANCSHARES, INC.

Impact of Year 2000, continued
------------------------------

         Contingency Plan. The Bank is monitoring our service bureau to evaluate
whether  our data  processing  system  achieve  compliance.  We are serving as a
"proxy" Year 2000 test site for other financial institutions on the same system.
Such tests were  completed on October 31, 1998.  Currently we are  reviewing the
results  of our  testing,  Upon  completion  of  this  step we  will  develop  a
contingency  plan including a range of alternatives  depending on the results of
the tests. The  alternatives  could range from shifting to a compliant system to
back-up for unforeseen contingencies on our current system. We currently utilize
many  spreadsheet  programs to compute  and store  data.  Should our core system
fail,  we will  rely on paper  reports  generated  prior to the  failure  by our
service bureau,  as well as enter deposit and loan  transactions in spreadsheets
in order to  conduct  business  until  the core  system  is  corrected.  If this
labor-intensive approach is necessary,  management and our employees will become
much less  efficient.  However,  we believe  that we would be able to operate in
this manner until our existing service bureau, or their replacement,  is able to
again  provide  data  processing  services.  If very few  financial  institution
service bureaus are operating in the year 2000, our replacement costs,  assuming
we could negotiate an agreement, could be material.

         This discussion of the impact of the Year 2000 is a Year 2000 readiness
disclosure within the meaning of the Year 2000 Readiness and Disclosure Act.


                                       23
<PAGE>


                        GUARANTY FEDERAL BANCSHARES, INC.

                                     PART II

Item 1.  Legal Proceedings
-------  -----------------

         None.

Item 2.  Changes in Securities
-------  ---------------------

         Not applicable.

Item 3.  Defaults Upon Senior Securities
-------  -------------------------------

         Not applicable.

Item 4.  Submission of Matters to Vote of Common Stockholders
-------  ----------------------------------------------------

         The  annual  meeting  of  stockholders  of the  registrant  was held on
October 28, 1998. At the meeting the stockholders  elected Jack L. Barham, James
E.  Haseltine and Raymond  Tripp to three-year  terms as director of the Savings
Bank, while Gary Lipscomb,  George Hall, Ivy Rogers and Wayne V. Barnes continue
to serve as directors.  Also at that meeting, Baird, Kurtz & Dobson was ratified
as  Independent  Certified  Public  Accountant.  These  same  entities  serve in
identical capacities for the subsidiary bank of the registrant.

The results of voting are shown for each matter considered.

Director election:

Nominee                 votes for   votes withheld

Jack Barham             5,280,321      46,634

James Haseltine         5,280,564      46,391

Raymond Tripp           5,276,708      50,247

Auditor ratification:

votes for               5,293,681

votes against              27,035

abstentions                 6,239

                                       24
<PAGE>


Item 5.  Other Information
-------  -----------------

         None.

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

         a)       Exhibits

                  None.

         b)       Reports on Form 8-K

                  None.

                                       25

<PAGE>
                        GUARANTY FEDERAL BANCSHARES, INC.

                                   SIGNATURES

         In accordance with the  requirements of the Securities  Exchange Act of
1934,  the  registrant  has  this  report  to be  signed  on its  behalf  by the
undersigned, thereunto duly authorized.

                        Guaranty Federal Bancshares, Inc.



                    Signatures                                      Date

              \S\  James E. Haseltine                        February 12, 1999 
-----------------------------------------------------       --------------------
     James E. Haseltine
     President and Chief Executive Officer
     (Principal Executive Officer)



                \S\  Bruce Winston                            February 12, 1999
-----------------------------------------------------       --------------------
     Bruce Winston
     Vice President and Chief Financial Officer
     (Principal Financial and Accounting Officer)