FORM 10-QSB

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549



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

                       For the period ended December 31, 1997

                                       OR

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

              For the transition period from _______ to _______.


                         Commission file number 0-24848


                       East Texas Financial Services, Inc.
             (Exact name of registrant as specified in its charter)

         Delaware                                         75-2559089
(State or other jurisdiction of                        (I.R.S. employer
incorporation or organization                        identification number)

                     1200 South Beckham, Tyler, Texas 75701
               (Address of principal executive offices) (Zip code)

                                 (903) 593-1767
              (Registrant's telephone number, including area code)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 of 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.       [x] Yes [ ] No
 
         The number of shares of the registrant's  common stock ($.01 par value)
outstanding as of December 31, 1997, was 1,026,366.
<PAGE>


                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1997



                                      INDEX

                                                                                

Part I - Financial Information

     Item 1.  Financial Statements

         Consolidated  Statements  of  Financial  Condition,  December  31, 1997
         (Unaudited) and September 30, 1997

         Consolidated  Statements  of Income,  (Unaudited)  three  months  ended
         December 31, 1997, and December 31, 1996

         Consolidated Statement of Changes in Stockholders' Equity,  (Unaudited)
         three months ended December 31, 1997

         Consolidated  Statements of Cash Flows,  (Unaudited) three months ended
         December 31, 1997, and December 31, 1996
                 
         Notes to (Unaudited)  Consolidated  Financial Statements,  December 31,
         1997
                     

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

Part II - Other Information

      Item 1. Legal Proceedings
                     
      Item 2. Changes In Securities
                     
      Item 3. Defaults Upon Senior Securities
                    
      Item 4. Submission of Matters To a Vote of Security Holders
                     
      Item 5. Other Information
                     
      Item 6. Exhibits and Reports on Form 8-K

Signature
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1997



PART I - FINANCIAL INFORMATION

     Item 1 - Financial Statements

East Texas Financial  Services,  Inc. (the "Company") was formed in September of
1994 for the  purpose  of  acquiring  all of the common  stock of First  Federal
Savings and Loan Association of Tyler (the  "Association"),  concurrent with its
conversion from the mutual to stock form of ownership. The Company completed its
initial public stock offering of 1,215,190 shares of $.01 par value common stock
on January 10,  1995.  The Company  utilized  approximately  one half of the net
stock  sale  proceeds  to  acquire  all  of  the  common  stock  issued  by  the
Association.  For additional  discussion of the Company's formation and intended
operations,  see the Form S-1 Registration  Statement (No.  33-83758) filed with
the Securities and Exchange  Commission and the Company's  annual report on Form
10-KSB  for the  fiscal  year  ended  September  30,  1997,  also filed with the
Commission.

The financial  statements presented in this Form 10-QSB reflect the consolidated
financial  condition  and  results of  operations  of the Company and its wholly
owned subsidiary, First Federal Savings and Loan Association of Tyler.
<PAGE>
<TABLE>
<CAPTION>
                                      EAST TEXAS FINANCIAL SERVICES, INC.
                                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                   ASSETS                                               December 31, 1997   September 30, 1997
                                                                        -----------------   ------------------
                                                                          (Unaudited)
<S>                                                                     <C>                <C>
Cash and due from banks ...........................................     $     586,802      $     508,729
Interest-bearing deposits with banks ..............................         2,545,055          6,422,404
Interest-earning time deposits with financial institutions.........         1,467,573         1,565,573
Federal funds sold ................................................         2,671,416            753,847
Mortgage-backed securities available-for-sale .....................         6,029,082          4,356,271
Investment securities held-to-maturity (estimated market value
     of $26,146,470 at December 31, 1997 and
     $23,128,073 at September 30, 1997) ...........................        26,077,423         23,058,359
Mortgage-backed securities held-to-maturity (estimated market
     value of $16,793,561 at December 31, 1997 and
      $18,611,834 at September 30, 1997) ..........................        16,303,540         18,151,765
Loans receivable, net of allowance for credit losses
     of $272,851 at December 31, 1997 and
     September 30, 1997 ...........................................        60,249,463         57,110,029
Accrued interest receivable .......................................           922,498            885,383
Federal Home Loan Bank stock, at cost .............................         1,020,900          1,005,700
Premises and equipment ............................................         1,094,361          1,123,311
Foreclosed real estate, net of allowances of $-0- .................                 0                  0
Deferred income taxes .............................................                 0                  0
Mortgage servicing rights .........................................           157,375            149,094
Other assets ......................................................           967,565            858,147
                                                                        -------------      -------------

         Total Assets .............................................     $ 120,093,053      $ 115,948,612
                                                                        =============      =============

    LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
     Demand deposits ..............................................     $   3,895,981      $   1,882,109
     Savings and NOW deposits .....................................        10,063,904          9,771,266
     Other time deposits ..........................................        77,096,211         76,897,274
                                                                        -------------      -------------
         Total deposits ...........................................        91,056,096         88,550,649
     FHLB advances ................................................         7,522,000          4,195,000
     Advances from borrowers for taxes and insurance ..............           171,878            881,685
     Federal income taxes
           Current ................................................           (14,696)                 0
           Deferred ...............................................           121,318            127,909
     Accrued expenses and other liabilities .......................           255,481          1,314,001
                                                                        -------------      -------------

         Total Liabilities ........................................        99,112,077         95,069,244
                                                                        -------------      -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                      EAST TEXAS FINANCIAL SERVICES, INC.
                                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                 (continued)


                                                                        December 31, 1997   September 30, 1997
                                                                        -----------------   ------------------
                                                                          (Unaudited)
<S>                                                                     <C>                <C>
Stockholders' equity:
     Preferred stock, $0.01 par value, 500,000
     shares authorized, none outstanding
     Common stock, $.01 par value, 5,500,000 shares authorized,
     1,256,387 shares issued ......................................            12,564             12,564
     Additional paid-in capital ...................................        12,196,879         12,196,879
     Deferred compensation - RRP shares ...........................          (300,652)          (329,748)
     Unearned employee stock ownership plan shares ................          (650,614)          (650,614)
     Net unrealized gain on securities available-for-sale .........            (4,961)            15,512
     Retained earnings (substantially restricted) .................        13,458,777         13,365,792
     Treasury stock, 230,021 shares at cost .......................        (3,731,017)        (3,731,017)
                                                                        -------------      -------------

         Total stockholders' equity ...............................        20,980,976         20,879,368
                                                                        -------------      -------------

         Total liabilities and stockholders' equity ...............     $ 120,093,053      $ 115,948,612
                                                                        =============      =============


</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
                      EAST TEXAS FINANCIAL SERVICES, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                                  Three Months
                               Ended December 31,
                                   (Unaudited)

                                                           1997            1996
                                                       ----------     ----------
<S>                                                    <C>            <C>
INTEREST INCOME
   Loans receivable:
        First mortgage loans .....................     $1,134,833     $  967,638
        Consumer and other loans .................         29,305         20,527
   Securities available-for-sale:
        Mortgage-backed securities ...............         64,390              0
   Securities held-to-maturity:
        Investment securities ....................        486,080        570,919
        Mortgage-backed securities ...............        314,702        421,434
                                                       ----------     ----------
          Total interest income ..................      2,029,310      1,980,518
                                                       ----------     ----------
INTEREST EXPENSE
   Deposits ......................................      1,123,670      1,109,672
   FHLB advances .................................         62,173              0
                                                       ----------     ----------
          Total interest expense .................      1,185,843      1,109,672
                                                       ----------     ----------

          Net interest income before provision
            for loan losses ......................        843,467        870,846
   Provision for loan losses .....................              0          5,000
                                                       ----------     ----------

          Net interest income after provision
            for loan losses ......................        843,467        865,846
NONINTEREST INCOME
   Gain (loss) on sales of interest-earning assets         21,437         13,079
   Loan origination and commitment fees ..........         22,963         17,219
   Loan servicing fees ...........................         22,303         31,686
   Other .........................................         10,712         15,430
                                                       ----------     ----------

          Total noninterest income ...............         77,415         77,414
                                                       ----------     ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                      EAST TEXAS FINANCIAL SERVICES, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                                  Three Months
                               Ended December 31,
                                   (Unaudited)
                                   (continued)

                                                           1997            1996
                                                       ----------     ----------
<S>                                                    <C>            <C>

NONINTEREST EXPENSE
   Compensation and benefits .....................        492,110        427,655
   Occupancy and equipment .......................         48,246         33,864
   SAIF deposit insurance premium ................         14,147         48,051
   (Gain) loss on foreclosed real estate .........              0             58
   Other .........................................        139,666        139,937
                                                       ----------     ----------

          Total noninterest expense ..............        694,169        649,565
                                                       ----------     ----------

Income (loss) before provision for income taxes ..        226,713        293,695
Income tax expense (benefit) .....................         82,409        110,465
                                                       ----------     ----------

NET INCOME (LOSS) ................................     $  144,304     $  183,230
                                                       ==========     ==========
Earnings per common share and earnings per
common share - assuming dilution .................     $     0.15     $     0.18

</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                              EAST TEXAS FINANCIAL SERVICES, INC.
                                   CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                          (UNAUDITED)

THREE MONTHS ENDED
December 31, 1997
                                      Common           Unearned        Unallocated       Net Unrealized                     
                                     Stock and            RRP              ESOP           Gain on Avail.         Retained   
                                  Paid in Capital       Shares           Shares        For Sale Securities       Earnings   
                                  ---------------       ------           ------        -------------------       --------  
<S>                                 <C>              <C>               <C>               <C>                  <C> 
Balance September 30, 1997 ....     $ 12,209,443     $   (329,748)     $   (650,614)     $     15,512         $ 13,365,792
Deferred compensation
     amortization .............             --             29,096              --                --                   --   
Purchase of treasury
     stock at cost ............             --               --                --                --                   --   
Payment of cash dividends .....             --               --                --                --               (50,082)
Accrued dividends - RRP stock .             --               --                --                --                (1,237)
Net change in unrealized
     gain on securities
     available for sale, net of
     deferred taxes of $10,547              --               --                --             (20,473)                --   
Net income for the three
     months ended
     December 31, 1997 ........             --               --                --                --                144,304
Balance December 31, 1997 .....     $ 12,209,443     $   (300,652)     $   (650,614)     $     (4,961)        $ 13,458,777

<CAPTION>

                                                           Total             
                                       Treasury       Stockholders'       
                                         Stock            Equity          
                                         -----            ------          
<S>                                 <C>               <C>                                         
Balance September 30, 1997 ....     $ (3,731,017)     $ 20,879,368
Deferred compensation
     amortization .............             --              29,096
Purchase of treasury
     stock at cost ............             --                --
Payment of cash dividends .....             --             (50,082)
Accrued dividends - RRP stock .             --              (1,237)
Net change in unrealized
     gain on securities
     available for sale, net of
     deferred taxes of $10,547              --             (20,473)
Net income for the three
     months ended
     December 31, 1997 ........             --             144,304
Balance December 31, 1997 .....     $ (3,731,017)     $ 20,980,976

</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
                             EAST TEXAS FINANCIAL SERVICES, INC.
                              CONSOLIDATED STATEMENT OF CASH FLOWS
                                          (Unaudited)


                                                                   For The Three Months Ended
                                                                           December 31,
                                                                      1997             1996
                                                                   -----------       -----------
<S>                                                               <C>              <C>
Cash flows from operating activities:
  Net income ................................................     $    144,304      $    183,230
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Amortization of deferred loan origination fees ........           (1,483)              (69)
      Amortization of premiums and discounts on investment
            securities, mortgage-backed securities, and loans           29,964            34,002
      Amortization of deferred compensation .................           29,096            29,095
      Compensation charge related to release of ESOP shares .           31,216            28,994
      Depreciation ..........................................           25,413            16,875
      Deferred income taxes .................................            3,956             4,567
      Stock dividends on FHLB stock .........................          (15,200)          (13,900)
      Amortization of mortgage servicing rights .............            8,686                 0
      Net (gain) loss on sale of:
        Securities held to maturity .........................                0                 0
        Foreclosed real estate ..............................                0                 0
        Net loss on disposal of fixed assets ................            3,889                 0
        Other Assets ........................................                0                 0
        Loans ...............................................          (21,438)           (4,925)
        Loans held for sale .................................                0                 0
      Proceeds from loan sales ..............................        1,596,651         1,184,950
      Origination of loans held for sale ....................                0                 0
      (Increase) decrease in:
        Accrued interest receivable .........................          (37,115)          (59,325)
        Other assets ........................................         (109,418)          136,571
        Accrued loan loss reserve ...........................                0             5,000
      Increase (decrease) in:
        Federal income tax payable ..........................                0           100,854
        Accrued expenses and other liabilities ..............       (1,073,216)         (655,252)
      Capitalized interest on time deposits .................                0                 0
                                                                   -----------       -----------

Net cash provided (used) by operating activities ............          615,305           990,667
                                                                   -----------       -----------

</TABLE>
        The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                      EAST TEXAS FINANCIAL SERVICES, INC.
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (Unaudited)

                                                                                For the Three Months Ended
                                                                                        December 31,
                                                                                   1997              1996
                                                                               -----------       -----------
<S>                                                                           <C>               <C>
Cash flows from investing activities:
  Purchases of interest earning time deposits ...........................     $          0      $          0
  Net decrease (increase) in fed funds sold .............................       (1,917,569)       (2,074,079)
  Purchases of obligations - U.S. Govt. and agencies
      held-to-maturity ..................................................       (6,533,031)         (997,578)
  Proceeds from maturity of time deposits ...............................           98,000            98,000
  Proceeds from sale of securities held-to-maturity .....................                0                 0
  Proceeds from maturity of securities held-to-maturity .................                0                 0
  Proceeds from maturities of obligations - U.S. Govt. and
      agencies held-to-maturity .........................................        3,500,000         3,000,000
  Purchases of mortgage-backed securities available-for-sale.............       (2,029,452)                0
  Purchases of mortgage-backed securities held-to-maturity ..............                0                 0
  Principal pmts on mortgage-backed securities available-for-sale........          312,146                 0
  Principal payments on mortgage-backed securities
      held-to-maturity ..................................................        1,847,047         1,628,759
  Net originations and principal collections on loans ...................       (4,762,692)       (3,721,670)
  Acquisition cost related to foreclosed real estate ....................                0            (5,252)
  Proceeds from sale of foreclosed real estate ..........................                0            58,300
  Expenditures for premises and equipment ...............................             (352)                0
                                                                               -----------       -----------
Net cash provided (used) by investing activities ........................       (9,485,903)       (2,013,520)
                                                                               -----------       -----------
Cash flows from financing activities:
  Net increase (decrease) in:
    Non-interest bearing deposits, savings, and NOW accounts ............        2,306,510           352,830
   Time deposits ........................................................          198,937          (154,908)
   FHLB advances ........................................................       15,738,500                 0
   Repayment of FHLB advances ...........................................      (12,411,500)                0
   Advances from borrowers for taxes and insurance ......................         (709,807)         (768,788)
Dividends paid to stockholders ..........................................          (51,318)          (53,965)
Purchase of treasury stock ..............................................                0                 0
                                                                               -----------       -----------

Net cash provided (used) by financing activities ........................        5,071,322          (624,831)
                                                                               -----------       -----------

Net increase (decrease) in cash and cash equivalents ....................       (3,799,276)       (1,647,684)
Cash and cash equivalents at beginning of the period ....................        6,931,133         5,699,647
                                                                               -----------       -----------

Cash and cash equivalents at end of the period ..........................     $  3,131,857      $  4,051,963
                                                                              ============      ============

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                      EAST TEXAS FINANCIAL SERVICES, INC.
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (Unaudited)
                                                  (continued)

                                                                                For the Three Months Ended
                                                                                        December 31,
                                                                                   1997              1996
                                                                               -----------       -----------
<S>                                                                           <C>               <C>
Supplemental disclosure:
Cash paid for:
  Interest on deposits ..................................................     $    561,505      $    559,672
  Income taxes ..........................................................     $          0      $      5,157
Transfers from loans to real estate
  acquired through foreclosures .........................................     $          0      $    197,595
Loan losses charged to valuation allowance ..............................     $          0      $      1,185
Recoveries credited to loan loss reserves ...............................     $          0      $          0
</TABLE>


The accompanying notes are an integral part of the financial statements.
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

             NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


NOTE 1 - BASIS OF PRESENTATION

The  financial  statements  presented  in this report have been  prepared by the
Company  pursuant to the rules and  regulations  of the  Securities and Exchange
Commission for interim  reporting and include all adjustments  which are, in the
opinion  of  management,   necessary  for  fair  presentation.  These  financial
statements  have  not  been  audited  by  an  independent  accountant.   Certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance with generally accepted  accounting  principles have been
condensed  or  omitted  pursuant  to such  rules  and  regulations  for  interim
reporting.  The Company  believes that the  disclosures are adequate to make the
information not misleading.  However,  these financial statements should be read
in conjunction  with the financial  statements and notes thereto included in the
Company's  Annual  Report on Form 10-KSB for the year ended  September 30, 1997.
The financial data and results of operations for interim  periods  presented may
not necessarily reflect the results to be anticipated for the complete year.

NOTE 2 - EARNINGS PER SHARE

Earnings per share for the three months  ended  December 31, 1997 and 1996,  has
been  computed  based on net income  divided by the weighted  average  number of
common shares outstanding during the period. For the three months ended December
31, 1997 and 1996,  the weighted  average number of shares  outstanding  totaled
961,304 and 1,002,964 shares respectively

Earnings  per  common  share - assuming  dilution,  for the three  months  ended
December 31, 1997 and 1996, has been computed based on net income divided by the
weighted average number of common shares outstanding.  In addition,  it includes
the effects of all dilutive potential common shares that were outstanding during
the period.  For the three months ended December 31, 1997 and 1996, the weighted
average number of shares  outstanding for earnings per share - assuming dilution
totaled 993,829 and 1,013,056 shares respectively.

For both  earnings per share and  earnings per common share - assuming  dilution
and as  prescribed  by the American  Institute of Certified  Public  Accountants
Statement of Position  93-6 ("SOP 93-6")  Employer's  Accounting  for  Employees
Stock Ownership Plans,  the weighted  average number of shares  outstanding does
not include unallocated Employee Stock Ownership Plan ("ESOP") shares.

See Part I, Item 1 - Note 4 to  consolidated  financial  statements  for further
information on the changes applicable for earnings per share reporting.

See Part II, Item 6 - Exhibits for a detailed  presentation  of the earnings per
share calculation for the three-month periods ended December 31, 1997 and 1996.
<PAGE>
NOTE 3 - SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
                                                         Gross          Gross        Estimated
                                      Amortized       Unrealized      Unrealized       Market
                                         Cost           Gains           Losses          Value
                                     -----------     ------------    -----------     ------------ 
<S>                                  <C>             <C>             <C>             <C>
Debt securities:
      U. S. Treasury ...........     $ 2,509,325     $    14,025     $         0     $ 2,523,350     


      U. S. government agency
                                      23,568,098          71,217          16,195      23,623,120
                                     -----------     -----------     -----------     -----------

           Total debt securities     $26,077,423     $    85,242     $    16,195     $26,146,470
                                     -----------     -----------     -----------     -----------
</TABLE>

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity  as of December 31,  1997,  by  contractual  maturity are shown
below:
<TABLE>
<CAPTION>


                                                                      Estimated
                                                     Amortized          Market
                                                        Cost             Value
                                                    -----------      ----------- 
<S>                                                 <C>                <C>
  Due in one year or less ....................      $ 9,504,316      $ 9,517,149

  Due after one year through two years .......        8,069,604        8,084,345

  Due after two years through three years ....        5,988,368        6,032,289

  Due after three years through five years ...        2,515,135        2,512,687
                                                    -----------      -----------

          Total debt securities ..............      $26,077,423      $26,146,470
                                                    -----------      -----------
</TABLE>

As of December 31, 1997, the weighted average yield on the Company's  investment
security held-to-maturity  portfolio was approximately 6.07% while the Company's
overall investment portfolio,  including securities held-to-maturity,  overnight
deposits and interest  earning time deposits with other  financial  institutions
was approximately 6.05%.
<PAGE>
The carrying values and estimated market values of  mortgage-backed  and related
securities  available-for-sale  as of December 31, 1997, by type of security are
as follows:
<TABLE>
<CAPTION>


                      Principal      Unamortized      Unearned        Unrealized       Carrying
                       Balance         Premiums       Discounts       Gain/(Loss)       Value
                    -----------     -----------     -----------      -----------      -----------
<S>                 <C>             <C>             <C>              <C>              <C>
Fixed Rate ....     $         0     $         0     $         0      $         0      $         0

Adjustable Rate       5,833,464         203,135               0           (7,517)       6,029,082
                    -----------     -----------     -----------      -----------      -----------

                    $ 5,833,464     $   203,135     $         0      $    (7,517)     $ 6,029,082
                    -----------     -----------     -----------      -----------      -----------
</TABLE>
The carrying values and estimated market values of  mortgage-backed  and related
securities  held-to-maturity as of December 31, 1997, by type of security are as
follows:
<TABLE>
<CAPTION>
                                                                                     Estimated
                      Principal      Unamortized      Unearned        Carrying         Market
                       Balance         Premiums       Discounts       Value            Value
                    -----------     -----------     -----------      -----------    -----------
<S>                 <C>             <C>             <C>             <C>             <C>
Fixed Rate ....     $ 3,163,270     $         0     $     7,279     $ 3,155,991     $ 3,164,560

Adjustable Rate      13,073,684          89,345          15,480      13,147,549      13,629,001
                    -----------     -----------     -----------     -----------     -----------

                    $16,236,954     $    89,345     $    22,759     $16,303,540     $16,793,561
                    -----------     -----------     -----------     -----------     -----------
</TABLE>
The overall yield on the Company's  mortgage-backed  securities  portfolio as of
December 31, 1997, was approximately 7.22%.

NOTE 4 - CURRENT ACCOUNTING ISSUES

SFAS NO. 128 In February 1997, the Financial  Accounting  Standards Board issued
Statement of Financial  Accounting Standards (SFAS) No. 128, Earnings Per Share.
SFAS No. 128  establishes  standards for computing and  presenting  earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. The Statement simplifies the standards for computing EPS and makes
them comparable with international EPS standards.

SFAS No. 128 replaces the  presentation of primary EPS previously  prescribed in
Accounting  Principles  Board Opinion (APB) No. 15,  Earnings Per Share,  with a
presentation  of basic EPS.  It also  requires  dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital   structures  and  requires  a  reconciliation   of  the  numerator  and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
<PAGE>
Basic EPS does not include dilution and is computed by dividing income available
to  common  stockholders  by  the  weighted  average  number  of  common  shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then shared in the  earnings  of the entity.  Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15.

The Statement is effective for financial  statements  issued for periods  ending
after December 15, 1997. The Company adopted the Statement as required.

SFAS No. 129 In February 1997, the Financial  Accounting  Standards Board issued
Statement  of  Financial  Accounting  Standards  (SFAS) No. 129,  Disclosure  of
Information  About  Capital  Structure.  It requires  information  about capital
structure  to be  disclosed  in three  separate  categories:  information  about
securities, liquidation preference of preferred stock and redeemable stock.

The Statement is effective for financial  statements  issued for periods  ending
after December 15, 1997. The Company adopted the Statement as required.

The  Company  has not  issued any  preferred  or  redeemable  stock and does not
anticipate any disclosure  requirements for these types of capital  instruments.
The Company has issued stock options and certain disclosure requirements related
to the number of shares, vesting, and exercise price of the options are required
to be disclosed in the  financial  statements.  (See Note 5 to the  Consolidated
Financial Statements of this report for a detailed presentation of the Company's
stock option plan.)

SFAS No. 130 In June of 1997, the Financial  Accounting  Standards  Board issued
Statement  of  Financial   Accounting  Standards  (SFAS  )  No.  130,  Reporting
Comprehensive  Income.  SFAS No. 130  establishes  standards  for  reporting and
displaying  comprehensive income and its components in general purpose financial
statements.  Comprehensive  income  includes net income and several  other items
that  current  accounting  standards  require  to be  recognized  outside of net
income.

SFAS No. 130 requires companies to display comprehensive income in its financial
statements,  to classify items of comprehensive  income by their nature in their
financial statements and to display accumulated balances of comprehensive income
in stockholders'  equity  separately from retained earnings and addition paid-in
capital.

The Statement is effective for fiscal years  beginning  after December 31, 1997.
The Company adopted the Statement as required.

SFAS No. 131 In June of 1997, the Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards  (SFAS) No. 131,  Disclosure About
Segments of and  Enterprise  and Related  Information.  The  Statement  requires
entities  to report  certain  information  about their  operating  segments in a
complete  set of  financial  statements.  It  requires  them to  report  certain
enterprise-wide  information  about their  products and services,  activities in
different  geographic  regions  and their  reliance on major  customers,  and to
disclose certain segment information in their interim financial statements.

The Statement is effective for fiscal years  beginning  after December 15, 1997.
The  Company  has not  determined  the  effects,  if any,  that  the  disclosure
requirements  will have on its  financial  statements.  The Company  adopted the
Statement as required.
<PAGE>
NOTE 5 - STOCK OPTION AND INCENTIVE PLAN

 The 1995 Stock Option and Incentive Plan (the "Stock Option Plan") provides for
awards in the form of stock options,  stock appreciation  rights,  limited stock
appreciation rights, and restricted stock.

Options to  purchase  shares of common  stock of the  Company  may be granted to
selected directors,  officers and key employees.  The number of shares of common
stock  reserved for issuance under the stock option plan was equal to 121,519 or
10% of the total number of common shares issued pursuant to the conversion.  The
option  exercise  price  cannot  be less  than  the  fair  market  value  of the
underlying  common  stock as of the date of the option  grant,  and the  maximum
option  term  cannot  exceed  ten years.  Awards  vest at a rate of 20% per year
beginning at the date of the grant.  The Company plans to use treasury stock for
the  exercise  of  options.  The  following  is a summary  of changes in options
outstanding:
<TABLE>
<CAPTION>
<S>                                                                     <C>
Options outstanding
     Balance, September 30, 1995 ...............................        103,411
           Granted at $14.125 per share ........................            -0-
           Exercised at $14.125 per share ......................         (2,090)
           Forfeited and expired ...............................            -0-
Balance, September 30, 1996 ....................................        101,321
           Granted .............................................            -0-
           Exercised at $14.125 per share ......................         (1,056)
           Forfeited and expired ...............................            -0-
      Balance, September 30, 1997 ..............................        100,276
                                                                       ========

Options exercisable at year end under stock option plan ........         38,233
                                                                       ========

Shares available for future grants .............................         18,108
                                                                       ========
</TABLE>

During the quarter ended December 31, 1997, there were no changes to the options
outstanding.

NOTE 6 - FORWARD-LOOKING STATEMENTS

When  used in this  Form  10-QSB  or  future  filings  by the  Company  with the
Securities and Exchange Commission, the Company's press releases or other public
or shareholder communications or in oral statements made with the approval of an
authorized  executive officer,  the words or phrases "will likely result",  "are
expected  to",  "will  continue",  "is  anticipated",   "estimate",   "project",
"believe"  or similar  expressions  are  intended to  identify  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  The Company  wishes to caution  readers not to place undue reliance on
any such forward-looking  statements,  which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions,  changes in levels of market interest rates, credit risks of lending
activities,  and competitive and regulatory factors,  could affect the Company's
financial  performance  and could cause the Company's  actual results for future
periods to differ materially from those anticipated or projected.
<PAGE>
The Company does not undertake,  and specifically  disclaims any obligation,  to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.
<PAGE>


                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1997





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

GENERAL

The principle business of the Company is that of a community-oriented  financial
institution  attracting deposits from the general public and using such deposits
to originate  one- to  four-family  residential  loans and, to a lesser  extent,
commercial  real estate,  one- to  four-family  construction,  multi-family  and
consumer  loans.  These  funds have also been used to  purchase  mortgage-backed
securities,  U. S.  government  and  agency  obligations  and other  permissible
securities.  The ability of the Company to attract  deposits is  influenced by a
number of  factors,  including  interest  rates paid on  competing  investments,
account maturities and levels of personal income and savings. The Company's cost
of funds is influenced by interest  rates on competing  investments  and general
market rates of interest.  Lending  activities  are influenced by the demand for
real  estate  loans and other types of loans,  which is in turn  affected by the
interest  rates at which  such  loans  are  made,  general  economic  conditions
affecting  loan  demand,  the  availability  of funds  for  lending  activities,
economic conditions and changes in real estate values.

The  Company's  results of operations  are  dependent  primarily on net interest
income,  which is the  difference  between  the  income  earned  on its loan and
investment portfolios and the interest paid on deposits and borrowings.  Results
of operations  are also affected by the Company's  provision for loan losses and
the net  gain(loss)  on sales of  interest  earning  assets and loan  fees.  The
Company's  results of  operations  are also  significantly  affected  by general
economic and  competitive  conditions,  particularly  changes in interest rates,
government policies and actions of regulatory authorities.

FINANCIAL CONDITION

Total assets were $120.1  million at December 31, 1997, a $4.2 million  increase
from the $115.9  million  reported at September  30, 1997,  the  Company's  most
recent  fiscal year end.  The  increase in total assets was the result of a $3.1
million  increase in loans  receivable,  a $3.0 million  increase in  investment
securities  held-to-maturity  and a $1.7  million  increase  in  mortgage-backed
securities  available-for-sale.  The increases were  partially  offset by a $2.0
million decrease in interest-bearing  deposits with banks and federal funds sold
and a $1.8 million decrease in mortgage-backed securities held-to-maturity.

The  increase  in loans  receivable  was the result of the  Company's  continued
emphasis  on one- to  four-family  portfolio  loans.  During the  quarter  ended
December  31,  1997,  the  Company  continued  its policy of placing all one- to
<PAGE>
four-family loans with original terms of less than or equal to 15 years and with
interest rates of greater than or equal to 7.00% into portfolio. Continued lower
mortgage rates  influenced  borrowers to select fixed rate loans and, as result,
the Company was able to increase its loans receivable  portfolio.  Subsequent to
December  31,  1997,  mortgage  loan  rates  for 15 year  loans  fell  below the
Company's 7.00% threshold. Management made the decision to then sell these loans
into the secondary market. A sustained period of declining  mortgage rates could
impede the  Company's  ability to  continue  to  increase  its loans  receivable
portfolio as few, if any, loans would be placed into portfolio. The result could
be an overall  decline in the  Company's  yield on earning  assets as cash flows
normally directed to loans are reinvested into lower yielding assets.

Also, the Company was able to originate approximately $1.4 million in commercial
real estate loans during the quarter ended December 31, 1997. The fixed interest
rate loans ranged in size from $140,000 to $500,000,  had interest rates ranging
from 7.25% to 8.50% and had terms of less than 20 years.  The loans were  funded
with  borrowed  funds  ("advances")  from the  Federal  Home Loan Bank of Dallas
("FHLB").  The  advances  were  designed  to mirror  the terms of the loans with
respect  to  original  maturity  of the loan and,  if  applicable,  any  balloon
payments.  In  addition,  the  advances  were set up to  amortize  over the same
schedule as the  corresponding  loan and the interest rates on the advances were
fixed for the term of the advance.  The advances had interest  rates that ranged
between  6.00% and 6.15%.  The result was a gross margin on each of the loans of
between 125 and 235 basis  points.  Subject to prudent  underwriting  standards,
favorable  borrowing  rates and  continued  strength in the local  economy,  the
Company expects to continue to originate  small to medium sized  commercial real
estate loans and fund them with advances from the FHLB.

At December 31, 1997, loans receivable totaled $60.2 million,  compared to $57.1
million at September  30, 1997.  For the quarter  ended  December 31, 1997,  the
Company originated approximately $8.1 million in loans.

The  increase  in  the  investment  securities  held-to-maturity  portfolio  was
primarily   the  result  of  the   Company's   decision   to   transfer   excess
interest-earning  bank  balances and federal  funds sold into longer term higher
yielding investments. At December 31, 1997, the portfolio contained $9.5 million
in securities  with remaining  terms until maturity of less than one year,  $8.1
million with  remaining  maturities of one through two years,  $6.0 million with
remaining  maturities of two through three years and $2.5 million with remaining
maturities of three through five years.

At December 31,  1997,  the  investment  securities  held-to-maturity  portfolio
totaled  $26.1  million,  compared to $23.1  million at September  30, 1997.  At
December 31, 1997, the overall yield on the portfolio was approximately 6.05%.

At December  31, 1997,  the Company  reported  $6.0  million in  mortgage-backed
securities  available-for-sale,  compared to $4.3 million at September 30, 1997.
The  increase  was the result of the  Company's  continued  program of borrowing
funds from the FHLB and investing the proceeds into  mortgage-backed and similar
securities in an effort to achieve a positive margin on the transaction.

Subject to the favorable  interest  rates,  the Company  intends,  over the next
several  quarters,  to systematically  borrow up to approximately  $20.0 million
from the  FHLB and  invest  the  proceeds  in  adjustable  rate  mortgage-backed
securities to be held in an available-for-sale  accounting  classification.  The
purpose of the program is to leverage a portion of the Company's  excess capital
and to  achieve  a rate of return on the  difference  in the rate  earned on the
<PAGE>
securities  and the cost of the  advances.  The success of the  program  will be
dependent  upon several  factors,  including the  Company's  ability to purchase
adjustable  rate  securities that will maintain a positive margin above the FHLB
advance rates.  The Company intends to primarily borrow funds from the FHLB with
terms of approximately thirty days and invest in mortgage-backed securities with
interest rate adjustment  frequencies  that vary between one month and one year.
As a result,  the success of the program will be dependent  upon the  difference
between  very short term  federal fund type  interest  rates and interest  rates
comparable  to U.S.  Treasury bill rates.  In general,  the program will be more
successful as the  difference  in these types of interest  rates widens and less
successful as the difference narrows. Also, the general level of interest rates,
which in turn affect mortgage  rates,  will have an effect on the success of the
program.  A period of lower  interest  rates could have the effect of increasing
prepayments  of  the  principal  balances  on the  securities  as  borrowers  on
underlying loans of the securities  elect to refinance their mortgages.  A rapid
period of  prepayments  could have the effect of decreasing the overall yield on
the program.

At  December  31,  1997,  the  yield  on  the  securities  in  the  program  was
approximately 6.31% while the cost of the FHLB advance was approximately 5.61%.

The Company's  mortgage-backed  securities  held-to-maturity  portfolio  totaled
$16.3  million at December 31, 1997,  compared to $18.2 million at September 30,
1997.  The decrease was  primarily  due to  principal  payments  received on the
portfolio   during  the   quarter.   The   Company's   decision   to  invest  in
mortgage-backed securities held-to-maturity, as it is with investment securities
held-to-maturity,  is primarily  dependent  upon and is counter to the Company's
ability  to  originate  portfolio  loans.  The  weighted  average  yield  on the
portfolio was approximately 7.65% at December 31, 1997.

Total deposits were $91.1 million at December 31, 1997, a $2.5 million  increase
from the $88.6 million  reported at September 30, 1997. The increase in deposits
was  primarily the result of the Company  transferring  funds from advances from
borrowers for taxes and insurance and custodial  accounts for escrow balances on
loans sold into a temporary  account  designated to pay year end property  taxes
for its loan customers. The balance in the account,  approximately $2.0 million,
was,  subsequent to December 31, 1997,  withdrawn as payments to various  taxing
entities were made on behalf of loan customers.

The Company's average deposit cost was approximately 4.91% at December 31, 1997,
unchanged from the 4.91% reported at September 30, 1997.

The Company  reported  $7.5 million in borrowed  funds at December 31, 1997,  an
increase of $3.3 million from the $4.2 million  reported at September  30, 1997.
Approximately  $6.0  million  of the  borrowed  funds were  associated  with the
Company's  investment  in  mortgage-backed  securities  available-for-sale.  The
advance  had a remaining  term of less than 30 days and had an interest  rate of
5.61%. The remaining $1.5 million in advances were associated with the Company's
commercial  real  estate  loan  portfolio  and had a  weighted  average  cost of
approximately 6.09%.

Stockholders'  equity totaled $21.0 million at December 31, 1997, an increase of
$102,000 from the $20.9 million reported at September 30, 1997. The increase was
primarily  attributable  to the net income of $144,000  reported for the quarter
and a $29,000  increase in deferred  compensation  RRP shares.  The increase was
partially  offset by a $20,000  decline in net  unrealized  gains on  securities
available-for-sale and $51,000 in cash dividends paid during the quarter .
<PAGE>
At December  31,  1997,  the  Company  reported a book value per share of $20.44
based on  1,026,366  outstanding  shares.  The  Company did not  repurchase  any
treasury stock during the quarter ended  December 31, 1997 and reported  230,021
shares of treasury stock at an average cost of $16.22 per share at quarter end.

RESULTS OF OPERATIONS

The Company's net income is dependent  primarily upon net interest  income,  the
difference or spread  between the average yield earned on loans and  investments
and the average rate paid on deposits,  as well as the relative  amounts of such
assets and liabilities.  The Company,  like other financial  intermediaries,  is
subject  to  interest  rate  risk  to  the  degree  that  its   interest-bearing
liabilities  mature or reprice at different times, or on a different basis, than
its interest earning assets.

COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997
         AND DECEMBER 31, 1996

General. Net income for the three months ended December 31, 1997 was $144,000 or
$.15 per  share,  a  decrease  of  $39,000  from the $ 183,000 or $.18 per share
reported  for the three months  ended  December  31,  1996.  The decrease in net
income was  attributable  to a $22,000  decline  in net  interest  income  after
provision for loan losses and a $45,000 increase in total non-interest expenses,
which were partially offset by a $28,000 decline in income tax expenses.

Net Interest  Income.  For the quarter  ended  December  31, 1997,  net interest
income after provision for loan losses totaled  $844,000,  a decrease of $22,000
from the $866,000  reported  for the quarter  ended  December  31,  1996.  On an
annualized  basis,  the $843,000 in net interest  income for the current quarter
was approximately  2.95% of average interest earning assets and 2.86% of average
total assets.  For the quarter ended December 31, 1996, the $866,000 in reported
net interest income was  approximately  3.10% of average interest earning assets
and  3.04% of  average  total  assets.  Average  interest  earning  assets  were
approximately  $114.4 million for the quarter ended December 31, 1997,  compared
to $111.7 million for the quarter ended December 31, 1996.

The  decline in net  interest  income,  despite the fact that  average  interest
earning assets increased, was primarily attributable to the continued decline in
the general level of interest rates and the narrowing of the difference in short
term and long term rates.  Cash flow from the Company's  interest earning assets
has increased over the past several quarters as mortgage  borrowers,  both local
and those associated with the Company's  mortgage-backed  securities portfolios,
have elected to refinance their mortgages. In addition,  scheduled maturities of
the  investment  securities   held-to-maturity   portfolio  have  also  provided
additional  challenges  for  reinvesting  cash flow in a falling  interest  rate
environment.  The result has been,  despite growth in interest earning assets, a
yield on the Company's  average interest earning assets that remained  unchanged
at 7.09% for the quarters ended December 31, 1997 and 1996.

Contrarily,   interest   rates  on  the  Company's   primary  source  of  funds,
certificates  of deposit,  have not  decreased  as interest  rates have  fallen.
Continued  competition  for deposits in the Company's  market have compelled the
Company to continue to pay higher  interest  rates in order to maintain  current
deposit  levels.  On an  annualized  basis,  the $1.2 million in total  interest
expense,  reported for the quarter ended  December 31, 1997,  was  approximately
4.95% of average interest costing liabilities  outstanding for the quarter.  For
the quarter ended December 31, 1996, the $1.1 million in total interest  expense
was approximately 4.83% of average interest costing liabilities.
<PAGE>
Total interest  income was $2.0 million for the quarter ended December 31, 1997,
unchanged from the $2.0 million reported for the same quarter in 1996.  Interest
income on loans  receivable  totaled  $1.2  million  or 7.94% of  average  loans
receivable  balances  outstanding for the quarter,  compared to 8.04% of average
loans  receivable  balances  for  the  $988,000  in  interest  income  on  loans
receivable  reported for the quarter ended December 31, 1996. During the quarter
ended December 31, 1997, the Company  continued its plan to place into portfolio
mortgage  loans with  original  maturities of less than or equal to 15 years and
with interest rates of greater than or equal to 7.00%. As a result,  the Company
has been able to increase its loan  receivable  portfolio and increase  interest
income from loans  receivable,  despite the decline in the average  yield on the
portfolio.  For the quarter ended December 31, 1997, the Company originated $8.1
million in loans. Approximately $1.6 million were sold into the secondary market
while the remainder were placed into portfolio.

Interest income from investment  securities  available-for  sale totaled $64,000
for the three  months ended  December  31, 1997,  compared to none for the three
months ended December 31, 1996.  Interest  income from this portfolio is part of
the Company's plan to borrow funds from the FHLB and invest in  mortgage-related
securities in an effort to achieve a margin on the  difference in the investment
yield and the cost of the  borrowings  from the FHLB. The yield on the portfolio
was approximately 6.31% at December 31, 1997.

Interest income from the investment  securities  held-to-maturity  and overnight
funds portfolios  totaled $486,000 for the three months ended December 31, 1997,
compared to $571,000 for the same quarter in 1996. The decline was primarily the
result  of a $4.2  million  decrease  in  average  balances  outstanding  in the
portfolios  from $36.5  million for the three months ended  December 31, 1996 to
$32.3  million for the three  months ended  December  31, 1997.  During the past
several  quarters,  maturing  investment  securities have been redirected to the
Company's lending operations.  Additionally, maturing investment securities that
are  replaced  are at lower  yields.  The  average  yield on the  portfolio  was
approximately  6.02% for the quarter ended December 31, 1997,  compared to 6.24%
for the three months ended December 31, 1996.

Interest income from the mortgage-backed  securities  held-to-maturity portfolio
totaled  $315,000  for the three months  ended  December  31, 1997,  compared to
$421,000 for the same period in 1996.  Continued  prepayments  on the adjustable
rate securities in the portfolio  caused the balance to decline to $16.3 million
at  December  31,  1997 from $23.3  million at December  31,  1996.  The Company
redirected the cash flow from the portfolio into its lending operations.

Interest  paid to  depositors  totaled  $1.1  million for the three months ended
December  31, 1997,  unchanged  from the $1.1 million for the three months ended
December 31, 1996.  Average  deposit  balances  declined $2.0 million from $91.8
million at December 31, 1996 to $89.8 million at December 31, 1997.  Interest on
FHLB advances was $62,000 for the three months ended December 31, 1997, compared
to none for the same period in 1996.  Total interest  expense as a percentage of
average  interest-costing  liabilities  was  approximately  4.95%  for the three
months ended  December  31,  1997,  compared to 4.83% for the three months ended
December 31, 1996.

Provision For Loan Losses. The Company made no provision for loan losses for the
quarter  ended  December  31,  1997,  compared to $5,000 for the  quarter  ended
December 31, 1996. (See - "Asset Quality")

Non-Interest  Income.  Non-interest  income totaled $77,000 for the three months
ended December 31, 1997, unchanged from the $77,000 reported for the same period
in 1996.
<PAGE>
Gains  on sales of  interest-earning  assets  equaled  $21,000  for the  current
quarter,  an $8,000  increase from the $13,000  reported for the same quarter in
1996. The increase was  attributable to additional gains on the sale of mortgage
loans into the  secondary  market  during the quarter  ended  December 31, 1997,
compared  to the same  quarter  in 1996.  In  addition,  loan  origination  fees
increased  $6,000 to $23,000 for the three months  ended  December 31, 1997 from
$17,000  for the  three  months  ended  December  31,  1996.  The  increase  was
attributable to the increase lending activity for the quarter ended December 31,
1997 compared to the same quarter in 1996.

Offsetting  the  increases  in gains on sales of loans and loan fee income was a
$9,000 decline in loan servicing fee income to $22,000 for the current  quarter,
compared to $32,000 for the quarter ended December 31, 1996. The decline was the
result,  as borrowers  paid of or  refinanced  their  mortgages,  of a continued
decrease  of older  loans  in the  Company's  servicing  portfolio  with  higher
servicing  margins.  In addition,  the Company's  decision to retain its fifteen
year loans and a borrower  preference for such loans, has resulted in fewer sold
loans and therefore fewer additions to the loan servicing portfolio.

Non-Interest  Expenses.  Non-interest  expenses  totaled  $694,000 for the three
months ended December 31, 1997,  compared to $650,000 for the three months ended
December 31, 1996.

The  increase  in  non-interest  expense was  primarily  the result of a $65,000
increase in compensation and benefits expense from $428,000 for the three months
ended  December 31, 1996 to $492,000  for the three  months  ended  December 31,
1997. The increase in compensation and benefits expense was mostly the result of
additional  compensation for two new employees added in 1997 in conjunction with
the opening of a new loan production office by the Company and the addition of a
loan officer in one of its full service  locations.  Also,  additional  expenses
associated  with the funding of the Company's  defined  benefit pension plan and
additional  expenses associated with the Company's Employee Stock Ownership Plan
accounted for a portion of the increase.

Occupancy and  equipment  expense  increased  $14,000 from $34,000 for the three
months ended  December  31, 1996 to $48,000 for the three months ended  December
31, 1997. The increase was also attributable to additional  expenses  associated
with the opening of a new loan production office in 1997.

Offsetting  the  increases  in  compensation  and  benefits  and  occupancy  and
equipment  expenses  was a $34,000  decrease in SAIF deposit  insurance  premium
expense.  The decrease was a result of reduced SAIF insurance premium rates once
the fund  attained  its  minimum  required  level  after  the  one-time  special
assessment paid by all institutions in 1996.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$82,000 or 36.3% or pre-tax income for the three months ended December 31, 1997,
compared  to  $110,000  or 37.6% of pre-tax  income for the three  months  ended
December 31, 1996.

ASSET QUALITY

At December 31, 1997, the Company's  non-performing  assets totaled  $399,000 or
 .33% of total assets,  compared to $310,000 or .27% of total assets at September
30, 1997.  The increase was  primarily  the result of the addition of one single
family residence.  At December 31, 1997,  non-performing assets was comprised of
seventeen  (17) loans,  the largest of which was  $204,000,  secured by a single
family dwellings.
<PAGE>
Non-performing  loans at December  31, 1997,  equaled  $399,000 or .66% of loans
receivable,  compared to $310,000 or .54% of loans  receivable  at September 30,
1997.

Classified assets totaled $819,000 or .68% of total assets at December 31, 1997,
compared to $904,000 or .78% of total assets at September 30, 1997.

Classified assets and non-performing assets differ in that classified assets may
include loans less than ninety (90) days delinquent.  Also, assets guaranteed by
government agencies such as the Veterans  Administration and the Federal Housing
Administration  are not  included  in  classified  assets  but are  included  in
non-performing  assets.  All classified assets at December 31, 1997, were deemed
to be "substandard".  No assets were classified  "doubtful" or "loss" as of such
date.

The Company's  allowance for loan losses totaled $273,0000 at December 31, 1997,
unchanged from September 30, 1997. The allowance for loan losses as a percentage
of loans  receivable  equaled  .45% at December  31,  1997,  compared to .48% at
September 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company's  principal sources of funds are deposits from customers,  advances
from  the  FHLB,  amortization  and  prepayment  of  loan  principal  (including
mortgage-backed  securities),  maturities  of  securities,  sales of  loans  and
operations.

Current  Office of Thrift  Supervision  regulations  require the  Association to
maintain, at a minimum, cash and eligible investments,  in an amount of not less
than 4.0% of net withdrawable  savings accounts and borrowings payable on demand
or in one year or less.  Liquid assets  include cash on hand,  unpledged  demand
deposits,  certain time deposits,  and, U. S Government and agency  obligations.
The Association  maintains a liquid asset ratio above the minimum required level
of the Office of Thrift  Supervision.  At December 31, 1997,  the  Association's
liquid asset ratio equaled 42.2%.

The  Association  uses its liquidity and capital  resources  principally to meet
ongoing   commitments  to  fund  maturing   certificates  of  deposit  and  loan
commitments,  maintain  liquidity  and pay operating  expenses.  At December 31,
1997,  the  Association  had  outstanding  commitments  to extend credit on $2.8
million of real estate loans.

Management  believes that present levels of liquid assets are sufficient to meet
anticipated future loan commitments as well as deposit withdrawal demands.

Total  stockholders'  equity  equaled  $21.0  million at December 31,  1997,  an
increase of $102,000 from the $20.9 million  reported at September 30, 1997. The
increase was  primarily  the result of the $144,000 net income  reported for the
quarter  ended  December 31, 1997,  less a $51,000 cash dividend paid during the
quarter.

As of December 31, 1997,  the  Company's  reported  book value per share,  using
total stockholders' equity of $21.0 million (net of the cost of unallocated ESOP
and RRP  shares) and  1,026,366  outstanding  shares of common  stock (the total
issued shares including  unallocated ESOP and RRP shares, less treasury shares),
equaled $20.44 per share.
<PAGE>
Subsequent to the quarter  ended  December 31, 1997,  the Company  announced its
intention  to pay a cash  dividend of $.05 per share on February  25,  1998,  to
stockholders of record at February 11, 1998.

Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989
("FIRREA"),  Congress  imposed  a three  part  capital  requirement  for  thrift
institutions.  At December  31,  1997,  the  Association's  actual and  required
capital amounts under each of the three requirements were as follows:

- Tangible  Capital  (stockholders'  equity) was $17.8 million or 14.8% of total
assets, exceeding the minimum requirement of 1.5% by $16.0 million.

- Core  Capital  (Tangible  capital plus  certain  intangible  assets) was $17.8
million or 14.8% of total assets,  exceeding the minimum  requirement of 3.0% by
$14.2 million.

- Risk-based  Capital (Core  capital plus general loan and valuation  allowances
less an adjustment for  capitalized  mortgage  servicing  rights)  equaled $18.1
million of 38.9% of risk weighted assets,  exceeding the minimum  requirement of
8.0% of risk weighted assets by $14.4 million.

At December 31,  1997,  the  Association  was  considered  a "well  capitalized"
institution  under the prompt  corrective  action  requirements  of the  Federal
Deposit Insurance Corporation Improvement Act of 1991.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                DECEMBER 31, 1997



                           PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

     There  are no  material  legal  proceedings  to which  the  Company  or the
     Association is a party or of which any of their  property is subject.  From
     time-to-time,  the  Association  is a party to  various  legal  proceedings
     incident to the conduct of its business.

Item 2.  Changes In Securities

     None

Item 3.  Defaults Upon Senior Securities

     None

Item 4.  Submissions Of Matters To A Vote Of Security Holders

     On January 21, 1998, the Company's Annual Stockholders' Meeting was held to
     elect directors and ratify the appointment of independent  auditors for the
     current  fiscal year. The following are the voting results of each of these
     matters submitted to stockholders:

     The election of Gerald W. Free,                  For                848,244
     Jim M. Vaughn, M.D., and H. H. Richardson, Jr.   Against                  0
     As directors for a three year term ending        Abstain              2,612
     January 2001.                                    Broker Non-Votes         0

     Ratification of the appointment of Bryant        For                848,244
     And Welborn, LLP, as independent                 Against                  0
     Auditors for the fiscal year ending              Abstain              2,612
     September 30, 1998.

     The text of the  matters  referred  to in this  Item 4 is set  forth in the
     Proxy  Statement  dated  December  23,  1997,  previously  filed  with  the
     Securities and Exchange Commission.

Item 5.  Other Information.

     None

Item 6.  Exhibits and Reports on Form 8-K

     (a)  The following exhibits are filed herewith:

         Exhibit 11.0 - Computation of Earnings Per Share

         Exhibit 27.0 - Financial Data Schedule
<PAGE>

     (b)  Reports on Form 8-K

         During the quarter ended  December 31, 1997, the Company filed a report
         on Form 8-K on October  28,  1997,  to report the  issuance  of a press
         release dated October 28, 1997,  announcing the Company's  intention to
         pay, on November 26,  1997,  a cash  dividend of $.05 per share for the
         quarter ended Septemer 30, 1997, to  stockholders of record on November
         2, 1997.

         During the quarter ended  December 31, 1997, the Company filed a report
         on Form 8-K on  December  1, 1997,  to report the  issuance  of a press
         release dated December 1, 1997,  announcing the Company's  earnings for
         the year ended September 30, 1997.

<PAGE>


                                   SIGNATURES

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


                                    East Texas Financial Services, Inc.


Date:  February 9, 1998             /s/ Gerald W. Free
                                    ------------------
                                    Vice Chairman, President and CEO
                                    (Principal Executive Officer)


Date:  February 9, 1998             /s/  Derrell W. Chapman
                                    -----------------------
                                    Vice President/COO/CFO
                                    (Principal Financial and Accounting Officer)