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 June 30, 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 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 June 30, 1998, was 1,539,461.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1998



                                      INDEX

                                   

Part I - Financial Information

     Item 1.  Financial Statements

         Consolidated   Statements  of  Financial   Condition,   June  30,  1998
         (Unaudited) and September 30, 1997

         Consolidated  Statements of Income,  (Unaudited)  three months and nine
         months ended June 30, 1998, and June 30, 1997

         Consolidated Statement of Changes in Stockholders' Equity,  (Unaudited)
         nine months ended June 30, 1998

         Consolidated  Statements of Cash Flows,  (Unaudited)  nine months ended
         June 30, 1998, and June 30, 1997

         Notes to (Unaudited) Consolidated Financial Statements, June 30, 1998
                     

     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 
<PAGE>


                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1998



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  acquired  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


                                      
                                                                     June 30, 1998    September 30, 1997
                                                                     -------------    ------------------
                                                                       (Unaudited)
<S>                                                                  <C>                <C>          
ASSETS
Cash and due from banks ........................................     $     853,232      $     508,729
Interest-bearing deposits with banks ...........................         2,161,915          6,422,404
Interest earning time deposits with financial institutions .....         1,565,617          1,565,573
Federal funds sold .............................................                 0            753,847
Mortgage-backed securities available-for-sale ..................        10,176,556          4,356,271
Investment securities held-to-maturity (estimated market value
     of $29,127,057 at June 30, 1998, and $23,128,073
     at September 30, 1997) ....................................        29,046,630         23,058,359
Mortgage-backed securities held-to-maturity (estimated market
     value of $12,752,806 at June 30, 1998, and
     $18,611,834 at September 30, 1997) ........................        12,547,113         18,151,765
Loans receivable, net of allowance for credit losses
     of $233,670 at June 30, 1998, and $272,851
     at September 30, 1997 .....................................        61,727,067         57,110,029
Accrued interest receivable ....................................           936,782            885,383
Federal Home Loan Bank stock, at cost ..........................           777,400          1,005,700
Premises and equipment .........................................         1,050,712          1,123,311
Foreclosed real estate, net of allowances of $-0- ..............           204,700                  0
Mortgage servicing rights ......................................           197,418            149,094
Other assets ...................................................         1,348,687            858,147
                                                                     -------------      -------------

         Total Assets ..........................................     $ 122,593,829      $ 115,948,612
                                                                     =============      =============


     LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Demand deposits ...........................................     $   1,965,549      $   1,882,109
     Savings and NOW deposits ..................................        10,862,579          9,771,266
     Other time deposits .......................................        74,845,657         76,897,274
                                                                     -------------      -------------
         Total deposits ........................................        87,673,785         88,550,649

     FHLB advances .............................................        12,322,028          4,195,000
     Advances from borrowers for taxes and insurance ...........           615,633            881,685
     Federal income taxes
         Current ...............................................            89,741                  0
         Deferred ..............................................            33,612            127,909
     Accrued expenses and other liabilities ....................           674,055          1,314,001
                                                                     -------------      -------------

         Total Liabilities .....................................       101,408,854         95,069,244
                                                                     -------------      -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   EAST TEXAS FINANCIAL SERVICES, INC.
                              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                               (continued)


                                      
                                                                     June 30, 1998    September 30, 1997
                                                                     -------------    ------------------
                                                                       (Unaudited)
<S>                                                                  <C>                <C>          
Stockholders' equity:
     Preferred stock, $0.01 par value, 500,000
     shares authorized, none outstanding
     Common stock, $0.01 par value, 5,500,000 shares authorized,
     1,884,492 shares issued and 1,539,461 outstanding .........            12,564             12,564
     Additional paid-in capital ................................        12,203,160         12,196,879
     Deferred compensation - RRP shares ........................          (242,461)          (329,748)
     Unearned employee stock ownership plan shares .............          (650,614)          (650,614)
     Unrealized gain/(loss) available-for-sale securities (net)             (9,805)            15,512
     Retained earnings (substantially restricted) ..............        13,603,148         13,365,792
     Treasury stock, 345,031 shares at cost ....................        (3,731,017)        (3,731,017)
                                                                     -------------      -------------

         Stock stockholders' equity ............................        21,184,975         20,879,368
                                                                     -------------      -------------

         Total liabilities and stockholders' equity ............     $ 122,593,829      $ 115,948,612
                                                                     =============      =============


</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
<PAGE>
<TABLE>
<CAPTION>
                                             EAST TEXAS FINANCIAL SERVICES, INC.
                                              CONSOLIDATED STATEMENTS OF INCOME


                                                                      Three Months                      Nine Months
                                                                     Ended June 30,                    Ended June 30,
                                                                      (Unaudited)                      (Unaudited)
                                                                 1998             1997             1998             1997
                                                             -----------      -----------      -----------      -----------
<S>                                                          <C>              <C>              <C>             <C>           
INTEREST INCOME
   Loans receivable:
     First Mortgage ....................................     $ 1,137,446      $ 1,050,080      $ 3,424,340      $ 3,023,247
     Consumer and other loans ..........................          60,995           20,378          131,083           61,306
   Securities available for sale:
     Investment securities .............................          11,546           14,626           41,859           42,328
     Mortgage-backed securities ........................         145,433            9,530          314,507            9,530
   Securities held to maturity:
     Investment securities .............................         422,663          428,745        1,223,087        1,367,214
     Mortgage-backed securities ........................         243,422          354,023          839,190        1,164,609
   Deposits with banks .................................          58,664           76,489          190,550          220,477
                                                             -----------      -----------      -----------      -----------

       Total interest income ...........................       2,080,169        1,953,871        6,164,616        5,888,711
                                                             -----------      -----------      -----------      -----------

INTEREST EXPENSE

   Deposits ............................................       1,096,740        1,105,921        3,325,875        3,310,523
   FHLB advances .......................................         167,030            4,728          350,878            4,728
                                                             -----------      -----------      -----------      -----------

       Total interest expense ..........................       1,263,770        1,110,649        3,676,753        3,315,251
                                                             -----------      -----------      -----------      -----------

       Net interest income before
          provision for loan losses ....................         816,399          843,222        2,487,863        2,573,460

   Provision for loan losses ...........................               0                0                0            5,000
                                                             -----------      -----------      -----------      -----------

       Net interest income after
         provision for loan losses .....................         816,399          843,222        2,487,863        2,568,460
                                                             -----------      -----------      -----------      -----------

NONINTEREST INCOME
   Gain(loss) on sale of interest-earning assets .......          37,230           13,050          100,675           44,372
   Loan origination and commitment fees ................          14,245           18,809           56,015           46,102
   Loan servicing fees .................................          19,874           26,860           68,798           73,797
   Gain on foreclosed real estate ......................          (6,911)               0           (6,351)               0
   Other ...............................................          13,692           18,967           35,330           51,382
                                                             -----------      -----------      -----------      -----------

       Total noninterest income ........................          78,130           77,686          254,467          215,653
                                                             -----------      -----------      -----------      -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                             EAST TEXAS FINANCIAL SERVICES, INC.
                                              CONSOLIDATED STATEMENTS OF INCOME


                                                                      Three Months                      Nine Months
                                                                     Ended June 30,                    Ended June 30,
                                                                      (Unaudited)                      (Unaudited)
                                                                 1998             1997             1998             1997
                                                             -----------      -----------      -----------      -----------
<S>                                                          <C>              <C>              <C>             <C>           
NONINTEREST EXPENSE
   Compensation and benefits ...........................         463,006          425,534        1,415,800        1,271,288
   Occupancy and equipment .............................          47,084           40,769          140,843          112,829
   SAIF deposit insurance premium ......................          14,417           15,011           42,862           66,186
   Loss on foreclosed real estate ......................               0               (8)               0            5,683
   Other ...............................................         173,060          136,337          470,015          438,547
                                                             -----------      -----------      -----------      -----------

       Total noninterest expense .......................         697,567          617,643        2,069,520        1,894,533
                                                             -----------      -----------      -----------      -----------

Income (loss) before provision for income taxes ........         196,962          303,265          672,810          889,580

Income tax expense (benefit) ...........................          73,913          112,354          247,662          329,646
                                                             -----------      -----------      -----------      -----------

NET INCOME (LOSS) ......................................     $   123,049      $   190,911      $   425,148      $   559,934
                                                             ===========      ===========      ===========      ===========



Earnings per common share ..............................     $       .09      $       .13      $       .29      $       .38
Earnings per common share - assuming dilution ..........             .08              .13              .28              .37
</TABLE>

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



NINE MONTHS ENDED
  June 30, 1998

                                     Common                                  Net Unrealized 
                                   Stock and        Unearned   Unallocated   Gain on Avail.                                Total
                                    Paid in            RRP         ESOP         For Sale      Retained     Treasury    Stockholders'
                                    Capital           Shares      Shares       Securities     Earnings       Stock        Equity
                                    -------           ------      ------       ----------     --------       -----        ------
<S>                               <C>             <C>          <C>          <C>              <C>          <C>           <C>        
Balance October 1, 1997           $12,209,443     $ (329,748)  $ (650,614)  $      15,512    $13,365,792  $(3,731,017)  $20,879,368

Deferred compensation
   amortization                             -         87,287            -               -              -             -       87,287

Payment of cash dividends                   -              -            -               -       (177,111)            -     (177,111)

Accrued dividends - RRP stock               -              -            -               -         (4,400)            -       (4,400)

Net change in unrealized gain               -              -            -         (25,317)             -             -      (25,317)
   on securities available for
   sale, net of deferred taxes
   of ($13,042)

Transfer of par value of                6,281              -            -               -         (6,281)            -            -
   shares created in stock split

Net income for the nine months
   ended June 30, 1998                      -              -            -               -        425,148             -      425,148

Balance June 30, 1998             $12,215,724     $ (242,461)  $ (650,614)  $     (9,805)    $13,603,148   $(3,731,017) $21,184,975
                                  ===========     ==========   ==========   ============     ==========    ===========  ===========


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


                                                                    For the Nine Months Ended
                                                                             June 30,
                                                                 ----------------------------
                                                                      1998             1997
                                                                 -----------      -----------
<S>                                                              <C>              <C>        
Cash flows from operating activites:
   Net income ..............................................     $   425,148      $   559,934
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Amortization of deferred loan origination fees ......           3,660           (1,947)
       Amortization of premiums and discounts on investment
         securities, mortgage-backed securities, and loans .         100,344           77,941
       Amortization of deferred compensation ...............          87,286           87,286
       Compensation charge related to release of ESOP shares          94,014           70,977
       Depreciation ........................................          72,410           50,890
       Deferred income taxes ...............................         (81,255)          21,649
       Stock dividends on FHLB stock .......................         (41,800)         (42,200)
       Origination of  mortgage servicing rights ...........         (80,916)               0
       Amortization of mortgage servicing rights ...........          32,592           18,819
       Net (gain) loss on sale of:
         Securities held to maturity .......................               0           (1,381)
         Foreclosed real estate ............................               0                0
         Fixed assets ......................................               0           (9,562)
         Net loss on disposal of fixed assets ..............           3,889                0
         Other assets ......................................               0                0
         Loans .............................................         (19,759)         (42,991)
         Loans held for sale ...............................               0                0
       Proceeds from loan sales ............................       6,805,150        2,989,034
       Originations of loans held for sale .................               0                0
       Proceeds from sale of fixed assets ..................               0                0
       (Increase) decrease in:
         Accrued interest receivable .......................         (51,399)           5,859
         Other assets ......................................        (490,540)         243,280
         Accrued loan loss .................................               0            5,000
       Increase (decrease) in:
         Federal income tax payable ........................          89,741           (2,582)
         Accrued expenses and other liabilities ............        (733,960)        (603,321)
       Capitalized interest on time deposits ...............               0                0
                                                                 -----------      -----------

Net cash provided (used) by operating activities ...........       6,214,605        3,426,685
                                                                 -----------      -----------

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

                                                                             For the Nine Months Ended
                                                                                     June 30,
                                                                               1998             1997
                                                                          ------------      ------------
<S>                                                                        <C>               <C>          
Cash flows from investing activites:
   Purchases of interest earning time deposits .......................     $   (295,617)     $    (98,000)
   Net decrease (increase) in fed funds sold .........................          753,847           480,094
   Purchases of obligations - U.S. Govt. and agencies
     held-to-maturity ................................................      (15,031,688)       (6,495,391)
   Proceeds from maturity of time deposits ...........................          295,573           196,000
   Proceeds from sale of securities held-to-maturity .................                0                 0
   Proceeds from maturity of securities held-to-maturity .............                0                 0
   Proceeds from maturity of obligations - U.S. Govt. and
     agencies held-to-maturity .......................................        9,000,000         8,500,000
   Proceeds from sale of obligations of U.S. Govt. agencies
     held-to-maturity ................................................                0         1,000,938
   Proceeds from redemption of FHLB stock ............................          270,100                 0
   Purchases of mortgage-backed securities available for sale ........       (7,598,697)       (2,035,446)
   Purchases of mortgage-backed securities held-to-maturity ..........                0          (512,122)
   Principal payments on mortgage-backed securities available for sale        1,686,740             1,130
   Principal payments on mortgage-backed securities held-to-maturity .        5,601,036         5,529,654
   Net originations and principal collections on loans ...............      (11,615,043)      (10,121,466)
   Capitalized acquisition cost related to foreclosed real estate ....           (2,737)           (9,489)
   Proceeds from sale of foreclosed real estate ......................            2,594           437,094
   Proceeds from sale of fixed assets ................................                0            17,500
   Expenditures for premises and equipment ...........................           (3,700)          (41,115)
                                                                           ------------      ------------

Net cash provided (used) by investing activities .....................      (16,937,592)       (3,150,619)
                                                                           ------------      ------------
Cash flows from financing activities:
   Net increase(decrease) in:
     Non-interest bearing deposits, savings, NOW accounts ............        1,174,753        (1,312,081)
     Time deposits ...................................................       (2,051,617)       (1,048,085)
     FHLB Advances ...................................................       77,701,500         2,481,420
     Repayment of FHLB Advances ......................................      (69,574,472)         (518,000)
     Advances from borrowers for taxes and insurance .................         (266,052)         (284,947)
   Dividends paid to stockholders ....................................         (177,111)         (157,549)
   Purchase of treasury stock ........................................                0          (951,116)
   Proceeds from sale of common stock ................................                0                 0
                                                                           ------------      ------------

Net cash provided (used) by financing activities .....................        6,807,001        (1,790,358)
                                                                           ------------      ------------

Net increase (decrease) in cash and cash equivalents .................       (3,915,986)       (1,514,292)

Cash and cash equivalents at beginning of the period .................        6,931,133         5,699,647
                                                                           ------------      ------------

Cash and cash equivalents at end of the period .......................     $  3,015,147      $  4,185,355
                                                                           ============      ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    EAST TEXAS FINANCIAL SERVICES, INC.
                                    CONSOLIDATED STATEMENT OF CASH FLOWS
                                                (UNAUDITED)
                                                (continued)

                                                                             For the Nine Months Ended
                                                                                     June 30,
                                                                               1998             1997
                                                                          ------------      ------------
<S>                                                                        <C>               <C>          
Supplemental disclosure:
Cash paid for:
   Interest on deposits ..............................................     $  1,652,209      $  1,666,746
   Income taxes ......................................................     $      4,589      $    310,692

Transfers from loans to real estate
   Acquired through foreclosures .....................................     $    244,229      $    467,991

Loans charged off to loan loss reserves ..............................     $     39,181      $     71,345

Recoveries credited to loan loss reserves ............................     $          0      $     51,159


</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY


             NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1998




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  statement 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 June 30, 1998 and 1997,  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 June 30, 1998
and 1997, the weighted average number of shares  outstanding  totaled  1,441,868
and  1,448,973  respectively.  For the nine months ended June 30, 1998 and 1997,
the  weighted  average  number  of  shares  outstanding  totaled  1,441,868  and
1,482,256 shares respectively.

Earnings  per common  share - assuming  dilution,  for the three months and nine
months  ended  June 30,  1998 and 1997,  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 June 30, 1998 and
1997, the weighted average number of shares outstanding for earnings per share -
assuming dilution totaled 1,499,546 and 1,479,110 shares  respectively.  For the
nine months ended June 30, 1998 and 1997, the weighted  average number of shares
outstanding  for earnings per share - assuming  dilution  totaled  1,495,531 and
1,507,631 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 II, Item 6 - Exhibits for a detailed  presentation of the earnings per
share calculation for the three-month and nine-month periods ended June 30, 1998
and 1997.)
<PAGE>
                               NOTE 3 - SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of June 30, 1998, 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 ..................      $ 2,506,210      $    13,460      $         0      $ 2,519,670


      U. S. government agency .........       26,540,420           73,834            6,867       26,607,167
                                             -----------      -----------      -----------      -----------

           Total debt securities ......      $29,046,630      $    87,294      $     6,867      $29,127,057
                                             -----------      -----------      -----------      -----------
</TABLE>

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of June 30, 1998, by contractual maturity are shown below:
<TABLE>
<CAPTION>
                                                                      Estimated
                                                   Amortized            Market
                                                      Cost              Value
                                                  -----------        -----------
<S>                                               <C>                <C>        
Due in one year or less ......................    $ 7,505,509        $ 7,516,432

Due after one year through two years .........      7,544,310          7,587,417

Due after two years through three years ......      2,990,995          3,013,878

Due after three years through five years .....     11,005,816         11,009,330
                                                  -----------        -----------

        Total debt securities ................    $29,046,630        $29,127,057
                                                  -----------        -----------
</TABLE>

As of June 30, 1998,  $12.0 million of the  securities  were callable at various
dates between November 1998 and June 2001.

As of June 30, 1998,  the weighted  average  yield on the  Company's  investment
security held-to-maturity  portfolio was approximately 6.03% 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 6.00%.
<PAGE>
The carrying values and estimated market values of  mortgage-backed  and related
securities  available-for-sale  as of June 30, 1998,  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        9,930,051          261,361                0           (14,856)       10,176,556
                    ------------     ------------     ------------      ------------      ------------

                    $  9,930,051     $    261,361     $          0      $    (14,856)       10,176,556
                    ------------     ------------     ------------      ------------      ------------

</TABLE>

The carrying values and estimated market values of  mortgage-backed  and related
securities  held-to-maturity  as of June 30,  1998,  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 ....     $ 2,261,358     $         0     $     3,241     $ 2,258,117     $ 2,256,892


Adjustable Rate      10,221,606          79,275          11,885      10,288,996      10,495,914
                    -----------     -----------     -----------     -----------     -----------

                    $12,482,964     $    79,275     $    15,126     $12,547,113     $12,752,806
                    -----------     -----------     -----------     -----------     -----------
</TABLE>

The overall yield on the Company's  mortgage-backed  securities  portfolio as of
June 30, 1998, was approximately 6.86%.

NOTE 4 - CURRENT ACCOUNTING ISSUES

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.
<PAGE>
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.

SFAS No. 132 In February  of 1998,  the  Financial  Accounting  Standards  Board
issued  Statement of Financial  Accounting  Standard (SFAS) No. 132,  Employers'
Disclosures  about  Pensions  and Other  Postretirement  Benefits.  SFAS No. 132
revises current  disclosures  for employers'  disclosures for pensions and other
postretirement  benefit plans. It standardizes  the disclosure  requirements for
these plans to the extent possible, and it requires additional information about
changes in the  benefit  obligations  and the fair value of plan assets that are
expected  to  enhance  financial  analysis.  It does not change  measurement  or
recognition standards for these plans.

SFAS No. 132 is effective for fiscal years  beginning  after  December 15, 1997.
The Company  anticipates  changing the  disclosure  requirements  of its defined
benefit  pension  plan as a result of the  statement.  The  Company has no other
postretirement benefit plans.

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.
<PAGE>
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:

Options outstanding:
     Balance, September 30, 1995                                      103,411
         Granted                                                            0
         Exercised                                                    (2,090)
         Forfeited and expired                                              0
                                                                     -------- 
     Balance, September 30, 1996                                      101,321

     Balance, September 30, 1996                                      101,321
         Granted                                                            0
         Exercised                                                    (1,045)
         Forfeited and expired                                              0
                                                                     -------- 
     Balance, September 30, 1997                                      100,276
                                                                     ======== 

     All  outstanding  options were granted at an exercise  price of $14.125 per
share.

On March 25, 1998, the Company  completed a 3 for 2 stock split in the form of a
50% stock dividend. As a result of the split, the number of outstanding options,
option  price,  options  exercisable  at year end, and shares  available for the
future grants were adjusted as follows:

Options outstanding at September 30, 1997 .......................        150,411
                                                                         =======

Option price ....................................................        $  9.42
                                                                         =======

Options exercisable at year end under stock option plan .........         57,350
                                                                         =======

Shares available for future grants ..............................         27,162
                                                                         =======

During the nine months ended June 30, 1998, no options were  exercised,  issued,
or forfeited.

NOTE 6 - COMMON STOCK SPLIT

On March 25, 1998, the Company  completed a 3 for 2 stock split in the form of a
50% stock dividend.  The effect of the split is presented  retroactively  within
stockholder's equity by transferring the par value of the additional shares from
retained earnings to additional paid in capital.

All share per share data,  including  stock  option plan  information,  has been
retroactively restated to reflect the stock split.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1998




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 $122.6 million at June 30, 1998, a $6.7 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 $5.8 million
increase  in  mortgage-backed  securities  available-for-sale,  a  $4.6  million
increase  in  loans  receivable  and  a  $6.0  million  increase  in  investment
securities  held-to-maturity.  The  increases  were  partially  offset by a $5.6
million  decline  in  mortgage-backed  securities  held-to-maturity  and a  $5.0
million decrease in interest-bearing deposits with banks and federal funds sold.

The increase in loans-receivable was a result of the Company's continued efforts
to originate and place into  portfolio  one- to  four-family  loans.  During the
quarter  ended June 30, 1998,  the Company  continued  its policy of placing all
fixed interest rate one- to  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 have  influenced  borrowers to
select  fixed rate loans and, as result,  the  Company was able to increase  its
<PAGE>
loans receivable portfolio.  In addition,  the Company has placed into portfolio
approximately  $2.5  million in home equity  loans  during the nine months ended
June 30,  1998.  Several  times  during the nine  months  ended  June 30,  1998,
interest  rates on 15 year  mortgage  loans  dropped below 7.00% and the Company
elected to sell such loans into the  secondary  market.  A  continued  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  under the  Company's  current  policy.  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.

In an effort to minimize  some of the interest rate risk inherent in its 15 year
fixed  rate  mortgage  portfolio  and in an effort to  achieve  higher  yielding
assets, the Company made the decision,  during the quarter ended March 31, 1998,
to begin  offering home equity loans.  Home equity lending was approved by Texas
voters in an amendment to the Texas Constitution in November of 1997.  Financial
institutions were able to begin making loans on January 1, 1998.

The Company  currently  offers home equity loans for up to 80% of the  borrowers
equity in the property, the maximum allowed by Texas law. Loan terms of up to 15
years  are  offered  at  interest  rates,  depending  upon the size of the loan,
ranging from 7.75% to 9.00%. As of June 30, 1998, the Company had  approximately
61 home equity loans outstanding totaling $2.5 million.

At June 30, 1998,  loans  receivable  totaled $61.7  million,  compared to $57.1
million at September  30, 1997.  For the three months and nine months ended June
30, 1998,  the Company  originated a total of $8.5 million and $24.5  million in
loans respectively.

In an effort to increase  its total loan  production,  to  diversify  into other
types of lending, and to achieve greater yields on loans, the Company intends to
open an  additional  full service  branch  location.  The new  location  will be
located in the rapidly growing area of South Tyler.  The location will offer all
of the lines of business the Company  currently  offers.  In  addition,  the new
office  will  offer  a full  line  of  commercial  banking  services,  including
commercial and consumer lending,  commercial checking accounts, personal banking
products  such  as  credit  and  debit  cards,  investment  brokerage  services,
automated teller machines,  and extended banking hours. The Company  anticipates
opening the new location late in 1998.

The increase in the mortgage-backed securities  available-for-sale portfolio was
primarily  the result of the  Company's  decision  to  continue  its  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.  At June 30, 1998, the portfolio totaled $10.2 million, compared to
$4.4 million at September 30, 1997.

Subject to favorable interest rates, the Company intends,  over the next several
quarters,  to systematically  borrow up to approximately  $20.0 million from the
Federal  Home Loan Bank  ("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 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
<PAGE>
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 June 30,  1998,  the  average  yield on the  securities  in the  program  was
approximately 6.07% while the cost of the FHLB advance was approximately 5.62%.

At June 30, 1998, the investment securities  held-to-maturity  portfolio totaled
$29.0  million,  compared to $23.1  million at September  30, 1997.  At June 30,
1998, the overall yield on the portfolio was  approximately  6.03%,  compared to
6.06% at September 30, 1997. The increase in  outstanding  balances was a result
of the Company's decision to transfer excess  interest-earning bank balances and
federal  funds sold into longer term higher  yielding  investments.  At June 30,
1998, the portfolio  contained $7.5 million in securities  with remaining  terms
until maturity of less than one year, $7.5 million with remaining  maturities of
one through two years,  $3.0 million with  remaining  maturities  of two through
three years and $11.0  million with  remaining  maturities of three through five
years. Of the $29.0 million  outstanding,  $12.0 million are callable at various
dates between November 1998 and June 2001.

The Company's  mortgage-backed  securities  held-to-maturity  portfolio  totaled
$12.5 million at June 30, 1998, compared to $18.2 million at September 30, 1997.
The decrease in mortgage-backed securities held-to-maturity was primarily due to
principal payments received on the portfolio during the period.  Continued lower
long-term  interest  rates could  continue to  influence  borrower  decisions to
refinance  the  adjustable   rate  mortgage   loans   underlying  the  Company's
mortgage-backed  securities  held-to-maturity  portfolio.  The result would be a
continued decrease in the balances reported in this asset category.

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 the  Company's  ability to  originate  portfolio  loans.  A decision by the
Company to discontinue  placing  mortgage  loans into  portfolio  could have the
effect of increasing the balances reported in this account as cash flow normally
directed to mortgage lending would be redirected to  mortgage-backed  securities
held-to-maturity.  The weighted-average yield on the portfolio was approximately
7.50% at June 30, 1998.

Total deposits were $87.7 million at June 30, 1998, a $877,000 decrease from the
$88.6 million  reported at September 30, 1997. The Company's  average funds cost
was  approximately  4.93% at June 30,  1998,  compared to the 4.91%  reported at
September 30, 1997.

The Company  reported  $12.3  million in  borrowed  funds at June 30,  1998,  an
increase of $8.1 million from the $4.2 million  reported at September  30, 1997.
Approximately  $10.2  million  of the  borrowed  funds  were  used to  invest in
<PAGE>
mortgage-backed securities available-for-sale as part of the Company's wholesale
funded arbitrage program.  The advance had a remaining term of less than 30 days
and had an interest rate of 5.62%.  The remaining  $2.1 million in advances were
used to fund a portion of the Company's  commercial  real estate loan  portfolio
and had a weighted average cost of approximately 6.05%.

Stockholders'  equity  totaled  $21.2  million at June 30, 1998,  an increase of
$306,000 from the $20.9 million reported at September 30, 1997. The increase was
primarily  attributable  to the net  income of  $425,000  reported  for the nine
months ended June 30, 1998,  offset by a $25,000 decline in net unrealized gains
and losses on securities  available-for-sale and $182,000 in cash dividends paid
to stockholders.

At June 30, 1998, the Company reported a book value per share of $13.76 based on
1,539,461 net  outstanding  shares.  The Company did not repurchase any treasury
stock  during the nine months  ended June 30,  1998.  The Company  held  345,031
shares of  treasury  stock at an  average  cost of $10.81  per share at June 30,
1998.

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 JUNE 30, 1998 AND JUNE 30, 1997

General.  Net income for the three  months  ended June 30, 1998 was  $123,000 or
$.09 per common share or $.08 per common share assuming dilution,  a decrease of
$68,000 from the $191,000 or $.13 per share  reported for the three months ended
June 30, 1997. The decrease in net income was  attributable to a $27,000 decline
in net interest income after provision for loan losses and a $80,000 increase in
total non-interest expense, which were partially offset by a $38,000 decrease in
income tax expense.  The $80,000 increase in total non-interest expense included
approximately  $40,000  in legal and  accounting  expenses  associated  with due
diligence  performed on a potential  bank  acquisition  during the quarter ended
June 30, 1998. The costs incurred negatively affected earnings per share by $.02
per share for the quarter ended June 30, 1998.

Net Interest  Income.  For the quarter ended June 30, 1998, net interest  income
before  provision for loan losses totaled  $816,000,  a decrease of $27,000 from
the $843,000  reported for the quarter  ended June 30,  1997.  On an  annualized
basis,  the  $816,000  in net  interest  income  for  the  current  quarter  was
approximately  2.78% of  average  interest  earning  assets and 2.68% of average
total assets.  For the quarter ended June 30, 1997, the $843,000 in net interest
income was 3.09% of average  interest  earning assets and 3.01% of average total
assets.  Average interest earning assets were  approximately  $117.5 million for
the quarter  ended June 30,  1998,  compared  to $109.3  million for the quarter
ended June 30, 1997.

The  decline in net  interest  income,  despite the fact that  average  interest
earning assets increased by approximately $8.2 million, was primarily the result
of continued period of minimal  differences in short term and long term interest
rates.  Cash flow from the Company's  interest earning assets has increased over
<PAGE>
the past several quarters as mortgage  borrowers have elected to refinance their
mortgages.  In  addition,  scheduled  maturities  of the  investment  securities
portfolios have also provided additional challenges for reinvesting cash flow in
this current interest rate environment.  The result has been,  despite growth in
interest-earning  assets,  a yield  on the  Company's  average  interest-earning
assets that declined from 7.15% for the quarter ended June 30, 1997 to 7.08% for
the quarter  ended June 30, 1998 as the cash flow has been  reinvested  at lower
interest rates.

Contrarily,   interest   rates  on  the  Company's   primary  source  of  funds,
certificates of deposits, have not decreased. Continued competition for deposits
in the  Company's  market has  compelled  the  Company to continue to pay higher
interest rates in order to maintain  current  deposit  levels.  On an annualized
basis,  the $1.1  million in  interest  expense on  deposits,  reported  for the
quarter  ended  June 30,  1998,  was  approximately  5.00% of  average  deposits
outstanding  for the  quarter.  For the quarter  ended June 30,  1997,  the $1.1
million in  interest  expense on  deposits  was  approximately  4.94% of average
deposits  outstanding  for the  quarter.  In addition,  growth of the  Company's
balance sheet has been done through  advances from the Federal Home Loan Bank of
Dallas and at marginal  rates higher than the  Company's  average cost of funds.
For the quarter  ended June 30, 1998,  the $167,000 in interest  expense on FHLB
advances was approximately 5.72%.

Total  interest  income was $2.1 million for the quarter ended June 30, 1998, an
increase of $126,000  from the $2.0  million  reported  for the same  quarter in
1997.  Interest  income on  loans-receivable  totaled  $1.2  million or 7.80% of
average loans  receivable  balances  outstanding  for the quarter ended June 30,
1998.   For  the  three  months  ended  June  30,  1997,   interest   income  on
loans-receivable  was approximately 8.05% of average loans receivable  balances.
During the quarter  ended June 30,  1998,  the Company  continued  its policy of
placing into portfolio  mortgage loans with an original maturity 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.  The growth has been at
marginal  yields at less than the  average in the  portfolio  and the result has
been a decline in the average yield on the portfolio. For the quarter ended June
30,  1998,  the Company  originated  $8.5 million in loans.  Approximately  $2.6
million were sold into the secondary  market while the remainder were place into
portfolio.

Interest  income from  mortgage-backed  securities  available-for  sale  totaled
$145,000  for the three  months  ended June 30,  1998,  compared to none for the
three months ended June 30, 1997. 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 6.07% at June 30, 1998. [See "Financial Condition"]

Interest  income  from  the  investment  securities  held-to-maturity  portfolio
totaled $423,000 for the three months ended June 30, 1998,  compared to $520,000
for the same quarter in 1997. The average  balance  outstanding in the portfolio
increased  from $26.6  million  for the  quarter  ended  June 30,  1997 to $27.1
million for the quarter ended June 30, 1998. Despite the increase in the average
balance outstanding,  the average yield on the portfolio declined from 7.37% for
the quarter  ended June 30, 1997 to 6.13% for the quarter  ended June 30,  1998.
The decline in the yield on the  portfolio  was a result of maturing  investment
securities that were replaced at lower yields.
<PAGE>
Interest income from the mortgage-backed  securities  held-to-maturity portfolio
totaled $243,000 for the three months ended June 30, 1998,  compared to $354,000
for the same  period  in 1997.  Continued  prepayments  on the  adjustable  rate
securities  in the  portfolio  caused the average  balance in the  portfolio  to
decline to $13.4  million for the quarter ended June 30, 1998 from $20.4 million
for the quarter ended June 30, 1997.  The Company  redirected the cash flow from
the portfolio into its lending operations.  The result was a decline in interest
income  from the  portfolio,  despite  the fact  that the  average  yield on the
portfolio  increased from 6.95% for the quarter ended June 30, 1997 to 7.26% for
the quarter ended June 30, 1998.

Interest paid to depositors totaled $1.1 million for the three months ended June
30,  1998,  unchanged  from the $1.1 million for the three months ended June 30,
1997.  Average deposit balances declined $1.8 million from $89.5 million for the
quarter  ended June 30, 1997 to $87.8  million  for the  quarter  ended June 30,
1998.

Total interest expense as a percentage of average  interest costing  liabilities
was  approximately  5.08% for the three months ended June 30, 1998,  compared to
4.91% for the three months ended June 30, 1997.

Provision For Loan Losses. The Company made no provision for loan losses for the
quarter  ended June 30,  1998 or for the  quarter  ended June 30,  1997.  [See -
"Asset Quality"]

Non-Interest  Income.  Non-interest  income totaled $78,000 for the three months
ended June 30, 1998, which was unchanged from the same period in 1997.

Gains on sales of  interest  earning  assets  equaled  $37,000  for the  current
quarter,  a $24,000  increase from the $13,000  reported for the same quarter in
1997. The increase was  attributable to additional gains on the sale of mortgage
loans into the secondary market during the quarter ended June 30, 1998, compared
to the same quarter in 1997. Partially offsetting the increase in gains on sales
of loans was a $5,000 decrease in loan origination fees to $14,000 for the three
months  ended June 30,  1998 from  $19,000 for the three  months  ended June 30,
1997. The decrease was  attributable to a decline in the number of single family
loans made by the Company  for which loan  processing  fee income is  collected.
During the nine months  ended June 30,  1998,  as compared to the same period in
1997,  the  Company  has made  fewer  traditional  one to four  family  loans as
compared  to the same period in 1997.  In  addition,  a $7,000  decrease in loan
servicing  fees for the current  quarter as compared to the same quarter in 1997
offset a portion of the  increase in gains on sales of loans.  The  decrease was
attributable to the  amortization  of previously  recorded  originated  mortgage
servicing rights, as loans were refinanced.

Non-Interest  Expenses.  Non-interest  expenses  totaled  $698,000 for the three
months ended June 30, 1998, compared to $618,000 for the same period in 1997, an
$80,000 increase.

The increase in non-interest  expense was partially the result of the $40,000 in
due diligence  expenses incurred during the quarter ended June 30, 1998, as well
as a $37,000  increase in  compensation  and benefits  expense.  The increase in
compensation  and  benefits  expense was  essentially  the result of  additional
compensation  for new employees added in 1997 in conjunction with the opening of
a new loan production office by the Company. Also, additional expense 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.
<PAGE>
Occupancy  and  equipment  expense  increased  $6,000 from $41,000 for the three
months  ended June 30, 1997 to $47,000 for the three months ended June 30, 1998.
The increase was also  attributable to additional  expenses  associated with the
opening of a new loan production office in 1997.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$74,000 or 37.5% of pre-tax  income for the three  months  ended June 30,  1998,
compared to $112,000 or 37.0% of pre-tax  income for the three months ended June
30, 1997.

COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997

General.  For the nine months  ended June 30,  1998,  the Company  reported  net
income of $425,000 or $.29 per common share and $.28 per common share - assuming
dilution,  compared  to  $560,000  or $.38 per common  share and $.37 per common
share - assuming  dilution for the nine months ended June 30, 1997. The decrease
in net income was  attributable  to an $81,000  decline in net  interest  income
after  provisions  for  loan  losses  and a  $175,000  increase  in  noninterest
operating  expenses,  which  were  partially  offset  by a $39,000  increase  in
noninterest income and a $82,000 decrease in income tax expense. Included in the
$175,000  increase  in  noninterest  expenses  is  approximately  $40,000 in due
diligence  expenses,  which were incurred on a potential bank acquisition during
the period.

Net  Interest  Income.  For the nine months  ended June 30,  1998,  net interest
income after provisions for loan losses totaled $2.5 million, down slightly from
the $2.6  million  reported  for the nine  months  ended  June 30,  1997.  On an
annualized  basis,  the $2.5 million in net interest income after provisions for
loan losses for the current period was  approximately  2.88% of average interest
earning assets and 2.78% of average total assets. For the nine months ended June
30,  1997,  the $2.6 million in net interest  income after  provisions  for loan
losses was  approximately  3.10% of average interest earning assets and 3.02% of
average total assets.  Average interest earning assets were approximately $115.2
million for the nine months ended June 30, 1998,  compared to $110.5 million for
the nine months ended June 30, 1997.

Total  interest  income was $6.2  million or 7.13% of average  interest  earning
assets for the nine months  ended June 30,  1998,  compared  to $5.9  million or
7.11% of average  interest  earning  assets for the nine  months  ended June 30,
1997.  The decline in average yield on interest  earning  assets was a result of
continued  lower interest  rates and a continued  narrowing of the difference in
short and long term  interest  rates.  Cash  flow  from the  Company's  interest
earning assets are being  re-deployed  in lower  yielding  assets in the current
interest  rate and the result is a decline in the average yield on the Company's
interest earning asset portfolio.

Interest  income on loans  receivable  totaled  $3.6 million for the nine months
ended June 30, 1998, a $471,000  increase from the $3.1 million reported for the
nine months  ended June 30,  1997.  The  increase  in  interest  income on loans
receivable,  despite a decline  in the  average  yield on the  portfolio,  was a
direct  result of the increase in balances  outstanding  in the portfolio as the
Company continued its policy of placing into portfolio the majority of the loans
it originates.  Average loans receivable balances increased to $59.4 million for
the nine months ended June 30, 1998 from $51.3 million for the nine months ended
June  30,1997.  For the nine months  ended June 30,  1998,  the $3.6  million in
interest  income on loans  receivable was  approximately  7.98% on an annualized
basis, compared to 8.02% on an annualized basis on the $3.1 million reported for
the nine months ended June 30, 1997.
<PAGE>
Interest  income from  mortgage-backed  securities  available-for  sale  totaled
$315,000 for the nine months ended June 30, 1998,  compared to none for the nine
months ended June 30, 1997.  Interest  income from this portfolio is part of the
Company's  program 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.  At June  30,  1998,  the  Company  had
approximately $10.2 million invested in the program. [See "Financial Condition"]

Interest income on investment securities  held-to-maturity  totaled $1.2 million
for the nine months ended June 30,  1998,  compared to $1.6 million for the nine
months ended June 30, 1997. The decrease in interest income on the portfolio was
partially  the  result of a decline in the  overall  yield on the  portfolio  as
maturing  securities were re-invested at lower yields. For the nine months ended
June 30, 1998, the $1.2 million in interest income was approximately 6.26% on an
annualized  basis of the average  balance  outstanding,  compared to 7.60% on an
annualized  basis for the $1.6  million  reported for the nine months ended June
30, 1997.

Interest income on mortgage-backed securities  held-to-maturity was $839,000 for
the nine  months  ended June 30,  1998,  compared  to $1.2  million for the nine
months ended June 30, 1997. The decline in interest  income on the portfolio was
primarily  the result of a decline in the  average  balance  outstanding  in the
portfolio  from $19.9  million for the nine months  ended June 30, 1997 to $12.5
million for the nine months ended June 30, 1998.  The Company  re-directed  cash
flow from the portfolio  into its lending  operations.  The average yield on the
portfolio  increased to 7.29% for the nine month period ended June 30, 1998 from
6.92% for the nine month period ended June 30, 1997. The increase in the overall
yield on the  portfolio,  despite an overall  decline  in the  general  level of
interest  rates,  was  attributable  to  the  adjustable  rate  features  of the
securities  in  the  portfolio.  The  portfolio  is  predominately  made  up  of
adjustable rate mortgage-backed securities. The securities have an interest rate
that is  determined  by a spread or margin over an index rate.  A portion of the
securities in the portfolio when purchased had discounted  initial coupon rates.
Over the past several  quarters,  despite an overall  decline in interest rates,
the coupon rates and  consequently  the yields on the securities have increased.
However,  the adjustable rate feature of the underlying loans in the securities,
the higher  coupon  rates on such  loans,  and lower  rates of interest on fixed
interest  mortgage loans have caused  borrowers on the underlying  loans to seek
out opportunities to refinance their mortgages.  The result has been an increase
in the cash flow from the  portfolio  and resulted in the decline in the average
balances in the portfolio.

Interest  expense was $3.7 million for the nine months  ended June 30, 1998,  an
increase of $362,000  from the $3.3  million  reported for the nine month period
ended June 30,  1997.  An  increase  in average  interest  costing  liabilities,
including  advances from the FHLB,  from $91.3 million for the nine months ended
June  30,  1997 to  $100.0  million  for the nine  months  ended  June 30,  1998
primarily  accounted for the increase in interest  expense.  The $3.7 million in
interest  expense  reported  for the nine month  period  ended June 30, 1998 was
approximately   4.90%  on  an  annualized  basis  of  average  interest  costing
liabilities,  compared  to 4.84% on an  annualized  basis for the same period in
1997.

Non-Interest Income.  Non-interest income was $254,000 for the nine months ended
June 30, 1998, compared to $216,000 for the nine months ended June 30, 1997. The
increase in income was directly  attributable  to  additional  gains on sales of
interest earning assets and additional loan origination  fees. Gains on sales of
interest earning asset totaled $101,000 for the nine month period ended June 30,
1998,  compared to $44,000 for the nine months ended June 30, 1997. The increase
<PAGE>
was a direct  result of the fact that more  loans  were sold into the  secondary
market during the current  period and more gains on sales of loan were reported.
At certain times during the nine months ended June 30, 1998,  interest  rates on
the  15-year  loans  being made by the  Company  fell below  7.00%.  The Company
elected  to sell  such  loans  into the  secondary  market,  which  resulted  in
additional gains on sales of loans. In addition, loan origination and commitment
fees were $56,000 for the nine months  ended June 30, 1998,  compared to $46,000
for the nine months ended June 30, 1997.

Non-Interest Expense.  Non-interest expense was reported as $2.1 million for the
nine month period ended June 30, 1998, a $175,000 increase from the $1.9 million
reported for the nine months ended June 30, 1997.

The  increase in  non-interest  expense was  primarily  the result of a $145,000
increase in  compensation  and  benefits  expense from $1.3 million for the nine
months  ended June 30, 1997 to $1.4  million for the nine months  ended June 30,
1998 and $40,000 in due  diligence  expenses  incurred  during the  period.  The
increase in  compensation  and benefits  expense was  essentially  the result of
additional  compensation for new employees added in 1997 in conjunction with the
opening of a new loan production office by the Company. Also, additional expense
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 totaled $141,000 for the nine months ended June
30, 1998,  compared to $113,000  for the nine months  ended June 30,  1997.  The
increase was attributable to additional  expenses associated with the opening of
a new loan production  office and the installation of a computer network linking
all of the Company offices, both in late 1997.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$248,000  or 36.8% of pre-tax  income for the nine months  ended June 30,  1998,
compared to $330,000 or 37.1% of pre-tax  income for the nine months  ended June
30, 1997.

ASSET QUALITY

At June 30, 1998, the Company's  non-performing  assets totaled $502,000 or .41%
of total  assets,  compared to $310,000 or .27% of total assets at September 30,
1997. At June 30, 1998,  non-performing assets were comprised of twenty-one (21)
loans,  the  largest of which was  $47,000,  secured  by one (1)  single  family
dwelling and two (2)  foreclosed  single  family real estate  properties  in the
amount of $204,700.

Non-performing  loans  at June  30,  1998,  equaled  $297,000  or .48% of  loans
receivable,  compared to $310,000 or .54% of loans  receivable  at September 30,
1997.

Classified  assets  totaled  $811,000 or .66% of total  assets at June 30, 1998,
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 June 30, 1998, were deemed to be
"substandard". No assets were classified "doubtful" or "loss" as of such date.
<PAGE>
The  Company's  allowance for loan losses  totaled  $234,000 at June 30, 1998, a
decrease of $35,000 from  September 30, 1997. The allowance for loan losses as a
percentage of loans receivable  equaled .38% at June 30, 1998,  compared to .48%
at September 30, 1997. The decrease was a result of the Company's acquisition of
a foreclosed real estate property. The property was appraised at acquisition and
the balance was written down to its estimated "fair value."

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 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 June 30, 1998, the Association's liquid
asset ratio equaled 40.0%.

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 June 30, 1998,
the Association had outstanding  commitments to extend credit on $2.9 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 $21.2 million at June 30, 1998, an increase
of $306,000 from the $20.9 million  reported at September 30, 1997. The increase
was primarily a result of the $425,000 net income for the nine months ended June
30, 1998, less $182,000 in cash dividends paid during the nine month period.

As of June 30, 1998,  the Company's  reported book value per share,  using total
stockholders'  equity of $21.2 million (net of the cost of unallocated  ESOP and
RRP shares) and 1,539,461  outstanding  shares of common stock (the total issued
shares including unallocated ESOP and RRP shares, less treasury shares), equaled
$13.76 per share.

Subsequent  to the  quarter  ended June 30,  1998,  the  Company  announced  its
intention  to pay a cash  dividend  of $.05 per share on  August  26,  1998,  to
stockholders of record at August 12, 1998.

Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989
("FIRREA"),  Congress  imposed  a three  part  capital  requirement  for  thrift
institutions.  At June 30, 1998, the  Association's  actual and required capital
amounts under each of the three requirements were as follows:

     - Tangible  Capital  (stockholders'  equity) was $18.2  million or 14.9% of
     total assets, exceeding the minimum requirement of 1.5% by $16.4 million.

     - Core Capital (Tangible capital plus certain  intangible assets) was $18.2
     million or 14.9% of total assets, exceeding the minimum requirement of 4.0%
     by $13.3 million.
<PAGE>
     -  Risk-based  Capital  (Core  capital  plus  general  loan  and  valuation
     allowances less an adjustment for capitalized  mortgage  servicing  rights)
     equaled  $18.5  million of 38.5% of risk  weighted  assets,  exceeding  the
     minimum requirement of 8.0% of risk weighted assets by $14.6 million.

At  June  30,  1998,  the  Association  was  considered  a  "well   capitalized"
institution  under the prompt  corrective  action  requirements  of the  Federal
Deposit Insurance Corporation Improvement Act of 1991.

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.

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.

YEAR 2000 ISSUE

The Year 2000 or Century  Date  Change  issue is a result of  computer  programs
being written using two digits rather than four digits to define the  applicable
year. A computer system's  inability to recognize the date "00" as the year 2000
or if the system  recognized  the date "00" as the year 1900,  could result in a
system failure or miscalculations causing disruptions of operations. The Company
outsources its primary computer processing functions.

The  Company has  established  a  management  committee  to identify  all of its
systems potentially  affected by the year 2000 and to ensure that re-programming
of affected  systems is completed.  The committee will also be  responsible  for
testing all company computer systems and ensuring that all third-party  computer
system vendors complete Year 2000 remediation.

The  Company  believes  that the Year  2000  issue  will not pose a  significant
operational  problem.  However,  it is possible that  non-compliant  third-party
computer  systems that fail to  successfully  address this issue could adversely
affect the Company.
<PAGE>
                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 1998


                           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

     None.

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

     (b) Reports on Form 8-K

         During the quarter  ended June 30, 1998,  the Company filed a report on
         Form 8-K on April 29, 1998,  to report the issuance of a press  release
         dated April 23, 1998, announcing the Company's intention to pay, on May
         27, 1998, a cash dividend of $.05 per share for the quarter ended March
         31, 1998, to stockholders of record on May 13, 1998.

         During the quarter  ended June 30, 1998,  the Company filed a report on
         Form 8-K on April 29, 1998,  to report the issuance of a press  release
         dated April 23, 1998, announcing the Company's earnings for the quarter
         ended March 31, 1998.
<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:  July 31, 1998                       /s/ Gerald W. Free
                                           ------------------
                                               Gerald W. Free
                                               Vice Chairman, President and CEO
                                               (Principal Executive Officer)


Date:  July 31, 1998                       /s/ Derrell W. Chapman
                                           -----------------------
                                               Derrell W. Chapman
                                               Vice President/COO/CFO
                                               (Principal Financial and 
                                               Accounting Officer)


<PAGE>



















                                  EXHIBIT 11.0