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, 2003

                                       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, 2003, was 1,171,724.


<PAGE>


                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  June 30, 2003

                                      INDEX

                                                                        Page No.
<TABLE>
Part I - Financial Information

     Item 1.  Financial Statements

<S>                                                                                                       <C>
         Consolidated Statements of Financial Condition, June 30, 2003
         (Unaudited) and September 30, 2002 ............................................................. 4

         Consolidated Statements of Income, (Unaudited) nine months ended
         June 30, 2003 and June 30, 2002 ................................................................ 5

         Consolidated Statement of Changes in Stockholders' Equity, (Unaudited)
         nine months ended June 30, 2003 ................................................................ 6

         Consolidated Statements of Cash Flows, (Unaudited) nine months ended
         June 30, 2003, and June 30, 2002 ............................................................... 7

         Notes to (Unaudited) Consolidated Financial Statements, June 30, 2003 .......................... 9

     Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations .......................................................................... 16

     Item 3.  Controls and Procedures ................................................................... 25

Part II - Other Information

     Item 1.  Legal Proceedings ......................................................................... 26

     Item 2.  Changes In Securities ..................................................................... 26

     Item 3.  Defaults Upon Senior Securities ........................................................... 26

     Item 4.  Submission of Matters To a Vote of Security Holders ....................................... 26

     Item 5.  Other Information ......................................................................... 26

     Item 6.  Exhibits and Reports on Form 8-K .......................................................... 26

Certifications .......................................................................................... 27
</TABLE>


                                    2 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  June 30, 2003

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.

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.


                                    3 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                              ASSETS                                      June 30, 2003      September 30, 2002
                                                                          -------------      ------------------
                                                                           (Unaudited)
<S>                                                                       <C>                  <C>
Cash and due from banks                                                   $   2,448,793        $   2,561,615
Interest-bearing deposits with banks                                          6,310,032            2,883,189
Interest-earning time deposits with financial institutions                            0              300,000
Federal funds sold                                                              808,817              599,698
Investment securities available-for-sale                                        369,930              516,443
Investment securities held-to-maturity (estimated market value of
    $7,221,624 at June 30, 2003, and $10,134,910 at September 30, 2002)       6,696,415            9,723,716
Mortgage-backed securities available-for-sale                                   723,262           20,144,942
Mortgage-backed securities held-to-maturity (estimated market
    value of $69,201,561 at June 30, 2003 and $30,822,859 at
    September 30, 2002)                                                      69,148,937           30,591,248
Loans receivable, net of allowance for credit losses of $878,471
    at June 30, 2003 and $756,566 at September 30, 2002                     115,960,749          137,182,965
Accrued interest receivable                                                   1,158,883            1,324,440
Federal Home Loan Bank stock, at cost                                         4,677,600            4,588,500
Premises and equipment                                                        2,774,778            2,868,435
Foreclosed assets, net                                                          358,761              394,210
Goodwill, net                                                                 2,170,381            2,170,381
Mortgage servicing rights                                                       435,928              255,269
Cash value of life insurance owned                                            3,725,306                    0
Other assets                                                                  1,678,033            1,605,326
                                                                          -------------        -------------

Total Assets                                                              $ 219,446,605        $ 217,710,377
                                                                          =============        =============

<CAPTION>
               LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                       <C>                  <C>
Liabilities:
      Noninterest deposits                                                $   3,418,959        $   3,900,913
      Interest-bearing deposits                                             109,382,457          103,567,616
                                                                          -------------        -------------
         Total deposits                                                     112,801,416          107,468,529

      FHLB advances                                                          83,522,137           86,312,294
      Advances from borrowers for taxes and insurance                           564,697            1,033,717
      Federal income taxes
         Current                                                               (113,604)             847,781
         Deferred                                                               543,301              493,953
      Accrued expenses and other liabilities                                  2,000,374            2,271,637
                                                                          -------------        -------------
         Total liabilities                                                  199,318,321          198,427,911
                                                                          -------------        -------------
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 1,171,724 and 1,162,320
        outstanding, respectively                                                18,845               18,845
      Additional paid-in-capital                                             12,525,303           12,525,303
      Unearned employee stock ownership plan shares                            (170,716)            (170,716)
      Retained earnings (substantially restricted)                           16,824,995           16,035,441
      Accumulated other comprehensive income                                   (305,553)            (259,125)
      Treasury stock, 712,768 and 722,172 shares, respectively, at cost      (8,764,590)          (8,867,282)
                                                                          -------------        -------------

         Total stockholder's equity                                          20,128,284           19,282,466
                                                                          -------------        -------------

Total liabilities and stockholders' equity                                $ 219,446,605        $ 217,710,377
                                                                          =============        =============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                    4 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                      Three Months                    Nine Months
                                                     Ended June 30,                 Ended June 30,
                                                  2003            2002            2003            2002
                                              ------------    ------------    ------------    ------------
<S>                                           <C>             <C>             <C>             <C>
INTEREST INCOME
    Loans receivable:
      First Mortgage                          $  1,091,286    $  1,605,417    $  3,949,061    $  4,763,261
      Consumer and other loans                   1,087,852         981,884       3,008,975       2,632,770
    Securities available-for-sale:
      Investment securities                         34,442          40,479         108,251         166,652
      Mortgage-backed securities                    19,309         183,626          87,922         556,294
    Securities held-to-maturity:
      Investment securities                        117,453         154,628         364,279         463,888
      Mortgage-backed securities                   483,484         427,240       1,333,789       1,450,617
    Deposits with banks:                            23,936           7,662          95,105          35,191
                                              ------------    ------------    ------------    ------------

         Total interest income                   2,857,762       3,400,936       8,947,382      10,068,673
                                              ------------    ------------    ------------    ------------

INTEREST EXPENSE

    Deposits                                       802,424         933,262       2,513,757       3,157,913
    FHLB advances                                  591,639         681,464       1,854,182       2,013,897
                                              ------------    ------------    ------------    ------------

      Total interest expense                     1,394,063       1,614,726       4,367,939       5,171,810
                                              ------------    ------------    ------------    ------------
      Net interest income before provision
        for loan losses                          1,463,699       1,786,210       4,579,443       4,896,863

    Provision for loan losses                      257,965          64,490         657,861         175,688
                                              ------------    ------------    ------------    ------------

      Net interest income after  provision
        for loan losses                          1,205,734       1,721,720       3,921,582       4,721,175
                                              ------------    ------------    ------------    ------------

NONINTEREST INCOME
    Gain (loss) on sale of interest-earning
    assets                                         239,335          55,147         596,869         507,320
    Loan origination and commitment fees            31,187          31,174          74,674         114,169
    Loan servicing fees                            (35,674)        (15,696)        (15,867)        (75,014)
    Other                                          125,464         118,706         519,640         316,734
                                              ------------    ------------    ------------    ------------

      Total noninterest income                     360,312         189,331       1,175,316         863,209
                                              ------------    ------------    ------------    ------------

NONINTEREST EXPENSE
    Compensation and benefits                      789,007         712,168       2,266,261       2,002,263
    Occupancy and equipment                         99,897         105,969         295,645         327,876
    SAIF deposit insurance premium                   5,143           4,726          14,839          15,199
    Foreclosed assets, net                          87,729          36,766         179,476          71,997
    Other                                          236,917         264,975         851,461         796,349
                                              ------------    ------------    ------------    ------------

      Total noninterest expense                  1,218,693       1,124,604       3,607,682       3,213,684
                                              ------------    ------------    ------------    ------------

Income (loss) before provision for income
taxes                                              347,353         786,447       1,489,216       2,370,700

Income tax expense (benefit)                        97,505         284,209         511,131         845,555
                                              ------------    ------------    ------------    ------------

NET INCOME (LOSS)                             $    249,848    $    502,238    $    978,085    $  1,525,145
                                              ============    ============    ============    ============


Earnings per common share                     $       0.22    $       0.45    $       0.86    $       1.36
Earnings per common share - assuming
dilution                                              0.21            0.44            0.83            1.34
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                    5 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                            Common         Additional        Retained
Balance at September 30, 2002                Stock       Paid-in Capital     Earnings     Treasury Stock
                                        ----------------------------------------------------------------
<S>                                     <C>              <C>              <C>               <C>
                                        $     18,845     $ 12,525,303     $ 16,035,441      $ (8,867,282)
Comprehensive income:
   Net Income                                                             $    978,085
   Net change in unrealized gain
     (loss) on securities
     available-for-sale net of
     deferred taxes

     Total comprehensive income

Stock Options Exercised                                                   $    (14,106)     $    102,692

Cash dividends of $0.15 per share                                         $   (174,425)
                                        ------------     ------------     ------------      ------------

Balance June 30, 2003                   $     18,845     $ 12,525,303     $ 16,824,995      $ (8,764,590)
                                        ============     ============     ============      ============

<CAPTION>
                                        Net Unearned
                                        Employee Stock    Other Accumulated
                                        Ownership Plan      Comprehensive
Balance at September 30, 2002              Shares              Income             Total
                                        --------------------------------------------------
<S>                                     <C>                 <C>               <C>
                                        $   (170,716)       $   (259,125)     $ 19,282,466
Comprehensive income:
   Net Income                                                                 $    978,085
   Net change in unrealized gain
     (loss) on securities
     available-for-sale net of
     deferred taxes                                         $    (46,428)     $    (46,428)
                                                                              ------------
     Total comprehensive income                                               $    931,657

Stock Options Exercised                                                       $     88,586

Cash dividends of $0.15 per share                                             $   (174,425)
                                        ------------        ------------      ------------

Balance June 30, 2003                   $   (170,716)       $   (305,553)     $ 20,128,284
                                        ============        ============      ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                    6 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              For the Nine Months Ended
                                                                                      June 30,
                                                                                 2003           2002
                                                                            ------------    ------------
<S>                                                                         <C>             <C>
Cash flows from operating activities:
    Net income                                                              $    978,085    $  1,525,145
    Adjustments to reconcile net income to net cash provided by operating
    activities:
      Amortization of deferred loan origination fees                              (6,620)         (3,767)
      Amortization of premiums and discounts on investment securities,
         mortgage-backed securities, and loans                                   409,449           3,523
      Amortization of mortgage servicing rights                                  122,139         170,314
      Depreciation                                                               121,890         124,990
      Deferred Income Taxes                                                       73,265               0
      Provision for loan losses                                                  657,861         175,688
      Stock dividends on FHLB stock                                              (89,100)        (97,916)
      Increase in cash value of life insurance                                  (125,306)              0
      Net (gain) loss on sale of:
         Loans held for sale                                                    (271,950)        (77,291)
         Mortgage-backed securities available-for-sale                           (22,121)              0
         Fixed assets                                                             (3,090)          8,287
         Foreclosed assets                                                       171,262          52,501
         Interest earning assets                                                       0        (325,503)
      Proceeds from loan sales                                                17,961,654       9,265,325
      Originations of loans held for sale                                    (17,689,704)     (9,188,034)
      (Increase) decrease in
         Accrued interest receivable                                             165,557        (108,350)
         Other assets                                                            (72,707)        643,500
      Increase (decrease) in:
         Accrued expenses and other liabilities                                 (271,263)       (178,990)
         Federal income tax payable                                             (961,385)        769,417

                                                                            ------------    ------------
Net cash provided (used) by operating activities                               1,147,916       2,758,839
                                                                            ------------    ------------
</TABLE>


                                   (Continued)


                                    7 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      For the Nine Months Ended
                                                                               June 30,
                                                                        2003            2002
                                                                    -------------    -------------
<S>                                                                 <C>              <C>
Cash flows from investing activities
    Net (increase) decrease in interest-earning time deposits             300,000          300,000
    Net (increase) decrease in fed funds sold                            (209,119)          86,242
Activity in securities available-for-sale
    Proceeds from sales                                                         0        6,308,899
    Proceeds from maturities and calls                                    140,000           25,000
Activity in securities held-for-maturity
    Proceeds from maturities and calls                                  3,000,000                0
    Purchases                                                                   0       (2,000,000)
Activity in mortgage-backed securities available-for-sale
    Proceeds from sales                                                 1,739,494                0
    Principal payments                                                 17,560,692       12,862,253
    Purchases                                                                   0       (8,569,474)
Activity in mortgage-backed securities held-to-maturities
    Principal payments                                                 38,212,214       16,134,753
    Purchases                                                         (77,072,266)     (11,627,398)
Activity in municipal bonds available-for-sale
    Principal payments                                                          0           20,000
Purchases of FHLB stock                                                         0          (97,100)
Purchases of bank Owned Life Insurance                                 (3,600,000)               0
Net (increase)decrease in loans                                        19,845,635      (24,780,787)
Proceeds from sale of foreclosed assets                                   599,065          433,717
Acquisition costs related to foreclosed assets                                  0           (6,699)
Proceeds from the sale of fixed assets                                      3,090                0
Capitalized acquisition costs related to foreclosed assets                (22,463)               0
Expenditures for premises and equipment                                   (15,310)         (93,224)
Origination of mortgage servicing rights                                 (302,798)        (104,525)
                                                                    -------------    -------------

Net cash provided (used) by investing activities                          178,234      (11,108,343)
                                                                    -------------    -------------

Cash flows from financing activities:
    Net increase (decrease) in:
      Deposits                                                          5,332,887       (8,937,768)
      Advances from borrowers                                            (469,020)        (496,034)
    Proceeds from advances from Federal Home Loan Bank                291,500,000      486,500,000
    Payment of advances from Federal Home Loan Bank                  (294,290,157)    (471,253,254)
    Exercise of Stock Options                                              88,586                0
    Dividends paid to stockholders                                       (174,425)        (174,348)
                                                                    -------------    -------------
Net cash provided (used) by financing activities                        1,987,871        5,638,596
                                                                    -------------    -------------

Net increase (decrease) in cash and cash equivalents                    3,314,021       (2,710,908)

Cash and cash equivalents at beginning of the period                    5,444,804        4,838,011
                                                                    -------------    -------------

Cash and cash equivalents at end of the period                      $   8,758,825    $   2,127,103
                                                                    =============    =============

Supplemental disclosure:
    Cash paid for:
      Interest on deposits                                          $   1,417,351    $   1,933,869
      Interest on FHLB advances and other borrowed funds                1,854,182        2,013,897
      Income taxes                                                      1,399,252           50,760

    Transfers from loans to real estate and other assets acquired
      through foreclosures                                              1,598,039          604,321
    Loans made to facilitate the sale of foreclosed assets                339,735          240,460
    Transfer of foreclosed assets to fixed assets                          12,925                0
</TABLE>

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


                                    8 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

             NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 2003

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, 2002.
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 common share for the three months and the nine months ended June
30, 2003 and 2002, 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, 2003 and 2002, the weighted average number of shares
outstanding totaled 1,140,272 and 1,123,979 shares, respectively. For the nine
months ended June 30, 2003 and 2002, the weighted average number of shares
outstanding totaled 1,138,157 and 1,123,979 shares respectively.

Earnings per common share - assuming dilution, for the three months and nine
months ended June 30, 2003 and 2002, 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, 2003 and
2002, the weighted average number of shares outstanding for earnings per share -
assuming dilution totaled 1,184,919 and 1,149,597 shares, respectively. For the
nine months ended June 30, 2003 and 2002, the weighted average number of share
outstanding for earnings per share - dilution totaled 1,175,429 and 1,140,243
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 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, 2003
and 2002.


                                    9 of 29
<PAGE>

NOTE 3 - SECURITIES

The carrying values and estimated market values of investment securities
available-for-sale as of June 30, 2003, 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>
Municipal bonds      $     350,000                 -0-      $       1,532      $       21,462     $      369,930
                     -------------      --------------      -------------      --------------     --------------


                     $     350,000      $          -0-      $       1,532      $       21,462     $      369,930
                     -------------      --------------      -------------      --------------     --------------
</TABLE>

The amortized cost and estimated market values of investment securities
held-to-maturity as of June 30, 2003, are as follows:

<TABLE>
<CAPTION>
                                                            Gross             Gross             Estimated
                                        Amortized        Unrealized         Unrealized           Market
                                          Cost              Gains             Losses              Value
                                      -------------     -------------     --------------     -------------
Debt securities:

<S>                                   <C>               <C>               <C>                <C>
      U. S. government agency         $     492,569     $      26,981     $          -0-     $     519,550

      Corporate Debt                      6,203,846           498,228                -0-         6,702,074
                                      -------------     -------------     --------------     -------------

           Total debt securities      $   6,696,415     $     525,209     $          -0-         7,221,624
                                      -------------     -------------     --------------     -------------
</TABLE>

The amortized cost and estimated market values of investment securities
held-to-maturity as of June 30, 2003, by contractual maturity are shown below:

                                                                      Estimated
                                                   Amortized            Market
                                                     Cost               Value
                                                 -------------    --------------

      Due in one year through two years          $   2,529,988    $    2,679,550

      Due in two years through three years           2,628,099         2,830,674

      Due in three years through six years           1,538,328         1,711,400

      Due after six years                                  -0-               -0-
                                                 -------------    --------------

             Total debt securities               $   6,696,415    $    7,221,624
                                                 -------------    --------------


                                    10 of 29
<PAGE>

The carrying values and estimated market values of mortgage-backed and related
securities available-for-sale as of June 30, 2003, 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          $     381,152     $          -0-     $         810     $      12,083     $      392,425

Adjustable Rate           330,596                163               -0-                78            330,837
                    -------------     --------------     -------------     -------------     --------------

                    $     711,748     $          163     $         810     $      12,161     $      723,262
                    -------------     --------------     -------------     -------------     --------------
</TABLE>

The carrying values and estimated market values of mortgage-backed and related
securities held-to-maturity as of June 30, 2003, 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          $  14,941,546     $       67,607     $       2,555      $  15,006,598     $   15,135,226

Adjustable Rate        52,677,189          1,465,557               407         54,142,339         54,066,335
                    -------------     --------------     -------------     --------------     --------------

                    $  67,618,735     $    1,533,164     $       2,962      $  69,148,937     $   69,201,561
                    -------------     --------------     -------------     --------------     --------------
</TABLE>


                                    11 of 29
<PAGE>

NOTE 4 - 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 182,278 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 generally vest at a rate of 20% per
year beginning at the date of the grant. The Company uses treasury stock for the
exercise of options. The following is a summary of changes in options
outstanding:

     Balance, September 30, 2001                                         151,776
         Granted                                                             -0-
         Exercised                                                           -0-
         Forfeited and expired                                               -0-
                                                                         -------

     Balance, September 30, 2002                                         151,776
         Granted                                                             -0-
         Exercised                                                         9,404
         Forfeited and expired                                               -0-
                                                                         -------

     Balance, June 30, 2003                                              142,372
                                                                         =======


Options exercisable at June 30, 2003 under stock option plan             140,873
                                                                         =======

Shares available for future grants                                        22,662
                                                                         =======


                                    12 of 29
<PAGE>

NOTE 5 - ADVANCES FROM FEDERAL HOME LOAN BANK

The outstanding advances from the FHLB consisted of the following at June 30,
2003:

       Maturity                       Balance                      Rate
-----------------------         --------------------          --------------

      07/07/03                     $  22,000,000                    1.27%
      07/14/03                     $   1,500,000                    1.18%
      09/01/03                     $     139,412                    6.25%
      12/01/03                     $   1,000,000                    3.12%
      12/05/03                     $   2,000,000                    1.66%
      12/05/03                     $   5,000,000                    3.57%
      02/12/04                     $   5,000,000                    2.09%
      02/15/04                     $     100,000                    6.01%
      03/10/04                     $   2,000,000                    1.21%
      05/18/04                     $   5,000,000                    1.95%
      09/10/04                     $   2,000,000                    1.40%
      11/30/04                     $   1,000,000                    3.93%
      12/31/04                     $     221,745                    6.09%
      01/03/05                     $      37,010                    6.03%
      02/15/05                     $     100,000                    6.04%
      03/10/05                     $   2,000,000                    1.58%
      06/06/05                     $   3,000,000                    2.83%
      09/12/05                     $   2,000,000                    1.95%
      02/15/06                     $     150,000                    6.05%
      03/10/06                     $   2,000,000                    2.20%
      04/11/11                     $   5,000,000                    3.73%
      04/11/11                     $   5,000,000                    3.91%
      04/11/11                     $   5,000,000                    4.25%
      06/07/11                     $   5,000,000                    4.38%
      01/01/13                     $     369,011                    6.09%
      01/01/13                     $     350,846                    6.13%
      02/01/13                     $     347,826                    5.91%
      03/03/14                     $     590,333                    5.45%
      04/01/14                     $     573,747                    5.97%
      05/01/14                     $     779,833                    5.66%
      06/01/14                     $     596,703                    5.90%
      07/01/14                     $     555,576                    6.38%
      08/01/14                     $     404,012                    6.37%
      09/01/14                     $     511,959                    6.59%
      10/01/14                     $     450,898                    6.86%
      11/03/14                     $   1,113,659                    6.77%
      12/01/14                     $     380,132                    6.57%
      01/01/15                     $     249,436                    6.73%
                                  --------------------
                                   $  83,522,137

Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock and deposit accounts in the FHLB, mortgage
collateral, securities collateral, and other collateral.


                                    13 of 29
<PAGE>

NOTE 6 - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

The following table sets forth an analysis of the Company's allowance for loan
losses.

<TABLE>
<CAPTION>
                                     Nine Months       Three Months      Three Months
                                        Ended             Ended              Ended
                                    June 30, 2003     June 30, 2003     March 31, 2002
                                    -------------     -------------     -------------
                                     (Dollars in       (Dollars in        (Dollars in
                                      Thousands)        Thousands)        Thousands)
<S>                                 <C>               <C>               <C>
Balance at beginning of period      $         757     $         823     $         775

Charge-offs:
   One- to four-family                          0                 0                 0
   Consumer and other loans                  (707)             (296)             (263)
                                    -------------     -------------     -------------
       Total charge-offs                     (707)             (296)             (263)
                                    -------------     -------------     -------------

Recoveries:
   One- to four-family                          0                 0                 0
   Consumer and other loans                   170                93                35
                                    -------------     -------------     -------------
       Total recoveries                       170                93                35
                                    -------------     -------------     -------------


Net (charge-offs)/recoveries                 (537)             (203)             (228)

Additions charged to income                   658               258               276
                                    -------------     -------------     -------------

Balance at end of period            $         878     $         878     $         823
                                    =============     =============     =============

Ratio of net
    charge-offs/recoveries during
    the period to average loans
    outstanding during the period           (0.42)%           (0.17)%           (0.18)%
                                    =============     =============     =============

Ratio of net
    charge-offs/recoveries during
    the period to average
    non-performing assets                  (28.20)%           (9.38)%           (8.85)%
                                    =============     =============     =============
</TABLE>

The distribution of the Company's allowance for losses on loans at the dates
indicated is summarized as follows:

<TABLE>
<CAPTION>
                                     June 30, 2003                           September 30, 2002
                      ------------------------------------------  --------------------------------------
                                                    Percent                                    Percent
                                       Gross        Of Loans                      Gross        Of Loans
                                        Loan        In Each                        Loan        In Each
                       Amount of      Amounts       Category      Amount of      Amounts       Category
                       Loan Loss        by          To Total      Loan Loss         by         To Total
                       Allowance      Category       Loans        Allowance      Category       Loans
                      -----------   -----------   -----------    -----------   -----------   -----------
                               (Dollars in Thousands)                     (Dollars in Thousands)
<S>                   <C>           <C>                 <C>      <C>           <C>                 <C>
One- to four-family   $       141   $    42,622         35.74%   $       108   $    61,396         43.07%
Other residential               3         2,871          2.41              0         2,679          1.88
Home equity and
   Improvement                  5        15,037         12.61              2        10,845          7.61
Non-residential                 0        19,634         16.46              0        17,185         12.05
Construction                    0         4,803          4.03              9         8,592          6.03
Commercial and
   Consumer                   139        34,288         28.75            272        41,845         29.36
Unallocated                   590             0             0            366             0          0.00
                      -----------   -----------   -----------    -----------   -----------   -----------
   Total              $       878   $   119,255        100.00%   $       757   $   142,542        100.00%
                      ===========   ===========   ===========    ===========   ===========   ===========
</TABLE>


                                    14 of 29
<PAGE>

NOTE 7 - BANK OWNED LIFE INSURANCE

During the nine months ended June 30, 2003, the Association elected to make an
investment in Bank Owned Life Insurance ("BOLI"). The BOLI purchase was made
with excess cash that was held by the Association that would have otherwise been
invested in securities. The purpose of the BOLI investment is to increase
earnings and thereby offset increased compensation and benefit expenses
associated with the Association's defined benefit pension plan, medical
insurance benefits, and other similar expenses. A total BOLI purchase of
approximately $3.6 million in premiums was invested with two separate life
insurance companies. The premiums are invested in the general assets of the life
insurance companies. Crediting rates are set by the life insurance companies and
are based on the overall performance of the assets under management by the
insurance company. Earnings on the policies are tax deferred for the life of the
insured under Internal Revenue Service guidelines. As part of the BOLI purchase,
the Association identified 17 key employees that were given an opportunity to
participate in the program. The $3.6 million in BOLI premiums were divided among
the 17 participants and life insurance contracts were purchased on the 17
individual employees. All participants in the program were given an opportunity
to decline to participate in the program. The Association is the owner and the
beneficiary of the life insurance contracts. As part of the BOLI program, the
Association expects to enter into separate death benefit agreements with the 17
employees. The death benefit agreements provide for a lump-sum payment to the
participant's beneficiary in the event of the death of the participant while
employed by the Association and, in certain instances, beyond the participant's
employment with the Association. The Association worked in conjunction with the
Meyer-Chatfield Company, a firm specializing in compensation and benefits
consulting, to design and implement the BOLI program. Meyer-Chatfield assisted
the Association in its due diligence efforts in analyzing prospective insurance
carriers and in the Association's efforts to comply with all regulatory and
legal aspects of the BOLI program. The Association also employed legal counsel
with expertise in compensation and benefit planning and BOLI transactions to
adopt board of director resolutions and draft the employee death benefit
agreements.


                                    15 of 29
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  June 30, 2003

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 holding company for a
community-oriented financial institution attracting deposits from the general
public and using such deposits to originate one- to four-family residential
loans, commercial real estate, one- to four-family construction, multi-family,
commercial and consumer loans. These funds have also been used to purchase
mortgage-backed securities, U. S. government and agency obligations and other
permissible investments. The Company also borrows funds from the Federal Home
Loan Bank of Dallas ("FHLB") to fund loans and to purchase 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.

As previously  disclosed in the Company's  Form 10-KSB for the fiscal year ended
September  30,  2002,  the  Company  has  been  notified  by the  OTS  that  the
Association has been deemed to be in "troubled  condition" as a result of a lack
of compliance with regulatory  requirements  involving oversight of its interest
rate risk  program.  The  Association  was required to take a number of steps to
comply with the OTS directive.  The Association has implemented internal control
measures to provide for more accurate and timely interest rate risk  measurement
and  monitoring.  In July 2003,  the OTS conducted a Field Visit  Examination to
assess the Company's efforts to address the deficiencies  noted in the September
30,  2002  exam.  Based  upon this  Examination,  management  believes  that the
Association  has taken,  or is in the process of taking,  all steps  required to
comply with the directive.  However,  the Company does not  anticipate  that the
"troubled condition" designation will be reviewed for possible removal until the
next full scope examination, scheduled for December 2003.

FINANCIAL CONDITION

Total assets were $219.4 million at June 30, 2003, a $1.7 million increase from
the $217.7 million reported at September 30, 2002, the Company's most recent
fiscal year end. The increase in total assets was the result of a $38.6 million
increase in mortgage-backed securities held-to-maturity, a $3.7 million increase
in cash value of life insurance owned, and a $3.4 million increase in interest
bearing deposits with banks. [See Note 7 for a discussion of the cash value of
life insurance owned.] The increases were partially offset by a $21.2 million
decrease in loans receivable, a $19.4 million decrease in mortgage-backed
securities available-for-sale, and a $3.0 million decrease in investment
securities held-to-maturity.

The changes in the composition of the balance sheet were primarily related to an
increase in cash flow from the Company's mortgage loan portfolio and
mortgage-backed securities portfolio. With continued lower interest rates, the
Company continued to receive significant amounts of cash flow from these
portfolios as customers refinanced existing mortgage loans. Also, the Company
sold into the secondary market the majority of the loans it originated or
refinanced. If cash flow from its mortgage-backed securities portfolio and the
loan portfolio continues, the Company expects to continue to have significant
amounts of cash to reinvest. The result would be a continuing increase in the


                                    16 of 29
<PAGE>

mortgage-backed securities held-to-maturity portfolio as the Company would
re-invest the cash into this portfolio, possibly at yields less than the average
in the current portfolio.

At June 30, 2003, loans receivable totaled $116.0 million, a decrease of $21.2
million or 15.5% from the $137.2 million at September 30, 2002. The decrease in
loans receivable was primarily the result of the Company's decision to sell the
majority of its one- to four-family loans originated during the period into the
secondary market. In addition, the Company elected to tighten the underwriting
standards and loan-to-value limits on its indirect auto lending program which
decreased the production of these type of loans.

Interest bearing deposits with banks increased to $6.3 million at June 30, 2003,
a $3.4 million increase from the $2.9 million reported at September 30, 2002.
The increase was due to the additional cash flow from the Company's loans
receivable and mortgage-backed securities portfolios as discussed above. The
Company expects to reinvest any excess cash flow into various investment,
mortgage-backed securities, and loan portfolios.

Investment securities held-to-maturity were reported as $6.7 million at June 30,
2003, a decrease of $3.0 million from the $9.7 million reported at September 30,
2002. The decrease was the result of the maturity of securities during the nine
months ended June 30, 2003. At June 30, 2003, this portfolio consisted of
approximately $493,000 of debt issued by governmental agencies such as Federal
National Mortgage Corporation, Federal Home Loan Mortgage Corporation, and the
Federal Home Loan Bank System, and approximately $6.2 million of corporate debt
securities. All securities in the portfolio are fixed rate and term.

Mortgage-backed securities available-for-sale totaled $723,000 at June 30, 2003,
a decrease of $19.4 million from the $20.1 million at September 30, 2002. The
decrease was primarily the result of principle repayments on the securities
during the nine months ended June 30, 2003, due to the refinancing activity
previously discussed.

Mortgage-backed securities held-to-maturity portfolio totaled $69.1 million at
June 30, 2003, an increase of $38.5 million from the $30.6 million reported at
September 30, 2002. The increase was primarily due to additional securities
added to the portfolio, during the nine months ended June 30, 2003 as the
Company directed excess cash flow from loans and mortgage-backed securities
available-for-sale into this portfolio.

Total deposits were $112.8 million at June 30, 2003, a $5.3 million increase
from the $107.5 million reported at September 30, 2002. The increase was
primarily the result of increases in certificate of deposit balances as the
Company paid competitive interest rates on renewing certificates of deposit
during the period.

The Company reported $83.5 million in borrowed funds at June 30, 2003, a
decrease of $2.8 from the $86.3 million reported at September 30, 2002. The
decrease was primarily due to the Company's decision to reduce its reliance on
short term advances from the FHLB and to replace them with longer term
certificates of deposits.

Stockholder's equity totaled $20.1 million at June 30, 2003, an increase of
$846,000 from the $19.3 million reported at September 30, 2002. The increase was
primarily attributable to a net increase in retained earnings of $790,000. The
increase in retained earnings was primarily due to the $978,000 in net income
less $174,000 in cash dividends paid during the nine months ended June 30, 2003.

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.


                                    17 of 29
<PAGE>

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003
      AND JUNE 30, 2002

General. Net income for the three months ended June 30, 2003 was $250,000 or
$0.22 per share and $0.21 per share assuming - dilution, a decrease of $252,000
from the $502,000 or $.45 per share and $.44 per share - assuming dilution,
reported for the three months ended June 30, 2002. The decrease in net income
was attributable to a $516,000 decrease in net interest income after provision
for loan losses. Approximately $193,000 of the decline in net interest income
after provision for loan losses was attributable to additional provisions for
loan losses and $323,000 was due to a decline in net interest income before
provision for loan losses. The decrease in net income was also partially due to
a $94,000 increase in noninterest expense. Noninterest income increased by
$171,000 and income tax expense decreased by $187,000.

Net Interest Income. For the quarter ended June 30, 2003, net interest income
before provision for loan losses totaled $1.5 million, a decrease of $323,000
from the $1.8 million reported for the quarter ended June 30, 2002. On an
annualized basis, the $1.5 million in net interest income for the current
quarter was approximately 2.88% of average interest-earning assets and 2.68% of
average total assets. For the quarter ended June 30, 2002, the $1.8 million in
net interest income before provisions for loan losses was approximately 3.47% of
average interest-earning assets and 3.32% of average total assets. Average
interest-earning assets were approximately $203.4 million for the quarter ended
June 30, 2003, compared to $205.8 million for the quarter ended June 30, 2002.

Total interest income was $2.9 million for the quarter ended June 30, 2003,
compared to $3.4 million for the quarter ended June 30, 2002. The decrease in
total interest income was primarily due to a $514,000 decline in interest on
first mortgage loans receivable. The decline in interest on first mortgage loans
receivable was due to an overall decline in the balance in the portfolio as the
Company elected to sell the majority of its mortgage loan production during the
past year into the secondary market. Also, the yields on loans placed into the
mortgage loan portfolio during the year were at lower levels which contributed
to the overall decrease in interest income on mortgage loans. However, interest
on consumer and other loans increased by $106,000 to $1.1 million for the three
months ended June 30, 2003 from $982,000 for the three months ended June 30,
2002. The increase in interest income on consumer and other loans was due to an
increase in balances in the consumer and other loan portfolio during the past
year. In addition, interest rates on these types of loans are not as sensitive
to overall movements in the general level of interest rates, which allowed the
Company to continue to originate and place into the loan portfolio loans with
higher yields than those available on mortgage loans.

The decrease in total interest income was also due to a $108,000 decrease in
interest income on the Company's mortgage-backed securities portfolio. The
decline in income was primarily due to a decline in the overall yield of the
portfolio. The Company replaced maturing or prepaid securities at yields that
were lower than maturing or prepaying securities and loans.

Interest income on loans receivable was $2.2 million for the quarter ended June
30, 2003, compared to $2.6 million for the quarter ended June 30, 2002. On an
annualized basis, the $2.2 million was approximately 7.33% of average loans
receivable balances outstanding for the quarter ended June 30, 2003, compared to
approximately 7.60% for the quarter ended June 30, 2002. The decrease in total
interest income on the loan portfolio was primarily the result of a decrease in
one- to four-family real estate loan balances, as previously discussed. In
addition, the overall decline in interest rates over the past 12 months and the
refinance of mortgage loans held in portfolio to lower yields contributed to the
decline in overall yield on the loan portfolio.

Interest income from mortgage-backed securities available-for-sale totaled
$19,000 for the quarter ended June 30, 2003, compared to $184,000 for the
quarter ended June 30, 2002. The decrease in income was due to a decline in the
balance of the portfolio from $22.9 million at June 30, 2002 to $723,000 at June
30, 2003, as the Company directed cash flow from this portfolio into other
investments.

Interest income on mortgage-backed securities  held-to-maturity totaled $483,000
for the quarter  ended June 30,  2003,  an increase of $56,000 from the $427,000
reported for the quarter ended June 30, 2002.  The increase was due primarily to
an increase in the balance in the portfolio  from $31.4 million at June 30, 2002
to $69.1  million at June 30, 2003 despite a decline of the overall yield of the
portfolio.  As previously  discussed,  the Company received excessive amounts of
cash flow from its mortgage  loans  receivable and mortgage  related  securities
portfolios during


                                    18 of 29
<PAGE>

the past year. The Company chose to reinvest the majority of this excess cash
flow into mortgage-backed securities held-to-maturity. The new securities were
at substantially lower, primarily adjustable, rates than those previously held
in the portfolio. The result was an overall decline in the yield and an overall
decrease in interest income on the portfolio.

Interest paid to depositors totaled $802,000 for the quarter ended June 30,
2003, a decrease of $131,000 from the $933,000 reported for the quarter ended
June 30, 2002. On an annualized basis, the $802,000 in interest expense on
deposits was approximately 2.85% of interest bearing deposits for the quarter
ended June 30, 2003, compared to 3.50% for the quarter ended June 30, 2002.

Interest on FHLB advances was $592,000 for the quarter ended June 30, 2003,
compared to $682,000 for the quarter ended June 30, 2002. The decrease in
interest expense was the result of declining interest rates during past year and
a decline in the balances of advances outstanding. At June 30, 2002, the Company
had approximately $89.7 million in advances compared to $83.5 million at June
30, 2003. For the three months ended June 30, 2003, the weighted average rate on
FHLB advances was approximately 2.85%.

Provision for Loan Losses. The Company made $258,000 in provision for loan
losses for the quarter ended June 30, 2003, compared to $64,000 for the quarter
ended June 30, 2002. The increase was directly related to the losses in the
Company's indirect automobile lending program and consumer lending portfolio.
[See "Asset Quality"]

Noninterest Income. Non-interest income totaled $360,000 for the quarter ended
June 30, 2003, compared to $189,000 for the quarter ended June 30, 2002. The
increase was primarily due to a $184,000 increase in gains on sales of interest
earning assets from $55,000 for the quarter ended June 30, 2002 to $239,000 for
the quarter ended June 30, 2003. The Company elected to sell the majority of its
one- to four-family loan production into the secondary market during 2002 and
2003. The result was an increase in gains on the sale of loans for the quarter
ended June 30, 2003, compared to the same period in 2002.

Noninterest Expense. Noninterest expense was $1.2 million for the quarter ended
June 30, 2003, an increase of $94,000 from the $1.1 million for the quarter
ended June 30, 2002. The increase in noninterest expense was primarily the
result of a $77,000 increase in compensation and benefits expense, mainly
associated with the Company's defined benefit pension plan and normal increases
in employee compensation. The increase in defined benefit plan expense was due
to the performance of plan assets in 2000 and 2001 and additional employees.
Approximately two-thirds of the assets in the defined benefit plan trust are
invested in various equity mutual funds. As the overall equity market declined
in 2000 and 2001, the value of the assets in the plan decreased. The result was,
on an actuarial basis, an increase in the pension plan expense to offset the
decrease in the value of the plan assets. In addition, expenses on foreclosed
assets increased by $51,000 from $37,000 for the three months ended June 30,
2002 to $ 87,000 for the three months ended June 30, 2003.

Provision for Income Taxes. The Company recorded federal income tax expense of
$98,000 or 28.0% or pre-tax income for the quarter ended June 30, 2003, compared
to $284,000 or 36.1% or pre-tax income for the quarter ended June 30, 2002. The
decrease in the percentage was due to the tax- deferred income earned on the
Bank Owned Life Insurance investment and the tax treatment of the provision for
loan losses incurred during the period ended June 30, 2003.


                                    19 of 29
<PAGE>

COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2003
      AND JUNE 30, 2002

General. For the nine months ended June 30, 2003, the Company reported net
income of $978,000 or $.86 per common share and $.83 per common share - assuming
dilution, compared to $1.5 million or $1.36 per common share and $1.34 per
common share - assuming dilution for the nine months ended June 30, 2002. The
decrease in net income was due to a $800,000 decrease in net interest income
after provisions for loan losses and a $394,000 increase in noninterest expense.
These were partially offset by a $334,000 decrease in income tax expense and a
$312,000 increase in noninterest income.

Net Interest Income. For the nine months ended June 30, 2003, net interest
income before provisions for loan losses totaled $4.6 million, a decrease of
$317,000 from the $4.9 million reported for the nine months ended June 30, 2002.
On an annualized basis, the $4.6 million in net interest income before
provisions for loan losses for the current period was approximately 2.99% of
average interest earning assets and 2.80% of average total assets. For the nine
months ended June 30, 2002, the $4.9 million in net interest income before
provisions for loan losses was, on an annualized basis, approximately 3.21% of
average interest earning assets and 3.07% of average total assets. Average
interest earning assets were approximately $204.5 million for the nine months
ended June 30, 2003, compared to $203.1 million for the nine months ended June
30, 2002.

Total interest income was $8.9 million or 5.83%, on an annualized basis, of
average interest earning assets for the nine months ended June 30, 2003,
compared to $10.1 million or 6.61% of average interest earning assets for the
nine months ended June 30, 2002. The decrease was primarily due to a decline in
interest on mortgage-backed securities available-for-sale of $468,000, and a
decline in interest on mortgage loans of $814,000. The declines in interest
income were partially offset by a $376,000 increase in interest income on
consumer and other loans.

Interest income on loans receivable totaled $7.0 million for the nine months
ended June 30, 2003 a decrease of $438,000 from the $7.4 million reported for
the nine months ended June 30, 2002. The decrease in interest income on loans
receivable was due to a $814,000 decline in interest on first mortgage loans as
the balance in the Company's one- to four-family portfolio declined. The balance
in the one- to four-family portfolio declined as the Company elected to sell the
majority of its new loans into the secondary market. Interest on consumer and
other loans increased by $376,000 as the Company placed more of these loans into
the loan portfolio

Interest income from mortgage-backed securities available-for-sale totaled
$88,000 for the nine months ended June 30, 2003, compared to $556,000 for the
nine months ended June 30, 2002. The decrease in income was primarily
attributable to a decrease in the balance in the portfolio. The Company elected
to direct cash flow from this portfolio into its mortgage-backed securities
held-to-maturity portfolio.

Interest income on investment securities held-to-maturity totaled $108,000 for
the nine months ended June 30, 2003, compared to $167,000 for the nine months
ended June 30, 2002. The decrease was due primarily to a decline in the balance
in the portfolio.

Interest income on mortgage-backed securities held-to-maturity was $1.3 for the
nine months ended June 30, 2003, compared to $1.5 million for the nine months
ended June 30, 2002. The decrease in interest income on the portfolio was
primarily the result of a decline in the overall yield of the portfolio as the
Company redirected cash flow from its loan and other portfolios into this
portfolio at lower yielding adjustable rate securities.

Interest expense was $4.4 million for the nine months ended June 30, 2003, a
decrease of $804,000 from the $5.2 million reported for the nine-month period
ended June 30, 2002. The decrease was due to a decline in the overall cost of
interest bearing deposits.

Noninterest Income. Noninterest income was $1.2 million for the nine months
ended June 30, 2003, compared to $863,000 for the nine months ended June 30,
2002. The increase was attributable to a $205,000 increase in other noninterest
income. The increase in other noninterest income was primarily due to a $125,000
increase in Bank Owned Life Insurance income and increases in loan fee income.
In addition, gains on the sale of interest earning assets increased by $90,000
from $507,000 for the nine


                                    20 of 29
<PAGE>

months ended June 30, 2002 to $597,000 for the nine months ended June 30, 2003.
The increase was due to additional gains on the sale of mortgage loans into the
secondary market.

Noninterest Expense. Noninterest expense was reported as $3.6 million for the
nine-month period ended June 30, 2003, a $394,000 increase from the $3.2 million
reported for the nine months ended June 30, 2002. The increase was primarily
attributable to a $264,000 increase in compensation and benefits expense due to
additional pension plan expense, additional employees, and normal compensation
increases. A $107,000 increase in net expenses on foreclosed and repossessed
assets accounted for a portion of the increase in noninterest expense. The
increase in net expenses on foreclosed and repossessed assets was primarily due
to expenses associated with the disposition of repossessed automobiles from the
Company's consumer loan portfolio and other repossessed loans.

Provision For Income Taxes. The Company incurred federal income tax expense of
$511,000 or 34.3% of pre-tax income for the nine months ended June 30, 2003,
compared to $846,000 or 35.7% of pre-tax income for the nine months ended June
30, 2002.

ASSET QUALITY

At June 30, 2003, the Company's non-performing assets (non-performing loans plus
foreclosed assets) totaled $1.5 million or .70% of total assets, compared to
$1.6 million or .75% of total assets at September 30, 2002. At June 30, 2003,
non-performing assets were comprised primarily of non-accruing one- to
four-family, consumer and other loans delinquent 90 days or more. It also
includes foreclosed one- to four-family and foreclosed consumer and other loans.

Non-performing loans at June 30, 2003 equaled $1.2 million or 1.02% of loans
receivable, compared to $1.2 million or .90% of loans receivable at September
30, 2002. The increase in non-performing loans was primarily related to the
Company's one- to four-family portfolio. The Company attributes the increased
number of non-performing one- to four-family loans to a general decline in the
economy in its market area. At June 30, 2003, the Company had no "troubled debt
restructurings" as defined in Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditor for Troubled Debt Restructurings", or any
other loans for which the Company has information about possible credit problems
of borrowers that would cause management to have serious doubts as to the
ability of such borrowers to comply with the preset loan repayment terms.

Classified assets totaled $2.9 million or 1.3% of total assets at June 30, 2003,
compared to $2.6 million or 1.2% of total assets at September 30, 2002. The
increase in classified assets was also due to an increase in past due one- to
four-family loans.

Classified assets and non-performing assets differ in that classified assets may
include loans less than 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. At June 30, 2003, $2.8 million of classified assets were
deemed to be substandard and $143,000 assets were classified as doubtful.

The Company's allowance for loan and lease losses was $878,000 at June 30, 2003,
which included $773,000 in general loan loss reserves, $88,000 in specific loan
loss reserves, and $17,000 checking account loss reserves. The total allowance
was $757,000 at September 30, 2002. The total allowance for loan losses as a
percentage of loans receivable equaled .75% at June 30, 2003 and 0.55% at
September 30, 2002.

The Company uses a methodology for estimating the adequacy of its general
allowance for loan losses that encompasses two separate components. The first
component is an estimate of losses on the Company's list of currently classified
assets. A percentage, generally ranging from 5% to 50% of each classified asset,
is applied to the balance of the asset. The percentage for each asset is
combined to determine the calculated allowance amount for this component. The
second component is a combined inherent risk and historical loss component. This
component recognizes the changes in the levels of loan balances and the
historical loss levels of various classes of the loan portfolio. The loan
portfolio is segregated into various classes of loans exhibiting similar risk
characteristics. Each of the classes of loans is multiplied by a risk factor to
determine the required allowance for the class of loans. The risk factor for
each class of loans is determined by analyzing actual historical losses on the
particular class of loans.


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The historical loss analysis takes into account a period of time that is
indicative of the current risks associated with the class of the loan portfolio
being analyzed. The balance of loans in each class is reduced for any loans
specifically reviewed by the Company and any classified assets, before applying
the percentage amounts. The calculated allowance amount for each class is summed
together to achieve the estimated allowance for the inherent risk and historical
loss component. To determine a final estimate of the allowance for loan losses,
the classified asset and inherent risk and historical loss component are summed
together. The resulting calculated minimum allowance is compared to the actual
balance in the allowance at the end of the period analyzed. A shortfall in the
actual amount as compared to the calculated amount is charged against provision
for loan losses in the period analyzed in order to bring the allowance up to the
minimum calculated amount. Any excess in the actual allowance as compared to the
calculated amount may remain in the allowance or may be reduced by applying the
overage amount back against the provision for loan losses.

At June 30, 2003, the classified asset component was calculated at $301,000
while the unidentified risk component was calculated at $486,000. At June 30,
2003, the Company had identified five separate components of the loan portfolio
that it deemed necessary to analyze individually under the unidentified risk
component. The five components were mortgage loans, indirect auto loans,
sub-prime indirect auto loans, unsecured and miscellaneous collateral consumer
loans, and all other non-mortgage loans.

The classified asset component decreased by $18,000 during the nine months ended
June 30, 2003 from approximately $319,000 at September 30, 2002 to $301,000 at
June 30, 2003. The unidentified risk component increased from approximately
$209,000 at September 30, 2002 to $486,000 at June 30, 2003. The increase in the
inherent risk component was due to additional increases in the separate
components. During the nine months ended June 30, 2003, the Company has
experienced an increase in losses in the consumer lending program. The loss
ratio for the sub-prime indirect portfolio was approximately 2.85% for the nine
months ended June 30, 2003. The loss ratio for the remainder of the indirect
portfolio was approximately 1.46% for the nine months ended June 30, 2003. The
loss ratio for the remainder of the consumer loan portfolio was approximately
1.93% for the nine months ended June 30, 2003. These loss rates were applied to
the remaining balances in the loan portfolio to calculate that portion of the
minimum allowance for loan and lease losses. The result was a significant
increase in the calculated allowance for loan loss at June 30, 2003. The Company
did not separate its loan portfolio for allowance for loan loss analysis at
September 30, 2002 in the same manner as June 30, 2003. Therefore, no comparison
of these specific components can be made at June 30, 2003.

The Company believes that segregating its loan portfolio into specific
categories of loan for allowance analysis will provide a more accurate method
for estimating the adequacy of the allowance. Also, the Company has
significantly decreased the volume of its indirect auto loan program by
substantially tightening credit and loan to value limits on such loans. In
addition, the Company has placed additional restrictions on the types of
unsecured and miscellaneous collateral loans that its individual loan officers
can make.

The Company establishes a specific loan loss allowance of 100% of the
outstanding balance of loans that are severely past due and deemed unlikely to
be collected in a timely manner. Generally, the Company establishes a specific
reserve when a real estate secured loan is 180 days or more past due and when a
consumer loan is 120 days or more past due. The Company may establish a specific
reserve sooner than these general guidelines in the case of a bankruptcy. Also,
the Company may choose not to establish a specific reserve for loans that would
otherwise warrant doing so, if there is sufficient value supporting the loan
balance.

At June 30, 2003, the Company had $88,000 in specific loan loss reserves
established, compared to $71,000 at September 30, 2002.

The Company believes that the overall quality of its loan portfolio remains
good. However, the Company did record $658,000 in provision for loan losses
during the nine months ended June 30, 2003, compared to $176,000 for the same
period in 2002. [See "Note 6".]

The Company anticipates that the general trend in the level of the allowance for
loan loss will be to remain in a range that is close to the current balance in
the allowance. By tightening loan-to-value and credit standards on its indirect
auto loan program and its unsecured and miscellaneous collateral consumer loans,
the Company believes that the balance in such loans will decline over time. The
result should be a reduction in the calculated amount of


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<PAGE>

the allowance for loan loss reserves for these specific components. However, the
Company can not predict the affect that outside factors such as economic
conditions in the Company's market and other factors may have on a borrower's
ability to repay their loans. In general, the estimated allowance for loan
losses could increase under the classified asset component if the Company
experiences an increase in its classified assets. The allowance could increase
under the inherent risk and historical loss component if the Company experiences
additional losses on its loan portfolio that are charged against the allowance
for loan loss account.

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.

The Company 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, 2003, the Company had
outstanding commitments to extend credit on approximately $13.8 million of
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 $20.1 million at June 30, 2003, an increase
of $846,000 from the $19.3 million reported at September 30, 2002. The increase
was primarily the result of a $790,000 increase in retained earnings that
resulted from the $978,000 net income less $174,000 in cash dividends paid
during the nine months ended June 30, 2003.

As of June 30, 2003, the Company's reported book value per share, using total
stockholders' equity of $20.1 million (net of the cost of unearned ESOP shares)
and 1,171,724 outstanding shares of common stock (the total issued shares
including unearned ESOP shares, less treasury shares), equaled $17.18 per share.
Subsequent to the quarter ended June 30, 2003, the Company announced its
intention to pay a cash dividend of $.05 per share on August 27, 2003, to
stockholders of record as of August 13, 2003. The Company paid $.15 per share in
cash dividends in the nine months ended June 30, 2003, which is approximately
17.8% of the $.86 in reported earnings per share. The Company reported an equity
to assets ratio of approximately 9.17% at June 30, 2003.

Federally insured savings associations, such as First Federal, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.

The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain non-cumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage-servicing rights, must
be deducted from total capital for calculating compliance with this requirement.
At June 30, 2003, First Federal had approximately $2.3 million of intangible
assets and other required regulatory adjustments that were required to be
deducted from total capital.

At June 30, 2003, First Federal had tangible capital of $17.6 million, or 8.08%
of adjusted total assets, which is approximately $14.3 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.

The capital standards also require Tier 1 capital equal to at least 4.0% of
adjusted total assets. Tier 1 capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased credit
card receivables.

At June 30, 2003, First Federal had Tier 1 capital equal to $17.6 million, or
8.08% of adjusted total assets, which is $8.9 million above the minimum
requirement for capital adequacy purposes of 4.0% as in effect on that date.


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The OTS risk-based requirement requires savings associations to have total
capital of at least 8.0% of risk-weighted assets. Total risk-based capital
consists of core capital, as defined above and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a savings
association to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities. At June
30, 2003, First Federal had no capital instruments that qualify as supplementary
capital and $787,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.

Certain exclusions from capital and assets are required to be made for the
purpose of calculating total risk-based capital. First Federal had no such
exclusions from capital and assets at June 30, 2003.

In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight generally, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more than 80% at origination unless insured
to such ratio by a insurer approved by Fannie Mae or Freddie Mac. For certain
assets, such as sub-prime indirect automobile lending, the OTS can require a
risk-weighting of greater than 100%. The OTS has assigned a risk weighting of
200% to the Company's sub-prime indirect automobile lending program. At June 30,
2003, the Company reported approximately $7.4 million in indirect automobile
loans that met the OTS definition of sub-prime.

On June 30, 2003, First Federal had total risk based capital of $18.4 million
(including $17.6 million in Tier 1 capital and $787,000 in loan loss reserves)
and risk-weighted assets of $118.7 million, or total risk-based capital of 15.5%
of risk-weighted assets. This amount was $8.9 million above the 8.0% requirement
in effect on that date.

At June 30, 2003, First Federal was also 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.


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Item 3.  Controls and Procedures.

      (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934 (the "Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and several other members of the Company's senior
management within the 90-day period preceding the filing date of this quarterly
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company's management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.

      (b) Changes in Internal Controls: In the nine months ended June 30,
2003, there were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.


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                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                  JUNE 30, 2003

                           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

      (b)   Reports on Form 8-K

            None.


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