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 March 31, 1998

                                       OR

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

              For the transition period from _______ to _______.


                         Commission 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 March 31, 1998, was 1,539,461.
<PAGE>

                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                 MARCH 31, 1998



                                      INDEX

                       

Part I - Financial Information

     Item 1.  Financial Statements

         Consolidated   Statements  of  Financial  Condition,   March  31,  1998
         (Unaudited) and September 30, 1997

         Consolidated  Statements  of Income,  (Unaudited)  three months and six
         months ended March 31, 1998, and March 31, 1997 

         Consolidated Statement of Changes in Stockholders' Equity,  (Unaudited)
         six months ended March 31, 1998

         Consolidated  Statements  of Cash Flows,  (Unaudited)  six months ended
         March 31, 1998, and March 31, 1997

         Notes to (Unaudited) Consolidated Financial Statements, March 31, 1998
                    

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

Part II - Other Information

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


                       EAST TEXAS FINANCIAL SERVICES, INC.
                                 AND SUBSIDIARY

                                   FORM 10-QSB

                                 MARCH 31, 1998



PART I - FINANCIAL INFORMATION

     Item 1 - Financial Statements

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

The financial  statements presented in this Form 10-QSB reflect the consolidated
financial  condition  and  results of  operations  of the Company and its wholly
owned subsidiary, First Federal Savings and Loan Association of Tyler.

<PAGE>
<TABLE>
<CAPTION>
                                   EAST TEXAS FINANCIAL SERVICES, INC.
                              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                      ASSETS
                                                                     March 31, 1998   September 30, 1997
                                                                     -------------      -------------
                                                                       (Unaudited)
<S>                                                                  <C>                <C>
Cash and due from banks ........................................     $     910,924      $     508,729
Interest-bearing deposits with banks ...........................         4,190,911          6,422,404
Interest earning time deposits with financial institutions .....         1,467,617          1,565,573
Federal funds sold .............................................           755,226            753,847
Mortgage-backed securities available for sale ..................         8,979,785          4,356,271
Investment securities held-to-maturity (estimated market value
     of $25,145,293 at March 31, 1998, and $30,114,685
     at September 30, 1997) ....................................        25,059,420         23,058,359
Mortgage-backed securities held-to-maturity (estimated market
     value of $14,607,615 at March 31, 1998, and
     $25,383,579 at September 30, 1997) ........................        14,264,392         18,151,765
Loans receivable, net of allowance for credit losses
     of $236,107 at March 31, 1998, and $272,851
     at September 30, 1997 .....................................        61,193,852         57,110,029
Accrued interest receivable ....................................           927,132            885,383
Federal Home Loan Bank stock, at cost ..........................         1,036,000          1,005,700
Premises and equipment .........................................         1,070,893          1,123,311
Foreclosed real estate, net of allowances of $-0- ..............           170,200                  0
Mortgage servicing rights ......................................           178,777            149,094
Other assets ...................................................           737,520            858,147
                                                                     -------------      -------------

         Total Assets ..........................................     $ 120,942,649      $ 115,948,612
                                                                     =============      =============


     LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
     Demand deposits ...........................................     $   1,554,898      $   1,882,109
     Savings and NOW deposits ..................................         9,778,621          9,771,266
     Other time deposits .......................................        76,573,858         76,897,274
                                                                     -------------      -------------
         Total deposits ........................................        87,907,377         88,550,649

     FHLB advances .............................................        11,025,888          4,195,000
     Advances from borrowers for taxes and insurance ...........           394,960            881,685
     Federal income taxes
         Current ...............................................           (33,820)                 0
         Deferred ..............................................           112,227            127,909
     Accrued expenses and other liabilities ....................           459,095          1,314,001
                                                                     -------------      -------------

         Total Liabilities .....................................        99,865,727         95,069,244
                                                                     -------------      -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   EAST TEXAS FINANCIAL SERVICES, INC.
                              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                               (continued)


                                      ASSETS
                                                                     March 31, 1998   September 30, 1997
                                                                     -------------      -------------
                                                                       (Unaudited)
<S>                                                                  <C>                <C> 
Stockholders' equity:
     Preferred stock, $0.01 par value, 500,000
     shares authorized, none outstanding
     Common stock, $0.01 par value, 5,500,000 shares authorized,
     1,884,492 shares issued ...................................            12,564             12,564
     Additional paid-in capital ................................        12,203,160         12,196,879
     Deferred compensation - RRP shares ........................          (271,557)          (329,748)
     Unearned employee stock ownership plan shares .............          (650,614)          (650,614)
     Unrealized gain/(loss) investments - AFS (net) ............           (42,687)            15,512
     Retained earnings (substantially restricted) ..............        13,557,073         13,365,792
     Treasury stock, 345,031 shares at cost ....................        (3,731,017)        (3,731,017)
                                                                     -------------      -------------

         Stock stockholders' equity ............................        21,076,922         20,879,368
                                                                     -------------      -------------

         Total liabilities and stockholders' equity ............     $ 120,942,649      $ 115,948,612
                                                                     =============      =============

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    EAST TEXAS FINANCIAL SERVICES, INC.
                                     CONSOLIDATED STATEMENTS OF INCOME


                                                         Three Months                   Six Months
                                                        Ended March 31,               Ended March 31,
                                                           (Unaudited)                  (Unaudited)
                                                      1998           1997           1998           1997
                                                  ----------     ----------     ----------     ----------
<S>                                               <C>            <C>            <C>            <C>
INTEREST INCOME
   Loans receivable:
     First Mortgage .........................     $1,152,062     $1,005,529     $2,286,895     $1,973,167
     Consumer and other loans ...............         40,783         20,401         70,088         40,928
   Securities available for sale:
     Investment securities ..................         15,104         13,716         30,313         27,702
     Mortgage-backed securities .............        104,684              0        169,074              0
   Securities held to maturity:
     Investment securities ..................        406,515        460,336        800,424        938,469
     Mortgage-backed securities .............        281,066        389,152        595,768        810,586
   Deposits with banks ......................         54,923         65,188        131,885        143,988
                                                  ----------     ----------     ----------     ----------

       Total interest income ................      2,055,137      1,954,322      4,084,447      3,934,840
                                                  ----------     ----------     ----------     ----------

INTEREST EXPENSE

   Deposits .................................      1,105,465      1,094,930      2,229,135      2,204,602
   FHLB advances ............................        121,675              0        183,848              0
                                                  ----------     ----------     ----------     ----------

       Total interest expense ...............      1,227,140      1,094,930      2,412,983      2,204,602
                                                  ----------     ----------     ----------     ----------

       Net interest income before
          provision for loan losses .........        827,998        859,392      1,671,464      1,730,238

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

       Net interest income after
         provision for loan losses ..........        827,998        859,392      1,671,464      1,725,238
                                                  ----------     ----------     ----------     ----------

NONINTEREST INCOME
   Gain(loss) on sale of interest-earning
      assets ................................         42,008         18,243         63,445         31,322
   Loan origination and commitment fees .....         18,807         10,074         41,770         27,293
   Loan servicing fees ......................         26,621         15,251         48,924         46,937
   Gain on foreclosed real estate ...........            560              0            560              0
   Other ....................................         10,926         16,985         21,638         32,415
                                                  ----------     ----------     ----------     ----------

       Total noninterest income .............         98,922         60,553        176,337        137,967
                                                  ----------     ----------     ----------     ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    EAST TEXAS FINANCIAL SERVICES, INC.
                                     CONSOLIDATED STATEMENTS OF INCOME
                                               (continued)


                                                         Three Months                   Six Months
                                                        Ended March 31,               Ended March 31,
                                                           (Unaudited)                  (Unaudited)
                                                      1998           1997           1998           1997
                                                  ----------     ----------     ----------     ----------
<S>                                               <C>            <C>            <C>            <C>
NONINTEREST EXPENSE
   Compensation and benefits ................        460,684        418,099        952,794        845,754
   Occupancy and equipment ..................         45,513         38,196         93,759         72,060
   SAIF deposit insurance premium ...........         14,299          3,124         28,446         51,175
   Loss on foreclosed real estate ...........              0          5,633              0          5,691
   Other ....................................        157,288        162,273        296,954        302,210
                                                  ----------     ----------     ----------     ----------

       Total noninterest expense ............        677,784        627,325      1,371,953      1,276,890
                                                  ----------     ----------     ----------     ----------

Income (loss) before provision for
      income taxes ..........................        249,135        292,620         475,84        586,315

Income tax expense (benefit) ................         91,340        106,827        173,749        217,292
                                                  ----------     ----------     ----------     ----------

NET INCOME (LOSS) ...........................     $  157,795     $  185,793     $  302,099     $  369,023
                                                  ==========     ==========     ==========     ==========


Earnings per common share ...................     $      .11     $      .12     $      .21     $      .25
Earnings per common share - assuming dilution            .11            .12            .20            .24
</TABLE>       
<PAGE>
<TABLE>
<CAPTION>
                                           EAST TEXAS FINANCIAL SERVICES, INC.
                                CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                       (UNAUDITED)



SIX MONTHS ENDED
March 31, 1998
                                        Common           Unearned          Unallocated          Net Unrealized                   
                                      Stock and            RRP                ESOP              Gain on Avail.      Retained     
                                   Paid in Capital       Shares             Shares           For Sale Securities    Earnings     
                                   ---------------       ------             ------           -------------------    --------     
<S>                                  <C>              <C>               <C>                     <C>               <C>            
Balance October 1, 1997 ........     $ 12,209,443     $   (329,748)     $   (650,614)           $     15,512      $ 13,365,792   
                                                                                                                                 
Deferred compensation                                                                                                            
   amortization ................             --             58,191              --                      --                --     
                                                                                                                                 
Payment of cash dividends ......             --               --                --                      --            (101,990)  
                                                                                                                                 
                                                                                                                                 
Accrued dividends - RRP stock ..             --               --                --                      --              (2,547)  
                                                                                                                                 
Net change in unrealized gain ..             --               --                --                   (58,199)             --     
                                                                                                                                 
   on securities available for                                                                                                   
   sale, net of deferred taxes                                                                                                   
   of $29,980.79                                                                                                                 
                                                                                                                                 
Transfer of par value of .......            6,281             --                --                      --              (6,281)  
                                                                                                                                 
   shares created in stock split                                                                                                 
                                                                                                                                 
Net income for the six months                                                                                                    
   ended March 31, 1998 ........             --               --                --                      --             302,099   
                                                                                                                                 
Balance March 31, 1998 .........     $ 12,215,724     $   (271,557)     $   (650,614)           $    (42,687)     $ 13,557,073   
                                     ============     ============      ============            ============      ============   
                                                                                            
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                       EAST TEXAS FINANCIAL SERVICES, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                   (UNAUDITED)
                                   (continued)



SIX MONTHS ENDED
March 31, 1998

                                                              Total         
                                       Treasury            Stockholders'     
                                        Stock                Equity         
<S>                                  <C>                 <C>    
Balance October 1, 1997 ........     $(3,731,017)        $   20,879,368    
                                                                           
Deferred compensation                                                      
   amortization ................               --                58,191    
                                                                           
Payment of cash dividends ......                                   --      
                                                                           
                                                              (101,990)    
                                                                           
Accrued dividends - RRP stock ..               --                (2,547)   
                                                                           
Net change in unrealized gain ..                                   --      
                                                                           
                                                               (58,199)    
   on securities available for                                             
   sale, net of deferred taxes                                             
   of $29,980.79                                                           
                                                                           
Transfer of par value of .......               --                    --    
   shares created in stock split                                           
                                                                           
Net income for the six months                                              
   ended March 31, 1998 ........               --               302,099    
                                                                           
Balance March 31, 1998 .........     $(3,731,017)        $   21,076,922    
                                     =============       ==============    
                                                         
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
                              EAST TEXAS FINANCIAL SERVICES, INC.
                             CONSOLIDATED STATEMENT OF CASH FLOWS
                                          (UNAUDITED)


                                                                    For the Six Months Ended
                                                                           March 31,
                                                                 ----------------------------
                                                                     1998             1997
                                                                 -----------      -----------
<S>                                                              <C>              <C>
Cash lows from operating activites:
   Net income ..............................................     $   302,099      $   369,023
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Amortization of deferred loan origination fees ......           2,071           (1,194)
       Amortization of premiums and discounts on investment
         securities, mortgage-backed securities, and loans .          64,514           54,068
       Amortization of deferred compensation ...............          58,191           58,191
       Compensation charge related to release of ESOP shares          60,547           46,350
       Depreciation ........................................          48,881           33,801
       Deferred income taxes ...............................          14,299           13,602
       Stock dividends on FHLB stock .......................         (30,300)         (27,600)
       Origination of  mortgage servicing rights ...........         (49,826)         (23,788)
       Amortization of mortgage servicing rights ...........          20,143           13,307
       Net (gain) loss on sale of:
         Securities held to maturity .......................               0                0
         Foreclosed real estate ............................               0                0
         Fixed assets ......................................               0                0
         Net loss on disposal of fixed assets ..............           3,889                0
         Other assets ......................................               0                0
         Loans .............................................         (13,619)         (31,321)
         Loans held for sale ...............................               0                0
       Proceeds from loan sales ............................       4,199,237        1,950,639
       Originations of loans held for sale .................               0                0
       Proceeds from sale of fixed assets ..................               0                0
       (Increase) decrease in:
         Accrued interest receivable .......................         (41,749)          29,985
         Other assets ......................................         120,627          316,077
         Accrued loan loss .................................               0            5,000
       Increase (decrease) in:
         Federal income tax payable ........................         (33,820)          (8,898)
         Accrued expenses and other liabilities ............        (915,453)        (639,709)
       Capitalized interest on time deposits ...............               0                0
                                                                 -----------      -----------

Net cash provided (used) by operating activities ...........       3,809,731        2,157,533
                                                                 -----------      -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                    EAST TEXAS FINANCIAL SERVICES, INC.
                                   CONSOLIDATED STATEMENT OF CASH FLOWS
                                                (UNAUDITED)


                                                                              For the Six Months Ended
                                                                                      March 31,
                                                                           ------------------------------
                                                                                1998              1997
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
Cash flows from investing activites:
   Purchases of interest earning time deposits .......................     $    (99,617)     $    (98,000)
   Net decrease (increase) in fed funds sold .........................           (1,379)          171,055
   Purchases of obligations - U.S. Govt. and agencies
     held-to-maturity ................................................       (8,530,438)       (3,513,046)
   Proceeds from maturity of time deposits ...........................          197,573            98,000
   Proceeds from sale of securities held-to-maturity .................                0                 0
   Proceeds from maturity of securities held-to-maturity .............                0                 0
   Proceeds from maturity of obligations - U.S. Govt. and
     agencies held-to-maturity .......................................        6,500,000         7,500,000
   Proceeds from sale of obligations of U.S. Govt. agencies
     held-to-maturity
   Purchases of mortgage-backed securities available for sale ........       (5,559,986)
   Purchases of mortgage-backed securities held-to-maturity ..........                0                 0
   Principal payments on mortgage-backed securities available for sale          815,511
   Principal payments on mortgage-backed securities held-to-maturity .        3,885,016         4,080,367
   Net originations and principal collections on loans ...............       (8,438,910)       (6,225,858)
   Capitalized acquisition cost related to foreclosed real estate ....           (2,800)           (9,489)
   Proceeds from sale of foreclosed real estate ......................                0           184,269
   Expenditures for premises and equipment ...........................             (352)           (6,703)
                                                                           ------------      ------------

Net cash provided (used) by investing activities .....................      (11,235,382)        2,180,595
                                                                           ------------      ------------
Cash flows from financing activities:
   Net increase(decrease) in:
     Non-interest bearing deposits, savings, NOW accounts ............         (319,856)       (1,903,542)
     Time deposits ...................................................         (323,416)           33,131
     FHLB Advances ...................................................       45,273,500                 0
     Repayment of FHLB Advances ......................................      (38,442,612)                0
     Advances from borrowers for taxes and insurance .................         (486,725)         (530,169)
   Dividends paid to stockholders ....................................         (104,538)         (107,930)
   Purchase of treasury stock ........................................                0                 0
   Proceeds from sale of common stock ................................                0                 0
                                                                           ------------      ------------

Net cash provided (used) by financing activities .....................        5,596,353        (2,508,510)
                                                                           ------------      ------------

Net increase (decrease) in cash and cash equivalents .................       (1,829,298)        1,829,618

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

Cash and cash equivalents at end of the period .......................     $  5,101,835      $  7,529,265
                                                                           ============      ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    EAST TEXAS FINANCIAL SERVICES, INC.
                                   CONSOLIDATED STATEMENT OF CASH FLOWS
                                                (UNAUDITED)
                                               (continued)


                                                                              For the Six Months Ended
                                                                                      March 31,
                                                                           ------------------------------
                                                                                1998              1997
                                                                           ------------      ------------
<S>                                                                        <C>               <C>
Supplemental disclosure:
Cash paid for:
   Interest on deposits ..............................................     $  1,114,472      $  1,115,923
   Income taxes ......................................................     $          0      $    212,701

Transfers from loans to real estate
   Acquired through foreclosures .....................................     $    207,229      $    419,527

Loans charged off to loan loss reserves ..............................     $     36,744      $     54,083

Recoveries credited to loan loss reserves ............................     $          0      $     33,622


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


             NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 1998




NOTE 1 - BASIS OF PRESENTATION

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

NOTE 2 - EARNINGS PER SHARE

Earnings per share for the three months ended March 31, 1998 and 1997,  has been
computed  based on net income  divided by the weighted  average number of common
shares  outstanding during the period. For the three months ended March 31, 1998
and 1997, the weighted average number of shares  outstanding  totaled  1,441,868
and  1,504,446  respectively.  For the six months ended March 31, 1998 and 1997,
the  weighted  average  number  of  shares  outstanding  totaled  1,441,868  and
1,504,446 shares respectively.

Earnings  per common  share - assuming  dilution,  for the three  months and six
months  ended March 31,  1998 and 1997,  has been  computed  based on net income
divided  by the  weighted  average  number  of  common  shares  outstanding.  In
addition,  it includes the effects of all dilutive  potential common shares that
were  outstanding  during the period.  For the three months ended March 31, 1998
and 1997,  the weighted  average number of shares  outstanding  for earnings per
share - assuming dilution totaled  1,496,037 and 1,535,612 shares  respectively.
For the six months ended March 31, 1998 and 1997, the weighted average number of
shares  outstanding for earnings per share assuming  dilution totaled  1,493,398
and 1,527,808 respectively.

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

(See Part I, Item 1 - Note 4 to  consolidated  financial  statements for further
information on the changes  applicable for earnings per share  reporting.)  (See
Part II, Item 6 - Exhibits for a detailed presentation of the earnings per share
calculation for the  three-month and six-month  periods ended March 31, 1998 and
1997.)
<PAGE>
NOTE 3 - SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of March 31, 1998, are as follows:
<TABLE>
<CAPTION>
                                                        Gross           Gross         Estimated
                                       Amortized      Unrealized      Unrealized         Market
                                         Cost           Gains           Losses           Value
                                     -----------     -----------     -----------     -----------
<S>                                  <C>             <C>             <C>             <C>                                      
Debt securities:
      U. S. Treasury ...........     $ 2,507,776     $    15,314     $         0     $ 2,523,090

      U. S. government agency...      22,551,644          81,363          10,804      22,622,203  
                                     -----------     -----------     -----------     -----------

           Total debt securities     $25,059,420     $    96,677     $    10,804     $25,145,293
                                     -----------     -----------     -----------     -----------
</TABLE>
The  amortized  cost  and  estimated  market  values  of  investment  securities
held-to-maturity as of March 31, 1998, by contractual maturity are shown below:
<TABLE>
<CAPTION>
                                                                      Estimated
                                                      Amortized         Market
                                                        Cost            Value
                                                    ------------     ----------- 
<S>                                                 <C>              <C>
Due in one year or less ......................      $ 8,000,367      $ 8,012,144

Due after one year through two
years ........................................        6,561,514        6,593,834

Due after two years through three years.......        5,989,701        6,036,487
                                                      
Due after three years through five years......        4,507,838        4,502,828
                                                      
                                                    -----------      -----------

        Total debt securities ................      $25,059,420      $25,145,293
                                                    -----------      -----------
</TABLE>
As of March 31, 1998,  the weighted  average yield on the  Company's  investment
security held-to-maturity  portfolio was approximately 5.99% while the Company's
overall investment portfolio,  including securities held-to-maturity,  overnight
deposits and interest  earning time deposits with other  financial  institutions
was approximately 5.93%.
<PAGE>
The carrying values and estimated market values of  mortgage-backed  and related
securities  available-for-sale  as of March 31, 1998, by type of security are as
follows:
<TABLE>
<CAPTION>
                      Principal     Unamortized      Unearned        Unrealized        Carrying
                       Balance        Premiums       Discounts       Gain/(Loss)         Value
                    -----------     -----------     -----------      -----------      -----------
<S>                 <C>             <C>             <C>              <C>              <C>
Fixed Rate ....     $         0     $         0     $         0      $         0                0

Adjustable Rate       8,817,427         227,035               0          (64,677)       8,979,785
                    -----------     -----------     -----------      -----------      -----------

                    $ 8,817,427     $   227,035               0      $   (64,677)       8,979,785
                    -----------     -----------     -----------      -----------      -----------
</TABLE>
The carrying values and estimated market values of  mortgage-backed  and related
securities  held-to-maturity  as of March 31,  1998,  by type of security are as
follows:
<TABLE>
<CAPTION>
                                                                                     Estimated
                      Principal      Unamortized      Unearned       Carrying          Market
                       Balance         Premiums       Discounts        Value            Value
                    -----------     -----------     -----------     -----------     -----------
<S>                 <C>             <C>             <C>             <C>             <C>                     
Fixed Rate ....     $ 2,570,493     $         0     $     5,220       2,565,273     $ 2,564,863


Adjustable Rate      11,628,489          84,310          13,680      11,699,119      12,042,752
                    -----------     -----------     -----------     -----------     -----------

                    $14,198,982     $    84,310     $    18,900     $14,264,392     $14,607,615
                    -----------     -----------     -----------     -----------     -----------
</TABLE>

The overall yield on the Company's  mortgage-backed  securities  portfolio as of
March 31, 1998, was approximately 7.08%.

NOTE 4 - CURRENT ACCOUNTING ISSUES

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

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

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

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

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

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

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

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

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

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

The Statement is effective for fiscal years  beginning  after December 15, 1997.
The  Company  has not  determined  the  effects,  if any,  that  the  disclosure
requirements  will have on its  financial  statements.  The Company  adopted the
Statement as required.
<PAGE>
SFAS No. 132 In February  of 1998,  the  Financial  Accounting  Standards  Board
issued  Statement of Financial  Accounting  Standard (SFAS) No. 132,  Employers'
Disclosures  about  Pensions  and Other  Postretirement  Benefits.  SFAS No. 132
revises current  disclosures  for employers'  disclosures for pensions and other
postretirement  benefit plans. It standardizes  the disclosure  requirements for
these plans to the extent possible, and it requires additional information about
changes in the  benefit  obligations  and the fair value of plan assets that are
expected  to  enhance  financial  analysis.  It does not change  measurement  or
recognition standards for these plans.

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

NOTE 5 - STOCK OPTION AND INCENTIVE PLAN

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

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

     Balance, September 30, 1996                                       101,321
         Granted                                                             0
         Exercised                                                     (1,045)
         Forfeited and expired                                               0
                                                                   -----------
     Balance, September 30, 1997                                       100,276
                                                                   ===========
</TABLE>
     All  outstanding  options were granted at an exercise  price of $14.125 per
share.

On March 25, 1998, the Company  completed a 3 for 2 stock split in the form of a
50% stock dividend. As a result of the split, the number of outstanding options,
option  price,  options  exercisable  at year end, and shares  available for the
future grants were adjusted as follows:
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                <C>
Options outstanding at September 30, 1997                              150,411
                                                                   ===========

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

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

Shares available for future grants                                      27,162
                                                                   ===========
</TABLE>

During the six months ended March 31, 1998, no options were  exercised,  issued,
or forfeited.

NOTE 6 - COMMON STOCK SPLIT

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

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

                                   FORM 10-QSB

                                 MARCH 31, 1998





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

GENERAL

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

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

FINANCIAL CONDITION

Total assets were $120.9 million at March 31, 1998, a $5.0 million increase from
the $115.9  million  reported at September 30, 1997,  the Company's  most recent
fiscal year end.  The  increase in total assets was the result of a $4.6 million
increase  in  mortgage-backed  securities  available-for-sale,  a  $4.1  million
increase  in  loans  receivable  and  a  $2.0  million  increase  in  investment
securities  held-to-maturity.  The  increases  were  partially  offset by a $3.9
million  decline  in  mortgage-backed  securities  held-to-maturity  and a  $2.3
million decrease in interest-bearing deposits with banks and federal funds sold.

The increase in loans-receivable was a result of the Company's continued efforts
to originate and place into  portfolio  one- to  four-family  loans.  During the
quarter  ended March 31, 1998,  the Company  continued its policy of placing all
fixed interest rate one- to  four-family  loans with original terms of less than
<PAGE>
or equal to 15 years and with  interest  rates of greater than or equal to 7.00%
into  portfolio.  Continued  lower mortgage rates have  influenced  borrowers to
select  fixed rate loans and, as result,  the  Company was able to increase  its
loans receivable portfolio.  Several times during the six months ended March 31,
1998,  interest  rates on 15 year  mortgage  loans  dropped  below 7.00% and the
Company elected to sell such loans into the secondary market. A continued period
of declining  mortgage  rates could impede the Company's  ability to continue to
increase its loans  receivable  portfolio as few, if any,  loans would be placed
into  portfolio  under the  Company's  current  policy.  The result  could be an
overall  decline in the Company's yield on earning assets as cash flows normally
directed to loans are reinvested into lower yielding assets.

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

The Company  currently  offers home equity loans for up to 80% of the  borrowers
equity in the property, the maximum allowed by Texas law. Loan terms of up to 15
years  are  offered  at  interest  rates,  depending  upon the size of the loan,
ranging from 7.75% to 9.00%. As of March 31, 1998, the Company had approximately
32 home equity loans outstanding totaling $1.4 million.

At March 31, 1998,  loans  receivable  totaled $61.2 million,  compared to $57.1
million at September  30, 1997.  For the three months and six months ended March
31,  1998,  the  Company  originated  a total of 7.9  million  and 16.0 in loans
respectively.

The increase in the mortgage-backed securities  available-for-sale portfolio was
primarily  the result of the  Company's  decision  to  continue  its  program of
borrowing  funds from the FHLB and investing  the proceeds into  mortgage-backed
and  similar  securities  in an  effort  to  achieve  a  positive  margin on the
transaction.  At March 31, 1998, the portfolio totaled $8.9 million, compared to
$4.4 million at September 30, 1997.

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

At March 31,  1998,  the  average  yield on the  securities  in the  program was
approximately 6.14% while the cost of the FHLB advance was approximately 5.55%.

At March 31, 1998, the investment securities  held-to-maturity portfolio totaled
$25.1  million,  compared to $23.1  million at September  30, 1997. At March 31,
1998, the overall yield on the portfolio was  approximately  5.99%,  compared to
6.06% at September 30, 1997. The increase in  outstanding  balances was a result
of the Company's decision to transfer excess  interest-earning bank balances and
federal funds sold into longer term higher  yielding  investments.  At March 31,
1998, the portfolio  contained $8.0 million in securities  with remaining  terms
until maturity of less than one year, $6.0 million with remaining  maturities of
one through two years,  $6.6 million with  remaining  maturities  of two through
three years and $4.5 million with  remaining  maturities  of three  through five
years.

The Company's  mortgage-backed  securities  held-to-maturity  portfolio  totaled
$14.3  million at March 31, 1998,  compared to $18.2  million at  September  30,
1997. The decrease in mortgage-backed securities  held-to-maturity was primarily
due to principal payments received on the portfolio during the period. Continued
lower long-term interest rates could continue to influence borrower decisions to
refinance  the  adjustable   rate  mortgage   loans   underlying  the  Company's
mortgage-backed  securities  held-to-maturity  portfolio.  The result would be a
continued decrease in the balances reported in this asset category.

The Company's decision to invest in mortgage-backed securities held-to-maturity,
as it is with investment  securities  held-to-maturity,  is primarily  dependent
upon the  Company's  ability to  originate  portfolio  loans.  A decision by the
Company to discontinue  placing  mortgage  loans into  portfolio  could have the
effect of increasing the balances reported in this account as cash flow normally
directed to mortgage lending would be redirected to  mortgage-backed  securities
held-to-maturity.  The weighted-average yield on the portfolio was approximately
7.53% at March 31, 1998.

Total  deposits were $87.9  million at March 31, 1998, a $644,000  decrease from
the $88.6 million  reported at September 30, 1997.  The Company's  average funds
cost was approximately  4.98% at March 31, 1998,  compared to the 4.91% reported
at September 30, 1997.

The Company  reported  $11.0  million in borrowed  funds at March 31,  1998,  an
increase of $6.8 million from the $4.2 million  reported at September  30, 1997.
Approximately  $9.2  million  of the  borrowed  funds  were  used to  invest  in
mortgage-backed securities available-for-sale as part of the Company's wholesale
funded arbitrage program.  The advance had a remaining term of less than 30 days
and had an interest rate of 5.55%.  The remaining  $1.8 million in advances were
used to fund a portion of the Company's  commercial  real estate loan  portfolio
and had a weighted average cost of approximately 6.05%.
<PAGE>
Stockholders'  equity  totaled  $21.1  million at March 31, 1998, an increase of
$198,000 from the $20.9 million reported at September 30, 1997. The increase was
primarily attributable to the net income of $302,000 reported for the six months
ended March 31, 1998,  offset  partially by a $58,000  decline in net unrealized
gains and losses on securities available-for-sale.

At March 31, 1998,  the Company  reported a book value per share of $13.69 based
on 1,539,461 net outstanding shares. The Company did not repurchase any treasury
stock  during the six months  ended March 31,  1998.  The Company  held  345,031
shares of  treasury  stock at an  average  cost of $10.81 per share at March 31,
1998.

RESULTS OF OPERATIONS

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

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997

General.  Net income for the three  months  ended March 31, 1998 was $158,000 or
$.11 per  share,  a  decrease  of  $28,000  from the $ 186,000 or $.12 per share
reported for the three  months ended March 31, 1997.  The decrease in net income
was attributable to a $31,000 decline in net interest income after provision for
loan losses and a $50,000  increase in total  non-interest  expense,  which were
partially  offset by a  $38,000  increase  in total  non-interest  income  and a
$15,000 decrease in income tax expense.

Net Interest  Income.  For the quarter ended March 31, 1998, net interest income
before  provision for loan losses totaled  $828,000,  a decrease of $31,000 from
the $859,000  reported for the quarter  ended March 31, 1997.  On an  annualized
basis,  the  $828,000  in net  interest  income  for  the  current  quarter  was
approximately  2.84% of  average  interest  earning  assets and 2.75% of average
total assets. For the quarter ended March 31, 1997, the $859,000 in net interest
income was  approximately  3.14% of average interest earning assets and 3.05% of
average total assets.  Average interest earning assets were approximately $116.7
million for the quarter ended March 31, 1998, compared to $109.5 million for the
quarter ended March 31, 1997.

The  decline in net  interest  income,  despite the fact that  average  interest
earning assets increased by approximately $7.2 million, was primarily the result
of continued period of minimal  differences in short term and long term interest
rates.  Cash flow from the Company's  interest earning assets has increased over
the past several quarters as mortgage  borrowers have elected to refinance their
mortgages.  In  addition,  scheduled  maturities  of the  investment  securities
portfolios have also provided additional challenges for reinvesting cash flow in
this current interest rate environment.  The result has been,  despite growth in
interest-earning  assets,  a yield  on the  Company's  average  interest-earning
assets that  declined  from 7.13% for the quarter  ended March 31, 1997 to 7.05%
for the quarter  ended March 31,  1998 as the cash flow has been  reinvested  at
lower interest rates.
<PAGE>
Contrarily,   interest   rates  on  the  Company's   primary  source  of  funds,
certificates of deposits, have not decreased. Continued competition for deposits
in the  Company's  market has  compelled  the  Company to continue to pay higher
interest rates in order to maintain  current  deposit  levels.  On an annualized
basis,  the $1.1  million in  interest  expense on  deposits,  reported  for the
quarter  ended  March 31,  1998,  was  approximately  4.94% of average  deposits
outstanding  for the quarter.  For the quarter  ended March 31,  1997,  the $1.1
million in  interest  expense on  deposits  was  approximately  4.82% of average
deposits  outstanding  for the  quarter.  In addition,  growth of the  Company's
balance sheet has been done through  advances from the Federal Home Loan Bank of
Dallas and at marginal  rates higher than the  Company's  average cost of funds.
For the quarter ended March 31, 1998,  the $121,000 in interest  expense on FHLB
advances was approximately 5.21%.

Total interest  income was $2.1 million for the quarter ended March 31, 1998, an
increase of $101,000  from the $2.0  million  reported  for the same  quarter in
1997.  Interest  income on  loans-receivable  totaled  $1.2  million or 7.86% of
average loans  receivable  balances  outstanding for the quarter ended March 31,
1998.  For  the  three  months  ended  March  31,  1997,   interest   income  on
loans-receivable  was approximately 8.23% of average loans receivable  balances.
During the quarter ended March 31, 1998, the Company continued its plan to place
into portfolio mortgage loans with an original maturity of less than or equal to
15 years and with interest rates of greater than or equal to 7.00%. As a result,
the Company has been able to increase its loan receivable portfolio and increase
interest income from loans-receivable. The growth has been at marginal yields at
less than the average in the  portfolio and the result has been a decline in the
average  yield on the  portfolio.  For the  quarter  ended March 31,  1998,  the
Company  originated $7.9 million in loans.  Approximately $4.2 million were sold
into the secondary market while the remainder were place into portfolio.

Interest  income from  mortgage-backed  securities  available-for  sale  totaled
$105,000 for the three  months  ended March 31,  1998,  compared to none for the
three months ended March 31, 1997.  Interest  income from this portfolio is part
of  the   Company's   plan  to  borrow   funds  from  the  FHLB  and  invest  in
mortgage-related  securities in an effort to achieve a margin on the  difference
in the investment  yield and the cost of the borrowings from the FHLB. The yield
on the  portfolio was  approximately  6.14% at March 31, 1998.  [See  "Financial
Condition"]

Interest  income  from  the  investment  securities  held-to-maturity  portfolio
totaled $407,000 for the three months ended March 31, 1998, compared to $460,000
for the same  quarter in 1997.  The decline was  partially  the result of a $1.5
million decrease in the average balance  outstanding in the portfolio from $27.1
million for the three months ended March 31, 1997 to $25.6 million for the three
months ended March 31, 1998.  In addition,  the average  yield on the  portfolio
declined  from  6.78% for the  quarter  ended  March  31,  1997 to 6.35% for the
quarter  ended March 31, 1998.  The decline in the yield on the  portfolio was a
result of maturing investment securities that were replaced at lower yields.

Interest income from the mortgage-backed  securities  held-to-maturity portfolio
totaled $281,000 for the three months ended March 31, 1998, compared to $389,000
for the same  period  in 1997.  Continued  prepayments  on the  adjustable  rate
securities  in the  portfolio  caused the average  balance in the  portfolio  to
decline to $15.3 million for the quarter ended March 31, 1998 from $22.1 million
for the quarter ended March 31, 1997. The Company  redirected the cash flow from
the portfolio into its lending operations.  The result was a decline in interest
income  from the  portfolio,  despite  the fact  that the  average  yield on the
portfolio increased from 7.05% for the quarter ended march 31, 1997 to 7.35% for
the quarter ended march 31, 1998.
<PAGE>
Interest  paid to  depositors  totaled  $1.1  million for the three months ended
March 31, 1998, unchanged from the $1.1 million for the three months ended March
31, 1997.  Average deposit balances declined $1.3 million from $90.8 million for
the quarter  ended March 31, 1997 to $89.5  million for the quarter  ended March
31, 1998.

Total interest expense as a percentage of average  interest costing  liabilities
was approximately  4.97% for the three months ended March 31, 1998,  compared to
4.82% for the three months ended March 31, 1997.

Provision For Loan Losses. The Company made no provision for loan losses for the
quarter  ended March 31, 1998 or for the quarter  ended March 31,  1997.  [See -
"Asset Quality"]

Non-Interest  Income.  Non-interest  income totaled $99,000 for the three months
ended March 31, 1998, compared to $61,000 for the same period in 1997, a $38,000
increase.

Gains on sales of  interest  earning  assets  equaled  $42,000  for the  current
quarter,  a $24,000  increase from the $18,000  reported for the same quarter in
1997. The increase was  attributable to additional gains on the sale of mortgage
loans  into the  secondary  market  during the  quarter  ended  March 31,  1998,
compared  to the same  quarter  in 1997.  In  addition,  loan  origination  fees
increased  to $19,000 for the three months ended March 31, 1998 from $10,000 for
the three  months ended March 31, 1997.  The  increase was  attributable  to the
increase  in lending  activity  for the  current  quarter  compared  to the same
quarter in 1997.

Non-Interest  Expenses.  Non-interest  expenses  totaled  $678,000 for the three
months  ended March 31,  1998,  compared to $627,000  for the three months ended
March 31, 1997.

The  increase  in  non-interest  expense was  primarily  the result of a $43,000
increase in compensation and benefits expense from $418,000 for the three months
ended March 31, 1997 to $461,000 for the three months ended March 31, 1998.  The
increase in  compensation  and benefits  expense was  essentially  the result of
additional  compensation for two new employees added in 1997 in conjunction with
the opening of a new loan production office by the Company and the addition of a
loan  officer in one of its full service  locations.  Also,  additional  expense
associated  with the funding of the Company's  defined  benefit pension plan and
additional  expenses associated with the Company's Employee Stock Ownership Plan
accounted for a portion of the increase.

Occupancy  and  equipment  expense  increased  $8,000 from $38,000 for the three
months  ended  March 31, 1997 to $46,000  for the three  months  ended March 31,
1998. The increase was also attributable to additional  expenses associated with
the opening of a new loan production office in 1997.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$91,000 or 36.7% of pre-tax  income for the three  months  ended March 31, 1998,
compared to $107,000 or 36.5% of pre-tax income for the three months ended March
31, 1997.
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997

General.  For the six months  ended March 31,  1998,  the Company  reported  net
income of $302,000 or $.21 per common share and $.20 per common share - assuming
dilution,  compared  to  $369,000  or $.25 per common  share and $.24 per common
share - assuming  dilution for the six months ended March 31, 1997. The decrease
in net income was attributable to a $54,000 decline in net interest income after
provisions  for loan  losses and a $95,000  increase  in  noninterest  operating
expenses,  which were  partially  offset by a $38,000  increase  in  noninterest
income and a $44,000 decrease in income tax expense.

Net  Interest  Income.  For the six months  ended March 31,  1998,  net interest
income after provisions for loan losses totaled $1.7 million, unchanged from the
$1.7 million  reported for the six months ended March 31, 1997. On an annualized
basis,  the $1.7 million in net interest income after provisions for loan losses
for the  current  period was  approximately  2.91% of average  interest  earning
assets and 2.87% of average  total  assets.  For the six months  ended March 31,
1997, the $1.7 million in net interest  income after  provisions for loan losses
was approximately  3.14% of average interest earning assets and 3.05% of average
total assets.  Average interest earning assets were approximately $114.7 million
for the six months ended March 31, 1998,  compared to $109.9 million for the six
months ended March 31, 1997.

Total  interest  income was $4.1  million or 7.12% of average  interest  earning
assets for the six months  ended March 31,  1998,  compared  to $3.9  million or
7.21% of average  interest  earning  assets for the six months  ended  March 31,
1997.  The decline in average yield on interest  earning  assets was a result of
continued  lower interest  rates and a continued  narrowing of the difference in
short and long term  interest  rates.  Cash  flow  from the  Company's  interest
earning assets are being  re-deployed  in lower  yielding  assets in the current
interest  rate and the result is a decline in the average yield on the Company's
interest earning asset portfolio.

Interest  income on loans  receivable  totaled  $2.4  million for the six months
ended March 31, 1998, a $343,000 increase from the $2.0 million reported for the
six months  ended March 31,  1997.  The  increase  in  interest  income on loans
receivable,  despite a decline  in the  average  yield on the  portfolio,  was a
direct  result of the increase in balances  outstanding  in the portfolio as the
Company continued its policy of placing into portfolio the majority of the loans
it originates.  Average loans receivable balances increased to $59.2 million for
the six months ended March 31, 1998 from $49.9  million for the six months ended
March  31,1997.  For the six months  ended March 31,  1998,  the $2.4 million in
interest income on loans receivable was approximately  7.97%,  compared to 8.08%
on the $2.0 million reported for the six months ended March 31, 1997.

Interest  income from  mortgage-backed  securities  available-for  sale  totaled
$169,000 for the six months  ended March 31, 1998,  compared to none for the six
months ended March 31, 1997.  Interest income from this portfolio is part of the
Company's  program,  begun in June of 1997,  to borrow  funds  from the FHLB and
invest in  mortgage-related  securities  in an effort to achieve a margin on the
difference in the investment yield and the cost of the borrowings.  At March 31,
1998, the Company had approximately $8.9 million invested in the program.
[See "Financial Condition"]

Interest income on investment securities  held-to-maturity  totaled $800,000 for
the six months  ended March 31,  1998,  compared to $938,000  for the six months
ended March 31,  1997.  The  decrease in interest  income on the  portfolio  was
<PAGE>
partially  the  result of a decline in the  overall  yield on the  portfolio  as
maturing  securities were re-invested at lower yields. In addition,  the average
balance  outstanding  in the portfolio  decreased from $28.1 million for the six
months ended March 31, 1997 to $24.1  million for the six months ended March 31,
1998 as the  Company  re-directed  a  portion  of the cash  flow  from  maturing
investment securities to its lending operations.  For the six months ended March
31, 1998, the $800,000 in interest income was approximately 6.65% of the average
balance  outstanding,  compared to 6.67% for the  $938,000  reported for the six
months ended March 31, 1997.

Interest income on mortgage-backed securities  held-to-maturity was $596,000 for
the six months  ended March 31,  1998,  compared to $811,000  for the six months
ended  March 31,  1997.  The  decline in interest  income on the  portfolio  was
primarily  the result of a decline in the  average  balance  outstanding  in the
portfolio  from $22.9  million for the six months  ended March 31, 1997 to $15.2
million for the six months ended March 31, 1998.  The Company  re-directed  cash
flow from the portfolio  into its lending  operations.  The average yield on the
portfolio  increased to 7.80% for the six month period ended March 31, 1998 from
7.07% for the six month period ended March 31, 1997. The increase in the overall
yield on the  portfolio,  despite an overall  decline  in the  general  level of
interest  rates,  was  attributable  to  the  adjustable  rate  features  of the
securities  in  the  portfolio.  The  portfolio  is  predominately  made  up  of
adjustable rate mortgage-backed securities. The securities have an interest rate
that is  determined  by a spread or margin over an index rate.  A portion of the
securities in the portfolio when purchased had discounted  initial coupon rates.
Over the past several  quarters,  despite an overall  decline in interest rates,
the coupon rates and  consequently  the yields on the securities have increased.
However,  the adjustable rate feature of the underlying loans in the securities,
the higher  coupon  rates on such  loans,  and lower  rates of interest on fixed
interest  mortgage loans have caused  borrowers on the underlying  loans to seek
out opportunities to refinance their mortgages.  The result has been an increase
in the cash flow from the  portfolio  and resulted in the decline in the average
balances in the portfolio.

Interest  expense was $2.4 million for the six months  ended March 31, 1998,  an
increase of $208,000  from the $2.2  million  reported  for the six month period
ended  March  31,1997.  An  increase in average  interest  costing  liabilities,
including  advances  from the FHLB,  from $90.7 million for the six months ended
March  31,  1997 to $95.8  million  for the six  months  ended  March  31,  1998
primarily  accounted for the increase in interest  expense.  The $2.4 million in
interest  expense  reported  for the six month  period  ended March 31, 1998 was
approximately 5.04% of average interest costing  liabilities,  compared to 4.86%
for the same  period  in 1997. 

Non-Interest  Income.  Non-interest income was $176,000 for the six months ended
March 31,  1998,  compared to $138,000  for the six months ended march 31, 1997.
The increase in income was directly attributable to additional gains on sales of
interest earning assets and additional loan origination  fees. Gains on sales on
interest  earning asset totaled $63,000 for the six month period ended March 31,
1998,  compared to $31,000 for the six months ended March 31, 1997. The increase
was a direct  result of the  increased  lending  activity of the Company and the
fact that more  loans were sold into the  secondary  market  during the  current
period and more gains on sales of loan were  reported.  At certain  times during
the six months ended March 31, 1998,  interest  rates on the 15-year loans being
made by the Company  fell below  7.00%.  The Company  elected to sell such loans
into the secondary  market and additional gains on sales of loans were reported.
In  addition,  loan  origination  and  commitment  fees were $42,000 for the six
months ended March 31, 1998,  compared to $27,000 for the six months ended March
31,  1997.  The  increase was  directly  attributable  to the  increase  lending
activity of the Company during the current period.
<PAGE>
Non-Interest Expense.  Non-interest expense was reported as $1.4 million for the
six month period ended March 31, 1998, a $95,000  increase from the $1.3 million
reported for the six months ended March 31, 1997.

The  increase in  non-interest  expense was  primarily  the result of a $107,000
increase in compensation  and benefits  expense from $846,000 for the six months
ended March 31, 1997 to $953,000 for the six months  ended March 31,  1998.  The
increase in  compensation  and benefits  expense was  essentially  the result of
additional  compensation for two new employees added in 1997 in conjunction with
the opening of a new loan  production  office by the Company.  Also,  additional
expense  associated  with the funding of the Company's  defined  benefit pension
plan and  additional  expenses  associated  with the  Company's  Employee  Stock
Ownership Plan accounted for a portion of the increase.

Occupancy and equipment  expense  totaled $94,000 for the six months ended March
31,  1998,  compared to $72,000 for the six months  ended  March 31,  1997.  The
increase was attributable to additional  expenses associated with the opening of
a new loan production  office and the installation of a computer network linking
all of the Company offices, both in late 1997.

Provision For Income Taxes.  The Company  incurred federal income tax expense of
$174,000 or 36.5% of pre-tax  income for the six months  ended  March 31,  1998,
compared to $217,000 or 37.1% of pre-tax  income for the six months  ended March
31, 1997.

ASSET QUALITY

At March 31, 1998, the Company's  non-performing assets totaled $496,000 or .41%
of total  assets,  compared to $310,000 or .27% of total assets at September 30,
1997. At March 31, 1998,  non-performing  assets were comprised of eighteen (18)
loans,  the  largest of which was  $90,000,  secured  by one (1)  single  family
dwelling and one (1) foreclosed single family real estate property in the amount
of $170,000.

Non-performing  loans at  March  31,  1998,  equaled  $326,000  or .53% of loans
receivable,  compared to $310,000 or .54% of loans  receivable  at September 30,
1997.

Classified  assets  totaled  $954,000 or .79% of total assets at March 31, 1998,
compared to $904,000 or .78% of total assets at September 30, 1997.

Classified assets and non-performing assets differ in that classified assets may
include loans less than ninety (90) days delinquent.  Also, assets guaranteed by
government agencies such as the Veterans  Administration and the Federal Housing
Administration  are not  included  in  classified  assets  but are  included  in
non-performing  assets.  All classified assets at March 31, 1998, were deemed to
be  "substandard".  No assets were  classified  "doubtful"  or "loss" as of such
date.

The Company's  allowance for loan losses  totaled  $236,000 at March 31, 1998, a
decrease of $37,000 from  September 30, 1997. The allowance for loan losses as a
percentage of loans receivable equaled .38% at March 31, 1998,  compared to .48%
at September 30, 1997. The decrease was a result of the Company's acquisition of
a foreclosed  real estate  property during the quarter ended March 31, 1998. The
property was  appraised at  acquisition  and the balance was written down to its
estimated "fair value."
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

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

Current  Office of Thrift  Supervision  regulations  require the  Association to
maintain,  at a minimum,  cash and eligible  investments,  in an amount not less
than 4.0% of net withdrawable  savings accounts and borrowings payable on demand
or in one year or less.  Liquid assets  include cash on hand,  unpledged  demand
deposits,  certain time deposits,  and, U. S Government and agency  obligations.
The Association  maintains a liquid asset ratio above the minimum required level
of the Office of Thrift Supervision. At March 31, 1998, the Association's liquid
asset ratio equaled 40.5%.

The  Association  uses its liquidity and capital  resources  principally to meet
ongoing   commitments  to  fund  maturing   certificates  of  deposit  and  loan
commitments,  maintain liquidity and pay operating expenses.  At March 31, 1998,
the Association had outstanding  commitments to extend credit on $4.4 million of
real estate loans.

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

Total stockholders'  equity equaled $21.1 million at March 31, 1998, an increase
of $198,000 from the $20.9 million  reported at September 30, 1997. The increase
was primarily a result of the $302,000 net income for the six months ended March
31, 1998, less $102,000 in cash dividends paid during the six month period.

As of March 31, 1998, the Company's  reported book value per share,  using total
stockholders'  equity of $21.0 million (net of the cost of unallocated  ESOP and
RRP shares) and 1,539,461  outstanding  shares of common stock (the total issued
shares including unallocated ESOP and RRP shares, less treasury shares), equaled
$13.69 per share.

Subsequent  to the quarter  ended March 31,  1998,  the  Company  announced  its
intention  to pay a cash  dividend  of  $.05  per  share  on May  27,  1998,  to
stockholders of record at May 13, 1998.

Under the Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989
("FIRREA"),  Congress  imposed  a three  part  capital  requirement  for  thrift
institutions.  At March 31, 1998, the Association's  actual and required capital
amounts under each of the three requirements were as follows:

- Tangible  Capital  (stockholders'  equity) was $18.0 million or 14.9% of total
assets, exceeding the minimum requirement of 1.5% by $16.2 million.

- Core  Capital  (Tangible  capital plus  certain  intangible  assets) was $18.0
million or 14.9% of total assets,  exceeding the minimum  requirement of 4.0% by
$13.2 million.

- Risk-based  Capital (Core  capital plus general loan and valuation  allowances
less an adjustment for  capitalized  mortgage  servicing  rights)  equaled $18.3
million of 39.0% of risk weighted assets,  exceeding the minimum  requirement of
8.0% of risk weighted assets by $14.5 million.
<PAGE>
At  March  31,  1998,  the  Association  was  considered  a  "well  capitalized"
institution  under the prompt  corrective  action  requirements  of the  Federal
Deposit Insurance Corporation Improvement Act of 1991.

FORWARD-LOOKING STATEMENTS

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

The Company does not undertake,  and specifically  disclaims any obligation,  to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.

YEAR 2000 ISSUE

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

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

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

                                   FORM 10-QSB

                                 MARCH 31, 1998


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes In Securities

     None

Item 3.  Defaults Upon Senior Securities

     None

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

     None.

Item 5.  Other Information.

     None

Item 6.  Exhibits and Reports on Form 8-K

     (a)  The following exhibits are filed herewith:

         Exhibit 11.0 - Computation of Earnings Per Share

         Exhibit 27.0 - Financial Data Schedule

     (b)  Reports on Form 8-K

         During the quarter ended March 31, 1998,  the Company filed a report on
         Form 8-K on January 28, 1998, to report the issuance of a press release
         dated January 28, 1998,  announcing the Company's  intention to pay, on
         February 25,  1998,  a cash  dividend of $.05 per share for the quarter
         ended  December 31,  1997,  to  stockholders  of record on February 11,
         1998.

         During the quarter ended March 31, 1998,  the Company filed a report on
         Form 8-K on January 28, 1998, to report the issuance of a press release
         dated  January 28,  1998,  announcing  the  Company's  earnings for the
         quarter ended December 31, 1997.

         During the quarter ended March 31, 1998,  the Company filed a report on
         Form 8-K on  February  24,  1998,  to report  the  issuance  of a press
         release dated February 24, 1998,  announcing the Company's intention to
         issue a 3 for 2 stock split in the form of a 50% stock dividend payable
         on March 25, 1998 to stockholders of record on March 11, 1998.
<PAGE>



                                   SIGNATURES

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


                                             East Texas Financial Services, Inc.


Date:  May 11, 1997                          /s/ Gerald W. Free
                                             ------------------
                                             Vice Chairman, President and CEO
                                             (Principal Executive Officer)


Date:  May 11, 1997                          /s/  Derrell W. Chapman
                                             -----------------------
                                             Vice President/COO/CFO
                                             (Principal Financial and 
                                             Accounting Officer)