SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                       ----------------------------------

                                   FORM 10-QSB

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

     For the quarterly period ended MARCH 31, 1998

[ ]  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 0-25076


                         GILMER FINANCIAL SERVICES, INC.
       (Exact name of small business issuer as specified in its charter)

            Delaware                                  75-2561513
(State or other jurisdiction                      (I.R.S. Employer
    of incorporation or                           Identification or
       organization)                                    Number)


                     218 W. Cass Street, Gilmer, Texas 75644
                    (Address of principal executive offices)

                                 (903) 843-5525
                           (Issuer's telephone number)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Transitional Small Business Disclosure Format (check one) :

                            Yes  [ ]       No  [X]

     State the number of Shares  outstanding of each of the issuer's  classes of
common equity, as of the latest date:

     As of May 21, 1998,  there were 195,755 shares of the  Registrant's  common
stock $.01 par value issued and 191,258 shares outstanding.


<PAGE>


                         GILMER FINANCIAL SERVICES, INC
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                       AT MARCH 31, 1998 AND JUNE 30, 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                               MARCH 31,      JUNE 30,
                                                                 1998           1997
                                                            ------------    ------------
<S>                                                         <C>             <C>         
ASSETS
  Cash on hand and in banks                                 $    439,710    $    532,292
  Interest bearing deposits                                    2,138,513       1,364,605
  Investment securities
    Available for sale                                           735,000               0
    Held to maturity                                               7,991         316,066
  Mortgage-backed securities
    Available for sale                                         4,355,373       4,841,083
    Held to maturity                                           9,326,652      10,218,465
  Loans receivable, net                                       23,722,019      23,407,057
  Accrued interest receivable                                    461,739         348,643
  Real estate and other assets
    acquired in settlement of loans,net                          153,816          98,690
  Federal Home Loan Bank stock, at cost                          513,100         495,100
  Office properties and equipment, at cost                       253,093         247,604
  Federal income taxes                                            39,319          54,154
  Prepaid expenses and other assets                               97,246         246,870
                                                            ------------    ------------
    Total assets                                            $ 42,243,571    $ 42,170,629
                                                            ============    ============

LIABILITIES
  Deposits                                                  $ 29,163,315    $ 29,106,164
  Accrued interest payable                                         9,824           7,452
  Advances by borrowers for taxes and ins                        369,176         487,714
  Accounts payable and accrued expenses                          273,137         215,897
  Advances from Federal Home Loan Bank                         8,585,000       8,550,000
                                                            ------------    ------------
    Total liabilities                                         38,400,452      38,367,227

STOCKHOLDERS' EQUITY
  Preferred Stock; $.01 par value; 2,000,000 shares
    authorized; none  issued
  Common stock, $.01 par value, 2,000,000 shares
    authorized; 195,755 shares issued                              1,958           1,958
  Additional paid in capital                                   1,624,968       1,624,968
  Retained earnings                                            2,426,804       2,466,014
  Less: Shares acquired by Employee Stock Ownership Plan        (105,705)       (117,450)
        Shares acquired by Recognition and Retention Plan        (33,180)        (41,900)
        Treasury Stock (4,497 shares, at cost)                   (56,527)        (56,527)
  Net unrealized loss on decline in market
    value of securities available for sale                       (15,199)        (73,661)
                                                            ------------    ------------
            Total stockholders' equity                         3,843,119       3,803,402
                                                            ------------    ------------
            Total liabilities and stockholders' equity      $ 42,243,571    $ 42,170,629
                                                            ============    ============
</TABLE>



        See accompanying notes to the consolidated financial statements.

                                        2

<PAGE>


                         GILMER FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                   (UNAUDITED)


                                                          1998           1997
                                                        ---------     ---------
INTEREST INCOME
  Loans                                                 $ 537,253     $ 509,390
  Investment securities                                     5,306         5,493
  Mortgage-backed securities                              232,746       248,278
  Other interest-earning assets                            15,492        17,820
                                                        ---------     ---------
    Total interest income                                 790,797       780,981

INTEREST EXPENSE
  Deposits                                                385,318       346,334
  Interest on FHLB advances                               129,475       127,202
                                                        ---------     ---------
    Total interest expense                                514,793       473,536
                                                        ---------     ---------
      Net interest income                                 276,004       307,445

  Provision for loan losses                                10,500         6,000
                                                        ---------     ---------
    Net interest income after provision for
    loan losses                                           265,504       301,445

NONINTEREST INCOME
  Gain (loss) on sale of interest-bearing assets           10,283        (1,071)
  Loan origination & commitment fees                       10,009        16,599
  Loan servicing fees                                      16,935        21,229
  Income (loss) from real estate operations                   (88)       (1,123)
  Mortgage servicing rights                                 2,483         1,570
  Other income                                             26,813        23,119
                                                        ---------     ---------
    Total noninterest income                               66,435        60,323

NONINTEREST EXPENSE
  Compensation and benefits                               158,375       132,879
  Occupancy and equipment                                  12,493        19,299
  Federal insurance premium                                 4,432         1,442
  Other expense                                           225,996        93,231
                                                        ---------     ---------
    Total noninterest expense                             401,296       246,851
                                                        ---------     ---------
      Income (loss) before taxes                          (69,357)      114,917

INCOME TAX EXPENSE                                        (23,414)       40,946
                                                        ---------     ---------
  Net income (loss)                                     $ (45,943)    $  73,971
                                                        =========     =========
EARNINGS (LOSS) PER SHARE

  Basic                                                 $    (.25)    $     .40
                                                        =========     =========

  Diluted                                               $    (.24)    $     .40
                                                        =========     =========


          See accompanying notes to consolidated financial statements.

                                        3

<PAGE>


                         GILMER FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
                                   (UNAUDITED)


                                                        1998           1997
                                                     -----------    -----------
INTEREST INCOME
  Loans                                              $ 1,622,194    $ 1,462,093
  Investment securities                                   15,322         17,751
  Mortgage-backed securities                             694,356        705,185
  Other interest-earning assets                           62,468         50,528
                                                     -----------    -----------
    Total interest income                              2,394,340      2,235,557

INTEREST EXPENSE
  Deposits                                             1,188,411        979,193
  Interest on FHLB advances                              365,149        382,202
                                                     -----------    -----------
    Total interest expense                             1,553,560      1,361,395
                                                     -----------    -----------
      Net interest income                                840,780        874,162

  Provision for loan losses                              182,500         28,000
                                                     -----------    -----------
    Net interest income after provision for
    loan losses                                          658,280        846,162

NONINTEREST INCOME
  Gain (loss) on sale of interest-bearing assets          10,601         (4,300)
  Loan origination & commitment fees                      37,320         54,286
  Loan servicing fees                                     57,230         58,038
  Income (loss) from real estate operations                  985              0
  Mortgage servicing rights                                7,031          5,510
  Other income                                            70,055         54,802
                                                     -----------    -----------
    Total noninterest income                             183,222        168,336

NONINTEREST EXPENSE
  Compensation and benefits                              447,729        400,748
  Occupancy and equipment                                 32,959         45,072
  Federal insurance premium                               13,584         24,151
  Other expense                                          406,386        260,152
  BIF/SAIF Assessment                                       --          164,429
                                                     -----------    -----------
    Total noninterest expense                            900,658        894,552
                                                     -----------    -----------
      Income (loss) before taxes                         (59,156)       119,946

INCOME TAX EXPENSE                                       (19,946)        42,656
                                                     -----------    -----------
  Net income (loss)                                  $   (39,210)   $    77,290
                                                     ===========    ===========
EARNINGS (LOSS) PER SHARE

  Basic                                              $      (.21)   $       .42
                                                     ===========    ===========

  Diluted                                            $      (.21)   $       .42
                                                     ===========    ===========


          See accompanying notes to consolidated financial statements.

                                        4

<PAGE>


                         GILMER FINANCIAL SERVICES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                    FOR THE NINE MONTHS ENDED MARCH 31, 1998
                                   (UNAUDITED)


                                                                       TOTAL
                                                                   STOCKHOLDERS'
                                                                       EQUITY

Balance at June 30, 1997                                            $ 3,803,402


Change in unrealized loss on decline in market
   value of securities available for sale                                58,462

Accrual of ESOP Plan Awards                                              11,745

Accrual of RRP Plan Awards                                                8,720

Net Income (Loss)                                                       (39,210)
                                                                    -----------
Balance at March 31, 1998                                           $ 3,843,119
                                                                    ===========


          See accompanying notes to consolidated financial statements

                                        5

<PAGE>


                         GILMER FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
                                   (UNAUDITED)

                                                        1998            1997
                                                     -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income(loss)                                   $   (39,210)   $    77,290
  Adjustments to reconcile net income
   to net cash provided by operating activities
     Depreciation                                         18,315         18,315
     Gain on sale of real estate owned                      --                0
     Provision of losses on loans and other
       real estate                                       182,500         28,000
    (Gain) Loss on sale of interest bearing assets       (10,601)         4,300
     Contribution to ESOP Plan                            11,745         11,745
     Contribution to RRP Plan                              8,720          6,457
     Change in assets and liabilities
       (Increase) decrease in mortgage
         servicing rights                                 (7,031)        (5,510)
       (Increase) decrease in accrued
         interest receivable                            (113,096)       (29,603)
       (Increase) decrease in prepaid
         expenses and other assets                       149,624        (13,422)
       (Decrease) increase in advances
         for taxes and insurance                        (118,538)      (217,445)
       (Decrease) increase in accrued
         interest payable                                  2,372           (279)
       (Decrease) increase in federal
         income taxes                                     14,835       (136,770)
       (Decrease) increase in deferred
         loan fees                                          (831)        10,069
       (Decrease) increase in accounts
         payable & accrued expenses                       57,240        178,331
                                                     -----------    -----------
         Net cash provided by operating
         activities                                      156,044        (68,522)

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sale of investment securities               --                0
  Purchase of investment securities                     (735,000)             0
  Capital expenditures                                   (23,804)       (42,058)
  Purchase of FHLB stock                                 (18,000)       (20,600)
  Proceeds from sales of mortgage loans                1,015,144        821,367
  Loans originates, net of payments                   (1,559,870)    (3,912,911)
  Sales proceeds from sale of real estate owned             --                0
  Purchase of mortgage-backed certificates                  --                0
  Purchase of securities available for sale                 --                0
  Sales proceeds from sale of mortgage-
    backed certificates available for sale                  --                0
  Principal paydown on mortgage-backed
    certificates                                       1,754,661        864,523
                                                     -----------    -----------
      Net cash provided by (used in)
      investing activities                               433,131     (2,289,679)

CASH FLOWS FROM FINANCING ACTIVITIES
  Increase (Decrease) in deposits                         57,151      2,241,621
  Net (decrease)increase in advances from FHLB            35,000        320,000
  Repurchase of treasury stock                                 0       (125,700)
                                                     -----------    -----------
     Net cash provided by financing activities            92,151      2,435,921
                                                     -----------    -----------
     Net increase (decrease) in cash
     and cash equivalents                                681,326         77,720

CASH AND CASH EQUIVALENTS AT BEGIN OF PERIOD           1,896,897        981,144
                                                     -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD           $ 2,578,223    $ 1,058,864
                                                     ===========    ===========

            See accompany notes to consolidated financial statements

                                        6

<PAGE>


                         GILMER FINANCIAL SERVICES, INC.
                   NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The  accounting  and  reporting  policies  and  practices  of  Gilmer  Financial
Services,  Inc.  conform to  generally  accepted  accounting  principles  and to
prevailing practices within the savings and loan industry.

The unaudited  interim  financial  statements  were prepared in accordance  with
instructions  for Form 10-QSB and,  therefore,  do not  include  information  or
footnotes necessary for a complete  presentation of financial position,  results
of operations,  and cash flows in conformity with generally accepted  accounting
principles.  However,  all  adjustments  (consisting  only of  normal  recurring
adjustments)  which,  in the opinion of  management,  are  necessary  for a fair
presentation  of the financial  statements  have been  included.  The results of
operations  for the three and nine month  periods  ended  March 31, 1998 are not
necessarily indicative of the results which may be expected for an entire fiscal
year.

The  OTS  has  adopted  a  regulation  which  requires  that,  for  purposes  of
calculating regulatory capital, unrealized gains or losses related to accounting
for certain  investments  in debt and equity  securities  under SFAS 115 are not
included in the Bank's regulatory capital. As a result of this rule at March 31,
1998,  the Bank's  core,  tangible  and  risk-based  capital  was  increased  by
approximately  $15,199 above the capital calculated in accordance with generally
accepted accounting principles.

NOTE 2-RECOGNITION AND RETENTION PLAN

The Board of Directors of the Company adopted and obtained  stockholder approval
at the October 12, 1995 stockholder's  meeting, a Recognition and Retention Plan
(RRP) to enable the Company to provide officers and employees with a proprietary
interest in the Company as incentive to contribute to its success.  Officers and
employees of the Company who are selected by members of a committee appointed by
the Board of Directors of the Company will be eligible to receive benefits under
the RRP.

The Company has  available to award 7,830 shares of Company stock and on October
12, 1996, the Company  awarded 4,303 shares,  with the remainder  being reserved
for future award.  The shares granted are in the form of restricted  stock to be
earned  and  payable  over a  five-year  period  at the  rate of 20%  per  year,
effective on the date of stockholder ratification. Compensation in the amount of
the fair  market  value  of the  common  stock  at the date of the  grant to the
officer or employee will be recognized pro rata over the five years during which
the shares  are earned and  payable.  The  Company  initially  funded the RRP in
October 1995 by issuing 4303 shares of its  previously  authorized  but unissued
common stock.  In October  1996,  the company  repurchased  10,000 shares of its
outstanding  common  stock for  $125,700,  of these  shares  4,303  shares  were
contributed to the RRP to retire shares previously issued. During the year ended
June 30, 1997, the Company awarded an additional  1,200 shares and used Treasury
shares to fund the award.  The remaining  4,497 shares of stock  repurchased are
held in treasury  shares at cost. RRP Plan expense  totalled  $2,907 and $8,720,
for the three and nine month periods ended March 31, 1998.

NOTE 3-EARNINGS PER SHARE

Effective  with the quarter  ended  December 31, 1997,  the Company  adopted the
provisions of the  Statement of Financial  Accounting  Standards No. 128,  which
changes  the method of  computing  and  reporting  earnings  per share.  Amounts
previously  reported have been  restated to conform to the new  standard.  Basic
earnings per share for the three and nine month periods ended March 31, 1998 and
1997 have been computed by dividing net earnings by the weighted  average number
of  shares  outstanding.  Shares  controlled  by the ESOP are  accounted  for in
accordance  with Statement of Position 93-6 under which  unallocated  shares are
not  considered  in the  weighted  average  number of  shares  of  common  stock
outstanding.  Diluted  earnings per share have been  computed,  giving effect to
outstanding stock purchase options by application of the treasury stock method.

                                        7

<PAGE>


                         GILMER FINANCIAL SERVICES, INC.
                   NOTES TO THE UNAUDITED FINANCIAL STATEMENTS


NOTE 4-RECLASSIFICATIONS

Certain items previously reported have been reclassified to conform with current
period reporting form. The most significant  change involves the adoption of the
Statement of Financial Accounting Standards No. 128, which changes the method of
computing and reporting earnings per share as described in Note 3.


                                        8

<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

     Gilmer  Financial  Services,  Inc.  was  formed  in July of 1994 and is the
holding  company and owner of 100% of the common  stock of Gilmer  Savings  Bank
FSB, a  federally  chartered  stock  savings  institution  and its wholly  owned
subsidiary,  Gilstar Service Corporation, which offers non-depository investment
products.  In this  discussion  and analysis,  reference to the  operations  and
financial  condition  of the  Company  includes  the  operations  and  financial
condition of the Bank.

     On February 9, 1995, the Bank  completed its conversion  from a mutual to a
stock savings  institution.  On that date,  the Company  issued and sold 195,755
shares of common  stock at $10.00 per share to complete  the  conversion  of the
Bank from mutual to stock form ("Conversion").  Net proceeds to the Company were
approximately $1.6 million after deducting expenses of approximately $320,000.

     The Holding Company's  business currently consists of the operations of the
Bank. As a consumer-oriented  financial institution,  the Company offers a range
of banking  services to  residents of its primary  market  area.  The Company is
principally  engaged in the  business of  attracting  deposits  from the general
public and investing those deposits,  along with funds generated from operations
and borrowings, into mortgage,  commercial, and consumer loans. The Company also
invests in  mortgage  and  government  backed  securities  and  certificates  of
deposit.

     The Bank's results of operations are primarily affected by its net interest
income,  which is the difference  between  interest  income earned on its loans,
investment and mortgage-backed securities and other investments, and its cost of
funds  consisting  of interest  paid on deposits and borrowed  funds,  including
Federal  Home Loan Bank  advances.  Net income of the Bank is also  affected  by
non-interest  income,  such  as  loan  origination  and  commitment  fees,  loan
servicing  fees  and  other  income,   and   non-interest   expense,   including
compensation and benefits,  insurance premiums, losses on foreclosed real estate
and  provisions  for losses on loans.  The Bank's  net income  also is  affected
significantly  by  general  economic  conditions  and  competitive   conditions,
particularly  changes  in  market  interest  rates  and  actions  of  regulatory
authorities.

Financial Condition

     March 31, 1998 Compared to June 30, 1997. Total assets remained  relatively
constant, increasing only $73,000. The increase was primarily attributable to an
increase  in net  loans  receivable  of  $315,000,  an  increase  in  investment
securities of $427,000, an increase in cash and cash equivalents of $681,000, an
increase in accrued  interest  receivable  of  $113,000  and an increase in real
estate  owned of  $55,000,  partially  offset by a decrease  in  mortgage-backed
securities of $1,378,000 and a decrease in prepaid  expenses and other assets of
$150,000.

     Cash and cash equivalents  increased $681,000 from $1.9 million at June 30,
1997 to $2.6 million at March 31, 1998. The increase was primarily  attributable
to principal repayments on mortgage-backed securities.

     Mortgage-backed securities decreased $1,378,000 from $15.1 million at June
30, 1997 to $13.7  million at March 31, 1998.  The decrease was primarily due to
principal repayments on mortgage-backed securities.

     Loans  receivable were $23.4 million at June 30, 1997, and $23.7 million at
March 31, 1998 an increase of  $315,000,  or 1.33%.  The  increase is  primarily
attributable to an increase in originations of consumer and commercial loans.

     Investment securities increased $427,000 from $316,000 at June 30, 1997 to
$743,000 at March 31, 1998.  The increase was due to the purchase of $735,000 in
Upshur County Bonds held as available for sale securities, offset by $308,000 in
principal repayments.

     Accrued interest  receivable  increased  $113,000 from $349,000 at June 30,
1997 to $462,000 at March 31, 1998.  The increase was  primarily due to interest
payments were made on mortgage-backed securities after the quarter ended.

                                        9

<PAGE>


     Real estate and other  assets  increased  $55,000  from $99,000 at June 30,
1997 to $154,000 at March 31, 1998.  The increase was due to a foreclosure  on a
single  family  loan of $36,000,  along with an  increase  in other  repossessed
assets of $19,000, resulting from repossession of auto loans.

     Prepaid expenses and other assets decreased $150,000, from $247,000 at June
30, 1997 to $97,000 at March 31, 1998. This decrease was primarily  attributable
to the write off of a receivable of $123,000  relating to a dishonored  cashiers
check  for  $145,000  which  is  currently  in  pending  litigation.  Management
continues to believe that the check will ultimately be paid; however, due to the
fact that litigation is in the preliminary  stages, the likelihood of success is
not determinable at this time.

     Deposits remain  relatively  unchanged from $29.1 million at June 30, 1997,
to $29.2  million  at March 31,  1998.  Federal  Home Loan  Bank  advances  also
remained relatively constant, increasing only $35,000.

     Advances by  borrowers  for taxes and  insurance  decreased  $119,000  from
$488,000 at June 30, 1997 to $369,000 at March 31, 1998.  The decrease is due to
the  majority of the  property  taxes being paid in the last quarter of calendar
1997.

     Total  stockholders'  equity  increased  $40,000 to $3,843,000 at March 31,
1998 from  $3,803,000 at June 30, 1997.  This increase was a result of a $58,000
decrease in unrealized loss on securities  available for sale, a decrease in the
Employee Stock Ownership Plan of $12,000,  and a decrease in the Recognition and
Retention Plan of $9,000, offset by a $39,000 net loss for the nine months ended
March 31,  1998.  The Bank  continued  to exceed all of its  regulatory  capital
requirements  at March 31, 1998,  with tangible and core capital of $3.8 million
(8.89% of total adjusted assets) and risk-based  capital of $4.0 million (18.48%
of risk-weighted assets).

Results of Operations

     The Company's  results of operations  depend  primarily on the level of its
net  interest  income and  non-interest  income  and the amount of  non-interest
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them.

Comparison  of  Operating  Results for the Three Months Ended March 31, 1998 and
1997

     General.  Net  income(loss)  for the  quarter  ended  March  31,  1998  was
($46,000),  a decrease of $120,000  from the quarter  ended March 31, 1997.  The
decrease  was  primarily  due to the  write  off of a  receivable  for  $123,000
relating to the dishonored cashiers check. See prepaid expenses and other assets
discussed above.

      Interest  Income.  Interest income totaled  $791,000 for the quarter ended
March 31, 1998,  compared to $781,000 for the quarter  ended March 31, 1997,  an
increase of $10,000.  The increase was primarily due to an increase in net loans
receivable.

      Interest Expense. Interest expense increased $41,000 for the quarter ended
March 31, 1998  compared to March 31, 1997.  The increase was primarily due to a
$39,000  increase in interest paid on deposits as a result of an increase in the
average balance of deposits for the quarter and an increase in rates.

      Provision  for Loan Losses.  The Company  maintains an allowance  for loan
losses based upon  management's  periodic  evaluation of  non-performing  loans,
inherent risks in the loan portfolio,  economic  conditions and past experience.
The provision for the three months ended March 31, 1998,  increased  $4,000 from
$6,000 for the three months ended March 31, 1997, to $10,000 for the three month
period ended March 31, 1998.  The provision for loan losses was increased  based
on management's  evaluation of  non-performing  loans,  along with  management's
decision to establish  additional reserves to support the growth in the consumer
and commercial portfolio.

     Non-Interest Income.  Non-interest income increased $6,000 from $60,000 for
the quarter  ended  March 31,  1997 to $66,000  for the quarter  ended March 31,
1998.  The increase  resulted  primarily  from an increase of $11,000 in gain on
sale of interest-bearing  assets,  partially offset by a $4,000 decrease in loan
origination and commitment fees.


                                       10

<PAGE>


     Non-Interest Expense. Non-interest expense increased $154,000 from $247,000
for the quarter ended March 31, 1997, compared to $401,000 for the quarter ended
March 31, 1998.  Compensation and benefits increased $25,000 to $158,000 for the
quarter ended March 31, 1998 from $133,000 for the quarter ended March 31, 1997,
due to the addition of a new employee.  Other  miscellaneous  expenses increased
$133,000  from $93,000 for the quarter ended March 31, 19976 to $226,000 for the
quarter ended March 31, 1998, the increase was primarily due to the write off of
$123,000  of the  receivable  relating to the  dishonored  cashiers  check,  see
prepaid expenses and other assets.

     Income Taxes. The provision for income taxes decreased $64,000 from $41,000
for the quarter  ended March 31, 1997 to ($23,000)  for the quarter  ended March
31, 1998. The decrease is due to a decrease in net earnings  before income taxes
of $120,000 for the quarter ended March 31, 1998.

Comparison  of  Operating  Results for the Nine Months  Ended March 31, 1998 and
1997

     General.  Net  income(loss)  for the nine  months  ended March 31, 1998 was
($39,000), a decrease of $117,000 from the nine months ended March 31, 1997. The
decrease was  primarily  due to a $155,000  increase in the  provision  for loan
losses,  a decrease in net interest  income of $33,000,  partially  offset by an
increase in other  income of $15,000,  along with a decrease in income  taxes of
$63,000.

     Interest  Income.  Interest  income totaled  $2,394,000 for the nine months
ended March 31, 1998, compared to $2,236,000 for the nine months ended March 31,
1997, an increase of $159,000.  The increase was due to an increase in net loans
receivable, along with upward changes in interest rates on adjustable loans.

     Interest Expense.  Interest expense increased  $192,000 for the nine months
ended March 31, 1998 compared to March 31, 1997.  The increase was primarily due
to an increase in interest paid on deposits,  resulting  from an increase in the
average  balance of deposits for the nine months  ended March 31,  1998,  and an
increase in rates.

     Provision  for Loan Losses.  The Company  maintains  an allowance  for loan
losses based upon  management's  periodic  evaluation of  non-performing  loans,
inherent risks in the loan portfolio,  economic  conditions and past experience.
The provision for the nine months ended March 31, 1998,  increased $150,000 from
$28,000  for the nine  months  ended March 31,  1997,  to $183,000  for the nine
months period ended March 31, 1997.

     Non-Interest  Income.  Non-interest  income increased $15,000 from $168,000
for the nine months  ended March 31, 1997 to $183,000  for the nine months ended
March 31, 1998. The increase  resulted  primarily from an increase of $15,000 in
gain on sale of interest-bearing assets.

     Non-Interest  Expense.  Non-interest  expense totaled $901,000 for the nine
months  ended March 31,  1998,  compared to $895,000  for the nine months  ended
March 31, 1997,  an increase of $6,000.  The primary  reason for this change was
the one time special  assessment of 65.7 basis points of the March 31, 1995 SAIF
assessment  base.  The  special  assessment  resulted  in a  $164,000  charge to
noninterest  expense during the nine months ended March 31, 1997,  compared to a
charge of $0 for the nine months ended March 31, 1998. Compensation and benefits
increased  $46,000 to  $447,000  for the nine  months  ended March 31, 1998 from
$401,000 for the nine months ended March 31, 1997,  due to the addition of a new
employee,  along with other benefits.  Other  miscellaneous  expenses  increased
$146,000  from $260,000 for the nine months ended March 31, 1997 to $406,000 for
the nine months ended March 31, 1998.  The primary  reason for this increase was
the  write  off of a  $123,000  of the  receivable  relating  to the  dishonored
cashiers check. See prepaid expenses and other assets.

     Income Taxes. The provision for income taxes decreased $63,000 from $43,000
for the nine months ended March 31, 1997 to ($20,000)  for the nine months ended
March 31, 1998. The decrease is due to a decrease in net earnings  before income
taxes of $117,000 for the nine months ended March 31, 1998.


                                       11

<PAGE>


Year 2000 Policy

     Effective June 19, 1997,  the Bank adopted a Year 2000 Policy.  This policy
implements  steps to assure any  problems  relating  to  software  that has been
written  to use a 2 digit  field  in the  year  designation  of a date  has been
corrected by year end 1998.  The twentieth  century is assumed to be the default
in such designations,  and will produce results that are wrong by 100 years when
the  century  is meant to be the twenty  first  century.  The Bank is  currently
testing all software to assure compliance with the Year 2000 Policy.


                                       12

<PAGE>


                          PART II. - OTHER INFORMATION



Item 1.     Legal Proceedings

            See Financial Condition - Prepaid expenses and other assets

Item 2.     Changes in Securities

            Not applicable.

Item 3.     Defaults Upon Senior Securities

            Not applicable.

Item 4.     Submission of Matters to Vote of Security Holders

            None.

Item 5.     Other Information

            None.

Item 6.     Exhibits and Reports on Form 8-K

            (a)  Exhibits:
                 Exhibit 27-Financial Data Schedule

            (b)  Reports on Form 8-K None.


                                       13

<PAGE>


                                   SIGNATURES

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



                         GILMER FINANCIAL SERVICES, INC.

      Date: May 21, 1998       By: /s/ Gary P. Cooper
                                   -------------------------------------
                                       Gary P. Cooper
                                       Pres. and Chief Executive Officer
                                       (Principal Executive Officer)


      Date: May 21, 1998       By: /s/ Sheri Parish
                                   -------------------------------------
                                       Sheri Parish
                                       Vice President/Secretary/Treasurer
                                       (Principal Fin. & Acct. Officer)


                                       14