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 SEPTEMBER 30, 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 organization)                      Identification or 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 November 11,  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 SEPTEMBER 30, 1998 AND JUNE 30, 1998
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,   JUNE 30,
                                                           1998         1998
                                                      ------------- ------------
<S>                                                    <C>          <C>        
ASSETS
  Cash on hand and in banks .........................  $   310,872  $   221,885
  Interest bearing deposits .........................    1,441,862    1,428,078
  Investment securities
    Available for sale ..............................      878,502      740,537
    Held to maturity ................................           --          980
  Mortgage-backed securities
    Available for sale ..............................   13,605,412    6,173,964
    Held to maturity ................................           --    8,928,088
  Loans receivable, net .............................   24,662,094   24,210,781
  Accrued interest receivable .......................      421,889      409,466
  Real estate and other assets
    acquired in settlement of loans,net .............      103,024      104,561
  Federal Home Loan Bank stock, at cost .............      533,300      525,400
  Office properties and equipment, at cost ..........      284,897      279,480
  Federal income taxes ..............................       24,583       76,015
  Prepaid expenses and other assets .................       84,749       90,695
                                                       -----------  -----------
    Total assets ....................................  $42,351,184  $43,189,930
                                                       ===========  ===========
LIABILITIES
  Deposits ..........................................  $27,992,865  $28,796,905
  Accrued interest payable ..........................       56,450       29,031
  Advances by borrowers for taxes and ins ...........      667,015      523,303
  Accounts payable and accrued expenses .............      250,488      187,114
  Advances from Federal Home Loan Bank ..............    9,351,346    9,751,346
                                                       -----------  -----------
      Total liabilities .............................   38,318,164   39,287,699

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 .................................    2,594,342    2,458,370
  Less:
    Shares acquired by Employee Stock Ownership Plan       (97,875)    (101,790)
    Shares acquired by Recognition and Retention Plan      (27,367)     (30,273)
    Treasury Stock (4,497 shares, at cost) ..........      (56,527)     (56,527)
  Accumulated other comprehensive income ............       (6,479)       5,525
                                                       -----------  -----------
      Total stockholders' equity ....................    4,033,020    3,902,231
                                                       -----------  -----------
      Total liabilities and stockholders' equity ....  $42,351,184  $43,189,930
                                                       ===========  ===========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                        2

<PAGE>

                         GILMER FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                             1998        1997
                                                           --------    --------
<S>                                                        <C>         <C>     
INTEREST INCOME
  Loans ..............................................     $574,061    $548,422
  Investment securities ..............................        9,554       5,279
  Mortgage-backed securities .........................      198,753     235,696
  Other interest-earning assets ......................       22,699      23,437
                                                           --------    --------
    Total interest income ............................      805,067     812,834
                                                      
INTEREST EXPENSE                                      
  Deposits ...........................................      373,494     407,656
  Interest on FHLB advances ..........................      147,752     112,206
                                                           --------    --------
    Total interest expense ...........................      521,246     519,862
                                                           --------    --------
    Net interest income ..............................      283,821     292,972
                                                      
  Provision for loan losses ..........................        7,000      10,500
                                                           --------    --------
    Net interest income after provision for           
      loan losses ....................................      276,821     282,472
                                                      
NONINTEREST INCOME                                    
  Gain on sale of interest-bearing assets ............          700           0
  Loan origination & commitment fees .................       20,775      15,915
  Loan servicing fees ................................       25,579      21,255
  Income (loss) from real estate operations ..........         (504)      2,162
  Mortgage servicing rights ..........................        6,471       1,757
  Other income .......................................      145,357      20,712
                                                           --------    --------
    Total noninterest income .........................      198,378      61,801
                                                      
NONINTEREST EXPENSE                                   
  Compensation and benefits ..........................      166,152     152,219
  Occupancy and equipment ............................       13,751      12,565
  Federal insurance premium ..........................        5,096       4,720
  Other expense ......................................       95,061      85,838
                                                           --------    --------
    Total noninterest expense ........................      280,060     255,342
                                                           --------    --------
    Income before taxes ..............................      195,139      88,931
                                                      
INCOME TAX EXPENSE ...................................       59,167      30,847
                                                           --------    --------
  Net income .........................................     $135,972    $ 58,084
                                                           ========    ========
EARNINGS PER SHARE                                    
  Basic ..............................................     $    .75    $    .32
                                                           ========    ========
  Diluted ............................................     $    .73    $    .32
                                                           ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                        3

<PAGE>

                         GILMER FINANCIAL SERVICES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
                                   (UNAUDITED)

                                                                       TOTAL
                                                                   STOCKHOLDERS'
                                                                       EQUITY
                                                                   -------------
Balance at June 30, 1998 .........................                  $3,902,231
                                                  
Accrual of ESOP Plan Awards ......................                       3,915
                                                  
Accrual of RRP Plan Awards .......................                       2,906
                                                  
Net Income .......................................      135,972
                                                  
Other comprehensive income .......................      (12,004)
                                                        --------
Comprehensive income .............................                     123,968
                                                                    ----------
Balance at September 30, 1998 ....................                  $4,033,020
                                                                    ==========
                                                              



See accompanying notes to consolidated financial statements


                                        4

<PAGE>

                         GILMER FINANCIAL SERVICES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          1998          1997
                                                      -----------   -----------
<S>                                                   <C>           <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income .......................................  $   135,972   $    58,084
  Adjustments to reconcile net income
    to net cash provided by operating activities
      Depreciation .................................        6,105         6,105
      Gain on sale of real estate owned ............           --            --
      Provision of losses on loans and other
        real estate ................................        7,000        10,500
      (Gain) Loss on sale of interest bearing assets         (700)           --
      Contribution to ESOP Plan ....................        3,915         3,915
      Contribution to RRP Plan .....................        2,906         2,907
      Change in assets and liabilities
        (Increase) decrease in mortgage
          servicing rights .........................       (6,471)        1,757
        (Increase) decrease in accrued
          interest receivable ......................      (12,423)       (1,909)
        (Increase) decrease in prepaid
          expenses and other assets ................        5,946        (4,461)
        (Decrease) increase in advances
          for taxes and insurance ..................      143,712       214,915
        (Decrease) increase in accrued
          interest payable .........................       27,419        (1,552)
        (Decrease) increase in federal
          income taxes .............................       51,432        24,819
        (Decrease) increase in deferred
          loan fees ................................       (2,152)          268
        (Decrease) increase in accounts
          payable & accrued expenses ...............       63,374        35,681
                                                      -----------   -----------
          Net cash provided by operating
            activities .............................      426,035       351,029

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sale of investment securities ......           --            --
  Purchase of investment securities ................     (120,000)           --
  Capital expenditures .............................      (11,522)      (14,948)
  Purchase of FHLB stock ...........................       (7,900)       (7,500)
  Proceeds from sales of mortgage loans ............      673,850       362,350
  Loans originates, net of payments ................   (1,121,303)     (840,077)
  Sales proceeds from sale of real estate owned ....           --            --
  Purchase of securities available for sale ........     (140,823)           --
  Sales proceeds from sale of mortgage-
    backed certificates available for sale .........           --            --
  Principal paydown on mortgage-backed
    certificates ...................................    1,608,474       280,528
                                                      -----------   -----------
      Net cash provided by (used in)
        investing activities .......................      880,776      (219,647)

CASH FLOWS FROM FINANCING ACTIVITIES
  Increase (Decrease) in deposits ..................     (804,040)       45,524
  Net (decrease)increase in advances from FHLB .....     (400,000)     (700,000)
                                                      -----------   -----------
      Net cash provided by financing activities ....   (1,204,040)     (654,476)
                                                      -----------   -----------
      Net increase (decrease) in cash
        and cash equivalents .......................      102,771      (523,094)

CASH AND CASH EQUIVALENTS AT BEGIN OF PERIOD .......    1,649,963     1,896,897
                                                      -----------   -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .........  $ 1,752,734   $ 1,373,803
                                                      ===========   ===========
</TABLE>

See accompany notes to consolidated financial statements

                                        5

<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 month periods ended September 30, 1998 and 1997 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 September
30, 1998,  the Bank's core,  tangible and  risk-based  capital was  increased by
approximately  $6,479 above the capital  calculated in accordance with generally
accepted accounting principles.

Beginning July 1, 1998, the Company adopted the Financial  Accounting  Standards
Board issued  Statement of Financial  Accounting  Standards  No.130,  "Reporting
Comprehensive  Income"  (FAS 130).  This  statement  establishes  standards  for
reporting and display of  comprehensive  income and its components in a full set
of  general-purpose  financial  statements.  The new standard  requires that all
items  that  are  required  to  be  recognized  under  accounting  standards  as
components of comprehensive  income be reported in a financial statement that is
displayed   with   the  same   prominence   as   other   financial   statements.
Reclassification  of  financial  statements  for earlier  periods  provided  for
comparative  purposes is  required.  As a result of adopting  this FAS 130,  the
Company  reported  (12,004)  in other  comprehensive  income for the three month
period ended September 30, 1998.


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 $2,906 for the three
month period ended September 30, 1998.

                                        6

<PAGE>

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


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 month periods ended September 30, 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.


NOTE 4--RECLASSIFICATIONS

Certain items previously reported have been reclassified to conform with current
period reporting form. The most significant  changes involve 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 and the
adoption of Statement of Financial  Accounting Standards No. 130, which requires
reporting and display of comprehensive income and its components.







                                        7

<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
(Bank),  a federally  chartered  stock savings  institution and its wholly owned
subsidiary,  Gilstar Service Corporation (Gilstar),  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 and Gilstar.

     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

     September  30,  1998  Compared to June 30,  1998.  Total  assets  decreased
$800,000  from $43.2  million at June 30, 1998 to $42.4 million at September 30,
1998.  The  decrease  was  primarily  attributable  $1.6  million  in  principal
repayments on mortgage  backed  securities,  partially  offset by an increase in
cash  and cash  equivalents  of  $100,000,  a  $500,000  increase  in net  loans
receivable,  an increase in investment securities of $137,000,  and the purchase
of $141,000 in mortgage backed securities.

     Cash and cash equivalents  increased $100,000 from $1.6 million at June 30,
1998 to  $1.7  million  at  September  30,  1998.  The  increase  was  primarily
attributable to principal repayments on mortgage-backed securities.

     Investment  securities increased $137,000 from $742,000 at June 30, 1998 to
$879,000 at September 30, 1998. The increase was due to the purchase of $120,000
of  municipal  bonds and an  increase  in  market  value of  available  for sale
investment securities of $17,000.

     Mortgage-backed  securities decreased $1,500,000 from $15.1 million at June
30, 1998 to $13.6 million at September 30, 1998.  The decrease was primarily due
to $1.6 million in principal repayments on mortgage-backed securities, partially
offset by the purchase of $141,000 in mortgage-backed securities. In the quarter
ended  September 30, 1998, the Bank elected to move all of its securities in the
held to maturity  category to the available for sale category,  to better manage
its securities portfolio.

     Loans  receivable were $24.2 million at June 30, 1998, and $24.7 million at
September 30, 1998 an increase of $500,000,  or 2.03%. The increase is primarily
attributable to an increase in originations of consumer loans due to an increase
in home equity lending.

                                        8

<PAGE>

     Deposits  decreased  $800,000 from $28.8 million at June 30, 1998, to $28.0
million at September  30, 1998.  The decrease was due primarily to a decrease in
average  rates  paid on  deposits.  Federal  Home Loan Bank  advances  decreased
$400,000  from $9.8 million at June 30, 1998,  to $9.4 million at September  30,
1998.  The decrease was due to repayment of advances  from funds  received  from
principal repayments on mortgage-backed securities.

     Advances by  borrowers  for taxes and  insurance  increased  $144,000  from
$523,000 at June 30, 1998 to $667,000 at September 30, 1998. The increase is due
to the majority of the property taxes being paid in the last quarter of calendar
1998.

     Total  stockholders'  equity increased  $131,000 to $4,033,000 at September
30,  1998  from  $3,902,000  at June 30,  1998.  This  increase  was a result of
$136,000  in net income,  a decrease in the  Employee  Stock  Ownership  Plan of
$3,915,  and a decrease in the Recognition and Retention Plan of $2,906,  offset
by a $12,000 increase in accumulated other comprehensive income.

     The Bank continued to exceed all of its regulatory capital  requirements at
September  30, 1998,  with  tangible and core capital of $3.9 million  (9.25% of
total  adjusted  assets)  and  risk-based  capital  of $4.2  million  (18.54% 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  September 30, 1998
and 1997

     General.  Net income for the quarter ended September 30, 1998 was $136,000,
an increase of $78,000 from the quarter ended  September 30, 1997.  The increase
was  primarily  due to the  recovery  of  $123,000  relating  to the  dishonored
cashiers check on which a settlement of $145,000 was reached in September  1998.
The remaining $22,000 was booked to the general valuation  allowance as recovery
on loans.

     Interest  Income.  Interest  income totaled  $805,000 for the quarter ended
September  30, 1998,  compared to $813,000 for the quarter  ended  September 30,
1997, a decrease of $8,000. The decrease was primarily due to a $37,000 decrease
in  interest  income  from  mortgage-backed  securities  due  to a  decrease  in
principal balance on mortgage-backed securities, partially offset by an increase
of  $26,000  in  interest  income  on  loans  due to an  increase  in net  loans
receivable.

     Interest Expense.  Interest expense remained relatively constant increasing
only $1,000 for the quarter  ended  September 30, 1998 compared to September 30,
1997.  Interest expense on advances  increased $35,000 due to an increase in the
average  outstanding  balances  on  advances,  which was  partially  offset by a
$34,000  decrease in interest  expense on deposits  due to a decrease in average
outstanding balances on deposits.

     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  September 30, 1998,  decreased  $3,500
from $10,500 for the three months ended  September  30, 1997,  to $7,000 for the
three month period ended  September 30, 1998.  The provision for loan losses was
decreased as a result of $22,000 being posted to the general valuation allowance
account for loans.  In  addition,  during the quarter the Bank  received a check
from  its  bond  company  for  loss on loans  of  $35,000,  relating  to  losses
associated with the same borrower who presented the dishonored  cashiers' check.
The Company had an excess in reserves at September 30, 1998, and elected to keep
the reserve balance steady due to the growth in the consumer and commercial loan
portfolio.

     Non-Interest  Income.  Non-interest  income increased $136,000 from $62,000
for the quarter  ended  September  30, 1997 to  $198,000  for the quarter  ended
September 30, 1998.

                                        9

<PAGE>

The increase  resulted  primarily from $123,000  increase in other income due to
the  settlement of the  dishonored  cashiers  check.  The Bank received the face
amount of the check,  $145,000,  of which,  $123,000 that was charged off in the
March 31, 1998  quarter  was booked  directly  to income and the  difference  of
$22,000 to recovery on loans.  Loan  origination  and commitment  fees increased
$5,000,  along with an increase in loan servicing fees of $4,000 and an increase
in mortgage servicing rights of $5,000, due to an increase in loan originations.

     Non-Interest Expense.  Non-interest expense increased $25,000 from $255,000
for the quarter ended  September 30, 1997,  compared to $280,000 for the quarter
ended  September  30,  1998.  Compensation  and  benefits  increased  $14,000 to
$166,000 for the quarter ended  September 30, 1998 from $152,000 for the quarter
ended  September  30,  1997,  due  to the  addition  of a new  employees.  Other
miscellaneous  expenses  increased  $9,000 from  $86,000  for the quarter  ended
September  30, 1997 to $95,000 for the quarter  ended  September  30, 1998,  the
increase  was  primarily  due to an  increase  in  legal  fees  relating  to the
dishonored cashiers check.

     Income Taxes. The provision for income taxes increased $28,000 from $31,000
for the quarter  ended  September  30,  1997 to $59,000  for the  quarter  ended
September  30, 1998.  The increase is due to an increase in net earnings  before
income taxes of $106,000 for the quarter ended September 30, 1998.


YEAR 2000 ISSUE

     Effective June 19, 1997, the Bank adopted a Year 2000 ("Y2K") 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.

     Financial  institution  regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance  concerning the  responsibilities
of  senior  management  and  directors.   The  Federal  Financial   Institutions
Examination Council ("FFIEC") has issued several  interagency  statements on Y2K
Project Management  Awareness.  These statements require financial  institutions
to,  among other  things,  examine  the Y2K  implications  of their  reliance on
vendors and with respect to data  exchange and the  potential  impact of the Y2K
issue on their  customers,  suppliers,  and  borrowers.  These  statements  also
require each federally regulated  financial  institution to survey its exposure,
measure its risk and prepare a plan to address the Y2K issue. Failure to address
appropriately  the Y2K issue could result in supervisory  action,  including the
reduction of the institution's  supervisory  ratings, or the imposition of civil
money penalties.

     The Company's operating,  processing and accounting operations are computer
reliant  and could be affected  by the Year 2000  issues.  Both the Bank and the
Company are reliant on third-party  vendors for their data  processing  needs as
well as  certain  other  significant  functions  and  services.  The  Company is
currently  working  with its third  party  vendors in order to assess  their Y2K
readiness. While no assurance can be given that such third party vendors will be
Y2K compliant,  management believes that its mission critical vendors are taking
appropriate steps to address the issues on a timely basis.

     The Company has formulated  five phases from the  regulatory  guidelines to
attain Y2K compliance. In the Awareness phase the Company formally established a
Y2K plan  headed by a senior  manager,  and a  project  team was  assembled  for
management  of the Y2K  project.  The project team created a plan of action that
included  strategies,  milestone dates, and budget estimates for Y2K compliance.
In the  Assessment  phase  the  Company  developed  strategies  to  achieve  the
objectives  of the Y2K plan,  and a Y2K  business  risk  assessment  was made to
quantify the extent of the  Company's  Y2K  exposure.  Systems were  prioritized
based on business impact and available alternatives.  The mission critical areas
supplied by vendors have been  researched to determine Y2K readiness.  The third
party systems that are not Y2K compliant are being  monitored for compliance and
the Company has identified replacements that are Y2K compliant. The

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<PAGE>

Bank has  identified  all of our major  customers,  borrowers  with  balances in
excess of $250,000, and sent letters to them to assess our risk and the Bank has
received  responses from all its major  customers and the Bank's risk appears to
be minimal.  In the  Renovation  phase the Company's  systems  revealed that Y2K
upgrades  were  available  for some of its vendors and all of the  hardware  and
software  systems that  required an upgrade  have been  replaced and were tested
during the  validation  phase.  In the  Validation  phase the Company tested the
ability of the hardware and software to accurately  process date sensitive data.
The Company  currently  is in the process of  validation  testing  each  mission
critical  system with the degree of completion of such testing  ranging from 80%
to 100%.  The Company has not incurred any Y2K related  errors in its testing to
date. The Company's validation phase is expected to be completed by December 31,
1998,  for  all  mission  critical  systems.  In the  Implementation  phase  the
Company's  plan calls for  implementing  the  renovated  systems by December 31,
1998.

     Although our service bureau has been tested for Y2K compliance,  the Office
of  Thrift  Supervision  requires  that  the  Bank  have a  business  resumption
contingency plan to carry on the main bank activities in case its service bureau
is not up and running.  The Bank is currently working on the business resumption
plan and should be finished by April 30, 1999.  While the Company  currently has
no reason to believe that the cost of addressing the Y2K issues will  materially
affect the Bank's  operations,  no  assurance  can be made that the third  party
vendors,  on which the Company relies, will become Y2K compliant in a successful
and timely fashion.  Nevertheless, the Company does not believe that the cost of
addressing  the Y2K issues will be a material  event or  uncertainty  that would
cause reported financial information not to be necessarily  indicative of future
operating results or financial conditions. The total cost of the Y2K project for
the Company is estimated to be $44,000.  Expenses of approximately  $10,000 were
incurred and expensed by the Company through September 30, 1998.







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<PAGE>

                          PART II. -- OTHER INFORMATION


Item 1.   Legal Proceedings

          Not applicable.

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.








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<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: November 11, 1998                   By: /s/ Gary P. Cooper
                                              ----------------------------------
                                              Gary P. Cooper
                                              Pres. and Chief Executive Officer
                                              (Principal Executive Officer)


Date: November 11, 1998                   By: /s/ Sheri Parish
                                              ----------------------------------
                                              Sheri Parish
                                              Vice President/Secretary/Treasurer
                                              (Principal Fin. & Acct. Officer)







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