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 DECEMBER 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 February 12, 1999,  there were  195,755  shares of the  Registrant's
common stock $.01 par value issued and 192,236 shares outstanding.


<PAGE>

<TABLE>
<CAPTION>


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


<S>                                                   <C>                 <C>


                                                            DECEMBER 31,      JUNE 30,
                                                                1998           1998
                                                           -------------   -------------
ASSETS
  Cash on hand and in banks                                $   386,241     $   221,885
  Interest bearing deposits                                  2,837,510       1,428,078
  Investment securities
    Available for sale                                         887,652         740,537
    Held to maturity                                                --             980
  Mortgage-backed securities
    Available for sale                                      11,606,394       6,173,964
    Held to maturity                                                --       8,928,088
  Loans receivable, net                                     24,475,889      24,210,781
  Accrued interest receivable                                  419,757         409,466
  Real estate and other assets
    acquired in settlement of loans,net                        138,420         104,561
  Federal Home Loan Bank stock, at cost                        541,000         525,400
  Office properties and equipment, at cost                     279,267         279,480
  Federal income taxes                                          (7,312)         76,015
  Prepaid expenses and other assets                            133,423          90,695
                                                           -------------   -------------
    Total assets                                           $41,698,241     $43,189,930
                                                           =============   =============


LIABILITIES
  Deposits                                                 $28,334,855     $28,796,905
  Accrued interest payable                                      87,607          29,031
  Advances by borrowers for taxes and ins.                     198,790         523,303
  Accounts payable and accrued expenses                         88,396         187,114
  Advances from Federal Home Loan Bank                       8,945,584       9,751,346
                                                           -------------   -------------
    Total liabilities                                       37,655,232      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                                 1,622,943       1,624,968
  Retained earnings                                          2,605,239       2,458,370
  Less: Shares acquired by Employee Stock Ownership Plan       (93,960)       (101,790)
        Shares acquired by Recognition and Retention Plan      (24,460)        (30,273)
        Treasury Stock (4,497 shares, at cost)                 (44,234)        (56,527)
  Accumulated other comprehensive income                       (24,477)          5,525
                                                           -------------   -------------
            Total stockholders' equity                       4,043,009       3,902,231
                                                           -------------   -------------
            Total liabilities and stockholders' equity     $41,698,241     $43,189,930
                                                           =============   =============


</TABLE>

 See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>

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

<S>                                                   <C>                  <C>

                                                                 1998             1997
                                                            -------------     -------------
INTEREST INCOME
  Loans                                                     $   559,602       $   536,519
  Investment securities                                          11,045             4,737
  Mortgage-backed securities                                    187,374           225,914
  Other interest-earning assets                                  34,969            23,539
                                                            -------------       -------------
    Total interest income                                       792,990           790,709

INTEREST EXPENSE
  Deposits                                                      366,368           395,437
  Interest on FHLB advances                                     128,355           123,468
                                                            -------------     -------------
    Total interest expense                                      494,723           518,905
                                                            -------------       -------------
      Net interest income                                       298,267           271,804

  Provision for loan losses                                      73,500           161,500
                                                            -------------     -------------
    Net interest income after provision for
    loan losses                                                 224,767           110,304

NONINTEREST INCOME
  Gain on sale of interest-bearing assets                          (700)              318
  Loan origination & commitment fees                              7,758            11,396
  Loan servicing fees                                            19,548            19,040
  Income (loss) from real estate operations                      (2,845)           (1,089)
  Mortgage servicing rights                                       5,775             2,791
  Other income                                                   27,040            22,530
                                                            -------------       -------------
    Total noninterest income                                     56,576            54,986

NONINTEREST EXPENSE
  Compensation and benefits                                     126,432           137,135
  Occupancy and equipment                                         9,514             7,901
  Federal insurance premium                                       5,859             4,432
  Other expense                                                 113,663            94,552
                                                            -------------       -------------
    Total noninterest expense                                   255,468           244,020
                                                            -------------     -------------
      Income before taxes                                        25,875           (78,730)

INCOME TAX EXPENSE                                               14,978           (27,379)
                                                            -------------     -------------
  Net income                                                $    10,897       $   (51,351)
                                                            =============     =============
EARNINGS PER SHARE

  Basic                                                     $       .06        $     (.28)
                                                            =============     =============

  Diluted                                                   $       .06        $     (.27)
                                                            =============     =============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>

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

<S>                                                  <C>                   <C>

                                                                 1998             1997
                                                            -------------     -------------
INTEREST INCOME
  Loans                                                     $ 1,133,663       $ 1,084,941
  Investment securities                                          20,599            10,016
  Mortgage-backed securities                                    386,127           461,610
  Other interest-earning assets                                  57,668            46,976
                                                            -------------       -------------
    Total interest income                                     1,598,057         1,603,543

INTEREST EXPENSE
  Deposits                                                      739,862           803,093
  Interest on FHLB advances                                     276,107           235,674
                                                            -------------     -------------
    Total interest expense                                    1,015,969         1,038,767
                                                            -------------       -------------
      Net interest income                                       582,088           564,776

  Provision for loan losses                                      80,500           172,000
                                                            -------------     -------------
    Net interest income after provision for
    loan losses                                                 501,588           392,776

NONINTEREST INCOME
  Gain on sale of interest-bearing assets                             0               318
  Loan origination & commitment fees                             28,533            27,311
  Loan servicing fees                                            45,127            40,295
  Income (loss) from real estate operations                      (3,349)            1,073
  Mortgage servicing rights                                      12,246             4,548
  Other income                                                  172,397            43,242
                                                            -------------       -------------
    Total noninterest income                                    254,954           116,787

NONINTEREST EXPENSE
  Compensation and benefits                                     292,584           289,354
  Occupancy and equipment                                        23,265            20,466
  Federal insurance premium                                      10,955             9,152
  Other expense                                                 208,724           180,390
                                                            -------------       -------------
    Total noninterest expense                                   535,528           499,362
                                                            -------------     -------------
      Income before taxes                                       221,014            10,201

INCOME TAX EXPENSE                                               74,145             3,468
                                                            -------------     -------------
  Net income                                                $   146,869       $     6,733
                                                            =============     =============
EARNINGS PER SHARE

  Basic                                                     $       .81        $      .04
                                                            =============     =============

  Diluted                                                   $       .79        $      .04
                                                            =============     =============
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

<TABLE>
<CAPTION>

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

<S>                                           <C>

                                                     TOTAL
                                                 STOCKHOLDERS'
                                                     EQUITY

Balance at June 30, 1998                         $ 3,902,231


Accrual of ESOP Plan Awards                            7,830


Accrual of RRP Plan Awards                             5,813


Treasury Shares Reissued for exercise of
   stock options                                      10,268

Net Income                                           146,869


Other comprehensive income                           (30,002)


Comprehensive income                                                116,867

                                                                -------------
Balance at December 31, 1998                                    $ 4,043,009
                                                                =============

</TABLE>

See accompanying notes to consolidated financial statements


<PAGE>
<TABLE>
<CAPTION>

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

<S>                                                <C>                <C> 
                                                          1998                1997
                                                      ------------        ------------
CASH FLOWS FROM OPERATING ACTIVITIES                 
  Net income                                          $   146,869         $    6,733
  Adjustments to reconcile net income                
   to net cash provided by operating activities      
     Depreciation                                          12,210             12,210
     Gain on sale of real estate owned                         --                 --
     Provision of losses on loans and other          
       real estate                                         80,500            172,000
    (Gain) Loss on sale of interest bearing assets             --               (318)
     Contribution to ESOP Plan                              7,830              7,830
     Contribution to RRP Plan                               5,813              5,813
     Change in assets and liabilities                
       (Increase) decrease in mortgage               
         servicing rights                                  (5,775)            (4,548)
       (Increase) decrease in accrued                
         interest receivable                              (10,291)           (62,627)
       (Increase) decrease in prepaid                
         expenses and other assets                        (42,728)            50,193
       (Decrease) increase in advances               
         for taxes and insurance                         (324,513)          (232,182)
       (Decrease) increase in accrued                
         interest payable                                  58,576               (498)
       (Decrease) increase in federal                
         income taxes                                      83,327              9,921
       (Decrease) increase in deferred               
         loan fees                                           (504)              (954)
       (Decrease) increase in accounts               
         payable & accrued expenses                       (98,718)            47,252
                                                      -------------      -------------
         Net cash provided by operating              
         activities                                       (87,404)            10,825
                                                     
CASH FLOWS FROM INVESTING ACTIVITIES                 
  Proceeds from sale of investment securities                  --                 --
  Purchase of investment securities                      (120,000)          (735,000)
  Capital expenditures                                    (11,997)            10,073
  Purchase of FHLB stock                                  (15,600)           (12,000)
  Proceeds from sales of mortgage loans                   985,515            656,394
  Loans originates, net of payments                    (1,358,703)        (1,045,616)
  Sales proceeds from sale of real estate owned                --                 --
  Purchase of securities available for sale            (1,319,426)                --
  Sales proceeds from sale of mortgage-              
    backed certificates available for sale                     --                 --
  Principal paydown on mortgage-backed               
    certificates                                        4,758,947            591,388
                                                      -------------      -------------
      Net cash provided by (used in)                 
      investing activities                              2,918,736           (534,761)
                                                     
CASH FLOWS FROM FINANCING ACTIVITIES                 
  Increase (Decrease) in deposits                        (462,050)           225,431
  Net (decrease)increase in advances from FHLB           (805,762)            35,000
  Reissuance of treasury shares                            10,268                 --
                                                      -------------      -------------
     Net cash provided by financing activities         (1,257,544)           260,431
                                                      -------------      -------------
     Net increase (decrease) in cash
     and cash equivalents                               1,573,788           (263,505)

CASH AND CASH EQUIVALENTS AT BEGIN OF PERIOD            1,649,963          1,896,897
                                                      -------------      -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD            $ 3,223,751        $ 1,633,392
                                                      =============      =============
</TABLE>

See accompany notes to consolidated financial statements



<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 six month periods ended December 31, 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 December
31, 1998,  the Bank's core,  tangible and  risk-based  capital was  increased by
approximately  $24,477 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 (30,002) in other comprehensive income for the six month period
ended December 31, 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.  During the six month period ended  December 31, 1998,
the Bank reissued treasury shares to fund 978 stock options exercised during the
quarter.  The remaining  3,519 shares of stock  repurchased are held in treasury
shares at cost. RRP Plan expense  totalled $5,813 for the six month period ended
December 31, 1998.

<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 and six month periods  ended  December 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.


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.


<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.

      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

      December 31, 1998 Compared to June 30, 1998.  Total assets  decreased $1.5
million  from $43.2  million at June 30, 1998 to $41.7  million at December  31,
1998.  The  decrease  was  primarily  attributable  to $4.8 million in principal
repayments on mortgage  backed  securities,  partially  offset by an increase in
cash and cash  equivalents  of $1.6  million,  a $265,000  increase in net loans
receivable,  an increase in investment securities of $147,000,  and the purchase
of $1.3 million in mortgage backed securities.

      Cash and cash equivalents increased $1.6 million from $1.6 million at June
30, 1998 to $3.2  million at December  31,  1998.  The  increase  was  primarily
attributable to principal repayments on mortgage-backed securities.

      Investment securities increased $147,000 from $742,000 at June 30, 1998 to
$887,000 at December 31, 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 $27,000.

      Mortgage-backed  securities  decreased  $3.5 million from $15.1 million at
June 30, 1998 to $11.6 million at December 31, 1998.  The decrease was primarily
due to $4.8  million in  principal  repayments  on  mortgage-backed  securities,
partially offset by purchases of $1.3 million 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,
in order to better manage its securities portfolio.

      Loans receivable were $24.2 million at June 30, 1998, and $24.5 million at
December 31, 1998 an increase of $265,000,  or 1.08%.  The increase is primarily
attributable to an increase in originations of consumer loans due to an increase
in home equity lending.

      Real estate and other assets  acquired in  settlement  of loans  increased
$33,000 from  $105,000 at June 30, 1998 to $138,000 at December  31,  1998.  The
increase was primarily due to the  foreclosure on real estate during the quarter
of $15,000, along with repossessed assets of $18,000.
<PAGE>

      Deposits  decreased $500,000 from $28.8 million at June 30, 1998, to $28.3
million at December  31, 1998.  The decrease was due  primarily to a decrease in
average  rates  paid on  deposits.  Federal  Home Loan Bank  advances  decreased
$900,000  from $9.8  million at June 30,  1998,  to $8.9 million at December 31,
1998. The decrease was due to the repayment of advances from funds received from
principal repayments on mortgage-backed securities.

      Advances by borrowers  for taxes and  insurance  decreased  $324,000  from
$523,000 at June 30, 1998 to $199,000 at December 31, 1998.  The decrease is due
to the majority of the property taxes being paid in the last quarter of calendar
1998.

      Total  stockholders'  equity increased  $141,000 to $4,043,000 at December
31, 1998 from  $3,902,000  at June 30,  1998.  This  increase  was a result of a
$147,000 increase in net income, a decrease in the Employee Stock Ownership Plan
of $7,830,  a decrease in the  Recognition  and Retention Plan of $5,813,  and a
decrease in treasury  shares of $12,293 due to the  reissuance  of stock to fund
stock  options  exercised,  offset by a $2,000  increase in  additional  paid in
capital  due to the cost  method  of  reissuing  treasury  shares  and a $30,000
increase in accumulated other comprehensive income.

      The Bank continued to exceed all of its regulatory capital requirements at
December 31,  1998,  with  tangible  and core capital of $3.9 million  (9.44% of
total  adjusted  assets)  and  risk-based  capital  of $3.9  million  (16.82% 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 December 31, 1998 and
1997

      General.  Net income for the quarter ended  December 31, 1998 was $11,000,
an increase of $62,000 from the quarter  ended  December 31, 1997.  The increase
was primarily due to a decrease in the provision for loan losses of $88,000.

      Interest  Income.  Interest income totaled  $793,000 for the quarter ended
December 31, 1998, compared to $791,000 for the quarter ended December 31, 1997,
an  increase of $2,000.  Interest  income on loans  increased  $23,000 due to an
increase  in net loans  receivable,  partially  offset by a $39,000  decrease in
interest income from  mortgage-backed  securities due to a decrease in principal
balance on mortgage-backed securities.

      Interest  Expense.  Interest expense  decreased $24,000 primarily due to a
decrease  in  interest  expense  on  deposits  due  to  a  decrease  in  average
outstanding  balances on  deposits,  along with a decrease in the average  rates
paid 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  December 31, 1998,  decreased  $88,000
from  $161,500 for the three months ended  December 31, 1997, to $73,500 for the
three month period ended  December 31, 1998. The primary reason for the decrease
was the  additional  provisions  of $151,000  that were  recorded in the quarter
ended December 31, 1997 due to loan losses on the same individual. This decrease
was offset by  specific  reserves of $35,000  that were record to guard  against
loss on slow pay and delinquent loans,  along with $28,000  additional  reserves
due to growth in the consumer and commercial loan portfolio.

      Non-Interest Income. Non-interest income increased $2,000 from $55,000 for
the quarter ended  December 31, 1997 to $57,000 for the quarter  ended  December
31, 1998. The increase resulted primarily from a $4,000 increase in other income
and a $3,000 increase in mortgage servicing rights, partially offset by a $4,000
decrease in loan  origination  and commitment fees and a $1,000 increase in loss
from real estate operations.

      Non-Interest Expense. Non-interest expense increased $11,000 from $244,000
for the quarter  ended  December 31, 1997,  compared to $255,000 for the quarter
<PAGE>


ended December 31, 1998. Compensation and benefits decreased $11,000 to $127,000
for the quarter  ended  December 31, 1998 from  $137,000  for the quarter  ended
December 31, 1997, due to the Company's  decision to decrease accrued bonuses to
offset some of the expense of additional reserves for loan losses. Occupancy and
equipment expense  increased $2,000 due to the purchase of new equipment.  Other
miscellaneous  expenses  increased  $19,000 from  $95,000 for the quarter  ended
December 31, 1997 to $114,000  for the quarter  ended  December  31,  1998,  the
increase was primarily due to increased  printing and expenses  associated  with
year end annual reports and filings.

     Income  Taxes.  The  provision  for income  taxes  increased  $42,000  from
($27,000)  for the quarter  ended  December  31, 1997 to $15,000 for the quarter
ended  December  31,  1998.  The  increase is due to an increase in net earnings
before income taxes of $105,000 for the quarter ended December 31, 1998.

Comparison of Operating  Results for the Six Months Ended  December 31, 1998 and
1997

      General.  Net  income  for the six  months  ended  December  31,  1998 was
$147,000,  an increase of $140,000 from the six months ended  December 31, 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  account as recovery on loans. The increase was also due to a decrease
in the provision for loan losses of $92,000.

      Interest Income.  Interest income remained relatively  constant,  interest
income for the six months ended December 31, 1998 was $1.6 million,  compared to
$1.6 million for the six months ended  December  31,  1997.  Interest  income on
loans  increased  $49,000 due to an increase in net loans  receivable,  interest
income on investment  securities increased $11,000, and interest income on other
interest-earning  assets  increased  $11,000,  partially  offset  by  a  $75,000
decrease in interest income from mortgage-backed securities due to a decrease in
the principal balance on mortgage-backed securities.

      Interest  Expense.  Interest expense  decreased $23,000 primarily due to a
$63,000  decrease in interest  expense on deposits  due to a decrease in average
outstanding  balances on  deposits,  partially  offset by a $40,000  increase in
interest paid on advances due to an increase in outstanding balances on advances
for the six months ended December 31, 1998.

      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 six months ended December 31, 1998, decreased $92,000 from
$172,000  for the six months ended  December  30,  1997,  to $80,500 for the six
month period ended  December 31, 1998.  The primary  reason for the decrease was
the additional provisions of $151,000 that were recorded in the six months ended
December 31, 1997 were due to loan losses on the same individual,  this decrease
was offset by  additional  specific  reserves of $35,000  that were  recorded to
guard  against  loss on slow  pay  and  delinquent  loans,  along  with  $24,000
additional reserves due to growth in the consumer and commercial loan portfolio.

      Non-Interest Income.  Non-interest income increased $138,000 from $117,000
for the six months ended  December 31, 1997 to $255,000 for the six months ended
December 31, 1998. The increase  resulted  primarily from a $129,000 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.  Noninterest  income also  increased
due to an $8,000 increase in mortgage servicing rights and an increase of $5,000
in loan servicing fees,  partially offset by a $4,000 increase in loss from real
estate operations.

    Non-Interest  Expense.  Non-interest expense increased $36,000 from $499,000
for the six months ended  December  31,  1997,  compared to $535,000 for the six
months ended December 31, 1998.  Compensation  and benefits  increased $3,000 to
$293,000  for the six months ended  December 31, 1998 from  $289,000 for the six
months ended December 31, 1997. Occupancy and equipment expense increased $3,000
due to the purchase of new equipment.  Other  miscellaneous  expenses  increased
$28,000 from $180,000 for the six months ended December 31, 1997 to $208,000 for
the six  months  ended  December  31,  1998,  the  increase  was due to a $4,000
<PAGE>

increase in service  bureau expense due to Year 2000 testing  expense,  a $4,000
increase in office supplies, a $4,000 increase in public relations, along with a
$10,000 increase in group life and health insurance due to the discontinuance of
our previous insurance plan and the addition of eligible employees.

     Income Taxes. The provision for income taxes increased  $71,000 from $3,000
for the six months  ended  December 31, 1997 to $74,000 for the six months ended
December  31, 1998.  The  increase is due to an increase in net earnings  before
income taxes of $211,000 for the six months ended December 31, 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 Y2K 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 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 has completed testing each mission critical system.  The Company has
not  incurred  any Y2K  related  errors in its  testing to date.  The  Company's
validation  phase was completed by December 31, 1998,  for all mission  critical
systems. The Company implemented the renovated systems as of December 31, 1998.

     Although our service bureau has been tested for Year 2000  compliance,  the
Office of Thrift Supervision  requires that the Bank have a business  resumption
<PAGE>


contingency plan to carry on the main bank activities in case its service bureau
is not up and running.  The Bank has completed the business  resumption plan and
submitted  the plan to an outside  firm to audit,  and  received a  satisfactory
rating.  The Bank has been  audited  by the Office of Thrift  Supervision  three
times,  with the most recent exam concluding in January 1999, for Y2K compliance
and received a satisfactory rating on all exams. 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  $20,000 were
incurred and expensed by the Company through December 31, 1998.

<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 
`                Not applicable


<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: February 12, 1999       By: /s/ Gary P. Cooper
                                         ----------------------------------
                                         Gary P. Cooper
                                         Pres. and Chief Executive Officer
                                         (Principal Executive Officer)


           Date: February 12, 1999       By: /s/ Sheri Parish
                                         ----------------------------------
                                         Sheri Parish
                                         Vice President/Secretary/Treasurer
                                         (Principal Fin. & Acct. Officer)