SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A
                                 AMENDMENT NO. 1

                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997

              |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from ______ to ______

                           Commission File No. 0-24532
                           FLAG FINANCIAL CORPORATION
             (Exact name of Registrant as specified in its charter)
           Georgia                                    58-2094179
(State or other jurisdiction of                   (I.R.S. Employer
 incorporation or organization)                   Identification No.)

               101 North Greenwood Street, LaGrange, Georgia 30240
                    (Address of principal executive offices)

                                 (706) 845-5000
                         (Registrant's telephone number)

        Securities registered pursuant to Section 12(b) of the Act: None
 
Securities  registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value 
                                 ---------------

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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. X

The aggregate market value of the Registrant's  outstanding Common Stock held by
non-affiliates of the Registrant was approximately $64,397,580 based on the last
reported  sale  price by Nasdaq  National  Market on June 30,  1998.  There were
5,174,807 shares of Common Stock outstanding as of June 30, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 1997 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting  of  Shareholders  to be held  on May  13,  1998,  are  incorporated  by
reference in Part III hereof.

FLAG  Financial  Corporation  (the  "Company")  is filing this  amendment to its
annual  report on Form 10-K for the year ended  December 31, 1997 to reflect the
acquisitions  by  the  Company  of  Middle  Georgia  Bankshares,  Inc.  ("Middle
Georgia") and Three Rivers  Bancshares,  Inc.  ("Three  Rivers").  The merger of
Middle  Georgia  with the  Company  became  effective  on March 31, 1998 and the
merger of Three Rivers with the Company  became  effective on May 12, 1998.  The
financial  data included in this Amendment have been restated to account for the
mergers with Middle Georgia and Three Rivers.


<PAGE>



                           FLAG FINANCIAL CORPORATION
                          Annual Report on Form 10-K/A
                   For the Fiscal Year Ended December 31, 1997

                                Table of Contents
Item                                                                       Page
Number                                                                    Number
                                     PART I
  1.   Business..............................................................  1

  2.   Properties............................................................ 13

  3.   Legal Proceedings..................................................... 14

  4.   Submission of Matters to a Vote of Security Holders................... 14

                                     PART II

  5.   Market for Registrant's Common Stock and Related Shareholder Matters.. 15

  6.   Selected Financial Data............................................... 15

  7.   Management's Discussion and Analysis of Financial Condition and
       Results of Operations................................................. 15

  8.   Financial Statements and Supplementary Data .......................... 15

  9.   Changes and Disagreements with Accountants on Accounting and Financial
       Disclosure............................................................ 15

                                    PART III

 10.   Directors and Executive Officers of the Registrant ................... 16

 11.   Executive Compensation................................................ 16

 12.   Security Ownership of Certain Beneficial Owners and Management........ 16

 13.   Certain Relationships and Related Transactions........................ 16

                                     PART IV

 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 17

                                                   Signatures................ 20

                                               Index of Exhibits ............ 22




<PAGE>




                                     PART I

ITEM 1.  BUSINESS

         SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

         Certain of the matters  discussed  in this  document  and in  documents
incorporated by reference herein,  including matters discussed under the caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  may  constitute  forward-looking  statements  for  purposes of the
Securities Act of 1933, as amended,  and the Securities Exchange Act of 1934, as
amended,  and as such may involve  known and unknown  risks,  uncertainties  and
other factors which may cause the actual results, performance or achievements of
the Company to be  materially  different  from future  results,  performance  or
achievements expressed or implied by such forward-looking  statements. The words
"expect,"  "anticipate,"  "intend," "plan," "believe,"  "seek,"  "estimate," and
similar  expressions are intended to identify such  forward-looking  statements.
The Company's actual results may differ materially from the results  anticipated
in these  forward-looking  statements  due to a variety of  factors,  including,
without  limitation:  the effects of future  economic  conditions;  governmental
monetary and fiscal policies, as well as legislative and regulatory changes; the
risks of changes in interest  rates on the level and  composition  of  deposits,
loan demand,  and the values of loan  collateral,  securities  and interest rate
protection  agreements,   as  well  as  interest  rate  risks;  the  effects  of
competition  from other  commercial  banks,  thrifts,  mortgage  banking  firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies,  money market and other mutual funds and other financial institutions
operating in the Company's  market area and  elsewhere,  including  institutions
operating locally,  regionally,  nationally and  internationally,  together with
such competitors offering banking products and services by mail, telephone,  and
computer  and the  Internet;  and the  failure  of  assumptions  underlying  the
establishment  of reserves for possible loan losses and estimations of values of
collateral and various  financial  assets and  liabilities.  All written or oral
forward-looking  statements  attributable to the Company are expressly qualified
in their entirety by these cautionary statements.

The Company

         FLAG  Financial  Corporation  (the  "Company") is a multi-bank  holding
company  headquartered  in LaGrange,  Georgia and is  registered  under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The Company is the sole
shareholder of the following depository institutions: First Federal Savings Bank
of LaGrange  ("First  Federal"),  Citizens Bank  ("Citizens")  and Bank of Milan
("Milan")  (collectively,  the "Banks"). The Company acquired Citizens through a
merger with Middle Georgia  Bankshares,  Inc.  ("Middle  Georgia'") and acquired
Milan  through a merger with Three Rivers  Bancshares,  Inc.  ("Three  Rivers"),
which mergers were  consummated  in March 1998 and May 1998,  respectively.  The
Company also has a one-third  ownership  interest in  ProImage,  Inc., a Georgia
corporation  that  provides  data  processing  and check  imaging  services  for
community banks. The Company obtained its ownership  interest in ProImage,  Inc.
through its acquisition of Middle, Georgia.

         The Company was incorporated  under the laws of the State of Georgia on
February 9, 1993 at the  direction of First  Federal for the purpose of becoming
the holding company for First Federal (the "Reorganization").  On March 1, 1994,
FLAG Interim Corporation, a wholly-owned subsidiary of the Company organized for
the  purpose of  effecting  the  Reorganization,  was merged with and into First
Federal,  and the Company issued shares of its common stock to  shareholders  of
First  Federal in  exchange  for all of the  outstanding  common  stock of First
Federal.  As a result,  shareholders of First Federal became shareholders of the
Company, with the same proportional  interests in the Company as they previously
held in First Federal  (excluding the nominal effect on their ownership interest
of the exercise of dissenters' rights by certain shareholders of First Federal).
Following the Reorganization, First Federal continued its business operations as
a  federally-chartered  stock  savings  bank  under the same name,  charter  and
bylaws.

                                       1
<PAGE>

         As a bank holding company, the Company facilitates the Banks' abilities
to serve their  customers'  requirements  for  financial  services.  The holding
company structure permits diversification by the Company into a broader range of
financial services and other business activities than currently are permitted to
the Banks under  applicable  law. The holding  company  structure  also provides
greater  financial  and  operating  flexibility  than is available to the Banks.
Additionally,  the Articles of  Incorporation  and Bylaws of the Company contain
terms that provide a degree of  anti-takeover  protection to the Company that is
currently  unavailable to the Banks and their  shareholders under regulations of
the Federal Deposit Insurance  Corporation (the "FDIC") and the Office of Thrift
Supervision  (the "OTS"),  but is permissible for the Company under Georgia law.
See "Supervision and Regulation" below.

         A  substantial  portion  of  the  Company's  growth  has  been  through
acquisitions  of  other  financial  institutions  and the  assets  and  deposits
thereof.  As  part  of its  ongoing  strategic  plan,  the  Company  continually
evaluates  business  combination   opportunities  and  frequently  conducts  due
diligence  activities in connection with possible  business  combinations.  As a
result,  business  combination  discussions,  and in  some  cases  negotiations,
frequently take place, and future business combinations  involving cash, debt or
equity  securities can be expected.  Any future  business  combination  that the
Company  might  undertake  may be  material,  in terms  of  assets  acquired  or
liabilities  assumed,  to the Company's  financial  condition.  Recent  business
combinations  in the banking  industry have typically  involved the payment of a
premium over book and market  values.  This practice could result in dilution of
book  value  and net  income  per share for the  acquirer.  It is the  Company's
practice  to  avoid  possible  dilution  except  where  projections  indicate  a
relatively short payback period.

The Banks

         First  Federal  Savings Bank of LaGrange.  First Federal is a federally
chartered  savings bank  headquartered in LaGrange,  Troup County,  Georgia with
five offices in LaGrange, Georgia. First Federal was originally chartered by the
State of  Georgia  in  January  1927  under  the name  "Home  Building  and Loan
Association." First Federal received its federal charter and changed its name to
First Federal Savings and Loan Association of LaGrange in 1955, and at that time
its  deposits   became  insured  by  the  Federal  Savings  and  Loan  Insurance
Corporation  (the  "FSLIC").  In December 1986,  First Federal  converted from a
federal mutual savings and loan  association to a federal stock savings and loan
association by selling  805,000 shares of Common Stock to the public pursuant to
a plan of conversion  approved by the members of the institution.  In June 1989,
First Federal  converted from a federal stock savings and loan  association to a
federal stock savings bank and changed its name to "First  Federal  Savings Bank
of LaGrange."  Based on total assets of  approximately  $248 million at December
31,  1997,  First  Federal  is  the  7th  largest  of  34  thrift   institutions
headquartered in Georgia and the largest financial institution  headquartered in
Troup  County.  First  Federal's  wholly owned service  corporation  subsidiary,
Piedmont Mortgage Service,  Inc., operates a full-service appraisal office under
the name of Piedmont Appraisal Service and offers certain  securities  brokerage
services under the name of Piedmont Investment Service.

         Citizens Bank.  Citizens Bank is a state bank organized  under the laws
of the State of Georgia with banking offices in the cities of Unadilla,  Vienna,
Byromville, Montezuma, Cordele, Oglethorpe and Pinehurst, Georgia. Citizens Bank
was originally chartered in 1931 and became a wholly-owned  subsidiary of Middle
Georgia in 1989.  On March 31,  1998,  Middle  Georgia  merged with and into the
Company and Citizens Bank became a  wholly-owned  subsidiary of the Company.  At
December 31, 1997, Citizens Bank had total assets of approximately $128 million.
Citizens is the sole shareholder of CB Financial Group, Inc. ("CB Financial"), a
Georgia corporation, which provides pawn, title pawn and check cashing services.
CB Financial is currently winding up its business operations.

                                       2
<PAGE>

         Bank of Milan.  Milan is a state bank  organized  under the laws of the
State of Georgia with banking offices in the cities of Milan and McRae, Georgia.
Milan was originally  chartered in 1906 and became a wholly-owned  subsidiary of
Three  Rivers in 1987.  On May 8, 1998,  Three  Rivers  merged with and into the
Company and Milan became a wholly-owned  subsidiary of the Company.  At December
31, 1997, Milan had total assets of approximately $35 million.

         The Banks' businesses consist primarily of attracting deposits from the
general  public and,  with these and other funds,  making  residential  mortgage
loans,  consumer  loans,   commercial  loans,   commercial  real  estate  loans,
residential  construction  loans and  securities  investments.  In  addition  to
deposits,  sources of funds for the Banks' loans and other  investments  include
amortization  and prepayment of loans,  loan  origination  and commitment  fees,
sales of loans or  participations  in loans,  fees received for servicing  loans
sold to  others  and  advances  from  the  Federal  Home  Loan  Bank of  Atlanta
("FHLBA").  The principal  sources of income for the Banks are interest and fees
collected on loans,  including fees received for  originating  and selling loans
and for servicing  loans sold to others,  and, to a lesser extent,  interest and
dividends  collected  on  other  investments  and  service  charges  on  deposit
accounts.  The  principal  expenses of the Banks are interest  paid on deposits,
interest  paid  on  FHLBA  advances,  employee  compensation,   federal  deposit
insurance premiums, office expenses and other overhead expenses.

         While the Banks  attempt to avoid  concentrations  of loans to a single
industry or based on a single type of collateral, the various types of loans the
Banks make have certain  risks  associated  with them.  Consumer and  commercial
loans  present  risks which,  among other  things,  include  fraud,  bankruptcy,
economic downturn,  deteriorated or non-existing collateral, changes in interest
rates and customer financial  problems.  Real estate loans present risks related
to,  among  other  things,  whether  the  builder is able to sell the  property,
whether  the  buyer is able to  obtain  permanent  financing  and the  nature of
changing economic conditions.

         The Company's  financial  performance has been determined  primarily by
the results of operations of the Banks because the common stock of the Banks are
the  Company's  primary  significant  assets.  For  information   regarding  the
consolidated  financial condition and results of operations of the Company,  the
Banks and their subsidiaries, as of December 31, 1997 and 1996 and for the three
years in the period ended  December 31, 1997, see  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations," as restated, and the
Consolidated  Financial Statements of the Company, as restated,  and the related
notes thereto which are contained herein. All average balances presented in this
report were derived based on monthly averages.

Pending Acquisitions

         Effective  July 24,  1998,  the  Company  and The Brown Bank  ("Brown")
entered into an Agreement and Plan of Merger (the "Brown Agreement") pursuant to
which Brown will merge with and into the Company's wholly-owned bank subsidiary,
Citizens. The Brown Agreement provides that the Company will exchange 1.5 shares
of Company Common Stock for each share of Brown Common Stock  outstanding,  with
approximately  262,500  shares of Company  Common Stock expected to be issued to
Brown  shareholders.  The  parties  expect the merger to be  accounted  for as a
pooling of interests and expect to consummate the transaction  during the fourth
quarter of 1998,  subject to approval of Brown  shareholders  in accordance with
applicable law, approval of various  regulatory  authorities and other customary
conditions of closing.

         Brown is a federal savings bank located in Cobbtown, Georgia. Brown has
two bank offices located in Cobbtown and Metter, Georgia.

         Effective July 30, 1998,  the Company and Empire Bank Corp.  ("Empire")
entered into an Agreement and Plan of Merger (the "Empire  Agreement")  pursuant
to which  Empire  will merge  with and into the  Company.  The Empire  Agreement
provides that the Company will exchange 42.5 shares of Company  Common Stock for
each share of Empire  Common Stock  outstanding,  with  approximately  1,124,125

                                       3
<PAGE>

shares of Company Common Stock expected to be issued to Empire shareholders. The
parties  expect the merger to be  accounted  for as a pooling of  interests  and
expect to consummate the transaction  during the third quarter of 1998,  subject
to approval of Empire  shareholders in accordance with applicable law,  approval
of various regulatory authorities and other customary conditions of closing.

Empire is a bank holding company located in Homerville,  Georgia and is the sole
shareholder of Empire Banking  Company.  Empire Banking  Company has two offices
located in Homerville and Waycross, Georgia.

         Additional  information  with respect to the Brown  transaction and the
Empire  transaction is set forth in FLAG's Current Reports on Form 8-K dated May
14,  1998,  May 28, 1998 August 10, 1998 and August 12, 1998 (the "FLAG  8-Ks").
The FLAG 8-Ks  include or  incorporate  by  reference  certain  forward  looking
statements,  estimates,  and projections  concerning the transactions with Brown
and Empire which are subject to various  uncertainties and risks.  Estimates and
projections concerning the future financial performance of the Company following
the transactions with Brown and Empire are predicated on certain assumptions and
depend  upon  future  events,  the course of which  cannot be  ascertained  with
certainty,  and therefore  such estimates and  projections  should be considered
only as  estimates  and  understood  to be  uncertain  and  subject  to risks of
inaccuracy.  Future events may cause the Company's  actual  experience to differ
materially from such estimates and projections.

Employees

         As of  June  30,  1998,  the  Company  (including  the  Banks)  had 192
full-time and 29 part-time  employees.  The employees are not represented by any
collective  bargaining unit, and the Company considers its relationship with its
employees to be good.

Competition

         The  banking  business  in  Georgia  is highly  competitive.  The Banks
compete  not only with  other  banks and  thrifts  that are  located in the same
counties  as the Banks and in  surrounding  counties,  but with other  financial
service organizations  including,  credit unions, finance companies, and certain
governmental  agencies.  To the extent that the Banks must maintain non-interest
earning reserves against deposits, it may be at a competitive  disadvantage when
compared with other  financial  service  organizations  that are not required to
maintain reserves against substantially equivalent sources of funds. Also, other
financial  institutions  with  which the Banks  compete  may have  substantially
greater resources and lending capabilities due to the size of the organization.

Supervision and Regulation

         The  following  discussion  sets  forth the  material  elements  of the
regulatory  framework  applicable  to bank holding  companies and their bank and
thrift  subsidiaries and provides certain  specific  information  related to the
Company.

General

         In  connection  with its  acquisition  of Middle  Georgia,  the Company
became a bank  holding  company  registered  with the Board of  Governors of the
Federal  Reserve  System (the  "Federal  Reserve")  under BHC Act. As such,  the
Company  and  its  non-bank   subsidiaries   are  subject  to  the  supervision,
examination,  and reporting  requirements  of the BHC Act and the regulations of
the Federal Reserve.  In addition,  as a savings and loan holding  company,  the
Company  is also  registered  with  the OTS and is  subject  to the  regulation,
supervision, examination, and reporting requirements of the OTS.

                                       4
<PAGE>

         The BHC Act  requires  every bank  holding  company to obtain the prior
approval of the Federal  Reserve  before:  (a) it may acquire direct or indirect
ownership  or  control  of  any  voting  shares  of  any  bank  if,  after  such
acquisition, the bank holding company will directly or indirectly own or control
more  than  5% of  the  voting  shares  of  the  bank;  (b)  it or  any  of  its
subsidiaries,  other than a bank,  may acquire all or  substantially  all of the
assets  of any  bank;  or (c) it may merge or  consolidate  with any other  bank
holding company.

         The BHC Act further  provides that the Federal  Reserve may not approve
any  transaction  that would result in a monopoly or would be in  furtherance of
any  combination  or  conspiracy  to  monopolize  or attempt to  monopolize  the
business of banking in any section of the United States,  or the effect of which
may be  substantially  to lessen  competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade,  unless the  anticompetitive  effects  of the  proposed  transaction  are
clearly  outweighed by the public  interest in meeting the convenience and needs
of the community to be served.  The Federal Reserve is also required to consider
the financial and managerial  resources and future prospects of the bank holding
companies and banks  concerned and the convenience and needs of the community to
be served.  Consideration of financial  resources  generally  focuses on capital
adequacy  and  consideration  of  convenience  and needs  issues  including  the
parties'  performance under the Community  Reinvestment Act of 1977 (the "CRA"),
both of which are discussed below.

         The BHC Act, as amended by the  interstate  banking  provisions  of the
Riegle-Neal  Interstate  Banking  and  Branching  Efficiency  Act of  1994  (the
"Interstate  Banking  Act"),  which  became  effective  on  September  29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank  holding  companies,  such that the  Company,  and any other  bank  holding
company  located in Georgia may now acquire a bank  located in any other  state,
and any bank holding company  located  outside Georgia may lawfully  acquire any
Georgia-based  bank,  regardless  of state law to the  contrary,  in either case
subject   to  certain   deposit-percentage,   aging   requirements,   and  other
restrictions.  The Interstate  Banking Act also  generally  provides that, as of
June 1, 1997, national and  state-chartered  banks may branch interstate through
acquisitions  of banks in other states.  By adopting  legislation  prior to that
date, a state had the ability  either to "opt in" and  accelerate the date after
which interstate  branching is permissible or "opt out" and prohibit  interstate
branching altogether.

         In response to the Interstate Banking Act, the Georgia General Assembly
adopted the Georgia Interstate Banking Act, which was effective on July 1, 1995.
The Georgia Interstate Banking Act provides that (a) interstate  acquisitions by
institutions  located in Georgia  will be  permitted  in states  that also allow
national interstate acquisitions and (b) interstate acquisitions of institutions
located  in Georgia  will be  permitted  by  institutions  in states  that allow
national interstate acquisitions.

         Additionally, on January 26, 1996, the Georgia General Assembly adopted
the Georgia Interstate Branching Act which permits  Georgia-based banks and bank
holding  companies  owning  or  acquiring  banks  outside  of  Georgia  and  all
non-Georgia  banks  and bank  holding  companies  owning or  acquiring  banks in
Georgia to merge any lawfully  acquired bank into an interstate  branch network.
The Georgia  Interstate  Branching  Act also allows  banks to  establish de novo
branches on a limited basis as of July 1, 1996.  As of July 1, 1998,  the number
of de novo branches that may be established is no longer limited.

         The BHC Act generally prohibits the Company from engaging in activities
other  than  banking  or  managing  or  controlling  banks or other  permissible
subsidiaries  and from acquiring or retaining  direct or indirect control of any
company engaged in any activities other than those activities  determined by the
Federal  Reserve to be so closely  related to banking or managing or controlling
banks as to be a proper incident  thereto.  In determining  whether a particular
activity  is  permissible,   the  Federal  Reserve  must  consider  whether  the
performance of such an activity  reasonably can be expected to produce  benefits
to the public, such as greater convenience,  increased competition,  or gains in
efficiency,  that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound

                                       5
<PAGE>

banking  practices.  For example,  factoring accounts  receivable,  acquiring or
servicing  loans,  leasing personal  property,  conducting  discount  securities
brokerage  activities,  performing certain data processing  services,  acting as
agent or broker in selling  credit life  insurance  and  certain  other types of
insurance  in  connection  with  credit  transactions,  and  performing  certain
insurance  underwriting  activities  all have  been  determined  by the  Federal
Reserve to be permissible activities of bank holding companies. The BHC Act does
not place territorial  limitations on permissible non-banking activities of bank
holding companies.  Despite prior approval, the Federal Reserve has the power to
order a holding  company or its  subsidiaries  to  terminate  any activity or to
terminate  its  ownership or control of any  subsidiary  when it has  reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety,  soundness,  or stability of
any bank subsidiary of that bank holding company.

         The bank and thrift  subsidiaries  of the  Company  are  members of the
FDIC, and as such,  their deposits are insured by the FDIC to the maximum extent
provided  by law.  Such  subsidiaries  are also  subject to  numerous  state and
federal statutes and regulations that affect their businesses,  activities,  and
operations, and they are supervised and examined by one or more state or federal
bank regulatory agencies.

         All of the  Company's  depository  institution  subsidiaries  that  are
state-chartered  banks and are not  members of the  Federal  Reserve  System are
subject to supervision and examination by the FDIC and the Georgia Department of
Banking and Finance.  The Company's subsidiary that is a federal savings bank is
subject to regulation, supervision, and examination by the OTS and the FDIC. The
federal banking regulator for each of the Company's subsidiaries, as well as the
Georgia  Department of Banking and Finance for each of the subsidiary banks that
is a state chartered bank,  regularly  examines the operations of the subsidiary
banks and is given authority to approve or disapprove  mergers,  consolidations,
the establishment of branches,  and similar corporate  actions.  The federal and
state  banking  regulators  also have the power to prevent  the  continuance  or
development of unsafe or unsound banking practices or other violations of law.

Payment of Dividends

         The  Company  is  a  legal  entity   separate  and  distinct  from  its
subsidiaries.  The principal sources of cash flow of the Company, including cash
flow to pay dividends to its shareholders,  are dividends by its bank and thrift
subsidiaries.  There are statutory and regulatory  limitations on the payment of
dividends by such  subsidiaries  to the Company as well as by the Company to its
shareholders.

         As to  the  payment  of  dividends,  all of  the  Company's  depository
institution  subsidiaries that are state nonmember banks are subject to the laws
and  regulations of the state of Georgia and to the regulations of the FDIC. The
Company's  depository  institution  subsidiary that is a federal savings bank is
subject to the OTS' capital distributions regulation.

         If, in the  opinion of the  applicable  federal  banking  regulator,  a
depository  institution  under its  jurisdiction  is  engaged  in or is about to
engage in an unsafe or  unsound  practice  (which,  depending  on the  financial
condition  of  the  depository   institution,   could  include  the  payment  of
dividends),  such  authority  may require,  after notice and hearing,  that such
institution  cease and desist from such practice.  The federal banking  agencies
have  indicated that paying  dividends  that deplete a depository  institution's
capital  base to an  inadequate  level  would be an unsafe and  unsound  banking
practice.  Under the Federal Deposit  Insurance  Corporation  Improvement Act of
1991  ("FDICIA"),  a depository  institution may not pay any dividend if payment
would cause it to become  undercapitalized or if it already is undercapitalized.
See "-- Prompt Corrective  Action."  Moreover,  the federal agencies have issued
policy  statements  that provide that bank holding  companies  and insured banks
should generally only pay dividends out of current operating earnings.

                                       6
<PAGE>

         At June 30, 1998, under dividend restrictions imposed under federal and
state laws, the bank and thrift  subsidiaries of the Company,  without obtaining
governmental  approvals,  could declare aggregate dividends to the Company of up
to approximately $4,100,000.

         The payment of dividends by the Company and its  subsidiaries  may also
be affected or limited by other  factors,  such as the  requirement  to maintain
adequate capital above regulatory guidelines.

Capital Adequacy

          The Company and its depository  institution  subsidiaries are required
to comply with the capital adequacy standards established by the Federal Reserve
and the  appropriate  federal  banking  regulator in the case of its  depository
institution  subsidiaries.  There are two basic measures of capital adequacy for
bank holding  companies  that have been  promulgated by the Federal  Reserve:  a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.

         The  risk-based  capital  standards  are  designed  to make  regulatory
capital  requirements  more sensitive to differences in risk profile among banks
and bank holding companies,  to account for off-balance-sheet  exposure,  and to
minimize  disincentives for holding liquid assets.  Assets and off-balance-sheet
items are assigned to broad risk categories,  each with appropriate weights. The
resulting   capital   ratios   represent   capital  as  a  percentage  of  total
risk-weighted assets and off-balance-sheet items.

         The  minimum  guideline  for the ratio (the "Total  Risk-Based  Capital
Ratio") of total capital ("Total  Capital") to risk-weighted  assets  (including
certain  off-balance-sheet  items,  such as standby letters of credit) is 8%. At
least half of Total Capital must comprise  common stock,  minority  interests in
the  equity  accounts  of  consolidated  subsidiaries,  noncumulative  perpetual
preferred stock, and a limited amount of cumulative  perpetual  preferred stock,
less  goodwill and certain  other  intangible  assets  ("Tier 1  Capital").  The
remainder may consist of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves ("Tier 2 Capital"). At June 30, 1998, the Company's
consolidated  Total Risk-Based  Capital Ratio and its Tier 1 Risk-Based  Capital
Ratio (i.e.,  the ratio of Tier 1 Capital to  risk-weighted  assets) were 12.72%
and 8.03%, respectively.

         In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding  companies.  These guidelines  provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets,  less goodwill
and certain other intangible  assets, of 3% for bank holding companies that meet
certain specified criteria,  including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%,  plus an  additional  cushion  of 100 to 200 basis  points.  The
Company's Leverage Ratio at June 30, 1998 was 8.50%. The guidelines also provide
that bank holding companies  experiencing internal growth or making acquisitions
will be expected to maintain strong capital  positions  substantially  above the
minimum  supervisory levels without  significant  reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a "tangible
Tier 1 Capital Leverage Ratio"  (deducting all intangibles) and other indicia of
capital strength in evaluating proposals for expansion or new activities.

         The  Company's  depository  institution  subsidiaries  are  subject  to
risk-based and leverage capital requirements adopted by their applicable federal
regulators,  which are  substantially  similar to those  adopted by the  Federal
Reserve for bank holding  companies.  Such  subsidiaries were in compliance with
applicable minimum capital requirements as of June 30, 1998. The Company has not
been advised by any federal banking agency of any specific minimum capital ratio
requirement applicable to it or its subsidiary depository institutions.

         Failure to meet capital  guidelines  could subject an  institution to a
variety of enforcement remedies,  including issuance of a capital directive, the
termination  of deposit  insurance by the FDIC, a  prohibition  on the taking of

                                       7
<PAGE>

brokered deposits,  and certain other restrictions on its business. As described
below,  substantial  additional  restrictions  can be imposed upon  FDIC-insured
depository institutions that fail to meet applicable capital requirements.
See "-- Prompt Corrective Action."

Community Reinvestment

         The Company's  subsidiaries  are subject to the  provisions of the CRA.
Under the terms of the CRA, the  subsidiaries  have a continuing and affirmative
obligation  consistent  with  their  safe and sound  operation  to help meet the
credit needs of their entire  communities,  including  low- and  moderate-income
neighborhoods.  The CRA does not  establish  specific  lending  requirements  or
programs  for  financial   institutions  nor  does  it  limit  an  institution's
discretion  to develop the types of products and  services  that it believes are
best  suited  to its  particular  community,  consistent  with the CRA.  The CRA
requires each appropriate federal bank regulatory agency, in connection with its
examination of a subsidiary depository institution, to assess such institution's
record in assessing and meeting the credit needs of the community served by that
institution,  including low- and moderate-income  neighborhoods.  The regulatory
agency's assessment of the institution's record is made available to the public.
Further,  such assessment is required of any  institution  which has applied to:
(a) charter a national bank; (b) obtain deposit  insurance  coverage for a newly
chartered  institution;  (c)  establish  a new branch  office  that will  accept
deposits;  (d) relocate an office;  or (e) merge or consolidate with, or acquire
the  assets  or assume  the  liabilities  of, a  federally  regulated  financial
institution.  In the case of a bank  holding  company  applying  for approval to
acquire a bank or other bank holding  company,  the Federal  Reserve will assess
the records of each  subsidiary  depository  institution  of the applicant  bank
holding company,  and such records may be the basis for denying the application.
All of the  Company's  subsidiary  depository  institutions  received at least a
"satisfactory" CRA rating in their most recent examinations.

           In April  1995,  the  federal  banking  agencies  adopted  amendments
revising their CRA regulations,  with a phase-in schedule  applicable to various
provisions. Among other things, the amended CRA regulations, implemented on July
1,  1997,  substitute  for the  prior  process-based  assessment  factors  a new
evaluation system that rates an institution  based on its actual  performance in
meeting community needs. In particular, the system focuses on three tests: (a) a
lending  test,  to  evaluate  the  institution's  record of making  loans in its
service areas; (b) an investment test, to evaluate the  institution's  record of
investing in community development projects; and (c) a service test, to evaluate
the  institution's  delivery of services  through its branches,  ATM's and other
offices.  The amended CRA  regulations  also  clarify how an  institution's  CRA
performance will be considered in the application process.

Support of Subsidiary Institutions

         Under  Federal  Reserve  policy,  the  Company is  expected to act as a
source of financial  strength for, and to commit  resources to support,  each of
its banking  subsidiaries.  This  support may be required at times when,  absent
such Federal Reserve  policy,  the Company may not be inclined to provide it. In
addition,  any capital loans by a bank holding  company to any of its depository
institution  subsidiaries are subordinate in right of payment to deposits and to
certain  other  indebtedness  of such  banks.  In the  event  of a bank  holding
company's  bankruptcy,  any commitment by the bank holding  company to a federal
bank  regulatory  agency to  maintain  the capital of a  depository  institution
subsidiaries  will be  assumed  by the  bankruptcy  trustee  and  entitled  to a
priority of payment.

         Under  the  Federal  Deposit  Insurance  Act  ("FDIA"),   a  depository
institution  insured by the FDIC can be held liable for any loss incurred by, or
reasonably  expected  to be  incurred  by,  the FDIC after  August 9,  1989,  in
connection with (a) the default of a commonly controlled FDIC-insured depository
institution  or (b)  any  assistance  provided  by  the  FDIC  to  any  commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined  generally as the  appointment of a conservator or receiver,  and "in
danger of default" is defined  generally as the existence of certain  conditions
indicating  that a  default  is  likely to occur in the  absence  of  regulatory

                                       8
<PAGE>

assistance.  The FDIC's claim for damages is superior to claims of  shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors,  secured  creditors,  and holders of subordinated  debt
(other  than  affiliates)  of  the  commonly   controlled   insured   depository
institution.  The subsidiary depository  institutions of the Company are subject
to these cross-guarantee  provisions. As a result, any loss suffered by the FDIC
in  respect  of these  subsidiaries  would  likely  result in  assertion  of the
cross-guarantee  provisions, the assessment of such estimated losses against the
depository  institution's  banking  affiliates,  and a  potential  loss  of  the
Company's investment in such other subsidiary depository institutions.

Prompt Corrective Action

         FDICIA  establishes a system of prompt corrective action to resolve the
problems of  undercapitalized  institutions.  Under this  system,  which  became
effective  in December  1992,  the federal  banking  regulators  are required to
establish five capital  categories (well  capitalized,  adequately  capitalized,
undercapitalized,     significantly     undercapitalized,     and     critically
undercapitalized)  and to take certain mandatory  supervisory  actions,  and are
authorized to take other discretionary  actions, with respect to institutions in
the three  undercapitalized  categories,  the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow  exception,  FDICIA  requires  the  regulator  to appoint a  receiver  or
conservator for an institution that is critically undercapitalized.  The federal
banking  agencies have  specified by regulation  the relevant  capital level for
each category.


                                       9
<PAGE>


         The  capital  levels  established  for  each of the  categories  are as
follows:
<TABLE>
<CAPTION>

========================== ==================== ========================= ====================== ===================
                                                Total                     Tier 1 Risk-
Capital Category           Tier 1 Capital       Risk-Based Capital        Based Capital          Other
========================== ==================== ========================= ====================== ===================
<S>                        <C>                  <C>                       <C>                                    
Well Capitalized           5% or more           10% or more               6% or more             Not subject to a
                                                                                                 capital directive
========================== -------------------- ------------------------- ---------------------- ===================
Adequately Capitalized     4% or more           8% or more                4% or more                      --
========================== -------------------- ------------------------- ---------------------- ===================
Undercapitalized           Less than 4%         less than 8%              less than 4%                    --
========================== -------------------- ------------------------- ---------------------- ===================
Significantly              Less than 3%         less than 6%              less than 3%                    --
Undercapitalized
========================== ==================== ========================= ====================== ===================
Critically                 2%     or      less           --                        --                     --
Undercapitalized           tangible equity
========================== ==================== ========================= ====================== ===================
</TABLE>

         For purposes of the  regulation,  the term "tangible  equity"  includes
core capital  elements  counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual preferred
stock  (including  related  surplus),  minus all intangible  assets with certain
exceptions.  A depository  institution  may be deemed to be in a  capitalization
category  that is lower than is indicated by its actual  capital  position if it
receives an unsatisfactory examination rating.

         An institution that is categorized as  undercapitalized,  significantly
undercapitalized,  or  critically  undercapitalized  is  required  to  submit an
acceptable capital  restoration plan to its appropriate  federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain  limitations.
The obligation of a controlling  holding  company under FDICIA to fund a capital
restoration  plan  is  limited  to  the  lesser  of 5%  of  an  undercapitalized
subsidiary's   assets  or  the  amount  required  to  meet  regulatory   capital
requirements.  An undercapitalized institution is also generally prohibited from
increasing  its average  total assets,  making  acquisitions,  establishing  any
branches, or engaging in any new line of business,  except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the  appropriate  federal  banking agency is given authority with respect to any
undercapitalized  depository  institution  to  take  any  of the  actions  it is
required  to or  may  take  with  respect  to a  significantly  undercapitalized
institution  as  described  below  if it  determines  "that  those  actions  are
necessary to carry out the purpose" of FDICIA.

         At June 30, 1998, the Company's depository institution subsidiaries had
the requisite capital levels to qualify as well capitalized.

FDIC Insurance Assessments

         Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured  depository  institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (a) well capitalized;
(b) adequately capitalized; and (c) undercapitalized. These three categories are
substantially  similar  to the prompt  corrective  action  categories  described
above,  with the  "undercapitalized"  category  including  institutions that are
undercapitalized,     significantly     undercapitalized,     and     critically
undercapitalized  for prompt corrective action purposes.  An institution is also
assigned by the FDIC to one of three  supervisory  subgroups within each capital

                                       10
<PAGE>


group. The supervisory  subgroup to which an institution is assigned is based on
a  supervisory  evaluation  provided  to the FDIC by the  institution's  primary
federal  regulator and  information  which the FDIC determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance funds (which may include, if applicable,  information  provided by the
institution's state supervisor).  An institution's  insurance assessment rate is
then determined based on the capital category and supervisory  category to which
it  is  assigned.  Under  the  risk-based  assessment  system,  there  are  nine
assessment  risk  classifications  (i.e.,  combinations  of  capital  groups and
supervisory subgroups) to which different assessment rates are applied.

         Pursuant  to  the  Deposit  Insurance  Funds  Act  of  1996,  the  FDIC
implemented a special  one-time  assessment of  approximately  65.7 basis points
(0.657%) on a depository  institution's  SAIF-insured  deposits held as of March
31, 1995 (or approximately  52.6 basis points on SAIF deposits acquired by banks
in certain qualifying transactions) and adopted revisions to the assessment rate
schedules that would generally  eliminate the disparity between assessment rates
applicable to the deposits  insured by the Bank  Insurance  Fund ("BIF") and the
SAIF. The revisions in the assessment rate schedules reduced assessment rates on
SAIF-insured deposits and would generally equalize BIF and SAIF assessment rates
by January, 2000. The Company anticipates that the net effect of the decrease in
the premium  assessment  rate on SAIF deposits will result in a reduction in its
total deposit  insurance premium  assessments  through 1999 as compared to years
prior to 1997,  assuming  no further  changes in  announced  premium  assessment
rates. The Company recorded a charge against earnings for the special assessment
in the quarter ended September 30, 1996, in the pre-tax amount of  approximately
$1,150,000.

         Under the FDIA,  insurance  of deposits may be  terminated  by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.

Proposed Legislation and Regulatory Action

     New  statutes  and   regulations   are  regularly   proposed  that  contain
wide-ranging proposals for altering the structures,  regulations and competitive
relationships  of the nation's  financial  institutions.  It cannot be predicted
whether or what form any proposed  statute or regulation  will be adopted or the
extent to which the  business of the Company may be affected by such  statute or
regulation.

ITEM 2.  PROPERTIES

         The Company and First Federal operate from a main office which contains
approximately  28,400  square  feet of usable  office  space and is  located  on
approximately  two  acres  of  land at 101  North  Greenwood  Street,  LaGrange,
Georgia.
First Federal owns both the building and the land.

         First Federal also operates three  full-service  branch offices and one
drive-through  facility in LaGrange,  Georgia. One of the full-service  branches
contains  approximately  360  square  feet of  office  space  in the  Winn-Dixie
Marketplace  grocery store at 908 Hogansville  Road in LaGrange.  This office is
leased by First Federal. A second  full-service branch office is located at 1795
West  Point  Road  at  Lee's   Crossing  in  LaGrange.   This  office   contains
approximately  2,700 square feet of office  space on one acre of land,  and both
the land and the building  are owned by First  Federal.  The third  full-service
branch  office is located at 1417  LaFayette  Parkway in  LaGrange.  This office
contains  approximately  2,300 square feet of office space on 1.2 acres of land,
and it has three drive through  lanes.  Both the building and the land are owned
by First Federal. The drive-through  facility is located at 306 Vernon Street in
LaGrange.  This facility contains  approximately 1,800 square feet of space, and
both the building and the land are owned by First Federal.

         First Federal leases approximately 2,760 square feet of office space at
5669  Whitesville  Road, Suite A, Columbus,  Georgia,  where its loan production
office is located.

                                       11
<PAGE>

         First Federal leases  approximately  600 square feet of office space at
200  Broad  Street,  Suite D,  LaGrange,  Georgia.  This  office  space is where
Piedmont Mortgage Service,  Inc.,  operating under the name "Piedmont  Appraisal
Service," is located.

         First Federal leases approximately 2,500 square feet of office space at
205 North Lewis Street, Suites 2 and 3, LaGrange,  Georgia. This office space is
the location for First Federal's Deposit Operations and Leasing department.

         Citizens  operates  three  full-service  offices in  Vienna,  Unadilla,
Montezuma,  and  Cordele.  It also  operates  three  limited-service  offices in
Byromville, Oglethorpe, and Pinehurst, and it operates a consumer loan office in
Unadilla.

         One of the  full-service  offices contains 10,500 square feet of office
space on .85 acres of land that is owned by Citizens and is located at 100 Union
Street,  Vienna,  Georgia. The second full-service office has 10,718 square feet
of office  space and is located  on 1.3 acres of land that is owned by  Citizens
and is located at 102 West Railroad Street, Montezuma, Georgia. The third office
located at 602 East 16th Avenue,  Suite G., Cordele,  Georgia,  with 2000 square
feet of office space and is leased by Citizens.

         One of the  limited-service  offices  has 1,750  square  feet of office
space on .07 acres and is located on Main Street, Byromville,  Georgia. The next
limited-service  office has 2,500 square feet on .6 acres of land and is located
at 201 Macon Street,  Oglethorpe,  Georgia. The third limited-service office has
843  square  feet of  office  space on .55 acres and is  located  on  Fullington
Avenue, Pinehurst, Georgia. Citizens owns each of these properties.

         Citizens  leases  2000 square feet of office  space for its  consumer  
loan office at 1180 Pine Street, Unadilla, Georgia.

         Citizens  owns three  warehouse/meeting  facilities  located in Vienna,
Georgia at the following locations:  (i) 2nd Street,  Vienna, Georgia with 4,100
square  feet of space on .10 acres of land,  (ii) 3rd Street,  Vienna,  Georgia,
with  2,940  square  feet of office  space on .09  acres of land,  and (iii) 3rd
Street, Vienna,  Georgia, with 1,755 square feet of office space on .05 acres of
land.

         Citizens also owns an office  parking lot at the corner of Union Street
and 2nd Street,  Vienna  Georgia.  The lot is on .42 acres of land.  Another lot
owned by Citizens  is located at  Fullington  Avenue and Highway 41,  Pinehurst,
Georgia. Citizens also owns a lot located at the corner of Fullington Avenue and
Cyprus Avenue,  Vienna, Georgia with 370 square feet of a vacant building on .23
acres of land.

         Milan  operates two full service  offices in Milan and McRae,  Georgia.
The office located at 1 Mt. Zion Street, Milan, Georgia has 5,124 square feet of
office space on .18 acres of land.  Milan also leases a full service office with
1,360  square  feet of  office  space  located  at 850 East Oak  Street,  McRae,
Georgia.

         The net  book  value of the  Company's  investment  in land,  premises,
furniture,  fixtures and equipment totaled  approximately  $12.5 million at June
30, 1998. See Note 4 of Notes to  Consolidated  Financial  Statements  contained
herein.  Most of the Company's data processing  equipment is held by the Company
under capitalized  leases, and it uses an independent service bureau for most of
its data processing needs.

         All of the Company's offices are in good condition and are adequate for
the Company's current and foreseeable needs.

         The Company is unaware of any potential environmental liability that it
may incur in connection with any properties or other assets owned by it.


                                       12
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         Flag and the Banks are periodically  involved as plaintiff or defendant
in various legal actions in the ordinary  course of its business.  During August
1992 through  October 1995,  First  Federal  entered into a series of leases and
secured loans with Bennett  Funding  Group,  Inc. and certain of its  affiliates
("Bennett  Funding").  Bennett Funding allegedly operated in a fraudulent manner
and are now the subject of bankruptcy proceedings,  In re Bennett Funding Group,
Inc., et al, Case No.  96-61376 et seq.,  which are pending in the United States
Bankruptcy  Court for the Northern  District of New York. These leases and loans
have an aggregate principal balance of $2.05 million.

         After a series of negotiations,  the Bank settled its disputes with the
bankruptcy  trustee under the terms of a Settlement  Agreement.  The  Settlement
Agreement has been approved by the Bankruptcy Court and executed by the Bank and
the trustee.  The  settlement  provides  for a "split"  between the Bank and the
trustee  on all cash  collections  on leases  which  collateralize  the loans at
issue.

         First  Federal  is named as the  defendant  in a suit filed on June 29,
1998 in the Circuit Court of Elmore County, Alabama. The plaintiffs contend that
a loan officer of First Federal told them that their  construction and permanent
loans in the amount of $95,000 had been  approved  and that the approval was not
subject to any conditions. First Federal later declined the permanent loan based
on that fact that the plaintiff did not meet certain conditions.  The plaintiffs
obtained  a loan from  another  source  but at an  interest  rate that was 2.25%
higher than the First Federal rate.  First Federal believes it has a meritorious
defense to the claim.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was  submitted  by the Company to a vote of its  shareholders
during the fourth quarter of 1997.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
           MATTERS

         Information  relating to the market for,  holders of and dividends paid
on the  Company's  Common  Stock  is set  forth  under  the  caption  "Corporate
Information-Stock  Prices and Dividends" on page 40 of the Company's 1997 Annual
Report.  Such information is incorporated  herein by reference.  The 1997 Annual
Report is filed as Exhibit 13 to this report.

ITEM 6.  SELECTED FINANCIAL DATA

     Selected  consolidated  financial data for the Company and its subsidiaries
for each year of the five-year period ended December 31, 1997 is set forth under
the caption  "Financial  Highlights" on page 4 of the 1997 Annual  Report.  Such
financial data is incorporated herein by reference.


                                       13
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

GENERAL

         FLAG Financial  Corporation  ("FLAG") is a multi-bank  holding  company
that owns 100  percent  of the common  stock of First  Federal  Savings  Bank of
LaGrange  ("FFSB"),  Citizens Bank  ("Citizens"),  and Bank of Milan  ("Milan"),
(collectively,  the "Banks").  FFSB is a federally  chartered stock savings bank
doing  business in West  Central  Georgia.  Citizens is a  commercial  bank that
serves Dooly, Macon, Crisp and surrounding counties in Middle Georgia.  Citizens
also owns  100% of CB  Financial  Group,  Inc.  a pawn  shop and  check  cashing
operation located in Unadilla,  Georgia.  Milan is a commercial bank that serves
Dodge,  Telfair  and  surrounding  counties  in  Middle  Georgia.  The Banks are
full-service,  retail  oriented  community  banks  primarily  engaged  in retail
banking,  small business,  residential  and commercial real estate lending,  and
mortgage banking.

         The  following   discussion  focuses  on  significant  changes  in  the
financial  condition  and results of operations of FLAG and the Banks during the
three  years  ended  December  31,  1997.  This  discussion  and  the  financial
information contained herein are presented to assist the reader in understanding
and  evaluating  the  financial  condition,  results of  operations,  and future
prospects of FLAG and should be read as a supplement to and in conjunction  with
the Consolidated Financial Statements and Related Notes.

CAPITAL ISSUES

         Effective  June 3, 1998,  FLAG declared a 3-for-2 stock split.  All per
share amounts and prices have been restated to reflect this stock split as if it
had occurred at the beginning of the earliest period presented.

         In October  1995,  FLAG  purchased  and retired  192,150  shares of its
common stock in the open market for $8.50 per share.  During 1996 and 1995, FLAG
issued 8,375 and 7,211 shares, respectively,  of its common stock. FLAG received
$44,269 and $59,486 in 1996 and 1995,  respectively,  in  connection  with these
issuances.  During 1997, FLAG did not purchase or issue any shares of its common
stock.

RESTATEMENT OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS

         Effective  March 30, 1998,  FLAG  completed the  acquisition  of Middle
Georgia  Bankshares,  Inc., the parent company of the $129 million Citizens Bank
in Vienna,  Georgia.  FLAG issued approximately 1.5 million shares of its common
stock in connection with this acquisition.

         Effective May 8, 1998,  FLAG completed the  acquisition of Three Rivers
Bancshares,  Inc., the parent company of the $35 million Bank of Milan in Milan,
Georgia.  FLAG  issued  approximately  597,000  shares  of its  common  stock in
connection with this acquisition.

         These  acquisitions  were  accounted for as poolings of interests  and,
accordingly,  the consolidated financial statements and management's  discussion
and  analysis  for all  periods  have been  restated  to include  the  financial
position and results of  operations  as if the  combination  had occurred at the
beginning of the earliest period presented.

PENDING ACQUISITIONS

         On May 14, 1998,  FLAG  announced  the signing of an agreement to merge
with The Brown Bank ("Brown"), a $28 million asset savings bank based in Metter,
Gergia.  The merger agreement  provides,  among other things,  for the merger of

                                       14
<PAGE>

Brown with and into FLAG and the  exchange of each share of Brown  common  stock
for 1.5  shares of FLAG  common  stock.  Total  outstanding  shares of FLAG will
increase by approximately 263,000 additional shares at closing.

         On May 28, 1998,  FLAG  announced  the signing of an agreement to merge
with Heart of Georgia Bancshares, Inc. ("HGB"), a $33 million asset bank holding
company based in Mt. Vernon, Georgia. The merger agreement provides, among other
things,  for the merger of HGB with and into FLAG and the exchange of each share
of HGB common stock for 2.025  shares of FLAG common  stock.  Total  outstanding
shares of FLAG will  increase  by  approximately  446,000  additional  shares at
closing.

         On June 1, 1998,  FLAG  announced  the signing of an agreement to merge
with Empire Bank Corp.  ("Empire"),  a $70 million  asset bank  holding  company
based in Homerville, Georgia. The merger agreement provides, among other things,
for the merger of Empire  with and into FLAG and the  exchange  of each share of
Empire  common  stock for 42.5 shares of FLAG common  stock.  Total  outstanding
shares of FLAG will increase by  approximately  1,145,000  additional  shares at
closing.



                                       15
<PAGE>

YEAR 2000 ISSUES

         FLAG is aware of the issues  relating  to its  computer  systems as the
Year 2000 approaches.  The Year 2000 issue is pervasive and complex as virtually
every  computer  operation  will be affected in some way by the  rollover of the
two-digit  value to 00.  The issue is whether  computer  systems  will  properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly  recognize such  information  could  generate  erroneous data or
cause a system to fail.

         FLAG has  appointed a Year 2000  committee  comprised of three  outside
directors and several key senior  executives.  The committee  meets on a monthly
basis to provide  direction  and monitor  the  progress  being made  relating to
FLAG's Year 2000 efforts.

         FLAG managers and  supervisors  have  identified  hardware and software
used in their area of  responsibility  impacted  by the Year 2000 issue and have
identified  vendors whom FLAG relies upon to provide  financial  information  or
services which may be impacted by the Year 2000 issue. FLAG has conducted a risk
assessment for each product,  and has categorized the risks associated with each
product as  "catastrophic,"  "serious,"  or  "minimal."  FLAG's  overall risk is
considered  to be serious to minimal.  A separate  plan and action date has been
established  for  hardware/software  that are considered  critical to the FLAG's
on-going operations. The next steps in the process will be to develop a test for
the  hardware/software,  to test the  hardware/software  as it becomes Year 2000
compliant, and to document those tests accordingly.

         FLAG plans to convert from its current NCR Starcom  software  system to
an application system provided by Phoenix  International Ltd., Inc.  ("Phoenix")
in August 1998.  Phoenix has  represented  in their  contract with FLAG that the
Phoenix application system is Year 2000 compliant. FLAG will test the system for
Year 2000 Compliance prior to conversion.  The Phoenix  application  system will
include  many  critical   applications,   including  the  general  ledger,  loan
application  system,  deposit  application  system, and accounts  receivable and
payable.  The third party application  system used to process FLAG's payroll has
already been certified as Year 2000 Compliant.

         FLAG is in the  initial  stages of  determining  the impact of the Year
2000 on its larger loan  customers.  For those loan customers with a significant
risk to their on-going  operations arising from possible Year 2000 issues,  FLAG
will monitor and document  their Year 2000  compliance  efforts.  FLAG is in the
process  of  developing  a  questionnaire  for its  lending  officers  to use in
assessing  the Year 2000 risk for larger loan  customers.  FLAG plans to conduct
Year 2000  seminars  for its  commercial  customers.  FLAG also intends to add a
provision to its standard loan agreement  relating to the  borrower's  Year 2000
compliance.

NET INTEREST INCOME

         Net interest  income (the  difference  between the  interest  earned on
assets and the interest paid on deposits and other interest-bearing liabilities)
is the single largest  component of FLAG's operating  income.  The management of
net interest income is of most importance in the banking industry.  FLAG manages
this income source while it controls credit, liquidity, and interest rate risks.

     Net interest  income  increased 8.4% in 1997, from $14.8 million in 1996 to
$16.0 million in 1997.  Net interest  income  increased 5.9% in 1996 compared to
1995.

         Total interest income increased 9.6% in 1997 and 2.4% in 1996. Interest
expense  decreased  approximately  1.4% in 1996 compared to 1995,  but increased
approximately  11.0% in 1997 compared to 1996.  The interest  expense  variances
from year to year have been  primarily  influenced  by the  average  balances of
interest bearing liabilities (see Tables 1 & 2).



                                       16
<PAGE>


<TABLE>
<CAPTION>

Table 1   -   Consolidated Average Balances, Interest, and Rates - Taxable Equivalent Basis
(dollars in thousands)
                                                             Years Ended December 31,
                                        1997                             1996                            1995
------------------------------------------------------------------------------------------------------------------------------
                                     Interest   Weighted               Interest   Weighted               Interest    Weighted
                          Average     Income/    Average      Average   Income/    Average     Average   Income/     Average
                          Balance     Expense     Rate        Balance   Expense     Rate       Balance    Expense      Rate

ASSETS
Interest-earning assets:
<S>                         <C>       <C>         <C>        <C>       <C>         <C>         <C>         <C>         <C>   
  Loans..................   $253,809  $25,850     10.18%     $225,774  $23,240     10.29%      $215,208    $21,768     10.11%
  Taxable investment
   securities............     64,800    4,081      6.30        65,261    4,042      6.19         77,077      4,889      6.34
  Tax-free investment
   securities............      5,144      398      7.74         4,467      390      8.73          3,519        335      9.52
  Interest-bearing deposits
    in other banks.......      2,515      158      6.28         1,692       90      5.32          2,959        138      4.66
  Federal funds sold.....       5,237        290   5.54         5,840        321    5.50          4,920        295      6.00
                         -----------------------         -----------------------    ----      --------- ----------      ----
Total interest-
     earning assets......   $331,505  $30,777      9.28%     $303,034  $28,083      9.27%      $303,683    $27,425      9.03%
Other assets.............     38,377                           30,450                            25,547
    Total assets.........   $369,882                         $333,484                          $329,230
                            ========                         ========                          ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  Interest-bearing demand
     deposits............   $ 64,062   $1,679      2.62%      $52,674   $1,461      2.77%     $  47,222     $1,466      3.10%
  Savings deposits ......     20,888      521      2.49        20,982      518      2.47         20,420        517      2.53
  Other time deposits....    190,706   10,977      5.76       174,726   10,014      5.73        166,637      9,521      5.71
  Federal funds purchased      1,002       68      6.79           207       12      5.80             -         -           -
  FHLB advances and
     other borrowings....     24,825    1,403      5.65        21,985    1,190      5.41         32,126      1,874      5.83
                            --------    -----      ----        ------    -----      ----         ------      -----      ----
     Total interest-
      bearing liabilities   $301,483  $14,648      4.86%     $270,574  $13,195      4.88%      $266,405    $13,378      5.02%
Noninterest bearing
     demand deposits.....     27,177                           27,219                            26,196
Other liabilities........      6,129                            3,278                             5,269
Stockholders' equity.....     35,093                           32,413                            31,360
     Total liabilities and
      stockholders' equity           $369,882                         $333,484                            $329,230
                                     ========                         ========                            ========
Tax-equivalent adjustment                 133                              132                                 114
Net interest income......             $15,996                          $14,756                             $13,933
                                      =======                          =======                             =======
Interest rate spread.....                          4.43%                            4.39%                               4.01%
Net interest margin......                          4.83%                            4.87%                               4.59%
Interest-earning assets/
 interest-bearing liabilities                       110%                             112%                                 114%

</TABLE>

CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES

         Net interest  income is  determined  by the amount of  interest-earning
assets  compared to  interest-bearing  liabilities  and their related yields and
costs.  The  difference  between the weighted  average  interest rates earned on
interest-earning assets (i.e., loans and investment securities) and the weighted
average interest rates paid on interest-bearing  liabilities (i.e., deposits and
borrowings) is called the net interest spread. Another measure of the difference
in interest income earned versus interest  expense paid is net interest  margin.
Net interest  margin is  calculated  by dividing net interest  income by average
earning assets.

         Table 1 presents for the three years ended  December 31, 1997,  average
balances of  interest-earning  assets and  interest-bearing  liabilities and the
weighted average interest rates earned and paid on those balances.  In addition,
interest rate spreads,  net interest  margins and the ratio of  interest-earning
assets  versus  interest-bearing  liabilities  for those  years  are  presented.
Average  interest-earning  assets were  $331.5  million in 1997,  versus  $303.0
million in 1996 and $303.7 million in 1995. Average interest-bearing liabilities

                                       17
<PAGE>

were $301.5 million in 1997, versus $270.6 million in 1996 and $266.4 million in
1995. The interest rate spread was 4.43% in 1997, versus 4.39% in 1996 and 4.01%
in 1995,  while the net  interest  margin  was 4.83% in 1997,  4.87% in 1996 and
4.59% in 1995.

     Table 2 shows the change in net interest  income from 1996 to 1997 and from
1995 to 1996 due to changes in volumes and rates.


Table 2 - Rate/Volume Variance Analysis - Taxable Equivalent Basis
(dollars in thousands)
                                            Years Ended December 31,
                                 1997 Compared to 1996    1996 Compared to 1995
                                -----------------------  -----------------------

                                         Rate/     Net            Rate/    Net
                                 Volume  Yield   Change   Volume  Yield  Change
Interest income:
 Loans                            2,855   (245)   2,610    1,088    384   1,472
 Taxable investment securities      (29)    68       39     (732)  (115)   (847)
 Tax-free investment securities      52    (44)       8       83    (28)     55
 Interest-bearing deposits in
   other banks                       52     16       68      (67)    19     (48)
 Federal funds sold                 (33)     2      (31)      51    (25)     26
                                  ---------------------------------------------
    Total interest income         2,897   (203)   2,694      423    235     658
                                -----------------------------------------------
Interest expense:
 Interest bearing demand deposits   298    (80)     218      151   (156)     (5)
 Savings deposits                    (2)     5        3       14    (13)      1
 Other time deposits                920     43      963      464     29     493
 Federal funds purchased             54      2       56       12      -      12
 FHLB advances an other borrowings  161     52      213     (549)  (135)   (684)
                                  ---------------------------------------------
    Total interest expense        1,431     22    1,453       92   (275)   (183)
                             --------------------------------------------------
Net interest income               1,467   (226)   1,241      331    510     841
                                  =====   =====   =====      ===    ===     ===


NONINTEREST INCOME

         Other  income  increased  to $5.3  million in 1997 from $4.6 million in
1996 and $3.7  million in 1995.  The  increases in other income in 1997 and 1996
resulted  from  increased  gains on the sale of loans and  increased  fee income
related to transaction deposit accounts.

         Gain on sales of loans increased to $821,000 in 1997 versus $596,000 in
1996  and  $56,000  in  1995.  The  increase  in gain on  sales of loans in 1997
primarily resulted from gains on the sale of SBA loans. The increase in gains on
sale of loans in 1996 resulted from increased  mortgage banking activity in 1996
compared to 1995.

     Fees and service charges on deposits increased to $3.6 million in 1997 from
$3.3 million in 1996 and $3.0 million in 1995.

NONINTEREST EXPENSES

         Other expenses were $15.0 million in 1997, versus $14.0 million in 1996
and $11.7 million in 1995. The increase in other operating expenses from 1995 to
1996  and  the  decrease  in  those  expenses  from  1996 to  1997  was  largely
attributable  to the one-time SAIF  assessment of $1,150,000  which  occurred in
1996.

         Salary and  employee  benefits  increased  to $7.3 million in 1997 from
$6.2  million  in 1996  and $5.7  million  in 1995.  This  increase  in 1997 was
primarily  due to  normal  increases  in  compensation  levels as well as to the
hiring of several key individuals in mid- and late-1996 and in 1997.

         Occupancy  expenses increased to $2.8 million in 1997 from $2.2 million
in 1996 and $1.8  million in 1995,  while  other  operating  expenses  were $5.0
million  in 1997,  versus  $5.6  million in 1996 and $4.1  million in 1995.  The
increase in 1997  occupancy  expense was the result of a  combination  in higher
depreciation expenses and an increase in maintenance contract expenses,  both of
which  related to an increase in fixed assets and the  relocation of the leasing
and the  deposit  operations  center to  off-premise  leased  office  space.  In
addition to the SAIF special  assessment,  1996  operating  expenses were higher

                                       18
<PAGE>

than 1995 because of expenses related to the start-up of a new leasing operation
and research  and  attorney  fees  related to the Bennett  Funding  Group,  Inc.
("Bennett Funding") bankruptcy.

INVESTMENT SECURITIES

         The  composition  of  the  investment   securities  portfolio  reflects
management's  strategy of maintaining an  appropriate  level of liquidity  while
providing a relatively  stable source of income.  The portfolio  also provides a
balance to  interest  rate risk and credit  risk in other  categories  of FLAG's
balance sheet while  providing a vehicle for the investment of available  funds,
furnishing liquidity,  and providing securities to pledge as required collateral
for certain deposits.

         Investment  securities  increased  $7.4  million  to $74.6  million  at
December 31, 1997 from $67.2 million at December 31, 1996. At December 31, 1997,
$71.7  million,  approximately  96% of investment  securities  outstanding,  was
classified  as  available-for-sale,   while  the  remainder  was  classified  as
held-to-maturity.  The overall  increase in the amount of investments was due to
the fact that new funds invested  exceeded  calls,  sales,  normal  paydowns and
prepayments of securities.  At December 31, 1997,  gross unrealized gains in the
total  portfolio  amounted to $591,000 and gross  unrealized  losses amounted to
$642,000.

         Table 3  reflects  the  carrying  amount of the  investment  securities
portfolio for the past three years.

Table 3 - Carrying Value of Investments
     (dollars in thousands)
                                             December 31,
                                   1997           1996           1995
---------------------------------------------------------------------
 Securities held-to-maturity:
    State, county and municipal $   350          $  515        $  731
    Mortgage-backed securities      103             118           131
    Collateralized mortgage 
      obligations                 2,505           3,092         3,766
                             ----------------------------------------
                                  2,958           3,725         4,628
                             ----------------------------------------
 Securities Available-for-sale:
   U.S. Treasuries and agencies  16,825          15,874        14,766
   Corporate debt securities.     1,000             990             -
   State, county and municipal    6,405           4,147         3,735
   Mortgage-backed securities    29,821          23,493        23,886
   Collateralized mortgage 
     obligations                 15,854          16,705        22,343
  Equity securities.............. 1,761           2,253         5,311
                             ----------------------------------------
                                 71,666          63,462        70,041
                             ----------------------------------------
             Total...........   $74,624         $67,187       $74,669
                             ========================================


CARRYING VALUE OF INVESTMENTS

         The December 31, 1997 market value of securities held to maturity, as a
percentage  of amortized  cost,  was 99%, up from 98% at December 31, 1996.  The
market value of the  securities  held-to-maturity  will change as interest rates
change and such  unrealized  gains and losses will not flow through the earnings
statement unless the related securities become permanently  impaired or they are
called at prices which differ from the carrying value at the time of the call.

                                       19
<PAGE>

LOANS

         Gross loans receivable increased by approximately $37.1 million in 1997
to $282.9  million from $245.8  million at December 31, 1996.  This increase was
the result of growth in  commercial,  financial  and  agricultural  loans,  real
estate  mortgages  and  lease  financings.  As shown  in  Table  4,  commercial,
financial and agricultural  loans increased  approximately  $12.4 million,  real
estate  mortgages  increased  approximately  $28.0 million and lease  financings
increased by approximately  $1.7 million.  The decrease in installment  loans to
individuals  primarily  resulted from the normal paydown and prepayment of these
loans.

<TABLE>
Table 4 - Loan Portfolio
(dollars in thousands)
<CAPTION>
                                                                           December 31,
                                         1997             1996                1995             1994            1993
                                   ------------------------------------------------------------------------------------------

                                            Percent           Percent            Percent            Percent           Percent
                                    Amount of Total   Amount  of Total    Amount Of Total   Amount  of Total  Amount  of Total
<S>                                <C>       <C>      <C>      <C>       <C>       <C>      <C>       <C>     <C>       <C> 
Commercial/financial/agricultural  $47,373   16.7%    $34,983  14.2%     $31,409   14.3%    $24,398   11.6%   $18,863   9.8%
Real estate construction.......     11,768    4.2      10,539   4.3        4,891    2.2       6,849    3.3      4,772   2.5
Real estate mortgage...........    198,566   70.2     170,615  69.4      150,146   68.5     152,419   72.4    145,931  75.5
Installment loans to individuals    15,855    5.6      22,088   9.0       26,018   11.9      18,470    8.8     17,295
8.9
Lease financings...............      9,304    3.3       7,572   3.1        6,654    3.0       8,354    4.0      6,553   3.4
                                  ------------------------------------------------------------------------------------------
     Total loans...............    282,866  100.0%    245,795 100.0%     219,118  100.0%    210,490  100.0%   193,414 100.0%
Less:
Deferred loan fees and discounts       236               (375)              (322)              (363)             (383)
Allowance for loan losses......     (3,816)            (5,767)            (2,592)            (2,412)           (2,002)
                                   -------            -------            -------            -------           -------
     Total net loans...........   $279,286           $239,653           $216,204           $207,715          $191,029
                                  ========           ========           ========           ========          ========
</TABLE>

Table 5 represents  the  expected  maturities  for  commercial,  financial,  and
agricultural loans and real estate  construction loans at December 31, 1997. The
table also  presents  the rate  structure  for these loans that mature after one
year.


<TABLE>

Table 5  - Loan Portfolio Maturity
(dollars in thousands)
<CAPTION>
                                                                           Rate Structure for Loans
                                            Maturity                       Maturity Over One Year
--------------------------------------------------------------------------------------------------------
                                        Over One Year                        Floating
                               One Year    Through     Over Five           or Adjustable  Predetermined
                               or Less   Five Years     Years     Total    Interest Rate      Rate
Commercial, financial, and
<S>                            <C>       <C>           <C>       <C>          <C>            <C>   
   agricultural............... $26,561   $12,020       $8,792    $47,373      $12,631        $8,181
Real estate - construction....  10,815       946            7     11,768           37           916
                              ---------------------------------------------------------------------
                               $37,376   $12,966       $8,799    $59,141      $12,668        $9,097
                               ====================================================================
</TABLE>


PROVISION AND ALLOWANCE FOR LOAN LOSSES

         Table 6 presents an analysis of  activities  in the  allowance for loan
losses for the past five years.  An allowance  for  possible  losses is provided
through  charges to FLAG's  earnings in the form of a provision for loan losses.
The  provision  for loan losses was $765,000 in 1997,  $3,744,000  in 1996,  and
$775,000 in 1995.  The large increase in the provision for loan losses from 1995
to 1996 is directly  attributable  to Bennett  Funding.  Excluding the provision
associated with Bennett  Funding,  the 1996 provision for loan losses would have
been $766,000.  Management determines the level of the provision for loan losses
based on outstanding  loan balances,  the levels of  nonperforming  assets,  and
reviews  of assets  classified  as  substandard,  doubtful,  or loss and  larger
credits,  together with an analysis of historical loss  experience,  and current
economic  conditions.  The responsible loan officers  conduct these reviews,  as
well as the loan review department.

         Historically,  the loan  portfolio  has  consisted  primarily  of loans
secured by one-to-four family residential properties, and actual losses have not
been  significant.  The Banks also provide  other  services and loan products to
meet the  growing  financial  needs of FLAG's  communities,  including  consumer
loans,  commercial loans, and commercial real estate loans.  Because these loans
present  a  somewhat  higher  credit  risk than  loans  secured  by  residential
properties, management has significantly increased the allowance for loan losses
compared  to  historic  levels to reflect  the  increased  potential  for future
losses.

         As shown in Table 6, the year-end  allowance for loan losses  decreased
to $3.8 million at December  31,  1997,  from $5.8 million at December 31, 1996.
The allowance for loan losses was $2.6 million at December 31, 1995. The decline
in the allowance for losses in 1997 was primarily due to a $2,465,000 charge-off
associated with the Bennett Funding assets. Total charge-offs in 1997, including
those related to Bennett Funding, were $2,917,000, up from $628,000 in 1996, and
$647,000 in 1995. If Bennett  Funding  assets had not been  charged-off to their
net realizable value, 1997 charge-offs would have been  approximately  $452,000.
The allowance for loan losses was 1.50% of net outstanding loans at December 31,
1997,  versus 2.55% of net outstanding  loans at December 31, 1996, and 1.20% of
net outstanding loans at December 31, 1995.

         Management  believes  that  the  allowance  for  loan  losses  was both
adequate and  appropriate.  However,  the future level of the allowance for loan
losses is highly  dependent upon loan growth,  loan loss  experience,  and other
factors, which cannot be anticipated with a high degree of certainty.


                                       20
<PAGE>


<TABLE>
Table 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands)
                                                        Years Ended December 31,
                                         --------------------------------------------------
                                            1997     1996       1995       1994      1993
                                         --------------------------------------------------
<S>                                      <C>       <C>        <C>        <C>       <C>     
Average net loans....................... $253,611  $225,774   $215,208   $204,200  $197,250
Allowance for loan losses, beginning
  of the period.........................    5,768     2,592      2,412      2,002     1,545
Charge-offs for the period:
  Commercial/financial/agricultural.....      167         8          6         88        59
  Real estate construction loans .......        -        22         23          2         -
  Real estate mortgage loans............      126       432        432         36       284
  Installment loans to individuals......      159       166        186        102       241
  Lease financings......................    2,465         -          -          -         -
                                          -------------------------------------------------
Total charge-offs....................... $  2,917   $   628    $   647    $   228   $   584
                                          -------------------------------------------------
Recoveries for the period:
  Commercial/financial/agricultural..... $      2   $     -    $     4    $    50   $    11
  Real estate construction loans........        -         -          -         10         -
  Real estate mortgage loans............      104         -          -          5        13
  Installment loans to individuals......       94        61         48         83        62
  Lease financings......................        -         -          -          -         -
                                          -------------------------------------------------
     Total recoveries................... $    200   $    61    $    52    $   148   $    86
                                          -------------------------------------------------
       Net charge-offs for the period...    2,719       567        595         80       498
Provision for loan losses...............      765     3,743        775        490       955
                                         --------------------------------------------------
Allowance for loan losses, end of period  $ 3,816   $ 5,768    $ 2,592     $2,412   $ 2,002
                                          =================================================
Ratio of allowance for loan losses to
 total net loans outstanding ...........    1.50%     2.55%      1.20%      1.18%     1.01%
Ratio of net charge-offs during the
 period to average net loans outstanding
 during the period .....................    1.07%     0.25%      0.28%      0.04%     0.25%
</TABLE>


ASSET QUALITY

                  At December 31, 1997, non-performing assets (non-accrual loans
and other real estate  owned)  totaled $5.5 million  compared to $8.6 million at
year-end  1996.  The decrease in 1997 is primarily  due to the  write-off of the
amount determined to be uncollectible from Bennett Funding.  As was discussed in
last year's annual report,  Bennett Funding was an equipment leasing and finance
company based in Syracuse,  New York. For several years,  FFSB,  along with many
other  financial  institutions  and  individuals  throughout  the United States,
invested in office equipment  leases sold through Bennett Funding.  During 1996,
Bennett Funding filed for Chapter 11 bankruptcy protection, and certain officers
of Bennett Funding were investigated for possible wrongdoing,  including but not
limited to criminal  securities  fraud. As a result of the Chapter 11 bankruptcy
filing, the collection of cash flows and the values associated with these leases
became  less  certain,  and  to  reflect  this  possible  loss  in  value,  FLAG
established  a  specific   reserve  for  possible   Bennett  Funding  losses  of
approximately  $3.0 million.  In addition,  it was also determined that the $4.5
million in equipment leases should be classified as "Doubtful," a classification
which  generally  requires  reserves  equal to 50% of the carrying  value of the
asset.  In 1997,  management  agreed to a settlement with the Trustee of Bennett
Funding.  In general,  the  agreement  provides  for a sharing of the  cashflows
generated  by  the  leases.   Subsequent   to  year-end   1997,   FLAG  received
approximately $2.0 million from the Trustee.  According to the settlement,  FLAG
will be receiving monthly remittances of cash collected by the Trustee until the
agreement is satisfied. Management believes that all of the remaining unreserved
balance of these leases will be recovered.

     In 1997, the Bennett Funding  receivables were charged-off by approximately
$2.5 million against the 1996 established reserve.

                                       21
<PAGE>

     There were no commitments to lend additional  funds on nonaccrual  loans at
December 31, 1997. Table 7 summarizes the non-performing  assets for each of the
last five years.

Table 7 - Risk Elements
(dollars in thousands)
                                                       December 31,
                                          --------------------------------------
                                           1997   1996     1995    1994    1993
--------------------------------------------------------------------------------
Loans on nonaccrual...................... $4,669  $7,716  $2,296  $2,838  $3,976
Loans past due 90 days and still accruing     87     980      22       -      36
Other real estate owned..................    817     862     892     364     504
Total non-performing assets.............. $5,573  $9,558  $3,210  $3,202  $4,516
                                          ======================================
Total non-performing loans as a
     percentage of net loans.............   1.70%  3.63%   1.07%   1.37%  2.10%


RISK ELEMENTS

 .........There  may be additional  loans within FLAG's loan  portfolio  that may
become classified as conditions may dictate;  however,  management was not aware
of any such loans that are material in amount at December 31, 1997.  At December
31, 1997,  management was unaware of any known trends,  events, or uncertainties
that will have, or that are reasonably  likely to have a material  effect on the
Banks' or FLAG's liquidity, capital resources, or operations.


DEPOSITS

     Total deposits increased  approximately $30.5 million during 1997, totaling
$324.9 million at December 31, 1997, versus $294.4 million at December 31, 1996.
The  maturities  of time  deposits  of  $100,000  or more issued by the Banks at
December 31, 1997, are summarized in Table 8.

Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)

    Three months or less..................          $22,989
    Over three months through six months..           10,933
    Over six months through twelve months.           17,885
    Over twelve months....................            5,864
                                                   --------
                                                    $57,671

     At December 31, 1997, the Banks were  shareholders in the Federal Home Loan
Bank of Atlanta  ("FHLBA").  Through this  affiliation,  advances totaling $43.6
million  were  outstanding  at rates  competitive  with  time  deposits  of like
maturities.  Management  anticipates  continued  utilization  of this short- and
long-term source of funds to minimize interest rate risk and to fund competitive
fixed rate loans to customers.


ASSET-LIABILITY MANAGEMENT

         A primary objective of FLAG's asset and liability management program is
to  control  exposure  to  interest  rate risk (the  exposure  to changes in net
interest  income due to changes in market  interest  rates) so as to enhance its
earnings  and  protect  its net worth  against  potential  loss  resulting  from
interest rate fluctuations.

         Historically,  the average term to maturity or repricing (rate changes)
of assets  (primarily loans and investment  securities) has exceeded the average
repricing period of liabilities  (primarily  deposits and  borrowings).  Table 9
provides   information  about  the  amounts  of   interest-earning   assets  and
interest-bearing  liabilities  outstanding  as of December  31,  1997,  that are
expected to mature,  prepay, or reprice in each of the future time periods shown

                                       22
<PAGE>

(i.e., the interest rate  sensitivity).  As presented in this table, at December
31, 1997, the  liabilities  subject to rate changes within one year exceeded its
assets  subject to rate  changes  within  one year.  This  mismatched  condition
subjects  FLAG to  interest  rate risk  within the one year  period  because the
assets,  due to their generally shorter term to maturity or repricing,  are more
sensitive  to  short-term  interest  rate changes  than the  liabilities.  It is
management's  belief that the result of this position would be a decrease in net
interest  income if market  interest  rates rise and an increase in net interest
income if market interest rates decline.

         Management  carefully  measures and monitors  interest rate sensitivity
and believes that its operating  strategies  offer  protection  against interest
rate risk.  As  required  by various  regulatory  authorities,  FLAG's  Board of
Directors  has  established  an interest  rate risk policy,  which sets specific
limits on  interest  rate risk  exposure.  Adherence  to this policy is reviewed
quarterly by the Board of Directors' Asset Liability Committee.

         Management has maintained  positive ratios of average  interest-earning
assets to average interest-bearing  liabilities.  As represented in Table 1 this
ratio,  based on average  balances for the respective  years,  was 110% in 1997,
112% in 1996, and 114% in 1995.
<TABLE>

Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands)                      
<CAPTION>
                                                           December 31, 1997
                                      ----------------------------------------------------------
                                                       Maturing or Repricing in
                                                 Over 1 Year  Over 3 Years
                                       One Year    Through      Through      Over     
                                        or Less    3 Years      5 Years     5 Years     Total
                                       ---------   --------     --------    -------     -----
Interest-earning assets:
<S>                                    <C>        <C>          <C>         <C>         <C>     
 Adjustable rate mortgages...........  $ 82,892   $       -    $      -    $      -    $ 82,892
 Fixed rate mortgages................    59,786      23,444      19,283      25,636     128,149
 Other loans.........................    45,896      10,657      12,143       3,128      71,824
 Investment securities...............    37,055       4,741       8,120      25,207      75,123
 Federal Home Loan Bank stock........     2,782           -           -           -       2,782
 Interest-bearing deposits
   in other banks....................     9,068           -           -           -       9,068
                                     ----------------------------------------------------------
   Total interest-earning assets.....  $237,479     $38,842     $39,546     $53,971    $369,838
                                       --------------------------------------------------------
Interest-bearing liabilities:
 Fixed maturity deposits............. $ 150,434     $35,660     $ 8,638     $ 5,802    $200,534
 NOW and money market demand
    accounts.........................    47,558       6,576       4,424       9,074      67,632
 Passbook accounts...................    16,614         648         592       5,331      23,185
 Federal funds purchased.............       170           -           -           -         170
 FHLB advances.......................    40,783       2,167         167         521      43,638
Other borrowed funds.................       708           -           -           -         708
                                     ----------------------------------------------------------
   Total interest-bearing liabilities  $256,267      $45,051     $13,821    $20,728    $335,867
                                     ----------------------------------------------------------

Interest rate sensitivity gap........ $(18,788)    $(6,209)     $25,725     $33,243    $ 33,971
Cumulative interest rate 
   sensitivity gap .................. $(18,788)   $(24,997)        $728     $33,971           -
Cumulative interest rate sensitivity 
   gap to total assets...............    -4.57%      -6.08%        -.18%       8.26%          -
</TABLE>

Table 10 represents the expected maturity of the total investment  securities by
maturity date and average  yields based on amortized  cost at December 31, 1997.
It should be noted that the composition and  maturity/repricing  distribution of
the  investment  portfolio is subject to change  depending on rate  sensitivity,
capital needs, and liquidity needs.

                                       23
<PAGE>

<TABLE>

Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)

<CAPTION>

                                                   After One But     After Five But
                                Within One Year  Within Five Years  Within Ten Years   After Ten Years   Totals
                               --------------------------------------------------------------------------------
                                   Amount  Yield    Amount  Yield   Amount   Yield     Amount Yield
Securities held-to-maturity:
<S>                             <C>       <C>        <C>   <C>         <C>    <C>         <C>  <C>       <C>
   State, county and municipals $    51   11.10%     224   9.00%       52     8.00%       24   8.60%     351
   Mortgage-backed securities..     103    6.98%      -      -          -       -        -      -        103
   Collateralized mortgage 
     obligations ..............      -       -       77    8.85%        -       -      2,428   7.22%    2,505
                                  ---------------------------------------------------------------------------


                                  $ 154    8.34%    301    8.96%       52     8.00%    2,452   7.23%    2,959
                                  ---------------------------------------------------------------------------
Securities available-for-sale:
   U.S. Treasury and agencies.. $ 3,131    5.43%   4,689   6.41%    8,542     6.76%      462  6.50%    16,824
   State, county and municipals     319    7.10%   2,585   6.50%    1,500     8.90%    2,001  9.00%     6,405
   Corporate debt securities...      -       -     1,000   6.86%      -         -       -        -      1,000
   Equity securities...........   1,761    4.53%     -       -        -         -       -        -      1,761
   Mortgage-backed securities..   1,264    5.37%   2,972   6.55%    4,171     6.98%   21,414  6.69%    29,821
   Collateralized mortgage 
      obligations                     -      -     1,272   5.98%    3,858     5.53%   10,724  6.18%    15,854
                                 ----------------------------------------------------------------------------

                                  6,475    5.25%  12,518   6.45%   18,071     6.73%   34,601  6.66%    71,665
                                  ---------------------------------------------------------------------------

            Total               $ 6,629    5.33%  12,819   6.51%   18,123     6.73%   37,053  6.70%    74,624
                                  =====    =====  ======   =====   ======     =====   ======  =====    ======

</TABLE>

LIQUIDITY

         The Banks are required  under federal  regulations  to maintain in cash
and eligible short-term  investment  securities a monthly average of 5.0% of net
withdrawable  deposits and  borrowings  payable in one year or less.  The Banks'
average  liquidity  in December  1997 was 11.68% of the  aggregate  of the prior
month's daily average deposits and short-term  borrowings.  The Banks' liquidity
was 13.03% at December 31, 1997, and 11.14% at December 31, 1996.

         The Banks' primary  sources of liquidity  (funds) are deposit  inflows,
loan repayments,  proceeds from sales of loans and securities, advances from the
FHLBA,  and  earnings  from  investments.   Short-term  deposits,   particularly
noninterest-bearing checking accounts, are becoming a more significant source of
liquidity than they have been historically to the Banks. Advances from the FHLBA
were $43,637,000 and $17,371,000, respectively, at December 31, 1997 and 1996.

         Subject to  certain  limitations,  the Banks may borrow  funds from the
FHLBA in the form of advances.  Credit  availability from the FHLBA to the Banks
are based on the Banks' financial and operating  condition.  Credit availability
from the FHLBA to the Bank was approximately $68.0 million at December 31, 1997.
In addition  to  creditworthiness,  the Bank must own a minimum  amount of FHLBA
capital  stock.  This  minimum is 5.0% of  outstanding  FHLBA  advances.  Unused
borrowing capacity at December 31, 1997, was $24.0 million.  The Banks use FHLBA
advances for both long-term and short-term  liquidity  needs.  Other than normal
banking operations,  the Banks have no long-term liquidity needs. The Banks have
never been involved with highly  leveraged  transactions  that may cause unusual
potential long-term liquidity needs.

     The  Consolidated  Statements  of Cash  Flows  for the  three  years  ended
December 31, 1997 detail FLAG's sources and uses of funds for those periods.


CAPITAL RESOURCES AND DIVIDENDS

         Stockholders'  equity  at  December  31,  1997,  increased  10.0%  from
December 31, 1996. All of this growth resulted from 1997 earnings.  Dividends of
$756,519 or $0.15 per share were  declared  and paid in 1997,  compared to $0.14
per share in 1996.

         Average  stockholders'  equity as a percent of total average  assets is
one  measure  used  to  determine  capital   strength.   The  ratio  of  average
stockholders'  equity to average  total  assets was 9.49% for 1997 and 9.72% for
1996.  Table 11  summarizes  these and other key ratios for FLAG for each of the
last three years.

         The Federal Deposit  Insurance  Corporation  Improvement Act ("FDICIA")
required federal banking agencies to take "prompt corrective action" with regard
to institutions  that do not meet minimum capital  requirements.  As a result of
FDICIA,  the federal banking agencies  introduced an additional  capital measure
called the "Tier 1 risk-based  capital  ratio." The Tier 1 ratio is the ratio of
core  capital  to  risk  adjusted  total  assets.  Note  10 to the  Consolidated
Financial  Statements  presents a summary of FDICIA's  capital tiers compared to
FLAG's and the Banks' actual capital levels. The Banks exceeded all requirements
of a  "well-capitalized"  institution  at December 31, 1997.  The pending merger
(see "Pending Acquisitions") will not significantly reduce FLAG's capital ratios
and  management  will  continue   leveraging   capital  to  increase  return  on
stockholders' equity.

                                       24
<PAGE>

Table 11 - Equity Ratios
                                        Years Ended December 31,
                                          1997       1996      1995
-------------------------------------------------------------------
Return on average assets...........       1.01%       .39%     1.05%
Return on average equity...........      10.68%      3.97%    11.07%
Dividend payout ratio..............      20.18%     57.06%    19.09%
Average equity to average assets...       9.49%      9.72%     9.53%


PROVISION FOR INCOME TAXES.

         The provision for income taxes was $1,795,000 in 1997,  versus $347,000
in 1996, and $1,707,000 in 1995. The effective  actual tax rates for 1997, 1996,
and 1995 (tax  provision as a  percentage  of income  before  taxes) were 32.4%,
21.2%,  and 33.0%,  respectively.  These tax rates are lower than the  statutory
Federal  tax  rate  of  34%  primarily  due to  interest  income  on tax  exempt
securities.  See FLAG's  consolidated  financial  statements  for an analysis of
income taxes.


IMPACT OF INFLATION AND CHANGING PRICES

         The  consolidated  financial  statements  and  related  financial  data
presented  herein  have been  prepared in  accordance  with  generally  accepted
accounting  principles  which require the measurement of financial  position and
operating results in terms of historical dollars without  considering changes in
relative purchasing power over time due to inflation.

         Unlike  most  industrial  companies,  virtually  all of the  assets and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
interest  rates  generally  have  a  more  significant  impact  on  a  financial
institution's  performance than does the effect of inflation.  The liquidity and
maturity  structures  of FLAG's  assets  and  liabilities  are  critical  to the
maintenance of acceptable performance levels.


RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
SFAS  No.  130,  "Reporting  Comprehensive  Income."  SFAS No.  130  establishes
standards for reporting and display of  comprehensive  income and its components
(revenues,  expenses,  gains,  and  losses)  in a full  set  of  general-purpose
financial statements.  SFAS No. 130 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. SFAS No. 130 requires that companies (i) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated  balance of other  comprehensive  income separately
from retained  earnings and additional  paid-in capital in the equity section of
the statement of financial condition. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.  Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.

         Also, in June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about
Segments of an Enterprise and Related  Information."  SFAS No. 131 specifies the
presentation  and disclosure of operating  segment  information  reported in the
annual  report  and  interim  reports  issued to  stockholders.  SFAS No. 131 is
effective  for fiscal  years  beginning  after  December  15,  1997.  Management
believes that the adoption of these  statements  will have no material impact on
FLAG's financial position, results of operation, or liquidity.



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA











                           FLAG FINANCIAL CORPORATION

                        Consolidated Financial Statements

                        December 31, 1997, 1996 and 1995

                 (with Independent Accountants' Report thereon)












                                       25
<PAGE>






               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS






The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia


We have audited the accompanying  consolidated  balance sheets of FLAG Financial
Corporation  and  subsidiaries as of December 31, 1997 and 1996, and the related
statements of earnings,  changes in stockholders' equity and cash flows for each
of the three  years in the period  ended  December  31,  1997.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits. We did not audit the 1996 and 1995 consolidated financial statements
of FLAG  Financial  Corporation  and  subsidiary  and the 1997,  1996,  and 1995
consolidated   financial  statements  of  Three  Rivers  Bancshares,   Inc.  and
subsidiary,  all of which were pooled with Middle Georgia  Bankshares,  Inc. and
subsidiary  in 1998 as  explained  in  Note 2 to the  accompanying  consolidated
financial  statements.   Those  statements  are  included  in  the  accompanying
consolidated  financial  statements and reflect total assets of $34,548,811  and
$250,746,998 as of December 31, 1997 and 1996, respectively, and net earnings of
$662,466,  $221,184,  and  $2,357,247  for each of the three years in the period
ended December 31, 1997.  Those  statements were audited by other auditors whose
reports  have been  furnished  to us and our  opinion,  insofar as it relates to
these amounts, is based solely on the reports of the other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the financial  position of FLAG Financial  Corporation  and
subsidiaries  as of  December  31,  1997  and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.


                                                /s/ Porter Keadle Moore, LLP


Atlanta, Georgia
January 22, 1998, except for Note 2 as to which the date is May 8, 1998 and Note
    10 as to which the date is June 3, 1998





                                       26
<PAGE>




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS






The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia


We have audited the  accompanying  consolidated  balance sheet of FLAG Financial
Corporation  and subsidiary as of December 31, 1996, and the related  statements
of  operations,  changes  in  stockholders'  equity and cash flows for the years
ended  December  31,  1996  and  1995.   These  financial   statements  are  the
responsibility of FLAG's management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of FLAG  Financial
Corporation  and  subsidiary  as of December 31, 1996,  and the results of their
operations  and their cash flows for the years ended December 31, 1996 and 1995,
in conformity with generally accepted accounting principles.

                                          /s/ Robinson, Grimes & Company, P.C.





Columbus, Georgia
January 31, 1997




                                       27
<PAGE>








               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS






The Board of Directors
Middle Georgia Bankshares, Inc.
Vienna, Georgia

         We have audited the accompanying  consolidated balance sheets of Middle
Georgia Bankshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the
related statements of earnings,  changes in stockholders'  equity and cash flows
for each of the  three  years in the  period  ended  December  31,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining on a test basis,  evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the  financial  position of Middle
Georgia Bankshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.

                                               /S/ Porter Keadle Moore, LLP





Atlanta, Georgia
January 23, 1998



                                       28
<PAGE>






               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS






The Board of Directors
Three Rivers Bancshares, Inc.
Milan, Georgia

         We have audited the accompanying  consolidated  balance sheets of Three
Rivers Bancshares,  Inc. and subsidiary as of December 31, 1997 and 1996 and the
related statements of earnings,  changes in stockholders'  equity and cash flows
for each of the three years ended December 31, 1997. These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the financial statements are fee of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Three Rivers
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the results
of their  operations  and their  cash  flows for each of the three  years  ended
December 31, 1997, in conformity with generally accepted accounting principles.

                                        /S/ Thigpen, Jones, Seaton & Co., P.C.



Dublin, Georgia
January 28, 1998



                                       29
<PAGE>


                           FLAG FINANCIAL CORPORATION

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996

                              Assets
                                                          1997         1996
                                                          ----         ----
 Cash and due from banks, including reserve
   requirements of $1,664,000 and $1,435,000..........$ 13,350,755   10,447,593
 Federal funds sold...................................   5,900,000    3,660,000
                                                       -----------  -----------
         Cash and cash equivalents....................  19,250,755   14,107,593
                                                        -----------------------
 Interest-bearing deposits in other banks.............   3,168,353    1,327,108
 Investment securities available-for-sale.............  71,665,213   63,461,953
 Investment securities held-to-maturity
     (fair value of $2,929,229 in 1997
     and $3,636,680 in 1996) .........................   2,957,971    3,724,440
 Other investments ...................................   4,756,655    4,018,460
 Mortgage loans held for sale ........................   3,481,678    1,505,798
 Loans, net .......................................... 279,285,679  239,653,367
 Premises and equipment, net .........................  11,348,843    9,527,561
 Mortgage servicing rights ...........................   1,174,292    1,703,710
 Accrued interest receivable .........................   4,713,021    3,809,317
 Cash surrender value of life insurance ..............   3,864,612    3,544,386
 Other assets ........................................   5,618,002    4,134,862
                                                      ------------ ------------
                                                      $411,285,074  350,518,555

               Liabilities and Stockholders' Equity
Deposits:
 Demand   ............................................ $32,245,871   32,401,509
 Interest-bearing demand .............................  70,503,608   61,395,808
 Savings..............................................  20,315,119   20,472,906
 Time ................................................ 144,116,285  130,174,492
 Time, over $100,000 .................................  57,671,160   49,975,738
                                                       ----------- ------------

          Total deposits.............................. 324,852,043  294,420,453
                                                       -----------  -----------

Federal funds purchased...............................     170,000    2,210,000
Advances from Federal Home Loan Bank .................  43,637,494   17,370,833
Accrued interest payable  ............................   1,312,319      940,139
Other liabilities.....................................   4,542,833    2,163,012
                                                       ----------- ------------

           Total liabilities ......................... 374,514,689  317,104,437
                                                       -----------  -----------

Stockholders' equity:
    Preferred stock (10,000,000 shares
      authorized; none issued and outstanding) .......        -             -
    Common stock ($1 par value, 30,000,000 shares 
      authorized, 5,171,474 and 5,163,678 shares 
      issued and outstanding) ........................   5,171,474    5,163,678
    Additional paid-in capital .......................   8,793,976    8,747,322
    Retained earnings ................................  22,813,421   19,821,242

    Unrealized loss on investment securities
       available-for-sale, net of tax ................      (8,486)    (318,124)
                                                       ----------- ------------

             Total stockholders' equity ..............  36,770,385   33,414,118
                                                       ----------- ------------
                                                      $411,285,074  350,518,555
                                                       ===========  ===========
See accompanying notes to consolidated financial statements.



                                       30
<PAGE>


                           FLAG FINANCIAL CORPORATION

                       Consolidated Statements of Earnings

              For the Years Ended December 31, 1997, 1996 and 1995

                                            1997          1996          1995
                                            ----          ----          ----
Interest income:
  Interest and fees on loans ......... $ 25,848,943    23,239,894    21,768,020
  Interest on investment securities ..    4,345,060     4,298,842     5,101,783
  Interest-bearing deposits...........      190,476       167,587       156,610
  Interest on federal funds sold .....      258,301       244,829       281,323
                                            -------       -------       -------
         Total interest income .......   30,642,780    27,951,152    27,310,880
                                         ----------    ----------    ----------
Interest expense:
  Deposits ...........................   13,175,309    11,992,860    11,504,740
  Borrowings .........................    1,470,797     1,201,626     1,872,996
                                          ---------     ---------     ---------
        Total interest expense .......   14,646,106    13,194,486    13,377,736
                                         ----------    ----------    ----------
      Net interest income before
        provision for loan losses ....   15,996,674    14,756,666    13,933,144
Provision for loan losses ............      765,000     3,743,529       774,500
                                            -------     ---------       -------
      Net interest income after
        provision for loan losses ....   15,231,674    11,013,137    13,158,644
                                         ----------    ----------    ----------
Other income:
  Fees and service charges ...........    3,567,828     3,301,176     2,971,322
  Gain on sales of investment
    securities .......................      171,119       232,097       261,659
  Gain on sales of loans .............      821,175       595,535        55,881
  Gain (loss) on other
    real estate, net .................      (82,719)      (79,643)       32,764
  Other ..............................      854,493       588,273       384,596
                                            -------       -------       -------
      Total other income .............    5,331,896     4,637,438     3,706,222
                                          ---------     ---------     ---------
Other expenses:
  Salaries and employee benefits .....    7,256,333     6,171,879     5,749,479
  Occupancy ..........................    2,778,741     2,227,851     1,824,663
  Other operating ....................    4,985,253     5,618,052     4,112,422
                                          ---------     ---------     ---------
      Total other expenses ...........   15,020,327    14,017,782    11,686,564
                                         ----------    ----------    ----------
       Earnings before provision for
        income taxes .................    5,543,243     1,632,793     5,178,302
Provision for income taxes ...........    1,794,545       346,545     1,706,668
                                          ---------       -------     ---------
      Net earnings ...................  $ 3,748,698     1,286,248     3,471,634
                                          =========     =========     =========
Basic earnings per share                $       .73           .25           .68
                                          =========    ==========     =========
Diluted earnings per share              $       .72           .25           .67
                                          ==========   ==========     =========

See accompanying notes to consolidated financial statements.



                                       31
<PAGE>


                           FLAG FINANCIAL CORPORATION

           Consolidated Statements of Changes in Stockholders' Equity

              For the Years Ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                                         Net Unrealized
                                                                             Loss on
                                                                           Securities
                                               Additional                 Available-for
Common                              Paid-In     Retained                     Sale,
                                     Stock       Capital      Earnings     Net of Tax     Total

Balance, December 31, 1994,
<S>                               <C>            <C>         <C>          <C>           <C>       
    as previously stated, ....... $ 3,018,750    6,861,250   11,157,835   (2,026,409)   19,011,426
Adjustments to reflect 
    pooling of interests ........   2,100,991    1,700,988    6,306,633     (379,922)    9,728,690
                                  -----------  -----------  -----------  -----------   -----------
Balance, December 31, 1994
      as restated ...............   5,119,741    8,562,238   17,464,468   (2,406,331)   28,740,116
 Exercise of stock options ......      40,190       84,208         --           --         124,398
 Issuance of common stock .......       7,211       52,275         --           --          59,486
 Repurchase of common stock .....    (192,150)    (436,733)  (1,004,389)        --      (1,633,272)
 Change in unrealized
   loss on securities
   available-for-sale ...........        --           --           --      2,133,702     2,133,702
Sale of treasury stock
  by pooled entity ..............       3,473       16,582         --           --          20,055
 Net earnings ...................        --           --      3,471,634         --       3,471,634
 Dividends declared .............        --           --       (662,816)        --        (662,816)
                                  -----------  -----------  -----------  -----------   -----------

Balance, December 31, 1995 ......   4,978,465    8,278,570   19,268,897     (272,629)   32,253,303
 Exercise of stock options ......     180,311      450,318         --           --         630,629
 Issuance of common stock .......       8,375       35,894         --           --          44,269
 Change in unrealized
   loss on securities
   available-for-sale ...........        --           --           --        (45,495)      (45,495)
   Purchase of treasury
     stock by pooled entity .....      (3,473)     (17,460)        --           --         (20,933)
  Net earnings ..................        --           --      1,286,248         --       1,286,248
    Dividends declared ..........        --           --       (733,903)        --        (733,903)
                                  -----------  -----------  -----------  -----------   -----------

Balance, December 31, 1996 ......   5,163,678    8,747,322   19,821,242     (318,124)   33,414,118
 Change in unrealized
   loss on securities
   available-for-sale ...........        --           --           --        309,638       309,638
Sale of treasury
  stock by pooled entity ........       7,796       46,654         --           --          54,450
Net earnings ....................        --           --      3,748,698         --       3,748,698
 Dividends declared .............        --           --       (756,519)        --        (756,519)
                                  -----------  -----------  -----------  -----------   -----------

Balance, December 31, 1997 ...... $ 5,171,474    8,793,976   22,813,421       (8,486)   36,770,385
                                  ===========  ===========  ===========  ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements



                                       32
<PAGE>




                           FLAG FINANCIAL CORPORATION

                      Consolidated Statements of Cash Flows

              For the Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                 1997         1996          1995
                                                                 ----         ----          ----
Cash flows from operating activities:
<S>                                                           <C>            <C>          <C>      
  Net earnings .............................................. $ 3,748,698    1,286,248    3,471,634
  Adjustments to reconcile net earnings to net cash
   provided by operating activities
   (net of effect of branch acquisition):
     Depreciation, amortization and accretion ...............   1,481,999    1,286,440    1,117,375
     Provision for loan losses ..............................     765,000    3,743,529      774,500
     Provision for deferred taxes ...........................     993,957   (1,037,538)    (115,896)
     Gains on sales of securities available-for-sale ........    (171,119)    (232,097)    (261,659)
     Gain on sales of loans .................................    (821,175)    (595,535)     (55,881)
     (Gain) loss on other real estate .......................      82,719       79,643      (32,764)
     Change in:
       Mortgage loans held for sale .........................  (1,317,157)    (887,549)  (1,281,363)
       Other ................................................   1,460,150    2,076,657     (553,563)
                                                               ----------   ----------   ----------

        Net cash provided by operating activities ...........   6,223,072    5,719,798    3,062,383
                                                               ----------   ----------   ----------

Cash flows from investing activities (net of effect of branch
      acquisition):
   Net change in interest-bearing deposits ..................  (1,841,245)     311,725     (100,554)
   Proceeds from sales and maturities
    of securities available-for-sale ........................  50,693,161   32,263,333   33,853,994
   Proceeds from maturities of
    securities held-to-maturity .............................     766,861    1,137,484    2,804,939
   Proceeds from sale of other investments ..................     225,400         --        318,500
   Purchases of other investments ...........................    (963,595)    (517,810)    (342,450)
   Purchases of securities available for sale ............... (58,301,833) (25,763,577) (25,846,485)
   Net change in loans ...................................... (39,239,491) (27,531,311)  (9,230,803)
   Proceeds from sales of other real estate .................      22,590      599,937    1,003,688
   Purchases of premises and equipment ......................  (2,554,591)  (1,082,945)  (3,440,321)
   Proceeds from sale of premises and equipment .............      67,023       75,930       19,977
   Purchase of cash surrender value life insurance ..........    (243,652)     (72,962)  (2,892,307)
   Cash acquired in branch acquisition, net of premium paid .  25,416,547         --           --
                                                               ----------   ----------   ----------

       Net cash used in investing activities ................ (25,952,825) (20,580,196)  (3,851,822)
                                                               ----------   ----------   ----------

Cash flows from financing activities (net of effect of branch
      acquisition):
  Net change in deposits ....................................   1,348,323   21,111,643   22,558,324
  Change in federal funds purchased .........................  (2,040,000)   2,210,000         --
  Proceeds from FHLB advances ...............................  42,300,000   16,000,000   67,800,000
  Payments of FHLB advances ................................. (16,033,339) (28,213,334) (82,056,389)
  Repurchase of common stock ................................        --           --     (1,633,272)
  Proceeds from exercise of stock options ...................        --        630,629      124,398
  Proceeds from issuance of common stock ....................        --         44,269       59,486
  Proceeds from sale of treasury stock of pooled entity .....      54,450         --         20,005
  Purchase of treasury stock of pooled entity ...............        --        (20,933)        --
  Cash dividends paid .......................................    (756,519)    (704,362)    (669,903)
                                                               ----------   ----------   ----------

        Net cash provided by  financing activities ..........  24,872,915   11,057,912    6,202,699
                                                               ----------   ----------   ----------

           Net change in cash and cash equivalents ..........   5,143,162   (3,802,486)   5,413,260

Cash and cash equivalents at beginning of year ..............  14,107,593   17,910,079   12,496,819
                                                               ----------   ----------  -----------
Cash and cash equivalents at end of year .................... $19,250,755   14,107,593   17,910,079
                                                               ==========   ==========   ==========
</TABLE>



                                       33
<PAGE>


                           FLAG FINANCIAL CORPORATION

               Consolidated Statements of Cash Flows, continued

              For the Years Ended December 31, 1997, 1996 and 1995

                                               1997        1996        1995
                                               -----      ------       ----

Supplemental disclosures of cash flow 
    information:
  Cash paid during the year for:
   Interest                                $14,311,123  13,208,236  13,100,360
                                            ==========  ==========  ==========

   Income taxes                            $ 1,494,210   1,541,745   1,915,325
                                             =========   =========   =========

Supplemental schedule of noncash 
   investing and financing activities:
  Real estate acquired
   through foreclosure                         607,898   1,228,775   1,807,018
                                               =======   =========   =========

Change in unrealized loss on
 securities available-for-sale,
   net of tax                              $   309,638     (45,495)  2,133,702
                                               =======     ========  =========

Increase (decrease) in
   dividends payable                             --         29,541      (7,335)
                                              =======       ======    ========

Deposit liabilities assumed in branch 
   acquisition                             $29,083,191        --         --
                                            ==========      ======    ========

Assets acquired in branch acquisition,
   other than cash and cash equivalents    $ 1,660,756        --         --
                                             =========      =======   ========


See accompanying notes to consolidated financial statements.



                                       34
<PAGE>


                           FLAG FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Basis of Presentation
--------------------------------------------------------------------------------
The  consolidated  financial  statements  include the accounts of FLAG Financial
Corporation ("FLAG"),  its wholly-owned  subsidiaries First Federal Savings Bank
of LaGrange ("FFSB"),  FFSB's wholly-owned subsidiary Piedmont Mortgage Service,
Inc.   ("Piedmont"),   Citizen's  Bank  ("Citizens"),   Citizens'  wholly  owned
subsidiary  CB  Financial  Group,  Inc.  ("CB  Financial"),  and  Bank of  Milan
("Milan") (FFSB, Citizens and Milan "the Banks", collectively).  All significant
intercompany accounts and transactions have been eliminated in consolidation.

FLAG  is a  multi-bank  holding  company  whose  business  is  conducted  by its
wholly-owned subsidiaries.  FLAG is subject to regulation under the Bank Holding
Company Act of 1956. FFSB is a federal  savings bank and is primarily  regulated
by the Office of Thrift  Supervision  ("OTS") and the Federal Deposit  Insurance
Corporation ("FDIC").  Citizens and Milan are commercial banks and are primarily
regulated by the Georgia Department of Banking and Finance ("DBF") and the FDIC.
The Banks  provide a full range of  commercial,  mortgage and  consumer  banking
services in West-Central  and Middle Georgia.  Piedmont is an appraisal  service
company working  principally for FFSB and as a brokerage service to individuals.
CB Financial is a pawn shop and check cashing operation.

The accounting principles followed by FLAG and its subsidiaries, and the methods
of  applying  these  principles,  conform  with  generally  accepted  accounting
principles  ("GAAP") and with general practices within the banking industry.  In
preparing financial  statements in conformity with GAAP,  management is required
to make  estimates  and  assumptions  that  affect the  reported  amounts in the
financial  statements.  Actual  results  could differ  significantly  from those
estimates.   Material   estimates  common  to  the  banking  industry  that  are
particularly susceptible to significant change in the near term include, but are
not  limited  to,  the  determination  of the  allowance  for loan  losses,  the
valuation of real estate  acquired in connection  with or in lieu of foreclosure
on loans,  the valuation  allowance for mortgage  servicing rights and valuation
allowances  associated  with the  realization  of deferred  tax assets which are
based on future taxable income.

Cash and Cash Equivalents
--------------------------------------------------------------------------------
Cash  equivalents  include  amounts  due from  banks  and  federal  funds  sold.
Generally, federal funds are sold for one-day periods.

Investment Securities

FLAG   classifies   its  securities  in  one  of  three   categories:   trading,
available-for-sale,  or  held-to-maturity.  There were no trading  securities at
December 31, 1997 and 1996. Securities held-to-maturity are those securities for
which FLAG has the ability and intent to hold to maturity.  All other securities
are classified as available-for-sale.

Available-for-sale  securities  are  recorded  at fair  value.  Held-to-maturity
securities are recorded at cost,  adjusted for the  amortization or accretion of
premiums or discounts.  Unrealized  holding gains and losses, net of the related
tax effect, on securities  available-for-sale are excluded from earnings and are
reported  as a  separate  component  of  stockholders'  equity  until  realized.
Transfers of  securities  between  categories  are recorded at fair value at the
date of transfer.

A decline  in the market  value of any  available  for sale or held to  maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.

Premiums and  discounts  are  amortized or accreted over the life of the related
security as an adjustment to the yield.  Realized  gains and losses are included
in  earnings  and the cost of  securities  sold are derived  using the  specific
identification method.



                                       35
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

--------------------------------------------------------------------------------
Summary of Significant Accounting Policies, continued

Other Investments
--------------------------------------------------------------------------------
Other  investments  include Federal Home Loan Bank ("FHLB") stock,  other equity
securities  with no  readily  determinable  fair  value and an  investment  in a
limited  partnership.  An  investment  in FHLB  stock is  required  by law for a
federally  insured  savings  bank.  FFSB  owns a  39.6%  interest  in a  limited
partnership,  which  invests in  multi-family  real estate and passes low income
housing credits to the investors.  FLAG recognizes these tax credits in the year
received. These investments are carried at cost, which approximates fair value.

Mortgage Loans Held for Sale
--------------------------------------------------------------------------------
Mortgage  loans  originated  and intended for sale in the  secondary  market are
carried at the lower of aggregate cost or market value. The amount by which cost
exceeds market value is accounted for as a valuation allowance. Changes, if any,
in the valuation  allowance are included in the determination of net earnings in
the period in which the change  occurs.  Gains and losses from the sale of loans
are determined using the specific identification method.

Loans, Loan Fees and Interest Income
--------------------------------------------------------------------------------
Loans that  management  has the intent and  ability to hold for the  foreseeable
future or until  maturity are  reported at their  outstanding  unpaid  principal
balances,  net of the  allowance  for  loan  losses,  deferred  fees or costs on
originated loans and unamortized premiums or discounts on purchased loans.

Loan fees and certain direct loan  origination  costs are deferred,  and the net
fee or cost is recognized in interest income using the  level-yield  method over
the contractual lives of the loans,  adjusted for estimated prepayments based on
the Banks' historical prepayment experience.  Commitment fees and costs relating
to commitments  whose  likelihood of exercise is remote are recognized  over the
commitment  period on a  straight-line  basis. If the commitment is subsequently
exercised during the commitment period, the remaining unamortized commitment fee
at the time of exercise is recognized over the life of the loan as an adjustment
to the yield.  Premiums and discounts on purchased  loans are amortized over the
remaining  lives of the loans using the  level-yield  method.  Fees arising from
servicing loans for others are recognized as earned.

FLAG considers a loan impaired when, based on current information and events, it
is probable that all amounts due according to the contractual  terms of the loan
agreement  will not be  collected.  Impaired  loans  are  measured  based on the
present value of expected future cash flows,  discounted at the loan's effective
interest rate or at the loan's observable market price, or the fair value of the
collateral of the loan if the loan is collateral dependent. Interest income from
impaired loans is recognized using a cash basis method of accounting  during the
time within that period in which the loans were impaired.

Leasing
--------------------------------------------------------------------------------
FFSB  originates  commercial and consumer  leases through its leasing  division.
Interest  income on leases is recorded on the accrual  basis and a provision for
possible losses on leases is recorded as a charge to earnings.

Allowance for Loan Losses
--------------------------------------------------------------------------------
The allowance for loan losses is established  through provisions for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management  believes  that the  collection  of the  principal is  unlikely.  The
allowance is an amount  which,  in  management's  judgment,  will be adequate to
absorb losses on existing loans that may become uncollectible.  The allowance is
established  through  consideration of such factors as changes in the nature and
volume of the  portfolio,  adequacy  of  collateral,  delinquency  trends,  loan
concentrations,  specific problem loans, and economic conditions that may affect
the borrower's ability to pay.

Management  believes  that the  allowance  for loan  losses is  adequate.  While
management  uses  available  information  to recognize  losses on loans,  future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions.  In addition,  various regulatory  agencies,  as an integral part of
their examination process, periodically review FLAG's allowance for loan losses.
Such agencies may require FLAG to recognize  additions to the allowance based on
their  judgments  about  information  available  to  them at the  time of  their
examination.



                                       36
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

   Summary of Significant Accounting Policies, continued

Other Real Estate Owned
--------------------------------------------------------------------------------
Real  estate  acquired  through  foreclosure  is  carried  at the  lower of cost
(defined as fair value at  foreclosure)  or fair value less  estimated  costs to
dispose.  Fair value is defined as the amount that is expected to be received in
a current  sale  between a willing  buyer and  seller  other than in a forced or
liquidation  sale.  Fair values at foreclosure  are based on appraisals.  Losses
arising from the  acquisition of foreclosed  properties are charged  against the
allowance  for loan losses.  Subsequent  writedowns  are provided by a charge to
operations  through the  allowance for losses on other real estate in the period
in which the need arises.

Premises and Equipment
--------------------------------------------------------------------------------
Premises and equipment are stated at cost less accumulated  depreciation.  Major
additions and improvements  are charged to the asset accounts while  maintenance
and  repairs  that do not  improve or extend the useful  lives of the assets are
expensed  currently.  When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any gain
or loss is reflected in earnings for the period.

Depreciation  expense  is  computed  using  the  straight-line  method  over the
following estimated useful lives:

     Buildings and improvements ............................. 15-40 years
     Furniture and equipment ................................  3-10 years

Mortgage Servicing Rights
--------------------------------------------------------------------------------
FLAG's mortgage  banking  division  accounts for mortgage  servicing rights as a
separate asset  regardless of whether the servicing  rights are acquired through
purchase  or  origination.   FLAG's  mortgage  servicing  rights  represent  the
unamortized  cost of  purchased  and  originated  contractual  rights to service
mortgages  for  others  in  exchange  for a  servicing  fee and  ancillary  loan
administration  income.  Mortgage servicing rights are amortized over the period
of estimated net servicing income and are  periodically  adjusted for actual and
anticipated prepayments of the underlying mortgage loans. Impairment analysis is
performed  quarterly after stratifying the rights by interest rate.  Impairment,
defined as the excess of the asset's carrying value over its current fair value,
is recognized through a valuation  allowance.  At December 31, 1997 and 1996, no
valuation allowances were required for FLAG's mortgage servicing rights.

FLAG recognized  approximately  $418,000 and $451,000 in servicing assets during
1997 and 1996,  respectively,  and recognized  amortization  expense relating to
servicing  assets of  approximately  $149,000 and $204,000 during 1997 and 1996,
respectively.  The risk  characteristics  that FLAG uses to stratify  recognized
servicing assets for purposes of measuring  impairment include the interest rate
and term of the underlying loans serviced.

Core Deposit Intangible
--------------------------------------------------------------------------------
During 1997,  Citizens  entered into a Purchase and  Assumption  agreement  with
Wachovia  Bank of Georgia,  N.A. to acquire  certain  loans,  deposits and other
liabilities of a branch in Montezuma, Georgia and a former branch in Oglethorpe,
Georgia  ("branch   acquisition")   for  a  net  purchase  price   approximating
$1,956,000.  The purchased core deposit  intangible and the associated  expenses
have been  capitalized and are being amortized  using the  straight-line  method
over the 15 year  estimated  average  life of the deposit  base  acquired and is
included as a  component  of other  assets.  Amortization  expense  approximated
$58,000 for the year ended December 31, 1997.

Income Taxes
--------------------------------------------------------------------------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective  tax bases.  Future tax
benefits, such as net operating loss carryforwards, are recognized to the extent
that  realization of such benefits is more likely than not.  Deferred tax assets
and  liabilities  are  measured  using  enacted  tax rates  expected to apply to
taxable income in the years in which the assets and  liabilities are expected to
be recovered or settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is  recognized  in income tax  expense  in the  period  that
includes the enactment date.


                                       37
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

   Summary of Significant Accounting Policies, continued

Income Taxes, continued
In the event the future tax  consequences  of differences  between the financial
reporting  bases and the tax bases of FLAG's assets and  liabilities  results in
deferred tax assets,  an evaluation of the  probability of being able to realize
the future benefits indicated by such assets is required.  A valuation allowance
is  provided  when it is more  likely  than not that some  portion or all of the
deferred tax asset will not be realized.  In assessing the  realizability of the
deferred tax assets,  management  considers the scheduled  reversals of deferred
tax liabilities, projected future taxable income, and tax planning strategies.

A deferred tax  liability is not  recognized  for portions of the  allowance for
loan  losses  for  income  tax  purposes  in excess of the  financial  statement
balance,  as  described in Note 7. Such a deferred  tax  liability  will only be
recognized  when it becomes  apparent  that  those  temporary  differences  will
reverse in the foreseeable future.

Net Earnings Per Common Share
--------------------------------------------------------------------------------
SFAS No. 128 "Earnings  Per Share" became  effective for FLAG for the year ended
December 31, 1997. This new standard specifies the computation, presentation and
disclosure  requirements  for  earnings  per share and is  designed  to simplify
previous  earnings per share  standards and to make  domestic and  international
practices  more  compatible.  Basic  earnings  per common share are based on the
weighted average number of common shares outstanding during the period while the
effects of potential common shares outstanding during the period are included in
diluted  earnings per share.  All  earnings  per common share  amounts have been
restated to conform to the provisions of SFAS No. 128.

SFAS No. 128 requires the  presentation of earnings per common share on the face
of the  statement  of  operations  with and  without  the  dilutive  effects  of
potential common stock issuances from  instruments such as options,  convertible
securities,  and  warrants.   Additionally,   the  new  statement  requires  the
reconciliation  of the amounts used in the  computation of both "basic  earnings
per share" and  "diluted  earnings  per share" for the years ended  December 31,
1997, 1996, and 1995 as follows:

For the Year EndedDecember 31, 1997         Net Earnings  Common Share Per Share
                                            (Numerator)   (Denominator)  Amount

Basic earnings per share ....................  3,748,698    5,166,857      .73
Effect of dilutive securities - stock options      -           29,364     (.01)
                                              --------------------------------
Diluted earnings per share .................. $3,748,698    5,196,221      .72
                                               =========    =========      ===

For the Year EndedDecember 31, 1996         Net Earnings  Common Share Per Share
                                             (Numerator)  (Denominator)  Amount

Basic earnings per share ....................  1,286,248    5,124,474     .25
Effect of dilutive securities - stock options        -         12,149       -
                                               --------------------------------
Diluted earnings per share ..................  1,286,248    5,136,623     .25
                                               =========    =========     ===

For the Year Ended December 31, 1995         Net Earnings Common Share Per Share
                                              (Numerator) (Denominator) Amount
Basic earnings per share ....................  $3,471,634   5,095,568     .68
Effect of dilutive securities - stock options        -        107,660    (.01)
                                               ---------------------------------
Diluted earnings per share ..................  $3,471,634   5,203,227     .67
                                                =========   =========     ===


                                       38
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

   Summary of Significant Accounting Policies, continued

Recent Accounting PronouncementsIn June 1997, the Financial Accounting Standards
Board issued SFAS No. 130,  "Reporting  Comprehensive  Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".  SFAS No.
130 establishes  standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose  financial statements.  SFAS
No.  131  specifies  the  presentation  and  disclosure  of  operating   segment
information  reported  in the  annual  report  and  interim  reports  issued  to
stockholders.  The provisions of both  statements are effective for fiscal years
beginning  after  December 15, 1997.  FLAG  believes  that the adoption of these
statements will not have a material impact on FLAG's financial position, results
of operations, or liquidity.

2.  Business Combinations

Effective March 30, 1998, FLAG acquired, for approximately 1.5 million shares of
its common stock,  all of the  outstanding  stock of Middle Georgia  Bankshares,
Inc., the holding company of the $129 million Citizens Bank,  located in Vienna,
Georgia.  Effective May 8, 1998, FLAG acquired, for approximately 597,000 shares
of its common stock all of the  outstanding  stock of Three  Rivers  Bancshares,
Inc.,  the holding  company of the $35 million Bank of Milan,  located in Milan,
Georgia.  These  acquisitions  were  accounted  for as poolings of interests and
accordingly,  the consolidated  financial  statements for all periods  presented
have been restated to include the  financial  position and results of operations
as if the combination had occurred on January 1, 1995.

The following is a reconciliation  of the amounts of net interest income and net
earnings previously reported with the restated amounts:

                                             1997        1996        1995
                                      -------------------------------------
Net interest income:
     FLAG, as previously reported ..  $   8,542,364   8,721,592   8,241,116
     Citizens ......................      5,623,192   4,667,851   4,529,064
     Milan .........................      1,831,118   1,367,223   1,162,964
                                         ----------------------------------

     As restated ...................  $  15,996,674  14,756,666  13,933,144
                                         ==========  ==========  ==========

Net earnings (loss):
     FLAG, as previously reported ..  $   2,033,114    (177,626)  2,026,007
     Citizens ......................      1,053,118   1,065,064   1,114,387
     Milan .........................        662,446     398,810     331,240
                                         ----------------------------------

     As restated ...................  $   3,748,698   1,286,248   3,471,634
                                          =========   =========   =========


                                       39
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued


3.         Investment Securities

Investment securities at December 31, 1997 and 1996 are summarized as follows:



                                            December 31, 1997
--------------------------------------------------------------------------------
                                               Gross        Gross     Estimated
                                Amortized    Unrealized   Unrealized     Fair
Securities Available-for-Sale     Cost         Gains        Losses      Value

U.S. Treasuries and
    agencies ...............   $16,732,501     94,820        2,532    16,824,789
State, county and municipals     6,318,621    121,973       35,859     6,404,735
Corporate debt securities ..       989,300     10,700         --       1,000,000
Equity securities ..........     1,637,584    125,370        1,817     1,761,137
Mortgage-backed securities .    29,782,954    214,379      176,613    29,820,720
Collateralized mortgage
    obligations ............    16,226,434     11,031      383,633    15,853,832
                                ----------     ------      -------    ----------
                               $71,687,394    578,273      600,454    71,665,213
                               ===========    =======      =======    ==========


                                              December 31, 1997
--------------------------------------------------------------------------------
                                                Gross        Gross     Estimated
                                 Amortized    Unrealized   Unrealized    Fair
Securities Held-to-Maturity        Cost        Gains         Losses      Value

State, county and municipals   $  350,136        9,950         --        360,086
Mortgage-backed securities .      103,140        1,160         --        104,300
Collateralized mortgage
    obligations ............    2,504,695        2,037       41,889    2,464,843
                                ---------        -----       ------    ---------
                               $2,957,971       13,147       41,889    2,929,229
                               ==========       ======       ======    =========


                                                    December 31, 1996
--------------------------------------------------------------------------------
                                             Gross        Gross       Estimated
                                Amortized  Unrealized   Unrealized     Fair
Securities Available-for-Sale     Cost       Gains        Losses       Value
U.S. Treasuries and
   agencies ................   $15,930,393     20,885      76,881   15,874,397
State, county and municipals     4,085,310     75,208      13,631    4,146,887
Corporate debt securities ..       980,790      9,100        --        989,890
Equity securities ..........     2,254,878      5,891       7,583    2,253,186
Mortgage-backed securities .    23,591,986    139,129     238,150   23,492,965
Collateralized mortgage
   obligations .............    17,132,514     17,921     445,807   16,704,628
                               -----------  ---------  ----------  -----------

                               $63,975,871    268,134     782,052   63,461,953
                               ===========  =========  ==========  ===========

                                       40
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

3.          Investment Securities, continued


                                              December 31, 1996
--------------------------------------------------------------------------------
                                                  Gross       Gross    Estimated
                                    Amortized   Unrealized  Unrealized   Fair
Securities Held-to-Maturity            Cost       Gains       Losses     Value

State, county and municipals ..... $   514,744    13,214        -        527,958
Mortgage-backed securities .......     117,547     1,396        -        118,943
Collaterlized mortgage
   obligations ...................   3,092,149     4,099    106,469    2,989,779
                                     -------------------------------------------

                                   $ 3,724,440    18,709    106,469    3,636,680
                                     =========    ======    =======    =========

The amortized cost and estimated fair value of securities available for sale and
securities held to maturity at December 31, 1997, by contractual  maturity,  are
shown below. Expected maturities may differ from contractual  maturities because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.

                                         Securities              Securities
                                     Available-for-Sale       Held-to-Maturity
                                   Amortized   Estimated   Amortized   Estimated
                                     Cost      Fair Value     Cost    Fair Value
U.S. Treasuries and agencies and
 State, county and municipals:
   Within 1 year .................$ 3,445,247   3,449,288      49,708     51,154
   1 to 5 years ..................  6,914,084   6,962,123     224,944    230,403
   5 to 10 years ................. 10,302,166  10,355,504      50,575     52,403
   After 10 years ................  2,389,625   2,462,609      24,909     26,126
                                    ---------   ---------      ------     ------

                                   23,051,122  23,229,524     350,136    360,086

Equity securities ................  1,637,584   1,761,137      -            -
Corporate debt securities ........    989,300   1,000,000      -            -
Mortgage-backed securities ....... 29,782,954  29,820,720     103,140    104,300
Collateralized mortgage
    obligations .................. 16,226,434  15,853,832   2,504,695  2,464,843
                                   ----------  ----------  ----------  ---------

                                  $71,687,394  71,665,213   2,957,971  2,929,229
                                   ==========  ==========   =========  =========


There were no sales of securities  held-to-maturity during 1997, 1996, and 1995.
Proceeds from sales of securities available-for-sale during 1997, 1996, and 1995
totaled approximately $50,693,000,  $32,263,000, and $33,854,000,  respectively.
Gross gains of approximately  $185,000,  $263,000, and $308,000 and gross losses
of approximately $14,000,  $31,000, and $46,000 were realized on those sales for
the years ended December 31, 1997, 1996, and 1995, respectively.

Securities and interest-bearing  deposits with a carrying value of approximately
$43,578,000  and $45,988,000 at December 31, 1997 and 1996,  respectively,  were
pledged to secure advances from FHLB, U.S. Government deposits, and other public
deposits.


                                       41
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

4.            Loans

Major  classifications  of loans at December 31, 1997 and 1996 are summarized as
follows:

                                                         1997         1996
                                                         ----         ----

Commercial, financial and agricultural .........   $   47,373,360   34,983,271
Real estate - construction ......................      11,767,846   10,538,752
Real estate - mortgage ..........................     198,565,814  170,614,612
Installment loans to individuals ................      15,854,704   22,087,539
Lease financings ................................       9,303,764    7,571,427
                                                        ---------    ---------

     Gross loans ................................     282,865,488  245,795,601

Less:
  Deferred loan costs (fees) - net ..............         236,092     (374,198)
  Allowance for loan losses .....................      (3,815,901)  (5,768,036)
                                                       ----------   ---------- 

                                                    $ 279,285,679  239,653,367
                                                    =============  ===========

The Banks concentrate  their lending  activities in the origination of permanent
residential  mortgage  loans,  commercial  mortgage loans,  agricultural  loans,
commercial  business loans, and consumer  installment loans. The majority of the
Banks' real estate loans are secured by real property  located in Troup,  Dooly,
Macon, Dodge, Telfair and surrounding counties in Georgia.

FLAG has recognized impaired loans of approximately  $10,579,000 and $15,495,000
at December 31, 1997 and 1996,  respectively,  with a total  allowance  for loan
losses  related  to these  loans of  $1,358,000  and  $4,159,000,  respectively.
Interest  income on impaired  loans of  approximately  $117,000 and $148,000 was
recognized for cash payments received in 1997 and 1996, respectively.

Activity in the allowance for loan losses is summarized as follows for the years
ended December 31, 1997, 1996, and 1995:

                                          1997           1996            1995
                                          ----           ----            ----

Balance at beginning of year ......   $ 5,768,036      2,592,080      2,411,662
Provisions charged to operations ..       765,000      3,743,529        774,500
Loans charged-off .................    (2,916,157)      (628,456)      (646,749)
Recoveries on loans previously
     charged-off ..................       199,022         60,883         52,667
                                      -----------    -----------    -----------

Balance at end of year ............   $ 3,815,901      5,768,036      2,592,080
                                      ===========    ===========    ===========


Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  financial statements.  Unpaid principal balances of these loans at
December  31,  1997  and  1996  approximate   $166,823,000   and   $247,963,000,
respectively.  Custodial  escrow  balances  maintained in  connection  with loan
servicing,  and included in demand  deposits,  were  approximately  $618,000 and
$710,000 at December 31, 1997 and 1996, respectively.

Mortgage  loans  secured  by  1-4  family  residences  totalling   approximately
$71,523,000  were pledged as  collateral  for  outstanding  FHLB  advances as of
December 31, 1997.



                                       42
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

5.            Premises and Equipment

Premises and equipment at December 31, 1997 and 1996 are summarized as follows:

                                                       1997              1996
                                                    ----------------------------
Land and land improvements .................       $ 1,498,806         1,379,570
Buildings and improvements .................         7,904,767         7,324,271
Furniture and equipment ....................         9,906,584         7,674,472
                                                                     -----------

                                                    19,310,157        16,378,313

Less accumulated depreciation ..............         7,961,314         6,850,752
                                                                     -----------

                                                   $11,348,843         9,527,561
                                                   ===========       ===========


Depreciation  expense  approximated  $1,320,000,  $1,139,000,  and  $891,000  at
December 31, 1997, 1996, and 1995, respectively

6.            Time Deposits

At December 31, 1997,  contractual maturities of time deposits are summarized as
follows:

     Year ending December 31,
--------------------------------------------------------------------------------
          1998                        $     160,906,809
          1999                               19,126,468
          2000                                9,462,305
          2001                                5,089,325
          2002 and thereafter                 7,202,538
          ----                                ---------
                                      $     201,787,445
                                      =================

7.            FHLB Advances

FHLB advances are collateralized by FHLB stock,  certain investment  securities,
and first  mortgage  loans.  Advances from the FHLB  outstanding at December 31,
1997, mature and bear fixed and variable interest rates as follows:


                    Year              Amount   Interest Rate
                    ----------   -----------   -------------
                          1998   $25,700,000   5.74% - 5.87%
                          2000     5,000,000           5.59%
                          2002     7,000,000           5.53%
                    Thereafter     5,937,494   5.23% - 6.75%
                                               -------------

                                 $43,637,494   5.23% - 6.75%
                                 ===========   ============= 



                                       43
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

8.            Income Taxes

The following is an analysis of the  components of income tax expense  (benefit)
for the years ended December 31, 1997, 1996, and 1995:

                                    1997         1996          1995
                               ----------------------------------------
         Current ............   $  800,588    1,384,083     1,822,564
         Deferred ...........      993,957   (1,037,538)     (115,896)
                                                           ----------

              Total provision   $1,794,545      346,545     1,706,668
                                ==========   ==========    ==========

The differences  between income tax expense (benefit) and the amount computed by
applying the statutory  federal income tax rate to earnings before taxes for the
years ended December 31, 1997, 1996, and 1995 are as follows:

                                          1997            1996             1995
                                    --------------------------------------------

Pretax income at statutory rate ...   $ 1,884,701        555,150      1,760,623
 Add (deduct):
   Tax-exempt interest income .....      (116,667)      (104,743)      (105,598)
   State income taxes, net of
     federal effect ...............       164,353        (34,123)       129,403
   Increase in cash surrender value
     of life insurance ............       (76,432)       (16,304)       (17,000)
   Other ..........................       (61,410)       (53,435)       (60,760)
                                          -------        -------        ------- 

                                      $ 1,794,545        346,545      1,706,668
                                      ===========    ===========    ===========

The following  summarizes the net deferred tax asset.  The deferred tax asset is
included as a component of other assets at December 31, 1997 and 1996.

                                                     1997       1996
                                                   ----------------------
        Deferred tax assets:
          Allowance for loan losses .........   $  939,085    2,047,499
          Allowance for other
            real estate owned ...............       21,208       41,818
          Net deferred loan fees ............         --         82,959
          Net operating loss carryforwards
            and credits .....................      397,021         --
          Unrealized loss on securities
            available-for-sale ..............       13,694      195,796
             Other ..........................       30,657       32,357
                                                             ----------

              Total gross deferred tax assets    1,401,665    2,400,429
                                                             ----------

        Deferred tax liabilities:
          Premises and equipment ............      361,564      341,109
          Net deferred loan fees ............      151,375         --
          Other .............................      189,250      183,885
                                                             ----------

             Total gross deferred tax
                liabilities .................      702,189      524,994
                                                ----------   ----------

              Net deferred tax asset ........   $  699,476    1,875,435
                                                ==========   ==========


                                       44
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued


8.            Income Taxes, continued

The Internal  Revenue  Code ("IRC") was amended  during 1996 and the IRC section
593  reserve  method  for loan  losses  for thrift  institutions  was  repealed.
Effective  January 1, 1996, FFSB now computes its tax bad debt reserve under the
rules of IRC section 585, which applies to commercial  banks.  In years prior to
1996, FFSB obtained tax bad debt deductions  approximating  $2 million in excess
of its financial  statement allowance for loan losses for which no provision for
federal  income tax was made.  These amounts were then subject to federal income
tax in future years pursuant to the prior IRC section 593 provisions if used for
purposes  other  than to absorb  bad debt  losses.  Effective  January  1, 1996,
approximately  $2 million of the excess  reserve is subject to recapture only if
FFSB ceases to qualify as a bank pursuant to the provisions of IRC section 585.

9.            Employee and Director Benefit Plans

Defined Contribution Plans
--------------------------------------------------------------------------------
FLAG has an established  retirement plan qualified  pursuant to Internal Revenue
Code section 401(k).  The plan allows  eligible  employees to defer a portion of
their income by making  contributions  into the plan on a pretax basis. The plan
provides a matching contribution based on a percentage of the amount contributed
by the  employee.  During the years  ended  1997,  1996,  and 1995,  the Company
contributed approximately $59,000, $49,000, and $48,000,  respectively,  to this
plan.  Citizens  also  sponsors  a 401(k)  plan  with  similar  terms.  Citizens
contributed  approximately $24,000,  $19,000 and $21,000 in 1997, 1996 and 1995,
respectively, to the plan.

FLAG has established a profit-sharing plan for which substantially all employees
are eligible. The Board of Directors makes discretionary contributions up to 15%
of eligible  compensation.  The plan allows  participants to direct up to 75% of
their account balance and/or contributions to be invested in the common stock of
FLAG.  The trustee of the plan is required to purchase  the FLAG stock at market
value and may not acquire  more than 25% of the issued and  outstanding  shares.
During the years ended  December  31,  1997,  1996,  and 1995,  FLAG  recognized
$196,000,  $185,000,  and  $182,000,  respectively,  in  expense  related to its
obligations under the plan.

Directors' Retirement Plan
--------------------------------------------------------------------------------
During 1995, FLAG initiated a defined contribution  postretirement  benefit plan
to provide  retirement  benefits to its Board of Directors  and to provide death
benefits for their  designated  beneficiaries.  Under this plan,  FLAG purchased
split-dollar whole life insurance  contracts on the lives of each Director.  The
increase in cash surrender  value of the  contracts,  less FFSB's cost of funds,
constitutes  FLAG's  contribution  to the  plan  each  year.  In the  event  the
insurance contracts fail to produce positive returns,  FLAG has no obligation to
contribute to the plan. At December 31, 1997 and 1996, the cash surrender  value
of the insurance contracts was approximately $2,114,000 and $1,911,000. Expenses
incurred  for benefits  were  approximately  $4,000 and $43,000  during 1997 and
1996,  respectively.  Citizens  sponsors a similar  plan  covering  its Board of
Directors.  At December 31, 1997 and 1996, the cash surrender value of Citizens'
insurance contracts was approximately  $1,358,000 and $1,283,000,  respectively,
and expenses incurred for benefits were approximately $13,000 and $11,000 during
1997 and 1996, respectively.

Defined Benefit Plan
--------------------------------------------------------------------------------
FLAG has a trusteed defined benefit pension plan which covers  substantially all
employees.  The  benefits  are  based  on years of  service  and the  employee's
compensation during the last five years of employment.  FLAG's policy is to fund
pension cost as actuarially  determined on an annual basis.  The plan is subject
to the Employee Retirement Income Security Act of 1974 (ERISA).  FLAG's 1997 and
1996 contribution exceeded the minimum funding requirements of ERISA.
Assets of the plan are invested primarily in a common trust fund.



                                       45
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

9.           Employee and Director Benefit Plans, continued

Defined Benefit Plan, continued
--------------------------------------------------------------------------------
The  following is a  reconciliation  of the funded  status of the plan using the
latest actuarial information applicable for each plan year:

                                                    1997          1996
                                                    ----         ------
Accumulated benefit obligation
  including vested benefits
  of $1,050,965 and $850,898 ................   $ 1,062,575        872,174
                                                ===========        =======

Projected benefit obligation for
  services rendered to date .................     1,635,798      1,342,926

Plan assets at fair value ...................     1,379,263      1,224,542
                                                  ---------      ---------
                                        
Projected benefit obligation in
  excess of plan assets .....................      (256,535)      (118,384)
Unrecognized transition obligation ..........        15,755         17,888
Unrecognized prior service cost .............       141,472        151,530
Unrecognized net loss .......................        (6,457)      (139,286)
                                                     ------       -------- 

    Accrued pension liability ...............   $  (105,765)       (88,252)
                                                ===========        ======= 

Net pension expense is summarized as follows:
                                             1997          1996          1995
                                          ---------     ---------     ---------

Service cost - benefits earned .......    $  93,676        71,238        84,835
Interest cost on projected
  benefit obligation .................      116,072        95,648        98,476
Actual return on plan assets .........      (99,024)      (85,327)      (68,476)
Net amortization .....................       12,191        12,191        21,401
                                          ---------     ---------     ---------

                                          $ 122,915        93,750       136,236
                                          =========     =========     =========


The  assumed  rate of return on assets was 8% for 1997,  1996 and 1995,  with an
assumed discount rate of 8% and an assumed rate of compensation increase of 4.5%
in 1997 and 5.5% in 1996 and 1995.  Prior service costs are generally  amortized
over a period of 17 years.


                                       46
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

9.          Employee and Director Benefit Plans, continued

Stock Option Plan
--------------------------------------------------------------------------------
FLAG has an employee stock  incentive plan and a director stock  incentive plan.
The plans  were  adopted  for the  benefit of  directors  and key  officers  and
employees  in order that they may  purchase  FLAG stock at a price  equal to the
fair market value on the date of grant.  A total of 301,875 shares were reserved
for possible  issuance  under the employee plan and 150,938 shares were reserved
under the director plan. The options  generally vest over a four-year period and
expire after ten years.

SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  became  effective
January 1, 1996. This statement  encourages,  but does not require,  entities to
compute  the fair value of options  at the date of grant and to  recognize  such
costs as  compensation  expense  immediately  if there is no  vesting  period or
ratably over the vesting period of the options. FLAG has chosen not to adopt the
cost recognition principles of this statement.  No compensation expense has been
recognized  in 1997,  1996,  or 1995  related  to the stock  option  plans.  Had
compensation  cost been  determined  based upon the fair value of the options at
the grant  dates  consistent  with the method of the new  statement,  FLAG'S net
earnings  and net  earnings  per share would have been  reduced to the pro forma
amounts indicated below.

                                                          1997           1996
                                                          ----           ----

Net earnings                    As reported ........ $  3,748,698      1,286,248
                                    Pro forma ...... $  3,679,211      1,272,893

Basic earnings per share        As reported ........ $     .73               .25
                                    Pro forma ...... $     .71               .25

Diluted earnings per share      As reported ........ $     .72               .25
                                    Pro forma ...... $     .71               .25


The fair  value of each  option  is  estimated  on the date of grant  using  the
Black-Scholes   options-pricing   model  with  the  following  weighted  average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of 2%
and 3%,  respectively;  volatility of .4269 and .2811,  respectively;  risk free
interest rate of 6% and an expected life of 5 years.



                                       47
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued


A summary of activity in these stock option plans is presented below:

                                1997               1996                1995
                         -------------------------------------------------------

                                 Weighted            Weighted          Weighted
                                  Average             Average           Average
                                  Option              Option            Option
                                  Price               Price             Price
                        Shares  Per Share   Shares   Per Share  Shares Per Share

Outstanding, beginning
  of year .............. 69,000   $ 6.68    240,311   $4.27    286,126  $ 4.16
Granted during
  the year ............. 42,000     7.58      9,000    9.00       -
Cancelled during
  the year ............. (1,875)    7.50          -             (5,625)   3.59
Exercised during
  the year               -                 (180,311    3.59    (40,190)   3.59
                        -------------------------------------------------------
Outstanding, end
  of year               109,125   $ 7.01     69,000   $6.68    240,311  $ 4.27
                        =======     ====     ======    ====    =======    ====

Number of shares
  Exercisable           109,125              69,000            240,311
                        =======              ======            =======



                                       48
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

9.          Employee and Director Benefit Plans, continued

The weighted  average  grant-date fair value of options granted in 1997 and 1996
was  $1.10 and  $1.15,  respectively.  For these  employee  and  director  stock
options,  options  outstanding  at December 31, 1997 are  exercisable  at option
prices ranging from $6.33 to $9.00 as presented in the table above. Such options
have a weighted average remaining contractual life of approximately 7.5 years as
of December 31, 1997.

10.        Stockholders' Equity

Shares of preferred  stock may be issued from time to time in one or more series
as  established by resolution of the Board of Directors of FLAG, up to a maximum
of 10,000,000 shares. Each resolution shall include the number of shares issued,
preferences, special rights, and limitations as determined by the Board.

On May 18, 1998,  FLAG declared a three for two stock split,  payable on June 3,
1998 to  shareholders of record on May 22, 1998. All per share amounts have been
restated to reflect this stock split as if it had occurred on January 1, 1995.

11.        Regulatory Matters

FLAG is subject to various regulatory capital  requirements  administered by the
federal  banking  agencies.  Failure to meet minimum  capital  requirements  can
initiate  certain  mandatory and possibly  additional  discretionary  actions by
regulators  that, if undertaken,  could have a direct  material effect on FLAG's
financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework for prompt  corrective  action,  FLAG and the Banks must meet specific
capital   guidelines   that  involve   quantitative   measures  of  the  assets,
liabilities,  and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components,  risk weightings, and
other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require FLAG to maintain  minimum amounts and ratios of total and Tier 1 capital
(as defined) to  risk-weighted  assets (as  defined),  and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997 and 1996, that FLAG meets all capital adequacy  requirements to which it is
subject.

As of December 31, 1997 and 1996, the Banks were categorized as well capitalized
or adequately  capitalized under the regulatory  framework for prompt corrective
action. To be categorized as well  capitalized,  the Banks must maintain minimum
total  risk-based,  Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the following table.  There are no conditions or events since that  notification
that management believes have changed the Banks' category.


                                       49
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

11.        Regulatory Matters, continued

The  Banks'  actual  capital  amounts  and  ratios as well as those of FLAG on a
consolidated basis are presented below.
<TABLE>
<CAPTION>

                                                                           To Be Well
                                                                         Capitalized Under
                                                     For Capital         Prompt Corrective
                                   Actual              Adequacy              Purposes
                              Amount     Ratio      Amount    Ratio      Amount       Ratio

  As of December 31, 1997:
   Total Capital (to Risk Weighted Assets)
<S>                       <C>             <C>     <C>            <C>                       
    FLAG consolidated ... $  37,546,000   13.2%   22,760,000  >/=8.0%         N/A       N/A
    FFSB ................ $  22,408,000   13.9%   12,871,000  >/=8.0%  16,089,000  >/=10.0%
    Citizens ............ $   9,326,000    9.4%    7,981,000  >/=8.0%   9,976,000  >/=10.0%
    Milan ............... $   3,077,000   13.8%    1,790,000  >/=8.0%   2,238,000  >/=10.0%

   Tier 1 Capital (to Risk Weighted Assets)
    FLAG consolidated ... $  33,968,000   11.9%   11,380,000  >/=4.0%         N/A       N/A
    FFSB ................ $  20,382,000   12.7%    6,436,000  >/=4.0%   9,653,000   >/=6.0%
    Citizens ............ $   8,053,000    8.1%    3,990,000  >/=4.0%   5,986,000   >/=6.0%
    Milan ............... $   2,798,000   12.5%      895,000  >/=4.0%   1,343,000   >/=6.0%

   Tier 1 Capital (to Average Assets)
    FLAG consolidated ... $  33,968,000    8.4%   16,091,000  >/=4.0%         N/A       N/A
    FFSB ................ $  20,382,000    8.3%    9,883,000  >/=4.0%  12,354,000   >/=5.0%
    Citizens ............ $   8,053,000    6.6%    4,881,000  >/=4.0%   6,101,000   >/=5.0%
    Milan ............... $   2,798,000    8.8%    1,270,000  >/=4.0%   1,587,000   >/=5.0%

As of December 31, 1996:
  Total Capital (to Risk Weighted Assets)
   FLAG consolidated .... $  36,229,000   14.5%   19,981,000  >/=8.0%         N/A       N/A
   FFSB ................. $  21,568,000   14.4%   12,000,000  >/=8.0%  15,000,000  >/=10.0%
   Citizens ............. $   9,875,000   12.4%    6,379,000  >/=8.0%   7,934,000  >/=10.0%
   Milan ................ $   2,524,000   12.7%    1,587,000  >/=8.0%   1,983,000  >/=10.0%

  Tier 1 Capital (to Risk Weighted Assets)
   FLAG consolidated .... $  33,115,000   13.3%    9,990,000  >/=4.0%         N/A       N/A
   FFSB ................. $  19,694,000   13.1%    6,000,000  >/=4.0%   9,000,000   >/=6.0%
   Citizens ............. $   8,876,000   11.1%    3,189,000  >/=4.0%   4,784,000   >/=6.0%
   Milan ................ $   2,283,000   11.5%      793,000  >/=4.0%   1,190,000   >/=6.0%

  Tier 1 Capital (to Average Assets)
   FLAG consolidated .... $  33,115,000    9.4%   13,454,000  >/=4.0%         N/A       N/A
   FFSB ................. $  19,694,000    8.8%    8,907,000  >/=4.0%  11,134,000   >/=5.0%
   Citizens ............. $   8,876,000   10.3%    3,441,000  >/=4.0%   4,302,000   >/=5.0%
   Milan ................ $   2,283,000    8.5%    1,078,000  >/=4.0%   1,348,000   >/=5.0%
</TABLE>

Banking  regulations  limit the  amount of  dividends  the Banks can pay to FLAG
without prior regulatory  approval.  These  limitations are a function of excess
regulatory  capital and net earnings in the year the  dividend is  declared.  In
1998, FFSB can pay dividends totaling approximately $3,160,000 plus net earnings
during 1998,  Citizens can pay dividends totaling  approximately  $607,000,  and
Milan can pay dividends totaling approximately $333,000.



                                       50
<PAGE>
                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued


12.   Commitments and Contingencies
--------------------------------------------------------------------------------
The Banks lease certain banking  facilities  under operating lease  arrangements
expiring  through 2000.  Approximate  future minimum  payments  required for all
operating leases with remaining terms in excess of one year are presented below:

         Year Ending December 31,
     ---------------------------------
          1998       $     77,000
          1999             74,000
          2000             65,000
     ---------------------------------
                     $    216,000
     =================================

Total rent expense was approximately $112,000, $71,000, and $66,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.

FLAG has a partially  self-insured  health care plan for the benefit of eligible
employees  and  their  eligible  dependents,   administered  by  a  third  party
administrator.  Claims in excess of $15,000 per person  annually,  but less than
$1,000,000,  are  covered by an  insurance  policy  with  Guarantee  Mutual Life
Company.  FLAG is  responsible  for any  claims  less than  $15,000  per  person
annually.

FLAG is a party to  financial  instruments  with  off-balance  sheet risk in the
normal  course of business to meet the  financing  needs of its customers and to
manage its cost of funds.  These financial  instruments  include  commitments to
extend  credit and standby  letters of credit.  These  instruments  involve,  to
varying degrees,  elements of credit risk in excess of the amounts recognized in
the  consolidated  statements of financial  condition.  The contract  amounts of
these instruments reflect the extent of involvement the Banks have in particular
classes of financial instruments.

Commitments  to  originate  first  mortgage  loans  and  to  extend  credit  are
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition  established  in  the  contract.   Commitments  generally  have  fixed
expiration dates or other termination  clauses and may require payment of a fee.
Since many of the  commitments  are expected to expire without being drawn upon,
the  total  commitment   amounts  do  not  necessarily   represent  future  cash
requirements.   The  Banks  evaluate  each  customer's   creditworthiness  on  a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Banks upon extension of credit,  is based on management's  credit evaluation
of  the  counterparty.   The  Banks'  loans  are  primarily   collateralized  by
residential and other real properties,  automobiles,  savings deposits, accounts
receivable, inventory, and equipment located in West-Central and Middle Georgia.

Standby  letters of credit are  written  conditional  commitments  issued by the
Banks to  guarantee  the  performance  of a  customer  to a third  party.  Those
guarantees  are  primarily  issued  to  support  public  and  private  borrowing
arrangements.  Most letters of credit extend for less than one year.  The credit
risk  involved  in  issuing  letters of credit is  essentially  the same as that
involved in extending loan facilities to customers.

FLAG's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the  contractual  amount of those  instruments.  The
Banks  use the same  credit  policies  in  making  commitments  and  conditional
obligations as it does for on-balance sheet instruments.  All standby letters of
credit are secured at December 31, 1997 and 1996.

                                                  1997               1996
                                                  ----               ----

Financial instruments whose contract
    amounts represent credit risk:
       Commitments to originate first
          mortgage loans                     $  17,609,000         9,932,000
       Commitments to extend credit          $  36,673,000        23,490,000
       Standby letters of credit             $   1,237,000         1,205,000



                                       51
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

13. Related Party Transactions
--------------------------------------------------------------------------------
At December 31, 1997,  deposits from directors,  executive  officers,  and their
related interests aggregated  approximately $206,000.  These deposits were taken
in the normal course of business at market interest rates.

The Banks conduct transactions with directors and executive officers,  including
companies  in which  they have  beneficial  interest,  in the  normal  course of
business.  It is the policy of the Banks that loan  transactions  with directors
and  executive  officers  be made on  substantially  the  same  terms  as  those
prevailing at the time for comparable loans to other persons. The following is a
summary of activity for related party loans for 1997.

     Balance at December 31, 1996               $     3,321,000
     New loans                                        3,835,000
     Repayments                                      (1,024,000)
                                                     -----------

     Balance at December 31, 1997               $     6,132,000
                                                      =========


14. Miscellaneous Operating Expenses
--------------------------------------------------------------------------------
Components  of other  operating  expenses in excess of 1% of interest  and other
income for the years ended December 31, 1997, 1996, and 1995 are as follows:

                                           1997         1996         1995
                                           ----         ----         ----

     Advertising                        $ 371,000      285,000      249,000
     Data processing expense            $ 579,000      598,000      586,000
     Federal deposit insurance premiums $ 199,000    1,670,000      552,000


                                       52
<PAGE>


                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

15.   FLAG Financial Corporation (Parent Company Only) Financial Information

                                 Balance Sheets

                           December 31, 1997 and 1996

                                     Assets
                                                       1997           1996
                                                       ----           ----

     Cash                                        $     919,188     1,374,516
     Investment securities available-for-sale        1,042,883       458,885
     Investment in subsidiaies                      33,856,585    31,048,129
     Equipment, net                                    536,282             -
     Other assets                                      837,891       724,928
                                                      --------       -------
                                                 $  37,192,829    33,606,458
                                                    ==========    ==========


                      Liabilities and Stockholders' Equity

     Accounts payable and
       accrued expenses                                422,444       192,340

     Stockholders' equity                           36,770,385    33,414,118
                                                    ----------    ----------
                                                 $  37,192,829    33,606,458
                                                    ==========    ==========



                                       53
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued


                             Statements of Earnings

              For the Years Ended December 31, 1997, 1996 and 1995

                                             1997          1996        1995
                                             ----          ----        ----
      Income:
        Dividend income from Banks     $  1,455,000    1,282,484     2,992,949
        Interest income                       7,357         -              167
        Other                               147,890      136,757       119,937
                                          ---------      -------       -------

          Total income                    1,610,247    1,419,241     3,113,053
                                          ---------    ---------     ---------

       Operating expenses:
        Interest expense                      1,333          347         9,692
        Other                               594,294      428,892       411,133
                                            -------      -------       -------
                                              
       Total operating expenses             595,627      429,239       420,825
                                            -------      -------       -------

        Earnings before income tax benefit
        and equity in undistributed
        earnings of Banks                 1,014,620      990,002     2,692,228

       Income tax b                         153,918       97,505        74,295
                                            -------       ------        ------

         Earnings before equity in
          undistributed earnings of Banks 1,168,538    1,087,507     2,766,523

       Equity in undistributed earnings
        of Banks                          2,580,160      198,741       705,111
                                          ---------      -------       -------
           Net earnings               $   3,748,698    1,286,248     3,471,634
                                          =========    =========     =========



                                       54
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(14) FLAG Financial  Corporation  (Parent Company Only)  Financial  Information,
                                   continued

                            Statements of Cash Flows

              For the Years Ended December 31, 1997, 1996 and 1995

                                             1997            1996          1995
                                        
Cash flows from operating activities:
  Net earnings                           $   3,748,698    1,286,248   3,471,634
  Adjustments to reconcile net
   earnings to net cash
   provided by operating activities:
     Amortization                               26,588       26,587      26,587
     Equity in undistributed earnings
       of Banks                             (2,580,160)    (198,741)   (705,111)
     Change in other assets
       and liabilities                          90,562     (151,474)     73,833
                                                ------      -------     --------

       Net cash provided by
        operating activities                 1,285,688      962,620   2,866,943
                                          ------------      -------    ---------

 Cash flows from investing activities:
   Purchase of securities
     available-for-sale                      (502,665)     (214,752)    (75,750)
   Proceeds from securities                         -        25,000            -
     available for sale
   Purchase of equipment                     (536,282)            -            -
                                            ---------     ---------    ---------

       Net cash used in investing activities     
          activities                       (1,038,947)    (189,752)     (75,750)
                                           ----------     ---------    ---------

Cash flows from financing activities:
  Repayment of long-term debt                       -      (80,000)    (480,000)
  Repurchase of common stock                        -            -   (1,633,272)
  Exercise of stock options                         -      630,629      124,398
  Issuance of common stock                          -       44,269       59,486
  Proceeds from sale of treasury
    stock of pooled entity                     54,450            -       20,055
  Purchase of treasury stock
    of pooled entity                                -      (20,933)            -
  Dividends paid                             (756,519)    (704,362)    (669,903)
                                           ----------     --------    ---------

       Net cash used in
        financing activities                 (702,069)    (130,397)  (2,579,236)
                                             ---------    ---------  -----------

Net change in cash                           (455,328)     642,471      211,957

Cash at beginning of year                   1,374,516      732,045      520,088
                                          -----------    ---------     --------

Cash at end of year                      $    919,188    1,374,516      732,045
                                              =======    =========      =======


                                       55
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

16. Fair Value of Financial Instruments
--------------------------------------------------------------------------------
FLAG is required to disclose fair value information about financial instruments,
whether or not  recognized  on the face of the  balance  sheet,  for which it is
practicable to estimate that value.  The  assumptions  used in the estimation of
the fair value of FLAG's financial  instruments are detailed below. Where quoted
prices are not available,  fair values are based on estimates  using  discounted
cash flows and other valuation techniques.  The use of discounted cash flows can
be significantly  affected by the assumptions used,  including the discount rate
and  estimates of future cash flows.  The  following  disclosures  should not be
considered a surrogate of the liquidation value of FLAG or its Banks, but rather
a  good-faith  estimate  of the  increase  or  decrease  in value  of  financial
instruments held by FLAG since purchase, origination, or issuance.

Cash and Cash Equivalents
--------------------------------------------------------------------------------
For cash, due from banks, federal funds sold and interest-bearing  deposits with
other banks the carrying amount is a reasonable estimate of fair value.

Securities Held-to-Maturity and Securities Available-for-Sale
--------------------------------------------------------------------------------
Fair values for securities  held-to-maturity  and securities  available-for-sale
are based on quoted market prices.

Other investments
--------------------------------------------------------------------------------
The carrying value of other investments approximates fair value.

Loans and Mortgage Loans Held for Sale
--------------------------------------------------------------------------------
The fair value of fixed rate loans is estimated by  discounting  the future cash
flows using the current  rates at which similar loans would be made to borrowers
with similar credit ratings.  For variable rate loans,  the carrying amount is a
reasonable estimate of fair value.

Mortgage Servicing Rights
--------------------------------------------------------------------------------
Fair value of mortgage  servicing rights is determined by estimating the present
value of the  future net  servicing  income,  on a  disaggregated  basis,  using
anticipated prepayment assumptions.

Cash Surrender Value of Life Insurance
--------------------------------------------------------------------------------
The carrying value of cash surrender value of life insurance  approximates  fair
value.

Deposits
--------------------------------------------------------------------------------
The fair value of demand deposits,  savings  accounts,  NOW accounts and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently  offered for deposits of similar
remaining maturities.

Federal Funds Purchased
--------------------------------------------------------------------------------
For federal funds  purchased,  the carrying  amount is a reasonable  estimate of
fair value.

FHLB Advances
--------------------------------------------------------------------------------
The fair value of the FHLB fixed rate borrowings are estimated using  discounted
cash flows based on the current incremental borrowing rates for similar types of
borrowing arrangements.

Commitments to Originate First Mortgage Loans,
Commitments to Extend Credit, and Standby Letters of Credit
--------------------------------------------------------------------------------
Because  commitments to originate  first mortgage  loans,  commitments to extend
credit and standby letters of credit are made using variable rates, the contract
value is a reasonable estimate of fair value.


                                       56
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

Fair Value of Financial Instruments, continued

Limitations
--------------------------------------------------------------------------------
Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  and  information  about  the  financial  instrument.  These
estimates do not reflect any premium or discount that could result from offering
for  sale  at  one  time  FLAG's  entire  holdings  of  a  particular  financial
instrument.  Because  no  market  exists  for a  significant  portion  of FLAG's
financial instruments,  fair value estimates are based on many judgments.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant  judgment and therefore cannot be determined with  precision.Changes
in assumptions could significantly affect the estimates.

Fair value  estimates are based on existing on and  off-balance  sheet financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial   instruments.   Significant  assets  and  liabilities  that  are  not
considered  financial   instruments  include  the  mortgage  banking  operation,
deferred  income  taxes,  and  premises  and  equipment.  In  addition,  the tax
ramifications  related to the realization of the unrealized gains and losses can
have a significant  effect on fair value  estimates and have not been considered
in the estimates.

The carrying amount and estimated fair values of FLAG's financial instruments at
December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                              1997                      1996
                                              ----                      ----
                                     Carrying     Estimated     Carrying     Estimated
                                      Amount     Fair Value      Amount      Fair Value
                                     ------      ----------      ------      ----------

Assets:
<S>                               <C>            <C>          <C>          <C>       
  Cash and cash equivalents ..... $ 19,250,755   19,250,755   14,107,593   14,107,593
   Interest-bearing deposits in
     other banks ................    3,168,353    3,168,353    1,327,108    1,327,108
   Investment securities ........   74,623,184   74,594,442   67,186,393   67,098,633
   Other investments ............    4,756,655    4,756,655    4,018,460    4,018,460
   Mortgage loans held for sale .    3,481,678    3,841,678    1,505,798    1,505,798
   Loans, net ...................  279,285,679  280,794,907  239,653,367  242,002,221
   Mortgage servicing rights ....    1,174,292    1,174,292    1,703,710    1,703,710
   Cash surrender value of life
     insurance ..................    3,864,612    3,864,612    3,544,386    3,544,386

Liabilities:
   Deposits .....................  324,852,043  326,263,733  294,420,453  295,412,619
   Federal funds purchased ......      170,000      170,000    2,210,000    2,210,000
   FHLB advances ................   43,637,494   42,927,033   17,370,833   17,370,833
Unrecognized financial
 instruments:
   Commitments to originate first
     mortgage loans .............   17,609,000   17,609,000    9,932,000    9,932,000
   Commitments to extend credit .   36,673,000   36,673,000   23,490,000   23,490,000
   Standby letters of credit ....    1,237,000    1,237,000    1,205,000    1,205,000
</TABLE>


                                       57
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                 AND FINANCIAL DISCLOSURE
                 ------------------------

         On February 20, 1997, the Company  engaged Porter Keadle Moore,  LLP as
independent  accountants  to audit the Company's  financial  statements  for the
fiscal year ending December 31, 1997, and elected not to renew the engagement of
the Company's previous independent accountants, Robinson, Grimes & Company, P.C.
No adverse  opinions or disclaimers of opinion were given by Robinson,  Grimes &
Company,  P.C.  during the fiscal years ended  December 31, 1995,  and 1996, nor
were  any of  their  opinions  qualified  as to  uncertainty,  audit  scope,  or
accounting  principle,  during the time Robinson,  Grimes & Company was engaged.
There were no  disagreements  or  "reportable  events" of any nature between the
Company  and  Robinson,  Grimes & Company,  P.C during  the fiscal  years  ended
December 31, 1995, 1996, and the subsequent  interim period through February 20,
1997,  as  described  in Items  304(a) (1) (iv) and (v) of  Regulation  S-K. The
decision was approved by the Company's Audit Committee and Board of Directors.



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------  --------------------------------------------------

         Information relating to the directors of the Company is set forth under
the captions  "Proposal 1 - Election of  Directors-Nominees"  and  "Proposal 1 -
Election of  Directors-Information  Regarding Nominees and Continuing Directors"
in the Company's  Proxy Statement for its 1998 Annual Meeting of Shareholders to
be held on May 13, 1998. Such  information is incorporated  herein by reference.
Pursuant  to  Instruction  3 to  Item  401(b)  of  Regulation  S-K  and  General
Instruction G(3) to Form 10-K, information relating to the executive officers of
the  Company  and the Bank is set  forth in Item 4(A) of this  report  under the
caption "Executive Officers of the Registrant." Information regarding compliance
with  Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended,  by
directors and executive  officers of the Company and the Bank is set forth under
the caption  "Compliance  with Section 16(a) of the  Securities  Exchange Act of
1934" in the Proxy Statement  referred to in Item 10 above.  Such information is
incorporated herein by reference.  To the Company's knowledge, no person was the
beneficial owner of more than 10% of the Company's common stock during 1997.

ITEM 11.  EXECUTIVE COMPENSATION
          ----------------------


         Information relating to executive compensation and the sale of stock to
certain  directors  is set forth  under the  captions  "Proposal 1 - Election of
Directors - Director  Compensation"  and "Executive  Compensation"  in the Proxy
Statement  referred  to  above.  Such  information  is  incorporated  herein  by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

         Information  regarding  ownership of the  Company's  common stock as of
December 31, 1997, by certain persons is set forth under the captions  "Voting -
Stock Ownership" and "Proposal 1 - Election of Directors - Information Regarding
Nominees and Continuing Directors" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

         Information   regarding  certain  transactions  between  the  Bank  and
affiliates of the Company and the Bank is set forth under the caption "Executive
Compensation - Loans to Management" in the Proxy  Statement  referred to in Item
10 above. Such information is incorporated herein by reference.


                                       58
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
          ------------------------------------------------------

(a)(1) and (2) The lists called for by this portion of Item 14 are  submitted as
a separate part of this report.

(a)(3) Exhibit List


Exhibit No.                        Description
-----------                        -----------

       2.1        Agreement  and Plan of  Merger,  dated July 30,  1998,  by and
                  between the Company and Empire Banking Corp.  (incorporated by
                  reference  herein from  Exhibit 2.1 to the  Company's  Current
                  Report on Form 8-K dated August 10, 1998).

       2.2        Agreement  and Plan of  Merger,  dated July 24,  1998,  by and
                  between  the  Company  and The  Brown  Bank  (incorporated  by
                  reference  herein from  Exhibit 2.1 to the  Company's  Current
                  Report on Form 8-K dated August 12, 1998).

       3.1            (i) Articles of Incorporation  of the Company,  as amended
                      through October 15, 1993 (Incorporated herein by reference
                      from Exhibit 3.1(i) to the Company's Annual Report on Form
                      10-K for the fiscal year ended December 31, 1993)

                  (ii)Bylaws of the Company, as amended through March 30, 1998

       4.1        Instruments  Defining the Rights of Security  Holders (See 
                  Articles of Incorporation  at Exhibit  3.1 hereto and  Bylaws
                  at Exhibit  3.2  hereto)  10.1

      10.1        Employment  Agreement between J. Daniel Speight,  Jr. and the
                  Company dated as of April 1, 1998*

      10.2        Employment  Agreement  between  John S. Holle and the Company
                  dated as of April 1, 1998*

      10.3        Employment Agreement between Ellison C. Rudd and the Company 
                  dated as of April 1, 1998*

      10.4        Employment Agreement between Patti S. Davis and the Company 
                  dated as of April 1, 1998*

      10.5        Separation Agreement between Charles D. Hinely and the Company
                  dated April 1, 1998*

      10.6        Separation Agreement between J. Preston Martin and the Company
                  dated May 13, 1998*

      10.7        Split Dollar Insurance Agreement between J. Daniel Speight,Jr.
                  and Citizens Bank dated November 2, 1992*

      10.8        Director Indexed Retirement Program for Citizens Bank dated 
                  January 13, 1995*

      10.9        Form of  Executive  Agreement  (pursuant  to Director  Indexed
                  Retirement  Program for Citizens Bank) for individuals  listed
                  on exhibit cover page*

      10.10       Form of Flexible  Premium Life  Insurance  Endorsement  Method
                  Split  Dollar Plan  Agreement  (pursuant  to Director  Indexed
                  Retirement  Program for Citizens Bank) for individuals  listed
                  on exhibit cover page*

                                       59
<PAGE>

      10.11       Tax Sharing  Agreement dated March 1, 1994, among the Company,
                  the Bank and Piedmont  Mortgage  Service,  Inc.  (Incorporated
                  herein by reference from Exhibit 10.1 to the Company's  Annual
                  Report on Form 10-K for the  fiscal  year ended  December  31,
                  1993)

      10.12       Director Indexed Fee  Continuation  Program for First Federal
                  Savings Bank of LaGrange effective February 3, 1995.

      10.13       Form of Director  Agreement  (pursuant to Director Indexed Fee
                  Construction   Program  for  First  Federal  Savings  Bank  of
                  LaGrange) for individuals listed on exhibit cover page*

      10.14       Form of Flexible  Premium Life  Insurance  Endorsement  Method
                  Split Dollar Plan Agreement  (pursuant to Director Indexed Fee
                  Continuation   Program  of  First  Federal   Savings  Bank  of
                  LaGrange) for individuals listed on exhibit cover page*

      10.15       Form of Indexed  Executive Salary  Continuation Plan Agreement
                  by and between  First  Federal  Savings  Bank of LaGrange  and
                  individuals listed on exhibit cover page*

      10.16       Form of Flexible  Premium Life  Insurance  Endorsement  Method
                  Split Dollar Plan  Agreement  (pursuant  to  Executive  Salary
                  Continuation  Plan for First Federal Savings Bank of LaGrange)
                  for individuals listed on exhibit cover page*

      10.17       Indexed Executive Salary Continuation Plan Agreement by and
                  between First Federal  Savings Bank of LaGrange and William F.
                  Holle, Jr. dated February 3, 1995*

      10.18       FLAG Financial Corporation 1994 Employees Stock Incentive Plan
                  (Incorporated  herein by  reference  from  Exhibit 10.6 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993)*

      10.19       FLAG Financial Corporation 1994 Directors Stock Incentive Plan
                  (Incorporated  herein by  reference  from  Exhibit 10.7 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993)*

      11          Statement regarding computation of per share earnings

      13          1997 Annual Report to Shareholders**+

      21          Subsidiaries

      27          Financial Data Schedule


       *          The indicated exhibit is a compensatory plan required to be
                  filed as an exhibit to this Form 10-K.

       **         Previously filed with the Company's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1997.


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<PAGE>

(b)    Reports on Form 8-K.

       Reports on Form 8-K filed during fourth quarter of 1997

        *     Current  Report on Form 8-K filed  October 28, 1997  regarding the
              execution  of  Agreement  and Plan of Merger with  Middle  Georgia
              Bankshares, Inc.

       Reports on Form 8-K filed since Year End 1997

        *     Current  Report  on Form 8-K  filed  January  28,  1998  regarding
              execution  of Letter of Intent on January  21, 1998 to merge Three
              Rivers Bancshares, Inc. with FLAG Financial Corporation

        *     Current  Report  on Form 8-K filed  February  18,  1998  regarding
              execution  of  Agreement  and Plan of  Merger  with  Three  Rivers
              Bancshares, Inc.

        *     Current  Report  on  Form  8-K  filed  April  15,  1998  regarding
              consummation  of merger with Middle  Georgia  Bankshares,  Inc. on
              March 31, 1998.

        *     Current Report on Form 8-K filed May 22, 1998 regarding
              declaration  on May 18,  1998 of a 3-for-2 stock split payable
              June 3, 1998

        *     Current Report on Form 8-K filed May 22, 1998 regarding  execution
              of Letter of Intent on May 14,  1998 to merge The Brown  Bank with
              FLAG Financial Corporation

        *     Current   Report  on  Form  8-K  filed  May  22,  1998   regarding
              consummation of merger with Three Rivers  Bancshares,  Inc. on May
              8, 1998

        *     Current Report on Form 8-K filed June 4, 1998 regarding  execution
              of  Letter of Intent  on May 28,  1998 to merge  Heart of  Georgia
              Bancshares, Inc. with FLAG Financial Corporation

        *     Current Report on Form 8-K filed June 4, 1998 regarding  execution
              of Letter of Intent  on June 1, 1998 to merge  Empire  Bank  Corp.
              with FLAG Financial Corporation

        *     Current Report on Form 8-K filed August 10, 1998 regarding the
              execution of Agreement and Plan of Merger with Empire Bank Corp.

        *     Current Report on Form 8-K filed August 12, 1998 regarding the 
              execution of Agreement and Plan of Merger with The Brown Bank

(c)    The  Exhibits  not  incorporated  herein by  reference  are  submitted as
       a separate part of this report.

(d)    Financial Statements Schedules:  None

------------------
+ Portions of the Company's 1997 Annual Report, as indicated in this report, are
incorporated herein by reference. Other than as noted herein, the Company's 1997
Annual Report is furnished to the Securities and Exchange  Commission solely for
its information and is not deemed to be "filed" with the Securities and Exchange
Commission  or  subject  to the  liabilities  of  Section  18 of the  Securities
Exchange Act of 1934, as amended.


                                       61
<PAGE>


                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                          FLAG FINANCIAL CORPORATION
                                            (Registrant)



Date:  August 12, 1998            By:     /s/ J. Daniel Speight, Jr.
                                          ---------------------------
                                          J. Daniel Speight, Jr.
                                          President and Chief Executive Officer





<PAGE>


                           FLAG FINANCIAL CORPORATION

                                Index of Exhibits

     The following exhibits are filed as part of or incorporated by reference in
this  report.  Where such  filing is made by  incorporation  by  reference  to a
previously filed registration  statement or report, such registration  statement
or report is identified in parentheses.

     Exhibit No.                        Description
     -----------                        -----------

       2.1        Agreement  and Plan of  Merger,  dated July 30,  1998,  by and
                  between the Company and Empire Banking Corp.  (incorporated by
                  reference  herein from  Exhibit 2.1 to the  Company's  Current
                  Report on Form 8-K dated August 10, 1998.)

       2.2        Agreement  and Plan of  Merger,  dated July 24,  1998,  by and
                  between  the  Company  and The  Brown  Bank  (incorporated  by
                  reference  herein from  Exhibit 2.1 to the  Company's  Current
                  Report on Form 8-K dated August 12, 1998.)

       3.1            (i) Articles of Incorporation  of the Company,  as amended
                      through October 15, 1993 (Incorporated herein by reference
                      from Exhibit 3.1(i) to the Company's Annual Report on Form
                      10-K for the fiscal year ended December 31, 1993)

                  (ii)Bylaws of the Company, as amended through March 30, 1998

       4.1        Instruments  Defining  the  Rights of  Security  Holders  (See
                  Articles of  Incorporation at Exhibit 3.1 hereto and Bylaws at
                  Exhibit 3.2 hereto)

       10.1       Employment  Agreement  between  J.  Daniel  Speight,  Jr.  and
                  the  Company  dated as of April 1, 1998*

       10.2       Employment Agreement between John S. Holle and the Company
                  dated as of April 1, 1998*

       10.3       Employment Agreement between Ellison C. Rudd and the Company 
                  dated as of April 1, 1998*

       10.4       Employment Agreement between Patti S. Davis and the Company 
                  dated as of April 1, 1998*

       10.5       Separation Agreement between Charles O. Hinely and the Company
                  dated April 1, 1998*

       10.6       Separation Agreement between J. Preston Martin and the Company
                  dated May 13, 1998*

       10.7       Split Dollar Insurance Agreement between J. Daniel Speight,Jr.
                  and Citizens Bank dated November 2, 1992*

       10.8       Director Indexed Retirement Program for Citizens Bank dated
                  January 13, 1995*

                                       62
<PAGE>

       10.9       Form of  Executive  Agreement  (pursuant  to Director  Indexed
                  Retirement  Program for Citizens Bank) for individuals  listed
                  on exhibit cover page*

       10.10      Form of Flexible  Premium Life  Insurance  Endorsement  Method
                  Split  Dollar Plan  Agreement  (pursuant  to Director  Indexed
                  Retirement  Program for Citizens Bank) for individuals  listed
                  on exhibit cover page*

       10.11      Tax Sharing  Agreement dated March 1, 1994, among the Company,
                  the Bank and Piedmont  Mortgage  Service,  Inc.  (Incorporated
                  herein by reference from Exhibit 10.1 to the Company's  Annual
                  Report on Form 10-K for the  fiscal  year ended  December  31,
                  1993)

       10.12      Director Indexed Fee Continuation Program for First Federal
                  Savings  Bank of LaGrange  effective February 3, 1995

       10.13      Form of Director  Agreement  (pursuant to Director Indexed Fee
                  Construction   Program  for  First  Federal  Savings  Bank  of
                  LaGrange) for individuals listed on exhibit cover page*

       10.14      Form of Flexible  Premium Life  Insurance  Endorsement  Method
                  Split Dollar Plan Agreement  (pursuant to Director Indexed Fee
                  Continuation   Program  of  First  Federal   Savings  Bank  of
                  LaGrange) for individuals listed on exhibit cover page*

       10.15      Form of Indexed  Executive Salary  Continuation Plan Agreement
                  by and between  First  Federal  Savings  Bank of LaGrange  and
                  individuals listed on exhibit cover page*

       10.16      Form of Flexible  Premium Life  Insurance  Endorsement  Method
                  Split Dollar Plan  Agreement  (pursuant  to  Executive  Salary
                  Continuation  Plan for First Federal Savings Bank of LaGrange)
                  for individuals listed on exhibit cover page*

       10.17      Indexed  Executive Salary  Continuation Plan Agreement by and 
                  between First Federal Savings Bank of LaGrange and William F.
                  Holle, Jr. dated February 3, 1995*

       10.18      FLAG Financial Corporation 1994 Employees Stock Incentive Plan
                  (Incorporated  herein by  reference  from  Exhibit 10.6 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993)*

       10.19      FLAG Financial Corporation 1994 Directors Stock Incentive Plan
                  (Incorporated  herein by  reference  from  Exhibit 10.7 to the
                  Company's Annual Report on Form 10-K for the fiscal year ended
                  December 31, 1993)*

       11         Statement regarding computation of per share earnings

       13         1997 Annual Report to Shareholders**

       21         Subsidiaries

       27         Financial Data Schedule

                                       63
<PAGE>


       *          The indicated exhibit is a compensatory plan required to be 
                  filed as an exhibit to this Form 10-K.

       **         Previously filed with the Company's Annual Report on Form 10-K
                  for fiscal year ended December 31, 1997.


                                       64
<PAGE>