ex13.htm

Guaranty Federal Bancshares, Inc.

2007 Annual Report

	Investor Information
Contents i President’s Message 1 Investor Information 2 Common Stock Prices & Dividends 4 Selected Consolidated Financial and Other Data 6 Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 Consolidated Financial Statements 49 Report of Independent Registered Public Accounting Firm 50 Notes Directors and Officers	ANNUAL MEETING OF STOCKHOLDERS: The Annual Meeting of Stockholders of the Company will be held Wednesday, May 28, 2008 at 6:00 p.m., local time, at the Clarion Hotel, 3333 S. Glenstone, Springfield, Missouri. ANNUAL REPORT ON FORM 10-K: Copies of the Company’s Annual Report on Form 10-K, including the financial statements, filed with the Securities and Exchange Commission are available without charge upon written request to: Lorene Thomas, Secretary Guaranty Federal Bancshares, Inc., 1341 W. Battlefield St., Springfield, MO 65807-4181 TRANSFER AGENT: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 STOCK TRADING INFORMATION: Over-the Counter Symbol: GFED SPECIAL LEGAL COUNSEL: Husch Blackwell Sanders LLP 901 St. Louis St., Suite 1900 Springfield, MO 65806
______________________________________ Bank History Fact 1: 1913 - St. Louis Savings moves to Springfield, MO and changes their name to Guaranty Federal Savings and Loan Association. ______________________________________	INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: BKD, LLP 901 St. Louis St. PO Box 1190 Springfield, MO 65801-1190 STOCKHOLDER AND FINANCIAL INFORMATION: Carter Peters, Executive Vice President, Chief Financial Officer 417-520-0235

Guaranty Federal Bancshares, Inc.

2007 Annual Report

		Common Stock Prices & Dividends

Bank History Fact 2: 1935 – Converts to a Federal charter and the name is changed to Guaranty Federal Savings and Loan Association.		The common stock of Guaranty Federal Bancshares, Inc. (the “Company”) is traded in the over-the-counter market and quoted on the NASDAQ National Market under the symbol “GFED”. As of March 18, 2008, there were approximately 1,572 stockholders. At that date the Company had 6,740,985 shares of common stock issued and 2,706,675 shares of common stock outstanding. During the year ended December 31, 2007, the Company paid dividends of (i) $0.17 per share on April 13, 2007, to stockholders of record as of April 3, 2007, (ii) $0.17 per share on July 13, 2007 to stockholders of record as of July 2, 2007, and (iii) $0.18 per share on October 15, 2007, to stockholders of record as of October 1, 2007, and also declared a cash dividend of $0.18 per share on December 21, 2007, which was paid on January 18, 2008, to stockholders of record on January 4, 2008. During the year ended December 31, 2006, the Company paid dividends of (i) $0.165 per share on April 14, 2006, to stockholders of record as of March 30, 2006, (ii) $0.165 per share on July 14, 2006 to stockholders of record as of July 3, 2006, and (iii) $0.17 per share on October 16, 2006, to stockholders of record as of October 2, 2006, and also declared a cash dividend of $0.17 per share on December 21, 2006, which was paid on January 19, 2007, to stockholders of record on January 5, 2007. The Company’s Board of Directors anticipates paying dividends on comparable dates during fiscal year ended December 31, 2008 to the payment dates during the fiscal year ended December 31, 2007. Such future dividends, if any, will be at the discretion of the Company’s Board of Directors and will depend on, among other things, the Company’s results of operations, cash requirements and surplus, financial condition and other factors that the Company’s Board of Directors may consider relevant. The table below reflects the range of common stock high and low closing prices per the NASDAQ Stock Market by quarter for the years ended December 31, 2007 and 2006.

Bank History Fact 3: 1979 – Guaranty Federal opens first branch office. 1987 – Guaranty Federal opens second branch office.

Bank History Fact 4: 1995 – Reorganizes and issues stock in connection with formation of MHC. Forms federally chartered stock savings bank.

	Year ended				Year ended
	December 31, 2007				December 31, 2006
	High		Low		High		Low
Quarter ended:
March 31	$	29.85		28.43		30.24		27.68
June 30		30.21		28.75		29.71		27.80
September 30		30.42		29.00		29.40		27.51
December 31		30.25		27.05		28.75		27.89

Guaranty Federal Bancshares, Inc.

2007 Annual Report

Bank History Fact 5:

2003 – The bank applies

for State Charter and

changes name to

Guaranty Bank.

Set forth below is a stock performance graph comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total stockholder return on stocks included in The Nasdaq – Total U.S. Index and (b) the cumulative total stockholder return on stocks included in The Nasdaq Bank Index. All three investment comparisons assume the investment of $100 as of the close of business on December 31, 2002 and the hypothetical value of that investment as of the Company’s fiscal years ended December 31, 2003, 2004, 2005, 2006, and 2007, assuming that all dividends were reinvested. The graph reflects the historical performance of the Common Stock, and, as a result, may not be indicative of possible future performance of the Common Stock. The data used to compile this graph was obtained from NASDAQ.

			Period Ending
Index	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
Guaranty Federal Bancshares, Inc.		100.00		128.26		165.55		197.22		207.74		212.72
NASDAQ – Total US		100.00		149.52		162.72		166.18		182.57		197.98
NASDAQ Bank Index		100.00		128.64		147.22		143.82		161.41		127.92

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

The following tables include certain information concerning the financial position and results of operations of Guaranty Federal Bancshares, Inc. (including consolidated data from operations of subsidiaries) as of the dates indicated. Dollar amounts are expressed in thousands except per share data.

Summary Balance Sheet	As of December 31,
	2007		2006		2005		2004		2003
ASSETS
Cash and cash equivalents	$	12,046		14,881		20,506		15,896		22,657
Investment securities		15,385		8,669		7,702		21,553		16,731
Loans receivable, net		516,242		480,269		435,528		392,333		332,130
Accrued interest receivable		3,323		2,910		2,089		1,570		1,306
Prepaids and other assets		8,612		10,075		7,696		1,977		7,351
Foreclosed assets		727		173		27		78		6
Premises and equipment		9,442		7,868		7,453		7,189		6,576
	$	565,778		524,845		481,001		440,596		386,757
LIABILITIES
Deposits	$	418,191		352,230		320,059		296,388		237,131
Federal Home Loan Bank advances		76,086		108,000		100,000		100,000		108,837
Subordinated debentures		15,465		15,465		15,465		-		-
Other liabilities		13,349		4,251		3,385		3,435		2,811
		523,091		479,946		438,909		399,823		348,779

STOCKHOLDERS' EQUITY		42,687		44,899		42,092		40,773		37,978
	$	565,778		524,845		481,001		440,596		386,757

Supplemental Data	As of December 31,
	2007		2006		2005		2004		2003
Number of full-service offices		8		8		7		7		9
Cash dividends per share	$	0.70		0.67		0.65		0.63		0.61

Guaranty Federal Bancshares, Inc.

Selected Consolidated Financial and Other Data

Summary Statement of Income	Years ended December 31,
	2007		2006		2005		2004

Interest income	$	37,972		35,204		27,413		20,539
Interest expense		20,519		17,386		11,860		8,446
Net interest income		17,453		17,818		15,553		12,093
Provision for loan losses		840		750		945		864
Net interest income after provision
for loan losses		16,613		17,068		14,608		11,229
Noninterest income		4,729		3,660		3,468		3,616
Noninterest expense		11,842		10,177		8,670		8,248
Income before income taxes		9,500		10,551		9,406		6,597
Provision for income taxes		3,400		4,042		3,507		2,313

Net income	$	6,100		6,509		5,899		4,284

Basic	$	2.25		2.34		2.12		1.53
Diluted	$	2.19		2.25		2.03		1.47

	Six months ended
	December 31,
	2003 (1)		2002 (1)
			(Unaudited)
Interest income	$	9,846		11,290
Interest expense		4,491		6,086
Net interest income		5,355		5,204
Provision for loan losses		1,162		205
Net interest income after provision
for loan losses		4,193		4,999
Noninterest income		2,089		1,752
Noninterest expense		3,994		4,060
Income before income taxes		2,288		2,691
Provision for income taxes		788		927

Net income	$	1,500		1,764

Basic	$	0.54		0.63
Diluted	$	0.52		0.62

(1) In 2003, the Company determined to change its fiscal year end from June 30 to a calendar year end of December 31. As a result, the Company reported a six-month transition period ended December 31, 2003 in order to change to this new calendar year end.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

GENERAL

Guaranty Federal Bancshares, Inc. (the “Company”) is a Delaware corporation organized on December 30, 1997 for the purpose of becoming the holding company of Guaranty Federal Savings Bank, a federal savings bank (the “Bank”). The Bank is a wholly-owned subsidiary of the Company.

In April 1995, Guaranty Federal Savings & Loan Association reorganized from a federally chartered mutual savings and loan association into a mutual holding company, Guaranty Federal Bancshares, M. H. C. (the “MHC”). Concurrent with the reorganization, the Bank was chartered. In December 1997, the Company completed the conversion and reorganization of the Bank and the former MHC by selling common stock to depositors of the Bank and a benefit plan of the Bank. In addition, all shares of common stock of the Bank held by public stockholders were exchanged for shares of common stock of the Company.

On June 27, 2003, the Bank converted to a state-chartered trust company with banking powers in Missouri, and the Company became a one-bank holding company. The name of the Bank was changed from Guaranty Federal Savings Bank to Guaranty Bank.

The primary activity of the Company is to oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. For this reason, unless otherwise specified, references to the Company include the operations of the Bank. The Company’s principal business consists of attracting deposits from the general public and using such deposits to originate mortgage loans secured by one- to four-family residences, multi-family, construction and commercial real estate loans and consumer and business loans. The Company also uses these funds to purchase mortgage-backed securities, US government and agency obligations, and other permissible securities. When cash outflows exceed inflows, the Company uses borrowings and brokered deposits as additional financing sources.

The Company derives revenues principally from interest earned on loans and investments and, to a lesser extent, from fees charged for services. General economic conditions and policies of the financial institution regulatory agencies, including the Missouri Division of Finance and the Federal Deposit Insurance Corporation (“FDIC”) significantly influence the Company’s operations. Interest rates on competing investments and general market interest rates influence the Company’s cost of funds. Lending activities are affected by the interest rates at which such financing may be offered. The Company intends to focus on one- to four-family residential, consumer, and commercial real estate lending throughout southwestern Missouri.

The Company has two wholly-owned subsidiaries other than the Bank, its principal subsidiary: (i) Guaranty Statutory Trust I, a Delaware statutory trust (“Trust I”); and (ii) Guaranty Statutory Trust II, a Delaware statutory trust. These Trusts were formed in December 2005 for the exclusive purpose of issuing trust preferred securities to acquire junior subordinated debentures issued by the Company. The Company’s banking operation conducted through the Bank is the Company’s only reportable segment. See also the discussion contained in the section captioned “Segment Information” in Note 1 of the Notes to Consolidated Financial Statements in this report.

The discussion set forth below, and in any other portion of this report, may contain forward-looking statements. Such statements are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this report. When used in this document, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time including the risk factors of the Company set forth in Item 1A. of the Company’s Form 10-K.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

FINANCIAL CONDITION

From December 31, 2006 to December 31, 2007, the Company’s total assets increased $40,932,985 (8%) to $565,777,980, liabilities increased $43,145,568 (9%) to $523,091,320, and stockholders' equity decreased $2,212,583 (5%) to $42,686,660. The ratio of stockholders’ equity to total assets decreased to 7.5% during this period, compared to 8.6% as of December 31, 2006.

From December 31, 2006 to December 31, 2007, securities available-for-sale increased $6,823,617 (86%). The increase is primarily due to purchases of $11,926,215, offset by maturities of $2,580,000 and the sale of 10,000 shares of the Federal Home Loan Mortgage Corporation (“FHLMC”) stock. The Company currently owns 26,600 shares of FHLMC stock with an amortized cost of $26,057 in the securities available-for-sale category. As of December 31, 2007, the gross unrealized gain on the stock is $880,205, a decrease of $1,569,088 from the gross unrealized gain at December 31, 2006, which was due to the sale of 10,000 shares during the year and a decrease in the stock price from $67.90 per share at December 31, 2006 to $34.07 at December 31, 2007.

From December 31, 2006 to December 31, 2007, securities held-to-maturity decreased $108,250 (14%) to $654,775 due to repayments received during the period. Stock of the Federal Home Loan Bank of Des Moines (“FHLB”) was decreased by $1,368,000 (25%) to $4,014,700 due to the reductions in stock necessary to meet FHLB borrowing requirements. The Bank is required to own stock in the FHLB equal to 0.12% of assets plus 4.45% of advances.

From December 31, 2006 to December 31, 2007, net loans receivable increased by $36,835,513 (8%) to $514,100,035. During this period, permanent loans secured by both owner and non-owner occupied one to four unit residential real estate decreased $3,627,329 (4%), multi-family permanent loans decreased $8,418,642 (17%), construction loans increased $5,757,244 (7%), permanent loans secured by commercial real estate increased $20,194,156 (13%), commercial loans increased $21,350,061 (26%), and installment loans increased $1,868,202 (8%). During this period the Company continued to increase its emphasis on commercial lending, while selling the majority of conforming single family loan production on the secondary market. Loans sold on the secondary market are sold servicing released, whereby the third party who purchases the loan provides the servicing.

From December 31, 2006 to December 31, 2007, loans past due 90 days or more increased $4,202,056 to $6,215,533 (1.21% of net loans). As of December 31, 2007, management considers loans totaling $7,254,334 as impaired with a related allowance for loan losses of $415,000. One commercial real estate loan and various one to four residential loans comprise the majority of the impaired loans. The Bank recognizes interest income on impaired loans as payments are received. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.

From December 31, 2006 to December 31, 2007, the allowance for loan losses increased $179,446 to $5,962,923. In addition to the provision for loan loss of $840,000 recorded by the Company during the year ended December 31, 2007, loan charge-offs exceeded recoveries by $660,554 for the twelve months ended December 31, 2007. The allowance for loan losses as of December 31, 2007 and December 31, 2006 was 1.16% and 1.21% of net loans outstanding, respectively. As of December 31, 2007, the allowance for loan losses was 82% of impaired loans versus 192% as of December 31, 2006. The allowance as a percentage of impaired loans declined primarily due to one impaired commercial real estate loan that was placed on non-accrual status in April 2007.

As of December 31, 2007, foreclosed assets held for sale consisted primarily of two single family residences and single family patio homes and lots from one small developer.

From December 31, 2006 to December 31, 2007, premises and equipment increased $1,574,541 (20%) to $9,442,350 due primarily to two land purchases for future branch and operations sites.

From December 31, 2006 to December 31, 2007, deposits increased $65,961,648 (19%) to $418,191,284. During this period, transaction accounts increased by $12,779,497 (10%) to 34% of total deposits and certificates of deposit increased by $53,182,151 (24%) to $276,418,573. Included in the certificates of deposit total is $4,381,699 in deposits placed by brokers, a decrease from $29,146,308 as of December 31, 2006.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

From December 31, 2006 to December 31, 2007, the Company’s borrowings from the Federal Home Loan Bank (“FHLB”) decreased $31,914,000 to $76,086,000, due to repayments exceeding new advances. The Company was able to make such repayments through the funds generated from deposit growth.

Securities sold under agreements to repurchase increased $8,146,074 (478%) from $1,703,221 as of December 31, 2006, to $9,849,295 as of December 31, 2007. due to a floating rate leveraged transaction completed during the third quarter.

As of December 31, 2007 and 2006, the Company had $15,465,000 of junior subordinated debentures that were comprised of $5,155,000 issued to Guaranty Statutory Trust I and $10,310,000 issued to Guaranty Statutory Trust II. On December 15, 2005, the Company completed an offering of $15 million of trust preferred securities (”Trust Securities”). The Company formed Guaranty Statutory Trust I and Guaranty Statutory Trust II as wholly-owned subsidiaries and Delaware statutory trusts for the purpose of issuing the Trust Securities. The proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust I, together with the proceeds of the Trust’s sale of its common securities issued to the Company, were used by the Trust to purchase 30-year junior subordinated deferrable interest debentures from the Company in the principal amount of $5,155,000 (“Trust I Debentures”). The proceeds of the sale of Trust Securities issued by Guaranty Statutory Trust II, together with the proceeds of the Trust’s sale of its common securities issued to the Company, were used by the Trust to purchase 30-year junior subordinated deferrable interest debentures from the Company in the principal amount of $10,310,000 (“Trust II Debentures”, and collectively with the Trust I Debentures, the “Debentures”). Both the Trust I Debentures and the Trust II Debentures were issued pursuant to the terms of Indentures dated December 15, 2005 by and between the Company and Wilmington Trust Company, as trustee. The Trust I Debentures bear interest at a fixed rate of 6.92%, payable quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47% for 5 years, payable quarterly, after issuance and thereafter at a floating rate equal to the three month LIBOR plus 1.45%. The interest payments by the Company to the Trusts will be used to pay the dividends payable by the Trusts to the holders of the Trust Securities.

The Debentures mature on February 23, 2036. Subject to prior approval by the Federal Reserve Board, the Debentures and the Trust Securities are each callable by the Company or the Trusts, respectively and as applicable, at its option after five years from issuance, and sooner in the case of a special redemption at a special redemption price ranging up to 103.2% of the principal amount thereof, and upon the occurrence of certain events, such as a change in the regulatory capital treatment of the Trust Securities, either Trust being deemed an investment company or the occurrence of certain adverse tax events. In addition, the Company and the Trusts may defer interest and dividend payments, respectively, for up to five consecutive years without resulting in a default. An event of default may occur if the Company declares bankruptcy, fails to make the required payments within 30 days or breaches certain covenants under the Debentures. The Debentures are subordinated to the prior payment of any other indebtedness of the Company.

The Company invested the proceeds of the sale of the Trust Securities in its banking subsidiary, where the funds were used primarily to restructure the investment portfolio, fund loan growth and repay FHLB advances.

Stockholders’ equity (including unrealized appreciation on securities available-for-sale, net of tax) decreased $2,212,583 (5%) to $42,686,660 as of December 31, 2007. Net income for the year ended December 31, 2007 exceeded cash dividends paid or declared by $4,219,443. The Company repurchased 252,799 shares as treasury stock at a cost of $7,479,118, at an average price of $29.59 per share. As of December 31, 2007, 260,678 shares remain to be repurchased under the repurchase plan announced August 20, 2007. The decrease in unrealized appreciation on securities available-for-sale, net of tax, decreased stockholders’ equity by $1,030,781. Stockholders’ equity also increased as a result of exercises of stock options to purchase the Company’s Common Stock and the release of shares of the Company’s Common Stock held by the Bank sponsored Employee Stock Ownership Plan. On a per share basis, stockholders’ equity increased $.07 from $16.30 as of December 31, 2006 to $16.37 as of December 31, 2007.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

The following table shows the balances as of December 31, 2007 of various categories of interest-earning assets and interest-bearing liabilities and the corresponding yields and costs, and, for the periods indicated: (1) the average balances of various categories of interest-earning assets and interest-bearing liabilities, (2) the total interest earned or paid thereon, and (3) the resulting weighted average yields and costs. In addition, the table shows the Company’s rate spreads and net yields. Average balances are based on daily balances. Tax-free income is not material; accordingly, interest income and related average yields have not been calculated on a tax equivalent basis. Average loan balances include non-accrual loans. Dollar amounts are expressed in thousands.

	As of						Year Ended								Year Ended								Year Ended
	December 31, 2007						December 31, 2007								December 31, 2006								December 31, 2005

	Balance			Yield / Cost			Average Balance			Interest		Yield / Cost			Average Balance			Interest		Yield / Cost			Average Balance			Interest		Yield / Cost
ASSETS
Interest-earning:
Loans	$	516,242			7.23	%		482,806			37,114		7.69	%		452,348			34,500		7.63	%		419,552			26,682		6.36	%
Investment securities		15,385			5.30	%		10,688			537		5.02	%		7,261			451		6.21	%		9,905			432		4.36	%
Other assets		4,976			4.69	%		7,372			322		4.37	%		9,843			253		2.57	%		11,681			299		2.56	%
Total interest-earning		536,603			7.15	%		500,866			37,973		7.58	%		469,452			35,204		7.50	%		441,138			27,413		6.21	%
Noninterest-earning		29,175						18,730								20,914								20,205
	$	565,778						519,596								490,366								461,343

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing:
Savings accounts	$	12,217			2.11	%		13,474			320		2.37	%	$	14,830			365		2.46	%	$	14,931			201		1.35	%
Transaction accounts		100,831			2.12	%		100,689			2,940		2.92	%		78,238			1,710		2.19	%		84,776			1,300		1.53	%
Certificates of deposit		276,419			5.10	%		246,785			12,600		5.11	%		195,772			8,448		4.32	%		178,301			5,788		3.25	%
FHLB advances		76,086			4.37	%		65,575			3,470		5.29	%		110,810			5,722		5.16	%		111,104			4,494		4.04	%
Subordinated debentures		15,465			6.62	%		15,465			1,024		6.62	%		15,465			1,028		6.65	%		701			47		6.70	%
Other borrowed funds		10,567			4.23	%		3,691			165		4.47	%		3,947			114		2.89	%		1,395			31		2.22	%
Total interest-bearing		491,585			4.33	%		445,679			20,519		4.60	%		419,062			17,387		4.15	%		391,208			11,861		3.03	%
Noninterest-bearing		31,506						28,401								26,898								28,374
Total liabilities		523,091						474,080								445,960								419,582
Stockholders' equity		42,687						45,516								44,406								41,761
	$	565,778						519,596							$	490,366							$	461,343
Net earning balance	$	45,018						55,187							$	50,390							$	49,930
Earning yield less costing rate					2.82	%							2.98	%							3.35	%							3.18	%
Net interest income, and
net yield spread on
interest-earning assets											17,454		3.48	%					17,817		3.80	%					15,552		3.53	%
Ratio of interest-earning assets to
interest-bearing liabilities		109	%					112	%							112	%							113	%

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

The following table sets forth information regarding changes in interest income and interest expense for the periods indicated resulting from changes in average balances and average rates shown in the previous table. For each category of interest-earning assets and interest-bearing liabilities information is provided with respect to changes attributable to: (i) changes in balance (change in balance multiplied by the old rate), (ii) changes in interest rates (change in rate multiplied by the old balance); and (iii) the combined effect of changes in balance and interest rates (change in balance multiplied by change in rate). Dollar amounts are expressed in thousands.

	Year ended												Year ended
	December 31, 2007 versus December 31, 2006												December 31, 2006 versus December 31, 2005
	Average Balance			Interest Rate			Rate & Balance			Total			Average Balance			Interest Rate		Rate & Balance			Total
Interest income:
Loans	$	2,323			273			18			2,614			2,075			5,318		416			7,809
Investment securities		213			(86	)		(41	)		86			(115	)		183		(49	)		19
Other assets		(64	)		177			(44	)		69			(47	)		1		-			(46	)
Net change in interest income		2,472			364			(67	)		2,769			1,913			5,502		367			7,782

Interest expense:
Savings accounts		(33	)		(13	)		1			(45	)		(2	)		167		(1	)		164
Transaction accounts		491			574			165			1,230			(100	)		553		(43	)		410
Certificates of deposit		2,201			1,548			403			4,152			567			1,907		187			2,661
FHLB advances		(2,336	)		142			(58	)		(2,252	)		(12	)		1,243		(3	)		1,228
Subordinated debentures		-			(4	)		-			(4	)		990			-		(9	)		981
Other borrowed funds		(7	)		62			(4	)		51			57			9		17			83
Net change in interest expense		316			2,309			507			3,132			1,500			3,879		148			5,527
Change in net interest income	$	2,156			(1,945	)		(574	)		(363	)	$	413			1,623		219			2,255

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006

	Average for the Year Shown
	Prime			Ten –Year Treasury			One-Year Treasury
December 31, 2007		8.05	%		4.63	%		4.53	%
December 31, 2006		7.96	%		4.80	%		4.94	%
Changes in rates		0.09	%		-0.17	%		-0.41	%

Interest Rates. The Bank charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates. The above table sets forth the weekly average interest rates for the 52 weeks ending December 31, 2007 and December 31, 2006 as reported by the Federal Reserve. The Bank typically indexes its adjustable rate commercial loans to prime and its adjustable rate mortgage loans to the one-year treasury rate. The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage loans.

Rates trended upward during 2006 as the Federal Reserve Open Market Committee (“FOMC”) continued its increase in the discount rates by 100 basis points from January through June. As of year-end 2006 the prime rate was 8.25%. Rates were steady for the first eight months of 2007, but due to several economic factors, the FOMC began decreasing the discount rate at its September 2007 meeting and continued for each meeting thereafter. As of year-end 2007 the prime rate was 7.25%.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Interest Income. Total interest income increased $2,768,092 (8%) as the average balance of interest-earning assets increased $31,414,000 (7%). In addition, the yield on average interest earning assets increased 8 basis points to 7.58%.

Interest on loans increased $2,613,520 (8%) and the average loan receivable balance increased $30,458,000 (7%) while the average yield increased 6 basis points to 7.69%.

Interest Expense. Total interest expense increased $3,132,710 (18%) as the average balance of interest-bearing liabilities increased $26,617,000 (6%). In addition, the average cost of interest-bearing liabilities increased 45 basis points to 4.60%.

Interest expense on deposits increased $5,337,591 (51%) as the average balance of interest bearing deposits increased $72,108,000 (25%) and the average interest rate paid to depositors increased 76 basis points to 4.40%.

The Company’s borrowings from the FHLB decreased to $76,086,000, which remains in compliance with the FHLB limitation of advances to 35% of assets. The average balance of advances decreased $45,235,000 (41%) and the average cost of those advances increased 13 basis points to 5.29%. As a result, interest expense on these advances decreased $2,252,422 (39%). As of December 31, 2007 FHLB advances were 13% of total assets, compared to 21% of total assets as of December 31, 2006.

Net Interest Income. The Company’s net interest income decreased $364,618 (2%). During the year ended December 31, 2007, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $55,187,000, resulting in an increase in the average net earning balance of $4,797,000 (10%). In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities decreased by 37 basis points from 3.35% to 2.98%.

Provision for Loan Losses. Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectibility of the Company’s loan portfolio.

During the year ended December 31, 2007, the Company experienced loan charge-offs, in excess of recoveries, of $660,554 and, based on a review as discussed above, elected to record a provision for loan loss of $840,000 to increase the allowance for loan losses to $5,962,923 as of December 31, 2007. The provision for loan losses recorded by the Company during year ended December 31, 2006 was $750,000. Management of the Company anticipates the need to continue increasing the loan loss allowance in the future through charges to provision for loan losses based on the anticipated growth in its loan portfolio.

Non-Interest Income. Non-interest income increased $1,068,849 (29%). The gain on sale of loans of $1,177,017 for 2007, compared to $692,276 for 2006, was the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process. The gain on sale of investments for the year ended December 31, 2007 was $618,363, compared to $750,869 for the year ended December 31, 2006. These gains were attributed to the sale of 10,000 shares of FHLMC stock in 2007 and the sale of 12,000 shares in 2006. Deposit service charges increased $813,917 (58%) due to increases in insufficient funds and overdraft charges primarily due to the Bank’s overdraft privilege program that was implemented in the fourth quarter of 2006.

Non-Interest Expense. Non-interest expense increased $1,665,457 (16%). This increase was primarily due to increases in salaries and employee benefits of $962,487 (16%), occupancy expense of $93,633 (6%), data processing of $111,490 (40%) and other expense of $498,249 (27%).

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

The increase in compensation was due to several factors, including additions in executive and staff positions, pay increases to existing employees, increases in employee benefit costs and an increase in the number of employees. The staff increased from 146 full-time equivalent employees as of December 31, 2006 to 150 full-time equivalent employees as of December 31, 2007.

The increases in occupancy and data processing expenses were primarily due to increased depreciation as well as maintenance expenses relating to the Bank’s conversion to a new core processing system in the first half of 2006.

Increases in other expenses are comprised of increased expenses related to audit and compliance costs for the Sarbanes-Oxley Act of 2002, fees paid to a third party vendor related to the Bank’s overdraft privilege program, increased amortization on low income housing tax credits and an increase in ATM expense. The Bank converted to a new ATM network provider in September 2006. The expense is now recorded at gross, rather than net of income earned as was previously done prior to the conversion. Currently, the associated income related to ATM services is recorded in noninterest income.

Income Taxes. The decrease in income tax expense is a direct result of the decrease in the Company’s taxable income for the year ended December 31, 2007 as compared to the year ended December 31, 2006.

Cash Dividends Paid. The Company paid dividends of $0.17 per share on April 13, 2007, to stockholders’ of record as of April 3, 2007, and $0.17 per share on July 13, 2007 to stockholders’ of record as of July 2, 2007, and $0.18 per share on October 15, 2007, to stockholders’ of record as of October 1, 2007. The Company declared a cash dividend of $0.18 per share on December 21, 2007, which was paid on January 18, 2008, to stockholders of record on January 4, 2008.

RESULTS OF OPERATIONS - COMPARISON OF YEAR ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005

	Average for the Year Shown
	Prime			Ten –Year Treasury			One-Year Treasury
December 31, 2006		7.96	%		4.80	%		4.94	%
December 31, 2005		6.19	%		4.29	%		3.62	%
Changes in rates		1.77	%		0.51	%		1.32	%

Interest Rates. The Bank charges borrowers and pays depositors interest rates that are largely a function of the general level of interest rates. The above table sets forth the weekly average interest rates for the 52 weeks ending December 31, 2006 and December 31, 2005 as reported by the Federal Reserve. The Bank typically indexes its adjustable rate commercial loans to prime and its adjustable rate mortgage loans to the one-year treasury rate. The ten-year treasury rate is a proxy for 30-year fixed rate home mortgage loans.

Rates trended upward during 2005 as the FOMC increased the discount rates 25 basis points after eight consecutive meetings from January 2005 to December 2005. As of year-end 2005 the prime rate was 7.25%.This trend continued in 2006 as the FOMC increased the discount rates 25 basis points after four consecutive meetings from January 2006 to June 2006. As of year-end 2006 the prime rate was 8.25%.

Interest Income. Total interest income increased $7,791,759 (28%) as the average balance of interest-earning assets increased $28,314,000 (6%). In addition, the yield on average interest earning assets increased 129 basis points to 7.50%.

Interest on loans increased $7,818,452 (29%) and the average loan receivable balance increased $32,796,000 (8%) while the average yield increased 127 basis points to 7.63%. The increase in loan yield is

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

the result of the combination of new loans at higher rates, a reduction in prepayments, and an increase of interest rates on adjustable rate loans.

Interest Expense. Total interest expense increased $5,526,189 (47%) as the average balance of interest-bearing liabilities increased $27,854,000 (7%). In addition, the average cost of interest-bearing liabilities increased 112 basis points to 4.15%.

Interest expense on deposits increased $3,235,130 (44%) as the average balance of interest bearing deposits increased $10,832,000 (4%) and the average interest rate paid to depositors increased 102 basis points to 3.64%. The average balance of interest bearing core deposit accounts decreased $6,639,000 (7%) and the average balance of certificates of deposit increased $17,471,000 (10%).

The Company’s borrowings from the FHLB increased to $108,000,000, which remains in compliance with the FHLB limitation of advances to 35% of assets. The average cost of those advances increased 112 basis points to 5.16%. As a result, interest expense on these advances increased $1,227,976 (27%). As of December 31, 2006 FHLB advances are 20% of total assets, compared to 21% of total assets as of December 31, 2005.

Net Interest Income. The Company’s net interest income increased $2,265,570 (14%). During the year ended December 31, 2006, the average balance of interest-earning assets exceeded the average balance of interest-bearing liabilities by $50,390,000, resulting in an increase in the average net earning balance of $460,000 (1%). In addition, the Company’s spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities increased by 17 basis points from 3.18% to 3.35%.

During the year ended December 31, 2006, the Company experienced loan charge-offs, in excess of recoveries, of $366,177 and, based on a review as discussed above, elected to record a provision for loan loss of $750,000 to increase the allowance for loan losses to $5,783,477 as of December 31, 2006. The provision for loan losses recorded by the Company during year ended December 31, 2005 was $945,000. Management of the Company anticipates the need to continue increasing the loan loss allowance in the future through charges to provision for loan losses based on the anticipated growth in its loan portfolio and the shift in the Company’s emphasis from primarily single-family loans to a mix of single-family and commercial loans.

Non-Interest Income. Non-interest income increased $191,941 (6%). The gain on sale of loans of $692,276 for 2006, compared to $623,252 for 2005, was the result of mortgage banking activities related to the sale of single-family conforming residential loans in the secondary market. The Bank attempts to minimize its risk of price changes by committing to sell loans while the loans are in the origination process. The gain on sale of investments for the year ended December 31, 2006 was $750,869, compared to $743,335 for year ended December 31, 2005. In 2006, this gain was attributed to the sale of 12,000 shares of FHLMC stock. During 2006 the Bank sold its mortgage loan servicing rights to a third party, which resulted in a profit on the sale of $89,441. In addition the Bank had income from tax credits purchased of $191,678 during 2006. Deposit service charges decreased $241,709 (15%) due to decreases in insufficient funds and overdraft charges on the Bank’s checking accounts. In addition, other fees decreased $38,869 (29%) primarily due to a decrease in prepayment penalties collected during the year ended December 31, 2006.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

Non-Interest Expense. Non-interest expense increased $1,507,193 (17%). This increase was primarily due to increases in salaries and employee benefits of $1,226,893 (25%) and occupancy expense of $155,211 (11%). The increase in compensation was due to normal salary and benefits increases for the Bank’s employees, along with an increase in the number of employees. The staff increased from 125 full-time equivalent employees as of December 31, 2005 to 146 full-time equivalent employees as of December 31, 2006. In 2006, the Company opened a new full-service branch in Springfield, Missouri. In addition advertising expense increased $173,038 (75%). This increase was primarily due to the Bank’s decision to increase its exposure through the use of several different advertising mediums. Data processing expense decreased $160,222 (36%). This decrease was primarily due to the Bank’s decision to terminate its relationship with a third-party vendor that provided data processing services. This conversion was completed in January of 2006.

Income Taxes. The increase in income tax expense is a direct result of the increase in the Company’s taxable income for the period ended December 31, 2006 as compared to the period ended December 31, 2005.

Cash Dividends Paid. The Company paid dividends of $0.165 per share on April 14, 2006, to stockholders’ of record as of March 30, 2006, and $0.165 per share on July 15, 2006 to stockholders’ of record as of July 1, 2006, and $0.17 per share on October 14, 2006, to stockholders’ of record as of October 1, 2006. The Company declared a cash dividend of $0.17 per share on December 21, 2006, which was paid on January 19, 2007, to stockholders of record on January 5, 2007.

ASSET / LIABILITY MANAGEMENT

The goal of the Bank’s asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Bank’s net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, it offers deposit rates and loan rates that maximize net interest income. Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income. This matching is especially difficult because the residential mortgage loans that comprise a significant portion of the Bank’s assets give the borrower the right to prepay at any time. These borrowers act in their economic self-interest and refinance higher rate loans when rates are low. Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.

The Bank has continued to emphasize the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short-term commercial real estate, construction, commercial business, home equity and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market.

The Bank is also managing interest rate risk by the origination of construction loans. As of December 31, 2007, such loans constitute 17% of the Bank’s loan portfolio. In general, these loans have higher yields, shorter maturities, and greater interest rate sensitivity than other real estate loans.

The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. As of December 31, 2007 and December 31, 2006, the Bank’s savings accounts, checking accounts, and money market deposit accounts totaled $141,772,709 or 34% of its total deposits and $128,993,214 or 37% of total deposits, respectively. The weighted average rate paid on these accounts increased 12 basis points from 1.99% on December 31, 2006 to 2.11% on December 31, 2007. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive, core deposits. As of December 31, 2007, the FHLB has the option to call $9.0 million of advances with a weighted average rate of 5.55% and a remaining life of seven months.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

INTEREST RATE SENSITIVITY ANALYSIS

The following table sets forth as of December 31, 2007, management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100, 200, and 300 basis point (“bp”) instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.

BP Change		Estimated Net Portfolio Value								NPV as % of PV of Assets
in Rates		$ Amount		$ Change			% Change			NPV Ratio			Change
	+300		43,361		1,657			4	%		7.79	%		0.41	%
	+200		43,437		1,733			4	%		7.77	%		0.39	%
	+100		42,874		1,170			3	%		7.62	%		0.24	%
NC			41,704		-			0	%		7.38	%		0.00	%
	-100		39,895		(1,809	)		-4	%		7.03	%		-0.35	%
	-200		37,499		(4,205	)		-10	%		6.59	%		-0.79	%
	-300		34,700		(7,004	)		-17	%		6.07	%		-1.31	%

Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates.

Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, which represent the Bank’s primary loan product, have an initial fixed rate period typically from one to five years and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank’s loan portfolio could decrease in future periods due to refinancing activity if market interest rates remain constant or decrease in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Bank’s Board of Directors is responsible for reviewing the Bank’s asset and liability policies. The Bank’s management is responsible for administering the policies and determinations of the Board of Directors with respect to the Bank’s asset and liability goals and strategies. Management expects that the Bank’s asset and liability policies and strategies will continue as described above so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s principal sources of funds for investments and operations are net income from operations, deposits from its primary market area, FHLB advances, principal and interest payments on loans and mortgage-backed securities, proceeds from maturing investment securities, and the issuance of subordinated debentures. The Company considers deposits and FHLB advances as its primary sources of funds.

The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $12,046,202 as of December 31, 2007 and $14,880,601 as of December 31, 2006, representing a decrease of

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

$2,834,399. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.

In addition to the capital necessary to meet the Company’s conditional commitments discussed under the caption “Off-Balance Sheet Arrangements” below, the Bank also has $201,179,713 in certificates of deposit that are scheduled to mature in one year or less. Management anticipates that the majority of these certificates will renew in the normal course of operations. Based on existing collateral as well as the FHLB’s limitation of advances to 35% of assets, the Bank has the ability to borrow an additional $68,951,000 from the FHLB, as of December 31, 2007. The Bank plans to maintain its FHLB borrowings to a level that will provide a borrowing capacity sufficient to provide for contingencies.

The Company’s Tier 1 capital position of $56,244,000 is 10.8% of average assets as of December 31, 2007. The Company has an excess of $35,460,000, $35,785,000, and $22,597,000 of required regulatory levels of tangible, core, and risk-based capital, respectively. In addition, under current regulatory guidelines, the Bank is classified as well capitalized. See also additional information provided under the caption “Regulatory Matters” in Note 1 of the Notes to Consolidated Financial Statements.

During the year ended December 31, 2007, the Company purchased 252,799 shares of common stock at an average price of $29.59 to place in the treasury account. During the year ended December 31, 2006, the Company purchased 125,066 shares of common stock at an average price of $28.73 to place in the treasury account. The Company intends to monitor the common stock price and, with regulatory approval, may from time to time initiate further stock repurchases in order to improve the Company’s long-term earnings per share while at the same time maintaining an adequate level of stockholders’ equity. The Company has a repurchase plan which was announced on August 20, 2007, and as of December 31, 2007, a total of 260,678 shares of the Company’s common stock may be purchased under this plan.

OFF-BALANCE SHEET ARRANGEMENTS

Various commitments and contingent liabilities arise in the normal course of business, which are not required to be recorded on the balance sheet. The most significant of these are loan commitments, lines of credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. As of December 31, 2007 and 2006, the Bank had outstanding commitments to originate loans of approximately $3,490,000 and $3,991,000, respectively. Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. As of December 31, 2007 and 2006, unused lines of credit to borrowers aggregated approximately $63,403,000 and $64,370,000 for commercial lines and $21,957,000 and $19,790,000 for open-end consumer lines. Since a portion of the loan commitment and line of credit may expire without being drawn upon, the total unused commitments and lines do not necessarily represent future cash requirements.

Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank had total outstanding standby letters of credit amounting to $12,464,000 and $9,182,000 as of December 31, 2007 and 2006, respectively. As of December 31, 2007 and 2006, the Bank had outstanding commitments to originate mortgage loans of approximately $3,490,000 and $3,991,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period.

In connection with the Company’s issuance of the Trust Securities and pursuant to two guarantee agreements by and between the Company and Wilmington Trust Company, the Company issued a limited, irrevocable guarantee of the obligations of each Trust under the Trust Securities whereby the Company has guaranteed any and all payment obligations of the Trusts related to the Trust Securities including distributions on, and the liquidation or redemption price of, the Trust Securities to the extent each Trust does not have funds available.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table summarizes the Company’s fixed and determinable contractual obligations by payment date as of December 31, 2007. Dollar amounts are expressed in thousands.

Payments Due By Period

			One Year		One to		Three to		More than
Contractual Obligations	Total		or less		Three Years		Five Years		Five Years

Deposits without stated maturity	$	141,773		141,773		-		-		-
Time and brokered certificates of deposit		276,419		201,180		60,843		11,381		3,014
Other borrowings		10,567		817		-		-		9,750
Federal Home Loan Bank advances		76,086		69,650		3,386		-		3,050
Subordinated debentures		15,465		-		-		-		15,465
Operating leases		572		125		189		99		160
Purchase obligations		-		-		-		-		-
Other long term obligations		117,984		117,984		-		-		-
Total	$	638,866		531,529		64,418		11,480		31,439

IMPACT OF INFLATION AND CHANGING PRICES

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

Unlike most companies, the assets and liabilities of a financial institution are primarily monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Bank’s assets and liabilities are critical to the maintenance of acceptable performance levels.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. On an on-going basis, management evaluates its estimates and judgments.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates. If actual results are different than management’s judgements and estimates, the Company’s financial results could change, and such change could be material to the Company.

Material estimates and judgments that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

The Company has identified the accounting policies for the allowance for loan losses and related significant estimates and judgments as critical to its business operations and the understanding of its results of operations. For a detailed discussion on the application of these significant estimates and judgments and our accounting policies, also see Note 1 of the notes to consolidated financial statements in this report.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 - Accounting for Income Taxes. This interpretation addresses accounting for tax uncertainties that arise when a position that an entity takes on its tax return may be different from the position that the taxing authority may take, and provides guidance about the accounting for tax benefits associated with uncertain tax positions, classification of a liability recognized for those positions, and interim reporting considerations. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit. The provisions of FIN 48 were effective as of January 1, 2007, with any cumulative effect of the change in accounting principle recorded as an adjustment to retained earnings. The adoption of this standard did not have a material impact on the consolidated financial condition or results of operations of the Company. The Company’s federal and state income tax returns are open and subject to examinations from the 2004 tax year and forward.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. This

Statement applies under other accounting pronouncements that require or permit fair value measurements, and does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in generally accepted accounting principles. SFAS No. 157 emphasizes that fair value is a market-based measurement based on an exchange transaction between market participants in which an entity sells an asset or transfers a liability. SFAS No. 157 also establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. The provisions of FASB 157 were effective as of January 1, 2008. The adoption of the standard did not have a material impact on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits companies to choose to measure financial instruments and certain other financial assets and liabilities at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The provisions of this statement were effective for the Company as of January 1, 2008. The adoption of the standard did not have a material impact on the consolidated financial statements.

Guaranty Federal Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS

	Year Ended December 31, 2007, Quarter ended
	Mar-07		Jun-07		Sep-07		Dec-07
Interest income	$	9,521,871		9,103,145		9,685,875		9,661,649
Interest expense		4,946,487		5,028,396		5,201,745		5,342,675
Net interest income		4,575,384		4,074,749		4,484,130		4,318,974
Provision for loan losses		210,000		210,000		210,000		210,000
Gain on sale of loans and investment securities		485,313		524,526		463,989		321,552
Other noninterest income, net		780,117		810,325		752,916		589,829
Noninterest expense		2,874,548		2,995,788		2,986,558		2,985,257
Income before income taxes		2,756,266		2,203,812		2,504,477		2,035,098
Provision for income taxes		1,002,726		787,588		891,786		717,671
Net income	$	1,753,540		1,416,224		1,612,691		1,317,427
Basic earnings per share	$	0.63		0.51		0.60		0.50
Diluted earnings per share	$	0.62		0.50		0.59		0.49

	Year Ended December 31, 2006, Quarter ended
	Mar-06		Jun-06		Sep-06		Dec-06
Interest income	$	8,077,915		8,386,269		9,054,605		9,685,529
Interest expense		3,769,423		4,125,175		4,543,095		4,948,900
Net interest income		4,308,492		4,261,094		4,511,510		4,736,629
Provision for loan losses		225,000		225,000		150,000		150,000
Gain on sale of loans and investment securities		317,997		336,889		349,425		438,834
Other noninterest income, net		503,823		621,981		571,626		519,273
Noninterest expense		2,367,394		2,543,500		2,630,195		2,635,605
Income before income taxes		2,537,918		2,451,464		2,652,366		2,909,131
Provision for income taxes		973,593		870,074		1,028,044		1,170,084
Net income	$	1,564,325		1,581,390		1,624,322		1,739,047
Basic earnings per share	$	0.56		0.56		0.58		0.63
Diluted earnings per share	$	0.54		0.54		0.56		0.61

Guaranty Federal Bancshares, Inc.

Consolidated Balance Sheets

December 31, 2007 and 2006

	December 31,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	11,135,960			10,684,831
Interest-bearing deposits in other financial institutions		910,242			4,195,770
Cash and cash equivalents		12,046,202			14,880,601
Available-for-sale securities		14,729,938			7,906,321
Held-to-maturity securities		654,775			763,025
Stock in Federal Home Loan Bank, at cost		4,014,700			5,382,700
Mortgage loans held for sale		2,141,998			3,004,635
Loans receivable, net of allowance for loan losses of
December 31, 2007 and 2006 - $5,962,923 and $5,783,477, respectively		514,100,035			477,264,522
Accrued interest receivable:
Loans		3,218,845			2,830,811
Investments		104,603			79,498
Prepaid expenses and other assets		2,841,411			2,955,483
Foreclosed assets held for sale		727,422			172,637
Premises and equipment		9,442,350			7,867,809
Income taxes receivable		-			774,469
Deferred income taxes		1,755,701			962,484
	$	565,777,980			524,844,995

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits	$	418,191,284			352,229,636
Federal Home Loan Bank advances		76,086,000			108,000,000
Securities sold under agreements to repurchase		9,849,295			1,703,221
Subordinated debentures		15,465,000			15,465,000
Notes payable		718,190			-
Advances from borrowers for taxes and insurance		157,811			222,869
Accrued expenses and other liabilities		299,005			441,890
Accrued interest payable		1,793,663			1,414,946
Dividend payable		469,373			468,190
Income taxes payable		61,699			-
		523,091,320			479,945,752

COMMITMENTS AND CONTINGENCIES		-			-

STOCKHOLDERS' EQUITY
Common Stock:
$0.10 par value; authorized 10,000,000 shares; issued
December 31, 2007 and 2006 - 6,736,485 and 6,653,527
shares, respectively		673,649			665,353
Additional paid-in capital		57,571,929			55,730,352
Unearned ESOP shares		(1,116,930	)		(1,344,930	)
Retained earnings, substantially restricted		45,402,449			41,183,006
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of income taxes; December 31, 2007 and 2006 - $295,863,
and $901,243, respectively		503,767			1,534,548
		103,034,864			97,768,329
Treasury stock, at cost;
December 31, 2007 and 2006 - 4,017,166 and 3,764,367
shares, respectively		(60,348,204	)		(52,869,086	)
		42,686,660			44,899,243
	$	565,777,980			524,844,995

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Income

Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005

INTEREST INCOME
Loans	$	37,113,849			34,500,329			26,681,877
Investment securities		537,176			450,919			431,863
Other		321,515			253,200			298,949
		37,972,540			35,204,448			27,412,689
INTEREST EXPENSE
Deposits		15,860,794			10,523,203			7,288,073
Federal Home Loan Bank advances		3,469,551			5,721,973			4,493,997
Subordinated debentures		1,023,783			1,027,526			47,683
Other		165,175			113,891			30,651
		20,519,303			17,386,593			11,860,404
NET INTEREST INCOME		17,453,237			17,817,855			15,552,285
PROVISION FOR LOAN LOSSES		840,000			750,000			945,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		16,613,237			17,067,855			14,607,285
NONINTEREST INCOME
Service charges		2,215,641			1,401,724			1,643,433
Other fees		90,360			96,209			135,078
Gain on sale of investment securities		618,363			750,869			743,335
Gain on sale of loans		1,177,017			692,276			623,252
Loss on foreclosed assets		(41,909	)		(46,833	)		(1,617	)
Other income		669,095			765,473			324,296
		4,728,567			3,659,718			3,467,777
NONINTEREST EXPENSE
Salaries and employee benefits		7,074,249			6,111,762			4,884,869
Occupancy		1,614,403			1,520,770			1,365,559
FDIC deposit insurance premiums		42,555			39,661			39,796
Data processing		391,679			280,189			440,411
Advertising		399,996			403,292			230,254
Other expense		2,319,269			1,821,020			1,708,612
		11,842,151			10,176,694			8,669,501
INCOME BEFORE INCOME TAXES		9,499,653			10,550,879			9,405,561
PROVISION FOR INCOME TAXES		3,399,771			4,041,795			3,506,591
NET INCOME	$	6,099,882			6,509,084			5,898,970

BASIC EARNINGS PER SHARE	$	2.25			2.34			2.12
DILUTED EARNINGS PER SHARE	$	2.19			2.25			2.03

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,099,882			6,509,084			5,898,970
Items not requiring (providing) cash:
Deferred income taxes		(187,839	)		(592,927	)		(249,519	)
Depreciation		902,322			814,150			759,931
Provision for loan losses		840,000			750,000			945,000
Gain on sale of loans and investment securities		(1,795,380	)		(1,443,145	)		(1,366,587	)
(Gain) loss on sale of equipment and other assets		-			(89,911	)		3,055
(Gain) loss on sale of foreclosed assets		(4,621	)		46,833			(1,323	)
Amortization of deferred income,
premiums and discounts		108,733			24,106			(48,305	)
Stock award plans		286,346			388,884			33,213
Origination of loans held for sale		(71,861,627	)		(51,685,484	)		(45,528,012	)
Proceeds from sale of loans held for sale		73,901,281			51,465,404			47,649,521
Release of ESOP shares		672,765			651,958			564,980
Changes in:
Accrued interest receivable		(413,139	)		(821,182	)		(519,112	)
Prepaid expenses and other assets		114,073			400,043			(628,141	)
Accrued expenses and other liabilities		235,832			1,060,085			200,417
Income taxes payable		836,168			(1,096,634	)		102,119
Net cash provided by operating activities		9,734,796			6,381,264			7,816,207

CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(39,788,084	)		(45,195,742	)		(45,967,115	)
Principal payments on held-to-maturity securities		108,250			186,219			358,395
Principal payments on available-for-sale securities		376,625			175,145			-
Purchase of available-for-sale securities		(11,926,192	)		(3,780,315	)		(10,516,958	)
Purchase of premises and equipment		(2,476,863	)		(719,094	)		(1,032,777	)
Purchase of tax credit investments		-			(2,195,334	)		-
Proceeds from sale of originated mortgage servicing rights		-			1,023,608			-
Proceeds from sale of premises and equipment		-			470			5,860
Proceeds from sales of available-for-sale securities		1,128,153			762,617			9,345,564
Proceeds from maturities of available-for-sale securities		2,580,000			1,750,000			9,000,000
(Purchase) redemption of FHLB stock		1,368,000			(403,900	)		167,700
Proceeds from sale of foreclosed assets		1,453,674			395,327			352,341
Net cash used in investing activities		(47,176,437	)		(48,000,999	)		(38,286,990	)

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Cash Flows (continued)

Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005

CASH FLOWS FROM FINANCING ACTIVITIES
Stock options exercised		1,118,762			1,147,042			1,031,400
Cash dividends paid		(1,879,256	)		(1,850,300	)		(1,794,557	)
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts		12,779,497			(1,259,419	)		2,901,337
Net increase in certificates of deposit		53,182,151			33,430,104			20,769,872
Net increase in securities sold under agreements to repurchase		8,146,074			108,963			330,238
Proceeds from FHLB advances		1,855,538,600			1,901,242,000			1,322,664,000
Repayments of FHLB advances		(1,887,452,600	)		(1,893,242,000	)		(1,322,664,000	)
Proceeds from issuance of notes payable		2,468,000			-			-
Repayments of notes payable		(1,749,810	)		-			-
Proceeds from issuance of subordinated debentures		-			-			15,465,000
Advances from borrowers for taxes and insurance		(65,058	)		10,549			(59,476	)
Treasury stock purchased		(7,479,118	)		(3,593,081	)		(3,563,011	)
Net cash provided by financing activities		34,607,242			35,993,858			35,080,803

INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS		(2,834,399	)		(5,625,877	)		4,610,020

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR		14,880,601			20,506,478			15,896,458

CASH AND CASH EQUIVALENTS,
END OF YEAR	$	12,046,202			14,880,601			20,506,478

Supplemental Cash Flows Information

Real estate acquired in settlement of loans	$	2,003,838			588,022			299,643

Interest paid	$	20,140,586			16,479,811			11,713,756

Income taxes paid	$	2,563,603			4,041,795			3,506,591

Dividend declared and unpaid	$	469,373			468,190			459,074

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2007, 2006 and 2005

	Common Stock		Additional Paid-In Capital		Unearned ESOP Shares			Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2005	$	649,386		52,384,842		(1,800,930	)		(45,712,994	)		32,437,131			2,815,828			40,773,263
Comprehensive income
Net income		-		-		-			-			5,898,970			-			5,898,970
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of ($495,626)		-		-		-			-			-			(843,903	)		(843,903	)
Total comprehensive income																		5,055,067
Dividends ($0.65 per share)		-		-		-			-			(1,802,763	)		-			(1,802,763	)
Stock award plans		-		33,213		-			-			-			-			33,213
Stock options exercised		7,749		1,023,651		-			-			-			-			1,031,400
Release of ESOP shares		-		336,980		228,000			-			-			-			564,980
Treasury stock purchased		-		-		-			(3,563,011	)		-			-			(3,563,011	)
Balance, December 31, 2005		657,135		53,778,686		(1,572,930	)		(49,276,005	)		36,533,338			1,971,925			42,092,149
Comprehensive income
Net income		-		-		-			-			6,509,084			-			6,509,084
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of ($256,871)		-		-		-			-			-			(437,377	)		(437,377	)
Total comprehensive income																		6,071,707
Dividends ($0.67 per share)		-		-		-			-			(1,859,416	)		-			(1,859,416	)
Stock award plans		-		388,884		-			-			-			-			388,884
Stock options exercised		8,218		1,138,824		-			-			-			-			1,147,042
Release of ESOP shares		-		423,958		228,000			-			-			-			651,958
Treasury stock purchased		-		-		-			(3,593,081	)		-			-			(3,593,081	)
Balance, December 31, 2006	$	665,353		55,730,352		(1,344,930	)		(52,869,086	)		41,183,006			1,534,548			44,899,243
Comprehensive income
Net income		-		-		-			-			6,099,882			-			6,099,882
Change in unrealized appreciation
on available-for-sale securitites, net
of income taxes of ($605,380)		-		-		-			-			-			(1,030,781	)		(1,030,781	)
Total comprehensive income																		5,069,101
Dividends ($0.70 per share)		-		-		-			-			(1,880,439	)		-			(1,880,439	)
Stock award plans		-		286,346		-			-			-			-			286,346
Stock options exercised		8,296		1,110,466		-			-			-			-			1,118,762
Release of ESOP shares		-		444,765		228,000			-			-			-			672,765
Treasury stock purchased		-		-		-			(7,479,118	)		-			-			(7,479,118	)
Balance, December 31, 2007	$	673,649		57,571,929		(1,116,930	)		(60,348,204	)		45,402,449			503,767			42,686,660

See Notes to Consolidated Financial Statements

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

In April 1995, Guaranty Federal Savings & Loan Association reorganized from a federally chartered mutual savings and loan association into a mutual holding company, Guaranty Federal Bancshares, M. H. C. (the "MHC"). Concurrent with the reorganization, Guaranty Federal Savings Bank (the "Bank"), a stock savings bank was chartered. The Bank issued 3,125,000 shares of common stock in connection with the reorganization, the majority of which were owned by the MHC.

On December 30, 1997, the MHC converted to Guaranty Federal Bancshares, Inc. (the “Company”), a Delaware-chartered stock corporation. In connection with the conversion and reorganization, the shares of the Bank held by the mutual holding company were extinguished along with the mutual holding company and the shares of the Bank held by the public were exchanged for 1,880,710 shares of the Company. Additional shares of the Company were sold to certain depositors of the Bank and to the trust of the employee stock ownership plan of the Bank as of December 30, 1997.

On June 27, 2003, the Bank converted to a state-chartered trust company with banking powers, and the Company became a one-bank holding company. The name of the Bank was changed from Guaranty Federal Savings Bank to Guaranty Bank.

Nature of Operations

The Company operates as a one-bank holding company. The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in southwest Missouri. The Bank is subject to competition from other financial institutions. The Company and the Bank are also subject to the regulation of certain federal and state agencies and receive periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany profits, transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties.

Securities

Available-for-sale securities, which include any security for which the Company or the Bank has no immediate plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Held-to-maturity securities, which include any security for which the Company or the Bank has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts.

Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific identification method.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are sometimes acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price plus the value of retained servicing rights, if any, and the carrying amount of the loans sold, net of discounts collected or paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method, and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on non-accrual status at ninety days past due and interest is considered a loss, unless the loan is well-secured and in the process of collection.

Loan Servicing

The cost of originated mortgage-servicing rights is amortized over the shorter of the actual or contractual loan life. Impairment of mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are estimated by discounting expected cash flows. For purposes of measuring impairment, the rights are stratified based on the loan type, remaining term to maturity and interest rate. The key assumptions used in the valuation include discount rates, prepayment speeds and servicing costs. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights exceeds their fair value. During 2006, the Company sold its mortgage servicing rights to a third party.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated methods over the estimated useful lives of the assets.

Income Taxes

Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

Cash Equivalents

The Company considers all highly liquid interest-bearing deposits in other financial institutions with an initial maturity of three months or less to be cash equivalents.

Regulatory Matters

The Company and the Bank are 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 and material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of December 31, 2007, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2007, the most recent notification from the Missouri Division of Finance and the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Company’s or the Bank’s category.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The Company’s and the Bank's actual capital amounts and ratios are also presented in the table. No amount was deducted from capital for interest-rate risk. Dollar amounts are expressed in thousands.

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007

Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	56,244		10.8	%		20,784		4.0	%		n/a		n/a
Bank	$	56,152		10.5	%		21,432		4.0	%		26,790		5.0	%

Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	56,244		11.0	%		20,459		4.0	%		n/a		n/a
Bank	$	56,152		11.0	%		20,437		4.0	%		30,656		6.0	%

Total risk-based capital, and
ratio to risk-weighted assets
Company	$	63,515		12.4	%		40,918		8.0	%		n/a		n/a
Bank	$	62,511		12.2	%		40,874		8.0	%		51,093		10.0	%

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006

Tier 1 (core) capital, and
ratio to adjusted total assets
Company	$	57,820		11.8	%		19,615		4.0	%		n/a		n/a
Bank	$	57,062		11.2	%		20,336		4.0	%		25,420		5.0	%

Tier 1 (core) capital, and
ratio to risk-weighted assets
Company	$	57,820		12.0	%		19,231		4.0	%		n/a		n/a
Bank	$	57,062		11.9	%		19,231		4.0	%		28,846		6.0	%

Total risk-based capital, and
ratio to risk-weighted assets
Company	$	65,251		13.6	%		38,461		8.0	%		n/a		n/a
Bank	$	63,948		13.3	%		38,461		8.0	%		48,077		10.0	%

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The amount of dividends that the Bank may pay is subject to various regulatory limitations. As of December 31, 2007, 2006, and 2005, the Bank exceeded its minimum capital requirements. The Bank may not pay dividends which would reduce capital below the minimum requirements shown above.

Earnings Per Share

The computation for earnings per share for years ended December 31, 2007, 2006 and 2005 is as follows:


	Year Ended		Year Ended		Year Ended
	December 31, 2007		December 31, 2006		December 31, 2005

Net income	$	6,099,882		6,509,084		5,898,970
Average common shares outstanding		2,713,384		2,786,823		2,780,249
Effect of stock options outstanding		77,998		109,200		126,885
Average diluted shares outstanding		2,791,382		2,896,023		2,907,134
Earnings per share - basic	$	2.25		2.34		2.12
Earnings per share - diluted	$	2.19		2.25		2.03

Options to purchase 69,500 and 21,500 shares of common stock were outstanding during the year ended December 31, 2007 and 2005, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares. All outstanding options to purchase common stock were included in the computation of diluted earnings per share for the year ended December 31, 2006.

Stock Option Plans

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which is how the Company previously accounted for its stock options. The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and, as such, results for prior periods have not been restated. Stock-based compensation expense is recognized for all stock options granted or modified after January 1, 2006. In addition, unvested options existing at January 1, 2006, are recognized in expense over the remaining vesting period. The fair value of all stock options has been estimated using the Black-Scholes option pricing model using various assumptions, some of which are highly subjective.

As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $71,324 and $64,655 for the years ended December 31, 2007 and 2006, respectively. As of December 31, 2007, there was $233,199 of unrecognized compensation expense related to nonvested stock options, which will be recognized over a weighted average period of 3.4 years.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Prior to January 1, 2006, no compensation expense was recognized for stock option grants, as all such grants had an exercise price equal to the fair market value on the date of grant. The following illustrates the effect on net income and earnings per share if the Company had applied the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” prior to January 1, 2006:

	Year Ended
	December 31, 2005

Net income, as reported	$	5,898,970
Less: Total stock-based employee
compensation cost determined
under the fair value-based
method, net of income taxes		(51,516	)

Pro forma net income	$	5,847,454

Earnings per share:
Basic - as reported	$	2.12
Basic - pro forma	$	2.10
Diluted - as reported	$	2.03
Diluted - pro forma	$	2.01

Segment Information

The principal business of the Company is overseeing the business of the Bank. The Company has no significant assets other than its investment in the Bank. The banking operation is the Company’s only reportable segment. The banking segment is principally engaged in the business of originating mortgage loans secured by one-to-four family residences, multi-family, construction, commercial and consumer loans. These loans are funded primarily through the attraction of deposits from the general public, borrowings from the Federal Home Loan Bank and brokered deposits. Selected information is not presented separately for the Company’s reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 2: SECURITIES

The amortized cost and approximate fair values of securities classified as available-for-sale securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2007
Equity Securities:
FHLMC stock	$	26,057		880,205		-			906,262
Other		718,190		-		(59,390	)		658,800
Debt Securities:
U. S. government agencies		1,800,034		4,049		-			1,804,083
Mortgage-backed securities		11,386,025		84,390		(109,622	)		11,360,793
	$	13,930,306		968,644		(169,012	)		14,729,938

As of December 31, 2006
Equity Securities:
FHLMC stock	$	35,847		2,449,293		-			2,485,140
Debt Securities:
U. S. government agencies		4,870,979		1,346		(12,074	)		4,860,251
Mortgage-backed securities		563,704		-		(2,774	)		560,930
	$	5,470,530		2,450,639		(14,848	)		7,906,321

Maturities of available-for-sale debt securities as of December 31, 2007:

	Amortized Cost		Approximate Fair Value
Within one year	$	500,000		501,953
2-5 years		1,300,034		1,302,130
Mortgage-backed securities not due on a
single maturity date		11,386,025		11,360,793
	$	13,186,059		13,164,876

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The amortized cost and approximate fair values of securities classified as held to maturity are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Approximate Fair Value
As of December 31, 2007
Debt Securities:
U. S. government agencies	$	148,529		-		(2,000	)		146,529
Mortgage-backed securities		506,246		32,397		-			538,643
	$	654,775		32,397		(2,000	)		685,172
As of December 31, 2006
Debt Securities:
U. S. government agencies	$	158,661		-		(481	)		158,180
Mortgage-backed securities		604,364		31,920		-			636,284
	$	763,025		31,920		(481	)		794,464

Maturities of held-to-maturity securities as of December 31, 2007:

	Amortized Cost		Approximate Fair Value
After ten years	$	148,529		146,529
Mortgage-backed securities not due on a
single maturity date		506,246		538,643
	$	654,775		685,172

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $12,661,393, $1,803,181 and $381,115 as of December 31, 2007, 2006 and 2005, respectively. The approximate fair value of pledged securities amounted to $12,659,842, $1,805,148 and $385,439 as of December 31, 2007, 2006 and 2005, respectively.

Gross gains of $618,363, $750,869 and $1,269,396 and gross losses of $0, $0 and $526,061 resulting from sale of available-for-sale securities were realized for the years ended December 31, 2007, 2006 and 2005, respectively. The tax effect of these net gains was $228,794, $277,822 and $275,034 in 2007, 2006 and 2005, respectively.

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2007 and 2006, was $4,013,643 and $4,836,168, respectively, which is approximately 26% and 56% of the Company’s investment portfolio, respectively. These declines primarily resulted from changes in market interest rates and failure of certain investments to meet projected earnings targets.

Based on evaluation of available evidence including recent changes in interest rates and other information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2007 and 2006.

	December 31, 2007
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Equity Securities	$	658,800		(59,390	)		-		-			658,800		(59,390	)
U. S. Government Agencies		-		-			146,529		(2,000	)		146,529		(2,000	)
Mortgage-backed securities		3,208,314		(109,622	)		-		-			3,208,314		(109,622	)
	$	3,867,114		(169,012	)		146,529		(2,000	)		4,013,643		(171,012	)

	December 31, 2006
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

U. S. Government Agencies	$	2,869,948		(9,183	)		1,405,290		(3,372	)		4,275,238		(12,555	)
Mortgage-backed securities		560,930		(2,774	)		-		-			560,930		(2,774	)
	$	3,430,878		(11,957	)		1,405,290		(3,372	)		4,836,168		(15,329	)

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

Categories of loans at December 31, 2007 and 2006 include:

	2007			2006
Real estate - residential mortgage:
One to four family units	$	83,018,129			86,645,458
Multi-family		41,947,555			50,366,197
Real estate - construction		89,724,220			83,966,976
Real estate - commercial		175,995,074			155,800,918
Commercial loans		104,025,575			82,675,514
Installment loans		25,576,502			23,708,300
Total loans		520,287,055			483,163,363
Less:
Allowance for loan losses		(5,962,923	)		(5,783,477	)
Deferred loan fees/costs, net		(224,097	)		(115,364	)
Net loans	$	514,100,035			477,264,522

Impaired loans totaled $7,254,334 and $3,016,448 as of December 31, 2007 and 2006, respectively with a related allowance for loan losses of $415,000 and $298,311, respectively. As of December 31, 2007 and 2006, respectively, impaired loans of $1,047,618 and $991,398 had no related allowance for loan losses.

Interest of $166,013, $275,143 and $615,928 was recognized on average impaired loans of $5,136,396, $3,250,403 and $4,805,205 for the years ended December 31, 2007, 2006 and 2005, respectively. Interest of $165,148, $272,600 and $600,288, was recognized on impaired loans on a cash basis during the years ended December 31, 2007, 2006 and 2005, respectively.

At December 31, 2007 and 2006 there were $103,270 and $0 in accruing loans delinquent 90 days or more, respectively. Non-accruing loans at December 31, 2006 and 2005 were $7,254,334 and $2,748,000, respectively.

Activity in the allowance for loan losses was as follows:

	Years ended
	December 31,
	2007			2006			2005

Balance, beginning of year	$	5,783,477			5,399,654			4,536,654
Provision charged to expense		840,000			750,000			945,000
Losses charged off, net of recoveries
of $70,990, $280,854 and $71,385 for the years ended
December 31, 2007, 2006 and 2005 respectively		(660,554	)		(366,177	)		(82,000	)
Balance, end of year	$	5,962,923			5,783,477			5,399,654

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The weighted average interest rate on loans as of December 31, 2007 and 2006 was 7.23% and 7.78%, respectively.

The Bank serviced mortgage loans for others amounting to $613,633 and $654,974 as of December 31, 2007 and 2006, respectively. The Bank serviced commercial loans for others amounting to $20,724,871 and $15,847,746 as of December 31, 2007 and 2006, respectively.

NOTE 4: PREMISES AND EQUIPMENT

Major classifications of premises and equipment, stated at cost, are as follows:


	December 31,			December 31,
	2007			2006
Land	$	2,323,789			1,250,789
Buildings and improvements		8,461,883			7,387,668
Automobile		16,479			-
Furniture, fixtures and equipment		6,251,839			5,938,670
Leasehold improvements		271,799			271,799
		17,325,789			14,848,926
Less accumulated depreciation		(7,883,439	)		(6,981,117	)
Net premises and equipment	$	9,442,350			7,867,809

Depreciation expense was $902,322, $814,150 and $759,931 for the years ended December 31, 2007, 2006, and 2005, respectively.

NOTE 5: OTHER COMPREHENSIVE LOSS

Other comprehensive loss components and related taxes were as follows:

	Year ended
	December 31,
	2007			2006			2005

Unrealized gains (losses) on
available-for-sale securities	$	(1,017,798	)		56,621			(596,194	)
Less: Reclassification adjustment for
realized gains included in income		(618,363	)		(750,869	)		(743,335	)
Other comprehensive loss before tax effect		(1,636,161	)		(694,248	)		(1,339,529	)
Tax benefit		(605,380	)		(256,871	)		(495,626	)
Other comprehensive loss	$	(1,030,781	)		(437,377	)		(843,903	)

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 6: DEPOSITS

	December 31, 2007								December 31, 2006
	Weighted Average Rate			Balance		Percentage of Deposits			Weighted Average Rate			Balance		Percentage of Deposits

Demand		0.00	%	$	28,520,385		6.8	%		0.00	%		26,893,997		7.6	%
NOW		1.35	%		36,511,976		8.7	%		1.18	%		35,468,920		10.1	%
Money market		3.48	%		64,319,237		15.4	%		3.38	%		52,313,962		13.7	%
Savings		2.11	%		12,421,113		3.0	%		2.67	%		14,316,335		4.1	%
		2.11	%		141,772,711		33.9	%		1.99	%		128,993,214		36.6	%
Certificates:
0% - 3.99%		3.60	%		5,523,980		1.3	%		3.16	%		29,366,266		8.3	%
4.00% - 5.99%		5.12	%		268,121,877		64.1	%		5.12	%		193,446,432		54.9	%
6.00% - 7.99%		6.00	%		2,772,716		0.7	%		6.06	%		423,724		0.1	%
		5.10	%		276,418,573		66.1	%		4.86	%		223,236,422		63.4	%
Total Deposits		4.09	%	$	418,191,284		100.0	%		3.81	%		352,229,636		100.0	%

The aggregate amount of certificates of deposit with a minimum balance of $100,000 was approximately $89,762,000 and $87,796,000, as of December 31, 2007 and 2006, respectively.

A summary of certificates of deposit by maturity as of December 31, 2007, is as follows:

2008	$	201,179,713
2009		51,356,348
2010		9,486,684
2011		5,335,232
2012		6,046,258
Thereafter		3,014,338
	$	276,418,573

A summary of interest expense on deposits is as follows:

	Years ended
	December 31,
	2007			2006			2005

NOW and Money Market accounts	$	2,940,311			1,709,996			1,299,800
Savings accounts		320,172			364,685			200,509
Certificate accounts		12,657,119			8,493,705			5,814,064
Early withdrawal penalties		(56,808	)		(45,183	)		(26,300	)
	$	15,860,794			10,523,203			7,288,073

The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was approximately $4,382,000 and $29,146,000 as of December 31, 2007 and 2006, respectively.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 7: BORROWINGS

Federal Home Loan Bank Advances

Federal Home Loan Bank advances consist of the following:

	December 31, 2007					December 31, 2006
Maturity Date	Amount		Weighted Average Rate			Amount		Weighted Average Rate
2007	$	-		-			85,414,000		5.32	%
2008		69,650,000		4.24	%		13,650,000		5.30	%
2009		386,000		7.21	%		386,000		7.21	%
2010		3,000,000		6.37	%		3,000,000		6.37	%
2011		-		-			-		-
2012		-		-			-		-
Thereafter		3,050,000		5.13	%		5,550,000		5.39	%
	$	76,086,000		4.37	%		108,000,000		5.35	%

The FHLB requires the Bank to maintain collateral equal to outstanding balances of advances. For collateral purposes, the FHLB values mortgage loans free of other pledges, liens and encumbrances at 80% of their fair value, and investment securities free of other pledges, liens and encumbrances at 95% of their fair value.

Securities Sold Under Agreements to Repurchase

The Company borrowed $9.8 million under a structured repurchase agreement in September 2007. Interest is based on a variable rate of three month LIBOR minus 100 basis points until September 12, 2009 and converts into a variable rate of two times the three month LIBOR minus 4.72% thereafter until maturity in September 2014. The counterparty, Barclay’s Capital, Inc., has the right to terminate the transaction after two years. The Company has pledged certain investment securities with a fair value of $10.5 million as of December 31, 2007.

Notes payable

The Company has a $3.5 million revolving line of credit with a correspondent bank to be used for stock repurchases and investments. The line of credit is unsecured, bears interest at one-month LIBOR plus 1.25%, payable quarterly, and matures on September 30, 2008. The balance was $718,190 and $0 at December 31, 2007 and 2006, respectively.

NOTE 8: SUBORDINATED DEBENTURES

During 2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty Statutory Trust I and Guaranty Statutory Trust II, to issue preferred securities representing undivided beneficial interests in the assets of the trusts and to invest the gross proceeds of the preferred securities in notes of the Company. Trust I issued $5,000,000 of preferred securities and Trust II issued $10,000,000 of preferred securities. The sole assets of Trust I were originally $5,155,000 aggregate principal amount of the Company’s fixed rate subordinated debenture notes due 2036, which are redeemable beginning in 2011. The sole assets of Trust II were originally $10,310,000 aggregate principal amount of the Company’s fixed/variable rate subordinated debenture notes due 2036, which are redeemable beginning in 2011. Trust II subordinated debenture notes bear interest at a fixed rate for five years and thereafter at a floating rate based on LIBOR. The preferred securities qualify as either Tier I or Tier II capital for regulatory purposes, subject to certain limitations.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

NOTE 9: INCOME TAXES

As of December 31, 2007 and 2006, retained earnings included approximately $5,075,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $1,878,000 as of December 31, 2007 and 2006.

The provision for income taxes consists of:

	Years Ended
	December 31,
	2007			2006			2005

Taxes currently payable	$	3,587,610			4,634,722			3,756,110
Deferred income taxes		(187,839	)		(592,927	)		(249,519	)
	$	3,399,771			4,041,795			3,506,591

The tax effects of temporary differences related to deferred taxes shown on the December 31, 2007 and 2006 balance sheets are:

	December 31,			December 31,
	2007			2006
Deferred tax assets:
Allowances for loan and foreclosed asset losses	$	2,206,281			2,139,886
Accrued compensated absences and bonuses		18,500			18,500
Interest on non-accrual loans		43,525			-
Deferred loan fees/costs		82,915			42,684
		2,351,221			2,201,070
Deferred tax liabilities:
FHLB stock dividends		(120,632	)		(120,632	)
Unrealized appreciation on available-for-sale securities		(295,863	)		(901,243	)
Accumulated depreciation		(93,383	)		(142,323	)
Other		(85,642	)		(74,388	)
		(595,520	)		(1,238,586	)
Net deferred tax asset	$	1,755,701			962,484

A reconciliation of income tax expense at the statutory rate to income tax expense at the Company’s effective rate is shown below:

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

	Years ended
	December 31,

	2007			2006			2005
Computed at statutory rate		34.0	%		34.0	%		34.0	%
Increase (reduction) in taxes resulting from:
State financial institution tax		0.8	%		2.7	%		1.8	%
ESOP		3.1	%		2.6	%		1.2	%
Other		-2.1	%		-1.0	%		0.3	%
Actual tax provision		35.8	%		38.3	%		37.3	%

Missouri law provides that banks will be taxed based on an annual privilege tax of 7% of net income. The privilege tax is included in provision for income taxes.

NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

	December 31, 2007				December 31, 2006
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	12,046,202		12,046,202		14,880,601		14,880,601
Available-for-sale securities		14,729,938		14,729,938		7,906,321		7,906,321
Held-to-maturity securities		654,775		685,172		763,025		794,464
Federal Home Loan Bank stock		4,014,700		4,014,700		5,382,700		5,382,700
Mortgage loans held for sale		2,141,998		2,141,998		3,004,635		3,004,635
Loans, net		514,100,035		514,637,570		477,264,522		474,906,965
Interest receivable		3,323,448		3,323,448		2,910,309		2,910,309
Financial liabilities:
Deposits		418,191,284		419,513,185		352,229,636		351,887,931
Federal Home Loan Bank advances		76,086,000		76,532,490		108,000,000		108,167,567
Securities sold under agreements
to repurchase		9,849,295		9,849,295		1,703,221		1,703,221
Subordinated debentures		15,465,000		15,465,000		15,465,000		15,465,000
Notes payable		718,190		718,190		-		-
Interest payable		1,793,663		1,793,663		1,414,946		1,414,946
Dividend payable		469,373		469,373		468,190		468,190
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit		-		-		-		-
Unused lines of credit		-		-		-		-

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents and Federal Home Loan Bank stock

The carrying amounts reported in the balance sheets for cash and cash equivalents approximate those assets' fair value.

Investment Securities

Fair values for investment securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities.

Interest Receivable

The carrying amount of interest receivable approximates its fair value.

Mortgage Loans Held for Sale

Fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans

The fair value of 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 and for the same remaining maturities. Loans with similar characteristics are aggregated for purposes of the calculations.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Deposits

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank Advances and Subordinated Debentures

Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing advances and subordinated debentures.

Securities Sold under Agreements to Repurchase and Notes Payable

For these variable rate instruments, the carrying amount is a reasonable estimate of fair value.

Interest and Dividend Payable

The carrying amounts of interest payable and dividend payable approximates their fair value.

Commitments to Extend Credit, Letters of Credit and Lines of Credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

NOTE 11: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.

NOTE 12: EMPLOYEE BENEFIT PLANS

Stock Award Plans

The Company has established four stock award plans for the benefit of certain directors, officers and employees of the Bank and its subsidiary. The plans provide a proprietary interest in the Company in a manner designed to encourage these individuals to remain with the Bank. A committee of the Bank’s Board of Directors administers the plans. The Company accounts for the cost of share purchases under the plans as a reduction of stockholders' equity. The awards vest at the rate of 20% per year over a five-year period. Compensation expense is recognized based on the Company’s stock price on the date the shares are awarded to employees.

At the annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders approved the Recognition and Retention Plan (the “RRP”). Following approval of the Plan, the Bank contributed $464,643 to a separate trust to purchase the 75,106 shares of the Company’s common stock in the RRP. As of December 31, 2007 all shares in this plan have vested.

At a special stockholders’ meeting on July 22, 1998, the Company’s stockholders approved the Restricted Stock Plan (the “RSP”). Following approval of the Plan, the Company contributed $2,373,065 to a separate trust to purchase the 173,632 shares in the RSP. As of December 31, 2007 all shares in this plan have vested.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

During the year ended June 30, 2000, the directors of the Company established the Stock Compensation Plan (the “2000 SCP”) with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 7,125 shares of the Company’s common stock. Following approval of the Plan, the Company contributed $85,945 to a separate trust to purchase the 7,125 shares in the SCP. As of December 31, 2007 all shares in this plan have vested.

During the year ended June 30, 2001, the directors of the Company established the Stock Compensation Plan (the “2001 SCP”) with both a stock award component and a stock option component. Under the stock award component of this plan, the Committee awarded 10,239 shares of the Company’s common stock. The shares for this plan were taken from forfeited shares in the RSP. As of December 31, 2007 all shares in this plan have vested.

The Bank recognized $0, $18,537 and $45,694 of expense under these stock award plans in the years ended December 31, 2007, 2006 and 2005, respectively.

Stock Option Plans

The Company has established four stock option plans for the benefit of certain directors, officers and employees of the Bank and its subsidiary. A committee of the Company’s Board of Directors administers the plans. The stock options under these plans may be either incentive stock options or nonqualified stock options. Incentive stock options can be granted only to participants who are employees of the Bank or its subsidiary. The option price must not be less than the market value of the Company stock on the date of grant. All options expire no later than ten years from the date of grant. The options vest at the rate of 20% per year over a five-year period.

At the annual stockholders’ meeting on October 18, 1995, the Bank’s stockholders approved the 1994 Stock Option and Incentive Plan for the benefit of certain directors, officers and employees of the Bank and its subsidiary. Under this Plan, the Committee may grant stock options for up to 187,764 shares of the Company’s common stock.

At a special stockholders’ meeting on July 22, 1998, the Company’s stockholders approved the 1998 Stock Option and Incentive Plan. Under this plan, the Committee may grant stock options for up to 434,081 shares of the Company’s common stock.

Under the stock option component of the 2000 SCP, the Committee granted nonqualified stock options for 17,875 shares of the Company’s common stock.

Under the stock option component of the 2001 SCP, the Committee granted nonqualified stock options for 13,263 shares of the Company’s common stock.

During the six months ended December 31, 2003, the directors of the Company authorized the issuance of 5,000 stock options as an employment inducement to a new officer of the Bank pursuant to a stock option agreement. Stock options awarded under this agreement are considered non-qualified for federal income tax purposes.

During the year ended December 31, 2004, the directors of the Company authorized the issuance of 25,000 stock options as an employment inducement to a new officer of the Bank pursuant to a stock option agreement. Stock options awarded under this agreement are considered non-qualified for federal income tax purposes.

On May 19, 2004, the Company’s stockholders voted to approve a 2004 Stock Option Plan (“2004 SOP”). The purpose of the plan is to attract and retain qualified personnel for positions of substantial responsibility. The aggregate number of shares with respect to options issued under this plan shall not exceed 250,000 shares. To date 84,500 stock options have been granted under this plan, with 5,000 stock options cancelled.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

The table below summarizes transactions under the Company’s stock option plans:

	Number of shares
	Incentive Stock Option			Non-Incentive Stock Option			Weighted Average Exercise Price
Balance outstanding as of January 1, 2005		198,772			186,091		$	14.27
Granted		42,500			-			25.11
Exercised		(66,487	)		(11,000	)		13.31
Forfeited		(10,000	)		-			20.88
Balance outstanding as of December 31, 2005		164,785			175,091			15.65
Granted		20,000			-			28.06
Exercised		(24,294	)		(57,885	)		13.96
Forfeited		(5,000	)		(2,000	)		24.84
Balance outstanding as of December 31, 2006		155,491			115,206			17.30
Granted		19,500			25,000			29.48
Exercised		(56,958	)		(26,000	)		13.49
Forfeited		-			-			-
Balance outstanding as of December 31, 2007		118,033			114,206			20.48
Options exercisable as of December 31, 2007		60,036			67,206			16.14

As of December 31, 2007, total outstanding stock options of 232,239 had a remaining contractual life of 5.57 years.

The total intrinsic value of outstanding stock options was $1,914,130 and $3,087,638 at December 31, 2007 and 2006, respectively, and the total intrinsic value of outstanding exercisable stock options was $1,600,704 and $2,587,449 at December 31, 2007 and 2006, respectively. The total intrinsic value of stock options exercised was $1,298,634 and $1,177,399 in 2007 and 2006, respectively. The total fair value of share awards vested was $919,069 and $1,053,858 during 2007 and 2006, respectively.

The fair value of each option granted is estimated on the date of the grant using the Black-Scholes pricing model with the following weighted-average assumptions:

	December 31, 2007			December 31, 2006			December 31, 2005
Dividends per share	$	0.70			0.66			0.64
Risk-free interest rate		4.54	%		4.52	%		4.00	%
Expected life of options	5 years			5 years			5 years
Weighted-average volatility		4.62	%		9.16	%		13.01	%
Weighted-average fair value
of options granted during year	$	2.95			3.41			3.30

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Employee Stock Ownership Plan

The Bank sponsors an internally-leveraged Employee Stock Ownership Plan (ESOP). All employees are eligible to participate after they attain age twenty-one and complete twelve consecutive months of service during which they work at least 1,000 hours. The ESOP borrowed $3,444,540 from the Company and purchased 344,454 shares of the common stock of the Company. The ESOP debt is secured by shares of the Company. The loan will be repaid from contributions to the ESOP as approved annually by the Bank’s Board of Directors. As the debt is repaid, shares are released from collateral and allocated to employees’ accounts. The shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. When shares are committed for release, the shares become outstanding for earnings per share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings and may be paid directly to participants or credited to their account; dividends are not paid on unallocated ESOP shares. Compensation expense is recognized ratably based on the average fair value of shares committed to be released. Compensation expense attributed to the ESOP was $672,765, $651,958 and $564,980 for the years ended December 31, 2007, 2006 and 2005, respectively.

The following is a summary of ESOP shares as of December 31, 2007:

Beginning ESOP shares		344,454
Released shares		(207,353	)
Shares committed for release		(23,214	)
Unreleased shares		113,887

Fair value of unreleased shares	$	3,270,835

NOTE 13: RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank has granted loans to executive officers and directors and their affiliates. Annual activity consisted of the following:

	Year ended December 31,
	2007			2006

Balance, beginning of year	$	3,508,387			3,270,812
New Loans		100,000			680,588
Repayments		(17,757	)		(443,013	)

Balance, end of year	$	3,590,630			3,508,387

In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons. Further, in management's opinion, these loans did not involve more than normal risk of collectability or present other unfavorable features.

NOTE 14: COMMITMENTS AND CREDIT RISK

Commitments 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 a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate.

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

As of December 31, 2007 and 2006, the Bank had outstanding commitments to originate mortgage loans of approximately $3,490,000 and $3,991,000, respectively. The commitments extend over varying periods of time with the majority being disbursed within a thirty-day period. As of December 31, 2007 and 2006, commitments of $2,941,000 and $3,991,000, respectively, were at fixed rates and $549,000 and $0, respectively, were at floating market rates.

Standby letters of credit are irrevocable conditional commitments issued by the Bank’s to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same at that involved in extending loans to customers. Fees for letters of credit issued after December 31, 2002 are initially recorded by the Bank as deferred revenue and are included in earnings at the termination of the respective agreements. Should the Bank be obligated to perform under the standby letters of credit, the Bank may seek recourse from the customer for reimbursement of amounts paid.

The Bank had total outstanding standby letters of credit amounting to $12,464,000 and $9,182,000 as of December 31, 2007 and 2006, respectively, with terms ranging from 30 days to 5 years.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on balance sheet instruments.

As of December 31, 2007 and 2006, unused lines of credit to borrowers aggregated approximately $63,403,000 and $64,370,000 for commercial lines and $21,957,000 and $19,790,000 for open-end consumer lines.

NOTE 15: CONDENSED PARENT COMPANY STATEMENTS

The condensed balance sheets as of December 31, 2007 and 2006, and statements of income and cash flows for the years ended December 31, 2007, 2006 and 2005 for the parent company, Guaranty Federal Bancshares, Inc., are as follows:

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Balance Sheets

	2007			2006
Assets
Cash	$	547,796			711,485
Available-for-sale securities		658,800			-
Due from subsidiary		28,126			28,895
Investment in subsidiary		56,693,200			58,597,264
Investment in Capital Trust I & II		468,420			468,420
Prepaid expenses and other assets		463,642			482,852
Refundable income taxes		681,266			820,225
Deferred income taxes		21,974			-
	$	59,563,224			61,109,141
Liabilities
Notes payable	$	718,190			-
Subordinated debentures		15,465,000			15,465,000
Accrued expenses and other liabilities		224,001			276,708
Dividend payable		469,373			468,190
Stockholders' equity
Common stock		673,649			665,353
Additional paid-in capital		57,571,929			55,730,352
Unearned ESOP shares		(1,116,930	)		(1,344,930	)
Retained earnings		45,402,449			41,183,006
Unrealized appreciation on
available-for-sale securities, net		503,767			1,534,548
Treasury stock		(60,348,204	)		(52,869,086	)
	$	59,563,224			61,109,141

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Income Statements	Years ended December 31,
	2007			2006			2005

Income
Dividends from subsidiary bank	$	8,487,268			4,639,062			3,540,000
Interest income:
Related party		135,015			150,308			127,786
Other		30,783			31,125			3
		8,653,066			4,820,495			3,667,789
Expense
Interest expense:
Other		13,037			963			-
Related party		1,023,783			1,027,526			47,683
Occupancy		2,400			2,400			2,400
Other		953,200			879,484			759,722
		1,992,420			1,910,373			809,805
Income before income taxes
and equity in undistributed
earnings of subsidiaries		6,660,646			2,910,122			2,857,984
Credit for income taxes		(349,935	)		(427,642	)		(117,312	)
Income before equity in undistributed
earnings of subsidiaries		7,010,581			3,337,764			2,975,296
Equity in undistributed
earnings of subsidiaries		(910,699	)		3,171,320			2,923,674
Net income	$	6,099,882			6,509,084			5,898,970

Guaranty Federal Bancshares, Inc.

Notes to Consolidated Financial Statements

Statements of Cash Flows	Years ended December 31,
	2007			2006			2005

Cash Flows From Operating Activities

Net income	$	6,099,882			6,509,084			5,898,970
Items not requiring (providing) cash:
Equity in undistributed earnings of subsidiaries		-			(3,171,320	)		(2,923,674	)
Release of ESOP shares		672,765			651,958			564,980
Stock award plan expense		71,325			83,192			23,161
Changes in:
Prepaid expenses and other assets		19,210			(8,810	)		(36,407	)
Income taxes payable/refundable		353,980			(307,380	)		17,707
Accrued expenses		(52,707	)		151,084			98,005
Net cash provided by operating activities		7,164,455			3,907,808			3,642,742

Cash Flows From Investing Activities
Capital contribution to subsidiary bank		-			-			(13,970,000	)
Purchase of AFS securities		(718,190	)		-			-
Purchase of investment in capital trusts		-			-			(465,000	)
Distributions in excess of net income of subsidiary		910,699			-			-
Net (increase) decrease in advance to subsidiary		769			(28,895	)		574,000
Net cash provided by (used in) investing activities		193,278			(28,895	)		(13,861,000	)

Cash Flows From Financing Activities
Stock options exercised		1,118,762			1,147,042			1,031,400
Cash dividends paid		(1,879,256	)		(1,850,300	)		(1,794,557	)
Treasury stock purchased		(7,479,118	)		(3,593,081	)		(3,563,011	)
Proceeds from issuance of notes payable		2,468,000			-			-
Repayment of notes payable		(1,749,810	)		-			-
Proceeds from issuance of subordinated debentures		-			-			15,465,000
Net cash provided by (used in) financing activities		(7,521,422	)		(4,296,339	)		11,138,832

Increase (decrease) in cash		(163,689	)		(417,426	)		920,574

Cash, beginning of year		711,485			1,128,911			208,337

Cash, end of year	$	547,796			711,485			1,128,911

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Guaranty Federal Bancshares, Inc.

Springfield, Missouri

We have audited the accompanying consolidated balance sheets of Guaranty Federal Bancshares, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and 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 Guaranty Federal Bancshares, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

/s/BKD, LLP

Springfield, Missouri

March 27, 2008

Guaranty Federal Bancshares, Inc.

2007 Annual Notes

Guaranty Federal Bancshares, Inc.

2007 Annual Report

Board of Directors	Guaranty
Guaranty Federal Bancshares, Inc.	Federal
and Guaranty Bank	Bancshares, Inc.

Don M. Gibson	Officers
Chairman of the Board
Guaranty Federal Bancshares and	Shaun A. Burke
Guaranty Bank	President,
	Chief Executive Officer
Jack L. Barham
Vice Chairman of the Board	Carter M. Peters
Guaranty Federal Bancshares	Executive Vice President,
	Chief Financial Officer/Chief
	Operations Officer
Shaun A. Burke
President and CEO	H. Michael Mattson
Guaranty Federal Bancshares and	Executive Vice President,
Guaranty Bank	Chief Lending Officer

Wayne V. Barnes	E. Lorene Thomas
Retired	Corporate Secretary

James R. Batten, CPA
Chief Operations Officer
AG Financial

Kurt D. Hellweg
President and CEO
International Dehydrated Foods, Inc. and
American Dehydrated Foods, Inc.

Gregory V. Ostergren
Chairman, President and CEO
American National Property and Casualty
Insurance Companies

Tim Rosenbury, AIA
Executive Vice President and Chairman
Butler, Rosenbury and Partners, Inc.

James L. Sivils, III, JD
Partner - Morelock Ross Companies