U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                   FORM 10-QSB
                                   (Mark One)

         /_X_/  Quarterly  report  under  Section 13 or 15(d) of the  Securities
         Exchange Act of 1934 For the quarterly  period ended September 30, 1998
         /___/  Transition  report under Section 13 or 15(d) of the Exchange Act
         For the  transition  period from  _______________  to  ________________
         Commission file number               0-24887
                                --------------------------------------

                        PATAPSCO VALLEY BANCSHARES, INC.
                        --------------------------------

        (Exact Name of Small Business Issuer as Specified in Its Charter)
            Maryland                                       52-1996620
            --------                                       ----------
   (State or Other Jurisdiction of                       (I.R.S. Employer
    Incorporation or Organization)                        Identification No.)

          8593 Baltimore National Pike, Ellicott City, Maryland 21043
          -----------------------------------------------------------
                    (Address of Principal Executive Offices)
                                  410-465-0900
                                  ------------
                (Issuer's Telephone Number, Including Area Code)

 ------------------------------------------------------------------------------
         (Former Name, Former Address and Former Fiscal Year, if Changed
                               Since Last Report)

      Check  whether the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days.
Yes       No   X
    -----    -----

                     APPLICABLE ONLY TO ISSUERS INVOLVED IN
                        BANKRUPTCY PROCEEDINGS DURING THE
                              PRECEDING FIVE YEARS

      Check whether the registrant  filed all documents and reports  required to
be filed by Section 12, 13 or 15(d) of the Exchange  Act after the  distribution
of securities under a plan confirmed by a court.
Yes       No     
    -----    -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

        State the number of shares  outstanding of each of the issuer's  classes
of common  equity,  as of the latest  practicable  date:  As of October 1, 1998,
there were 1,356,192 shares of common stock outstanding.

         Transitional Small Business Disclosure Format (check one):
Yes   X    No      
    -----     -----




<PAGE>






                PATAPSCO VALLEY BANCSHARES, INC. AND SUBSIDIARIES

                                    Contents
                                    --------


PART I - FINANCIAL INFORMATION                                            Pages

Item 1.   Financial Statements

    Consolidated statements of financial condition at September 30, 1998
    (unaudited) and December 31, 1997                                         3

    Consolidated statements of operations (unaudited)  for nine months
    and three months ended September 30, 1998 and 1997                        4

    Consolidated statements of cash flows (unaudited) for nine months
    ended September 30, 1998 and 1997                                       5-6

    Notes to Financial Statements                                             7


Item 2.  Management's Discussion and Analysis or Plan of Operation         8-11


PART II - OTHER INFORMATION


Item 5.  Other Information                                                   12

Item 6.  Exhibits
                  (a) Exhibit 27- Financial Data Schedule



Signatures                                                                   13


















<PAGE>




                          PART I- FINANCIAL INFORMATION

                PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
                             ELLICOTT CITY, MARYLAND

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                  September 30,     December 31,
ASSETS                                                1998              1997
------                                             (Unaudited)          
                                                  
Cash and due from banks                             $4,756,508        $5,085,542
Interest bearing assets in other banks               1,277,473            40,937
Federal funds sold                                   5,886,000        13,140,063
  Total cash and cash equivalents                   11,919,981        18,266,542
Securities available for sale                       14,497,004        15,160,333
Loans held for sale                                 19,413,050         5,540,585
Net loans, less allowance for credit losses of
  $1,440,841 and $1,615,008                        100,274,776        96,795,828
Premises and equipment                               4,504,886         2,108,434
Foreclosed real estate                                       0            23,581
Deferred income taxes                                  292,945           284,213
Accrued interest receivable                            828,050           706,904
Prepaid income taxes                                   266,517           496,763
Intangibles                                            394,979           406,392
Other assets                                           477,009           439,572
                                                       -------           -------
                                                  $152,869,197      $140,229,147
                                                   ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Deposits
  Non-interest-bearing                             $33,448,798       $31,006,823
  Interest-bearing                                  97,209,574        88,488,181
                                                    ----------        ----------
     Total deposits                                130,658,372       119,495,004

Securities sold under repurchase agreements          3,474,233         2,861,324
Dividend payable                                       169,093           444,287
Accrued interest payable                               579,550           548,505
Other liabilities                                    1,340,025           986,168
                                                     ---------           -------
                                                     5,562,901         4,840,284

      Total liabilities                            136,221,273       124,335,288

Stockholders' Equity
  Common stock, par value $0.01 per share; 
   authorized 50,000,000 shares; issued
   and outstanding 1,356,192 shares in 1998 and
   667,408 shares in 1997                               13,562             6,674
  Surplus                                           11,654,551        11,307,989
  Retained earnings                                  4,959,175         4,546,605
  Accumulated other comprehensive income                20,636            32,591
                                                        ------            ------
     Total stockholders equity                      16,647,924        15,893,859
                                                    ----------        ----------
                                                  $152,869,197      $140,229,147
                                                   ===========       ===========

       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.


                                       3
<PAGE>






                PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
                             ELLICOTT CITY, MARYLAND

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>


                                                        For Nine Months Ended                For Three Months Ended
                                                            September 30,                         September 30,
                                                          1998              1997             1998              1997
                                                          ---------------------------------------------------------

<S>     <C>    <C>    <C>    <C>    <C>    <C>
INTEREST INCOME
Loans, including fees                               $7,900,981        $6,510,778       $2,710,904        $2,248,638
U.S. Treasury securities                               381,535           593,284          134,088           127,261
U.S Government agency securities                        95,289           174,420           23,995            53,011
State and municipal securities                          36,370            49,090           11,627            19,752
Federal funds sold                                     293,759           423,773           91,556           148,535
Other investments                                       46,986            37,917           16,813            13,521
                                                        ------            ------           ------            ------
    Total interest income                            8,754,920         7,789,262        2,988,983         2,610,718
INTEREST EXPENSE
Deposits                                             2,494,899         2,030,127          885,409           676,535
Other short-term borrowings                            227,298           105,941           61,723            33,838
                                                       -------           -------           ------            ------
    Total interest expense                           2,722,197         2,136,068          947,132           710,373

     Net interest income                             6,032,723         5,653,194        2,041,851         1,900,345
Provision for credit losses                                  0                 0                0                 0
      Net interest income after provision for
        credit losses                                6,032,723         5,653,194        2,041,851         1,900,345

NON-INTEREST INCOME
Service charges on deposit accounts                    599,390          483,674           205,743           186,190
Mortgage banking fees and gains                      1,260,521                 0          247,655                 0
Other fees and commissions                             179,079           182,498           51,187            52,489
                                                       -------           -------           ------            ------
       Total non-interest income                     2,038,990           666,172          504,585           238,679

NON-INTEREST EXPENSES
Salaries                                             3,031,174         1,724,247          946,407           622,719
Employee benefits                                      697,456           398,150          228,860           139,461
Occupancy                                              622,228           353,109          191,999           120,194
Furniture and equipment                                620,800           386,604          248,296           159,466
Other                                                1,647,934         1,201,955          641,129           450,266
                                                     ---------         ---------          -------           -------
         Total non-interest expenses                 6,619,592        4,064,065         2,256,691         1,492,106

Income before taxes                                  1,452,121         2,255,301          289,745           646,918
Income taxes                                           525,612           824,445          104,918           243,812
                                                       -------           -------          -------           -------
Net income                                             926,509         1,430,856        184,827             403,106
Change in unrealized gain (loss) on securities
  available for sale                                   (11,955)           27,907            1,066            25,185
                                                       --------           ------            -----            ------

Comprehensive  income                                 $914,554        $1,458,763         $185,893          $428,291
                                                      --------        ----------         --------          --------

Basic and diluted earnings per share                     $0.68            $1.09             $0.14             $0.32
                                                          ====             ====              ====              ==== 
</TABLE>


       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.


                                       4
<PAGE>





                                                          
                PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
                             ELLICOTT CITY, MARYLAND

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



<TABLE>
<CAPTION>
                                                                     For the Nine Months Ended
                                                                             September 30,
                                                                         1998             1997
                                                                         ----             ----

<S>     <C>    <C>    <C>    <C>    <C>    <C>
Cash Flows From Operating Activities
------------------------------------

Interest received                                                  $8,679,748        $7,681,860
Fees and commissions received                                         778,469           666,172
Proceeds from sales of loans held for sale                        119,897,232                 0
Originations of loans held for sale                              (132,509,176)                0
Interest paid                                                      (2,691,152)       (2,152,415)
Cash paid to suppliers and employees                               (5,778,640)       (3,458,479)
Income taxes paid                                                    (384,387)         (953,622)
                                                                     ---------         ---------
                                                                  (12,007,906)        1,783,516

Cash Flows From Investing Activities
------------------------------------

Proceeds from maturities of securities available for sale          19,592,147        25,482,650
Purchases of securities available for sale                        (18,949,262)      (11,896,826)
Loans made, net of principal collected                             (3,523,955)      (13,054,158)
Payments of organization costs                                           (505)           (4,173)
Proceeds from sales of other real estate                               23,581           125,419
Purchases of premises, equipment, and software                     (2,821,255)       (1,087,147)
                                                                   -----------       -----------
                                                                   (5,679,249)         (434,235)

Cash Flows From Financing  Activities
-------------------------------------

Net increase (decrease) in time deposits                            8,721,393          (329,927)
Net increase (decrease) in other deposits                           2,441,975          (168,987)
Net increase (decrease) in other borrowed funds                       612,909          (644,140)
Dividends paid                                                       (789,133)         (712,355)
Dividends reinvested                                                  353,450           302,572
Stock options exercised                                                     0             5,459
                                                                            -             -----
                                                                   11,340,594        (1,547,378)

Net  increase (decrease) in cash and cash equivalents              (6,346,561)        (198,097)
Cash and equivalents at beginning of year                          18,266,542        18,571,732
                                                                   ----------        ----------
Cash and equivalents at end of year                               $11,919,981       $18,373,635
                                                                   ==========        ==========

</TABLE>



       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.


                                       5

<PAGE>






                PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
                             ELLICOTT CITY, MARYLAND

                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



                                                      For the Nine Months Ended
                                                             September 30,
                                                        1998              1997
                                                        ----              ----


Reconciliation of Net Income to Net Cash Flows Provided
-------------------------------------------------------
  By Operating Activities
  -----------------------

Net income                                            $926,509        $1,430,856

Adjustments to Reconcile Net Income to Net Cash
-----------------------------------------------
  Provided by Operating Activities
  --------------------------------



Depreciation, amortization and losses                 437,688           413,405
Deferred taxes                                         (1,210)                3
Increase (decrease) in;
  Deferred loan fees                                   45,007            15,041
  Accrued interest payable                             31,045           (16,347)
  Income taxes payable                                (87,811)          (79,799)
  Other liabilities                                   441,668           221,543
  Loans held for sale                             (13,872,465)                0
Decrease (increase) in;
  Accrued interest receivable                        (121,146)         (122,281)
  Prepaid taxes                                       230,246           (49,381)
  Other assets                                        (37,437)          (29,524)
                                                  ------------        ----------
                                                 $(12,007,906)       $1,783,516
                                                  ============        ==========







       The accompanying notes to consolidated financial statements are an
                        integral part of these statements


                                       6




<PAGE>

                PATAPSCO VALLEY BANCSHARES INC. AND SUBSIDIARIES
                             ELLICOTT CITY, MARYLAND

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 1 - Principles of consolidation
         ---------------------------

                          The  consolidated  financial  statements  include  the
              accounts of Patapsco  Valley  Bancshares  Inc.  ( the "Company") ,
              The Central Maryland Service Corporation ("CMSC"),  Commercial and
              Farmers Bank (the "Bank") and its subsidiaries,  Founders Mortgage
              Company,  Inc. ("Founders"), C&F Insurance Agency, Inc. and Rogers
              Avenue Realty,  Inc. All  inter-company  accounts and transactions
              have been eliminated in the  accompanying  consolidated  financial
              statements.

Note 2 - Basis of Presentation
         ---------------------

                         The  accompanying   unaudited   consolidated  financial
               statements  have  been  prepared  in  accordance  with  generally
               accepted accounting  principles for interim financial information
               and  in  accordance   with  the   instructions  to  form  10-QSB.
               Accordingly,  they do not include all of the disclosures required
               by  generally   accepted   accounting   principles  for  complete
               financial   statements.   In  the  opinion  of  management,   all
               adjustments  necessary for a fair  presentation of the results of
               operations  for  the  interim   periods  have  been  made.   Such
               adjustments  were normal and recurring in nature.  The results of
               operations  for the nine months ended  September  30, 1998 do not
               necessarily  reflect  the results  that may be  expected  for the
               entire fiscal year December 31, 1998 or any other interim period.
               The  consolidated   financial   statements   should  be  read  in
               conjunction  with  the  consolidated   financial  statements  and
               related  notes which are  incorporated  in the  Company's  Annual
               Report for the year ended December 31, 1997, and Form 10SB/A.

Note 3 - Earnings Per Share
         ------------------

                         Earnings  per share is  presented  in  accordance  with
               Statement  of  Financial   Accounting  Standards  No.  128.  This
               Statement   requires  dual  presentation  of  basic  and  diluted
               earnings per share ( EPS ) with a reconciliation of the numerator
               and denominator of the EPS computations.  Basic per share amounts
               are based on weighted average shares of common stock outstanding.
               Diluted  earnings  per share assume the  conversion,  exercise or
               issuance of all  potential  common stock  instruments  unless the
               effect  is to  reduce  a loss or  increase  earnings  per  share.
               Average shares outstanding are adjusted giving retroactive effect
               of a 100% stock  dividend  declared  on  September  15,1998,  and
               payable  on  October 1,  1998.  No  adjustments  were made to net
               income for all periods  presented.  The basic and diluted average
               shares  outstanding  for the nine and three month  periods are as
               follows:
 
<TABLE>
<CAPTION>
                                                       Nine Months Ended                   Three Months Ended
                                                         September 30,                       September 30,
                                                      1998              1997             1998               1997
                                                      ----              ----             ----               ----
<S>                                                <C>            <C>                <C>                <C>     
         Net income                                $926,509       $1,430,856         $184,827           $428,291
                                                   --------       ----------         --------           --------
         Weighted average shares
           Outstanding - Basic                    1,352,463        1,332,700        1,354,476          1,334,797
         Diluted securities: 
           Options                                    1,757                0            2,113                  0
                                                      -----                -            -----                  -
         Adjusted weighted average
           Shares- Diluted                        1,354,220         1,332,700       1,356,589          1,334,797
           Basic and diluted EPS                      $0.68             $1.09           $0.14              $0.32
                                                       ====              ====            ====               ====
</TABLE>

Note 3 - Reclassification 
         ---------------- 

                         Certain prior year's amounts have been  reclassified to
               conform to current year's presentation.


                                        7
<PAGE>





ITEM 2            MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

         In  addition  to  the  historical  information  contained  herein,  the
discussion in this Form 10-QSB contains certain forward-looking  statements that
involve risks and  uncertainties,  such as  statements  of the Company's  plans,
strategies,  objectives,  expectations  and intentions,  including,  among other
statements,  statements  involving the Bank's projected loan and deposit growth,
loan  collateral  values,   collectability  of  loans,  anticipated  changes  in
non-interest income, payroll and branching expenses, branch and office expansion
of the Bank and its affiliates,  and liquidity  levels.  These statements may be
identified  by  such   forward-looking   terminology  as  "expect",   "believe",
"anticipate",  or by expressions of confidence  such as "continuing" or "strong"
or similar  statements or variations of such terms. The Company's actual results
could differ  materially from those  discussed  herein and involve certain risks
and uncertainties.  These risks and uncertainties  include,  but are not limited
to, general  economic  conditions and competition in the geographic and business
areas in which the Company and its subsidiaries operate, inflation, fluctuations
in interest rates,  legislation,  and  governmental  regulation.  The cautionary
statements  made in this Form 10-QSB  should be read as being  applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB.

FINANCIAL CONDITION

         Total assets of the Company were $152,869,000 as of September 30, 1998,
compared to  $140,229,000 as of December 31, 1997, an increase of $12,640,000 or
9.01 percent.  The increase was primarily  attributable  to an increase in loans
held for sale of  $13,872,000,  an  increase in net loans of  $3,479,000  and an
increase in premises and equipment of $2,396,000.  These increases were slightly
offset by a decline in federal funds sold of  $7,254,000.  The increase in loans
held for sale and net loans is part of  management's  strategy to continue  with
the  Founders  operation  and to  emphasize  services  to small and medium  size
businesses and professional practices.  While retail loan demand continues to be
soft,  management  plans  to  grow  this  portfolio  in the  future  in  part by
additional product promotions.

         Total  Liabilities were  $136,221,000 as of September 30, 1998 compared
to  $124,335,000  as of December 31, 1997,  an increase of  $11,886,000  or 9.56
percent.  The  increase  was  primarily  due  to  an  increase  in  deposits  of
$11,163,000.  This  increase was the result of the Bank opening a branch  during
the fourth  quarter of 1997 and  aggressively  marketing for new  deposits.  The
campaign  continued  into 1998 and the branch has  exceeded all  projections  in
deposit  growth.  In September  1998,  the Bank opened an additional  branch and
another  branch  is  currently  under  construction.  With  the  current  branch
expansion, the deposit growth is expected to continue.

         Stockholders' equity was $16,648,000 as of September 30, 1998, compared
to  $15,894,000  as of December 31, 1997, an increase of $754,000.  The increase
was due to  comprehensive  income  for the  period  of  $915,000  and  dividends
reinvested in the amount $353,000. These increases were partially offset by cash
dividends of $514,000.

RESULTS OF OPERATIONS

GENERAL

         Net income for the nine and three months ended  September  30, 1998 was
$927,000 and $185,000  respectively,  as compared to $1,431,000 and $403,000 for
the same periods in 1997.  The  decreases in net income of $504,000 and $218,000
for the nine and three months ended September 30, 1998  respectively as compared
to the same  periods in 1997 was  primarily  due to an increase in  non-interest
expenses.  These  increases  were  slightly  offset by increases in net interest
income and non-interest income.


                                       8

<PAGE>




INTEREST INCOME

         Total interest income for the nine and three months ended September 30,
1998 was  $8,755,000  and  $2,989,000  respectively,  compared to $7,789,000 and
$2,611,000  for the same periods in 1997,  an increase of $966,000 or 12.40% and
$378,000 or 14.48% respectively. The increases were primarily due to an increase
of  $26,258,000  and  $26,729,000  in the average dollar amount of net loans and
loans held for sale for the nine and three months  ended in September  30, 1998.
The growth in loans  held for sale is  attributed  to the  Bank's  new  mortgage
banking subsidiary, Founders. These increases were partially offset by a decline
in the average dollar amount of investments by $6,482,000 and $7,805,000 for the
nine and three months ended  September  30, 1998 as compared to the same periods
in 1997.  The weighted  average yield on interest  earning  assets was 8.49% and
8.75% for the nine and three months ended  September  30, 1998 compared to 8.59%
and 8.65% for the same periods in 1997.

INTEREST EXPENSE

         Total  interest  expense for the nine and three months ended  September
30, 1998 was  $2,722,000 and $947,000  respectively,  compared to $2,136,000 and
$710,000  for the same  periods in 1997,an  increase  of  $586,000 or 27.43% and
$237,000 or 33.38% respectively. The increases resulted primarily from increases
in the  average  dollar  amount  of  deposits  of  $11,388,000  and  $10,380,000
respectively as the Bank conducted an aggressive marketing campaign, advertising
the Bank and its various new deposit products.

         The average  yields paid on Deposits  were 3.69% and 3.97% for the nine
and three  month  periods,  compared  to 3.43%  for both  periods  in 1997.  The
increases  were also the result of  increases  in the average  dollar  amount of
borrowings of  $3,542,000  and  $3,951,000  for the nine and three month periods
respectively.  The increase was due to the Bank  borrowing from the Federal Home
Loan Bank in order to fund new loan  originations  at  Founders.  There  were no
outstanding  Federal Home Loan Bank  borrowings  as of September  30, 1998.  The
weighted average rates paid on interest-bearing liabilities were 3.74% and 3.93%
for the nine and three months ended September 30, 1998, respectively as compared
to 3.47% and 3.46% for the same periods in 1997.

PROVISION FOR LOAN LOSSES

         For the nine and three  months  ended  September  30,  1998 and 1997 no
provision  for loan losses was charged to expense . The Bank  recorded  $174,000
and $17,000 in net  charge-offs  for the nine and three months  ended  September
30,1998 as  compared  to $89,000  and  $28,000  in net  recoveries  for the same
periods in 1997.

         While  management   believes  that,  based  on  information   currently
available,  the Bank's  allowance  for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of  allowance  for loan losses will be  sufficient  to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan  losses  will not be  necessary  if economic  and other  conditions  differ
substantially  from the economic  and other  conditions  at the time  management
determined the current level of the allowance for loan losses.

         The Bank's allowance for loan losses is established through a provision
for loan losses based on  management's  evaluation of the risks  inherent in its
loan  portfolio  and the  general  economy.  The  allowance  for loan  losses is
maintained at the amount management considers adequate to cover estimated losses
in loans  receivable that are deemed probable and estimable based on information
currently known to management.  The allowance is based upon a number of factors,
including current economic conditions, actual losses experience, diversification
and  size  of  the  portfolio,   adequacy  of  the  collateral,  the  amount  of
non-performing  loans and  industry  trends.  In  addition,  various  regulatory
agencies, as an


                                       9

<PAGE>



integral  part of their  examination  process,  periodically  review  the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provision for estimated loan losses based upon judgments different from those of
management.

         The Company has seen a recent  decrease in principal  balances of loans
past 90 days due and non-accrual.  Included in these loans is one commercial and
one mortgage totaling $846,616,  which management believes are subject to little
risk of loss based on collateral values.  However,  management cannot be certain
that  collateral  values will be maintained.  The commercial loan is a purchased
participation  from another  local  commercial  bank where the loan is receiving
regular payments through bankruptcy  proceedings.  Management is waiting for the
approval from the courts for  liquidation  of the  collateral for full payoff of
the loan.  The mortgage loan had a contract of sale from a  foreclosure  auction
rescinded and is in the process of re-auctioning the property.

NON-INTEREST INCOME

         Non-interest  income for the nine and three months ended  September 30,
1998 was  $2,039,000  and  $505,000,  respectively  as compared to $666,000  and
$239,000 for the same period in 1997. This increase was attributed to $1,261,000
in  mortgage  banking  fees and  gains,  which  was  generated  by the  Founders
operation  for the nine months ended  September  30, 1998.  Income from mortgage
banking fees and gains for the three months ended September  30,1998 was down as
compared to the prior  quarter due to an  increase  in loan  origination  costs.
These fees are  expected to increase in the last  quarter of 1998.  In addition,
the Bank has  experienced  an increase in service  charges on deposit  accounts.
These  increases  follow an increased  level of fees  collected for checks drawn
against  insufficient funds, because of increases in deposit accounts and due to
the  introduction of new checking  account programs that have monthly fees. With
the  continued  anticipated  expansion  of  the  Bank's  branch  network  and of
Founders, management expects to see increased levels of non-interest income.

NON-INTEREST EXPENSE

         Total  non-interest  expense  for  the  nine  and  three  months  ended
September 30, 1998 was  $6,620,000  and $2,257,000 as compared to $4,064,000 and
$1,492,000 for the same periods in 1997.

         A  significant  portion  of the  increase  in  non-interest  expense is
related to the  increases in salaries  and related  benefits of  $1,606,000  and
$413,000  for the nine and three  month  periods in 1998 as compared to the same
periods in 1997. The Company has added a significant  number of employees to the
payroll as a result of the  expansion in the Bank,  Founders and CMSC.  Salaries
and benefits also include cost of living  increases and benefit cost  increases.
Employee  expenses  continue  to  increase  as the  reflection  of the full year
salaries for the employees added in 1997 and as the Company continued to expand.

         Occupancy and furniture and equipment expense increased by $503,000 and
$161,000  for the nine and three  months  ended in 1998 as  compared to the same
periods in 1997. The increases are due to the Company  expanding its facilities,
making  improvements  to existing  facilities  and upgrading  equipment.  Absent
unforeseen  circumstances,  these  increases  are  expected  to  continue as new
branches are opened and a full year of depreciation  costs and equipment service
contracts are realized.  With more  facilities and  equipment,  the Company will
also require more maintenance, and the additional investment will be depreciated
over the estimated useful life of the asset.

         Other  expenses  increased  by $446,000  and  $191,000 for the nine and
three months ended  September  30, 1998 as compared to the same periods in 1997.
Increases were noted in marketing and  stationery  and supplies.  These areas of
increased  expense include costs associated with the promotion and establishment
of  Founders  and the new  branches.  In  addition,  the  Company  had adopted a
full-scale  marketing  program to compete  effectively  for  deposits and loans,
including direct mail, cable television


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commercials, newspaper advertising and product promotion.

INCOME TAX

         The Company's income tax expense was $526,000 and $105,000 for the nine
and three months ended  September  30, 1998 as compared to $824,000 and $244,000
for the same  periods in 1997.  The  changes  were  primarily  the result of the
variations  in pre-tax  income.  The  effective  tax rate for the nine and three
months ended  September 30, 1998 was 36.20% and 36.21% as compared to 36.55% and
37.68% in the same periods in 1997.

LIQUIDITY MANAGEMENT

         Liquidity  describes  the  ability  of the  Company  to meet  financial
obligations  that arise out of the  ordinary  course of  business.  Liquidity is
primarily needed to meet borrower and depositor  withdrawal  requirements and to
fund current and planned expenditures. The Company maintains its asset liquidity
position internally through short-term investments, the maturity distribution of
the investment portfolio, loan repayments,  proceeds from the sale of loans held
for sale and income from earning  assets.  A primary  source of cash is from the
proceeds from the sale of loans held for sale. In addition,  the Company  relies
on the  proceeds  from  maturity  of  securities  available  for  sale  and  the
investment  portfolio  contains  readily  marketable  securities  that  could be
converted to cash.  On the  liability  side of the balance  sheet,  liquidity is
affected by the timing of maturing  liabilities  and the ability to generate new
deposits or borrowings as needed. The Company may borrow up to $33,000,000 under
secured  lines of credit  with the  Federal  Home Loan Bank of  Atlanta  and has
available  lines  of  credit  of  $2,500,000  in  overnight  federal  funds  and
$1,000,000 in short-term credit from other correspondent  banks. The increase in
loans  held for  sale of  $13,872,000  or  250.37%  from  December  31,  1997 to
September 30, 1998 was primarily  funded by an increase in growth in Deposits of
8.9% and a reduction in federal funds sold of 55.20 %. The Company believes that
it has adequate  liquidity sources to meet all anticipated  liquidity needs over
the next  twelve  months.  While  management  plans to  continue  to rely on the
secured  lines of credit from the Federal Home Loan Bank of Atlanta,  management
knows of no trend or event  which will have a material  impact on the  Company's
ability to maintain liquidity at satisfactory levels.

         The  Company  announced  on  September  15,  1998,  that  the  Board of
Directors had declared a 100% stock dividend to all shareholders of record as of
that date. The dividend was distributed on October 1, 1998.

CAPITAL RESOURCES AND ADEQUACY

         One  measure  of  capital  adequacy  is the  leverage  ratio,  which is
calculated  by dividing  average  total assets for the most recent  quarter into
Tier l capital.  The regulatory  minimum for this ratio is 4%, with 6% being the
regulatory minimum for well-capitalized companies. The leverage capital ratio as
of September 30, 1998 was 10.43%.

         Another measure of capital adequacy is the risk-based capital ratio, or
the ratio of total capital to risk adjusted assets. Total capital is composed of
both  core  capital  (Tier  l) and  supplemental  capital  (Tier  2),  including
adjustments  for off balance  sheet  items,  such as letters of credit,  and the
different  degrees of risk among various  assets.  Regulators  require a minimum
risk-based  capital  ratio of 8 percent.  As of September  30,  1998,  the total
risk-based capital ratio was 15.01%.  According to FDIC capital guidelines,  the
Bank is considered to be "well capitalized ."

         The Bank opened a new branch in  September  1998 and is planing to open
another in December  1998 and  Founders  is planning to continue to expand.  The
funding  sources  for these  projects  are  primarily  Cash,  Federal  Funds and
maturities  of  Investment  Securities.  Management  knows of no other  trend or
event, that will have a material impact on capital.


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                           PART II. OTHER INFORMATION


Item 5. Other Information

              On September 28, 1998,  Barbara M. Broczkowski,  CPA, was hired as
the Vice  President  and Chief  Financial  Officer of the  Company and the Bank.
Prior to her current  position,  she served as a Partner of Anderson  Associates
LLP,  since  January,  1996 and as an Audit  Manager  for the  same  firm  since
December, 1986.


Item 6. Exhibits and Reports on Form 8-K

        (a)  Exhibits

             Exhibit
             Number
             ------

             27       Financial Data Schedule

        (b)  No reports have been filed on Form 8-K during the past quarter  for
which this report is filed.
























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SIGNATURES


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




                               PATAPSCO VALLEY BANCSHARES, INC.





    Date:  11/12/98            By: /s/ John S. Whiteside
           -------------           -------------------------
                                   John S. Whiteside
                                   President and Chief Executive Officer





    Date:  11/12/98            By:/s/ Barbara M. Broczkowski
           -------------       -----------------------------
                                  Barbara M. Broczkowski
                                  Vice President and Chief Financial Officer








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