SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C.

                                   FORM 10-QSB

         [X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 1998

                                       OR

        [ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

            For the transition period from ____________to____________

                           Commission File No. 0-24330

                            Bedford Bancshares, Inc.
             (Exact name of registrant as specified in its charter)

                    Virginia                              54-1709924
          --------------------------------------------------------------
          (State or other jurisdiction of              (I.R.S. Employer  
          incorporation or organization)             Identification No.)


                  125 West Main Street, Bedford, Virginia 24523
                  ---------------------------------------------
                    (Address of principal executive offices)


                                 (540) 586-2590
                                 --------------
              (Registrant's telephone number, including area code)


     Check whether issuer (1) filed all reports required to be filed by Sections
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 thNop.st 90 days. Yes X No .


State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.

        Class:  Common Stock, par value $.10 per share
                Outstanding at February 8, 1999: 2,285,530 shares

<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY

                              INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>


        PART I    FINANCIAL INFORMATION                                              PAGE
        ------    ---------------------                                              ----
<S>                                                                                 <C>
                                                                      
        Item 1.   Financial Statements                                               

                  Consolidated Statements of Financial Condition at
                  December 31, 1998 and September 30, 1998 (unaudited)                  1

                  Consolidated Statements of Income for the three months
                  ended December 31, 1998 and 1997 (unaudited)                          2

                  Consolidated Statements of Comprehensive Income for the three
                  months ended December 31, 1998 and 1997 (unaudited)                   3

                  Consolidated Statements of Cash Flows for the three months ended
                  December 31, 1998 and 1997 (unaudited)                                4

                  Notes to Unaudited Interim Consolidated Financial Statements          5

        Item 2.   Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                             6


        PART II   OTHER INFORMATION
        -------   -----------------

        Item 1.   Legal proceedings                                                    11

        Item 2.   Changes in Securities                                                11

        Item 3.   Defaults upon Senior Securities                                      11

        Item 4.   Submission of Matters to a Vote of Security Holders                  11

        Item 5.   Other Information                                                    11

        Item 6.   Exhibits and Reports on Form 8-K                                     11

SIGNATURES                                                                             12

</TABLE>


<PAGE>


                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                 Consolidated Statements of Financial Condition
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                              December 31   September 30
                                                                                                  1998          1998
                                                                                              -------------------------- 
                                                                                                    (In Thousands)
<S>                                                                                           <C>         <C>     
Assets
------

Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  4,516    $   5,666
Investment securities held to maturity (estimated market value of $1,324 and $2,147) . . . .       1,313        2,114
Marketable equity securities available for sale, at market value . . . . . . . . . . . . . .       4,442        4,396
Investment securities available for sale, at market value  . . . . . . . . . . . . . . . . .      12,315       12,424
Investment in Federal Home Loan Bank stock, at cost  . . . . . . . . . . . . . . . . . . . .       1,550        1,550
Loans receivable, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     132,937      129,744       
Foreclosed real estate, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          83            -   
Property and equipment, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1,133        1,160
Accrued interest receivable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         876          996
Deferred income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         123           95
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         275          566
                                                                                                     ---          ---
    Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $159,563     $158,711
                                                                                                --------     --------
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $108,916     $107,086
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . .      28,000       29,000
Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . . . . . . . . . .         303          528
Dividends payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         184          184
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         539          665
                                                                                                     ---          ---     
     Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     137,942      137,463
                                                                                                --------     --------

Commitments and contingent liabilities

Stockholders' equity
--------------------
Preferred stock, par value $.10 per share, authorized 250,000; issues and outstanding, none            -            -
Common stock, par value $.10 per share, authorized 2,750,000 shares; issued and outstanding
  2,297,900 at December 31, 1998 and September 30, 1998 . . . . . . . . . . . . . . . . . .          230          230
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       11,000       10,939
Retained earnings, substantially restricted . . . . . . . . . . . . . . . . . . . . . . . .       11,244       10,900
Unrealized (loss) gain on securities available for sale . . . . . . . . . . . . . . . . . .           16           60
Less stock acquired by ESOP and RRP . . . . . . . . . . . . . . . . . . . . . . . . . . . .         (869)        (881)
                                                                                                     ---          ---
     Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       21,621       21,248
                                                                                                --------     --------
     Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . .     $159,563     $158,711
                                                                                                --------     --------
</TABLE>


See notes to consolidated financial statements.


                                     - 1 -


<PAGE>

                                   BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                                      Consolidated Statements of Income
                                                 (Unaudited)

<TABLE>
<CAPTION>
                                                                        Three Months Ended
                                                                           December 31
                                                                        1998         1997
                                                                        ----         ----
                                                                      (Dollars in Thousands
                                                                      Except Per Share Data)

<S>                                                                   <C>          <C>       
Interest Income:
 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $2,610        $2,404    
 U.S. Government Obligations including agencies  . . . . . . .            304           217
 Other investments, including overnight deposits . . . . . . .             68            47
                                                                       ------        ------
  Total interest income  . . . . . . . . . . . . . . . . . . .          2,982         2,668
                                                                       ------        ------
Interest Expense:                                                                   
 Deposits  . . . . . . . . . . . . . . . . . . . . . . . . . .          1,135         1,167
 Borrowed funds  . . . . . . . . . . . . . . . . . . . . . . .            396           204
                                                                       ------        ------
  Total interest expense . . . . . . . . . . . . . . . . . . .          1,531         1,371
                                                                       ------        ------
  Net interest income  . . . . . . . . . . . . . . . . . . . .          1,451         1,297
Provision for credit losses  . . . . . . . . . . . . . . . . .             23            30
                                                                       ------        ------
  Net interest income after provision for credit losses  . . .          1,428         1,267
                                                                       ------        ------
Noninterest income:                                                                 
 Service charges and fees on loans . . . . . . . . . . . . . .            158            95
 Other customer service fees and commissions . . . . . . . . .             85            68
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .             27            24
                                                                       ------        ------
  Total noninterest income . . . . . . . . . . . . . . . . . .            270           187
                                                                       ------        ------
Noninterest expense:                                                                
 Personnel compensation and benefits . . . . . . . . . . . . .            474           463
 Occupancy and equipment . . . . . . . . . . . . . . . . . . .             80            80
 Data processing . . . . . . . . . . . . . . . . . . . . . . .             96            85
 Federal insurance of accounts . . . . . . . . . . . . . . . .             15            16
 Advertising . . . . . . . . . . . . . . . . . . . . . . . . .             29            33
 Professional fees . . . . . . . . . . . . . . . . . . . . . .             63            72
 Net cost of (gain on) operations of foreclosed real estate  .              3             -   
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .             88            86
                                                                       ------        ------
  Total noninterest expense  . . . . . . . . . . . . . . . . .            848           835
                                                                       ------        ------
   Income before income taxes  . . . . . . . . . . . . . . . .            850           619
Provision for income taxes . . . . . . . . . . . . . . . . . .            323           235
                                                                       ------        ------
  Net income . . . . . . . . . . . . . . . . . . . . . . . . .         $  527        $  384
                                                                       ======        ======
  Basic earnings per share . . . . . . . . . . . . . . . . . .         $ 0.24        $ 0.18
                                                                       ======        ======
  Diluted  earnings per share  . . . . . . . . . . . . . . . .         $ 0.23        $ 0.16
                                                                       ======        ======
</TABLE>

                                                                               
See notes to consolidated financial statements.

                                       -2-

<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                 Consolidated Statements of Comprehensive Income
                                   (Unaudited)


                                                             Three Months Ended
                                                                 December 31
                                                              1998        1997
                                                              ----        ----
                                                                In Thousands
                                                                 of Dollars)

Net Income . . . . . . . . . . . . . . . . . . . . . . . .    $527        $384

Other comprehensive income, net of tax effect:

     Unrealized gains on securities available for sale . .     (44)          6 
                                                              ----        ----

Comprehensive Income . . . . . . . . . . . . . . . . . . .    $483        $390 
                                                              ====        ==== 

See notes to consolidated financial statements.


                                       -3-


<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                           Three Months Ended
                                                                                              December 31
                                                                                            1998        1997
                                                                                            ----        ----
                                                                                         (Dollars in Thousands)

<S>                                                                                      <C>        <C>    
Operating activities:
  Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $  527     $  384 
  Adjustments to reconcile net income to net cash provided by operating activities
    Provision for credit losses  . . . . . . . . . . . . . . . . . . . . . . . . . . .        23         30
    Provision for depreciation and amortization  . . . . . . . . . . . . . . . . . . .        35         37
    Amortization of investment security premiums and accretion of discounts, net              (2)        (3)
    (Increase) decrease in deferred income taxes . . . . . . . . . . . . . . . . . . .       (28)         9
    Loans originated for sale  . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (852)         -
    Proceeds from sale of loans originated for sale  . . . . . . . . . . . . . . . . .       943          -   
    (Increase) decrease in accrued interest receivable . . . . . . . . . . . . . . . .       120         40
    (Increase) decrease in other assets  . . . . . . . . . . . . . . . . . . . . . . .       291        (26)
    Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . .      (126)        40
                                                                                           -----      -----     
      Net cash provided by (used in) operating activities  . . . . . . . . . . . . . .       931        511
                                                                                           -----      -----     
Investing activities:
    Proceeds from the maturities of investments  . . . . . . . . . . . . . . . . . . .     2,800      1,000
    Proceeds from the sales of investments . . . . . . . . . . . . . . . . . . . . . .         -        992
    Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . .    (2,000)      (500)
    Net increase in loans to customers . . . . . . . . . . . . . . . . . . . . . . . .    (3,211)    (1,599)
    Net proceeds from the sale of foreclosed real estate . . . . . . . . . . . . . . .         -        200
    Principal collected on mortgage-backed securities  . . . . . . . . . . . . . . . .         1          1
    Purchases of premises, equipment and leasehold improvements  . . . . . . . . . . .        (9)       (16)
    Net (increase) decrease in foreclosed real estate, net . . . . . . . . . . . . . .       (83)         -
                                                                                           -----      -----     
      Net cash provided by (used in) investing activities  . . . . . . . . . . . . . .    (2,502)        78
                                                                                           -----      ----- 
Financing activities:
    Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (184)      (160)
    Net increase (decrease) in customer deposits . . . . . . . . . . . . . . . . . . .     1,830       (225)
    Proceeds from (repayment of ) advances and other borrowed money  . . . . . . . . .    (1,000)    (2,000)
    Net increase (decrease) in advance payments from borrowers for
      taxes and insurance  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (225)      (256)
                                                                                           -----      -----     
Net cash provided by financing activities  . . . . . . . . . . . . . . . . . . . . . .       421     (2,641)
                                                                                           -----      -----     
                                                                                                             
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . .    (1,150)    (2,052)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . .     5,666      5,446
                                                                                           -----      -----     
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . .    $4,516     $3,394
                                                                                          ======     ======     

</TABLE>

See notes to consolidated financial statements.


                                       -4-


<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
          Notes to Unaudited Interim Consolidated Financial Statements
                                December 31, 1998

NOTE 1: BASIS OF PRESENTATION
-----------------------------
     The accompanying  unaudited interim consolidated  financial statements have
been  prepared in  accordance  with  generally  accepted  accounting  principles
("GAAP") for interim financial information. Accordingly, they do not include all
of the  information  and  footnotes  required by generally  accepted  accounting
principles for complete financial statements.
     The  accompanying   unaudited  interim  consolidated  financial  statements
include the accounts of Bedford  Bancshares,  Inc. (the  "Company")  and Bedford
Federal Savings Bank (the "Bank"), a wholly owned subsidiary of the Company. All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.
     In the  opinion  of  management,  all  adjustments  (consisting  of  normal
recurring  accruals)  considered  necessary for the fair presentations have been
included.  The results of operations  for the interim  period ended December 31,
1998 are not necessarily indicative of the results which may be expected for any
future  period.  For  further  information,   refer  to  consolidated  financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended September 30, 1998.

NOTE 2: EARNINGS PER SHARE
--------------------------
     Earnings per share calculated in accordance with SFAS 128 is as follows:

                                                           Three Months Ended
                                                               December 31
                                                         -----------------------
                                                           1998          1997
                                                           ----          ----
Basic Earnings Per Share:
-------------------------
Net Income . . . . . . . . . . . . . . . . . . . . .     $527,000      $384,000
                                                         ========      ========
Average Shares Outstanding, Net of
  unallocated ESOP Shares (93,334 and 109,334
  at December 31, 1998 and 1997, respectively.)  . .    2,204,566     2,175,516
                                                        =========     ========= 
Basic Earnings Per Share . . . . . . . . . . . . . .        $0.24         $0.18
                                                            =====         =====
Diluted Earnings Per Share:
---------------------------
Net Income . . . . . . . . . . . . . . . . . . . . .     $527,000      $384,000
                                                         ========      ========
Average Shares Outstanding, Net of
  unallocated ESOP Shares (93,334 and 109,334
  at December 31, 1998 and 1997, respectively) . . .    2,204,566     2,175,516
    Dilutive effect of RRP Plan shares . . . . . . .       19,704        20,254
    Dilutive effect of Stock Options . . . . . . . .      106,250       127,488
                                                          -------       -------
Average Shares Outstanding . . . . . . . . . . . . .    2,330,520     2,323,258
                                                        =========     =========
Diluted Earnings Per Share . . . . . . . . . . . . .        $0.23         $0.16
                                                            =====         =====

NOTE 3: COMPREHENSIVE INCOME
----------------------------
     Effective  October 1, 1998,  the Company  adopted FASB  Statement  No. 130,
"Reporting  Comprehensive  Income."  Statement No. 130 requires the reporting of
comprehensive  income in addition to net income from  operations.  Comprehensive
income  is a  more  inclusive  financial  reporting  methodology  that  includes
disclosure  of certain  financial  information  that has  historically  not been
recognized in the calculation of net income.
     Statement No. 130 is effective for fiscal years  beginning  after  December
15, 1997.  Reclassification of financial statements for earlier periods provided
for comparative purposes is required.

                                       -5-

<PAGE>


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

FORWARD-LOOKING STATEMENTS
--------------------------

     Certain   statements   in  this   quarterly   report  on  Form  10-QSB  are
forward-looking  and may be  identified  by the use of words such as  "believe",
"expect", "anticipate", "should", "planned", "estimated", and "potential". These
statements are based on the Company's current expectations. A variety of factors
could cause the Company's  actual  results and  experience to differ  materially
from  the  anticipated   results  or  other   expectations   expressed  in  such
forward-looking  statements.  The risks and  uncertainties  that may  affect the
operations,  performance,  development,  and results of the  Company's  business
include   interest  rate   movements,   competition   from  both  financial  and
non-financial  institutions,  the timing and  occurrence (or  nonoccurrence)  of
transactions  and  events  that  may be  subject  to  circumstances  beyond  the
Company's control, and general economic conditions.

FINANCIAL CONDITION
-------------------

     Total assets of the  Corporation  were $159.6 million at December 31, 1998,
compared to $158.7 million on September 30, 1998. Net loans receivable increased
$3.2 million,  with funding  provided by reductions of $ 1.1 million in cash and
cash equivalents and $.8 million in investment securities held to maturity,  and
a $1.8 million increase in deposits.  Stockholders'  equity was $21.6 million on
December 31, 1998, up $373,000 from the level on September 30, 1998.

     At December 31, 1998,  nonperforming assets increased $387,000 to $919,000,
or .57% of total assets from $532,000,  or .34% of total assets at September 30,
1998.  This increase was due due  primarily to the addition of four  residential
real estate loans in the amount of $543,000,  partially offset by the removal of
one large consumer loan of $186,000.  These real estate loans are secured and no
material  loss is  anticipated.  The  $83,000  of  foreclosed  property  held at
December 31, 1998 was  classified  as  nonperforming  at September  30, 1998. At
December 31, 1998, the allowance for credit losses totaled  $782,000 and equaled
85.09% of nonperforming assets.

RESULTS OF OPERATIONS
---------------------

COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
-----------------------------------------------------------

     General.  Net income  for the three  months  ended  December  31,  1998 was
$527,000,  up 37.2% from the $384,000 earned in the comparable  period of fiscal
1998. Net interest income for the first quarter of fiscal 1999 was $1.5 million,
compared  to net  interest  income for the first  quarter of fiscal 1998 of $1.3
million.  In  addition,  $23,000 was added to the  allowance  for credit  losses
during the first quarter of fiscal 1999,  compared to $30,000 for the comparable
period of fiscal 1998.

     Interest  Income.  Total interest  income  amounted to $3.0 million for the
three months ended  December  31, 1998,  up from the $2.7 million  earned in the
comparable quarter of fiscal 1998. The increase was primarily due to an increase
in the average  balance of loans  receivable  to $131.5  million for the quarter
ended December 31, 1998 from $116.8 million for the same quarter of fiscal 1998.

                                       -6-

<PAGE>

     Interest  Expense.  For the three  months ended  December  31, 1998,  total
interest expense rose to $1.5 million from the $1.4 million for the three months
ended December 31, 1997,  primarily due to an increase in the average balance of
interest  bearing  liabilities to $129.6 million for the first quarter of fiscal
1999 from $111.1 million for the same quarter of fiscal 1998.  Average  interest
bearing  deposits  were  $101.5  million for the first  quarter of fiscal  1999,
compared  to an average  of $97.8  million  for the same three  months of fiscal
1998.

     Net Interest  Income.  For the three months  ended  December 31, 1998,  net
interest  income was $1.5  million,  up $154,000  from the net  interest  income
earned in the same period of 1997.  During the three months  ended  December 31,
1998, the  Corporation's  interest rate spread and net interest margin decreased
to 2.96% and 3.75%, respectively,  compared to 3.13% and 3.92%, respectively for
the same period of 1997. These decreases are primaily the result of the 24 basis
point decline in the yield on mortgage loans, from 7.79% in the first quarter of
fiscal  1998 to 7.55% in the first  quarter of fiscal  1999.  The lower yield on
mortgage loans for the three months ended December 31, 1998 is reflective of the
overall lower market rates for mortgage loans.

     Provision for Credit  Losses.  The  provision  for credit losses  decreased
$7,000 to $23,000 for the three months ended  December 31, 1998 from $30,000 for
the comparable 1997 period.  Although  non-performing  assets increased $387,000
from September 30, 1998,  management believes the allowance for credit losses is
sufficient  since the  loans  are  adequately  secured.  Management  of the Bank
regularly  assesses the credit risk of the loan  portfolio  based on information
available at such times,  including  trends in the local real estate  market and
levels of the Bank's  non-performing  loans and assets.  The  assessment  of the
adequacy of the allowance for loan losses involves subjective judgment regarding
future events and there can be no assurance that additional  provisions for loan
losses will not be required in future periods.

     Total Noninterest Income. Noninterest income totaled $270,000 for the first
quarter of fiscal  1999,  compared  to $187,000  for the same  quarter of fiscal
1998.  The  increase  was  primarily  attributable  to strong  growth in service
charges and fees on loans,  due to new fees  introduced in the second quarter of
fiscal 1998, and expansion of other customer service fees and  commissions.  The
increases in both of these categories  reflects the impact of the strategic plan
implemented during fiscal 1998.

     Total Noninterest  Expense.  Total noninterest expense was $848,000 for the
three months ended December 31, 1998, up $13,000,  or 1.6%,  from the comparable
quarter of fiscal 1998. Data processing expenses increased $11,000 or 12.9%, due
to  the  installation  of a new  installment  loan  origination  system  and  an
increased level of items being processed.  Professional fees declined $9,000, or
12.5%,  due to fees paid in fiscal 1998 in connection with the Bank's three year
strategic plan.

     Provision for Income Taxes. The provision for income taxes was $323,000 for
the three  months  ended  December  31,  1998,  up from the  $235,000  provision
recorded in the three months ended December 31, 1997. The increase  reflects the
higher  profitability  of the Company in the quarter ended December 31, 1998, as
the effective tax rate for both periods was 38%.


                                       -7-
<PAGE>

CAPITAL COMPLIANCE
------------------

The  following  table  presents  the  Bank's   compliance  with  its  regulatory
requirements of December 31, 1998. (Dollar amounts in thousands).

                                                           December 31, 1998
                                                       -------------------------
                                                                      Percentage
                                                                      of assets
                                                                      ---------

GAAP Capital . . . . . . . . . . . . . . . . .         $19,703           12.33 %
                                                       =======           =====
Tangible capital . . . . . . . . . . . . . . .         $19,703           12.33 %
Tangible capital requirement . . . . . . . . .           2,397            1.50
                                                         -----            ----
Excess . . . . . . . . . . . . . . . . . . . .         $17,306           10.83 %
                                                       =======           =====
Core capital . . . . . . . . . . . . . . . . .         $19,703           12.33 %
Core capital requirement . . . . . . . . . . .           6,392            4.00
                                                         -----            ----
Excess . . . . . . . . . . . . . . . . . . . .         $13,311            8.33 %
                                                       =======            ====
Total risk-based capital (1) . . . . . . . . .         $20,386           21.57 %
Total risk-based capital requirement (1) . . .           7,561            8.00
                                                         -----            ----
Excess . . . . . . . . . . . . . . . . . . . .         $12,825           13.57 %
                                                       =======           =====

------------------------------------------
(1)  Based on risk-weighted assets of $94,512

     Management believes that under current regulations,  the Bank will continue
to meet its minimum  capital  requirements  in the  foreseeable  future.  Events
beyond the control of the Bank,  such as increased  interest rates or a downturn
in the economy in areas in which the Bank operates could adversely affect future
earnings  and as a result,  the  ability of the Bank to meet its future  minimum
capital requirements.

LIQUIDITY
---------

     The Bank's liquidity is a measure of its ability to fund loans, pay deposit
withdrawals, and other cash outflows in an efficient, cost effective manner. The
Bank's  primary  source of funds are deposits  and  scheduled  amortization  and
prepayment of loans. During the past several years, the Bank has used such funds
primarily to fund maturing time deposits, pay savings withdrawals,  fund lending
commitments,  purchase new investments,  and increase liquidity.  The Bank funds
its operations internally but also borrows funds from the Federal Home Loan Bank
("FHLB") of Atlanta.  As of December 31, 1998, such borrowed funds totaled $28.0
million.  Loan  payments  and maturing  investments  are greatly  influenced  by
general interest rates, economic conditions and competition.

     The  Bank  is  required  under  Federal  regulations  to  maintain  certain
specified  levels of  "liquid  assets,"  which  include  certain  United  States
government  obligations  and other  approved  investments.  Current  regulations
require  the  Bank  to  maintain  liquid  assets  of  not  less  than  4% of net
withdrawable  accounts plus  short-term  borrowings.  At December 31, 1998,  the
Bank's regulatory liquidity was 18.7%.

     The amount of certificate accounts which are scheduled to mature during the
next twelve months ending December 31, 1999, is approximately  $38.9 million. To
the extent that these deposits do not remain at the Bank upon maturity, the Bank
believes that it can replace these

                                       -8-

<PAGE>

funds with other deposits, excess liquidity, FHLB advances, or other borrowings.
It has been the Bank's  experience  that a substantial  portion of such maturing
deposits remain at the Bank.

     At December 31, 1998,  the Bank had loan  commitments  outstanding of $ 8.1
million.  Funds required to fulfill these commitments are derived primarily from
current excess  liquidity,  deposit  inflows,  borrowings or loan and investment
repayments.

THE YEAR 2000 ISSUE
-------------------

     The Year  2000("Y2K")  issue  relates  to  whether  computer  systems  will
properly  recognize and process date sensitive  information on and after January
1, 2000.  Systems that do not properly recognize such information could generate
erroneous data or fail. The Bank is heavily dependent on computer systems in the
conduct of substantially all of its business activities.

     The Company has both a Y2K Committee  and a Y2K Plan that were  established
and  adopted  in  1998.  The  Plan , as  recommended  by the  Federal  Financial
Institutions   Examination   Council,  is  based  on  five  phases:   Awareness,
Assessment,  Renovation, Validation and Implementation. The Company continues in
the Validation  phase,  or testing  phase,  which is scheduled for completion by
June 30, 1999 and is proceeding on time.  The  Implementation  Phase is targeted
for  completion  by  September  30,  1999.  In the event that any of its mission
critical computer systems fail to meet the Y2K requirements, or if other systems
that the Bank depends upon for automated  processing  its ongoing  transactions,
such as electrical or data  transmission , fail, the Bank is required by Federal
regulators to develop and test a comprehensive contingency plan. The contingency
plan is currently being developed and should be completed by September 30, 1999.

     Successful   and  timely   completion  of  the  Y2K  project  is  based  on
management's best estimates  derived from various  assumptions of future events,
which are  inherently  uncertain,  including  the  testing  results  of the core
processing system  maintained by a third party service bureau,  and readiness of
all vendors,  suppliers and  customers.  No assurance can be given that the Plan
will be sucessfully  completed by the Year 2000, in which case the Company could
incur data processing delays,  mistakes or failures.  These delays,  mistakes or
failures could have a significant adverse impact on the financial  statements of
the Company.

OTHER DEVELOPMENTS
------------------

     On  January  19,  1999,  Bedford  Bancshares  announced  its  intention  to
repurchase up to 10% of its 2,297,900 outstanding common shares. The repurchases
will be made in open-market  transactions  subject to the availability of stock.
Repurchased  shares become  authorized but unissued  shares and will be utilized
for general  corporate and other  purposes,  including the issuance of shares in
connection with the exercise of stock options.

                                       -9-

<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                              Key Operating Ratios
                                   (Unaudited)

                                                              For the
                                                         Three Months Ended
                                                             December 31
                                                      --------------------------
                                                       1998(1)          1997(1)
                                                      ---------        ---------
                                                             (Unaudited)


Basic earnings per common share  . . . . . . .         $0.24            $0.18
                                                       =====            ===== 
Diluted earnings per common share  . . . . . .         $0.23            $0.16
                                                       =====            =====
Return on average assets . . . . . . . . . . .          1.32 %           1.11 %
Return on average equity . . . . . . . . . . .          9.82 %           7.76 %
Interest rate spread . . . . . . . . . . . . .          2.96 %           3.13 %
Net interest margin  . . . . . . . . . . . . .          3.75 %           3.92 %
Noninterest expense to average assets  . . . .          2.19 %           2.41 %
Net charge-offs to average outstanding loans .             -                -



                                                         At              At
                                                     December 31    September 30
                                                        1998            1998
                                                     -----------    ------------
                                                        (Dollars in Thousands)

Nonaccrual and 90 days past due loans  . . . . . . .    $836             $532
Foreclosed real estate . . . . . . . . . . . . . . .      83                -
                                                        ----             ----
Total nonperforming assets . . . . . . . . . . . . .    $919             $532
                                                        ====             ====


Allowance for credit losses to nonperforming assets    85.09 %         143.80 %
Nonperforming loans to total loans . . . . . . . . .    0.69 %           0.41 %
Nonperforming assets to total assets . . . . . . . .    0.57 %           0.34 %

Book value per share . . . . . . . . . . . . . . . .   $9.41            $9.25
                                                       =====            =====

--------------
(1)     The ratios for the three-month periods are annualized


                                      -10-

<PAGE>

                           PART II - OTHER INFORMATION
                           ---------------------------


Item 1.   Legal Proceeedings
          ------------------ 

               Neither  the  Corporation  nor the Bank was  engaged in any legal
          proceedings  of a material  nature at December 31, 1998.  From time to
          time, the Corporation is a party to legal  proceedings in the ordinary
          course of business wherein it enforces its security interest in loans.

Item 2.   Changes in Securities
          ---------------------          

          Not applicable.

Item 3.   Defaults upon Senior Securities
          -------------------------------

          Not applicable.

Item 4.   Submission of Matters to a Vote of Security Holders
          ---------------------------------------------------

          Not applicable.

Item 5.   Other Information
          -----------------

          Not applicable.

Item 6.   Exhibits and Reports on Form 8-K
          --------------------------------

          (a)     Exhibit
                  Exhibit 27:  Financial Data Schedule (electronic filing only)

          (b)     Reports on Form 8-K

                  Not applicable.

                                      -11-

<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY

                                   SIGNATURES


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



                                                 BEDFORD BANCSHARES, INC.


Date: February 8, 1999                       By: /s/ Harold K. Neal
                                                 -------------------------------
                                                 Harold K. Neal
                                                 President and
                                                 Chief Executive Officer
                                                 (Principal Executive Officer)


Date: February 8, 1999                       By: /s/ James W. Smith
                                                 -------------------------------
                                                 James W. Smith
                                                 Vice President and Treasurer
                                                 (Principal Accounting and
                                                  Financial officer)


                                      -12-