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 June 30, 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 tthe past 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 August 7, 1998: 2,297,900 shares




<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY

                              INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
         PART I     FINANCIAL INFORMATION                                                            PAGE
         ------     ---------------------                                                            ----
<S>       <C>       <C>                                                                               <C>
          Item 1.   Financial Statements

                    Consolidated Statements of Financial Condition at
                    June 30, 1998 and September 30, 1997 (unaudited)                                    1

                    Consolidated Statements of Income for the three and nine months
                    ended June 30, 1998 and 1997 (unaudited)                                            2

                    Consolidated Statements of Cash Flows for the nine months ended
                    June 30, 1998 and 1997 (unaudited)                                                  3

                    Notes to Unaudited Interim Consolidated Financial Statements                        4

          Item 2.   Management's Discussion and Analysis of Financial Condition
                    and Results of Operations                                                           5


         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>
                                                                                                     June 30,         September 30
                                                                                                       1998                1997
                                                                                                       ----                ----
                                                                                                           (In Thousands)
<S>                                                                                                  <C>                <C>        
Assets
------
Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $  4,897           $  5,446   
Investment securities held to maturity (estimated market value of $2,113 and $4,581)   . . . .          2,099              4,596 
Mortgage-backed securities held to maturity (estimated market value of $16 and $20)    . . . .             16                 20
Marketable equity securities available for sale, at market value   . . . . . . . . . . . . . .          4,341              4,238
Investment securities available for sale, at market value  . . . . . . . . . . . . . . . . . .         15,279              5,006 
Investment in Federal Home Loan Bank stock, at cost  . . . . . . . . . . . . . . . . . . . . .          1,550                932 
Loans receivable, net . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        125,483            116,093 
Foreclosed real estate, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             --                212 
Property and equipment, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          1,128              1,214 
Accrued interest receivable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            958                847 
Deferred income taxes . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             63                 58
Other assets . . . . . . . . . . .  . . . . . . .  . . . . . . . . . . . . . . . . . . . . . .            494                427
                                                                                                     --------           -------- 
    Total assets . . . . . .  . . . .  . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $156,308           $139,089
                                                                                                     ========           ========
                                                                                                                      
Liabilities and Stockholders' Equity                                                                                  
------------------------------------                                                                                  
Liabilities                                                                                                           
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $104,660           $103,612
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . . . .         30,000             15,000
Advances from borrowers for taxes and insurance . . . .  . . . . . . . . . . . . . . . . . . .            296                502 
Dividends payable . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . .            184                160 
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .            436                194
                                                                                                     --------           -------- 
     Total liabilities . . . . . . . . . . . . . . . . . . . . .. .. . . . . . . . . . . . . .        135,576            119,468
                                                                                                     --------           -------- 
                                                                                                                     
Commitments and contingent liabilities                                                                                
                                                                                                                      
Stockholders' equity                                                                                                  
Preferred stock, par value $.10 per share, authorized 250,000 shares; issued and outstanding, none         --                 -- 
Common stock, par value $.10 per share, authorized 2,750,000 shares; issued and outstanding                           
  2,297,900  and 2,284,850 at June 30, 1998 and September 30, 1997,  respectively. . . . . . .            230                228 
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         10,969             10,836 
Retained earnings, substantially restricted . . . . . . . . . . . . . . . . . . . . . . . .  .         10,456              9,649 
Unrealized gain on securities available for sale, net . . . . . . . . . . . . . . . . . . .  .              5                 22 
Less stock acquired by ESOP and RRP . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .           (928)            (1,114)
                                                                                                     --------           -------- 
     Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .         20,732             19,621 
                                                                                                     --------           -------- 
     Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . .  .       $156,308           $139,089 
                                                                                                     ========           ======== 
</TABLE>
                                                                          
See notes to consolidated financial statements.             
                                                                       
                                                                       
                                                                       
                                       -1-
<PAGE>
                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                        Consolidated Statements of Income
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                          Three Months Ended              Nine Months Ended
                                                                                June 30                        June 30
                                                                         1998             1997           1996           1997
                                                                         ----             ----           ----           ----
                                                                             (Dollars in Thousands, Except Per Share Data)

<S>                                                                     <C>             <C>            <C>             <C>   
Interest Income:
 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $2,525          $2,342         $7,352          $6,868
 U.S. Government Obligations including agencies . . . . . . . . ..         282             204            733             583 
 Other investments, including overnight deposits . . . . . . . . .         128              40            243             136
                                                                         -----           -----          -----           -----
  Total interest income. . . . . . . . . . . . . . . . . . . . . .       2,935           2,586          8,328           7,587
                                                                         -----           -----          -----           -----
Interest Expense:
 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . ..       1,122           1,075          3,423           3,158
 Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . ..         382             217            831             654
                                                                         -----           -----          -----           -----
  Total interest expense . . . . . . . . . . . . . . . . . . . . .       1,504           1,292          4,254           3,812
                                                                         -----           -----          -----           -----
  Net interest income . . . . . . . . . . . . . . . . . . . . . ..       1,431           1,294          4,074           3,775
Provision for credit losses . . . . . . . . . . . . . . . . . . ..          30              25             90              75
                                                                         -----           -----          -----           -----
  Net interest income after provision for credit losses . . . . ..       1,401           1,269          3,984           3,700
                                                                         -----           -----          -----           -----
Noninterest income:
 Service charges and fees on loans . . . . . . . . . . . . . . . .         112              87            322             237
 Other customer service fees and commissions . . . . . . . . . . .          82              58            227             178
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           8               9             64              39
                                                                         -----           -----          -----           -----
  Total noninterest income . . . . . . . . . . . . . . . . . . . .         202             154            613             454
                                                                         -----           -----          -----           -----
Noninterest expense:
 Personnel compensation and benefits . . . . . . . . . . . . . . .         432             429          1,334           1,231
 Occupancy and equipment . . . . . . . . . . . . . . . . . . . . .          78              82            229             234
 Data processing . . . . . . . . . . . . . . . . . . . . . . . . .          97              84            273             254
 Federal insurance of accounts . . . . . . . . . . . . . . . . . .          16              16             48              73
 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . .          28              46             89             105 
 Professional fees . . . . . . . . . . . . . . . . . . . . . . . .          32              28            157             100
 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          83              81            261             258
                                                                         -----           -----          -----           -----
  Total noninterest expense . . . . . . . . . . . . . . . . . . ..         766             766          2,391           2,255
                                                                           ---             ---          -----           -----
   Income before income taxes . . . . . . . . . . . . . . . . . ..         837             657          2,206           1,899
Provision for income taxes . . . . . . . . . . . . . . . . . . . .         325             250            850             721
                                                                         -----           -----          -----           -----
  Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .        $512            $407         $1,356          $1,178
                                                                         =====           =====          =====           =====

  Basic earnings per share . . . . . . . . . . . . . . . . . . . .       $0.23           $0.19          $0.62           $0.54
                                                                         =====           =====          =====           =====

  Diluted  earnings per share . . . . . . . . . . . . . . . . . ..       $0.22           $0.18          $0.58           $0.52
                                                                         =====           =====          =====           =====
</TABLE>

See notes to consolidated financial statements 

                                       -2-
<PAGE>
                     BEDFORD BANCSHARES, INC AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                            Nine Months Ended
                                                                                         ------ June 30 -------
                                                                                            1998        1997
                                                                                            ----        ----
                                                                                         (Dollars in Thousands)
<S>                                                                                      <C>         <C>     
Operating activities:
  Net income .........................................................................   $  1,356    $  1,178
  Adjustments to reconcile net income to net cash provided by operating activities :
    Provision for credit losses ......................................................         90          75
    Provision for depreciation and amortization ......................................        112         120
    Amortization of investment security premiums and accretion of discounts, net .....         (7)         (8)
    (Increase) decrease in deferred income taxes .....................................         (5)         66
    (Gain) loss on sale of loans, investments and foreclosed real estate .............         (3)         (8)
    Loans originated for sale ........................................................       --          (185)
    Proceeds from sale of loans originated for sale ..................................       --           185
    (Increase) decrease in accrued interest receivable ...............................       (111)       (166)
    (Increase) decrease in other assets ..............................................        (67)        117
    Increase (decrease) in other liabilities .........................................        242         345
                                                                                           ------      ------
      Net cash provided by (used in) operating activities ............................      1,607       1,719
                                                                                           ------      ------
Investing activities:
    Proceeds from the sale of investment securities available for sale................        992       1,000
    Proceeds from the maturities of investment securities available for sale .........      2,500        --   
    Proceeds from the maturities of investment securities held to maturity ...........      2,000       1,400
    Purchases of investment securities available for sale ............................    (13,266)     (3,695)
    Purchase of Federal Home Loan Bank stock .........................................       (618)       --   
    Net increase in loans to customers ...............................................     (9,480)     (6,683)
    Principal collected on mortgage-backed securities ................................          4          26
    Purchases of premises, equipment and leasehold improvements ......................        (26)       (128)
    Proceeds from the sale of REO ....................................................        212          48
                                                                                           ------      ------
      Net cash provided by (used in) investing activities ............................    (17,682)     (8,032)
                                                                                           ------      ------
Financing activities:
    Exercise of stock options ........................................................        103        --   
    Allocation of ESOP and RRP shares ................................................        189        --   
    Dividends paid ...................................................................       (481)       (402)
    Net increase (decrease) in customer deposits .....................................      1,048       4,669
    Proceeds from advances and other borrowed money ..................................     15,000       2,500
    Purchase of stock by ESOP and RRP ................................................        (86)        (23)
    Net increase (decrease) in advance payments from borrowers for taxes and insurance       (206)       (217)
    Other, net .......................................................................        (41)       --   
                                                                                           ------      ------
Net cash provided by financing activities ............................................     15,526       6,527
                                                                                           ------      ------
Increase (decrease) in cash and cash equivalents .....................................       (549)        214
Cash and cash equivalents at beginning of period .....................................      5,446       3,075
                                                                                           ------      ------
Cash and cash equivalents at end of period ...........................................   $  4,897    $  3,289
                                                                                           ======      ======
</TABLE>

See notes to consolidated financial statements

                                       -3-
<PAGE>
                     BEDFORD BANCSHARES, INC AND SUBSIDIARY
          Notes to Unaudited Interim Consolidated Financial Statements
                                  June 30, 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 "Corporation") and Bedford
Federal Savings Bank (the "Bank"), a wholly owned subsidiary of the Corporation.
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 June 30, 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 Corporation's  Annual Report on
Form 10-KSB for the year ended September 30, 1997.

NOTE 2: EARNINGS PER SHARE
     On May 20, 1998 , the Corporation's  Board of Directors  approved a 2-for-1
stock  split in the form of a 100% stock  dividend.  The stock split was payable
June 15, 1998 to  shareholders of record on June 1, 1998. All per share data has
been adjusted to reflect the effects of the stock split.
     The  Corporation  adopted  Statement  of  Financial   Accounting  Standards
("SFAS")  128,  as of  December  31,  1997.  SFAS  is  effective  for  financial
statements,  including  interim reports issued for periods ending after December
15, 1997.  SFAS 128  provides a different  method for  calculating  earnings per
share than was used in accordance with APB 15, "Earnings Per Share."
     SFAS 128 provides  for the  calculation  of basic and diluted  earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares  outstanding  for the period.  Diluted  earnings  per share  reflects the
potential  dilution  of  securities  that could  share in earnings of an entity,
similar to fully diluted earnings per share.
     Earnings per share calculated in accordance with SFAS 128 is as follows:


<TABLE>
<CAPTION>
                                                    Three Months Ended      Nine Months Ended
                                                        June 30                 June 30
                                                 ---------------------   -----------------------
                                                    1998        1997        1998         1997
                                                 ---------   ---------   ----------   ---------- 

<S>                                              <C>         <C>         <C>          <C>       
Basic Earnings Per Share:
Net Income ...................................   $ 512,000   $ 407,000   $1,356,000   $1,178,000
                                                 =========   =========   ==========   ==========
Average Shares Outstanding, Net of
  unallocated ESOP Shares (109,334 and 121,694
  at June 30, 1998 and 1997, respectively ) ..   2,180,575   2,161,264    2,188,566    2,162,150
                                                 =========   =========   ==========   ==========
Basic Earnings Per Share .....................   $    0.23   $    0.19   $    0.62    $     0.54
                                                 =========   =========   ==========   ==========

Diluted Earnings Per Share:
Net Income ...................................   $ 512,000   $ 407,000   $1,356,000   $1,178,000
                                                 =========   =========   ==========   ==========
Average Shares Outstanding, Net of
  unallocated ESOP Shares (109,334 and 121,694
  at June 30, 1998 and 1997, respectively ) ..   2,180,575   2,161,264    2,188,566    2,162,150
    Dilutive effect of RRP Plan shares .......      26,008      25,015       25,852       23,680
    Dilutive effect of Stock Options .........     121,507      78,809      120,155       71,435
                                                 ---------   ---------   ----------   ----------
Average Shares Outstanding ...................   2,328,090   2,265,088    2,334,573    2,257,265
                                                 =========   =========   ==========   ==========
Diluted Earnings Per Share ...................   $    0.22   $    0.18   $    0.58    $     0.52
                                                 =========   =========   ==========   ==========
</TABLE>

                                       -4-

<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

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

          The  Corporation's  assets totaled $156.3 million at June 30, 1998, an
increase of $17.2  million from  September  30, 1997.  The asset  expansion  was
concentrated  in  investment  securities  available for sale which were up $10.3
million and in net loans  receivable  which  reflected a $9.4 million  increase.
Funding for the asset  growth was  provided  by a $15  million  increase in FHLB
borrowings and a $1.0 million rise in deposits.  Stockholders'  equity was $20.7
million on June 30, 1998,  up $1.1  million from the $19.6  million on September
30, 1997. 

          At June 30, 1998, nonperforming assets were $328,000, or .21% of total
assets,  compared to $730,000,  or .52% of total  assets at September  30, 1997.
During the quarter ended June 30, 1998, nonperforming mortgage loans decreased a
net $283,000, while nonperforming consumer loans decreased $42,000. The decrease
in  nonperforming  mortgage loans was primarily due to the pay-off of a $220,000
loan,  while the  reduction in  nonperforming  consumer  loans was the result of
several loans being brought current.

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

COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
-------------------------------------------------------

          General.  For the three  months  ended  June 30,  1998 net  income was
$512,000,  up 25.8% from the $407,000 earned in the comparable  period of fiscal
1997. Net interest income for the third quarter of fiscal 1998 was $1.4 million,
compared  to $1.3  million for the same  quarter of fiscal  1997.  In  addition,
$30,000 was added to the allowance for credit losses during the third quarter of
fiscal 1998, compared to $25,000 for the comparable period of fiscal 1997.

          Interest Income.  Total interest income was $2.9 million for the three
months ended June 30, 1998,  compared to $2.6 million  earned in the  comparable
quarter of fiscal 1997. The $349,000  increase was due to a $9.0 million rise in
the average balance of loans receivable,  an increase of $6.5 million in average
investment  securities  available  for sale and a $6.4  million  rise in average
overnight funds.

          Interest  Expense.  For the three months  ended June 30,  1998,  total
interest expense rose to $1.5 million from the $1.3 million for the three months
ended June 30,  1997,  primarily  due to an increase  in the average  balance of
interest  bearing  liabilities to $125.0 million for the third quarter of fiscal
1998 from $108.1  million for the same quarter of fiscal 1997.  The increase was
primarily in FHLB  advances  which  averaged  $26.7 million for the three months
ended June 30, 1998,  compared to $14.4  million for the third quarter of fiscal
1997.

          Net Interest  Income.  For the three  months ended June 30, 1998,  net
interest  income was $1.4  million,  up $132,000  from the net  interest  income
earned in the same period of 1997.  During the three months ended June 30, 1998,
the  Corporation's  interest  rate spread and net interest  margin  decreased to
3.09% and 3.85%, respectively,  compared to 3.28% and 4.03%,  respectively,  for
the same period of 1997. A 14 basis point decline in the yield on earning assets
combined with a 4 basis point rise in the cost of funds were the primary reasons
for the declines.


                                       -5-
<PAGE>

Provision for Credit Losses.  For the three months ended June 30, 1998, the Bank
recorded a provision for credit  losses of $30,000,  compared to $25,000 for the
same period of fiscal 1997.  During the third quarter of fiscal 1998,  net loans
receivable  rose $4.6  million,  compared to an increase of $3.1  million in the
same  quarter of 1997,  which was the  primary  reason for the  increase  in the
provision.

Total  Noninterest  Income.  Noninterest  income totaled  $202,000 for the third
quarter of fiscal  1998,  compared  to $154,000  for the same  quarter of fiscal
1997. The $48,000  increase was  attributable  to a $25,000  increase in service
charges  and  fees on  loans,  due to  recently  introduced  processing  fees on
mortgage and consumer loans,  and an increase in other customer service fees and
commissions  which were up $24,000  primarily  due to higher  income on checking
accounts,  and increased ATM charges.  Other  noninterest  income was relatively
unchanged when comparing the third quarter of fiscal 1998 to the same quarter of
fiscal 1997.

          Total Noninterest Expense.  Total noninterest expense was $766,000 for
the  three  months  ended  June  30,  1998,  unchanged  from the  total  for the
comparable quarter of fiscal 1997. Data processing expenses were $97,000 for the
third quarter of fiscal 1998, compared to $84,000 for the same quarter of fiscal
1997 due to higher  expenses  related to year-end  processing and an increase in
processing  volume.  Advertising  expenses of $28,000 for the three months ended
June 30, 1998 decreased $18,000 from the comparable period of fiscal 1997 due to
expenses related to an equity line promotion in 1997.

Provision for Income Taxes.  The provision for income taxes was $325,000 for the
three months ended June 30, 1998, up from the $250,000 provision recorded in the
three months ended June 30, 1997. The increase reflects the higher profitability
of the Company in the quarter ended June 30, 1998, as the effective tax rate for
both periods was 38%.

COMPARISON OF NINE MONTHS ENDED JUNE 30, 1998 AND 1997
------------------------------------------------------

Forethe.nine months ended June 30, 1998 net income was $1.4 million, up
15.1% from the $1.2 million earned in the comparable  period of fiscal 1997. Net
interest  income  for the first  nine  months of fiscal  1998 was $4.1  million,
compared to net interest  income for the nine months ended June 30, 1997 of $3.8
million.  For the first  nine  months of fiscal  1998,  noninterest  income  was
$613,000 compared to $454,000 for the same period of 1997.  Noninterest  expense
totaled $2.4  million for the nine months ended June 30, 1998,  up from the $2.3
million for the comparable period of fiscal 1997.

Interest  Income.  Total interest  income  amounted to $8.3 million for the nine
months ended June 30, 1998,  up from the $7.6 million  earned in the  comparable
period of fiscal 1997.  The increase  was  attributable  to expansion of average
loans  receivable to $119.8 million for the nine months ended June 30, 1998 from
$112.4  million  for the same  period  of 1997.  In  addition,  overnight  funds
averaged $4.1 million and  investment  securities  averaged  $10.7 for the first
nine months of 1998,  compared to  averages  of $1.1  million and $7.4  million,
respectively,  for the comparable  period of 1997. These increases  reflects the
Bank's  continued  success  in  originating  mortgage  loans and  expanding  the
consumer and commercial loan  portfolios,  as well as effective  asset/liability
management strategies.



                                       -6-
<PAGE>

Interest  Expense.  For the nine  months  ended June 30,  1998,  total  interest
expense  rose to $4.3  million  from the $3.8  million for the nine months ended
June 30, 1997,  primarily due to an increase in the average  balance of interest
bearing  liabilities  to $117.6 million for the first nine months of fiscal 1998
from  $106.3  million  for the  comparable  period of fiscal  1997.  The average
balance of interest bearing  deposits  increased $6.4 million from $91.9 million
for the nine  months  ended June 30,  1997 to $98.3  million for the nine months
ended June 30, 1998.  In addition,  average FHLB advances were $19.3 million for
the first nine months of fiscal  1998,  up $4.9  million from the same period of
fiscal 1997.

Net Interest  Income.  Net interest  income was $4.1 million for the nine months
ended June 30,  1998,  up 7.9% from the net interest  income  earned in the same
period of 1997. The  Corporation's  interest rate spread and net interest margin
were 3.11% and 3.88% for the first  nine  months of fiscal  1998,  down from the
3.25% and 4.00%,  respectively,  for the same nine months of fiscal  1997.  A 10
basis point decline in the yield on earning assets combined with a 4 basis point
rise in the cost of funds were the primary reasons for the declines.

Provision for Credit  Losses.  For the nine months ended June 30, 1998, the Bank
recorded a provision for credit  losses of $90,000,  compared to $75,000 for the
same nine months of fiscal 1997.  Expansion of the consumer and commercial  loan
portfolios and continued  growth of the mortgage loan portfolio were the primary
reasons for the higher provision.

Total Noninterest Income. For the first nine months of fiscal 1998,  noninterest
income  totaled  $613,000,  compared  to  $454,000  for the same period of 1997.
Service  charges and fees on loans were up $85,000 due to fees  associated  with
refinancings  and loan  modifications,  and loan processing fees. Other customer
service  fees and  commissions  rose  $49,000  due to higher  income on checking
accounts and increased ATM usage.  Other  noninterest  income was up $25,000 due
primarily to income from the sale of mortgage insurance.

Total Noninterest  Expense.  Total noninterest  expense was $2.4 million for the
nine months ended June 30, 1998, up $136,000 from the $2.3 million total for the
comparable  period of fiscal 1997.  Personnel  compensation and benefits totaled
$1.3 million for the nine months June 30, 1998,  up $103,000  from the same nine
months of 1997,  primarily due to merit increases and the increased valuation of
ESOP shares for fiscal 1998 which is based on the period end market value of the
Corporation's  common  stock.  Professional  fees totaled  $157,000 for the nine
months ended June 30,  1998,  compared to $100,000 for the same period of fiscal
1997 due primarily to consulting fees associated  with the  Corporation's  three
year strategic  business plan.  Advertising  expenses were $89,000 for the first
nine month of fiscal 1998, down $16,000 from the $105,000 for the same period of
1997 due to an equity line promotion in 1997.

Provision for Income Taxes.  The provision for income taxes was $850,000 for the
nine months  ended June 30,  1998,  compared to $721,000  for the same period of
fiscal  1997.  The  increase  was due to the  increase in taxable  income 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  capital
requirements of June 30, 1998. (Dollar amounts in thousands).

                                                              June 30, 1998
                                                         -----------------------
                                                                     Percentage
                                                                     of assets
                                                                     ---------

GAAP Capital . . . . . . . . . . . . . . . . . .         $18,615       11.90 %
                                                         =======       =====  

Tangible capital . . . . . . . . . . . . . . . .         $18,615       11.90 %
Tangible capital requirement . . . . . . . . . .           2,346        1.50
                                                           -----        ----
  Excess . . . . . . . . . . . . . . . . . . . .         $16,269       10.40 %
                                                         =======       =====  

Core capital . . . . . . . . . . . . . . . . . .         $18,615       11.90 %
Core capital requirement . . . . . . . . . . . .           6,256        4.00
                                                           -----        ----
  Excess . . . . . . . . . . . . . . . . . . . .         $12,359        7.90 %
                                                         =======        ====  

Total risk-based capital (1). . . . . . . . . ..         $19,274       23.82 %
Total risk-based capital requirement (1). . . .            6,473        8.00
                                                           -----        ----
  Excess . . . . . . . . . . . . . . . . . . . .         $12,801       15.82 %
                                                         =======       =====  

-----------------
(1)  Based on risk-weighted assets of $80,909


     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  sources 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 June 30, 1998,  such  borrowed  funds  totaled $30.0
million.  Loan  payments  and maturing  investments  are greatly  influenced  by
general interest rates, economic conditions and competition.

    The OTS adopted a new liquidity  rule  effective  November 24, 1997. The new
rule lowers liquidity  requirements for savings associations from 5 to 4 percent
of the  association's  liquidity base. In addition,  the liquidity base has been
reduced by modifying  the  definition  of net  withdrawable  accounts to exclude
accounts  with  maturities  exceeding  one  year.  Another  change  removes  the
requirement that


                                       -8-
<PAGE>

certain  obligations  must mature in five years or less in order to qualify as a
liquid  asset.  The new rule also  eliminates  a separate  limit  that  required
savings  associations to hold assets equal to 1 percent of a thrift's  liquidity
base in cash  or  short  term  liquid  assets.  At June  30,  1998,  the  Bank's
regulatory liquidity as measured by the new requirement was 19.44%.

     The amount of certificate accounts which are scheduled to mature during the
next twelve months ending June 30, 1999, is approximately  $40.2 million. To the
extent  that these  deposits do not remain at the Bank upon  maturity,  the Bank
believes that it can replace these 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 June  30,  1998,  the Bank had  loan  commitments  outstanding  of $10.4
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 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 interpret 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 Bank has  conducted  a
comprehensive  review of its computer  systems,  including  its core  processing
systems maintained by a third party service bureau, to identify the systems that
could  be  affected  by the Year  2000  Issue.  Management  has  identified  the
corrective   actions   required   to  ensure  that  the  Bank's   internal   and
vendor-maintained  systems that are date sensitive will be Year 2000  compliant,
and is  monitoring  the progress of vendor  maintained  systems in effecting the
necessary modifications. In addition, the Bank is required by Federal regulators
to develop contingency plans should any of its mission critical computer systems
fail to meet the Year 2000 requirements.  These contingency plans will be tested
and reviewed by the both the Bank's  management  and  regulators to ensure their
reliability.

     Based on a preliminary  estimates,  the Bank expects to spend approximately
$125,000 to $150,000  from 1998 through 1999 to modify its computer  information
systems enabling proper processing of transactions relative to the year 2000 and
beyond. The Bank continues to evaluate appropriate courses of corrective action,
including  replacement  of  certain  systems  whose  associated  costs  would be
recorded  as assets  and  amortized.  Accordingly,  the Bank does not expect the
amounts  required  to be  expensed  over the next two  years to have a  material
effect on its financial position or results of operations.


                                       -9-
<PAGE>
                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                              Key Operating Ratios

<TABLE>
<CAPTION>
                                                 Three Months Ended   Nine Months Ended
                                                      June 30              June 30
                                                  1998(1)  1997(1)    1998(1)   1997(1)
                                                  -------  -------    -------   -------
                                                             (Unaudited)


<S>                                              <C>       <C>       <C>       <C>  
Basic earnings per share  (2). . . . . . . . .    $0.23     $0.19     $0.62     $0.54
Diluted earnings per share (2). . . . . . . .     $0.22     $0.18     $0.58     $0.52
Return on average assets . . . . . . . . . . .     1.33 %    1.22 %    1.25 %    1.19 %
Return on average equity . . . . . . . . . . .     9.95 %    8.52 %    8.96 %    8.36 %
Interest rate spread . . . . . . . . . . . . .     3.09 %    3.28 %    3.11 %    3.25 %
Net interest margin . . . . . . . . . . . . ..     3.85 %    4.03 %    3.88 %    4.00 %
Noninterest expense to average assets . . . ..     1.99 %    2.29 %    2.20 %    2.28 %
Net charge-offs to average outstanding loans .       -- %    0.01 %      -- %    0.06 %

</TABLE>

                                                          June 30   September 30
                                                            1998        1997
                                                         ---------  -----------
                                                         (DOLLARS IN THOUSANDS)
                                                             (Unaudited)
Nonaccrual loans . . . . . . . . . . . . . . . . . . . .    $328        $518    
Repossessed real estate . . . . . . . . . . . . . . . ..      --         212
                                                            ----         ---
Total nonperforming assets . . . . . . . . . . . . . . .    $328        $730
                                                            ====        ====
                                                                       
                                                                       
                                                                       
Allowance for credit losses to nonperforming assets . ..  232.93 %     92.88 %
Nonperforming loans to total loans . . . . . . . . . . .    0.26 %      0.63 %
Nonperforming assets to total assets . . . . . . . . . .    0.21 %      0.52 %
                                                                   

Book value per share (2). . . . . . . . . . . . . . . ..   $9.02       $8.59
                                                           =====       =====


--------------
(1)   The ratios for the three- and nine-month periods are annualized
(2)   All per share data has been adjusted to reflect the 2-for-1 stock dividend
      paid June 15, 1998.


                                      -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 June 30, 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
                   On  May  29,  1998,   the   Corporation   filed  a  Form  8-K
                   announcing  Board  authorization  to repurchase up to  5%  of
                   its outstanding Common  Stock. In addition,  the  Corporation
                   announced  a  two  for  one stock split in the form of a 100%
                   stock dividend.


                                      -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: August 12, 1998                     By: /s/ Harold K. Neal
                                               ---------------------------------
                                               Harold K. Neal
                                               President and
                                               Chief Executive Officer
                                               (Principal Executive Officer)


Date: August 12, 1998                     By: /s/ James W. Smith
                                               ---------------------------------
                                               James W. Smith
                                               Vice President and Treasurer
                                               (Principal Accounting and
                                               Financial officer)




                                   -12-