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 March 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 tNo .ast 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 May 8, 1998: 1,148,950 shares


<PAGE>
                    BEDFORD BANCSHARES, INC. AND SUBSIDIARY

                              INDEX TO FORM 10-QSB

<TABLE>
<CAPTION>


          PART I                 FINANCIAL INFORMATION                                                            PAGE
          ------                 ---------------------                                                            ----
<S>                              <C>                                                                               <C> 

          Item 1.                Financial Statements

                                 Consolidated Statements of Financial Condition at
                                 March 31, 1998 and September 30, 1997 (unaudited)                                   1

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

                                 Consolidated Statements of Cash Flows for the six months ended
                                 March 31, 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>

                                                                                              March 31    September 30
                                                                                                1998           1997
                                                                                              -------------------------
                                                                                                   (In Thousands)

<S>                                                                                           <C>           <C>     
Assets
------
Cash and cash equivalents ................................................................... $  12,283     $  5,446
Investment securities held for investment (estimated market value of $3,110 and $4,581) .....     3,099        4,596
Mortgage-backed securities held for investment (estimated market value of $17 and $20) ......        17           20
Marketable equity securities available for sale, at market value ............................     4,294        4,238
Investment securities available for sale, at market value ...................................     8,535        5,006
Investment in Federal Home Loan Bank stock, at cost .........................................     1,300          932
Loans receivable, net .......................................................................   120,924      116,093
Foreclosed real estate, net .................................................................         0          212
Property and equipment, net .................................................................     1,157        1,214
Accrued interest receivable .................................................................       889          847
Deferred income taxes .......................................................................        58           58
Other assets ................................................................................       593          427
                                                                                              ---------     --------
    Total assets ............................................................................ $ 153,149     $139,089
                                                                                              =========     ========

Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits ....................................................................................   106,027      103,612
Advances from the Federal Home Loan Bank ....................................................    26,000       15,000
Advances from borrowers for taxes and insurance .............................................       444          502
Dividends payable ...........................................................................       161          160
Other liabilities ...........................................................................       166          194
                                                                                              ---------     --------
     Total liabilities ......................................................................   132,798      119,468
                                                                                              ---------     --------

Commitments and contingent liabilities

Stockholders' equity
--------------------
Preferred stock, par value $.10 per share, authorized 250,000; issued and outstanding, none..        --           --
Common stock, par value $.10 per share, authorized 2,750,000 shares; issued and outstanding
  1,148,950 and 1,142,425 at March 31, 1998 and September 30, 1997,  respectively ...........       115          114
Additional paid in capital ..................................................................    10,917       10,836
Retained earnings, substantially restricted .................................................    10,231        9,763
Unrealized gain on securities available for sale ............................................        27           22
Less stock acquired by ESOP and RRP .........................................................      (939)      (1,114)
                                                                                              ---------     --------
     Total stockholders' equity .............................................................    20,351       19,621
                                                                                              ---------     --------
     Total liabilities and stockholders' equity ............................................. $ 153,149    $ 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   Six Months Ended
                                                              March 31          March 31
                                                           1998      1997     1998     1997
                                                          ------    -----   ------   ------
                                                                  (Dollars in Thousands, 
                                                                   Except Per Share Data)
<S>                                                       <C>       <C>     <C>      <C>   
Interest Income:
 Loans ................................................   $2,423    2,308   $4,827   $4,526
 U.S. Government Obligations including agencies .......      234      189      451      379
 Other investments, including overnight deposits ......       68       42      115       96
                                                          ------    -----   ------   ------
  Total interest income ...............................    2,725    2,539    5,393    5,001
                                                          ------    -----   ------   ------
Interest Expense:
 Deposits .............................................    1,134    1,030    2,301    2,083
 Borrowed funds .......................................      245      222      449      437
                                                          ------    -----   ------   ------
  Total interest expense ..............................    1,379    1,252    2,750    2,520
                                                          ------    -----   ------   ------
  Net interest income .................................    1,346    1,287    2,643    2,481
Provision for credit losses ...........................       30       25       60       50
                                                          ------    -----   ------   ------
  Net interest income after provision for credit losses    1,316    1,262    2,583    2,431
                                                          ------    -----   ------   ------
Noninterest income:
 Service charges and fees on loans ....................      115       63      210      150
 Other customer service fees and commissions ..........       77       59      145      120
 Other ................................................       32       23       56       30
                                                          ------    -----   ------   ------
  Total noninterest income ............................      224      145      411      300
                                                          ------    -----   ------   ------
Noninterest expense:
 Personnel compensation and benefits ..................      438      410      902      809
 Occupancy and equipment ..............................       71       80      151      152
 Data processing ......................................       91       90      176      170
 Federal insurance of accounts ........................       16       15       32       57
 Advertising ..........................................       28       25       61       59
 Professional fees ....................................       53       38      125       65
 Other ................................................       93       82      178      177
                                                          ------    -----   ------   ------
  Total noninterest expense ...........................      790      740    1,625    1,489
                                                          ------    -----   ------   ------
   Income before income taxes .........................      750      667    1,369    1,242
Provision for income taxes ............................      290      253      525      471
                                                          ------    -----   ------   ------
  Net income ..........................................   $  460   $  414   $  844   $  771
                                                          ======   ======   ======   ======

  Basic earnings per share ............................   $ 0.42   $ 0.38   $ 0.77   $ 0.71
                                                          ======   ======   ======   ======

  Diluted  earnings per share .........................   $ 0.40   $ 0.37   $ 0.73   $ 0.69
                                                          ======   ======   ======   ======
</TABLE>

See notes to consolidated financial statements

                                       -2-

<PAGE>
                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                           Six Months Ended
                                                                                         ------ March 31 -------
                                                                                            1998       1997
                                                                                         --------    --------

                                                                                         (Dollars in Thousands)
<S>                                                                                      <C>         <C>     
Operating activities:
  Net income .........................................................................   $    844    $    771
  Adjustments to reconcile net income to net cash provided by operating activities :
    Provision for credit losses ......................................................         60          50
    Provision for depreciation and amortization ......................................         65          65
    Amortization of investment security premiums and accretion of discounts, net .....        (12)         (3)
    (Increase) decrease in deferred income taxes .....................................          0          39
    (Gain) loss on sale of loans, investments and foreclosed real estate .............         (2)         (5)
    Loans originated for sale ........................................................       --           185
    Proceeds from sale of loans originated for sale ..................................       --          (185)
    (Increase) decrease in accrued interest receivab.e ...............................        (42)       (117)
    (Increase) decrease in other assets ..............................................       (166)        212
    Increase (decrease) in other liabilities .........................................        (28)       (723)
                                                                                         --------    --------
      Net cash provided by (used in) operating activities ............................        719         289
                                                                                         --------    --------
Investing activities:
    Proceeds from the sale of investments ............................................        992        --
    Proceeds from the maturities of investments ......................................      2,500         400
    Purchases of investment securities ...............................................     (5,568)     (1,626)
    Purchase of Federal Home Loan Bank stock .........................................       (368)       --
    Net increase in loans to customers ...............................................     (4,891)     (3,605)
    Principal collected on mortgage-backed securities ................................          3          15
    Purchases of premises, equipment and leasehold improvements ......................         (8)        (63)
    Proceeds from the sale of REO ....................................................        212          48
                                                                                         --------    --------
      Net cash provided by (used in) investing activities ............................     (7,128)     (4,831)
                                                                                         --------    --------
Financing activities:
    Exercise of stock options ........................................................        103        --
    Allocation of ESOP and RRP shares ................................................        189        --
    Dividends paid ...................................................................       (288)       (253)
    Net increase (decrease) in customer deposits .....................................      2,415       2,464
    Proceeds from advances and other borrowed money ..................................     11,000       2,000
    Purchase of stock by ESOP and RRP ................................................        (86)        (23)
    Net increase (decrease) in advance payments from borrowers for taxes and insurance        (58)        (44)
    Other, net                                                                                (29)       --
                                                                                         --------    --------
    Net cash provided by financing activities ........................................     13,246       4,144
                                                                                         --------    --------
    Increase (decrease) in cash and cash equivalents .................................      6,837        (398)
Cash and cash equivalents at beginning of period .....................................      5,446       3,075
                                                                                         --------    --------
Cash and cash equivalents at end of period ...........................................   $ 12,283    $  2,677
                                                                                         ========    ========
</TABLE>

See notes to consolidated financial statements.


                                       -3-


<PAGE>


          Notes to Unaudited Interim Consolidated Financial Statements
                                 March 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 "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 March 31, 1998
is not  necessarily  indicative of the results which may may be expected for any
future  period.  For  futher  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

     The  Corpoation  adopted  Statement  of  Fianancial   Accounting  Standards
("SFAS")  128, as of December 31,  1997.  SFAS 128 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       Six Months Ended
                                                                 March 31                  March 31
                                                         -----------------------   ------------------------
                                                            1998          1997        1998          1997 
                                                         ----------   ----------   ----------   ----------
Basic Earnings Per Share:
<S>                                                      <C>          <C>          <C>          <C>       
Net Income ...........................................   $  460,000   $  414,000   $  844,000   $  771,000
                                                         ==========   ==========   ==========   ==========
Average Shares Outstanding, Net of
  unallocated ESOP Shares (54,667 and 61,793
  at March 31, 1998 and March 31, 1997, respectively.)    1,089,056    1,081,005    1,088,290    1,081,297
                                                         ==========   ==========   ==========   ==========
Basic Earnings Per Share .............................   $     0.42   $     0.38   $     0.77   $     0.71
                                                         ==========   ==========   ==========   ==========

Diluted Earnings Per Share:
Net Income ...........................................   $  460,000   $  414,000   $  844,000   $  771,000
                                                         ==========   ==========   ==========   ==========
Average Shares Outstanding, Net of
  unallocated ESOP Shares (54,667 and 61,793
  at March 31, 1998 and March 31, 1997, respectively.)    1,089,056    1,081,005    1,088,290    1,081,297
    Dilutive effect of RRP Plan shares ...............       12,006       10,759       12,006       10,117
    Dilutive effect of Stock Options .................       59,399       36,918       59,399       33,710
                                                         ----------   ----------   ----------   ----------
Average Shares Outstanding ...........................    1,160,461    1,128,682    1,159,695    1,125,124
                                                         ==========   ==========   ==========   ==========
Diluted Earnings Per Share ...........................   $     0.40   $     0.37   $     0.73   $     0.69
                                                         ==========   ==========   ==========   ==========
</TABLE>

                                       -4-


<PAGE>

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

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

     Total assets of the  Corporation  were $153.1 million at March 31, 1998, an
increase of $14 million from  September 30, 1997.  During the second  quarter of
fiscal 1998, the Bank  increased its borrowings  from the Federal Home Loan Bank
by $10 million. These funds, priced favorably to alternative funding sources for
the same maturity,  moderating  the interest rate risk,  will be used to provide
additional  funding for anticipated loan growth.  The portion of these funds not
currently needed for loans or investments is kept in overnight  funds,  which is
reflected in a $6.8 million increase in cash and cash  equivalents.  In addition
to this increase, loans were up $4.8 million and investments reflected growth of
$2.0  million.  Additional  support for the asset  growth was provided by a $2.4
million  increase in deposits.  Stockholders'  equity was $20.4 million on March
31, 1998, up $730,000 from the $19.6 million on September 30, 1997.

     At March 31, 1998,  nonperforming  assets were  $653,000,  or .43% of total
assets,  compared to $730,000,  or .52% of total  assets at September  30, 1997.
During the quarter ended March 31, 1998,  nonperforming mortgage loans increased
$141,000, while nonperforming consumer loans decreased $228,000. The increase in
mortgage   loans  was  due  to  the   addition  of  one  credit  which  is  well
collateralized, while the decrease in the consumer category was due primarily to
one large consumer credit which became current during the quarter.

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

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

     General. Net income for the three months ended March 31, 1998 was $460,000,
up 11.1% from the $414,000  earned in the comparable  period of fiscal 1997. Net
interest income for the second quarter of fiscal 1998 was $1.35 million,compared
to $1.29 million for the second quarter of fiscal 1997. In addition,  during the
second  quarter of fiscal 1998,  $30,000 was added to the  allowance  for credit
losses, compared to $25,000 for the comparable period of fiscal 1997.

     Interest  Income.  Total  interest  income was $2.73  million for the three
months ended March 31, 1998,  compared to $2.54 million earned in the comparable
quarter of fiscal  1997.  The  increase  was due to a $7.1  million  rise in the
average balance of loans receivable, offset somewhat by a 10 basis point decline
in the yield on the loan  portfolio.  In  addition,  interest  income from U. S.
Government  obligations  and other  investments  increased  $45,000 and $26,000,
respectively, due primarily to higher average balances.

     Interest Expense. For the three months ended March 31, 1998, total interest
expense rose to $1.38  million from the $1.25 million for the three months ended
March 31, 1997,  primarily due to an increase in the average balance of interest
bearing liabilities to $116.9 million for the second quarter of fiscal 1998 from
$106.5  million for the same quarter of fiscal 1997.  Average  interest  bearing
deposits were $98.9 million for the second  quarter of fiscal 1998,  compared to
an average of $91.6 million for the same three months of fiscal 1997.

     Net  Interest  Income.  For the three  months  ended  March 31,  1998,  net
interest  income was $1.35  million,  up $59,000  from the net  interest  income
earned in the same period of 1997. During

                                       -5-
<PAGE>

the three months ended March 31, 1998,  the  Corporation's  interest rate spread
and net interest margin decreased to 3.12% and 3.87%, respectively,  compared to
3.40% and 4.11%,  respectively,  for the same  period of 1997.  A 26 basis point
decline in the yield on earning assets combined with a 2 basis point rise in the
cost of funds were the primary reasons for the declines.

     Provision for Credit Losses. For the three months ended March 31, 1998, the
Bank recorded a provision for credit losses of $30,000, compared $25,000 for the
same period of fiscal 1997.  Strong growth in the  commercial  and consumer loan
portfolios  during the second  quarter  of 1998 was the  primary  reason for the
higher provision.

     Total  Noninterest  Income.  Noninterest  income  totaled  $224,000 for the
second  quarter of fiscal  1998,  compared to $145,000  for the same  quarter of
fiscal 1997. The $79,000  increase was primarily  attributable to an increase in
service charges and fees on loans, due to recently introduced processing fees on
consumer loans and charges related to refinancings and modifications of mortgage
loans. Other customer service fees and commissions were up $18,000 primarily due
to higher income on checking and increased ATM charges. Other income rose $9,000
due to income associated with the sale of mortgage insurance.

     Total Noninterest  Expense.  Total noninterest expense was $790,000 for the
three months ended March 31,  1998,  up $50,000 from the $740,000  total for the
comparable quarter of fiscal 1997.  Personnel  compensation and benefits totaled
$438,000 for the second  quarter of fiscal 1998, an increase of $28,000 from the
comparable  period of fiscal 1997. All other  categories of noninterest  expense
reflected a combined  increase of 6.7% when  comparing  the three  months  ended
March 31, 1998 to the same three months of fiscal 1997.

     Provision for Income Taxes. The provision for income taxes was $290,000 for
the three months ended March 31, 1998, up from the $253,000  provision  recorded
in the three  months  ended March 31,  1997.  The  increase  reflects the higher
profitability  of the  Company  in the  quarter  ended  March 31,  1998,  as the
effective tax rate for both periods was 38%.

COMPARISON OF SIX MONTHS ENDED MARCH 31, 1998 AND 1997
------------------------------------------------------

     General.  Net income for the six months ended March 31, 1998 was  $844,000,
up 9.5% from the $771,000  earned in the  comparable  period of fiscal 1997. Net
interest income for the first half of fiscal 1998 was $2.64 million, compared to
net  interest  income  for the  first  half of  fiscal  1997 of  $2.48  million.
Noninterest  income and  expense  for the six months  ended  March 31, 1998 were
$411,000  and  $1.63  million,  respectively,  compared  to  $300,000  and $1.49
million, respectively, for the same period of fiscal 1997.

     Interest  Income.  Total interest  income amounted to $5.39 million for the
six  months  ended  March  31,  1998,  up from the $5.00  million  earned in the
comparable period of fiscal 1997. The increase was primarily  attributable to an
increase in the average  balance of loans  receivable to $118.2  million for the
six months ended ended March 31, 1998 from $111.5 million for the same period of
1997.  This  increase  reflects  the Bank's  continued  success  in  originating
mortgage loans and expanding the consumer and commercial loan portfolios.

     Interest  Expense.  For the six months ended March 31, 1998, total interest
expense rose to $2.75  million  from the $2.52  million for the six months ended
March 31, 1997, primarily

                                       -6-
<PAGE>

due to an increase in the average  balance of interest  bearing  liabilities  to
$114.0  million for the first half of fiscal  1998 from  $105.5  million for the
comparable  period of fiscal  1997.  The  average  balance of  interest  bearing
deposits  increased  $7.3  million  from $91.0  million for the six months ended
March 31, 1997 to $98.3 million for the six months ended March 31, 1998.

     Net Interest Income.  For the six months ended March 31, 1998, net interest
income was $2.64  million,  up 6.5% from the net interest  income  earned in the
same  period  of  1997.  During  the  six  months  ended  March  31,  1998,  the
Corporation's interest rate spread and net interest margin declined to 3.13% and
3.90%,  respectively,  compared  to 3.24% and 3.98%,  respectively  for the same
period of 1997. A 7 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.

     Provison for Credit  Losses.  For the six months ended March 31, 1998,  the
Bank recorded a provision for credit losses of $60,000,  compared to $50,000 for
the same six months of fiscal 1997.  Expansion  of the  consumer and  commercial
loan portfolios is the principal reason for the higher provision.

     Total Noninterest Income. Noninterest income totaled $411,000 for the first
six months of fiscal  1998,  compared to  $300,000  for the same period of 1997.
Service  charges and fees on loans were up $60,000 due to fees  associated  with
refinancings  and loan  modifications,  and processing  fess on consumer  loans.
Other customer service fees and commissions rose $25,000 due to higher income on
checking and increased ATM usage.  Other  noninterest  income was up $26,000 due
primarily to income from the sale of mortgage insurance.

     Total Noninterest Expense.  Total noninterest expense was $1.63 million for
the six months ended March 31, 1998,  up $140,000  from the $1.49  million total
for the comparable  period of fiscal 1997.  Personnel  compensation and benefits
totaled  $902,000 for the six months  ended March 31, 1998,  up $93,000 from the
same six 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 $125,000 for
the six months ended March 31, 1998,  compared to $65,000 for the same period of
fiscal 1997 due primarily to consulting fees  associated with the  Corporation's
three year strategic business plan.

     Provision for Income Taxes. The provision for income taxes was $525,000 for
the six months  ended March 31,  1998,  compared  to  $471,000  for the same six
months 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
requirements of March 31, 1998. (Dollar amounts in thousands).
<TABLE>
<CAPTION>

                                                                     March 31, 1998
                                                                 ---------------------------
                                                                                 Percentage
                                                                                 of assets 

<S>                                                               <C>              <C>   
GAAP Capital ................................................     $18,135          11.82%
                                                                  =======          ===== 
  
Tangible capital ............................................     $18,135          11.82%
Tangible capital requirement ................................       2,301           1.50
                                                                  -------          ----- 
  Excess ....................................................     $15,834          10.32%
                                                                  =======          ===== 

Core capital ................................................     $18,135          11.82%
Core capital requirement ....................................       6,135           4.00
                                                                  -------          ----- 
  Excess ....................................................     $12,000           7.82%
                                                                  =======          ===== 
     
Total risk-based capital (1) ................................     $18,786          24.07%
Total risk-based capital requirement (1).....................       6,243           8.00
                                                                  -------          ----- 
  Excess ....................................................     $12,543          16.08%
                                                                  =======          ===== 
</TABLE>


----------------------------------------------
(1)  Based on risk-weighted assets of $78,035


     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 March 31, 1998,  such  borrowed  funds totaled $26.0
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  Novenber 24, 1997. The new
rule lowers liquidity  requirements for savings associations from 5 to 4 percent
of the association's liquidity base. In

                                       -8-

<PAGE>

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 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 March 31, 1998, the Bank's  regulatory  liquidity as measured by the
new requirement was 20.88%.

     The amount of certificate accounts which are scheduled to mature during the
next twelve months ending March 31, 1999, is approximately $39.9 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 March  31,  1998,  the Bank had loan  commitments  outstanding  of $ 9.9
million.  Funds required to fulfill these commitments are derived primarily from
current excess  liquidity,  deposit  inflows,  borrowings or loan and investment
repayments.







                                       -9-

<PAGE>

                     BEDFORD BANCSHARES, INC. AND SUBSIDIARY
                              Key Operating Ratios
<TABLE>
<CAPTION>
                                                                            Three Months Ended    Six Months Ended
                                                                                  March 31              March 31
                                                                             -----------------    -------------------
                                                                             1998(1)   1997(1)    1998(1)     1997(1)
                                                                             -------   -------    -------     ------- 
                                                                                   (Unaudited)


<S>                                                                          <C>     <C>          <C>           <C>       
Basic earnings per share................................................     $ 0.42   $ 0.38      $ 0.77      $ 0.71
Diluted earnings per share..............................................     $ 0.40   $ 0.37      $ 0.73      $ 0.69
Return on average assets ...............................................       1.28%    1.26%       1.20%       1.18%
Return on average equity ...............................................       9.13%    8.81%       8.45%       8.27%
Interest rate spread ...................................................       3.12%    3.40%       3.13%       3.24%
Net interest margin ....................................................       3.87%    4.11%       3.90%       3.98%
Noninterest expense to average assets ..................................       2.26%    2.26%       2.28%       2.28%
Net charge-offs to average outstanding loans ...........................       0.01%    0.06%       0.01%       0.06%
                                                                                                            
</TABLE>

<TABLE>
<CAPTION>
                                                                       March 31   September 30
                                                                         1998        1997 
                                                                       ---------  ------------
                                                                       (DOLLARS IN THOUSANDS)
                                                                          (Unaudited)
<S>                                                                    <C>         <C>   
Nonaccrual and 90 days past due loans...............................   $   653     $  518
Repossessed real estate ............................................      --          212
                                                                       -------     ------
Total nonperforming assets .........................................   $   653     $  730
                                                                       =======     ======



Allowance for credit losses to nonperforming assets ................    113.03%     92.81%
Nonperforming loans to total loans..................................      0.54%      0.45%
Nonperforming assets to total assets ...............................      0.43%      0.52%


Book value per share................................................   $ 17.71     $17.17
                                                                       =======     ======
</TABLE>



---------------------
(1)     The ratios for the three- and six-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 March 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
                 ----------------------------------------------------

                    The annual meeting of  shareholders  of the  Corporation was
                 held on  January  28,1998  and the  following  items were acted
                 upon:

                    Election of  Directors  Hugh H. Bond,  William T. Powell and
                 Macon C.  Putney for terms of three years  ending in 2001.  All
                 were elected as indicated below:

                                             Votes          Votes       Broker
                                              For         Withheld     Non-votes
                                              ---         ---------    ---------
                 Hugh H. Bond              993,168         39,695       124,334
                 William T. Powell         973,681         59,182       124,334
                 Macon C. Putney           993,018         39,845       124,334

                    Ratification of the appointment of BDO Seidman,  LLP, as the
                 Corporation's  auditors for the 1998 fiscal year.  BDO SEIDMAN,
                 LLP, was ratified as follows:

                          Votes           Votes                         Broker
                           For           Against         Abstain       Non-votes
                           ---           -------         -------       ---------
                        1,006,698         20,965          5,200         124,334

                    Consideration of a stockholder  proposal  recommending  that
                 the Board of Directors  take certain  action.  The proposal was
                 not adopted as shown below:

                          Votes           Votes                         Broker
                           For           Against         Abstain       Non-votes
                           ---           -------         -------       ---------
                          272,720        610,907        24,902         124,334

Item 5.          Other Information
                 -----------------
                      Not applicable.
<TABLE>
<CAPTION>
Item 6.          Exhibits and Reports on Form 8-K
                 --------------------------------
                 <S>    <C>    
                 (a)     Exhibit
                         Exhibit 27:  Financial Data Schedule (electronic filing only)

                 (b)     Reports on Form 8-K
                          Not applicable.

</TABLE>


                                      -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: May 11, 1998                         By: /s/ Harold K. Neal
                                               ---------------------------------
                                               Harold K. Neal
                                               President and
                                               Chief Executive Officer
                                               (Principal Executive Officer)


Date: May 11, 1998                         By: /s/ James W. Smith
                                               ---------------------------------
                                               James W. Smith
                                               Vice President and Treasurer
                                               (Principal Accounting and
                                                    Financial officer)