SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One):

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 For the fiscal year ended September 30, 2002, OR

|_|  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 For the transition period from           to          .
                                                         ---------    ---------

                        Commission File Number: 0-24330

                            Bedford Bancshares, Inc.
                 ---------------------------------------------
                 (Name of Small Business Issuer 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)                              (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:   None
                                                              ----
Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

     Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. YES  X     NO    .
          ---       ---

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     State issuer's revenues for its most recent fiscal year $17,455,000.

     As of December 12, 2002, there were issued and outstanding 2,011,952 shares
of the registrant's Common Stock.

     The registrant's voting stock is traded  over-the-counter  under the symbol
"BFSB." The aggregate market value of the voting stock held by non-affiliates of
the registrant,  based on the closing price of the registrant's  common stock as
reported by the Nasdaq National Market on December 12, 2002, was $26,204,000.

Transition Small Business Disclosure Format (check one)
YES      NO  X
    ---     ---

                       DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of Annual  Report to  Stockholders  for the Fiscal Year Ended
          September 30, 2002. (Part II)
     2.   Portions of Proxy Statement for the Annual Meeting of Stockholders for
          the Fiscal Year Ended September 30, 2002. (Part III)
<PAGE>


                                     PART I

     Bedford  Bancshares,  Inc. (the "Registrant" or "Company") may from time to
time make written or oral  "forward-looking  statements",  including  statements
contained in the company's  filings with the Securities and Exchange  Commission
(including this annual report on Form 10-KSB and the exhibits  thereto),  in its
reports to stockholders and in other  communications  by the Company,  which are
made in good faith by the Company  pursuant to the "safe  harbor"  provisions of
the Private Securities Litigation Reform Act of 1995.

     These forward-looking  statements involve risks and uncertainties,  such as
statements  of the  Company's  plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the board of  governors of the
Federal  Reserve  System,   inflation,   interest  rate,   market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes;  acquisitions;  changes in consumer spending
and savings habits;  and the success of the Company  managing the risks involved
in the foregoing.

     The Company  cautions that the foregoing  list of important  factors is not
exclusive.  The  Company  does  not  undertake  to  update  any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company.

Item 1.  Business
-----------------

General

     The Company is the holding  company for Bedford  Federal  Savings Bank (the
"Bank")  and as a unitary  savings and loan  holding  company is  generally  not
restricted in the types of business  activities in which it may engage  provided
that the Bank  retains a  specified  amount of its  assets  in  housing  related
investments.  The Company  conducts no significant  business or operations other
than holding all of the outstanding stock of the Bank. As a result references to
the  Registrant  or  Company  generally  refer to the Bank  unless  the  context
indicates otherwise.

     The Bank is a federally  chartered  stock  savings  bank  headquartered  in
Bedford,  Virginia and is subject to examination and comprehensive regulation by
the Office of Thrift Supervision  ("OTS") and its deposits are federally insured
by the Savings Association Insurance Fund ("SAIF").  The Bank is a member of and
owns capital stock in the Federal Home Loan Bank  ("FHLB") of Atlanta,  which is
one of the 12 regional banks in the FHLB System.


                                       -1-

<PAGE>

     The Bank operates a traditional  savings bank business,  attracting deposit
accounts from the general public and using those  deposits,  together with other
funds,  primarily  to  originate  and invest in loans  secured by  single-family
residential real estate.

Competition

     Competition  for deposits comes from other insured  financial  institutions
such as commercial banks,  thrift  institutions,  credit unions, and multi-state
regional banks in our market areas.  Deposit  competition also includes a number
of insurance  products  sold by local  agents and  investment  products  such as
mutual  funds and other  securities  sold by local and  regional  brokers.  Loan
competition  varies  depending upon market  conditions and comes from commercial
banks,  thrift  institutions,   credit  unions,  mortgage  bankers  and  finance
companies.



                                       -2-

<PAGE>

Lending Activities

Analysis of Portfolio.  The following  table sets forth the  composition  of the
Registrant's  loan  portfolio  by type of loan and in percent of the  respective
portfolios at the dates indicated.

<TABLE>



                                                                           September 30,
                               -------------------------------------------------------------------------------------------------
                                      2002                2001               2000               1999                 1998
                               -------------------  ------------------ ------------------ ------------------  ------------------
                                          Percent             Percent            Percent            Percent             Percent
                                            of                   of                of                 of                  of
                                  Amount   Total     Amount    Total    Amount   Total      Amount   Total     Amount    Total
                               ---------  --------  --------  -------- -------- --------  ---------  -------  --------  -------
                                                                        (Dollars in Thousands)
<S>                          <C>        <C>      <C>        <C>     <C>        <C>     <C>        <C>     <C>         <C>

Real estate:
  Residential:
    One- to four-family........ $137,696   60.36%   $118,906   61.85%  $112,411   62.74%  $ 97,212   62.19%  $ 95,620    70.46%
    Multi-family...............    4,510    1.98       2,408    1.25      3,083    1.72      2,405    1.54        854      .63
    Commercial.................   16,030    7.03      12,405    6.45      7,891    4.40      7,623    4.88      4,181     3.08
    Construction...............   18,448    8.09      17,701    9.21     19,844   11.08     18,232   11.66      8,450     6.23
    Land.......................    4,484    1.96       5,073    2.64      5,755    3.21      5,254    3.36     11,769     8.67
Consumer and
  commercial business..........   46,932   20.58      35,762   18.60     30,183   16.85     25,595   16.37     14,830    10.93
                                --------  ------    --------  ------   --------  ------   --------  ------   --------   ------
      Total loans..............  228,100  100.00%    192,255  100.00%   179,167  100.00%   156,321  100.00%   135,704   100.00%
                                          ======              ======             ======             ======              ======
Less:
  Loans-in-process.............    6,925               6,607              8,438              7,556                290
  Allowance for credit losses..    1,194                 981                850                804              4,906
  Unearned discounts,
    premium, deferred
    loan fees, net.............      347                 262                287                272                764
                                --------            --------           --------           --------           --------
      Total loans, net......... $219,634            $184,405           $169,592           $147,689           $129,744
                                ========            ========           ========           ========           ========

</TABLE>


                                       -3-

<PAGE>

Loan Maturity Tables

     The  following  table  sets forth the  maturity  of the  Registrant's  loan
portfolio  at  September  30, 2002.  The table does not include  prepayments  or
scheduled principal  repayments.  Prepayments and scheduled principal repayments
on  loans  totaled  $85.6  million  for  the  year  ended  September  30,  2002.
Adjustable-  rate  mortgage  loans are shown as  maturing  based on  contractual
maturities.


<TABLE>
                                                          Due after
                                              Due within  1 through  Due after
                                                1 year     5 years    5 years      Total
                                              ----------  ---------  ---------   ----------
                                                           (In Thousands)
<S>                                         <C>         <C>        <C>         <C>

One- to four-family residential real estate..  $    59     $  1,050   $136,587    $137,696
Multi-family residential real estate.........       --           26      4,484       4,510
Commercial real estate.......................       --           43     15,987      16,030
Construction, net of loans in process........   10,168          325      1,030      11,523
Land.........................................       --            6      4,478       4,484
Consumer and commercial business.............    7,013       22,013     17,906      46,932
                                               -------      -------   --------    --------
Total........................................  $17,240      $23,463   $180,472    $221,175
                                               =======      =======   ========    ========
</TABLE>



     The  following  table sets forth the dollar amount at September 30, 2002 of
all loans due after  September  30, 2003,  which have fixed  interest  rates and
floating or adjustable interest rates.

                                                 Floating or
                                Fixed Rates    Adjustable Rates      Total
                                -----------    ----------------    ----------
                                                 (In Thousands)
Real estate loans:
   One- to four-family........    $22,858         $114,779          $137,637
   Multi-family...............        707            3,803             4,510
   Commercial real estate.....      4,156           11,874            16,030
   Construction...............      1,050              305             1,355
   Land.......................        252            4,232             4,484
Consumer and commercial
  business....................     18,707           21,212            39,919
                                  -------         --------          --------
  Total.......................    $47,730         $156,205          $203,935
                                  =======         ========          ========

     One- to Four-Family  Residential  Loans. The  Registrant's  primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Registrant's  primary market areas. The
Registrant generally originates  owner-occupied one- to four-family  residential
mortgage  loans in  amounts up to 80% of the  lesser of the  appraised  value or
selling price of the mortgaged  property without requiring  mortgage  insurance.
The  Registrant  will  originate  a mortgage  loan in an amount up to 95% of the
lesser of the appraised value or selling price of a mortgaged property, however,
mortgage  insurance  is required  for the amount in excess of 80% of such value.
Adjustable-rate  mortgage  loans may be  originated  at up to 95% of the loan to
value ratio.


                                       -4-

<PAGE>

     For  all  adjustable-rate  mortgage  loans,  the  Registrant  requires  the
borrower to qualify at the initial rate and such loans are indexed to the weekly
average of the one year U.S.  Treasury  bill. The  Registrant's  adjustable-rate
mortgage loans provide for periodic  interest rate  adjustments of plus or minus
1% to 2% with a maximum adjustment over the term of the loan as set forth in the
loan agreement and usually ranges from 3% to 6% above the initial  interest rate
depending on the terms of the loan. Adjustable-rate mortgage loans reprice every
one or two years, some have a fixed rate for three,  five, or seven years before
adjusting annually and have terms from 10 to 30 years. Interest rates charged on
mortgage  loans are  competitively  priced  based on market  conditions  and the
Registrant's cost of funds.  Generally,  the Registrant's  standard underwriting
guidelines  for  mortgage  loans  conform  to the  Federal  Home  Loan  Mortgage
Corporation ("FreddieMac") guidelines.

     Adjustable-rate  mortgage loans decrease the risks  associated with changes
in interest rates by more closely  reflecting  these changes,  but involve other
risks  because as  interest  rates  increase,  the  underlying  payments  by the
borrower increase,  thus increasing the potential for default. At the same time,
the  marketability  of the underlying  collateral  may be adversely  affected by
higher interest rates.

     The Registrant also offers  fixed-rate  one- to four-family  mortgage loans
with  terms from 10 to 30 years.  Fixed-rate  loans are  generally  underwritten
according to FreddieMac  guidelines,  utilizing their approved documents so that
the loans  qualify for sale in the secondary  mortgage  market.  The  Registrant
originates and holds some fixed-rate mortgage loans as deemed appropriate by the
Asset Liability Management Committee.

     Construction  Lending.  The  Registrant  engages  in  construction  lending
involving loans to qualified  borrowers for  construction of one- to four-family
residential  properties  and,  on a  limited  basis,  involving  commercial  and
multi-family properties. These properties are located in the Registrant's market
area.

     Construction  lending is generally considered to involve a higher degree of
credit  risk  than  long-  term   financing  of  residential   properties.   The
Registrant's  risk of loss on a construction  loan is dependent largely upon the
accuracy  of the initial  estimate  of the  property's  value at  completion  of
construction  or  development  and the estimated  cost of  construction.  If the
estimate  of  construction  cost  and the  marketability  of the  property  upon
completion  of  the  project  prove  to be  inaccurate,  the  Registrant  may be
compelled to advance additional funds to complete construction.  Furthermore, if
the estimate of value proves to be inaccurate,  the Registrant may be confronted
at or prior to the  maturity of the loan,  with a property  with a value that is
insufficient to assure full repayment.

     Multi-Family  and  Commercial  Real Estate  Loans.  The  Registrant  offers
multi-family  and commercial  real estate loans,  however,  this type of lending
represents a small portion of the Registrant's  lending  activities.  Commercial
real estate loans consist of permanent loans secured by small office  buildings,
churches,  shopping centers and other  non-residential  buildings on real estate
located in the west- central Virginia area.  Substantially all of the properties
securing the  Registrant's  commercial  and multi-  family real estate loans are
inspected by the  Registrant's  lending  personnel  before the loan is made. The
Registrant also obtains appraisals on each property.

     Loans  secured  by  multi-family  and  commercial  real  estate  properties
generally  involve a greater degree of risk than residential  mortgage loans and
carry larger loan balances. This increased credit risk

                                       -5-

<PAGE>

is a result of several  factors,  including the  concentration of principal in a
limited  number  of  loans  and  borrowers,  the  effects  of  general  economic
conditions  on income  producing  properties  and the  increased  difficulty  of
evaluating and monitoring  these types of loans.  Furthermore,  the repayment of
loans  secured  by  commercial  real  estate  is  typically  dependent  upon the
successful  operation of the related real estate project.  If the cash flow from
the  project  is  reduced,  the  borrower's  ability  to  repay  the loan may be
impaired.

     Land Loans.  Land loans are made  primarily  to  individuals  on  developed
residential lots located in the Registrant's market area. Land lending generally
involves  additional risks to the lender as compared with  residential  mortgage
lending.  These risks are  attributable to the fact that loan funds are advanced
upon the security of unimproved  and developed  lots or land under  development,
predicated on the future value of the property upon  completion of  development.
Loans  on  undeveloped  land  may  run  the  risk  of  adverse  zoning  changes,
environmental or other restrictions on future use. Because of these factors, the
analysis of land loans  requires an expertise  that is different in  significant
respects from that which is required for residential mortgage lending.

     Consumer and Commercial  Business Loans. In response to a perceived need in
the local  community and to provide for  diversification  of its asset portfolio
and improved interest rate risk management,  the Registrant continues increasing
the amount of consumer and commercial  business  loans it  originates.  Consumer
loans consist of automobile loans, savings account loans, home equity,  personal
secured  and  unsecured  loans  and home  improvement  loans.  The  underwriting
standards  employed by the Registrant for consumer loans include a determination
of the  applicant's  payment  history on other  debts and an  assessment  of the
borrower's ability to make payments on the proposed loan and other indebtedness.
In addition to the  creditworthiness of the applicant,  the underwriting process
also includes a comparison of the value of the security,  if any, in relation to
the proposed loan amount.  The  Registrant's  consumer loans tend to have higher
interest rates and shorter  maturities  than one- to four-family  first mortgage
loans,  but are  considered  to entail a greater risk of default  than  mortgage
loans.

     Commercial   business  loans  consisting  of  revolving  lines  of  credit,
short-term  working  capital  loans,  and  term  loans  up to  seven  years  are
originated  to meet  the  needs  of  local  small  businesses.  Some  loans  are
unsecured,  but the  majority  are  secured by  inventory,  equipment,  accounts
receivable,  marketable  securities,  savings  deposits,  real estate,  personal
guaranties,  or a combination of these types of collateral.  Commercial business
loans generally involve a greater degree of risk than residential mortgage loans
and frequently  carry larger loan balances.  The  Registrant  offers  fixed-rate
commercial business loans and adjustable-rate  loans. This increased credit risk
is a result of several  factors,  including the  concentration of principal in a
limited  number  of  loans  and  borrowers,  the  effects  of  general  economic
conditions  on  business  cash  flow,  and  the  difficulty  of  evaluating  and
monitoring these types of loans.

     Loan Solicitation and Processing. The Registrant's sources of mortgage loan
applications are referrals from existing or past customers, real estate brokers,
builders, call-in and walk-in customers and also the result of advertising.  All
loans  are  underwritten  and  approved  by the loan  committee.  Any loan up to
$300,000 is reviewed and approved by two members of the loan committee. Any loan
over $300,000 is reviewed and approved by three  members of the loan  committee.
All loan approvals are ratified by the Board of Directors on a monthly basis.

                                       -6-

<PAGE>



     The Registrant  uses  independent fee appraisers on all real estate related
transactions.  Each fee appraiser used must be state licensed or state certified
and approved by the Registrant's board of directors.

     It is the  Registrant's  policy to obtain title  insurance or an attorney's
opinion  and  certification  of title and fire and  casualty  insurance  for all
mortgage loans. If appropriate, flood insurance is also required.

     Loan Commitments.  The Registrant issues written,  formal commitments as to
interest rate to  prospective  borrowers on all real estate loans at the date of
application.  The interest rate  commitment is good for 45 days from the date of
the application.  Upon receipt of loan approval, the borrower has the balance of
the 45 day period to close the loan at the interest rate committed. At September
30, 2002, the Registrant had $15.6 million of commitments to originate  mortgage
loans, $10.2 million in unfunded home equity loans and $14.6 million in unfunded
commercial lines of credit.

Non-Performing and Problem Assets

     Loan Delinquencies and Non-Performing  Assets. The Registrant's  collection
procedures  provide  that when a  mortgage  loan is 15 days past due, a computer
printed delinquency notice is sent. If payment is still delinquent at the end of
that month,  within five days a telephone  call is made to the borrower.  If the
delinquency continues, subsequent efforts are made to eliminate the delinquency.
If the loan  continues in a delinquent  status for 90 days or more, the Board of
Directors of the  Registrant  generally  approves the  initiation of foreclosure
proceedings unless other repayment  arrangements are made and a specific reserve
for 100% of uncollected  interest is  established,  thus  effecting  non-accrual
status.  Collection  procedures for  non-mortgage  loans generally begin after a
loan is 10 days delinquent.

     The following table sets forth information  regarding  nonaccrual loans and
real  estate  owned,  as of the dates  indicated.  The  Registrant  had no loans
categorized  as impaired loans and troubled debt  restructurings.  Additionally,
there were no accruing loans that were  delinquent  more than 90 days.  Interest
income that would have been  recorded  on loans  accounted  for on a  nonaccrual
basis  under the  original  terms of such loans was  $23,000  for the year ended
September 30, 2002.

<TABLE>
                                                                 At September 30,
                                                  --------------------------------------------
                                                    2002     2001     2000      1999     1998
                                                  ------    ------   ------    ------   ------
                                                              (Dollars in thousands)
<S>                                             <C>      <C>      <C>       <C>      <C>

Loans accounted for on a nonaccrual basis:
Mortgage loans:
  One- to four-family residential real estate...   $ 458    $ 451    $ 517     $  211   $ 281
  Land..........................................      --       --      336        839     214
  Consumer and commercial business loans........     172       63      107         39      37
                                                   -----    -----    -----     ------   -----
Total non-accrual loans.........................   $ 630    $ 514    $ 960     $1,089   $ 532
                                                   =====    =====    =====     ======   =====
Real estate owned...............................   $  26    $  94    $  --     $   --   $  --
                                                   =====    =====    =====     ======   =====
Total non-performing assets.....................   $ 656    $ 608    $ 960     $1,089   $ 532
                                                   =====    =====    =====     ======   =====
Total non-accrual loans to total loans..........     .29%     .28%     .56%       .73%    .41%
                                                   =====    =====    =====     ======   =====

</TABLE>

     Classified Assets. OTS regulations provide for a classification  system for
problem  assets of  insured  institutions.  Under  this  classification  system,
problem  assets  of  insured   institutions  are  classified  as  "substandard,"
"doubtful,"  or  "loss."  An  asset  is  considered   "substandard"   if  it  is
inadequately  protected  by the  current  net worth and paying  capacity  of the
obligor or of the collateral pledged, if any.


                                       -7-

<PAGE>

     "Substandard"   assets  include  those   characterized   by  the  "distinct
possibility"  that the  insured  institution  will  sustain  "some  loss" if the
deficiencies are not corrected.  Assets classified as "doubtful" have all of the
weaknesses   inherent  in  those  classified   "substandard,"   with  the  added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts,  conditions and values, "highly
questionable and improbable."  Assets  classified as "loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
designated   "special   mention"  by  management  are  assets  included  on  the
Registrant's  internal  watchlist because of potential weakness but which do not
currently warrant classification in one of the aforementioned categories.

     When an insured institution classifies problem assets as either substandard
or doubtful,  it may establish general allowances for credit losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required  either to establish a specific  provision  for losses
equal to 100% of that portion of the asset so  classified  or to charge off such
amount.  An institution's  determination as to the  classification of its assets
and the  amount of its  valuation  allowances  is  subject to review by the OTS,
which may  order the  establishment  of  additional  general  or  specific  loss
allowances.  A portion of general loss allowances  established to cover possible
losses  related to assets  classified as substandard or doubtful may be included
in determining an institution's  regulatory  capital,  while specific  valuation
allowances for credit losses generally do not qualify as regulatory capital.

     The  following  table  sets  forth the  Registrant's  classified  assets in
accordance with its classification.


                                   At September 30, 2002
                                   ---------------------
                                      (In Thousands)

           Special Mention                $ --
           Substandard                     630
           Doubtful                         --
           Loss                             --
                                           ---
                                          $630
                                           ===

     Allowances for Loan Losses. It is management's policy to provide for losses
on  unidentified  loans in its loan  portfolio.  A provision  for loan losses is
charged to operations based on management's evaluation of the losses that may be
incurred in the Registrant's loan portfolio.  Such evaluation,  which includes a
review of all loans of which full  collectibility  of interest and principal may
not be reasonably assured, considers the Registrant's past loan loss experience,
known and inherent risks in the portfolio,  adverse  situations  that may affect
the borrower's ability to repay,  estimated value of any underlying  collateral,
any existing guarantees,  past performance of the loan, available  documentation
for the loan,  legal  impediments  to  collection,  financial  condition  of the
borrower, and current economic conditions.

     Management  will continue to review the entire loan  portfolio to determine
the extent,  if any, to which further  additional  loss provisions may be deemed
necessary.  There can be no  assurance  that the  allowance  for losses  will be
adequate  to cover  losses  which may in fact be realized in the future and that
additional provisions for losses will not be required.


                                       -8-

<PAGE>


     The  following  table  sets  forth the  Registrant's  allowance  for credit
losses, allowance for losses on foreclosed real estate and related ratios.

<TABLE>

                                                              At or For the Year Ended
                                                                      September 30,
                                                    ----------------------------------------------
                                                      2002      2001      2000      1999     1998
                                                    -------   -------    ------    ------   ------
                                                                 (Dollars in thousands)
<S>                                              <C>         <C>       <C>       <C>       <C>

Allowance balance (at beginning of period).......     $981      $850      $804      $764      $678
                                                    ------      ----      ----      ----      ----
 Charge-offs:
   One- to four-family...........................       --        --        --        --        --
   Multi-family..................................       --        --        --        --        --
   Commercial real estate........................       --        --        --        --        --
   Construction and land.........................       --        --        --        --        --
   Consumer and commercial business..............      124        40       140        58         8
                                                    ------      ----      ----      ----      ----
     Total charge-offs...........................     (124)      (40)     (140)      (58)       (8)
  Recoveries.....................................       42        21        66         8         4
  Provision......................................      295       150       120        90        90
                                                    ------      ----      ----      ----      ----
Allowance balance (at end of period).............   $1,194      $981      $850      $804      $764
                                                    ======      ====      ====      ====      ====
Ratios of net charge-offs during the period
  to average loans outstanding during the
  period.........................................     .04%      .01%      .05%      .04%      .01%
                                                    ======      ====      ====      ====      ====
Ratio of allowance for credit losses to total
  loans at the end of the period.................     .54%      .53%      .50%      .54%      .58%
                                                    ======      ====      ====      ====      ====
Ratio of allowance for credit losses to non-
  performing assets at the end of the
  period.........................................     182%      161%       89%       74%      144%
                                                    ======      ====      ====      ====      ====

</TABLE>


                                       -9-

<PAGE>


     Analyses of the Allowance for Loan Losses.  The following  table sets forth
the allocation of the allowance by category,  which  management  believes can be
allocated only on an approximate  basis. The allocation of the allowance to each
category is not necessarily  indicative of future loss and does not restrict the
use of the allowance to absorb losses in any category.

<TABLE>

                                                                At September 30,
                        -----------------------------------------------------------------------------------------------
                              2002               2001                2000               1999               1998
                        ------------------- -----------------  -----------------  -----------------  ------------------
                                 Percent of        Percent of         Percent of          Percent of         Percent of
                                  Loans in          Loans in           Loans in            Loans in           Loans in
                                    Each              Each               Each                Each               Each
                                  Category          Category           Category            Category           Category
                                  to Total          to Total           to Total            to Total           to Total
                         Amount     Loans   Amount   Loans     Amount    Loans    Amount    Loans    Amount     Loans
                        -------- ---------  ------ ----------  ------  ---------  ------  ---------  ------  ----------
                                                              (Dollars in Thousands)
<S>                    <C>      <C>       <C>     <C>        <C>    <C>         <C>    <C>        <C>      <C>

One- to four-family.....  $  375    60.36%   $350     61.85%    $304    62.74%     $294    62.19%    $381      70.46%
Multi-family............      50     1.98      10      1.25       10     1.72        10     1.54        1        .63
Commercial real estate..     180     7.03     120      6.45       90     4.40        90     4.88       50       3.08
Construction............      70     8.09      70      9.21       70    11.08        75    11.66       49       6.23
Land....................      50     1.96      45      2.64       45     3.21        50     3.36       39       8.67
Consumer and commercial
  business..............     469    20.58     386     18.60      331    16.85       285    16.37      244      10.93
                          ------   ------    ----    ------     ----   ------      ----   ------     ----     ------
  Total.................  $1,194   100.00%   $981    100.00%    $850   100.00%     $804   100.00%    $764     100.00%
                          ======   ======    ====    ======     ====   ======      ====   ======     ====     ======

</TABLE>


                                      -10-

<PAGE>


Investment and Mortgage-backed Securities Activities

     Investment Securities. The Registrant is required under federal regulations
to  maintain a  sufficient  amount of liquid  assets  which may be  invested  in
specified short-term securities and certain other investments. The OTS, however,
does not  prescribe by  regulation  to a minimum  amount or percentage of liquid
assets. Liquidity levels may be increased or decreased depending upon the yields
on  investment   alternatives   and  upon   management's   judgment  as  to  the
attractiveness  of the yields then available in relation to other  opportunities
and its expectation of future yield levels, as well as management's  projections
as to the  short-term  demand  for  funds  to be used in the  Registrant's  loan
origination and other activities.

     Current   regulatory  and  accounting   guidelines   regarding   investment
securities  require the Company to categorize  securities as "held to maturity,"
"available  for sale" or "trading."  As of September  30, 2002,  the Company had
securities  classified  as  "held  to  maturity",   including  FHLB  stock,  and
"available for sale" in the amount of $502,000 and $13,589,000, respectively. At
September  30, 2002,  the Company had no  securities  classified  as  "trading."
Securities  classified  as  "available  for sale"  are  reported  for  financial
reporting purposes at the fair market value with net changes in the market value
from period to period included as a separate component of stockholders'  equity,
net of income taxes. At September 30, 2002, the Company had securities available
for sale with an amortized cost of  $13,553,000  and market value of $13,589,000
(unrealized gain $36,000).  Changes in the market value of securities  available
for sale do not affect the Company's income. In addition,  changes in the market
value of  securities  available  for sale do not affect  the  Bank's  regulatory
capital requirements or its loan-to-one borrower limit.

     Mortgage-backed  Securities.  Mortgage-backed  securities are participation
certificates  issued and  guaranteed by FreddieMac and secured by an interest in
pools of  conventional  mortgages  originated by other  financial  institutions.
Mortgage-backed  securities  provide  for  monthly  payments  of  principal  and
interest  and  generally  have  contractual  maturities  ranging from five to 30
years.  However,  due to expected repayment terms being  significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives of
these securities could be significantly shorter.

     Securities Portfolio.  The following table sets forth the carrying value of
the Registrant's securities
at the dates indicated:

                                                          At September 30,
                                                        -------------------
                                                          2002       2001
                                                        --------   --------
                                                           (In thousands)
Investment securities and mortgage backed securities:
  Held to maturity:
    Mortgage backed securities.........................  $     2     $    4
    FHLB stock.........................................    2,600      2,300
    U.S. Government and agency obligations.............      500        500
                                                         -------     ------
      Total held to maturity...........................    3,102      2,804
                                                         -------     ------
Available for sale:
    U.S. Government and agency obligations.............   13,536      7,079
    Marketable equity securities and other.............       53         53
                                                         -------     ------
      Total available for sale.........................   13,589      7,132
                                                         -------     ------
      Total ...........................................  $16,691     $9,936
                                                         =======     ======


                                      -11-

<PAGE>

     Investment  Yields and  Maturities.  The table  below  sets  forth  certain
information   regarding  the  carrying  value,   weighted   average  yields  and
contractual  maturities  of  the  Registrant's  federal  funds  sold  and  other
short-term  investments,  investment  securities,  securities  held for sale and
mortgage-backed securities as of September 30, 2002.


<TABLE>
                       One Year or Less    One to Five Years   Five to Ten Years  More than Ten Years Total Investment Securities
                    --------------------  ------------------  ------------------  ------------------- ----------------------------
                                Weighted            Weighted            Weighted            Weighted             Weighted
                      Carrying   Average   Carrying  Average  Carrying   Average  Carrying   Average   Carrying   Average  Market
                       Value      Yield     Value     Yield     Value     Yield     Value    Yield      Value      Yield    Value
                     ---------  --------   -------- --------  --------  --------  --------  --------   --------  --------  -------
                                                                (Dollars in thousands)
<S>                <C>         <C>     <C>         <C>       <C>        <C>        <C>     <C>       <C>         <C>    <C>

Held to maturity:
    Mortgage-backed
      securities......$     2     8.44%   $   --        --%    $ --        --%       $ --      --%     $     2     8.44%  $     2
    FHLB stock........  2,600     5.38        --        --       --        --          --      --        2,600     5.38     2,600
    U.S. government
      and agency
      obligations.....    500     7.05        --        --       --        --          --      --          500     7.05       504
Available for sale:
    U.S. Government
      and agency
      obligations .... 11,506     6.54     2,030      6.50       --        --          --      --       13,536     6.53    13,536
    Marketable equity
     securities and
     other............     53                 --        --       --        --          --      --           53       --        53
                      -------             ------               ----                  ----               -------           -------
Total.................$14,661    6.09%    $2,030      6.50%    $ --        --%       $ --      --%      $16,691    6.14%  $16,695
                      =======    ====     ======      ====     ====       ===        ====     ===       =======    ====   =======
</TABLE>


                                      -12-

<PAGE>

Sources of Funds

     General.  Deposits  are the  major  source  of the  Registrant's  funds for
lending and other  investment  purposes.  The Registrant also derives funds from
amortization  and prepayment of loans,  maturities of investment  securities and
operations  and  utilizes  advances  from the FHLB of  Atlanta.  Scheduled  loan
principal  repayments  are a relatively  stable  source of funds,  while deposit
inflows and  outflows  and loan  prepayments  are  significantly  influenced  by
general interest rates and market  conditions.  The Registrant does not have any
brokered deposits.

     Deposits.  Customer  deposits  are  attracted  principally  from within the
Registrant's  primary  market area through the offering of a broad  selection of
deposit  instruments  including  negotiable order of withdrawal accounts ("NOW")
(including  interest-bearing  and  noninterest-bearing),  passbook and statement
savings,   money  market  deposit,  term  certificate  accounts  and  Individual
Retirement Accounts. Deposit account terms vary according to the minimum balance
required,  the time  period the funds must  remain on deposit  and the  interest
rate. At September 30, 2002, the Registrant had no brokered deposits.

     Certificates  of Deposit of $100,000 or More. The following table indicates
the amount of the  Registrant's  certificates of deposit and other time deposits
of $100,000 or more by time remaining until maturity as of September 30, 2002.


                                                                Amount
                                                                ------
                 Maturity Period                            (In thousands)
                 Within three months......................       $17,933
                 Three through six months.................        22,257
                 Six through twelve months................        22,387
                 Over twelve months.......................        42,820
                                                                --------
                     Total................................      $105,397
                                                                ========

     Borrowings.  While  deposits  are  the  primary  source  of  funds  for the
Registrant's  lending and  investment  activities  and for its general  business
purposes,  the  Registrant  also  obtains  advances  from the FHLB of Atlanta to
supplement its supply of lendable  funds.  Advances from the FHLB of Atlanta are
secured by the Registrant's  first mortgage loans.  The Registrant,  if the need
arises,  may also access the Federal  Reserve Bank discount window to supplement
its supply of lendable funds and to meet deposit withdrawal requirements.


                                      -13-

<PAGE>

     The  following  tables  sets forth the  maximum  month-end  balance and the
average balance of short term FHLB advances for the periods indicated.


                                                          During the Year Ended
                                                               September 30,
                                                          ---------------------
                                                            2002         2001
                                                          --------    ---------
                                                             (In thousands)
Maximum amount of short-term borrowings outstanding
at any month end:
  Advances from Federal Home Loan Bank.................    $19,000     $19,000
Approximate average short-term borrowings
  outstanding with respect to:
  Advances from Federal Home Loan Bank.................    $14,924     $15,159
  Approximate weighted average rate paid on:
  Advances from Federal Home Loan Bank.................       5.90%       5.61%


Employees

     At September  30, 2002,  the  Registrant  had 54 full-time  and 3 part-time
employees.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining  group. The Bank believes that its relationship with its employees is
good.

     Regulation

     Set forth below is a brief  description of certain laws which relate to the
regulation of the Company and the Bank. The  description  does not purport to be
complete and is qualified  in its entirety by reference to  applicable  laws and
regulations.

     Regulation of the Company

     General.  The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
authority  also  permits the OTS to restrict  or  prohibit  activities  that are
determined  to be a serious risk to the  subsidiary  savings  association.  This
regulation  and  oversight  is  intended  primarily  for the  protection  of the
depositors of the Bank and not for the benefit of stockholders of the Company.

     As a unitary savings and loan holding company, the Company generally is not
subject   to  any   restrictions   on  its   business   activities.   While  the
Gramm-Leach-Bliley  Act (the "GLB Act")  terminated the "unitary  thrift holding
company"  exemption  from  activity  restrictions  on a prospective  basis,  the
Company enjoys  grandfathered status under this provision of the GLB Act because
it acquired the Bank prior to May 4, 1999. As a result,  the  Company's  freedom
from activity restrictions as a unitary savings and loan holding company was not
affected by the GLB Act.  However,  if the Company were to acquire control of an
additional  savings  association,  its business  activities  would be subject to
restriction under the Home Owners' Loan Act. Furthermore, if the Company were in
the future to sell control of the Bank to any other company,  such company would
not succeed to the Company's grandfathered status under the GLB

                                      -14-

<PAGE>

Act and would be subject to the same activity restrictions.  The continuation of
the Company's  exemption from  restrictions on business  activities as a unitary
savings and loan  holding  company is also  subject to the  Company's  continued
compliance  with the Qualified  Thrift Lender ("QTL") test. See "- Regulation of
the Bank - Qualified Thrift Lender Test."

     Regulation of the Bank

     General. Set forth below is a brief description of certain laws that relate
to the regulation of the Bank. The  description  does not purport to be complete
and  is  qualified  in  its  entirety  by  reference  to  applicable   laws  and
regulations.  As a federally chartered,  SAIF-insured  savings association,  the
Bank is subject  to  extensive  regulation  by the OTS and the  Federal  Deposit
Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal statutory and regulatory  requirements.  The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

     The  OTS  regularly   examines  the  Bank  and  prepares  reports  for  the
consideration  of the Bank's  Board of Directors  on any  deficiencies  that are
found in the Bank's operations.  The Bank's relationship with its depositors and
borrowers  is also  regulated  to a great  extent  by  federal  and  state  law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.

     The Bank must file  reports  with the OTS  concerning  its  activities  and
financial  condition,  in addition to obtaining  regulatory  approvals  prior to
entering into certain transactions such as mergers with or acquisitions of other
savings   institutions.   This   regulation   and   supervision   establishes  a
comprehensive  framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure  also  gives  the  regulatory   authorities  extensive  discretion  in
connection with their  supervisory  and  enforcement  activities and examination
policies,  including  policies with respect to the  classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.

     Insurance of Deposit  Accounts.  The deposit  accounts held by the Bank are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's primary regulator.

     The Bank is required to pay insurance premiums based on a percentage of its
insured  deposits to the FDIC for  insurance of its deposits by the SAIF.  Under
the  risk-based  system  established by the FDIC for setting  deposit  insurance
premiums, the 2002 insurance assessment rates for SAIF-member institutions range
from 0% to .27% of insured deposits on an annualized  basis, with the assessment
rate for most savings  institutions set at 0%. The Bank currently  qualifies for
the  lowest  assessment  rate  under  the risk-  based  assessment  system  and,
accordingly,  did not pay any  deposit  insurance  assessments  during  the past
fiscal year.

     In addition, all FDIC-insured institutions are required through 2017 to pay
assessments  to the  FDIC to fund  interest  payments  on  bonds  issued  by the
Financing Corporation ("FICO"), an agency of the

                                      -15-

<PAGE>

Federal government  established to recapitalize the predecessor to the SAIF. For
calendar 2001, the average annual assessment rate was .0190% of insured deposits
and, for 2002, the average annual  assessment rate will be approximately  .0175%
of insured deposits.

     Loans to One Borrower.  A savings association may not make a loan or extend
credit  to a single  or  related  group of  borrowers  in  excess  of 15% of the
associations's unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of the unimpaired capital and surplus, under certain circumstances.
At September 30, 2002, the Registrant's  lending limit for loans to one borrower
was approximately  $5,708,000 and the Registrant had no outstanding  commitments
that  exceeded  the  loans  to one  borrower  limit at the  time  originated  or
committed.

     Regulatory Capital  Requirements.  OTS capital  regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of  total  adjusted  assets,  (2)  core  capital  equal  to at least 3% of total
adjusted assets for savings  institutions  that receive the highest  supervisory
rating for safety and  soundness and 4% of total  adjusted  assets for all other
thrifts,  and (3) risk-based capital equal to 8% of total risk-weighted  assets.
At September 30, 2002, the Bank was in compliance  with its  regulatory  capital
requirements.

     For purposes of the OTS capital regulations, tangible capital is defined as
core capital less all intangible  assets,  except for certain mortgage servicing
rights,  and less certain  investments.  Core,  or Tier 1, capital is defined as
common  stockholders'  equity,   noncumulative  perpetual  preferred  stock  and
minority interests in the equity accounts of consolidated subsidiaries,  certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill,  less nonqualifying  intangible assets, certain
mortgage servicing rights and certain investments.

     The  risk-based  capital  standard  for savings  institutions  requires the
maintenance  of  total  risk-based  capital  of  8%  of  risk-weighted   assets.
Risk-based  capital  equals  the  sum of core  and  supplementary  capital.  The
components  of  supplementary  capital  include,  among other items,  cumulative
perpetual preferred stock,  perpetual  subordinated debt, mandatory  convertible
subordinated debt, intermediate-term preferred stock, general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted  assets,  and up
to 45% of unrealized gains on equity securities.  Overall, supplementary capital
is limited to 100% of core capital.  A savings  association  must  calculate its
risk-weighted  assets by multiplying  each asset and  off-balance  sheet item by
various risk factors as determined  by the OTS,  which range from 0% for cash to
100% for delinquent  loans,  property acquired through  foreclosure,  commercial
loans, and other assets.

     In addition to the above regulatory capital requirements,  the OTS's prompt
corrective action regulation  classifies savings  associations by capital levels
and  provides  that the OTS will  take  various  corrective  actions,  including
imposing significant operational restrictions,  against any thrift that fails to
meet  the  regulation's  capital  standards.  Under  this  regulation,  a  "well
capitalized"  savings  association  is one that has a total  risk-based  capital
ratio of at least 10%, a Tier 1  risk-based  capital  ratio of at least 6% and a
leverage  capital  ratio  of 5%,  and is not  subject  to any  capital  order or
directive.  A thrift is deemed  "adequately  capitalized"  category  if it has a
total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio
of at least 4%, and a leverage capital ratio of at least 4%.  Institutions  with
lower  capital  levels  are  deemed  to  be  "undercapitalized,"  "significantly
undercapitalized" or "critically  undercapitalized,"  depending on their capital
levels. A thrift that falls within any of the three undercapitalized  categories
is subject to severe  regulatory  sanctions under the prompt  corrective  action
regulation.   At  September  30,  2002,   the  Bank  was   classified  as  "well
capitalized."

                                      -16-

<PAGE>

     Dividend  and  Other  Capital  Distribution  Limitations.  The OTS  imposes
various  restrictions or requirements on the ability of savings  institutions to
make capital distributions, including cash dividends.

     A savings association,  such as the Bank, that is a subsidiary of a savings
and loan holding  company must file an  application  or a notice with the OTS at
least 30 days before making a capital distribution. Savings associations are not
required to file an application  for  permission to make a capital  distribution
and need only file a notice if the  following  conditions  are met: (1) they are
eligible for expedited  treatment under OTS  regulations,  (2) they would remain
adequately capitalized after the distribution,  (3) the annual amount of capital
distribution  does not exceed net income for that year to date added to retained
net income for the two preceding years, and (4) the capital  distribution  would
not violate any  agreements  between the OTS and the savings  association or any
OTS regulations. Any other situation would require an application to the OTS.

     The OTS may  disapprove an  application  or notice if the proposed  capital
distribution   would:  (i)  make  the  savings   association   undercapitalized,
significantly  undercapitalized,  or  critically  undercapitalized;  (ii)  raise
safety  or  soundness  concerns;  or (iii)  violate  a  statue,  regulation,  or
agreement  with  the OTS (or  with  the  FDIC),  or a  condition  imposed  in an
OTS-approved application or notice. Further, a federal savings association, like
the  Bank,  cannot  distribute   regulatory  capital  that  is  needed  for  its
liquidation account.

     Qualified Thrift Lender Test. Federal savings institutions must meet one of
two  Qualified  Thrift  Lender  ("QTL")  tests.  To  qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal  Revenue Code by maintaining at least 60% of its total assets
in specified types of assets,  including cash,  certain  government  securities,
loans  secured  by and  other  assets  related  to  residential  real  property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by  maintaining at
least 65% of its "portfolio assets" in  certain"Qualified  Thrift  Investments".
Qualified thrift investments  consist primarily of an institution's  residential
mortgage  loans and other loans and  investments  relating to  residential  real
estate and manufactured housing and also include student,  credit card and small
business loans, stock issued by a Federal Home Loan Bank, the FreddieMac and the
FannieMae,  and other enumerated assets. For purposes of the statutory QTL test,
portfolio assets are defined as total assets minus intangible  assets,  property
used by the  institution in conducting its business,  and liquid assets equal to
10% of total assets. A savings  institution must maintain its status as a QTL on
a monthly basis in at least nine out of every 12 months. A failure to qualify as
a QTL  would  result  in a number  of  sanctions,  including  certain  operating
restrictions.  At September 30, 2002,  the Bank was in  compliance  with its QTL
requirement, with 77.6% of its assets invested in Qualified Thrift Investments.

     Federal Home Loan Bank System. The Bank is a member of the FHLB of Atlanta,
which is one of 12 regional FHLBs that  administers  the home  financing  credit
function of savings associations.  Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB System.  It makes
loans to members  (i.e.,  advances) in accordance  with policies and  procedures
established by the Board of Directors of the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of Atlanta in an amount equal to the greater of 1% of its aggregate  unpaid
residential mortgage loans, home purchase

                                      -17-

<PAGE>

contracts  or similar  obligations  at the  beginning  of each year or 5% of the
Bank's advances from the FHLB. At September 30, 2002, the Bank was in compliance
with this requirement.

     Federal Reserve  System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW, and Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements that are imposed by the OTS. At September
30,  2002,  the  Bank  was  in  compliance  with  these  Federal  Reserve  Board
requirements.

Item 2.  Description of Property.
---------------------------------

     (a) The Registrant  conducts its business  through a main office located in
Bedford, Virginia and three branch offices. The Registrant also has eight ATM's,
three of which are located in convenience  markets. The Registrant believes that
the  current  facilities  are  adequate  to meet  its  present  and  immediately
foreseeable needs.

                                                              Original Date
Location                            Leased or Owned        Leased or Acquired
--------                            ---------------        ------------------

125-133 W. Main Street                   Owned             12/70 - Main Office
Bedford, VA  24523                                         12/84 - Drive thru
                                                              3/89 - Annex

1152 Hendricks Store Road             Land Leased                 8/86
Moneta, VA  24121                   Building Owned                1/87

ATM                                   Land Leased                 7/95
Moneta Road                         Building Owned                8/95
Moneta, VA  24121

14915 Forest Road                        Owned                    12/78
Forest, VA  24551
Including ATM

ATM
Longwood Avenue                          Owned                    1/85
Bedford, VA  24523

ATM                                   Land Leased                 10/99
Blue Ridge Avenue
Bedford, VA  24523

12130 East Lynchburg Turnpike           Leased                    8/00
Forest, VA 24551
Including ATM


                                      -18-

<PAGE>

     (b)  Investment  Policies.  See  "Item 1.  Business"  above  for a  general
description of the Registrant's  investment policies and any regulatory or Board
of Directors'  percentage of assets limitations  regarding certain  investments.
The Registrant's  investments are primarily acquired to produce income, and to a
lesser extent, possible capital gain.

     (1)  Investments  in Real Estate or Interests in Real Estate.  See "Item 1.
Business - Lending  Activities and - Regulation of the Registrant," and "Item 2.
Description of Property."

     (2) Investments in Real Estate  Mortgages.  See "Item 1. Business - Lending
Activities and - Regulation of the Registrant."

     (3) Investments in Securities of or Interests in Persons  Primarily Engaged
in Real Estate  Activities.  See "Item 1.  Business - Lending  Activities  and -
Regulation of the Registrant."

     (c) Description of Real Estate and Operating Data. Not Applicable.

Item 3.  Legal Proceedings
--------------------------

     There  are  various  claims  and  lawsuits  in  which  the  Registrant  are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Registrant holds security interests, claims involving
the making and servicing of real property  loans,  and other issues  incident to
the  Registrant's  business.  In the opinion of management,  no material loss is
expected from any of such pending claims or lawsuits.

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

     No matter was  submitted  to a vote of security  holders  during the fourth
quarter of the fiscal year.

                                     PART II

Item 5.  Market for the Registrant's Common Equity and Related Stockholder
         Matters
--------------------------------------------------------------------------

     The  information  contained  under the  sections  captioned  "Stock  Market
Information" in the Company's  Annual Report to Stockholders for the Fiscal Year
Ended  September  30,  2002 (the  "Annual  Report")  is  incorporated  herein by
reference.

Item  6.  Management's Discussion and Analysis or Plan of Operation
-------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report is incorporated herein by reference.

Item  7.  Financial Statements
------------------------------

     The Registrant's financial statements listed under Item 13 are incorporated
herein by reference.


                                      -19-

<PAGE>

Item  8. Changes in and Disagreements with Accountants On Accounting and
         Financial Disclosure.
------------------------------------------------------------------------

     Not applicable.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons:
         Compliance with Section 16(a) of the Exchange Act.
----------------------------------------------------------------------

     The  information  required  under  this  item  is  incorporated  herein  by
reference  to the  Proxy  Statement  for the 2003  Annual  Meeting  (the  "Proxy
Statement")  contained under the sections  captioned  "Section 16(a)  Beneficial
Ownership  Reporting  Compliance,"  "Proposal I - Election of Directors," and "-
Biographical Information."

Item 10. Executive Compensation
-------------------------------

     The  information  required by this item is incorporated by reference to the
Proxy Statement  contained under the section  captioned  "Director and Executive
Officer Compensation."

Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

     (a)  Security Ownership of Certain Beneficial Owners

     (b)  Security Ownership of Management

          The information  required by items (a) and (b) is incorporated  herein
          by  reference  to the Proxy  Statement  contained  under the  sections
          captioned   "Principal   Holders"  and   "Proposal  I  -  Election  of
          Directors."

     (c)  Management  of the Company  knows of no  arrangements,  including  any
          pledge by any person of  securities  of the Company,  the operation of
          which may at a  subsequent  date  result in a change in control of the
          Company.

     (d)  Securities Authorized for Issuance Under Equity Compensation Plans


                                      -20-

<PAGE>



     Set forth below is  information  as of  September  30, 2002 with respect to
compensation   plans  under  which  equity  securities  of  the  Registrant  are
authorized for issuance.

<TABLE>



                                                           EQUITY COMPENSATION PLAN INFORMATION
                                                (a)                   (b)                       (c)
                                                                                        Number of securities
                                       Number of securities     Weighted-average      remaining available for
                                         to be issued upon     exercise price of       future issuance under
                                            exercise of           outstanding        equity compensation plans
                                       outstanding options,    options, warrants       (excluding securities
                                       warrants and rights        and rights         reflected in column (a))
                                       --------------------    -----------------     -------------------------
<S>                                        <C>                 <C>                            <C>


Equity compensation plans
approved by shareholders:

1994 Stock Option Plan..............          128,060             $  6.11                        20,994

Recognition and Retention Plan......             --                    --                         8,394

Equity compensation plans
not approved by
shareholders(1).....................            n/a                  n/a                           n/a
                                              -------             -------                        ------
     TOTAL.........................           128,060             $  6.11                        29,388
                                             ========             =======                        ======
_______________
(1)      Not applicable.
</TABLE>


Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------

     The information  required by this item is incorporated  herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.

Item 13. Exhibits, List, and Reports on Form 8-K
------------------------------------------------

     (a)  Listed below are all financial  statements  and exhibits filed as part
          of this Report.

          1.   The consolidated  balance sheets of Bedford Bancshares,  Inc. and
               subsidiaries  as of  September  30, 2002 and 2001 and the related
               consolidated  statements of operations,  changes in stockholders'
               equity  and cash  flows for each of the  years in the three  year
               period ended September 30, 2002,  together with the related notes
               and  the  independent   auditors'  report  of  BDO  Seidman,  LLP
               independent certified public accountants.

          2.   Schedules omitted as they are not applicable.


                                      -21-

<PAGE>


          3.   The   following   exhibits   are   included  in  this  Report  or
               incorporated herein by reference:

               (a)  List of Exhibits:

                    3(i) Restated   Articles   of   Incorporation   of   Bedford
                         Bancshares, Inc. *

                    3(ii) Bylaws of Bedford Bancshares, Inc. *

                    4    Specimen Stock Certificate *

                    10.1 1994 Stock Option Plan *

                    10.2 Recognition and Retention Plan and Trust Agreement *

                    10.3 Employment  Agreement between the Registrant and Harold
                         K. Neal *

                    13   Portions of the 2002 Annual Report to Stockholders

                    21   Subsidiaries   of  the   Registrant   (See   "Item   1-
                         Description of Business)

                    23   Consent of BDO Seidman, LLP

                    99   Certification  pursuant to 18 U.S.C.  Section  1350, as
                         adopted  pursuant to Section 906 of the  Sarbanes-Oxley
                         Act of 2002.

               (b)  Reports   on  Form   8-K.
                    None

_____________________
*    Incorporated  by reference to the  Registrant's  Form 10-KSB filed with the
     SEC on December 9, 1994.


Item 14. Controls and Procedures
--------------------------------

     (a)  Evaluation  of  disclosure  controls  and  procedures.  Based on their
evaluation  as of a date within 90 days of the filing date of this Annual Report
on Form 10-KSB,  the  Registrant's  principal  executive  officer and  principal
financial officer have concluded that the Registrant's  disclosure  controls and
procedures  (as defined in Rules  13a-14(c) and 15d-14(c)  under the  Securities
Exchange  Act of 1934  (the  "Exchange  Act"))  are  effective  to  ensure  that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.

     (b) Changes in internal controls.  There were no significant changes in the
Registrant's  internal  controls or in other  factors  that could  significantly
affect these controls subsequent to the date of their evaluation,  including any
corrective  actions  with  regard  to  significant   deficiencies  and  material
weaknesses.


                                      -22-

<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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  as of December 23,
2002.

                                         BEDFORD BANCSHARES, INC.


                                         By:  /s/ Harold K. Neal
                                              ----------------------------------
                                              Harold K. Neal, President and
                                              Chief Executive Officer
                                              (Duly Authorized Representative)

     Pursuant to the  requirement of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the  capacities and on the dates  indicated as of December 23,
2002.


By:  /s/ Harold K. Neal                            By: /s/ Hugh H. Bond
     --------------------------------------------      -------------------------
     Harold K. Neal                                    Hugh H. Bond
     President, Chief Executive                        Chairman of the Board
     Officer and Director
     (Principal Executive Officer)



By:  /s/ James W. Smith                            By: /s/ George N. Cooper
     --------------------------------------------      -------------------------
     James W. Smith                                    George N. Cooper
     Vice President, Treasurer and Comptroller         Director
     (Principal Financial and Accounting Officer)



By:  /s/ Macon C. Putney                           By: /s/ Harry W. Garrett, Jr.
     --------------------------------------------      -------------------------
     Macon C. Putney                                   Harry W. Garrett, Jr.
     Director                                          Director



By:  /s/ William P. Pickett                        By: /s/ William T. Powell
     --------------------------------------------      -------------------------
     William P. Pickett                                 William T. Powell
     Director                                           Director



By:  /s/ Jennie T. Allman
     --------------------------------------------
     Jennie T. Allman
     Director


<PAGE>

                            SECTION 302 CERTIFICATION


     I,  Harold K.  Neal,  President  and Chief  Executive  Officer  of  Bedford
Bancshares, Inc., certify that:

1.   I have reviewed  this annual  report on Form 10-KSB of Bedford  Bancshares,
     Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     (b)  evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

<PAGE>


     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.



Date:  December 23, 2002                  /s/ Harold K. Neal
                                          --------------------------------------
                                          Harold K. Neal
                                          President and Chief Executive Officer

<PAGE>

                            SECTION 302 CERTIFICATION


     I, James W. Smith, Chief Financial Officer, certify that:

1.   I have reviewed  this annual  report on Form 10-KSB of Bedford  Bancshares,
     Inc.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     (b)  evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     (c)  presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

<PAGE>


6.   The  registrant's  other  certifying  officer and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Date:  December 23, 2002                              /s/ James W. Smith
                                                      --------------------------
                                                      James W. Smith
                                                      Chief Financial Officer