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, 1997, 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.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

Virginia                                                         54-1709924
---------------------------------------------                 ------------------
(State or other jurisdiction of incorporation                 I.R.S. Employer
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    .

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-B is not contained  herein,  and will not 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 $10,873,000.

         As of December 10, 1997,  there were issued and  outstanding  1,142,425
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 10, 1997, was
$27,940,427.

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, 1997. (Parts I, II and IV)

         2.  Portions  of  Proxy  Statement  for  the  1998  Annual  Meeting  of
stockholders. (Part III)


<PAGE>



                                     PART I

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

The Company

         Bedford  Bancshares,  Inc. (the  "Company")  is a Virginia  corporation
organized  in March of 1994 at the  direction  of Bedford  Federal  Savings Bank
("Bedford  Federal" or the "Savings  Bank") to acquire all of the capital  stock
that the Savings Bank issued in its conversion  from the mutual to stock form of
ownership (the "Conversion"). On August 19, 1994, the Savings Bank completed the
Conversion and became a wholly owned subsidiary of the Company. The Company is a
unitary  savings and loan company which,  under existing laws,  generally is not
restricted in the types of business  activities in which it may engage  provided
that the  Savings  Bank  retains a  specified  amount of its  assets in  housing
related investments.

The Savings Bank

         Bedford Federal, a wholly owned subsidiary of the Company,  was founded
in 1935 and is primarily engaged in attracting  deposits from the general public
and using those funds to  originate  real  estate  loans on one- to  four-family
residences  and, to a lesser extent,  multi-family,  commercial  real estate and
consumer  loans.  The  Savings  Bank has  offices in the city of Bedford  and in
Forest and Moneta, which are located in Bedford County,  Virginia.  In addition,
the  Savings  Bank  invests  in  investment   securities   and   mortgage-backed
securities.   The   Savings   Bank   offers  its   customers   fixed-rate,   and
adjustable-rate mortgage loans, as well as consumer loans, including home equity
and savings  account  loans.  Adjustable-rate  mortgage loans are originated for
retention in the Savings Bank's  portfolio while  fixed-rate  mortgage loans are
sometimes sold upon  origination into the secondary  market.  All consumer loans
are retained in the Savings Bank's portfolio.

         The  principal   sources  of  funds  for  the  Savings  Bank's  lending
activities are deposits,  the amortization,  repayment and maturity of loans and
investment  securities  and advances from the Federal Home Loan Bank ("FHLB") of
Atlanta. Primary sources of income are interest and fees on loans and investment
securities and customer service fees and commissions. The Savings Bank's primary
expense is interest paid on deposits.

Market Area/Competition

         The City and County of Bedford are the Savings  Bank's  primary  market
area.  The Bedford  City/County  area  consists of over 770 square  miles and is
located in the west-central  portion of Virginia known as the Piedmont  Plateau.
The Savings Bank's main office is located at 125 West Main Street in the City of
Bedford, Virginia, and two other offices are located at opposite ends of Bedford
County.  An office in Forest  serves the eastern part of the county,  as well as
parts of the City of  Lynchburg,  Campbell  and  Amherst  Counties.  The  office
located in Moneta  serves the southern and western parts of Bedford  County,  as
well as the area  surrounding  Smith  Mountain Lake which  includes  portions of
Franklin and Roanoke Counties.

         The City of Bedford is located  approximately 25 miles west of the City
of  Lynchburg  and 30 miles east of Roanoke.  The City of Bedford  serves as the
county seat and the  commercial and retail hub of the area with a market of over
55,000  persons.  The Bedford  area enjoys a  diversified  economy  comprised of
manufacturing, wholesale, retail, service, agriculture and tourism.


<PAGE>




         The Savings Bank is the only  financial  institution  headquartered  in
Bedford City/County. This area is also served by branch offices of five regional
commercial banks and a branch office of a thrift headquartered in Lynchburg. The
Savings Bank encounters  strong  competition  both in the attraction of deposits
and  origination of real estate and other loans.  Competition for deposits comes
primarily from  commercial  banks and competition for loans comes primarily from
branches of commercial  banks and thrifts,  as well as mortgage  companies  that
operate in the areas which  comprise the Savings Bank's primary market area. Due
to their size, many of the Savings Bank's competitors  possess greater financial
and marketing resources.

Lending Activities

         General.  The Savings Bank's loan portfolio  predominantly  consists of
adjustable-rate mortgage loans or short-term fixed-rate loans secured by one- to
four-family  residences  and  to  a  lesser  extent,   commercial  real  estate,
construction  and consumer  loans.  Fixed rate  mortgage  loans with  maturities
exceeding 15 years  generally  are sold with  servicing  rights  retained by the
Savings Bank in the secondary market.

         The following  table sets forth the  composition  of the Savings Bank's
loan portfolio in dollar amounts and in percent of the respective  portfolios at
the dates indicated.

<TABLE>
<CAPTION>
                                                         1997                               1996
                                             ------------------------------      ---------------------------
                                                               Percent of                         Percent of
                                                Amount            Total            Amount            Total
                                                ------            -----            ------            -----
                                                               (Dollars in Thousands)
<S>                                           <C>                <C>             <C>                <C>   
Real estate:
  Residential:
    One- to four-family................       $ 84,727           70.79%          $ 84,235           74.53%
    Multi-family.......................            523             .44%             1,000              .88
  Commercial...........................          3,836            3.20%             4,998             4.42
  Construction.........................          8,433            7.05%             9,783             8.66
  Land.................................         10,538            8.80%             4,127             3.65
Consumer and commercial business.......         11,630            9.72%             8,878             7.86
                                                ------          ------            -------            -----
      Total loans......................       $119,687          100.00%          $113,021          100.00%
                                              --------          ------           --------          ------ 

Less:
  Unearned discounts, premium,
    deferred loan fees, net............            287                                299
  Loans-in-process.....................          2,629                              3,199
  Allowance for credit losses..........            678                                650
                                               -------                           --------
    Total loans, net...................       $116,093                           $108,873
                                               =======                            =======

</TABLE>


                                       -2-

<PAGE>
         The following  table sets forth the maturity of the Savings Bank's loan
portfolio  at  September  30, 1997.  The table does not include  prepayments  or
scheduled principal  repayments.  Prepayments and scheduled principal repayments
on  loans  totalled  $26.5  million  for the  year  ended  September  30,  1997.
Adjustable-rate  mortgage  loans  are  shown as  maturing  based on  contractual
maturities.
<TABLE>
<CAPTION>
                                                                       At September 30, 1997
                                          -------------------------------------------------------------------------------
                                                                                                    Consumer
                                          One- to                                                     and       Total
                                           Four-      Multi-  Commercial                           Commercial   Loans
                                           Family     Family  Real Estate  Construction    Land     Business  Receivable
                                           ------     ------  -----------  ------------   ------    --------  ----------
                                                                          (In thousands)            
<S>                                       <C>        <C>        <C>           <C>        <C>        <C>        <C>     
Amounts due:                                                                 
  One year or less ....................   $     16   $   --     $    299      $  6,477   $     15   $  1,496   $  8,303
                                          --------   --------   --------      --------   --------   --------   --------
                                                                             
  After one year:                                                            
    More than one year to three years .        137       --           44         1,584        421      3,623      5,809
    More than three years to five years      1,007          3        112          --        2,145      3,670      6,937
    More than five years to 10 years ..      6,553        295        537           204      6,677      1,945     16,211
    More than 10 years to 20 years ....     24,447        225      2,844           168      1,280        896     29,860
    More than 20 years ................     52,567       --         --            --         --         --       52,567
                                          --------   --------   --------      --------   --------   --------   --------
                                                                             
     Total due after one year .........     84,711        523      3,537         1,956     10,523     10,134    111,384
                                          --------   --------   --------      --------   --------   --------   --------
     Total amounts due ................     84,727        523      3,836         8,433     10,538     11,630    119,687
Less:                                                                        
  Loans-in-process ....................       --         --         --           2,629       --         --        2,629
  Unearned discounts, premiums and                                           
   deferred loan fees, net ............        222          2         15            30          6         12        287
  Allowance for credit losses .........        379          1         50            50         40        158        678
                                          --------   --------   --------      --------   --------   --------   --------
    Loans, net ........................   $ 84,126   $    520   $  3,771      $  5,724   $ 10,492   $ 11,460   $116,093
                                          ========   ========   ========      ========   ========   ========   ========

</TABLE>

         The following table sets forth the dollar amount of all loans due after
September 30, 1998,  which have fixed  interest rates and which have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
                                                                    Floating or
                                            Fixed Rates           Adjustable Rates       Total
                                            -----------           ----------------       -----
                                                            (In thousands)
<S>                                           <C>                      <C>               <C>    
Real estate loans:
   One- to four-family
    (including construction).....             $14,494                  $72,173           $86,667
   Multi-family..................                 153                      370               523
   Commercial real estate........               1,593                    1,944             3,537
   Land..........................               3,394                    7,129            10,523
Consumer and commercial
  business.......................               5,977                    4,157            10,134
                                                -----                    -----            ------
  Total..........................             $25,611                  $85,773          $111,384
                                               ======                   ======           =======
</TABLE>

                                       -3-

<PAGE>



         One- to  Four-Family  Residential  Loans.  The Savings  Bank's  primary
lending   activity   consists  of  the   origination   of  one-to   four-family,
owner-occupied,  residential  mortgage loans secured by property  located in the
Savings  Bank's  primary  market area.  Management  believes  that its policy of
focusing on one- to four-family  lending has been effective in  contributing  to
net interest income while reducing credit risk by keeping loan delinquencies and
losses to a minimum.

         The  Savings  Bank  currently  offers  adjustable-rate  mortgage  loans
("ARMs")  that adjust 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. Generally,  the interest rates on ARMs are based on treasury bill indices
and are adjustable  with certain  limitations on adjustments per period and over
the life of the loan. Most have a "floor rate", whereby interest charged on such
loans cannot be reduced below the rate set forth in the loan documents,  thereby
insulating  the  Savings  Bank from lower  yields due to further  reductions  in
interest  rates.  The Savings Bank considers the market factors and  competitive
rates on loans as well as its own cost of funds  when  determining  the rates on
the loans  that it  offers.  The  Savings  Bank does not  originate  loans  with
negative amortization.

         Bedford  Federal   originated   $16.2  million  and  $19.0  million  of
adjustable-rate,  one- to four-family  permanent and construction mortgage loans
during the fiscal years ended  September  30, 1997 and 1996,  respectively.  The
Savings Bank's total one- to four-family ARM portfolio amounted to $74.0 million
of the Savings Bank's gross loans receivable at September 30, 1997.

         The retention of ARMs in the Savings Bank's portfolio  greatly helps to
reduce the Savings Bank's exposure to changes in interest rates. However,  there
are  unquantifiable  credit  risks which would result from  potential  increased
payments to the borrower as a result of repricing of ARMs.  It is possible  that
during periods of rapidly rising interest rates, the risk of default on ARMs may
increase  due to  the  upward  adjustment  of  interest  cost  to the  borrower.
Additionally, the ARMs originated by the Savings Bank historically have provided
for initial  rates of interest  below the fully indexed rates that would prevail
were the index used for repricing applied initially.  These loans are subject to
increased risk of delinquency or default when the higher,  fully-indexed rate of
interest subsequently comes into effect and replaces the lower initial rate. The
Savings Bank attempts to limit such potential risk by placing limitations on the
interest rate  adjustments.  Although the potential  exists for a higher rate of
delinquency on ARMs versus fixed-rate loans, Bedford Federal has not experienced
a disproportionate share of delinquencies or defaults in its ARM portfolio.

         Generally, during periods of rising interest rates, the risk of default
on ARMs is  considered  to be greater  than the risk of default on a  fixed-rate
loan due to the upward  adjustment of interest  costs to the  borrower.  To help
reduce  such risk,  the Savings  Bank  qualifies  the loan at the fully  indexed
accrual rate, as opposed to the original  interest rate.  ARMs may be made at up
to 95% of the loan to value  ratio.  Although  ARMs  allow the  Savings  Bank to
increase the  sensitivity  of its asset base to changes in interest  rates,  the
extent of this  interest  sensitivity  is limited by the  periodic  and lifetime
interest rate  adjustment  limitations.  Accordingly,  there can be no assurance
that yields on the Savings  Bank's ARMs will adjust  sufficiently  to compensate
for increases in the Savings Bank's cost of funds.

         The  Savings  Bank  also  offers   conventional   fixed-rate   one-  to
four-family mortgage loans with terms from 10 to 30 years.  Fixed-rate loans are
generally  underwritten  according to the Federal Home Loan Mortgage Corporation
("FHLMC")  guidelines,  utilizing  their  approved  documents  so that the loans
qualify for sale in the secondary  mortgage market.  The Savings Bank originates
and holds its fixed-rate  mortgage loans with  maturities not exceeding 15 years
in its portfolio.  Bedford  Federal  originated $1.5 million and $3.0 million in
permanent fixed-rate,  one- to four-family mortgage loans during the years ended
September  30, 1997 and 1996,  respectively.  The Savings Bank sold $413,000 and
$152,000 of

                                       -4-

<PAGE>



the loans originated  during the fiscal years ended September 30, 1997 and 1996,
respectively.  In  addition,  the Savings  Bank  originated  $0 and  $167,000 in
fixed-rate   one-to   four-family   mortgage  loans  for  the  Virginia  Housing
Development Authority ("VHDA") in fiscal 1997 and 1996, respectively.

         While one- to  four-family  residential  real estate loans are normally
originated  with  terms  from  10 to  30  years,  such  loans  typically  remain
outstanding for substantially  shorter periods.  This is because borrowers often
prepay their loans in full upon sale of the property pledged as security or upon
refinancing  the original loan. In addition,  substantially  all of the mortgage
loans in the Savings Bank's loan portfolio contain due-on-sale clauses providing
that the Savings  Bank may declare  the unpaid  amount due and payable  upon the
sale of the  property  securing  the  loan.  The  Savings  Bank  enforces  these
due-on-sale  clauses to the extent permitted by law. Thus, average loan maturity
is a function of, among other  factors,  the level of purchase and sale activity
in the real estate  market,  prevailing  interest  rates and the interest  rates
payable on outstanding loans.

         Construction  Lending. The Savings Bank 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 Savings  Bank's
market area.

         Construction  loans are made to builders on a speculative  basis and to
owners for construction of their primary  residence on a  construction/permanent
basis. Loans for speculative housing construction are made to area builders only
after a thorough  background check has been made. This background check includes
an analysis of the builder's financial  statements,  credit report and reference
checks with subcontractors and suppliers.  The Savings Bank usually will have no
more than  three  construction  loans  outstanding  at any time to any  builder.
Construction   loans  on  speculative   properties  are  limited  to  a  maximum
loan-to-value  ratio of 80% and  have a  maximum  maturity  of 12  months.  Loan
proceeds  are  disbursed  in  increments  as  construction  progresses.  Accrued
interest on loan  disbursements  is paid  monthly.  At September  30, 1997,  the
Savings  Bank had $3.1  million in  construction  loans  outstanding  secured by
unsold  properties,  with  $727,000  in loans in process  (funds  being held for
construction  progress)  outstanding and attributed to these loans.  The Savings
Bank has experienced  increased  residential  construction lending in its market
area, primarily in the Forest, Virginia area. This increased lending is a result
of the  recruitment  by the Savings  Bank of several  financially  strong  small
builders as customers in the Forest area.

         Construction/permanent  loans to  owner/borrowers  have either fixed or
adjustable  rates and are  underwritten  in  accordance  with the same terms and
requirements as the Savings Bank's  permanent  mortgages on existing  properties
except that the builder must qualify as a Savings Bank approved contractor,  and
the loans generally provide for disbursement of loan proceeds in stages during a
construction  period of up to six months.  Borrowers are required to pay accrued
interest on the outstanding  balance monthly during the  construction  phase. At
September 30, 1997, there was $2.6 million  outstanding in construction loans to
owner/borrowers  with $1.8  million  outstanding  loans-in-process  allocated to
these projects.  Construction  loans  originated on commercial and  multi-family
properties   amounted  to  $796,000   and  $0  during   fiscal  1997  and  1996,
respectively.  The Savings  Bank  originated  $9.4  million and $9.9  million in
construction  loans on one- to four-family  properties  during fiscal years 1997
and 1996, respectively.

         Construction  financing  is  generally  considered  to involve a higher
degree  of risk of loss than  long-term  financing  on  improved  occupied  real
estate.  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  (including  interest) of
construction. During the construction phase,

                                       -5-

<PAGE>



a number of factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate,  it may be necessary for the Savings
Bank  to  advance  funds  beyond  the  amount  originally  committed  to  permit
completion  of  the  construction.  If  the  estimate  of  value  proves  to  be
inaccurate,  the Savings Bank may be confronted,  at or prior to the maturity of
the loan,  with  collateral  having a value which is insufficient to assure full
repayment. As a result of the foregoing, construction lending often involves the
disbursement  of  substantial  funds with repayment  dependent,  in part, on the
success of the  construction.  If the Savings  Bank is forced to  foreclose on a
property prior to or at completion  due to a default,  there can be no assurance
that the Savings Bank will be able to recover all of the unpaid  balance of, and
accrued interest on, the loan as well as related  foreclosure and holding costs.
The Savings Bank has sought to minimize this risk by limiting construction loans
to qualified  borrowers on properties  located in the Savings Bank's market area
and by  limiting  the  number of  construction  loans for  speculative  purposes
outstanding at any time.

         Multi-Family  and Commercial Real Estate Loans. The Savings Bank offers
multi-family  and commercial  real estate loans,  however,  this type of lending
represents a small portion of the Savings Bank'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.

         Loans secured by  multi-family  and  commercial  real estate  generally
involve a greater degree of risk than one- to four-family  residential  mortgage
loans and carry larger loan balances.  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 income
producing  properties and the increased  difficulty of evaluating and monitoring
these types of loans. Furthermore,  the repayment of loans secured by commercial
and  multi-family  real  estate  is  typically  dependent  upon  the  successful
operation or  management  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.  The Savings Bank seeks to minimize  these risks in a variety of ways,
including  limiting  the  size of  such  loans  and  strictly  scrutinizing  the
financial  condition  of the  borrower,  the quality of the  collateral  and the
management of the property securing the loan. In certain instances,  the Savings
Bank will  require  personal  guarantees.  Substantially  all of the  properties
securing the Savings Bank's  commercial and  multi-family  real estate loans are
inspected by the Savings Bank's lending  personnel  before the loan is made. The
Savings Bank also obtains  appraisals on each  property.  At September 30, 1997,
the  largest  commercial  or  multi-family  real  estate  loan had a balance  of
$667,000 and was performing.

         Land Lending. Land loans are made primarily to individuals on developed
residential  lots  located in the  Savings  Bank'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. The Savings Bank views consumer
lending as an important  component of its lending  operations  because  consumer
loans generally have shorter terms and higher yields,  thus reducing exposure to
changes in interest rates. In addition,  the Savings Bank believes that offering
consumer  loans helps to expand and create  stronger ties to its customer  base.
Consequently,  the Savings  Bank has  recently  focused on  consumer  lending by
marketing consumer loans to existing and potential  customers.  All branches are
now able to originate consumer loans. Regulations permit federally

                                       -6-

<PAGE>



chartered savings  associations to make secured and unsecured  consumer loans up
to 35% of the  Savings  Bank's  assets,  with no  limit  for  credit  cards  and
educational loans. In addition, the Savings Bank has lending authority above the
35% limit for certain consumer loans,  such as home improvement  loans and loans
secured by savings accounts.

         Consumer loans consist of automobile loans, savings account loans, home
equity,  personal secured and unsecured loans and home improvement  loans. As of
September 30, 1997, $1.6 million of such loans consisted of automobile loans.

         The  underwriting  standards  employed by the Savings Bank for consumer
loans include a determination of the applicant's  payment history on other debts
and an assessment of ability to meet  existing  obligations  and payments on the
proposed loan. In addition, the stability of the applicant's monthly income from
primary   employment   is   considered   during   the   underwriting    process.
Creditworthiness  of the  applicant is of primary  consideration,  however,  the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.

         Consumer loans entail greater credit risk than do residential  mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles,  mobile homes, boats and
recreational  vehicles.  In such cases,  repossessed  collateral for a defaulted
consumer  loan  may  not  provide  an  adequate  source  of  repayment  for  the
outstanding  loan and the remaining  deficiency  often does not warrant  further
substantial  collection  efforts  against the borrower.  In particular,  amounts
realizable on the sale of repossessed  automobiles may be significantly  reduced
based  upon the  condition  of the  automobiles  and the lack of demand for used
automobiles. The Savings Bank adds a general provision to its consumer loan loss
allowance,  based on general  economic  conditions,  prior loss  experience  and
management's  periodic evaluation.  See "--Loan Delinquencies and Non-Performing
Assets and Classified Assets" for information  regarding the Savings Bank's loan
loss experience and reserve policy.

         Regulations  authorize  the Savings Bank to make secured and  unsecured
loans  for  commercial,  corporate,  business  and  agricultural  purposes.  The
aggregate  amount of such loans  outstanding  may not exceed 20% of the  Savings
Bank's  assets.  Any loans in excess of 10% of assets must be made to qualifying
small  businesses  and farms.  In  addition,  another 10% of total assets may be
invested in commercial  equipment leasing.  The Savings Bank has offered limited
commercial  business  loans  since  the  early  1980s,   primarily  to  existing
customers.  Generally,  the Savings Bank's commercial business loans are secured
by real estate or other assets.

         It is the  policy of Bedford  Federal  annually  to  request  financial
statements from commercial loan borrowers. The financial statements are reviewed
as received by  management  to detect any  conditions or trends which may affect
the ability of the borrower and/or cash flows of the project to repay the debt.

         Loan  Solicitation  and  Processing.  The  Savings  Bank'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.


                                       -7-

<PAGE>





         The Savings Bank uses  independent  fee  appraisers  on all real estate
related  transactions.  Each fee appraiser  used must be state licensed or state
certified  and  approved  by Bedford  Federal's  Board of  Directors.  It is the
Savings  Bank'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 Savings Bank 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 60 days from the
date of the  application.  Upon receipt of loan  approval,  the borrower has the
balance of the 60 day period to close the loan at the interest  rate  committed.
At September  30, 1997,  the Savings  Bank had $2.8  million of  commitments  to
originate  mortgage  loans,  $4.1  million in  unfunded  home  equity  loans and
$100,000 in unfunded commercial lines of credit.

         Loan  Processing and Servicing  Fees. In addition to interest earned on
loans,  the Savings  Bank  recognizes  fees and service  charges  which  consist
primarily of fees charged for loan  originations  and loans  serviced for others
and late charges.  The Savings Bank  recognized  loan servicing fees of $296,000
and $403,000 for the years ended September 30, 1997 and 1996,  respectively.  As
of September 30, 1997,  loans serviced for others totalled $2.9 million.  To the
extent possible, the Savings Bank intends to expand the amount of loans serviced
for others through the continued sale of fixed-rate,  long-term  loans to others
and through the VHDA.

         Loans to One Borrower.  Current regulations limit loans-to-one borrower
to an  amount  equal to 15% of  unimpaired  capital  and  retained  income on an
unsecured basis and an additional amount equal to 10% of unimpaired  capital and
retained  income  if the  loan  is  secured  by  readily  marketable  collateral
(generally,  financial instruments,  not real estate) or $500,000,  whichever is
greater. Under such regulations, the Savings Bank's maximum loan-to-one borrower
limit  was  approximately  $2.7  million  as of  September  30,  1997.  See " --
Classified Assets."

         The Savings  Bank's  largest  loan to one borrower is comprised of four
loans to an  operating  dairy farm located in Bedford  County.  Two of the loans
were  originated  in October  1996 in the  amounts  of  $305,000  and  $300,000,
respectively  and the third loan was  orginated in April 1997,  in the amount of
$90,000. These loans are secured by real estate, cattle and operating equipment.
The fourth loan was  originated  in July 1997 and  represents an $18,000 line of
credit secured by real estate. All of the loans were performing at September 30,
1997,  and  are  personally  guaranteed  by the  individuals  and are  also  90%
guaranteed by the Farmers Home Administration.

         Loan  Delinquencies  and  Non-Performing  Assets.  The  Savings  Bank'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  Savings  Bank  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.

         Real estate  acquired by the Savings Bank as a result of foreclosure or
by deed in lieu of  foreclosure  is classified  as foreclosed  real estate until
such time as it is sold. When foreclosed real estate is acquired, it is recorded
at the lower of fair value or cost.  Valuations  are  periodically  performed by
management and subsequent  charges to specific loss allowances are taken when it
is  determined  that the carrying  value of the property  exceeds the fair value
less estimated costs to sell. See "-- Foreclosed Real Estate."


                                       -8-

<PAGE>



         At September  30, 1997 and 1996,  delinquencies  in the Savings  Bank's
loan portfolio were as follows:
<TABLE>
<CAPTION>
                                                                At September 30,
                         --------------------------------------------------------------------------------------------
                                              1997                                             1996
                         ---------------------------------------------   --------------------------------------------
                                60-89 Days           90 Days or More           60-89 Days           90 Days or More
                         ----------------------   --------------------   -----------------------  -------------------

                          Number     Principal     Number    Principal    Number      Principal   Number   Principal
                            of       Balance        of       Balance       of         Balance      of      Balance
                          Loans      of Loans      Loans     of Loans     Loans       of Loans    Loans    of Loans
                         ------      --------      -----     --------     -----       --------    -----    --------
<S>                         <C>        <C>           <C>        <C>         <C>          <C>        <C>       <C> 
One- to four-
   family................    6         $318           5         421          9           $651        4        $510
Multi-family.............   --           --          --          --         --             --       --          --
Commercial
   real estate...........   --           --          --          --         --             --        1          54
Land.....................   --           --           1          49         --             --       --          --
Consumer and
 commercial
 business................    5           53           8          48          8             83        6         120
                            --           --          --          --        ---           ----       --        ----
   Total.................   11         $371          14         518         17           $734       11        $684
                            --          ---          ==         ===         ==            ===       ==         ===
Delinquent loans
  to total net loans.....               .32%                    .45%                      .67%                 .63%

</TABLE>

         Uncollectible  interest  on loans  that are  contractually  past due is
charged off, or an  allowance  is  established  based on  management's  periodic
evaluation  of its  portfolio.  The  allowance  is  established  by a charge  to
interest  income  equal  to all  interest  previously  accrued,  and  income  is
subsequently  recognized  only to the extent  that cash  payments  are  received
until, in management's  judgment,  the borrower has the ability to make periodic
interest  and  principal  payments or is no longer  delinquent,  and the loan is
returned to accrual  status.  The Savings Bank ceases the accrual of interest on
delinquent  loans upon  foreclosure.  At  September  30,  1997,  the Bank had no
restructured  loans  within the meaning of  Statement  of  Financial  Accounting
Standard ("SFAS") 15. The following table sets forth information regarding loans
which are 90 days or more delinquent.

                                               At September 30,(1)
                                               -------------------
                                               1997          1996
                                               ----          ----
                                                (In thousands)

Loans 90 days or more delinquent........      $518           $684
Foreclosed real estate..................       212             --
                                               ---           ----
    Total non-performing assets.........      $730          $ 684
                                               ===           ====


-------------------
(1)      A 100%  reserve is  established  for  interest on loans 90 days or more
         delinquent.  At September 30, 1997 and 1996, the balance of the reserve
         for accrued  interest on loans  delinquent  90 days or more was $35,000
         and $168,000, respectively. At September 30, 1997, the Savings Bank had
         no loans  accounted  for on a nonaccrual  basis which were less than 90
         days past due.


                                       -9-

<PAGE>



         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. "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 Savings Bank'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.

         At  September  30,  1997,  the Savings  Bank's  problem  assets were as
follows:  $0 were  designated  special  mention,  $730,000  were  classified  as
substandard and $0 were classified as doubtful or loss.

         Foreclosed  Real Estate.  Real estate acquired by the Savings Bank as a
result of foreclosure,  judgment or by deed in lieu of foreclosure is classified
as  foreclosed  real estate  until it is sold.  When  property is acquired it is
recorded at the lower of fair value less estimated selling costs, or the balance
of the loan on the property at the date of  foreclosure.  Foreclosed real estate
totalled $212,000 at September 30, 1997.

         Provision  for  Credit  and  Foreclosed  Real  Estate  Losses.   It  is
management's  policy to  provide  for losses on  unidentified  loans in its loan
portfolio and foreclosed  real estate.  A provision for credit losses is charged
to operations based on management's  evaluation of the potential losses that may
be  incurred  in the  Savings  Bank'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,  among  other  matters,
perceived risks,  delinquency ratios,  economic conditions and the estimated net
realizable value of the underlying collateral.

         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.

                                      -10-

<PAGE>




         Allowance  Analysis.  The following table sets forth the Savings Bank's
allowance for credit losses,  allowance for losses on foreclosed real estate and
related ratios.
<TABLE>
<CAPTION>

                                                        At or For the Year Ended
                                                               September 30,
                                                           ---------------------
                                                           1997          1996
                                                           ----          ----
                                                          (Dollars in thousands)
<S>                                                        <C>           <C> 
Allowance for credit losses:
Balance at beginning of period....................         $650          $640
                                                            ---           ---
 Charge-offs:
   One- to four-family............................           --            --
   Multi-family...................................           --            --
   Commercial real estate.........................           58            --
   Construction and land..........................           --            --
   Consumer and commercial business...............           15            12
                                                            ---           ---
     Total charge-offs............................           73            12
  Recoveries......................................            1            --
  Provisions charged to income....................          100            22
                                                            ---           ---
Balance at end of period(1).......................         $678          $650
                                                            ===           ===

Allowance for losses on foreclosed real estate:
Balance at beginning of period....................         $ --          $ --
  Provision charged to income.....................           --            --
  Charge-offs.....................................           --            --
  Recoveries......................................           --            --
                                                            ---         -----
Balance at end of period..........................         $ --        $   --
                                                            ===         =====

Ratios of net charge-offs during the period
  to average loans outstanding during the
  period..........................................          .06%          .01%
Ratio of allowance for losses to total
  loans at the end of the period(2)...............          .58%          .60%
Ratio of allowance for losses to non-
  performing assets at the end of the
  period(2).......................................        92.88%        95.03%
</TABLE>

------------------
(1)  Includes  reserves  attributable  to  loans  classified  as  "loss,"  which
     totalled $-0- at September 30, 1997 and 1996.
(2)  Allowance for losses includes valuation  allowances on loans and foreclosed
     real estate.

         Allowance by Loan Category.  The following table sets forth the Savings
Bank's  allocation  of the  allowance for credit losses by loan category and the
percent  of loans  in each  category  to total  loans  receivable  at the  dates
indicated. The portion of the allowance for credit losses allocated to each loan
category  does not  represent  the total  available  for future losses which may
occur within the loan category.

                                      -11-

<PAGE>

<TABLE>
<CAPTION>
                                                                 At September 30,
                                            ---------------------------------------------------------------------
                                                       1997                                   1996
                                            --------------------------------    ---------------------------------
                                                               Percent of                         Percent of
                                                              Loans in Each                       Loans in Each
                                                               Category to                         Category to
                                              Amount           Total Loans         Amount          Total Loans
                                              ------           -----------         ------          -----------
                                                                  (Dollars in Thousands)

<S>                                          <C>                 <C>               <C>                <C>  
One- to four-family....................        $379                55.9%             $445               68.5%
Multi-family...........................           1                  .1                 1                 .2
Commercial real estate.................          50                 7.4                50                7.7
Construction...........................          50                 7.4                40                6.1
Land...................................          40                 5.9                25                3.8
Consumer and commercial
 business..............................         158                23.3                89               13.7
                                                ---               -----               ---              -----
  Total valuation allowances(1)(2).....        $678               100.0              $650              100.0%
                                                ===               =====               ===              =====
</TABLE>

------------------
(1)  Includes  reserves  attributable  to  loans  classified  as  "loss,"  which
     totalled $-0- at September 30, 1997 and 1996.
(2)  Includes  $-0- of allowance  for losses on  foreclosed  real estate at both
     September 30, 1997 and 1996.

Investment and Mortgage-backed Securities Activities

         Investment  Securities.  The  Savings  Bank is required  under  federal
regulations  to maintain a minimum amount of liquid assets which may be invested
in specified  short-term  securities and certain other investments.  The Savings
Bank has generally maintained a liquidity portfolio well in excess of regulatory
requirements.  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  Savings  Bank's  loan
origination and other activities. At September 30, 1997, the Savings Bank had an
investment  securities  portfolio of  approximately  $14.6  million,  consisting
primarily  of U.S.  government  and agency  obligations,  Federal Home Loan Bank
("FHLB") stock and marketable  equity  securities.  Marketable equity securities
consist of the Asset  Management  Fund for Financial  Institutions,  Inc.  ("AMF
Fund"), a mutual fund that invests in securities  eligible for direct investment
by  savings  associations.  The  Savings  Bank uses this  fund to  increase  its
short-term yield,  primarily on overnight funds. The AMF Fund consists primarily
of adjustable-rate  mortgage-related  securities.  These funds are marked to the
lower of cost or market at the end of each month with all  adjustments  in value
reported to the Board of Directors  monthly.  At September 30, 1997, the Savings
Bank had $4.1 million or 28.1% of its investment securities portfolio in the AMF
Fund. Bedford Federal will continue to seek high quality  investment  securities
with short to intermediate maturities and durations from one to five years.

         Mortgage-backed    Securities.     Mortgage-backed    securities    are
participation  certificates issued and guaranteed by the FHLMC 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.

                                      -12-

<PAGE>




         The  Savings   Bank  sold   $440,000  of   mortgage-backed   securities
(designated  as  available  for sale) during  fiscal  1997.  It did not sell any
mortgage-backed securities during the year ended September 30, 1996.

         As of  September  30,  1997,  mortgage-backed  securities  amounted  to
$20,000 or 1.4% of total assets. All mortgage-backed securities were fixed-rate.

         Investment  Carrying and Market Values.  The following table sets forth
certain  information  regarding  the carrying  and market  values of the Savings
Bank's  federal  funds  sold  and  other  short-term   investments,   investment
securities,  securities available for sale and mortgage-backed securities at the
dates indicated:
<TABLE>
<CAPTION>
                                                                  At September 30,
                                                      -------------------------------------
                                                              1997              1996
                                                      ------------------  -----------------
                                                      Carrying    Market  Carrying   Market
                                                        Value     Value    Value     Value
                                                        -----     -----    -----     -----
                                                                   (In thousands)
<S>                                                   <C>       <C>       <C>       <C>    
Federal funds sold and other short-term investments   $ 2,791   $ 2,791   $   223   $   223
Investment securities:
  Held to maturity:
    FHLB stock ....................................       932       932       932       932
    U.S. Government and agency obligations ........     4,596     4,581     5,214     5,161
                                                      -------   -------   -------   -------
      Total held to maturity ......................     8,319     8,304     6,369     6,316
Available for sale:
    U.S. Government and agency obligations ........     5,006     5,006     1,860     1,860
    Marketable equity securities ..................     4,238     4,238     3,879     3,879
                                                      -------   -------   -------   -------
      Total available for sale ....................     9,244     9,244     5,739     5,739
                                                      -------   -------   -------   -------
      Total .......................................   $17,563   $17,548   $12,108   $12,055
                                                      =======   =======   =======   =======
Mortgage-backed securities:
  Held to maturity ................................   $    20   $    20   $    25   $    25
  Available for sale ..............................        --        --       457       457
                                                      -------   -------   -------   -------
      Total .......................................   $    20   $    20   $   482   $   482
                                                      =======   =======   =======   =======
</TABLE>




                                      -13-

<PAGE>



         Investment  Yields and  Maturities.  The table below sets forth certain
information   regarding  the  carrying  value,   weighted   average  yields  and
contractual  maturities  of the  Savings  Bank's  federal  funds  sold and other
short-term  investments,  investment  securities,  securities  held for sale and
mortgage-backed securities as of September 30, 1997.
<TABLE>
<CAPTION>
                                                                  As of September 30, 1997
                          ----------------------------------------------------------------------------------------------------------
                            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>   
                                                                                                      
Federal funds sold and                                                                                  
  other short-term                                                                                      
  investments............... $2,791     5.47%    $   --      --%      $ --      --%    $  --      --%   $2,791    5.47%    $2,791
Held for investment:                                                                                    
  Investment securities:                                                                                
    FHLB Stock..............    932      7.19        --      --%        --      --%       --      --%      932    7.19%       932
    U.S. government                                                                                     
      federal agency                                                                                    
      obligations...........  1,500      4.43     2,596    6.34%       500    7.25%       --      --%    4,596    5.82%     4,581
                              -----               -----                ---              ----             -----              -----
Total investment                                                                                        
  securities                                                                                            
  held to maturity.......... $5,223      5.48    $2,596    6.34%      $500    7.25%    $  --      --%   $8,319    5.86%    $8,304
                              =====               =====                ===              ====             =====              =====
Total mortgage-backed                                                                                   
  securities held                                                                                       
  to maturity............... $   --        --    $   20    8.43%      $ --      --%    $  --      --%   $   20    8.43%   $    20
                              =====               =====                ===              ====             =====             ======
                                                                                                        
Available for sale:                                                                                     
  U.S. Government                                                                                       
    and agencies ........... $   --        --    $4,506    6.56%      $500    5.82%    $  --      --%   $5,006    6.49%    $5,006
  Marketable equity                                                                                     
    securities..............  4,238      6.05        --      --%        --      --%       --      --%    4,238    6.05%     4,238
                              -----               -----                ---              ----             -----              -----
Total investment                                                                                        
  securities                                                                                            
  available for sale........ $4,238      6.05    $4,506    6.56%      $500    5.82%    $  --      --%   $9,244    6.24%    $9,244
                              =====               =====                ===              ====             =====              =====
Total mortgage-                                                                                         
  backed securities                                                                                     
  available for sale........ $   --        --    $   --      --%      $ --      --%    $  --      --%   $   --      --%    $   --
                              =====               =====                ===              ====             =====              =====
</TABLE>
                                                                      
                                                       
                         
                                      -14-
                                                                      
<PAGE>



Sources of Funds

         General.  Deposits are the major source of the Savings Bank's funds for
lending and other investment purposes.  The Savings Bank 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 Savings Bank does not have any
brokered deposits.

         Deposits.  Customer deposits are attracted  principally from within the
Savings Bank'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.

         The interest  rates paid by the Savings Bank on deposits are set at the
direction  of  the  asset/liability  committee.  The  asset/liability  committee
consists of senior  management.  The interest rates on deposit account  products
are  determined by  evaluating  the following  factors:  (i) the interest  rates
offered by other local financial  institutions and the degree of competition the
Savings Bank wishes to maintain;  (ii) the Savings Bank's  anticipated  need for
cash and the timing of that desired cash flow;  (iii) the cost of borrowing from
other sources versus the cost of acquiring funds through customer deposits;  and
(iv) the Savings Bank's  anticipation of future economic  conditions and related
interest rates.

         NOW accounts  (including  noninterest-bearing),  money market accounts,
passbook and statement savings accounts  constituted $32.7 million,  or 31.6% of
the Savings  Bank's  deposit  portfolio at September 30, 1997.  Certificates  of
deposit  constituted $70.9 million or 68.4% of the deposit portfolio,  including
certificates  of deposit,  with  principal  amounts of  $100,000 or more,  which
constituted $8.7 million or 8.7% of the deposit portfolio at September 30, 1997.
The Savings Bank has no brokered deposits.


                                      -15-

<PAGE>



         Deposit  Account  Composition.  The  following  table  sets  forth  the
distribution  of the Savings Bank's deposit  accounts for the periods  indicated
and the weighted average interest rates on each category presented.
<TABLE>
<CAPTION>
                                                                       For the Year Ended September 30,
                                                ------------------------------------------------------------------------------------
                                                               1997                                         1996
                                                ---------------------------------------     ----------------------------------------
                                                               Percent                                       Percent
                                                               of Total       Weighted                      of Total        Weighted
                                                Average        Average         Average       Average         Average        Average
                                                Balance        Deposits         Rate         Balance        Deposits          Rate
                                                                            (Dollars in thousands)

<S>                                             <C>            <C>             <C>          <C>              <C>            <C>  
Money market deposits....................       $ 4,603           4.67%           3.11%       $5,011            5.39%          3.07%
Passbook and statement deposits..........        14,675          14.88            3.04        15,400           16.57           2.97
NOW and other demand deposits............         8,203           8.32            2.40         7,316            7.87           2.77
Noninterest bearing deposits.............         5,307           5.38              --         5,131            5.52             --
                                                 ------          -----                        ------           -----
      Total..............................       $32,788          33.25            2.39        32,858           35.35           2.48
                                                 ------          -----                        ------           -----

Certificate accounts:
   Three months or less..................        11,695          11.86            5.35        10,775           11.59           5.37
   Over three through six months.........         9,440           9.57            5.13         8,437            9.08           5.34
   Over six through 12 months............        17,624          17.87            4.98        13,335           14.35           5.22
   Over one to three years...............        18,165          18.42            5.53        25,083           26.99           5.46
   Over three to five years..............         8,910           9.03            5.90         2,463            2.64           6.34
                                                 ------         ------                       -------          ------

      Total certificates.................        65,834          66.75%           5.34        60,093           64.65           5.41
                                                 ------         ------                        ------           -----
      Total deposits.....................       $98,622         100.00%                      $92,951          100.00%
                                                 ======         ======                        ======          ======
</TABLE>


         Deposit Account Rate Analysis. The following table presents, by various
rate  categories,  the amount of certificate  accounts  outstanding at the dates
indicated and the periods to maturity of the certificate accounts outstanding at
September 30, 1997.
<TABLE>
<CAPTION>
                                            At September 30,                      Period to Maturity from September 30, 1997
                                       -------------------------        ------------------------------------------------------------
                                                                                           Over One
                                                                         Within            To Three         Over Three
                                         1997             1996           One Year            Years            Years         Total
                                         ----             ----           --------            -----            -----        ------
                                                                            (In thousands)
<S>                                     <C>              <C>               <C>               <C>               <C>         <C>    
Certificate Accounts:
  3.00% or less...............          $    --         $     --           $    --           $    --          $    --           --
  3.01% to 4.00%..............                3               75                 3                --               --            3
  4.01% to 5.00%..............           12,254           16,239            11,495               759               --       12,254
  5.01% to 6.00%..............           52,564           36,025            28,370            15,672            8,522       52,564
  6.01% to 7.00%..............            5,434            9,486             3,899             1,147              388        5,434
  7.01% to 8.00%..............              605              627                --               605               --          605
  Over 8.01%..................               --               --                --                --               --           --
                                         ------         --------            ------            ------            -----       ------

     Total....................          $70,860          $62,452           $43,767           $18,183           $8,910      $70,860
                                         ======           ======            ======            ======            =====       ======
</TABLE>




                                      -16-

<PAGE>



         Certificates  of Deposit  of  $100,000  or More.  The  following  table
indicates  the amount of the Savings  Bank's  certificates  of deposit and other
time  deposits  of  $100,000  or more by time  remaining  until  maturity  as of
September 30, 1997.

                                                              Amount
                                                              ------
Maturity Period                                           (In thousands)
---------------
Within three months...........................                $  538
Three through six months......................                 1,161
Six through twelve months.....................                 2,926
Over twelve months............................                 4,052
                                                               -----
    Total.....................................                $8,677
                                                               =====


         Deposit Activity.  The following table presents the deposit activity of
the Savings Bank for the periods indicated.


                                                     For the Year Ended
                                                       September 30,
                                               -----------------------------
                                                  1997                1996
                                               ---------            --------
                                                   (Dollars in thousands)
Opening balance............................    $  95,378             $90,063
Net deposits (withdrawals).................        3,968               1,210
Interest credited on deposits..............        4,266               4,105
                                                --------             -------
Ending balance.............................     $103,612             $95,378
                                                 =======              ======
  Total increase (decrease)  deposits......    $   8,234             $ 5,315
                                                ========              ======
  Percentage increase (decrease)...........         8.63%               5.90%


         Borrowings.  While  deposits  are the  primary  source of funds for the
Savings Bank's lending and  investment  activities and for its general  business
purposes,  the Savings  Bank 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 Savings  Bank's first  mortgage  loans.  The Savings Bank, 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.

         The  following  table  sets forth  certain  information  regarding  the
Savings Bank borrowed funds at or for the years ended on the dates indicated:


                                      -17-

<PAGE>
                                                   At or For the Year Ended
                                                         September 30,
                                                  ---------------------------
                                                   1997                 1996
                                                  --------            -------
                                                      (Dollars in thousands)
FHLB advances:
   Average balance outstanding...............     $12,249             $ 6,333
   Maximum amount outstanding at any
         month-end during the year...........      16,000              12,000
   Balance outstanding at end of year........      15,000              12,000
   Weighted average interest rate
         during the year.....................        6.07%               5.85%
   Weighted average interest rate
         at end of year......................        6.01%               5.77%


Personnel

         As of September 30, 1997, the Savings Bank had 37 full-time  employees.
None of the Savings Bank's employees are represented by a collective  bargaining
group.  The Savings Bank  believes that its  relationship  with its employees is
good.

Regulation

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


Company Regulation

         General.  The  Company is a unitary  savings and loan  holding  company
subject to regulatory  oversight by the OTS and the SEC. As such, the Company is
required to register and file reports with the OTS and the SEC 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 also permits the OTS to restrict or prohibit
activities  that are determined to be a serious risk to the  subsidiary  savings
association.

         Qualified  Thrift  Lender Test.  As a unitary  savings and loan holding
company,  the Company  generally  will not be subject to activity  restrictions,
provided  the Savings  Bank  satisfies  the QTL test.  If the  Company  acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding  company,  and the activities of the Company
and  any  of its  subsidiaries  (other  than  the  Savings  Bank  or  any  other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies unless such other  associations  each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-- Savings
Bank Regulation -- Qualified Thrift Lender Test."

Savings Bank Regulation

         General. As a federally chartered,  Savings Association  Insurance Fund
("SAIF")-insured  savings association,  the Savings Bank is subject to extensive
regulation by the OTS and the Federal Deposit

                                      -18-

<PAGE>



Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal statutory and regulatory  requirements.  The Savings
Bank is also subject to certain reserve requirements  promulgated by the Federal
Reserve Board.

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

         The Savings Bank must file reports with the OTS and the FDIC 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.  Any change in such  regulations,  whether by the OTS, the FDIC or the
Congress could have a material  adverse impact on the Company,  the Savings Bank
and their operations.

         Insurance of Deposit Accounts.  The Savings Bank's deposit accounts 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.

         Because a significant  portion of the assessments paid into the SAIF by
savings  associations  were used to pay the cost of prior thrift  failures,  the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required  reserve level during the third calendar  quarter of 1995. As a
result,  deposit  insurance  premiums  for  deposits  insured  by the  BIF  were
substantially  less than  premiums for  SAIF-insured  deposits.  Legislation  to
capitalize the SAIF and to eliminate the significant  premium  disparity between
the BIF and the SAIF became effective  September 30, 1996. The  recapitalization
plan provided for a special  assessment equal to $.657 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. Certain BIF institutions holding SAIF-insured  deposits were required to
pay a lower  special  assessment.  Based on its deposits at March 31,  1995,  on
November  27,  1996,  the  Savings  Bank paid a pre-tax  special  assessment  of
$555,000.  Such  payment was  recorded as an expense  and  accounted  for by the
Savings Bank as of September  30, 1996.  Earnings and capital  were,  therefore,
negatively affected for the quarter ended September 30, 1996.

         The  recapitalization  plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF (Fico Bond payments), which
will increase BIF assessments for healthy banks to approximately  $.013 per $100
of deposits in 1997. SAIF  assessments for healthy savings  institutions in 1997
will be approximately  $.064 per $100 in deposits and may never be reduced below
the level set for healthy BIF institutions.


                                      -19-

<PAGE>



         The FDIC has  lowered  the  rates on  assessments  paid to the SAIF and
widened  the  spread  of those  rates.  The  FDIC's  action  established  a base
assessment  schedule for the SAIF with rates  ranging from 4 to 31 basis points,
and an adjusted  assessment schedule that reduces these rates by 4 basis points.
As a result,  the  effective  SAIF rates  range from 0 to 27 basis  points as of
October 1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates  ranging  from 18 to 27 basis points for  SAIF-member  savings
institutions  for the last quarter of calendar 1996, to reflect the  assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure  for making  limited  adjustments  to the base  assessment  rates by
rulemaking without notice and comment, for both the SAIF and the BIF.

         The recapitalization  plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings  associations under
federal law. Under separate  proposed  legislation,  Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts.  As a result,  the  Savings  Bank would have to convert to a  different
financial  institution  charter and would be  regulated  under  federal law as a
bank,  including  being  subject to the more  restrictive  activity  limitations
imposed on national  banks.  The Savings  Bank cannot  predict the impact of the
conversion  of the Savings Bank to, or regulation of the Savings Bank as, a bank
until the legislation requiring such change is enacted.

         Regulatory Capital Requirements.  Set forth below is the Savings Bank's
regulatory capital requirements applicable to it as of September 30, 1997:
<TABLE>
<CAPTION>
                                                                        Percent
                                                                     of Adjusted
                                                 Amount                 Assets
                                                 ------                 ------
                                                     (Dollars in Thousands)
<S>                                             <C>                     <C> 
Tangible Capital:
Regulatory requirement...................       $ 2,094                   1.5%
Actual capital...........................        17,301                  12.4%
                                                 ------                  ----
  Excess.................................       $15,207                  10.9%
                                                 ======                  ====

Core Capital:
Regulatory requirement...................       $ 4,187                   3.0%
Actual capital...........................        17,301                  12.4%
                                                 ------                  ----
  Excess.................................       $13,114                   9.4%
                                                 ======                  ====

Risk-Based Capital:
Regulatory requirement(1)................       $ 6,296                   8.0%
Actual capital...........................        17,887                  22.7%
                                                 ------                  ----
  Excess.................................       $11,591                  14.7%
                                                 ======                  ====
</TABLE>

--------------------
(1)      Based on risk-weighted assets of $78,694.

         Net Portfolio Value. In recent years, the Savings Bank has measured its
interest  rate  sensitivity  by  computing  the "gap"  between  the  assets  and
liabilities  which were expected to mature or reprice  within  certain  periods,
based on assumptions  regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which  the net  present  value  of an  institution's  cash  flows  from  assets,
liabilities and off balance sheet items (the  institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in

                                      -20-

<PAGE>



market  interest  rates.  The OTS also  requires  the  computation  of estimated
changes in net interest income over a four-quarter  period.  These  computations
estimate  the  effect  of an  institution's  NPV  and  net  interest  income  of
instantaneous  and permanent 1% to 4% increases and decreases in market interest
rates.  In the Savings Bank's  interest rate  sensitivity  policy,  the Board of
Directors has established a maximum  decrease in net interest income and maximum
decreases in NPV given these instantaneous changes in interest rates.

         In order to encourage  associations to reduce their interest rate risk,
the OTS adopted a final rule in August 1993  incorporating an interest rate risk
("IRR") component into the risk-based  capital rules. The new rule was effective
January 1, 1994, with  institutions  first required to meet the new standards at
September  30, 1995.  The IRR component is a dollar amount that will be deducted
from total capital for the purpose of  calculating an  institution's  risk-based
capital  requirement  and is measured in terms of the  sensitivity of its NPV to
changes in interest rates.  NPV is the difference  between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An  institution's  IRR is  measured  as the  change  to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated  market value of its assets will require
the institution to maintain additional  capital.  The rules provide that the OTS
will calculate the IRR component quarterly for each institution.

         The following table sets forth the interest rate risk capital component
for the Savings Bank at September 30, 1997 given a hypothetical  200 basis point
rate change in market interest rates. See "-- Regulatory Capital Requirements."

                                                  As of September 30, 1997
                                                  ------------------------
RISK MEASURES:                                     (Dollars in thousands)
200 Basis Point Rate Shock

Pre-Shock NPV Ratio:  NPV as %
  of Present Value of Assets.................              15.13%
Exposure Measure:  Post-Shock
 NPV Ratio..................................               13.87%
Sensitivity Measure:  Change in NPV
  Ratio......................................               -126bp

CALCULATION OF CAPITAL
COMPONENT:

Change in NPV as % of Present Value
  of Assets..................................                1.68%
Interest Rate Risk Capital Component.........              $2,418


         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates, loan prepayments and deposit run-offs,  and should not be relied
upon  as  indicative  of  actual  results.  Further,  the  computations  do  not
contemplate any actions the Savings Bank may undertake in response to changes in
interest rates.

         Certain  shortcomings are inherent in the method of analysis  presented
in both the  computation  of NPV and in the  analysis  presented in prior tables
setting  forth  the  maturing  and  repricing  of  interest-earning  assets  and
interest-bearing   liabilities.   For  example,   although  certain  assets  and
liabilities may have similar maturities or periods to repricing,  they may react
in differing degrees to changes in market

                                      -21-

<PAGE>



interest  rates.  The interest rates on certain types of assets and  liabilities
may fluctuate in advance of changes in market  interest  rates,  while  interest
rates on other  types may lag  behind  changes  in market  rates.  Additionally,
certain  assets,  such as  adjustable  rate loans,  which  represent the Savings
Bank's primary loan product,  have features  which restrict  changes in interest
rates on a short-term  basis and over the life of the asset.  In  addition,  the
proportion  of  adjustable  rate loans in the Savings  Bank's  portfolios  could
decrease in future periods if market  interest rates remain at or decrease below
current levels due to refinance  activity.  Further, in the event of a change in
interest  rates,  prepayment  and early  withdrawal  levels would likely deviate
significantly  from those  assumed in the tables.  Finally,  the ability of many
borrowers to service their  adjustable-rate debt may decrease in the event of an
interest rate increase.

         Pursuant to the Financial Institutions Reform, Recovery and Enforcement
Act of 1991 ("FIRREA"),  the OTS must revise the risk-based capital  regulations
to include a credit risk component and a  nontraditional  activities  component,
the purpose of which will be to increase the minimum  capital  requirements  for
savings associations with higher credit risks.

         Prompt  Corrective  Action.  The FDICIA  established a system of prompt
corrective  action to resolve  the  problems of  undercapitalized  institutions.
Under  this  system,  the  banking  regulators  are  required  to  take  certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the  institution's  degree of  capitalization.  Under the OTS final
rule implementing the prompt corrective action provisions,  an institution shall
be deemed to be (i) "well  capitalized"  if it has total  risk-based  capital of
10.0% or more, has a Tier I risk-based  capital ratio (core or leverage  capital
to risk-weighted assets) of 6.0% or more, has a leverage capital of 5.0% or more
and is not subject to any order or final capital  directive to meet and maintain
a specific capital level for any capital measure, (ii) "adequately  capitalized"
if it  has a  total  risk-based  capital  ratio  of  8.0%  or  more,  a  Tier  I
risked-based  ratio of 4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under  certain  circumstances)  and does not meet the  definition of "well
capitalized,"  (iii)  "undercapitalized"  if it has a total  risk-based  capital
ratio that is less than 6.0%,  a Tier I  risk-based  capital  ratio that is less
than 4.0% or a  leverage  capital  ratio that is less than 4.0% (3.0% in certain
circumstances),   (iv)  "significantly  undercapitalized"  if  it  has  a  total
risk-based  capital  ratio that is less than 6.0%, a Tier I  risk-based  capital
ratio that is less than 3.0% or a leverage  capital ratio that is less than 3.0%
and (v)  "critically  undercapitalized"  if it has a ratio of tangible equity to
total  assets  that is equal to or less than  2.0% In  addition,  under  certain
circumstances,  a federal  banking  agency  may  reclassify  a well  capitalized
institution as adequately  capitalized and may require an adequately capitalized
institution  or an  undercapitalized  institution  to  comply  with  supervisory
actions as if it were in the next lower  category  (except that the FDIC may not
reclassify  a   significantly   undercapitalized   institution   as   critically
undercapitalized).

         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require the Savings Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory  powers to prohibit  the payment of  dividends  to the  Company.  In
addition, the Savings Bank may not declare or pay a cash dividend on its capital
stock if the effect  thereof  would be to reduce the  regulatory  capital of the
Savings  Bank  below the  amount  required  for the  liquidation  account  to be
established pursuant to the Savings Bank's Plan of Conversion.

         OTS regulations  impose  limitations upon all capital  distributions by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar

                                      -22-

<PAGE>



year  equal to the  greater  of (i) 100% of its net  income to date  during  the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning  of the  calendar  year,  or (ii) 75% of its net income  over the most
recent four quarter period. Any additional capital  distributions  require prior
regulatory  approval.  As of September  30, 1997,  the Savings Bank was a Tier 1
institution.  In the event  the  Savings  Bank's  capital  fell  below its fully
phased-in  requirement  or the OTS  notified it that it was in need of more than
normal  supervision,  the Savings Bank's  ability to make capital  distributions
could be  restricted.  In addition,  the OTS could  prohibit a proposed  capital
distribution  by any  institution,  which would  otherwise  be  permitted by the
regulation,  if the OTS determines that such  distribution  would  constitute an
unsafe or unsound practice.

         Finally,  a savings  association  is  prohibited  from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized"   (not  meet  any  one  of  its  minimum  regulatory  capital
requirements).

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the Savings Bank  maintains an  appropriate  level of Qualified  Thrift
Investments (primarily residential mortgages and related investments,  including
certain mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full  borrowing  privileges  from the FHLB of Atlanta.
The  required  percentage  of QTIs is 65% of  portfolio  assets  (defined as all
assets minus intangible  assets,  property used by the institution in conducting
its business and liquid assets equal to 10% of total assets). Certain assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying  QTIs. An  association  must be in compliance  with the QTL test on a
monthly  basis in nine out of every 12 months.  As of September  30,  1997,  the
Savings Bank was in compliance with its QTL requirement with 81.7% of its assets
invested in QTIs.

         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 at least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year.

         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, 1997, the Bank was in compliance  with these Federal Reserve Board
requirements.

Subsidiary Activity

         In August 1994,  the Company  acquired all of the capital  stock of the
Savings Bank. The officers of the Company consist of the officers of the Savings
Bank. The Company is organized as a holding

                                      -23-

<PAGE>



company.  As of  September  30,  1997,  the  net  book  value  of the  Company's
investment in the Savings Bank amounted to $17.3 million.

         The  Savings  Bank  dissolved  its  one  subsidiary,   First  Financial
Enterprises,  Inc.  ("FFE") during the first quarter of the year ended September
30, 1997.

Item 2.  Description of Property.

         (a) The  Savings  Bank  conducts  its  business  through a main  office
located in Bedford,  Virginia and two branch offices. The Savings Bank installed
three  freestanding ATM's during fiscal 1995; all were in operation at September
30, 1997. The Savings Bank believes that the current  facilities are adequate to
meet its present and immediately foreseeable needs.
<TABLE>
<CAPTION>
                                                                                                           Net Book Value
                                                                                                           of Property or
                                                                  Original                                   Leasehold
                                                                     Date               Date of            Improvements at
                                              Leased or           Leased or              Lease              September 30,
Location                                        Owned             Acquired            Expiration                1997
--------                                      ---------           ---------           -----------          -------------------
                                                                                                            (In thousands)

<S>                                          <C>                <C>                  <C>                      <C>
125-133 W. Main Street                          Owned            12/70 - Main             N/A                   $538
Bedford, VA  24523                                                  Office
                                                                 12/84 -Drive
                                                                     thru
                                                                 3/89 - Annex

655 at 122                                      Land                 8/86               8/01(1)                  N/A
Moneta, VA  24121                              Leased

                                              Building               1/87                 N/A                    107
                                                Owned
ATM
Route 122                                       Land
Moneta, VA  24121                              Leased                7/95               8/01(1)                  N/A

                                              Building
                                                Owned                8/95                 N/A                     27

Forest Village Square including                 Owned               12/78                 N/A                    177
ATM
Forest, VA  24551

Longwood Avenue (ATM)                           Owned                1/85                 N/A                     26
Bedford, VA  24523

</TABLE>
-----------
(1)      Lease is renewable for one five-year term.


                                      -24-

<PAGE>



         At September  30, 1997,  the Bank had a total  investment  in its land,
buildings and improvements, and fixtures, furniture and equipment of $2,418,000,
less  accumulated  depreciation  of  $1,204,000,  or a  net  carrying  value  of
$1,214,000.

         The Bank owns  various  bookkeeping  and  accounting  equipment  and is
on-line with an outside data processing company, BISYS, Inc.

         (b)  Investment  Policies.   See  "Item  1.  Business"  for  a  general
description of the Company's  investment policies and any regulatory or Board of
Directors' percentage of assets limitations  regarding certain investments.  All
of the Company's  investment  policies are reviewed and approved by the Board of
Directors  of the Company or the Savings  Bank,  and such  policies,  subject to
regulatory restrictions (if any), can be changed without a vote of stockholders.
The Company'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 "Item 2.  Properties."

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

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

         (c)  Description of Real Estate and Operating Data.

         Not Applicable.

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

         Neither  the  Corporation  nor  the  Bank  are  engaged  in  any  legal
proceedings  of a material  nature at the present time.  From time to time,  the
Bank is a party to legal  proceedings in the ordinary course of business wherein
it enforces its security interest in mortgage loans made by it.

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

         Not applicable.

                                     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  Corporation's  Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1997 (the "Annual  Report") is  incorporated  herein by
reference. The Annual Report is included as Exhibit 13 to this Form 10-KSB.


                                      -25-

<PAGE>



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

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

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

         The Corporation's consolidated financial statements required herein are
incorporated herein by reference.

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

         Not applicable.

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

         The required information is on pages 3-9 of the Registrant's definitive
proxy statement for Registrant's 1998 Annual Meeting of Stockholders  filed with
the  Commission  on December 19, 1997 (the "Proxy  Statement")  is  incorporated
herein by reference.

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

         The  required  information  is  contained  under the section  captioned
"Management  Remuneration  and Other  Information - Executive  Compensation"  on
pages 9-11 in the Proxy Statement is incorporated herein by reference.

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

         (a)      Security Ownership of Certain Beneficial Owners

                  Information  required by this item is  incorporated  herein by
                  reference  to the Section  captioned  "Voting  Securities  and
                  Principal   Holders   Thereof"  on  pages  2-3  of  the  Proxy
                  Statement.

         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference to the section  captioned  "Information with Respect
                  to Nominees for Director;  Directors Whose Term Continues; and
                  Executive  Officers -- Election of  Directors" on pages 4-5 of
                  the Proxy Statement.

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

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

         The  information  required  by this  item  is  incorporated  herein  by
reference to the section captioned "-- Certain  Transactions with Management and
Others" on page 14 of the Proxy Statement.

                                      -26-

<PAGE>



Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------
<TABLE>
<CAPTION>
<S>       <C>     <C>      <C>
          a.      Exhibits

                  3.1      Restated Articles of Incorporation of Bedford Bancshares, Inc.*

                  3.2      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 with Harold K. Neal*

                  11       Computation of Earnings Per Share

                  13       Annual Report to Stockholders for Fiscal Year Ended September 30, 1997

                  21       Subsidiaries of the Registrant  (See Item 1 - Business -- Subsidiary Activity)

                  23       Independent Auditor's Consent

                  27       Financial Data Schedule **

</TABLE>


----------------
         *        Included as an exhibit to the  Registrant's  Form 10-KSB filed
                  with the SEC on December  19,  1994,  and is  incorporated  by
                  reference herein.
         **       Only included in electronic filing.


         b.       Reports on Form 8-K

                  No reports on Form 8-K were filed by the Registrant during the
                  last quarter of the period covered by this report.


                                      -27-

<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.

                                        BEDFORD BANCSHARES, INC.


Date:  December 29, 1997                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.

<TABLE>
<CAPTION>
<S>                                                      <C>  <C>
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)

Date:  December 29, 1997                                 Date: December 29, 1997


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)

Date:  December 29, 1997                                 Date: December 29, 1997


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

Date:  December 29, 1997                                 Date: December 29, 1997


By:/s/W. Henry Walton, Jr.                               By:  /s/William P. Pickett
   ---------------------------------------------------        ---------------------------------------
   W. Henry Walton, Jr.                                       William P. Pickett
   Director                                                   Director

Date:  December 29, 1997                                 Date: December 29, 1997


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

Date:  December 29, 1997

</TABLE>