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 [NO FEE  REQUIRED]  For the fiscal  year ended  September  30,
      1996, OR

|_|   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to 
      ____________________ 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. $9,999,000.

      As of December 6, 1996, there were issued and outstanding 1,143,669 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 6, 1996,  was  $16,207,987.

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, 1996. (Parts I, II and IV)

  2. Portions of Proxy  Statement for the 1997 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
generally 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>

                                             1996                    1995
                                       --------------------     --------------------
                                                 Percent of               Percent of
                                       Amount      Total        Amount      Total
                                       ------    ----------     ------    ----------
                                                (Dollars in Thousands)
Real estate:
  Residential:
<S>                                    <C>          <C>       <C>           <C>   
    One- to four-family............    $ 84,235     74.53%    $ 75,341      74.08%
    Multi-family...................       1,000        .88         223         .22
  Commercial.......................       4,998       4.42       4,379        4.31
  Construction.....................       9,783       8.66       9,732        9.56
  Land.............................       4,127       3.65       3,588        3.53
Consumer and commercial business...       8,878       7.86       8,436        8.30
                                        -------     ------     -------      ------
      Total loans..................     113,021     100.00%    101,699      100.00%
                                                    ======                  ======

Less:
  Unearned discounts, premium,
    deferred loan fees, net........         299                    396
  Loans-in-process.................       3,199                  2,994
  Allowance for credit losses......         650                    640
                                        -------                -------
    Total loans, net...............    $108,873               $ 97,669
                                        =======                =======


</TABLE>


                                       -2-

<PAGE>



     The  following  table sets forth the  maturity of the  Savings  Bank's loan
portfolio  at  September  30, 1996.  The table does not include  prepayments  or
scheduled principal  repayments.  Prepayments and scheduled principal repayments
on  loans  totalled  $23.6  million  for the  year  ended  September  30,  1996.
Adjustable-rate  mortgage  loans  are  shown as  maturing  based on  contractual
maturities.

<TABLE>
<CAPTION>


                                                                              At September 30, 1996
                                              -------------------------------------------------------------------------------
                                                                                                       Consumer
                                               One- to                                                   and         Total
                                                Four-      Multi-   Commercial                        Commercial     Loans
                                               Family      Family   Real Estate  Construction   Land   Business    Receivable
                                               -------     ------   -----------  ------------   ----  ----------   ----------

                                                                                 (In thousands)
Amounts due:
<S>                                          <C>         <C>        <C>           <C>          <C>     <C>         <C>     
  One year or less ....................      $     38    $     1    $  1,956      $  7,736     $   21  $  2,229    $ 11,981
                                               ------     ------     -------       -------      -----   -------     -------
  After one year:
    More than one year to three years..           260         --          54           866        170     2,212       3,562
    More than three years to five years           669         --         288           717      1,853     2,996       6,523
    More than five years to 10 years...         6,337        300         828            47      1,181     1,348      10,041
    More than 10 years to 20 years.....        26,871        699       1,872           352        902        87      30,783
    More than 20 years ................        50,060         --          --            65       --           6      50,131
                                               ------     ------     -------       -------      -----   -------     -------

     Total due after one year .........        84,197        999       3,042         2,047      4,106     6,649     101,040
                                               ------     ------     -------       -------      -----   -------     -------
     Total amounts due ................        84,235      1,000       4,998         9,783      4,127     8,878     113,021
Less:
  Loans-in-process ....................            --         --          --         3,199         --        --       3,199
  Unearned discounts, premiums and
   deferred loan fees, net ............           239          3          14            28         12         3         299
  Allowance for credit losses .........           445          1          50            40         25        89         650
                                               ------     ------     -------       -------      -----   -------     -------
    Loans, net ........................      $ 83,551    $   996    $  4,934      $  6,516     $4,090  $  8,786    $108,873
                                               ======     ======     =======       =======      =====   =======     =======

</TABLE>

      The  following  table sets forth the dollar  amount of all loans due after
September 30, 1997,  which have fixed  interest rates and which have floating or
adjustable interest rates.

                                                      Floating or
                                  Fixed Rates       Adjustable Rates     Total
                                  -----------       ----------------   ---------
Real estate loans:                                  (In thousands)
   One- to four-family....          $10,645             $75,599        $ 86,244
   Multi-family...........              171                 828             999
   Commercial real estate               955               2,087           3,042
   Land...................            2,856               1,250           4,106
Consumer and commercial
  business................            3,174               3,475           6,649
                                     ------              ------         -------
  Total...................          $17,801             $83,239        $101,040
                                     ======              ======         =======


      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

                                       -3-

<PAGE>



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 three  years,  some have a fixed rate for 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
once a year with certain limitations on adjustments per period and over the life
of the loan.  All ARMs 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   $19.0   million   and  $16.8   million  of
adjustable-rate,  one- to four-family  permanent and construction mortgage loans
during the fiscal years ended  September  30, 1996 and 1995,  respectively.  The
Savings Bank's total one- to four-family ARM portfolio amounted to $75.6 million
of the Savings Bank's gross loans receivable at September 30, 1996.

      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  either  according  to the Federal Home Loan  Mortgage  Corporation
("FHLMC")or Federal National Mortgage Association ("FNMA") 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  $2.2  million  and $3.0  million in  permanent  fixed-rate,  one- to
four-family  mortgage loans during the years ended  September 30, 1996 and 1995,
respectively.  The  Savings  Bank  sold  $152,000  and  $184,000  of  the  loans
originated   during  the  fiscal  years  ended  September  30,  1996  and  1995,
respectively.  In addition, the Savings Bank originated $167,000 and $262,000 in
fixed-rate   one-to   four-family   mortgage  loans  for  the  Virginia  Housing
Development Authority ("VHDA") in fiscal 1996 and 1995, respectively.


                                       -4-

<PAGE>


      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, 1996,  the
Savings  Bank had $1.2  million in  construction  loans  outstanding  secured by
unsold  properties,  with  $271,000 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, 1996, there was $9.8 million  outstanding in construction loans to
owner/borrowers  with $3.2  million  outstanding  loans-in-process  allocated to
these projects.  Construction  loans  originated on commercial and  multi-family
properties   amounted  to  $0  and  $385,000   during   fiscal  1996  and  1995,
respectively.  The Savings Bank  originated  $9.9  million and $10.8  million in
construction  loans on one- to four-family  properties  during fiscal years 1996
and 1995, 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,  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

                                       -5-

<PAGE>



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, 1996,  the largest
commercial  or  multi-family  real estate loan had a balance of $1.6 million 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  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.


                                       -6-

<PAGE>

      Consumer loans consist of automobile  loans,  savings account loans,  home
equity,  personal secured and unsecured loans and home improvement  loans. As of
September 30, 1996, $1.5 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.

     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.

                                       -7-

<PAGE>

     Loan  Originations,  Purchases,  Sales and Repayments.  The following table
sets forth the Savings Bank's loan originations, sales, and principal repayments
for the periods  indicated.  The Savings  Bank did not purchase any loans during
these periods.

                                            For the Year Ended
                                               September 30,
                                            --------------------
                                             1996          1995
                                            -------       ------
                                             (In thousands)
Gross loans:
Beginning balance....................       $97,669      $ 89,309
                                             ------       -------
  Loans originated:
   One- to four-family...............        15,473         8,159
   Multi-family......................            --           130
   Commercial real estate............           126           315
   Construction......................        11,559        11,233
   Land..............................         2,393         1,566
   Consumer and commercial
     business........................         8,616         7,003
                                            -------      --------
      Total loans originated.........        38,167        28,406
                                            -------      --------
Less:
  Transfer to foreclosed real estate.            --            --
  Principal repayments...............        23,612        16,868
  Sales of loans.....................           152           184
  Loans-in-process...................         3,199         2,994
                                            -------      --------
Net loan activity....................        11,204         8,360
                                           --------       -------
Ending balance.......................      $108,873      $ 97,669
                                            =======       =======

      Loan Sales.  The Savings Bank  generally  underwrites  fixed-rate  one- to
four-family  mortgage loans pursuant to FHLMC and FNMA  guidelines to facilitate
sale in the secondary market.  However, all fixed-rate mortgage loans with terms
not exceeding 15 years are retained in the Savings Bank's portfolio.  Loans with
maturities  exceeding 15 years generally are sold with servicing rights retained
by the Savings Bank unless the loan was  originated  for community  reinvestment
purposes. Prior to 1992, the Savings Bank retained all fixed-rate mortgage loans
originated  as  management  sought to increase its mortgage  loan  holdings to a
desired level. See also "--One- to Four-Family Residential Loans."

      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,  1996,  the  Savings  Bank had $1.8  million  of  commitments  to
originate  mortgage  loans,  $2.0 million in unfunded  home equity loans and $.4
million 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 $403,000
and $345,000 for the years ended September 30, 1996 and 1995,  respectively.  As
of September 30, 1996,  loans serviced for others totalled $2.7 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.

                                       -8-

<PAGE>


      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  $2.4  million  as of  September  30,  1996.  See " --  Classified
Assets."

     The  Savings  Bank's  largest  loan to one  borrower  is a loan  originated
jointly  in May 1988 by  three  financial  institutions  in the  amount  of $3.5
million of which Bedford  Federal  loaned  approximately  $1.2  million.  During
fiscal 1996 the three financial  institutions  loaned an additional $1.2 million
of which Bedford  Federal loaned  $400,000,  for  remodeling to accommodate  the
relocation of a national chain grocer within the shopping center. The balance of
the amount due Bedford Federal was $1.6 million at September 30, 1996. This loan
is  secured  by a  shopping  center  located  in the  City  of  Bedford  and was
performing at September 30, 1996.

      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."



                                       -9-

<PAGE>



      At September 30, 1996 and 1995,  delinquencies  in the Savings Bank's loan
portfolio were as follows:

<TABLE>
<CAPTION>


                                                      At September 30,
                  ------------------------------------------------------------------------------------------
                                         1996                                         1995
                      ------------------------------------------   -----------------------------------------

                          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
                      ------   ---------    ------    ---------    ------   ---------    ------    ---------

One- to four-
<S>                     <C>       <C>          <C>     <C>           <C>       <C>          <C>     <C>   
   family.......         9        $651          4      $  510         5        $465          4      $  266
Multi-family....        --          --         --          --        --          --         --          --
Commercial
   real estate..        --          --          1          54        --          --          1        1,042
Land............        --          --         --          --         1          17         --          --
Consumer and
 commercial
 business.......         8          83          6         120         4          21          2           4
                       ---        ----         --        ----       ---         ---         --        ----
   Total........        17        $734         11        $684        10        $503          7      $1,312
                        ==         ===         ==         ===       ===         ===         ==       =====
Delinquent loans
  to total loans                   .67%                   .63%                  .52%                  1.34%

</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, 1996,  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,
                                               ----------------
                                                1996       1995
                                               -------   ------
                                                (In thousands)

Loans 90 days or more delinquent...........       $684    $1,312
Foreclosed real estate.....................         --         -
                                                   ---     -----
    Total non-performing assets............       $684    $1,312
                                                   ===     =====

--------------------------
(1)   A 100%  reserve  is  established  for  interest  on  loans 90 days or more
      delinquent. At September 30, 1996 and 1995, the balance of the reserve for
      accrued  interest on loans  delinquent  90 days or more was  $168,000  and
      $122,000,  respectively.  At September  30, 1996,  the Savings Bank had no
      loans  accounted  for on a  nonaccrual  basis which were less than 90 days
      past due.

      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.

                                      -10-

<PAGE>



"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and  of  such  little  value  that  their  continuance  as  assets  without  the
establishment  of a specific loss reserve is not  warranted.  Assets  designated
"special  mention" by  management  are assets  included  on the  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, 1996,  the Savings Bank's problem assets were as follows:
$83,000 were designated special mention, $670,000 were classified as substandard
and none 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. The Savings Bank held no
foreclosed real estate at September 30, 1996.

      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.  During the years ended September 30, 1996 and 1995, the
Savings Bank charged  $22,000 and $20,000,  respectively,  to the  provision for
credit  losses.  There were no charges to the provision for losses on foreclosed
real estate for either fiscal 1996 or 1995.

     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.

      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.

                                      -11-

<PAGE>



                                                   At or For the Year Ended
                                                        September 30,
                                                   ------------------------ 
                                                       1996         1995
                                                   ----------    ----------
                                                     (Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period................          $640         $636
                                                         ---          ---
 Charge-offs:
   One- to four-family........................            --           --
   Multi-family...............................            --           --
   Commercial real estate.....................            --           --
   Construction and land......................            --           --
   Consumer and commercial business...........            12           18
                                                         ---          ---
     Total charge-offs........................            12           18
  Recoveries..................................            --            2
  Provisions charged to income................            22           20
                                                         ---          ---
Balance at end of period(1)...................        $  650         $640
                                                         ===          ===

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......................................           .01%         .02%
Ratio of allowance for losses to total
  loans at the end of the period(2)...........           .60%         .63%
Ratio of allowance for losses to non-
  performing assets at the end of the
  period(2)...................................         95.03%       48.78%

------------------
(1)  Includes  reserves  attributable  to  loans  classified  as  "loss,"  which
     totalled $-0- at September 30, 1996 and 1995.
(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.

                                      -12-

<PAGE>

<TABLE>
<CAPTION>

                                                        At September 30,
                                        -------------------------------------------------
                                               1996                      1995
                                        ----------------------    -----------------------
                                                   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...............       $445         68.46%       $469          74.08%
Multi-family......................          1           .15           1            .22
Commercial real estate............         50          7.69          44           4.31
Construction......................         40          6.15          39           9.57
Land..............................         25          3.85          22           3.52
Consumer and commercial
 business.........................         89         13.70          65           8.30
                                          ---        ------         ---         ------
  Total valuation allowances(1)(2)       $650        100.00%       $640         100.00%
                                          ===        ======         ===         ======
</TABLE>

------------------
(1)  Includes  reserves  attributable  to  loans  classified  as  "loss,"  which
     totalled $-0- at September 30, 1996 and 1995.
(2)  Includes  $-0- of allowance  for losses on  foreclosed  real estate at both
     September 30, 1996 and 1995.

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, 1996, the Savings Bank had an
investment  securities  portfolio of  approximately  $11.5  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 and a $48,000 investment in corporate common stock. 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, 1996,  the Savings Bank had $3.8
million or 30.2% 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.   The  Savings  Bank  purchased   additional
mortgage-backed  securities during fiscal 1996. The  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.


                                      -13-

<PAGE>



      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.

      The Savings Bank did not sell any  mortgage-backed  securities  during the
years ended September 30, 1996 and 1995.

      As of September 30, 1996,  mortgage-backed securities amounted to $482,000
or .38% 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 held for sale and mortgage-backed securities at the dates
indicated:

<TABLE>
<CAPTION>
                                                                    At September 30,
                                                      -------------------------------------------
                                                             1996                    1995
                                                      ------------------     --------------------
                                                      Carrying    Market     Carrying      Market
                                                        Value      Value       Value       Value
                                                      ---------   ------     --------      ------
                                                                     (In thousands)

<S>                                                    <C>        <C>         <C>         <C>    
Federal funds sold and other short-term investments    $  223     $  223      $   725     $   725
Investment securities:
  Held for investment:
    FHLB stock...................................         932        932          932         932
    U.S. Government and agency obligations.......       5,214      5,161        5,420       5,377
                                                        -----      -----        -----       -----
      Total held for investment..................       6,369      6,316        7,077       7,034
Held for sale:
    U.S. Government and agency obligations.......       1,860      1,860        1,409       1,409
    Marketable equity securities.................       3,879      3,879        3,660       3,660
                                                       ------     ------       ------      ------
      Total held for sale........................       5,739      5,739        5,069       5,069
                                                       ------     ------       ------      ------
      Total .....................................     $12,178    $12,055      $12,146     $12,103
                                                       ======     ======       ======      ======
Mortgage-backed securities:
  Held for investment............................     $    25    $    25           31     $    31
  Held for sale..................................         457        457           --          --
                                                       ------     ------       ------      ------
      Total......................................     $   482    $   482      $    31     $    31
                                                       ======     ======       ======      ======
</TABLE>




                                      -14-

<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, 1996.

<TABLE>
<CAPTION>

                                                                     As of September 30, 1996
                                  --------------------------------------------------------------------------------------------------
                                                                                             More Than          Total Investment
                                  One Year or Less  One to Five Years Five to Ten Years      Ten Years              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
                                   --------------   -------  -------  -------  -------  -------     ------- -------  ------- ------
                                                                  

Federal funds sold and other    
<S>                               <C>       <C>    <C>          <C>   <C>        <C>      <C>        <C>     <C>       <C>   <C>
  short-term investments.         $   223   5.15%  $     --       --% $    --      --%    $    --      --%   $  223    5.15% $  223
Held for investment:
  Investment securities:
    FHLB Stock...........             932   7.19         --       --       --      --          --      --       932    7.19     932
    U.S. government and federal
      agency obligations.              --     --      3,481     5.87    1,733    7.80          --      --     5,214    6.51   5,161
                                   ------             -----             -----              ------             -----            -----
Total investment securities
  held for investment....          $1,155   6.79   $  3,481     5.87  $ 1,733    7.80     $    --      --    $6,369    6.56  $6,316
                                    =====             =====             =====              ======             =====            =====
Total mortgage-backed securities
  held for investment            $     --     --   $     25     8.43  $    --      --     $    --      --    $   25    8.43  $   25
                                    =====             =====             =====              ======             =====           ======

Held for sale:
  U.S. Government and agencies         --     --   $  1,391     6.49  $   469    5.82     $    --      --    $1,860    6.32  $1,860
  Marketable equity securities      3,879   6.05         --       --       --      --          --      --     3,879    6.05   3,879
                                    -----             -----             -----              ------             -----           -----
Total investment securities
  held for sale..........        $  3,879   6.05   $  1,391     6.49  $   469    5.82     $    --      --    $5,739    6.14  $5,739
                                    =====             =====             =====              ======             =====           =====
Total mortgage-backed securities
  held for sale..........        $            --   $     --       --  $   --       --     $   457    6.50    $  457    6.50  $  457
                                    =====             =====             =====              ======             =====           =====
</TABLE>





                                      -15-

<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 $32.9 million, or 34.52% of
the Savings  Bank's  deposit  portfolio at September 30, 1996.  Certificates  of
deposit constituted $62.5 million or 65.48% of the deposit portfolio,  including
certificates  of deposit,  with  principal  amounts of  $100,000 or more,  which
constituted  $7.0 million or 7.34% of the deposit  portfolio  at  September  30,
1996. The Savings Bank has no brokered deposits.


                                     -16-

<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,
                                          ------------------------------------------------------------------
                                                       1996                               1995
                                          -------------------------------    -------------------------------
                                                      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.......             $ 5,011       5.39%       3.07      $ 5,957        6.91%      3.04%   
Passbook and statement deposits           15,400       16.57       2.97       17,045        19.77       3.03
NOW and other demand deposits              7,316        7.87       2.77        5,971         6.92       2.81
Noninterest bearing deposits               5,131        5.52         --        4,717         5.47         --
                                          ------       -----                  ------        -----
      Total.................              32,858       35.35       2.48       33,690        39.07       2.57   
                                          ------       -----                  ------        -----
                                                                                          
Certificate accounts:                                                                     
   Three months or less.....              10,775       11.59       5.37        6,588         7.64       4.31
   Over three through six month            8,437        9.08       5.34        7,914         9.18       5.05
   Over six through 12 months             13,335       14.35       5.22       17,878        20.74       5.05
   Over one to three years..              25,083       26.99       5.46       16,474        19.11       5.48
   Over three to five years.               2,463        2.64       6.34        3,675         4.26       5.63
                                         -------      ------                 -------       ------
                                                                                          
      Total certificates....              60,093       64.65       5.41       52,529        60.93       5.13
                                          ------       -----                  ------        -----
      Total deposits........             $92,951      100.00%                $86,219       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, 1996.

<TABLE>
<CAPTION>


                          At September 30,  Period to Maturity from September 30, 1996
                          ----------------  ------------------------------------------
                                                         Over
                                                         One To
                                            Within       Three      Over Three
                          1996     1995     One Year     Years        Years      Total
                          ----     ----     --------     ------     ----------   -----
                                               (In thousands)
Certificate Accounts:
<S>                    <C>       <C>        <C>       <C>            <C>       <C>    
  3.00% or less......  $    --   $    19    $    --   $     --       $  --     $    --
  3.01% to 4.00%.....       75       572         75         --          --          75
  4.01% to 5.00%.....   16,239    16,808     14,692      1,547          --      16,239
  5.01% to 6.00%.....   36,025    25,667     14,009     21,010       1,006      36,025
  6.01% to 7.00%.....    9,486    13,902      5,051      3,511         924       9,486
  7.01% to 8.00%.....      627       755         --         --         627         627
  8.01% to 9.00%.....       --        15         --         --          --          --
  9.01% to 10.00%....       --        --         --         --          --          --
  Over 10.01%........       --        --         --         --          --          --
                        ------    ------     ------     ------       -----      ------

     Total...........  $62,452   $57,738    $33,827    $26,068      $2,557     $62,452
                        ======    ======     ======     ======       =====      ======

</TABLE>



                                      -17-

<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, 1996.

                                                         Amount
                                                         ------
Maturity Period                                      (In thousands)
---------------
Within three months............................         $  742
Three through six months.......................            757
Six through twelve months......................          2,005
Over twelve months.............................          3,474
                                                         -----
    Total......................................         $6,978
                                                         =====


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

                                           For the Year Ended
                                             September 30,
                                           ------------------
                                            1996         1995
                                           ------       ------
                                         (Dollars in thousands)

Opening balance....................       $90,063      $84,841
Net deposits (withdrawals).........         1,210        1,660
Interest credited on deposits......         4,105        3,562
                                          -------      -------
Ending balance.....................       $95,378      $90,063
                                           ======       ======
  Total increase (decrease)  deposits     $ 5,315      $ 5,222
                                           ======       ======
  Percentage increase (decrease)...         5.90%        6.16%


      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.  At
September  30,  1996 and  1995,  the  Savings  Bank had $12.0  million  and $5.0
million, respectively, of advances outstanding from the FHLB of Atlanta.

Personnel

      As of  September  30, 1996,  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.



                                      -18-

<PAGE>



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  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.

                                      -19-

<PAGE>

      Pursuant to the Economic  Growth and Paperwork  Reduction Act of 1996 (the
"Act"),  the FDIC imposed a special assessment on SAIF members to capitalize the
SAIF at the  designated  reserve level of 1.25% as of October 1, 1996.  Based on
the Savings  Bank's  deposits as of March 31, 1995,  the date for  measuring the
amount of the special  assessment  pursuant to the Act,  the Savings Bank paid a
special   assessment  of   approximately   $555,000  on  November  27,  1996  to
recapitalize  the SAIF.  The FDIC is  expected  to lower the premium for deposit
insurance to a level  necessary  to maintain  the SAIF at its  required  reserve
level; however, the range of premiums has not been determined at this time.

      Pursuant to the Act,  the Savings Bank will pay, in addition to its normal
deposit  insurance  premium  as a  member  of  the  SAIF,  an  amount  equal  to
approximately   6.4  basis  points  toward  the   retirement  of  the  Financing
Corporation  bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by
contrast,  will pay, in  addition to their  normal  deposit  insurance  premium,
approximately  1.3 basis  points.  Based on total  deposits as of September  30,
1996,  had the Act been in effect,  the Savings  Bank's Fico Bond premium  would
have been  approximately  $61,000 in  addition to its normal  deposit  insurance
premium.  Beginning no later than  January 1, 2000,  the rate paid to retire the
Fico  Bonds  will be equal for  members  of the BIF and the  SAIF.  The Act also
provides  for the  merging of the BIF and the SAIF by  January 1, 1999  provided
there are no financial  institutions still chartered as savings  associations at
that time. Should the insurance funds be merged before January 1, 2000, the rate
paid by all members of this new fund to retire the Fico Bonds would be equal.

      Recent Tax Treatment Changes.  The Bank computed income tax by application
of Section  593(b)2 of the U.S.  Internal  Revenue Code which provided a special
deduction for bad debts.  The benefits of Section  593(b)2 were repealed by 1996
federal tax legislation. The Bank will now compute its tax bad debt deduction by
use of the "experience  method" which is based on a moving five-year  average of
actual loss experience.  According to the legislation  that  "applicable  excess
reserves"  must be  recaptured  as taxable  income over five years  beginning in
fiscal  1997.  The  amount to be  recaptured  is the  excess of the  accumulated
reserves since 1987 over the amount allowed by use of the experience  method for
those years.  The Bank has been computing  deferred taxes and therefore does not
believe it will have a material effect on its reportable earnings.



                                      -20-

<PAGE>



     Regulatory  Capital  Requirements.  Set forth below is the  Savings  Bank's
regulatory capital requirements applicable to it as of September 30, 1996:

                                                                Percent
                                                              of Adjusted
                                                 Amount          Assets
                                                 ------       ------------
                                                    (Dollars in Thousands)
Tangible Capital:
Regulatory requirement............              $ 1,918            1.5%
Actual capital....................               15,844            12.4
                                                 ------            ----
  Excess..........................              $13,926            10.9%
                                                 ======            ====

Core Capital:
Regulatory requirement............              $ 3,835             3.0%
Actual capital....................               15,844            12.4
                                                 ------            ----
  Excess..........................              $12,009             9.4%
                                                 ======            ====

Risk-Based Capital:
Regulatory requirement(1).........              $ 5,677             8.0%
Actual capital....................               16,417            23.1
                                                 ------            ----
  Excess..........................              $10,740            15.1%
                                                 ======            ====

--------------------
(1)   Based on risk-weighted assets of $70,966.

      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 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.


                                      -21-

<PAGE>



      The following  table sets forth the interest  rate risk capital  component
for the Savings Bank at September 30, 1996 given a hypothetical  200 basis point
rate change in market interest rates. See "-- Regulatory Capital Requirements."

                                            As of September 30, 1996
                                            ------------------------
                                             (Dollars in thousands)
RISK MEASURES:
200 Basis Point Rate Shock

Pre-Shock NPV Ratio:  NPV as %
  of Present Value of Assets............              15.21%
Exposure Measure:  Post-Shock
  NPV Ratio.............................              13.38%
Sensitivity Measure:  Change in NPV
  Ratio.................................               -183 bp

CALCULATION OF CAPITAL
COMPONENT:

Change in NPV as % of Present Value
  of Assets.............................               2.26%
Interest Rate Risk Capital Component....             $2,988


      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 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

                                      -22-

<PAGE>



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 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, 1996, 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

                                      -23-

<PAGE>



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,  1996,  the  Savings  Bank was in
compliance with its QTL requirement with 81.15% 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,  1996,  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  company.  As of September 30, 1996,
the net book value of the  Company's  investment in the Savings Bank amounted to
$15.9 million.

     The Savings Bank has one  subsidiary,  First  Financial  Enterprises,  Inc.
("FFE")  which was  incorporated  in the State of Virginia and is engaged in the
sale of mortgage life insurance.

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,
1996. The Savings Bank believes that the current facilities are adequate to meet
its present and immediately foreseeable needs.

                                      -24-

<PAGE>

<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        1996
--------                      ---------     ---------     ----------    --------------
                                                                       (In thousands)
<S>                          <C>          <C>              <C>            <C>
125-133 W. Main Street          Owned     12/70 - Main       N/A          $557,000
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           133,000
                                Owned
ATM
Route 122                       Land
Moneta, VA  24121              Leased         7/95         8/01(1)

                              Building
                                Owned         8/95                          29,000

Forest Village Square           Owned        12/78          N/A            215,000
including ATM
Forest, VA  24551

Longwood Avenue (ATM)           Owned         1/85           N/A            80,000
Bedford, VA  24523

</TABLE>

-------------------------------
(1)   Lease is renewable for one five-year term.




      At  September  30,  1996,  the Bank had a total  investment  in its  land,
buildings and improvements, and fixtures, furniture and equipment of $2,283,000,
less  accumulated  depreciation  of  $1,045,000,  or a  net  carrying  value  of
$1,238,000.

      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.


                                      -25-

<PAGE>



          (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, 1996 (the "Annual  Report") is  incorporated  herein by
reference. The Annual Report is included as Exhibit 13 to this Form 10-KSB.

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.

                                      -26-

<PAGE>



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 1997 Annual Meeting of Stockholders  filed with
the  Commission  on December 17, 1996 (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 10-12 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  4-6 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 15 of the Proxy Statement.

                                      -27-

<PAGE>

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

       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,
               1996

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

          23   Independent Auditors' Consents

          27   Financial Data Schedule **

          99   Prior Accountant's Independent Auditor's Report



       *  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.



                                      -28-

<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 30, 1996               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.


By:  /s/ Harold K. Neal                      /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 30, 1996                     Date: December 30, 1996


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

Date:  December 30, 1996                     Date: December 30, 1996


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

Date:  December 30, 1996                     Date: December 30, 1996


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

Date:  December 30, 1996                     Date: December 30, 1996


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

Date:  December 30, 1996