SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------

                                   FORM 10-KSB

(Mark One):

|X|      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998, OR

|_|      TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 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 $12,162,000.

         As of December 11, 1998, there  were  issued and  outstanding 2,297,900
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 11, 1998, was
$24,439,000.

Transition Small Business Disclosure Format (check one)
YES      NO  X 
    ---     ---
                       DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of Annual  Report to  Stockholders  for the Fiscal Year Ended
          September 30, 1998.  (Part II)
     2.   Portions  of  Proxy   Statement   for  the  1999  Annual   Meeting  of
          stockholders. (Part III)


<PAGE>



                                     PART I

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

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

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

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

General

         The Company is a Virginia corporation organized in March of 1994 at the
direction of Bedford Federal  Savings Bank ("Bedford  Federal" or the "Bank") to
acquire all of the capital stock that the Bank issued in its conversion from the
mutual to stock form of ownership  (the  "Conversion").  On August 19, 1994, the
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 Bank retains a specified amount of its assets in
housing related investments.

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



<PAGE>



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

Competition

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

Lending Activities

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

<TABLE>
<CAPTION>
                                                                      1998                               1997
                                                         -------------------------------      --------------------------
                                                                          Percent of                         Percent of
                                                            Amount            Total            Amount            Total
                                                            ------            -----            ------            -----
                                                                           (Dollars in Thousands)
<S>                                                       <C>                 <C>             <C>                <C>   
Real estate:
  Residential:
    One- to four-family...........................         $  95,620           70.46%          $ 84,727           70.79%
    Multi-family..................................               854              .63               523              .44
  Commercial......................................             4,181             3.08             3,836             3.20
  Construction....................................             8,450             6.23             8,433             7.05
  Land............................................            11,769             8.67            10,538             8.80
Consumer and commercial business..................            14,830            10.93            11,630             9.72
                                                            --------          -------           -------            -----
      Total loans.................................         $ 135,704           100.00          $119,687          100.00%
                                                            --------          =======           -------          ======

Less:
  Unearned discounts, premium,
    deferred loan fees, net.......................               290                                287
  Loans-in-process................................             4,906                              2,629
  Allowance for credit losses.....................               764                                678
                                                            --------                            -------
    Total loans, net..............................         $ 129,744                           $116,093
                                                            ========                            =======
</TABLE>








                                       -2-

<PAGE>



Loan Maturity Tables

The  following  table sets forth the  maturity of the Bank's loan  portfolio  at
September  30,  1998.  The  table  does not  include  prepayments  or  scheduled
principal  repayments.  Prepayments and scheduled principal  repayments on loans
totalled  $28.1 million for the year ended  September 30, 1998.  Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.

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

<S>                                                               <C>           <C>          <C>           <C>    
One- to four-family residential real estate..............          $     5       $1,573       $89,260       $90,838
Multi-family residential real estate.....................               --           --           853           853
Commercial residential real estate.......................               20          632         3,478         4,130
Construction.............................................            8,018          297            96         8,411
Land.....................................................               --          257         4,998         5,255
Consumer and commercial business.........................            2,113        8,994        10,205        21,312
                                                                     -----        -----        ------        ------
Total                                                              $10,156      $11,753      $108,890      $130,799
                                                                    ======       ======       =======       =======

</TABLE>

         The following table sets forth the dollar amount of all loans due after
September 30, 1999,  which have fixed  interest rates and which have floating or
adjustable interest rates.
  
<TABLE>
<CAPTION>

                                                                    Floating or
                                           Fixed Rates            Adjustable Rates          Total
                                           -----------            ----------------          -----
                                                                    (In thousands)
<S>                                          <C>                      <C>                 <C>    
Real estate loans:                                             
   One- to four-family...........             $21,897                  $68,936             $90,833
   Multi-family..................                  66                      787                 853
   Commercial real estate........               1,806                    2,304               4,110
   Construction..................                 218                      175                 393
   Land..........................               3,876                    1,379               5,255
Consumer and commercial
  business.......................              13,814                    5,385              19,199
                                               ------                   ------              ------
  Total..........................             $41,677                  $78,966            $120,643
                                               ======                   ======             =======
</TABLE>

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

         For all adjustable-rate  mortgage loans, the Bank requires the borrower
to qualify at the initial rate and such loans are indexed to the weekly  average
of the one year U.S.  Treasury bill. The Bank's  adjustable-rate  mortgage loans
provide for periodic  interest rate adjustments of plus or minus 1% to 2% with a
maximum  adjustment over the term of the loan as set forth in the loan agreement
and usually

                                       -3-

<PAGE>



ranges from 3% to 6% above the initial  interest rate  depending on the terms of
the loan.  Adjustable-rate  mortgage loans reprice every one or two years,  some
have a fixed rate for three,  five, or seven years before adjusting annually and
have terms from 10 to 30 years.  Interest  rates  charged on mortgage  loans are
competitively  priced based on market  conditions  and the Bank's cost of funds.
Generally,  the Bank's  standard  underwriting  guidelines  for  mortgage  loans
conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines.

         Adjustable-rate  mortgage  loans  decrease  the risks  associated  with
changes in interest rates by more closely reflecting these changes,  but involve
other risks because as interest rates increase,  the underlying  payments by the
borrower increase,  thus increasing the potential for default. At the same time,
the  marketability  of the underlying  collateral  may be adversely  affected by
higher interest  rates.  Upward  adjustment of the contractual  interest rate is
also limited by the adjustable-rate mortgage loan documents, thereby potentially
limiting their  effectiveness  during periods of rising  interest  rates.  These
risks have not had an adverse effect on the Bank.

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

         Construction   Lending.   The  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 Bank's market area.

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

         Multi-Family   and  Commercial  Real  Estate  Loans.  The  Bank  offers
multi-family  and commercial  real estate loans,  however,  this type of lending
represents a small portion of the 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.  Substantially all of the properties
securing the Bank's  commercial and multi-family real estate loans are inspected
by the Bank's lending  personnel  before the loan is made. The Bank also obtains
appraisals on each property.

         Loans secured by  multi-family  and commercial  real estate  properties
generally  involve a greater degree of risk than residential  mortgage loans and
carry larger loan balances.  This  increased  credit risk is a result of several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects of general  economic  conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore,  the repayment of loans secured by commercial real estate
is typically dependent upon the successful  operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.

                                       -4-

<PAGE>




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

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


         Loan  Solicitation and Processing.  The 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 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 the Bank's board of directors. It is the Bank's policy to obtain
title insurance or an attorney's opinion and certification of title and fire and
casualty  insurance for all mortgage loans.  If appropriate,  flood insurance is
also required.

         Loan  Commitments.  The 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, 1998, the Bank had $1.8 million of commitments to originate  mortgage loans,
$5.0 million in unfunded home equity loans and $1.4 in unfunded commercial lines
of credit.

                                       -5-

<PAGE>




         Loan  Processing and Servicing  Fees. In addition to interest earned on
loans,  the Bank recognizes fees and service charges which consist  primarily of
fees  charged  for loan  originations  and loans  serviced  for  others and late
charges.  The Bank  recognized  loan servicing fees of $459,000 and $296,000 for
the years ended September 30, 1998 and 1997, respectively.

         Loans to One  Borrower.  Savings  institutions  are subject to the same
limits as those  applicable to national banks,  which under 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 Bank's  maximum
loan-to-one  borrower limit was  approximately  $2.9 million as of September 30,
1998.

         At September 30, 1998,  the Bank's largest loan customer has performing
loans totaling  approximately  $1.6 Million,  which  constituted 17 loans.  This
customer  is a building  contractor  in Bedford  County.  Six of these loans are
construction loans on single family dwellings with funds still in process.

Non-Performing and Problem Assets

         Loan  Delinquencies and  Non-Performing  Assets.  The 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  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.

         The following table sets forth information  regarding  nonaccrual loans
and  real  estate  owned,  as of the  dates  indicated.  The  Bank  had no loans
categorized as troubled debt restructurings within the meaning of SFAS 15 and no
accruing loans that were delinquent more than 90 days.

<TABLE>
<CAPTION>
                                                             At September 30,
                                                            1998            1997
                                                            ----            ----
                                                              (In thousands)
<S>                                                      <C>             <C> 
Loans accounted for on a nonaccrual basis:
Mortgage loans:
  One- to four-family residential real estate.........    $281            $421
  Land................................................     214              49
  Consumer and commercial business loans                    37              48
                                                           ---             ---
Total non-accrual loans...............................    $532            $518
                                                           ===             ===
Real estate owned.....................................    $  0            $212
                                                           ===             ===
Total non-performing assets...........................    $532            $730
                                                           ===             ===
Delinquent loans to total net loans...................     .41%            .45%
                                                           ===             ===

</TABLE>


         Interest income that would have been recorded on loans accounted for on
a nonaccrual basis under the original terms of such loans was immaterial for the
year ended September 30, 1998. The amount included in the Bank's interest income
for the year ended September 30, 1997 was also immaterial.

                                       -6-

<PAGE>




         Classified Assets. OTS regulations provide for a classification  system
for problem assets of insured  institutions.  Under this classification  system,
problem  assets  of  insured   institutions  are  classified  as  "substandard,"
"doubtful,"  or  "loss."  An  asset  is  considered   "substandard"   if  it  is
inadequately  protected  by the  current  net worth and paying  capacity  of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct  possibility"  that the insured  institution will
sustain "some loss" if the deficiencies are not corrected.  Assets classified as
"doubtful"   have  all  of  the   weaknesses   inherent   in  those   classified
"substandard,"  with the added  characteristic  that the weaknesses present make
"collection or liquidation in full," on the basis of currently  existing  facts,
conditions and values,  "highly  questionable and improbable." Assets classified
as "loss" are those  considered  "uncollectible"  and of such little  value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.  Assets designated  "special mention" by management are assets
included on the 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,  1998,  the Bank's  problem  assets were as follows:
$515,000  were  designated   special   mention,   $530,000  were  classified  as
substandard and $2,000 were classified as doubtful or loss.


         Real  Estate  Owned.  Real  estate  acquired by the 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.

         Allowances for Loan Losses.  It is  management's  policy to provide for
losses on unidentified loans in its loan portfolio.  A provision for loan losses
is charged to operations based on management's evaluation of the losses that may
be incurred in the 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 the Bank's past loan loss experience, known
and inherent  risks in the  portfolio,  adverse  situations  that may affect the
borrower's ability to repay, estimated value of any underlying  collateral,  any
existing guarantees,  past performance of the loan, available  documentation for
the loan, legal impediments to collection,  financial condition of the borrower,
and current economic conditions.

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


                                       -7-

<PAGE>



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

                                                       At or For the Year Ended
                                                            September 30,
                                                       -------------------------
                                                        1998               1997
                                                        ----               ----
                                                        (Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period......................    $678              $650
                                                         ---               ---
 Charge-offs:
   One- to four-family..............................      --                --
   Multi-family.....................................      --                --
   Commercial real estate...........................      --                58
   Construction and land............................      --                --
   Consumer and commercial business.................       8                15
                                                         ---               ---
     Total charge-offs..............................       8                73
  Recoveries........................................       4                 1
  Provisions charged to income......................      90               100
                                                         ---              ----
Balance at end of period............................    $764              $678
                                                         ===               ===

Ratios of net charge-offs during the period
  to average loans outstanding during the
  period............................................     .01%              .06%
Ratio of allowance for losses to total
  loans at the end of the period....................     .58%              .58%
Ratio of allowance for losses to non-
  performing assets at the end of the
  period............................................  143.80%            92.88%




                                       -8-

<PAGE>



         Allocation of Allowance for Loan Losses. The following table sets forth
the 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  since the  total  loan  loss  allowance  is a
valuation reserve applicable to the entire loan portfolio.

<TABLE>
<CAPTION>
                                                      At September 30,
                               ---------------------------------------------------------------------
                                         1998                                   1997
                               ------------------------------------   ------------------------------
                                                    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..........    $  381                 49.8%            $379                55.9%
Multi-family.................         1                   .1                1                  .1
Commercial real estate.......        50                  6.5               50                 7.4
Construction.................        49                  6.4               50                 7.4
Land.........................        39                  5.1               40                 5.9
Consumer and commercial
 business....................       244                 32.1              158                23.3
                                  -----                -----             ----               -----
  Total......................   $   764                100.0%            $678               100.0%
                                 ======                =====              ===               =====
</TABLE>


Investment and Mortgage-backed Securities Activities

         Investment  Securities.  The 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 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 Bank's loan  origination  and
other activities.  Marketable equity securities  consist of the Asset Management
Fund for Financial  Institutions,  Inc. ("AMF Fund"), a mutual fund that invests
in securities eligible for direct investment by savings  associations.  The 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,  1998,  the  Bank  had $4.4  million  or 18.3% of its  investment
securities portfolio in the AMF Fund. Bedford Federal will continue to seek high
quality  investment  securities  with  short  to  intermediate   maturities  and
durations from one to five years.

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



                                       -9-

<PAGE>



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

<TABLE>
<CAPTION>

                                                               At September 30,
                                                         ---------------------------
                                                             1998             1997
                                                         ----------       ----------
                                                                (In thousands)
<S>                                                      <C>                <C>    
Federal funds sold and other short-term investments....   $  3,650          $ 2,791
Investment securities and Mortgage backed securities:
  Held to maturity:
    Mortgage backed securities.........................         15               20
    FHLB stock.........................................      1,550              932
    U.S. Government and agency obligations.............      2,099            4,596
                                                          --------            -----
      Total held to maturity...........................      3,664            5,548
Available for sale:
    U.S. Government and agency obligations.............     12,371            5,006
    Marketable equity securities and other.............      4,449            4,238
                                                          --------           ------
      Total available for sale.........................     16,820            9,244
                                                          --------           ------
      Total ...........................................  $  24,134          $17,583
                                                          ========           ======

</TABLE>




                                      -10-

<PAGE>



         Investment  Yields and  Maturities.  The table below sets forth certain
information   regarding  the  carrying  value,   weighted   average  yields  and
contractual  maturities of the Bank's  federal  funds sold and other  short-term
investments, investment securities, securities held for sale and mortgage-backed
securities as of September 30, 1998.

<TABLE>
<CAPTION>
                        One Year or Less    One to Five Years  Five to Ten Years  More than Ten Years  Total Investment Securities
                       ------------------  ------------------ ------------------  -------------------  -------------------------  
                                 Weighted            Weighted           Weighted             Weighted            Weighted
                        Carrying  Average  Carrying  Average  Carrying  Average   Carrying   Average   Carrying  Average  Market
                          Value    Yield    Value     Yield     Value    Yield      Value     Yield     Value     Yield    Value
                         -------   -----   -------   -------   -------  -------    -------   -------   -------   -------  ------
                                                              (Dollars in thousands)
<S>                     <C>         <C>    <C>         <C>      <C>      <C>       <C>       <C>     <C>           <C>   <C>     
Federal funds 
  sold and other
  short-term 
  investments..........  $ 3,650     7.41%  $    --       --%    $   --       --%   $    --      --%   $  3,650     7.41% $  3,650
Held to maturity:                                                                                     
    Mortgage-backed 
      securities.......       15     8.31        --       --         --       --         --      --          15     8.31        15
    FHLB stock.........    1,550     7.38        --       --         --       --         --      --       1,550     7.38     1,550
    U.S. government 
      and agency                                                                        
      obligations......      300     5.32     1,299     6.02        500     7.25         --      --       2,099     6.21     2,132
Available for sale:                                                                                   
    U.S. Government 
      and agency                                                                        
      obligations .....    5,789     5.74     3,037     6.61      3,545     6.47         --      --      12,371     6.21    12,371
    Marketable equity 
     securities and                                                                  
     other.............    4,449     5.71        --        --        --       --         --      --       4,449     5.71     4,449
                         -------            -------              ------             -------             -------            -------
Total..................  $15,753            $ 4,336              $4,045            $     --            $ 24,134           $ 24,167
                          ======            =======              ======             =======             =======            =======
                                                                                                     
</TABLE>



                                      -11-

<PAGE>



Sources of Funds

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

         Deposits.  Customer deposits are attracted  principally from within the
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. At September 30,
1998, the Bank had no brokered deposits.

         Certificates  of Deposit  of  $100,000  or More.  The  following  table
indicates  the  amount of the  Bank's  certificates  of  deposit  and other time
deposits of $100,000 or more by time  remaining  until  maturity as of September
30, 1998.
                                                       Amount
                                                       ------
Maturity Period                                    (In thousands)
---------------
Within three months....................               $ 1,296
Three through six months...............                   979
Six through twelve months..............                 2,793
Over twelve months.....................                 5,348
                                                        -----
    Total..............................               $10,416
                                                       ======


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

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

                                                    At or For the Year Ended
                                               ---------------------------------
                                                         September 30,
                                               ---------------------------------
                                                    1998                  1997
                                               -----------            ----------
                                                     (Dollars in thousands)
FHLB advances:
   Average balance outstanding...........         $22,487               $12,249
   Maximum amount outstanding at any
         month-end during the year.......          31,000                16,000
   Balance outstanding at end of year....          29,000                15,000
   Weighted average interest rate
         during the year.................           5.54%                 6.07%
   Weighted average interest rate
         at end of year..................           5.55%                 6.01%




                                      -12-

<PAGE>



Personnel

         As of September  30, 1998,  the Bank had 40 full-time  employees  and 1
part-time employee. None of the Bank's employees are represented by a collective
bargaining  group. The Bank believes that its relationship with its employees is
good.

Regulation

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

Company Regulation

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

         Qualified  Thrift  Lender Test.  As a unitary  savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the Qualified  Thrift  Lender  ("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  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 "Regulation
of the Bank Qualified Thrift Lender Test."

Regulation of the Bank

         General. As a federally  chartered,  SAIF-insured  savings association,
the Bank is subject to  extensive  regulation  by the OTS and the FDIC.  Lending
activities and other  investments must comply with various federal statutory and
regulatory   requirements.   The  Bank  is  also  subject  to  certain   reserve
requirements promulgated by the Federal Reserve Board.

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

         The Bank must file  reports  with the OTS 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

                                      -13-

<PAGE>



policies,  including  policies with respect to the  classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.

         Under  separate  proposed  legislation,  Congress  is  considering  the
elimination of the federal thrift charter and the separate federal regulation of
thrifts.  As a result,  the Bank might have to convert to a different  financial
institution  charter and be  regulated  under  federal law as a bank,  including
being subject to the more restrictive  activity  limitations imposed on national
banks.  The Bank cannot  predict the impact of its  conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.

         Insurance of Deposit Accounts.  The Bank's deposit accounts are insured
by the Savings Association  Insurance Fund (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.

         As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum  of 0.23% of its  total  deposits.  The FDIC  also  maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial  bank deposits.  In 1996, the annual  insurance  premium for most BIF
members  was lowered to $2,000.  The lower  insurance  premiums  for BIF members
placed SAIF members at a competitive disadvantage to BIF members.

         Effective  September  30,  1996,  federal  law was revised to mandate a
one-time  special  assessment on SAIF members such as the Bank of  approximately
 .657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance  assessment  for most SAIF members was reduced to .064% of deposits on
an annual basis  through the end of 1999.  During this same period,  BIF members
will be assessed  approximately .013% of deposits.  After 1999,  assessments for
BIF and SAIF members  should be the same. It is expected  that these  continuing
assessments  for both  SAIF and BIF  members  will be used to repay  outstanding
Financing Corporation bond obligations.  As a result of these changes, beginning
January  1, 1997,  the rate of  deposit  insurance  assessed  the Bank  declined
annually by approximately 70%.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted  assets,  (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets, and (3) a risk-based  capital  requirement
equal to 8.0% of total risk-weighted assets.

         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require  the  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.

         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

                                      -14-

<PAGE>



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, 1998, the
Bank was a Tier 1  institution.  In the event the 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 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.

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue  to enjoy  full  borrowing  privileges  from the FHLB of  Atlanta.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus  intangible  assets,  property used by the  institution  in conducting its
business and liquid  assets equal to 10% of total  assets).  Certain  assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying  QTIs. An  association  must be in compliance  with the QTL test on a
monthly basis in nine out of every 12 months.  As of June 30, 1998, the Bank was
in compliance with its QTL requirement with 76% 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 or 5%
of its outstanding  borrowings to the FHLB of Atlanta,  at the beginning of each
year.

         Liquidity  Requirements.  All  savings  associations  are  required  to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At September  30, 1998,  the Bank's  actual
liquid asset ratio was 19%.

         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, 1998, the Bank was in compliance  with these Federal Reserve Board
requirements.




                                      -15-

<PAGE>



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

         (a) The Bank  conducts  its business  through a main office  located in
Bedford,  Virginia and two branch offices. The Bank installed three freestanding
ATM's during fiscal 1995;  all were in operation at September 30, 1998. The Bank
believes  that the  current  facilities  are  adequate  to meet its  present and
immediately foreseeable needs.


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

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

                                                              3/89 - Annex

1152 Hendricks Store Road           Land Leased                   8/86
Moneta, VA  24121
                                   Building Owned                 1/87
ATM
Moneta Road                         Land Leased                   7/95
Moneta, VA  24121
                                   Building Owned                 8/95

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

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


         (b)      Investment Policies.

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

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

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



                                      -16-

<PAGE>



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

         (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
------------------------------------------------------------

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

                                     PART II

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

         The information  contained under the sections  captioned  "Stock Market
Information" in the  Corporation's  Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1998 (the "Annual  Report") is  incorporated  herein by
reference.

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

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

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

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

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

         Not Applicable.

                                    PART III


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

         The information  contained under the sections  captioned "Section 16(a)
Beneficial Ownership Reporting  Compliance" and "I - Information with Respect to
Nominees for Director,  Directors  Continuing in Office,  and Executive Officers
Election  of  Directors"  and  "  -  Biographical  Information"  in  the  "Proxy
Statement" is incorporated herein by reference.


                                      -17-

<PAGE>



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

         The  information  contained  in the  section  captioned  "Director  and
Executive Officer Compensation" 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  first  chart in the  section  captioned  "I
                  Information  with Respect to Nominees for Director,  Directors
                  Continuing in Office, and Executive Officers" in the Proxy
                  Statement.

         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference  to the  first  chart in the  section  captioned  "I
                  Information  with Respect to Nominees for Director,  Directors
                  Continuing in Office, and Executive Officers" in the Proxy
                  Statement.

         (c)      Management  of  the  Registrant   knows  of  no  arrangements,
                  including  any  pledge  by any  person  of  securities  of the
                  Registrant,  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   Relationships  and  Related
Transactions" in the Proxy Statement.

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

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

          1.   The consolidated balance sheets of Bedford Bancshares, Inc. as of
               September  30,  1998  and  1997  and  the  related   consolidated
               statements of income,  changes in  stockholders'  equity and cash
               flows  for  each of the  years in the  three  year  period  ended
               September  30,  1998,  together  with the  related  notes and the
               independent  auditors'  report of BDO  Seidman,  LLP  independent
               certified public accountants.

          2.   Schedules omitted as they are not applicable.


                                      -18-

<PAGE>



          3.   The   following   exhibits   are   included  in  this  Report  or
               incorporated herein by reference:
<TABLE>
<CAPTION>
               <S>     <C>
               (a)       List of Exhibits:

                         3(i)   Restated Articles of Incorporation of Bedford Bancshares, Inc. *
                         3(ii)  Bylaws of Bedford Bancshares, Inc. *
                         4      Specimen  Stock  Certificate  *
                         10.1   1994 Stock  Option  Plan * 
                         10.2   Recognition  and Retention  Plan and Trust  Agreement  * 
                         10.3   Employment  Agreement  between  the Bank and Harold  K.  Neal * 
                         13     1998 Annual Report to Stockholders    
                         21     Subsidiaries of the Registrant (See "Item 1- Description  of  Business) 
                         23     Consent of BDO Seidman,  LLP 
                         27     Financial  Data  Schedule (electronic filing only)

</TABLE>

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


                                      -19-

<PAGE>




                                   SIGNATURES

          Pursuant to the  requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized as of December  21,
1998.
                                   BEDFORD BANCSHARES, INC.


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

          Pursuant to the  requirement of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates  indicated as of December  21,
1998.


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



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



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



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



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