<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  -----------

                                   FORM 10-QSB

(Mark One)

 X       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
---
         ACT OF 1934
         For the quarterly period ended June 30, 2002
                                        -------------

___      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the transition period from _______________ to  _______________


                          COMMISSION FILE NUMBER 1-5735


                        UNION FINANCIAL BANCSHARES, INC.
                        --------------------------------
        (Exact name of small business issuer as specified in its charter)

<TABLE>
<CAPTION>
Delaware                                                            57-1001177
-----------------------------------------------------------------------------------------
<S>                                                   <C>
(State or other Jurisdiction of Incorporation)        (I.R.S. Employer Identification No.)

203 West Main Street, Union, South Carolina                              29379
-------------------------------------------                           ----------
(Address of Principal Executive Offices)                              (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (864) 429-1864

The Corporation had 1,955,922 shares, $0.01 par value, common stock issued and
outstanding as of July 30, 2002.

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.


                                      INDEX
<TABLE>
<S>       <C>                                                                         <C>
Part I.   Financial Information                                                        Page
          ---------------------                                                        ----
          Item 1.  Consolidated Financial Statements (unaudited)

          Consolidated Balance Sheets as of June 30, 2002
          and September 30, 2001                                                          3

          Consolidated Statements of Income for the three and nine months
          ended June 30, 2002 and 2001                                                    4

          Consolidated Statements of Cash Flows for the nine
          months ended June 30, 2002 and 2001                                             5

          Consolidated Statements of Shareholders' Equity for the
          nine months ended June 30, 2002 and 2001                                        6

          Notes to Consolidated Financial Statements                                   7-10

          Item 2.  Management's Discussion and Analysis of
          Financial Condition and Results of Operations                               10-18


Part II. Other Information
         -----------------

          Item 1. Legal Proceedings                                                      18

          Item 2. Changes in Securities                                                  18

          Item 3. Defaults Upon Senior Securities                                        18

          Item 4. Submission of Matters to a Vote of Security Holders                    18

          Item 5. Other Information                                                      18

          Item 6. Exhibits and Reports on Form 8-K                                       18

          Signatures                                                                     19
</TABLE>

<PAGE>

Item 1. Financial Statements
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 (unaudited) and September 30, 2001

<TABLE>
<CAPTION>
                                                                                       June 30,     September 30,
ASSETS                                                                                   2002           2001
                                                                                     -----------    -------------
                                                                                        (DOLLARS IN THOUSANDS)
<S>                                                                                  <C>            <C>
Cash                                                                                 $       820    $         914
Short term interest-bearing deposits                                                       9,739            5,694
                                                                                     -----------    -------------
Total cash and cash equivalents                                                           10,559            6,608
                                                                                     -----------    -------------
Investment and mortgage-backed securities:
  Held to maturity                                                                             -           11,315
  Available for sale                                                                     107,926           77,802
                                                                                     -----------    -------------
Total investment and mortgage-backed securities                                          107,926           89,117
Loans, net                                                                               166,834          158,063
Office properties and equipment, net                                                       6,731            7,204
Federal Home Loan Bank Stock, at cost                                                      2,900            2,625
Accrued interest receivable                                                                1,968            1,629
Mortgage servicing rights                                                                    569              842
Intangible assets                                                                          5,807            6,299
Cash surrender value of life insurance                                                     4,661            4,465
Other assets                                                                                 568              900
                                                                                     -----------    -------------
TOTAL ASSETS                                                                         $   308,523    $     277,752
                                                                                     ===========    =============
LIABILITIES

Deposit accounts                                                                     $   204,168    $     194,079
Advances from the Federal Home Loan Bank and other borrowings                             52,000           46,007
Securities sold under agreements to repurchase                                            17,000           11,000
Corporate obligated floating rate capital securities                                       8,000                -
Accrued interest on deposits                                                                 407              404
Advances from borrowers for taxes and insurance                                              278              374
Other liabilities                                                                            362            1,512
                                                                                     -----------    -------------
TOTAL LIABILITIES                                                                        282,215          253,376
                                                                                     -----------    -------------
SHAREHOLDERS' EQUITY

Serial preferred stock, no par value,
  authorized - 500,000 shares, issued
  and outstanding - None                                                                       -                -
Common stock - $0.01 par value,
  authorized - 2,500,000 shares,
   issued and outstanding - 1,955,922 shares at 6/30/02 and 1,924,478 at 9/30/01              20               20
Additional paid-in capital                                                                11,546           11,321
Accumulated other comprehensive loss                                                         746             (182)
Retained earnings, substantially restricted                                               13,996           13,217
                                                                                     -----------    -------------
TOTAL SHAREHOLDERS' EQUITY                                                                26,308           24,376
                                                                                     -----------    -------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           $   308,523    $     277,752
                                                                                     ===========    =============
</TABLE>

See notes to consolidated financial statements.

                                       3

<PAGE>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended June 30, 2002 (unaudited) and 2001 (unaudited)

<TABLE>
<CAPTION>
                                                      Three Months Ended        Nine Months Ended
                                                      June 30,   June 30,       June 30,  June 30,
                                                        2002       2001          2002       2001
                                                    ----------- ----------     ---------  --------
                                                     (DOLLARS IN THOUSANDS)   (DOLLARS IN THOUSANDS)
<S>                                                 <C>           <C>           <C>          <C>
Interest Income:
  Loans                                             $    3,160    $    3,616    $    9,485    $   11,073
  Deposits and federal funds sold                           29            65            41           224
  Mortgage-backed securities                             1,035           728         3,066         2,069
  Interest and dividends on
   investment securities                                   421           328         1,348         1,008
                                                    ----------    ----------    ----------    ----------
Total Interest Income                                    4,645         4,737        13,940        14,374
                                                    ----------    ----------    ----------    ----------

Interest Expense:
  Deposit accounts                                       1,415         2,192         4,657         6,675
  Trust preferred corporate obligation                     116             -           250             -
  Advances from the FHLB and other borrowings              879           653         2,515         2,241
                                                    ----------    ----------    ----------    ----------
Total Interest Expense                                   2,410         2,845         7,422         8,916
                                                    ----------    ----------    ----------    ----------

Net Interest Income                                      2,235         1,892         6,518         5,458
  Provision for loan losses                                350            10           690            45
Net Interest Income After                           ----------    ----------    ----------    ----------
   Provision for Loan Losses                             1,885         1,882         5,828         5,413
                                                    ----------    ----------    ----------    ----------

Non Interest Income:
  Fees for financial services                              394           233         1,094           683
  Loan servicing costs                                     (40)          (44)         (129)          (28)
  Net gains (loss) on sale of investments                   10             -           (31)            3
  Net gains on sale of loans                                 -            17             -           210
                                                    ----------    ----------    ----------    ----------
Total Non Interest Income                                  364           206           934           868
                                                    ----------    ----------    ----------    ----------
Non Interest Expense:
  Compensation and employee benefits                       745           743         2,145         2,208
  Occupancy and equipment                                  398           349         1,168           960
  Deposit insurance premiums                                 9             8            26            24
  Professional services                                     96            73           253           190
  Advertising/Public relations                              14            32           102            93
  Real estate operations                                    16            (2)           48            14
  Deposit premium intangible                                83            81           248           242
  Goodwill amortization                                     82            81           245           247
  Other                                                    197           255           718           695
                                                    ----------    ----------    ----------    ----------
Total Non Interest Expense                               1,640         1,620         4,953         4,673
                                                    ----------    ----------    ----------    ----------
Income Before Income Taxes                                 609           468         1,809         1,608
Income tax expense                                         148           165           448           569
                                                    ----------    ----------    ----------    ----------
Net Income                                          $      461    $      303    $    1,361    $    1,039
                                                    ==========    ==========    ==========    ==========
Basic Net Income Per Common Share                   $     0.24    $     0.16    $     0.70    $     0.54
                                                    ==========    ==========    ==========    ==========
Diluted Net Income Per Common Share                 $     0.23    $     0.15    $     0.67    $     0.53
                                                    ==========    ==========    ==========    ==========
Weighted Average Number of
 Common Shares Outstanding

Basic                                                1,954,480     1,920,176     1,944,391     1,916,759

Diluted                                              2,043,195     1,977,210     2,025,224     1,967,502
</TABLE>

See notes to consolidated financial statements.

                                       4

<PAGE>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 2002 (unaudited) and 2001 (unaudited)

<TABLE>
<CAPTION>
                                                                        Nine Months Ended
                                                                    June 30,         June 30,
                                                                     2002             2001
                                                               ------------------------------
                                                                         (IN THOUSANDS)
<S>                                                               <C>              <C>
OPERATING ACTIVITIES:

Net income                                                        $   1,361        $    1,039
Adjustments to reconcile net income to
  net cash provided by operating activities:
  Provision for loan losses                                             690                45
  Amortization of intangibles                                           493               578
  Depreciation expense                                                  672               593
  Recognition of deferred income, net of                                (50)              (58)
costs

  Deferral of fee income, net of costs                                  158                70
  Loans originated for sale                                               -            27,825
  Sale of loans                                                           -           (27,825)
  Gain on sale of loans                                                   -               210
  Changes in operating assets and
liabilities:
   (Increase) in accrued interest receivable                           (339)               20
   (Increase) in other assets                                           332              (752)
   Increase (decrease) in other liabilities                          (1,246)              462
   Increase in accrued interest payable                                   3                50
                                                                  ---------        ----------
Net cash provided by operating activities                             2,074             2,257
                                                                  ---------        ----------
INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
   Available for sale                                               (56,767)           (8,923)
Proceeds from sale of investment and
mortgage-backed securities                                           23,334             4,353
Proceeds from maturity of investment and mortgage-
    backed securities:
   Available for sale                                                 5,435             1,650
Principal repayments on mortgage-backed securities:
   Held to maturity                                                     605               296
   Available for sale                                                 8,584             1,478
Net (increase) decrease in loans                                     (8,838)           10,161
Net (increase) decrease in mortgage servicing rights                    273              (536)
Purchase of FHLB stock                                                 (275)                -
Purchase of office properties and equipment                            (199)           (1,282)
                                                                  ---------        ----------
Net cash provided by (used by) investing activities                 (27,848)            7,197
                                                                  ---------        ----------

FINANCING ACTIVITIES:

Proceeds from the dividend reinvestment plan                             84                89
Dividends paid in cash ($0.30 per share -2002
and $0.30 per share - 2001)                                            (582)             (574)
Proceeds from the exercise of stock options                             141                 -
Proceeds from term borrowings                                        11,993                 -
Proceeds from issuance of trust preferred                             8,000            (8,560)
corporate obligations
Increase  in deposit accounts                                        10,089             7,505
                                                                  ---------        ----------
Net cash  provided by (used by) financing activities                 29,725            (1,540)
                                                                  ---------        ----------

NET DECREASE\INCREASE IN CASH
   AND CASH EQUIVALENTS                                               3,951             7,914

CASH AND CASH EQUIVALENTS
   AT BEGINNING OF PERIOD                                             6,608             4,613
                                                                  ---------        ----------

CASH AND CASH EQUIVALENTS
   AT END OF PERIOD                                               $  10,559        $   12,527
                                                                  =========        ==========

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
  Income taxes                                                    $   1,616        $      437
  Interest                                                            7,419             8,866

Non-cash transactions:
  Loans foreclosed                                                $     288        $       71

See notes to consolidated financial statements.
</TABLE>

                                       5

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
              NINE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 Retained     Accumulated
                                                                    Additional   Earnings        Other        Total
                                                    Common Stock     Paid-in   Substantially Comprehensive Shareholders'
                                                  Shares     Amount  Capital     Restricted      Income       Equity
                                                  ------     ------  -------     ----------      ------       ------
                                                                   (In Thousands, Except Share Data)
<S>                                              <C>         <C>     <C>         <C>            <C>           <C>
BALANCE AT SEPTEMBER 30, 2000                    1,911,005      $ 20 $ 11,314     $12,640       ($2,050)      $21,924

Net income                                                                          1,039                       1,039

  Other comprehensive income
    Unrealized gains on securities:
       Equity reclassification                                                                      113           113
       Unrealized holding gains arising during
        period                                                                                      761           761
                                                                                                    ---           ---
  Comprehensive income                                                                                          1,913

Equity reclassification                                                 (113)                                    (113)

Dividend reinvestment plan contributions            10,293                89                                       89

Cash dividend ($.30 per share)                                                       (574)                       (574)

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

BALANCE AT JUNE 30, 2001                         1,921,298      $20  $11,290      $13,105       ($1,176)      $23,239
                                                 ====================================================================

BALANCE AT SEPTEMBER 30, 2001                    1,924,478      $20  $11,321      $13,217         ($182)      $24,376

Net income                                                                          1,361                       1,361

  Other comprehensive income
    Unrealized gains on securities:
       Unrealized holding gains arising during
        period                                                                                      928           928
                                                                                                    ---           ---
  Comprehensive income                                                                                          2,289

Options exercised                                   23,605               141                                      141

Dividend reinvestment plan contributions             7,839                84                                       84

Cash dividend ($.30 per share)                                                       (582)                       (582)

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

BALANCE AT JUNE 30, 2002                         1,955,922      $20  $11,546      $13,996          $746       $26,308
                                                 ====================================================================
</TABLE>

                                        6

<PAGE>

                        UNION FINANCIAL BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       Presentation of Consolidated Financial Statements

         The accompanying unaudited consolidated financial statements of Union
         Financial Bancshares, Inc. (the "Corporation") were prepared in
         accordance with instructions for Form 10-QSB and, therefore, do not
         include all disclosures necessary for a complete presentation of
         consolidated financial condition, results of operations, and cash flows
         in conformity with generally accepted accounting principles. However,
         all adjustments which are, in the opinion of management, necessary for
         the fair presentation of the interim consolidated financial statements
         have been included. All such adjustments are of a normal and recurring
         nature. The consolidated financial statements include the Corporation's
         wholly owned subsidiaries, Provident Community Bank (the "Bank"), a
         federally charted stock savings bank and Union Financial Statutory
         Trust I (the "Trust"), a statutory trust created under the laws of the
         state of Connecticut. The results of operations for the nine months
         ended June 30, 2002 are not necessarily indicative of the results which
         may be expected for the entire fiscal year. The consolidated balance
         sheet as of September 30, 2001 has been derived from the Corporation's
         audited financial statements presented in the annual report to
         shareholders. Certain amounts in the prior year's financial statements
         have been reclassified to conform with current year classifications.

         Recently Issued Accounting Standards

         In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other
         Intangible Assets. This SFAS addresses how goodwill and other
         intangible assets should be accounted for at their acquisition (except
         for those acquired in a business combination) and after they have been
         initially recognized in the financial statements. The statement is
         effective for all fiscal years beginning after December 15, 2001.The
         FASB has also proposed additional guidance related to reconsideration
         of SFAS 72, which could also impact the Corporation's accounting for
         goodwill. The Corporation is in the process of determining the effect
         of this SFAS on the financial position of the Corporation and plans to
         adopt it on October 1, 2002.

         Additional accounting standards that have been issued or proposed by
         the FASB that do not require adoption until a future date are not
         expected to have a material impact on the consolidated financial
         statements upon adoption.

2.       Income Per Share

         Basic income per share amounts for the three and nine months ended June
         30, 2002 and 2001 were computed based on the weighted average number of
         common shares outstanding during the period. Diluted income per share
         adjusts for the dilutive effect of outstanding common

                                       7

<PAGE>

         stock options during the periods.

3.       Assets Pledged

         Approximately $34,601,000 and $28,411,000 of debt securities at June
         30, 2002 and September 30, 2001, respectively, were pledged by the Bank
         as collateral to secure deposits of the State of South Carolina,
         Laurens County and certain other liabilities. The Bank pledges as
         collateral for Federal Home Loan Bank advances the Bank's Federal Home
         Loan Bank stock and has entered into a blanket collateral agreement
         with the Federal Home Loan Bank whereby the Bank maintains, free of
         other encumbrances, qualifying mortgages (as defined) with unpaid
         principal balances equal to, when discounted at 75% of the unpaid
         principal balances, 100% of total advances.

4.       Contingencies and Loan Commitments

         The Bank is a party to financial instruments with off-balance-sheet
         risk in the normal course of business to meet the financing needs of
         its customers. These instruments expose the Bank to credit risk in
         excess of the amount recognized on the balance sheet.

         The Bank's exposure to credit loss in the event of nonperformance by
         the other party to the financial instrument for commitments to extend
         credit is represented by the contractual amount of those instruments.
         The Bank uses the same credit policies in making commitments and
         conditional obligations as it does for on-balance-sheet instruments.
         Total credit exposure at June 30, 2002 related to these items is
         summarized below:

         Loan Commitments:                                       Contract Amount
         ----------------                                        ---------------
              Approved loan commitments                            $     699,000
              Unadvanced portions of loans and credit lines           17,486,000
                                                                      ----------
              Total loan commitments                                 $18,185,000
                                                                     ===========

         Loan commitments to extend credit are agreements to lend to a customer
         as long as there is no violation of any condition established in the
         contract. Loan commitments generally have fixed expiration dates or
         other termination clauses and may require payment of a fee. The Bank
         evaluates each customer's creditworthiness on a case-by-case basis. The
         amount of collateral obtained upon extension of credit is based on
         management's credit evaluation of the counter party. Collateral held is
         primarily residential and commercial property.

         Commitments outstanding at June 30, 2002 consist of fixed and
         adjustable rate loans provided above at rates ranging from 6.0% to
         7.0%. Commitments to originate loans generally expire within 30 to 60
         days.

         Commitments to fund credit lines (principally variable rate, consumer
         lines secured by real estate and overdraft protection) totaled
         approximately $38,917,000 at June 30, 2002. Of these

                                       8

<PAGE>

         lines, the outstanding loan balances totaled approximately $21,431,000.
         The Bank also has commitments to fund warehouse lines of credit for
         various mortgage banking companies totaling $2,000,000, which had an
         outstanding balance at June 30, 2002 of approximately $336,000.

5.       Corporation Obligated Floating Rate Capital Securities

         On November 14, 2001, the Corporation sponsored the creation of the
         Trust. The Corporation is the owner of all of the common securities of
         the Trust. On December 18, 2001, the Trust issued $8.0 million in the
         form of floating rate capital securities through a pooled trust
         preferred securities offering. The proceeds from this issuance, along
         with the Corporation's $248,000 capital contribution for the Trust's
         common securities, were used to acquire $8.2 million aggregate
         principal amount of the Corporation's floating rate junior subordinated
         deferrable interest debentures due December 18, 2031 (the
         "Debentures"), which constitute the sole asset of the Trust. The
         interest rate on the Debentures and the capital securities is variable
         and adjustable quarterly at 3.60% over the three-month LIBOR, with an
         initial rate of 5.60%. A rate cap of 12.50% is effective through
         December 18, 2006. The Corporation has, through the Trust agreement
         establishing the Trust, the Guarantee Agreement, the notes and the
         related Debenture, taken together, fully irrevocably and
         unconditionally guaranteed all of the Trust's obligations under the
         capital securities.

         A summary of the Trust securities issued and outstanding follows:

<TABLE>
<CAPTION>
 ------------------------------------------------------------------------------------------------------------------
                                 Amount
                             Outstanding at
                                June 30,                                                           Distribution
                             --------------                Prepayment                                Payment
            Name               2002     2001    Rate      Option Date          Maturity             Frequency
 -------------------------  ----------- ----    ----     -----------------   -----------------      ------------
<S>                          <C>        <C>    <C>       <C>                <C>                    <C>
 Union Financial Statutory   $8,000,000  --     5.60%    December 18, 2006   December 18, 2031      Quarterly
 Trust I
</TABLE>

         The stated maturity of the Debentures is December 18, 2031. In
         addition, the Debentures are subject to redemption at par at the option
         of the Corporation, subject to prior regulatory approval, in whole or
         in part on any interest payment date after December 18, 2006. The
         Debentures are also subject to redemption prior to December 18, 2006 at
         107.5% of par after the occurrence of certain events that would either
         have a negative tax effect on the Trust or the Corporation or would
         result in the Trust being treated as an investment company that is
         required to be registered under the Investment Company Act of 1940.
         Upon repayment of the Debentures at their stated maturity or following
         their redemption, the Trust will use the proceeds of such repayment to
         redeem an equivalent amount of outstanding trust preferred securities
         and trust common securities.

         The Corporation has the right, at one or more times, to defer interest
         payments on the Debentures for up to twenty consecutive quarterly
         periods. All deferrals will end on an interest payment date and will
         not extend beyond December 18, 2031, the stated maturity date

                                       9

<PAGE>

         of the Debentures. If the Corporation defers interest payments on the
         Debentures, the Trust will also defer distributions on the capital
         securities. During any deferral period, each installment of interest
         that would otherwise have been due and payable will bear additional
         interest (to the extent payment of such interest would be legally
         enforceable) at the applicable distribution rate, compounded quarterly.

 Item 2.     Management's Discussion and Analysis of Financial Condition and
             Results of Operations

         Forward Looking Statements

         Management's discussion and analysis of financial condition and results
         of operations and other portions of this Form 10-Q contain certain
         "forward-looking statements" concerning the future operations of the
         Corporation and the Bank. Management intends to take advantage of the
         "safe harbor" provisions of the Private Securities Litigation Reform
         Act of 1995 and is including this statement for the express purpose of
         availing the Corporation of the protections of such safe harbor with
         respect to all "forward-looking statements" contained in our 10-Q to
         describe future plans and strategies. Management's ability to predict
         results or the effect of future plans or strategies is inherently
         uncertain. Factors which could effect actual results include interest
         rate trends, the general economic climate in the Corporation's and the
         Bank's market area and the country as a whole, the ability of the
         Corporation and the Bank to control costs and expenses, competitive
         products and pricing, loan delinquency rates, and changes in federal
         and state regulation. These factors should be considered in evaluating
         the "forward-looking statements," and undue reliance should not be
         placed on such statements.

         Financial Condition

         Assets

         Total assets of the Corporation increased $30,771,000, or 11.08%, to
         $308,523,000 at June 30, 2002 from $277,752,000 at September 30, 2001.
         Investments and mortgage-backed securities increased approximately
         $18,809,000, or 21.11%, from September 30, 2001 to June 30, 2002, due
         to the purchase of mortgage backed securities and municipal securities
         with the capital received through the trust preferred capital offering
         and borrowings. During the quarter ended June 30, 2002, management
         determined that a reclassification of the held to maturity securities
         was necessary in order to achieve certain interest rate risk management
         goals. This transfer was determined to be necessary due to the
         volatility in interest rates during the most recent 12-15 month period
         as management reclassified $9.5 million (amortized cost) of
         mortgage-backed securities to available for sale in order to sell them
         and restructure the Corporation's interest rate risk profile. In
         addition, management reclassified $8.5 million (amortized cost) of
         additional securities as available for sale. This transfer was done to
         comply with the FASB's position that following transfers of held to
         maturity securities for any purpose other than under unusual and
         unforeseen circumstances, any remaining held-to-

                                       10

<PAGE>

         maturity securities should be reclassified to available-for-sale. The
         net unrealized gain on the securities included in equity related to the
         reclassification of the securities was $131,000.

         Loans increased $8,771,000, or 5.55%, to $166,834,000 at June 30, 2002.
         The Corporation continues to focus on consumer and commercial lending
         with reduced emphasis on residential mortgage loans. Consumer and
         commercial loans outstanding during this period increased $17,837,000,
         or 41.51%, while outstanding residential mortgage loans decreased
         $8,134,000 or 6.89%.

         Liabilities

         Total liabilities increased $28,839,000, or 11.38% , to $282,215,000 at
         June 30, 2002 from $253,376,000 at September 30, 2001.

         Deposits increased $10,089,000 or 5.20%, to $204,168,000 at June 30,
         2002. The increase was due primarily to growth in certificates of
         deposits as a result of ongoing promotions for longer term products. In
         addition, transaction accounts increased 9.97% or $3,886,000 during
         this period as a result of a focus to reduce overall costs of funds.
         Borrowings from the Federal Home Loan Bank (FHLB) increased $5,993,000,
         or 13.03%, to $52,000,000 at June 30, 2002 from $46,007,000 at
         September 30, 2001. Securities sold under agreements to repurchase
         increased $6,000,000 to $17,000,000 at June 30, 2002 from $11,000,000
         at September 30, 2001. During this period, securities sold under
         agreement to repurchase provided a lower-cost funding alternative to
         Federal Home Loan Bank advances. The increases in borrowings from FHLB
         and securities sold under agreement to repurchase were utilized to fund
         additional growth for the Corporation. Other liabilities decreased
         $1,150,000, or 76.06%, to $362,000 at June 30, 2002 from $1,512,000 at
         September 30, 2001 due to the payment of state and federal income
         taxes.

         Shareholders' Equity

         Shareholders' equity increased $1,932,000 or 7.93% to $26,308,000 at
         June 30, 2002 from $24,376,000 at September 30, 2001 due to net income
         year to date, along with an increase in unrealized gains in securities
         available for sale, offset by the payment of $0.20 per share quarterly
         dividends.

         Trust Preferred Securities

         On November 14, 2001, the Corporation established the Trust as a
         business trust for the purpose of issuing trust preferred securities in
         a private placement conducted as part of a pooled offering sponsored by
         First Tennessee Capital Markets and Keefe Bruyette & Woods, Inc. On
         December 18, 2001, the Trust issued $8.0 million in trust preferred
         securities in the form of floating rate capital securities and issued
         approximately $248,000 of trust common securities to Union Financial.
         The Trust used the proceeds of these issuances to purchase $8.2

                                       11

<PAGE>

     million of Union Financial's floating rate junior subordinated deferrable
     interest debentures due December 18, 2031 (the "Debentures"). The interest
     rate on the Debentures and the trust preferred securities is variable and
     adjustable quarterly at 3.60% over three-month LIBOR, with an initial rate
     of 5.60%. A rate cap of 12.50% is effective through December 18, 2006. The
     Debentures are the sole assets of the Trust and are subordinate to all of
     Union Financial's existing and future obligations for borrowed money, its
     obligations under letters of credit and certain derivative contracts, and
     any guarantees by Union Financial of any such obligations. The trust
     preferred securities generally rank equal to the trust common securities in
     priority of payment, but will rank prior to the trust common securities if
     and so long as Union Financial fails to make principal or interest payments
     on the Debentures. Concurrently with the issuance of the Debentures and the
     trust preferred and common securities, Union Financial issued a guarantee
     related to the trust securities for the benefit of the holders.

     The Debentures, the common securities issued by the Trust, and the related
     income effects are eliminated within Union Financial's financial
     statements. Union Financial's obligations under the Debentures, the related
     debenture, the trust agreement relating to the trust securities, and the
     guarantee constitute a full and unconditional guarantee by Union Financial
     of the obligations of the Trust under the trust preferred securities.

     The stated maturity of the Debentures is December 18, 2031. In addition,
     the Debentures are subject to redemption at par at the option of Union
     Financial, subject to prior regulatory approval, in whole or in part on any
     interest payment date after December 18, 2006. The Debentures are also
     subject to redemption prior to December 18, 2006 at 107.5% of par after the
     occurrence of certain events that would either have a negative tax effect
     on the Trust or Union Financial or would result in the Trust being treated
     as an investment company that is required to be registered under the
     Investment Company Act of 1940. Upon repayment of the Debentures at their
     stated maturity or following their redemption, the Trust will use the
     proceeds of such repayment to redeem an equivalent amount of outstanding
     trust preferred securities and trust common securities.

     Union Financial used the proceeds of the offering for general corporate
     purposes, to fund dividends to shareholders and for contributions to the
     capital of the Bank.

     Liquidity

     Liquidity is the ability to meet demand for loan disbursements, deposit
     withdrawals, repayment of debt, payment of interest on deposits and other
     operating expenses. The primary sources of liquidity are savings deposits,
     loan sales and repayments, borrowings, maturity of securities and interest
     payments.

     While maturities and scheduled amortization of loans and securities are
     predictable sources of funds, deposit outflows and mortgage prepayments are
     greatly influenced by general interest rates, economic conditions and
     competition. The primary investing activities of the

                                       12

<PAGE>

     Corporation are the origination of residential one-to-four family mortgage
     loans and commercial and consumer loans, and the purchase of investment and
     mortgage-backed securities. These activities are funded primarily by
     principal and interest payments on loans and investment securities, deposit
     growth, securities sold under agreements to repurchase, the utilization of
     FHLB advances and the proceeds from the offering of trust preferred
     securities.
     During the nine months ended June 30, 2002, the Corporation's loan
     originations totaled $72.5 million. At June 30, 2002, the Corporation's
     investment in investment and mortgage-backed securities totaled $107.9
     million. Additionally, outstanding loan commitments (including commitments
     to fund credit lines) totaled $18.2 million at June 30, 2002. Management of
     the Corporation anticipates that it will have sufficient funds available to
     meet its current loan commitments.

     During the nine months ended June 30, 2002, total deposits increased $10.1
     million. Deposit flows are affected by the overall level of interest rates,
     the interest rates and products offered by the Corporation and its local
     competitors and other factors. The Corporation closely monitors its
     liquidity position on a daily basis. Certificates of deposit, which are
     scheduled to mature in one year or less from June 30, 2002, totaled $66.3
     million. The Corporation relies primarily on competitive rates, customer
     service, and long-standing relationships with customers to retain deposits.
     From time to time, the Corporation will also offer competitive special
     products to its customers to increase retention and to attract new
     deposits. Based upon the Corporation's experience with deposit retention
     and current retention strategies, management believes that, although it is
     not possible to predict future terms and conditions upon renewal, a
     significant portion of such deposits will remain with the Corporation. If
     the Corporation requires funds beyond its ability to generate them
     internally, additional sources of funds are available through FHLB advances
     and securities sold under agreements to repurchase. At June 30, 2002, the
     Corporation had $52 million of FHLB borrowings and $17.0 million of
     securities sold under agreements to repurchase.

     Capital Resources

     The capital requirement of the Bank consists of three components: (1)
     tangible capital, (2) core capital and (3) risk based capital. Tangible
     capital must equal or exceed 1.5% of adjusted total assets. Core capital
     must be a minimum of 4% of adjusted total assets and risk based capital
     must be a minimum of 8% of risk weighted assets.

     As of June 30, 2002, the Bank's capital position, as calculated under
     regulatory guidelines, exceeds these minimum requirements as follows
     (dollars in thousands):

                                                 Requirement   Actual    Excess
--------------------------------------------------------------------------------
     Tangible capital                                $ 4,553  $25,003   $20,450
     Tangible capital to adjusted total assets          1.50%    8.24%     6.74%


                                   13

<PAGE>

     Core capital                                  $12,170   $25,003   $12,833
     Core capital to adjusted total assets            4.00%     8.24%     4.24%

     Risk based capital                            $12,976   $26,700   $13,724
     Risk based capital to risk weighted assets       8.00%    16.46%     8.46%


     During the quarter ending December 31, 2001, the Corporation contributed $5
     million to the capital of the Bank from the proceeds of the trust preferred
     capital securities completed on December 18, 2001.

     The reported capital requirements are based on information reported in the
     OTS June 30, 2002 quarterly thrift financial report.

     Results of operations for the nine months ended June 30, 2002 and 2001

     General

     Net income increased $322,000, or 30.99%, to $1,361,000 for the nine months
     ended June 30, 2002 as compared to the same period in 2001. Increases in
     net interest income and non interest income were partially offset by an
     increase in the provision for loan losses and increases in non interest
     expense.

     Interest Income

     Interest income decreased $434,000, or 3.02%, for the nine months ended
     June 30, 2002 as compared to the same period in 2001. Interest income on
     loans decreased by 14.34%, or $1,588,000, to $9,485,000 for the nine months
     ended June 30, 2002 from $11,073,000 for the nine months ended June 30,
     2001, due primarily to declining interest rates along with higher net loan
     growth in prime-based commercial loans. Interest and dividends on
     investment and mortgage-backed securities increased $1,154,000, or 34.96%,
     for the nine months ended June 30, 2002 to $4,455,000 from $3,301,000
     during the same period in 2001. The increase was due primarily to increased
     investments in mortgage-backed securities and municipal securities.

     Interest Expense

     Interest expense decreased $1,494,000, or 16.76%, for the nine months ended
     June 30, 2002 as compared to the nine months ended June 30, 2001, due
     primarily to lower deposit rates from a declining interest rate
     environment. Interest expense on deposit accounts decreased $2,018,000, or
     30.23%, to $4,657,000 for the nine months ended June 30, 2002 from
     $6,675,000 during the same period in 2001. Interest expense on borrowings
     increased $274,000, or 12.23%, for the nine months ended June 30, 2002 as
     compared to the same period in the previous year due to a higher level of
     borrowings that was utilized to fund

                                       14

<PAGE>

     growth, offset by lower interest rates during the period. The Corporation
     has also extended borrowing terms during this period to improve interest
     rate risk exposure. The Corporation also recorded $250,000 for the nine
     months ended June 30, 2002 for interest expense on the trust preferred
     securities that were issued on December 18, 2001.

     Provision for Loan Loss

     During the nine months ended June 30, 2002, the provision for loan losses
     was $690,000 as compared to $45,000 for the same period in the previous
     year. The increase in the provision reflects the implementation of a risk
     weighted loan loss reserve methodology that is intended to more closely
     track the level of risk of different types of loans. During this same
     period, non-accrual loans increased $1,142,000 from $795,000 at September
     30, 2001 to $1,937,000 at June 30, 2002. The increased provision also
     reflects the Corporation's continued movement from longer term, fixed rate
     residential mortgage loans to shorter term, floating rate consumer and
     commercial loans. Consumer and commercial loans carry higher risk weighted
     rates in the reserve calculation as compared to residential mortgage loans.
     Management believes the Bank's loan loss allowance is adequate to absorb
     future loan losses inherent in the portfolio. The Bank's loan loss
     allowance at June 30, 2002 was approximately .99% of the Bank's outstanding
     loan portfolio and 87.56% of non-performing loans compared to .74% of the
     Bank's outstanding loan portfolio and 126.33% of non-performing loans at
     June 30, 2001.

     The provision for loan loss calculation includes a segmentation of loan
     categories subdivided by residential mortgage, commercial and consumer
     loans. Each category is rated for all loans including performing groups.
     The weights assigned to each performing group is developed from previous
     loan loss experience and as the loss experience changes, the category
     weight is adjusted accordingly. In addition, as the loan categories
     increase and decrease in balance, the provision for loan loss calculation
     will adjust accordingly.

     The following table sets forth information with respect to the Bank's
     non-performing assets at the dates indicated (dollars in thousands):

                                        June 30, 2002    September 30, 2001
                                        -------------    ------------------
     Non-accruing loans which are
     contractually past due 90 days
      or more:

     Real Estate:
     Residential                               $  375               $   626
     Commercial                                 1,161                   160
     Consumer                                     401                     9
                                               ------                ------
     Total                                     $1,937               $   795
                                               ======               =======


                                       15

<PAGE>

     Percentage of loans receivable, net                   1.16%      0.50%
                                                        =======     ======

     Percentage of allowance for loan losses
     to total loans receivable, net                        0.99%      0.67%
                                                        =======     ======

     Allowance for loan losses                          $ 1,696     $1,080
                                                        =======     ======

     Real estate acquired through
      foreclosure and repossessed
      assets, net of allowances                         $   365     $   77
                                                        =======     ======

     Non-accrual loans increased $1,142,000 to $1,937,000 for the period ending
     June 30, 2002 from $795,000 at September 30, 2001. The increase was due
     primarily to the increase in consumer and commercial loan non-accruals as a
     result of higher than state average unemployment from plant layoffs and
     closings in the surrounding communities. The increase in commercial loans
     was the result of the classification of one local loan that is well
     supported by commercial real estate. These loans are supported by
     mortgages, equipment, and automobiles that should reduce the risk of loss
     for the Corporation.

     Non Interest Income

     Total non interest income increased $66,000, or 7.60%, to $934,000 for the
     nine months ended June 30, 2002 from $868,000 for the same period in the
     previous year. Fees from financial services increased $411,000, or 60.18%,
     to $1,094,000 for the nine months ended June 30, 2002 from $683,000 for the
     same period in the previous year. The increase was due primarily to the
     development of new fee income programs that were implemented during the
     first quarter of the 2002 fiscal year. Loan servicing fee costs for the
     nine months ended June 30, 2002 were $129,000 compared to loan service fee
     costs of $28,000 for the nine months ended June 30, 2001. The increase in
     loan servicing fee costs was due to higher premium mortgage servicing
     rights amortization as a result of increased loan refinancing activity.
     There was no gain on the sale of loans for the nine months ended June 30,
     2002 compared to a gain of $210,000 for the same period in the previous
     year. The Corporation phased out its wholesale mortgage operation during
     the first quarter of fiscal year 2001 and no longer actively sells loans
     into the secondary market. Loss on the sale of investments was $31,000 for
     the nine months ended June 30, 2002 compared to a gain on sale of
     investments of $3,000 for the same period in the previous year. The loss on
     sale of investments for the current year was the result of the sale of
     investments with higher interest rate sensitivity and therefore the sale
     will improve interest rate exposure for the Corporation.

     Non Interest Expense

     For the nine months ended June 30, 2002, total non interest expense
     increased $280,000, or 5.99%, to $4,953,000 from $4,673,000 for the same
     period in 2001. Compensation and

                                      -16-

<PAGE>

          employee benefits decreased $63,000, or 2.85%, to $2,145,000 for the
          nine month period ended June 30, 2002 from $2,208,000 for the same
          period in 2001 due primarily to staff reductions resulting from the
          phase out of the wholesale mortgage operation that occurred during the
          first quarter of the previous fiscal year. Occupancy and equipment
          expense increased $208,000, or 21.67%, to $1,168,000 for the nine
          months ended June 30, 2002 from $960,000 for the same period in 2001,
          due to higher depreciation and equipment expense as a result of a new
          branch opening in the fourth quarter of the previous fiscal year.
          Professional services expense increased $63,000, or 33.16%, to
          $253,000 for the nine months ended June 30, 2002 from $190,000 for the
          same period in 2001 due to higher consultant and audit expenses. The
          Corporation currently uses consultants in the loan and credit
          administration areas for additional support. Advertising and public
          relations expense increased $9,000 or 9.68%, to $102,000 for the nine
          months ended June 30, 2002 from $93,000 for the same period in 2001
          due to additional advertising for special product promotions and
          customer surveys. Real estate operations expense increased $34,000, or
          242.86%, to $48,000 for the nine months ended June 30, 2002 from
          $14,000 for the same period in 2001 due to higher disposition costs
          for loan foreclosures and asset repossessions. Other expense increased
          $23,000, or 3.31%, to $718,000 for the nine months ended June 30, 2002
          from $695,000 for the same period in 2001 due primarily to higher
          items processing expense that resulted from new customer account
          features.

          Income Tax Expense

          The overall effective income tax rate for the Corporation was 24.76%
          for the nine month period ended June 30, 2002 compared to 35.39% for
          the same period in 2001. The reduction was due to increased
          investments in government municipal securities with the municipal
          securities investments at June 30, 2002 at $16,363,000 compared to
          $1,710,000 at June 30, 2001.

                                       17

<PAGE>

PART II  - OTHER INFORMATION

Item 1.  Legal Proceedings

                           The Corporation is involved in various claims and
                           legal actions arising in the normal course of
                           business. Management believes that these proceedings
                           are immaterial to the Corporation's financial
                           condition and results of operations.

Item 2.  Changes in Securities

                           The Corporation has the right, at one or more times,
                           unless an event of default exists under the floating
                           rate junior subordinated deferrable interest
                           debentures due December 18, 2031 (the "Debentures"),
                           to defer interest payments on the Debentures for up
                           to 20 consecutive quarterly periods. During this
                           time, the Corporation will be prohibited from
                           declaring or paying cash dividends on its common
                           stock.

Item 3.  Defaults upon Senior Securities

                           Not applicable.

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

                           None

Item 5.  Other Information

                           None

Item 6.  Exhibits and Reports on Form 8-K

                           Exhibits

                           99.1   Certification of Chief Executive Officer
                                    pursuant to 18 U.S.C Section 1350.
                           99.2   Certification of Chief Financial Officer
                                    pursuant to 18 U.S.C. Section 1350.

                           Reports on Form 8-K

                           None

                                       18

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                        UNION FINANCIAL BANCSHARES, INC.
                                  (Registrant)

Date: August 7, 2002                           By: /s/ Dwight V. Neese
                                                  ----------------------------
                                                  Dwight V. Neese, CEO

Date: August 7, 2002                           By: /s/ Richard H. Flake
                                                  ----------------------------
                                                  Richard H. Flake, CFO

                                       19