SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                   FORM 10-QSB

  [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
  OF 1934

                For the quarterly period 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 ______________


               Office of Thrift Supervision Docket Number: H-2736

                               AF BANKSHARES, INC.
                               -------------------
        (Exact name of small business issuer as specified in its charter)

              Federally Chartered                       56-2098545
              -------------------                       ----------
       (State or other jurisdiction of      (I.R.S. Employer Identification No.)
       incorporation or organization)

                           206 South Jefferson Avenue
                      West Jefferson, North CarolinA 28694
                      ------------------------------------
               (Address of principal executive office) (Zip code)

                                 (336)-246-4344
                                 --------------
                           (Issuer's telephone number)

                                       N/A
                                       ---
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check /X/ whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 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 / /

As of October 31, 1998 there were issued and outstanding 1,053,678 shares of the
Registrant's common stock, $.01 par value

Transitional Small Business Disclosure Format: Yes / / No /X/
                                                  


<PAGE>





<TABLE>
<CAPTION>
                                     AF BANKSHARES, INC.
                                           CONTENTS


PART I - FINANCIAL INFORMATION                                                          Pages
                                                                                        -----
<S>                                                                                     <C>
         Item 1.  Financial Statements
Condensed Consolidated Statements of Financial Condition as of
September 30, 1998 (unaudited) and June 30, 1998                                        1

Condensed Consolidated Statements of Income and Comprehensive Income for
the Three Months ended  September 30, 1998 and 1997 (unaudited)                         2

Condensed Consolidated Statements of Cash Flows for the Three Months ended
September, 1998 and 1997                                                                3 - 4

Condensed notes to financial statements                                                 5 - 7

         Item 2.  Management's Discussion and Analysis of Financial
         Condition And Results of Operations                                            8 - 13

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                     14
         Item 2.  Changes in Securities and Use of Proceeds                             14
         Item 3.  Defaults upon Senior Securities                                       14
         Item 4.  Submission of Matters to a Vote of Security Holders                   14
         Item 5.  Other Information                                                     14
         Item 6.  Exhibits and Reports on Form 8-K                                      14
         Signatures                                                                     15
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

AF BANKSHARES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF
SEPTEMBER 30, 1998 (UNAUDITED) AND JUNE 30, 1998

ASSETS
                                                                  September 30,      June 30,
                                                                     1998              1998
-------------------------------------------------------------------------------------------------
                                                                 (Unaudited)           Note
<S>                                                          <C>                <C>              
Cash and cash equivalents:
   Interest-bearing deposits                                 $       7,954,112  $      11,358,167
   Noninterest-bearing deposits                                      5,242,118          2,949,842
Certificates of deposit                                                198,000            198,000
Investment securities:
   Available for sale, at estimated market value                     7,774,459          8,094,739
   Held to maturity, at cost                                           100,000            100,000
   FHLB stock                                                          624,000            624,000
Loans receivable, net                                               75,189,892         72,627,870
Real estate owned                                                            -             38,115
Accrued interest receivable                                            500,902            409,559
Property and equipment, net                                          2,205,977          2,160,783
Goodwill, net                                                          275,467            285,010
Prepaid expenses and other assets                                      432,704            439,663
Deferred tax asset                                                     304,626            307,294
                                                             ------------------------------------
                              TOTAL ASSETS                   $     100,802,257  $      99,593,042
                                                             ====================================
LIABILITIES AND EQUITY
Liabilities:
   Deposits                                                  $      85,186,650  $      82,488,216
   Note payable-ESOP                                                   295,420            295,420
   Advances from Federal Home Loan Bank                              2,602,797          4,115,596
   Accrued expenses and other liabilities                              655,028            699,555
   Redeemable common stock held by the ESOP, net of
      earned ESOP shares                                               267,960            508,069
                                                             ------------------------------------
                              TOTAL LIABILITIES                     89,007,855         88,106,856
                                                             ------------------------------------
Commitments and Contingencies (Note 5)
Stockholders Equity:
   Preferred stock                                                           -                  -
   Common stock                                                         10,537             10,537
   Additional paid-in capital                                        4,584,777          4,580,151
   Deferred recognition and retention plan                            (628,922)          (678,576)
   Retained earnings, substantially restricted                       7,627,267          7,279,694
    Accumulated other comprehensive income, unrealized
      gain on securities available for sale, net tax                   298,243            294,380
                                                             ------------------------------------
                              TOTAL EQUITY                          11,891,902         11,486,186
                                                             ------------------------------------

                              LESS TREASURY SHARES                      97,500                  -

                                                             ------------------------------------
                              TOTAL LIABILITIES AND EQUITY   $     100,802,257  $      99,593,042
                                                             ====================================
</TABLE>

See Notes to Condensed Financial Statements.

Note:  Extracted from June 30, 1998 audited financial statements.

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARY


CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                       September 30,
---------------------------------------------------------------------------------------------------------------
                                                                                 1998                1997
---------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>               
Interest and dividend income:
   Loans                                                                $        1,685,282  $        1,595,376
   Investment securities                                                           127,228             102,165
   Interest-bearing deposits                                                       157,593              20,477
                                                                        --------------------------------------
                TOTAL INTEREST INCOME                                            1,970,103           1,718,018
                                                                        --------------------------------------
Interest on deposits and
   advances from FHLB                                                            1,039,718             872,105
                                                                        --------------------------------------
                NET INTEREST INCOME                                                930,385             845,913
Provision for loan losses                                                            5,000                   -
                                                                        --------------------------------------
                NET INTEREST INCOME
                AFTER PROVISION FOR LOAN
                LOSSES                                                             925,385             845,913
                                                                        --------------------------------------
Noninterest income                                                                 214,425             146,330
                                                                        --------------------------------------
Noninterest expense:
   Compensation and employee benefits                                              513,729             352,410
   Occupancy                                                                       108,492              83,013
   Federal insurance                                                                 5,786              10,645
   Data processing and outside service fees                                         47,101              71,610
   Other operating expense                                                         229,358             210,407
                                                                        --------------------------------------
                                                                                   904,466             728,085
                                                                        --------------------------------------
                INCOME BEFORE INCOME TAXES                                         235,344             264,158
Income taxes                                                                        88,069             102,787
                                                                        --------------------------------------
                NET INCOME                                              $          147,275  $          161,371
                                                                        ======================================

Other comprehensive income, unrealized holding gains (losses)
    arising during the period, net of tax                                            3,863             (10,146)
                                                                        --------------------------------------
                COMPREHENSIVE INCOME                                    $          151,138  $          151,225
                                                                        ======================================
Basic Earnings per share of common stock (Note 3)                       $             0.15  $             0.17
                                                                        ==================  ==================

Diluted Earnings per share of common stock (Note 3)                     $             0.15  $             0.17
                                                                        ==================  ==================

Dividends paid per share of common stock                                $             0.05  $             0.05
                                                                        ==================  ==================
</TABLE>

See Notes to Condensed Financial Statements.

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                                 Three Months Ended
                                                                                             1998                 1997
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                 <C>                  
Cash Flows from Operating Activities
    Net income (loss)                                                           $           147,275 $             161,371
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Provision for loan losses and REO                                                      5,000                     -
       Provision for depreciation                                                            83,131                45,284
       Change in operating assets and liabilities:
           Accrued interest receivable                                                      (91,343)              (18,772)
           Accrued interest payable                                                          (6,922)               (8,118)
           Prepaid and other assets                                                           6,959                (5,040)
           Accounts payable and other liabilities                                           (44,527)              (16,859)
           Other                                                                            393,004                73,936
                                                                                -----------------------------------------
                         NET CASH PROVIDED BY OPERATING ACTIVITIES                          492,577               231,802
                                                                                -----------------------------------------
Cash Flows from Investing Activities
    Purchases of securities available for sale                                             (799,564)                    -
    Proceeds from securities available for sale                                             800,000               450,000
    Net originations of loans receivable                                                 (2,567,022)           (3,265,989)
    Purchases of office properties and equipment                                           (121,932)             (307,620)
    Purchases of Insurance Agency                                                                 -              (320,000)
    Acquisition of foreclosed real estate                                                    38,115                     -
                                                                                -----------------------------------------
                         NET CASH USED IN INVESTING ACTIVITIES                           (2,650,403)           (3,443,609)
                                                                                -----------------------------------------
Cash Flows from Financing Activities
    Net increase in savings deposits                                                      2,705,356             2,565,769
    FHLB Advances                                                                        (1,512,799)            2,999,726
    Repurchase Stock                                                                        (97,450)                    -
    Dividends paid                                                                          (49,060)                    -
                                                                                -----------------------------------------
                         NET CASH PROVIDED BY FINANCING ACTIVITIES                        1,046,047             5,565,495
                                                                                -----------------------------------------
                         NET INCREASE IN CASH AND CASH EQUIVALENTS                       (1,111,779)            2,353,688
Cash and cash equivalents:
    Beginning                                                                            14,308,009             2,532,505
                                                                                -----------------------------------------

    Ending                                                                      $        13,196,230 $           4,886,193
                                                                                =========================================
</TABLE>

<PAGE>


AF BANKSHARES, INC. AND SUBSIDIARY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                        1998                  1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                   <C>                  
Supplemental Schedule of Cash and Cash Equivalents
    Cash:
       Interest-bearing deposits                                            $           7,954,112 $           3,799,338
       Noninterest-bearing                                                              5,242,118             1,086,855
                                                                            -------------------------------------------
                                                                            $          13,196,230 $           4,886,193
                                                                            ===========================================

Supplemental Disclosures of Cash Flow Information
    Cash payments for:
       Interest                                                             $           1,046,640 $             829,089
                                                                            ===========================================
       Income taxes                                                         $              76,500 $             100,000
                                                                            -------------------------------------------
</TABLE>

See Notes to Condensed Financial Statements.

<PAGE>

                               AF BANKSHARES, INC.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1.   NATURE OF BUSINESS

AF Bankshares, Inc. (the "Company") is a federally chartered stock holding
company for AF Bank (the "Bank") which conducts business from its main office
located in West Jefferson, North Carolina, branches in Jefferson and
Warrensville North Carolina operating under the trade name Ashe Federal Bank and
one branch in Alleghany County, North Carolina operating under the trade name,
Alleghany First Bank. The Bank has an insurance subsidiary operating under the
trade name AF Ashelande Insurance Service, in West Jefferson, AF Brown Insurance
Agency in Wilkesboro, and AF Insurance Services, Inc. in Sparta and Jefferson,
North Carolina. The Company has a brokerage service subsidiary, operating as AF
Securities, Inc., which serves Ashe and Alleghany Counties. On April 15, 1996,
the Board of Directors of Ashe Federal Bank (the "Bank") adopted a Plan of
Reorganization and the related Stock Issuance Plan pursuant to which the Bank
exchanged its federal mutual savings bank charter for a federal stock savings
bank charter, conducted a minority stock offering, and formed AsheCo, MHC a
mutual holding company which owns more than 50% of the common stock issued by
the Bank. The Bank conducted its minority stock offering in July and August of
1996 and the closing occurred on October 4, 1996. The Bank sold 461,779 shares
of common stock in the minority stock offering, which includes 36,942 shares
sold to its Employee Stock Ownership Plan (the "ESOP"), and issued 538,221
shares to the mutual holding company.

At the Bank's annual meeting held on December 8, 1997, the shareholders of Ashe
Federal Bank approved the Ashe Federal Bank 1997 Stock Option Plan; the Ashe
Federal Bank 1997 Recognition and Retention Plan; a change in the Bank's federal
stock charter, changing the corporate name to AF Bank and approved a plan of
reorganization providing for the establishment of AF Bankshares, Inc., as a
federally chartered stock holding company parent of the Bank. On June 16, 1998,
the bank completed its reorganization into a two-tier mutual holding company and
became a wholly owned subsidiary of the Company and the Company became a
majority owned subsidiary of AsheCo, MHC the Bank's mutual holding company.

On December 11, 1997, the Bank filed notice with the OTS of its intention to
open a branch office in Alleghany County to operate under the name Alleghany
First Bank. Subsequent to the notice filed with the OTS, the Bank published
public notice of its intent in the Alleghany News and the Jefferson Post. No
public objection was filed within the ten day period allowed under OTS
regulations; therefore the OTS notified the Bank that it had no objection to the
planned branch on January 15, 1998. The Bank opened the new office, Alleghany
First Bank, on March 18, 1998. Additionally, the Bank's insurance agency
subsidiary offers property, casualty, health and life insurance products within
the Alleghany facility.

Management believes that the Company's customers perceive "financial services"
to include three elements: funds transfer including checking accounts and
savings instruments, insurance and securities brokerage. Further, management
believes that failure to offer insurance and brokerage services will deter the
Company's growth and make retention of existing customers more difficult. During
the 1998 fiscal year, the Company acquired two insurance agencies to satisfy the
insurance portion of its customers' expectations. During the three month period
ending September 30, 1998, the Company began offering brokerage services through
a subsidiary, AF Securities, Inc. AF Securities, Inc. will initially conduct
brokerage services through a third party vendor but expects to receive approval
to operate with its broker/dealer registration prior to the end of the fiscal
year.

During the three months ended September 30, 1998, the Company purchased 5,000
shares of its common at $19.50 a share for a total price of $97,500. 


                                       5

<PAGE>

NOTE 2.   BASIS OF PRESENTATION

The accompanying unaudited financial statements (except for the statement of
financial condition at June 30, 1998, which is extracted from audited financial
statements) have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The results of operations for the three month
period ended September 30, 1998 are not necessarily indicative of the results of
operations that may be expected for the Company's fiscal year ending June 30,
1999.

The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 1997 financial statements, which are
included in the Company's form 10-KSB for the year ended June 30, 1998.

NOTE 3.   EARNINGS PER SHARE

The Bank's basic and diluted earnings per share for the three month period ended
September 30, 1998 is based on a weighted average of 990,173 shares, assumed to
be outstanding for the period. Options to purchase 21,322 shares of common stock
at $18.50 per share were outstanding during the first quarter of fiscal year
ended June 1999, and because the average market price is lower then the exercise
price of $18.50, the incremental shares, are not considered dilutive and are not
included in the calculation of diluted earnings per share. Shares owned by the
Bank's ESOP that have not been committed to be released are not considered to be
outstanding for the purposes of computing earnings per share. Earnings per share
has been calculated in accordance with Statement of Position 93-6 "Employers'
Accounting for Employee Stock Ownership Plans and Statement of Financial
Standards Number 128.

NOTE 4.   INCENTIVE PLAN

On August 19, 1997 the Bank's board of directors approved the AF Bank 1997
Recognition and Retention Plan (RRP), established a Recognition and Retention
Plan Trust to be used to hold awards to be made under the RRP and agreed to
issue an additional 53,678 shares of the Bank's stock to be issued as the shares
are vested by the eligible participants in the plan. On the same date, the
Bank's board of directors approved the AF Bank 1997 Stock Option Plan (Option
Plan) and approved the allocation of 21,322 authorized but unissued shares of AF
Bank Common Stock to be reserved for issuance upon exercise of options granted
under the Option Plan. Both the RRP and the Option Plan were approved by the
minority shareholders of AF Bank at the December 8, 1997 annual meeting. The
terms of the RRP provided that the eligible participants are vested at the
beginning of the period. The Company adopted the RRP and the Option Plan on the
effective date of the reorganization into a two-tier mutual holding company.


NOTE 5.   CASH DIVIDENDS

Dividends of $49,060 were accrued and distributed during the quarter.


                                       6

<PAGE>


NOTE 6.   COMPREHENSIVE INCOME

The Company was required to adopt Financial Accounting Standards Board Statement
No. 130, "Reporting Comprehensive Income", during the three months ended
September 30, 1998. This Statement establishes standard for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in full set of general-purpose financial statements. The financial
statements for the three months ended September 30, 1997 have also been restated
to reflect the new statement.


                                       7

<PAGE>





                               AF BANKSHARES, INC.
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATION

THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONSISTING OF
ESTIMATES WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
OTHER BUSINESS OF THE AF BANKSHARES, INC. THAT ARE SUBJECT TO VARIOUS FACTORS
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ESTIMATES.
FACTORS WHICH COULD INFLUENCE THE ESTIMATES INCLUDE CHANGES IN GENERAL AND LOCAL
MARKET CONDITIONS, LEGISLATIVE AND REGULATORY CONDITIONS AND AN ADVERSE INTEREST
RATE ENVIRONMENT.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998:

Total assets increased by $1.2 million or 1.2% to $100.8 million at September
30, 1998 from $99.6 million at June 30, 1998. The increase in assets was the
result of an increase of $2.6 million, or 3.5%, in loans receivable, net,
partially offset by a decrease of $1.1 million or 8.4% in cash and cash
equivalents, from June 30, 1998 to September 30, 1998. The increase in net loans
receivable is typical for the Bank, which operates in lending markets that have
had sustained loan demand over the last several years. Management believes that
a decrease in cash and cash equivalents is primarily a result of Federal Home
Loan Bank ("FHLB") advances that matured and were liquidated during the quarter.
The Bank's level of advances from the Federal Home Loan Bank (FHLB) decreased
$1.5 million from $4.1 million at June 30, 1998 to $2.6 million at September 30,
1998. The remaining FHLB advances have high prepayment penalties; therefore,
management intends to keep these advances until maturity.

The Company's net investment in property and equipment increased $45,000 or 2.1%
to $2.2 million at September 30, 1998, primarily a result of acquiring the
necessary equipment and furniture for AF Securities, Inc. AF Securities, Inc.
began operations on August 1, 1998; therefore, all furniture and equipment for
this subsidiary was purchased during the three month period ending September 30,
1998.

The Bank's deposits increased by $2.7 million, or 3.3%, from $82.5 million at
June 30, 1998 to $85.2 million at September 30, 1998. Management believes that
the increase in deposits is attributable to its marketing efforts directed
towards increasing balances in savings and transaction accounts. During the
three month period ending September 30, 1998, the Bank's savings and transaction
accounts increased $2.9 million, including 453 net new accounts.

At September 30, 1998, retained earnings increased $348,000 or 4.8% to $7.6
million dollars as a result of earnings of $147,000, an increase for a fair
market value adjustment for ESOP stock in the amount of $240,000 and a reduction
for dividends of $49,000. Additional paid in capital decreased by $93,000 or
2.0% to $4.5 million at September 30, 1998 as a result of repurchasing 5,000
shares of the Company's common stock. Deferred recognition and retention plan
("RRP") decreased by $50,000 as a result of recognizing the vesture of
additional RRP shares. At September 30, 1998, the Bank's regulatory capital
amounted to $11.5 million compared to $11.2 million at June 30, 1998, which as a
percentage of total assets was 11.4% and was considerably in excess of
regulatory capital requirements at such date.

The Bank's level of non-performing loans, defined as loans past due 90 days or
more, increased slightly to $65,000 at September 30, 1998 compared to $24,000 at
June 30, 1998. The Bank's level of non-performing loans has remained
consistently low in relation to prior periods and total loans outstanding. The
Bank recognized net charge offs of $6,000 during the three month period ended
September 30, 1998 compared to net charge offs of $10,500 for the comparable
period ended September 30, 1997. As a result and based on management's analysis
of its allowances, a $5,000 provision for additional loan loss allowance was
made for the three month period ended September 30, 1998.


                                       8

<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997:

GENERAL. Net income for the three month period ended September 30, 1998 was
$147,275 or $14,096 less than the $161,371 earned during the same periods in
1997. Changes in the net income during the comparable three month period were
primarily attributable to the start up expenses for the Company's brokerage
division, AF Securities, Inc., and the costs associated with the Bank's branch
office in Alleghany County, Alleghany First. The expenses incurred during the
three-month period ended September 30, 1997, from Alleghany First and AF
Securities, Inc. are projected to decrease during the future periods of the
fiscal year ending June 30, 1999. In management's opinion, there has not been a
material change in interest rate risk from the end of the Company's most recent
fiscal year.

INTEREST INCOME. Interest income increased by $252,085 or 14.67% from $1,718,018
for the three month period ended September 30, 1997 to $1,970,103 for the three
month period ended September 30, 1998. These increases were attributable to both
an overall increase of the Bank's loan portfolio and by a change in the volume
and mix of interest earning assets outstanding.

INTEREST EXPENSE. Interest expense increased by $167,613 or 19.22% from $872,105
for the three months ended September 30, 1997 to $1,039,718 for the three month
period ended September 30, 1998. The increase is the result of an increase in
the average outstanding balances in the level of deposits for the period ended
September 30, 1998 as compared to the similar period in 1997. However, the
average rate for deposits was lower at September 30, 1998 than for the
comparable period in 1997, and was an offsetting factor to interest expense.

NET INTEREST INCOME. Net interest income increased by $84,472 or 9.99% from
$845,913 for the three month period ended September 30, 1997 to $930,385 for the
three months ended September 30, 1998. The increase is a result of increased
average outstanding balances in interest earning assets and an improved interest
rate spread in effect during the period, primarily due to increasing commercial
loan balances. The Bank's interest rate spread increased primarily because of
lower average interest rates on its deposits, while the average yield on loans
was higher during the three month periods ended September 30, 1998 as compared
to the same periods in 1997.

PROVISION FOR LOAN LOSSES. Management made an additional $5,000 provision for
loan losses during the three month period ended September 30, 1998. During the
same period in 1997, no provisions were made. Provisions, which are charged to
operations and resulting loan loss allowances, are amounts that the Bank's
management believes will be adequate to absorb potential losses on existing
loans that may become uncollectible. Loans are charged off against the allowance
when management believes that collection is unlikely. The evaluation to increase
or decrease the provisions and resulting allowances is based both on prior loan
loss experience and other factors, such as changes in the nature and volume of
the loan portfolio, overall portfolio quality and current economic conditions.

The Bank made an additional provision for loan loss allowances during the three
month period ended September 30, 1998 based upon an analysis of its reserves.
The bank's level of non-performing loans remained consistently low in relation
to prior periods and total loans outstanding during the three month period ended
September 30, 1998; however, due to changes in the mix of the Bank's loan
portfolio, management determined it was necessary to make an additional
provision. At September 30, 1998, the Bank's level of general valuation
allowances for loan losses amounted to $1.1 million which management believes is
adequate to absorb any existing losses in its loan portfolio.

NON-INTEREST INCOME. Non-interest income increased by $68,095 from $146,330 for
the three month period ended September 30, 1997 to $214,425 for the three months
ended September 30, 1998. The increase was primarily attributable to commission
income earned by AF Securities, Inc. totaling $15,021 and increased 


                                       9

<PAGE>

revenues generated from insurance sales.

NON-INTEREST EXPENSE. Non-interest expense increased by $176,381 or 24.23% from
$728,085 for the three months ended September 30, 1998 to $904,466 for the three
months ended September 30, 1998. Increases for non-interest expense for the
three month period are primarily attributable to compensation costs and
occupancy expenses. Compensation costs increased by $161,319 for the three month
period ended September 30, 1998, primarily as the result of the cost of the
Company's 1997 Management Recognition and Retention Plan, AF Securities
employees' salaries, and Alleghany First employees' salaries. Occupancy cost
increased by $25,479 for the three month period ended September 30, 1998,
because of the costs associated with the new branch location in Sparta, AF
Securities, Inc. and computer equipment acquired to address the year 2000
problem.

CAPITAL RESOURCES AND LIQUIDITY.

The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating
activities, expansion of the deposit base, borrowings, through the sale or
maturity of investments, the ability to raise equity capital, or maintenance of
shorter term interest-earning deposits.

During the three month period ended September 30, 1998, cash and cash
equivalents, a significant source of liquidity, totaled $13.2 million. A
significant portion of this amount is a direct result of the Bank selling loans
in the secondary market and retaining the proceeds in the Bank's Federal Home
Loan Bank account.

As a federally chartered savings bank, AF Bank must maintain a daily average
balance of liquid assets equal to at least 4% of withdrawable deposits and
short-term borrowings. During the quarter ended December 31, 1997 the OTS
reduced the required level of liquidity to 4% from 5%, eliminated the short term
liquidity requirement and imposed a new requirement that savings associations
generally maintain sufficient liquidity to ensure safe and sound operations. The
Bank's liquidity ratio at September 30, 1998, as computed under OTS regulations,
was considerably in excess of such requirements. Given its excess liquidity and
its ability to borrow from the Federal Home Loan Bank, the Bank believes that it
will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, and other cash requirements.

ASSET/LIABILITY MANAGEMENT.

The Company's asset/liability management is focused primarily on evaluating and
managing the Company's net interest income in relation to various risk criteria.
Factors beyond the Company's control, such as the effects of changes in market
interest rates and competition, may also have an impact on the management of
interest rate risk.

In the absence of other factors, the Company's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Inversely, the Company's yields and cost of funds will decrease when market
rates decline. The Company is able to manage these fluctuations to some extent
by attempting to control the maturity or rate adjustments of its
interest-earning assets and interest-bearing liabilities over given periods of
time. One of the Company's tools to monitor interest rate risk is the
measurement of sensitivity of its net portfolio value to changes in interest
rates.

In order to minimize the potential effects of adverse material and prolonged
increases in market interest rates on the Company's operations, management has
implemented an asset/liability program designed to improve the Company's
interest rate risk exposure. The program emphasizes that originations of
five-year fixed rate balloon 


                                       10

<PAGE>

mortgages, adjustable rate mortgages, selling long term fixed rate loans to the
secondary market, shorter term consumer and commercial loans, the investment of
excess cash in short or intermediate term interest-earning assets, and the
solicitation of deposit accounts that can be repriced rapidly.

Although the Company's asset/liability management program has generally helped
to decrease the exposure of its earnings to interest rate increases, the Company
continues to be susceptible to increased levels of interest rates, which will
adversely affect earnings during prolonged periods of rising interest rates and
positively affect earnings during prolonged periods of interest rate declines.

NET PORTFOLIO VALUE.

All federally regulated financial institutions are required to measure the
exposure to changes in interest rates. Institutions with assets of less than
$500 million may rely on outside sources of measurement such as that provided by
the Office of Thrift Supervision (OTS) and the Federal Home Loan Bank (FHLB).
The purpose is to determine how changes in interest rates affect the estimated
value or Net Portfolio Value ("NPV") of the insured institution's statement of
financial condition under several immediate or "shock" changes in market rates.
Since the timing of repricing opportunities for interest-earning assets and
interest-bearing liabilities are different, the impact of shock changes will
have a negative, neutral or positive impact on the NPV of the bank based on the
structure of the bank's assets and liabilities. Thus, NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities and
off-balance sheet contracts. Generally, the level of interest rate risk is
measured in a 200 basis point shock environment that has the most negative
impact on the Company.

The Company's banking subsidiary, AF Bank, has historically been a mortgage
lender which means that it generally has longer terms before repricing its
assets than does its interest bearing liabilities or deposit accounts;
therefore, a rising rate environment will have the most negative impact on the
NPV of the Company. Management has implemented a strategy of limiting the terms
of mortgage loans that it cannot sell in the secondary market, increasing the
level of loans tied more closely to market interest rates such as the prime
rate, and generally reducing the terms of loans that the Company offers for
portfolio. The following table presents the Company's NPV at June 30, 1998 as
calculated by the OTS, based on information provided to the OTS by the Company.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                                         NPV as % of PV (5) of
-----------------------------------------------------------------------------------------------------------------------
                              Net Portfolio Value                                               Assets
                              -------------------                                               ------
-----------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------
   CHANGE IN RATES          $ AMOUNT       $ CHANGE (1)      % OF CHANGE (2)       RATIO (3)          CHANGE (4)
   ---------------          --------       ------------      ----------------      ---------          ----------
-----------------------------------------------------------------------------------------------------------------------
                                     (Dollars in Thousands)
-----------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>                  <C>              <C>                <C>
       +400 bp               10,868           -2,621               -19%             11.11%             -211 bp
-----------------------------------------------------------------------------------------------------------------------
       +300 bp               11,785           -1,703               -13%             11.89%             -133 bp
-----------------------------------------------------------------------------------------------------------------------
       +200 bp               12,593            -895                -7%              12.55%              -67 bp
-----------------------------------------------------------------------------------------------------------------------
       +100 bp               13,212            -276                -2%              13.03%              -18 bp
-----------------------------------------------------------------------------------------------------------------------
         0 bp                13,488                                                 13.22%
-----------------------------------------------------------------------------------------------------------------------
       -100 bp               13,835             347                +3%              13.45%              +24 bp
-----------------------------------------------------------------------------------------------------------------------
       -200 bp               14,269             780                +6%              13.76%              +54 bp
-----------------------------------------------------------------------------------------------------------------------
       -300 bp               14,868            1,380               +10%             14.19%              +98 bp
-----------------------------------------------------------------------------------------------------------------------
       -400 bp               15,590            2,102               +16%             14.72%             +150 bp
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the excess (deficiency) of NPV assuming the indicated change in
    interest rates minus the estimated NPV assuming no change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
    estimated NPV assuming no change in interest rates.


                                       11

<PAGE>

(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
    indicated change in interest rates over the estimated NPV ratio assuming no
    change in interest rates.
(5) PV means present value.
(6) Certain shortcomings are inherent in the methodology used in the above
    table. Modeling changes in NPV requires the making of certain assumptions
    that may tend to oversimplify the manner in which actual yields and costs
    respond to changes in market interest rates. First, the models assume that
    the composition of the Bank's interest sensitive assets and liabilities
    existing at the beginning of a period remains constant over the period being
    measured. Second, the models assume that a particular change in interest
    rates is reflected uniformly across the yield curve regardless of the
    duration to maturity or repricing of specific assets and liabilities.
    Accordingly, although the NPV measurements do provide an indication of the
    Company's interest rate risk exposure at a particular point in time, such
    measurements are not intended to provide a precise forecast of the effect of
    changes in market interest rates on the Company's net interest income.
    Furthermore, in times of decreasing interest rates, the value of fixed-rate
    assets could increase in value and the lag in repricing of interest rate
    sensitive assets could be expected to have a positive effect on the Company.

Management believes that the NPV method of assessing the Company's exposure to
interest rate risk and potential reductions in net interest income is a useful
tool for measuring risk. Management also believes that the charts reflect the
positive impact of strategies to reduce interest rate risk. The strategies that
have reduced the level of interest rate risk under an increasing rate assumption
will continue to reduce the impact or rising rates as long term mortgages are
sold and replaced with shorter term mortgage and non-mortgage loans with rates
that can be adjusted to more closely simulate market rates of interest.
Management believes that a strong equity capital position and the existence of
the corporate authority to raise additional capital as necessary act as valuable
tools to absorb interest rate risk.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and accompanying footnotes have been prepared in
accordance with GAAP, which require the measurement of financial position and
operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The assets and liabilities of the Bank are primarily monetary in nature and
changes in market interest rates have a greater impact on the Bank's performance
than do the effects of inflation.

IMPACT OF THE YEAR 2000.

 A lot of attention has been given to the impact that the year 2000 date change
will have on businesses, utilities and other organizations that rely on
computerized systems to help run their operations. The year 2000 date change can
affect any system that uses computer software or computer chips including
automated equipment and machinery. For example, many computer programs and
computer chips store the calendar year portion of the date as two digits rather
than four digits. These software programs and chips record the year 1999 as
"99". This approach works until the year 2000 when the "00" may be interpreted
as the year 1900 instead of the year 2000. Banks use computer systems to perform
financial calculations, transfer funds, record deposits and loan payments, run
security systems and vaults and a myriad of other functions. Because banks rely
heavily on their computer systems, the Federal Financial Institutions
Examination Council ("FFIEC") has placed significant emphasis on the problems
surrounding the year 2000 issues and has required financial institutions to
document the assessment, testing and corrections made to ready their computer
systems and programs for the year 2000 date change. The FFIEC and OTS have
strict regulations, guidelines, and milestones in place that each FDIC insured
financial institution must follow in order to remain operational. The Company's
board of directors has remained informed of the Company's position and progress
in its year 2000 project.

The Company's year 2000 project remains on schedule according to the guidelines
set forth by the FFIEC. The 


                                       12

<PAGE>

Company replaced all of its computer systems in the fall of 1997 with year 2000
compliant systems. The Company's internal software remediation, replacement, and
testing efforts are approximately 85% complete with full completion scheduled
for December 1998. The Company's most critical external exposure to year 2000
system problems is with its data processing provider, Fiserv Orlando. Fiserv
renovated its systems in June 1998 and is currently testing its remediation
efforts. Fiserv plans to have all of its systems year 2000 compliant by December
1998. In addition, the Company has contacted its major customers and vendors to
inquire about their progress in addressing the year 2000 problem and does not
believe that the problems of such customers and vendors will have a material
adverse effect on the Company or its operations. The Company will continue to
monitor the progress of these parties in addressing the year 2000 problem as the
new millennium approaches.

As noted, the Company has replaced all of its computers and printers at a cost
of $244,000. Software costs amounted to $101,000 and include internal software
for accounts payable, fixed assets, payroll and insurance agency management.
Management believes that all material costs to prepare for the year 2000 that
are under the direct control of the Company have been incurred. The remaining
costs are expected to amount to less than $10,000 and relate primarily to travel
in order to test Fiserv Orlando's renovations to its software.

The year 2000 problems can affect the Company's operation in a number of ways
but the mission critical issue is maintaining customers' account information
including tracking deposits, interest accruals and loan payments. The Company is
dependent upon electricity, telephone lines, computer hardware and Fiserv
Orlando's data processing capacity.

The Company is in contact with its electric utility and the utility's staff
regularly updates the Company as to its progress. Assurances have been given
that no major problems exist and that the electric company will have all year
2000 problems addressed well before December 31, 1999. If the electric utility
is unable to certify that its renovation is completed by June 30, 1999, the
Company will acquire portable generators with sufficient capacity to run the
system servers and at least one work station in each branch office.

The Company uses two telephone utilities: Skyline Telephone Membership
Corporation and Sprint. Skyline Telephone has tested its system with the Company
and had no date related problems. Service between Fiserv Orlando and the Company
is the responsibility of Fiserv Orlando. Fiserv will certify to communications
by the end of 1998.

To prevent difficulties in the event there is an unforeseen interruption in
either telephone or electrical service when the year changes, the Company will
print hard copies of all account information. In addition, the Company will
download all account information into programs on the Company's hardware that
will allow bank personnel to extract customer information without regard to
outside sources. Additionally, the Company stores customer information on
retrievable media in house. The Company has tested its equipment for
compatibility with the year 2000. The insurance agency's computer hardware is
tested to be compliant with the year 2000 and tracking program will be compliant
by December 31, 1998.

Fiserv Orlando has responded to the Company that renovation of its program is
virtually complete. Representatives of the Company are scheduled to test the
Fiserv program with the Company's applications in November 1998. All
transactions are to be tested using the Company's data and procedures and any
additional corrections are to be made on or before December 31, 1998. Fiserv has
reported that the progress of the update is on schedule. In the event that
Fiserv Orlando is unable to make the necessary corrections to its programs to
accommodate the Year 2000, beginning in December 1998, the Company will convert
its data to one of the other Fiserv programs that is able to operate in the 2000
environment.


<PAGE>


                               AF BANKSHARES, INC.


Part II.  OTHER INFORMATION


        Item 1.  Legal Proceedings
                  The Company is not engaged in any material legal proceedings
                  at the present time other than those proceedings within the
                  normal course of business.

        Item 2.  Changes in Securities and Use of Proceeds
                  Not applicable


        Item 3.  Defaults Upon Senior Securities
                  Not applicable

        Item 4.  Submission of Matters to a Vote of  Security Holders
                 Not applicable

        Item 5.  Other Information
                  Not applicable

        Item 6.  Exhibits and Reports on Form 8-K
                 Exhibit 27.1  Financial Data Schedule*


*    Filed in electronic format only.  






                                       14

<PAGE>

SIGNATURES


        Pursuant to the requirements 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.

                                       AF BANKSHARES, INC.


Dated: November 6, 1998           By: /s/ James A. Todd
                                     -------------------------------------------
                                     James A. Todd
                                     President and Chief Executive Officer

Dated: November 6, 1998           By: /s/ Melanie Paisley Miller
                                     -------------------------------------------
                                     Melanie Paisley Miller
                                     Senior Vice President, Secretary,
                                     Treasurer and Chief Financial Officer


                                       15