SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                   FORM 10-QSB

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

         For the quarterly period ended MARCH 31, 2004
                                        --------------

OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

         For the transition period from _____________________ to


                           Commission File No: 0-24479

                               AF FINANCIAL GROUP
                               ------------------
        (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)

                               21 EAST ASHE STREET
                      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)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes U    No
                                                             ----     ----

As of April 30, 2004 there were 1,049,838 shares of the Registrant's common
stock outstanding, $.01 par value.

Transitional Small Business Disclosure Format: Yes    No  U
                                                  ---    ---


<PAGE>



                               AF FINANCIAL GROUP
                                    CONTENTS

PART I - FINANCIAL INFORMATION                                            PAGES
                                                                          -----

         Item 1. Financial Statements

Condensed Consolidated Statements of Financial Condition
as of March 31, 2004 (unaudited) and June 30, 2003                            1

Condensed Consolidated Statements of Income and
Comprehensive Income(unaudited) for the Three
and Nine Months ended March 31, 2004                                          2

Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months ended
March 31, 2004 and 2003                                                       3

Notes to Condensed Consolidated Financial Statements                      4 - 8

         Item 2. Management's Discussion and Analysis                    9 - 17
         Item 3. Controls and Procedures                                     18

PART II - OTHER INFORMATION

         Item 1. Legal Proceedings                                           19
         Item 2. Changes in Securities and Small Business Issuer
                 Purchases of Equity Securities                              19
         Item 3. Defaults upon Senior Securities                             19
         Item 4. Submission of Matters to a Vote of Security Holders         19
         Item 5. Other Information                                           19
         Item 6. Exhibits and Reports on Form 8-K                            19
         Signatures                                                          20

<PAGE>
AF FINANCIAL GROUP AND SUBSIDIARIES
<TABLE>
<CAPTION>


CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2004 AND JUNE 30, 2003


ASSETS
                                                                   March 31,      June 30,
                                                                     2004           2003
----------------------------------------------------------------------------------------------
                                                                  (Unaudited)        (*)
<S>                                                                  <C>          <C>
Cash and cash equivalents:
   Interest-bearing deposits                                         $ 328,246    $ 6,151,744
   Noninterest-bearing deposits                                      8,179,368      7,920,274
Securities held to maturity                                            385,000        100,000
Securities available for sale                                        5,162,043      7,596,814
Federal Home Loan Bank stock                                         1,332,300      1,057,300

Loans                                                              173,248,523    157,368,574
Less allowance for loan losses                                      (1,141,625)    (1,110,684)

         Loans receivable, net                                     172,106,898    156,257,890
                                                                 -------------  -------------
Real estate owned                                                            -         43,000
Office properties and equipment, net                                10,556,984      8,691,947
Accrued interest receivable on loans                                   810,759        787,675
Accrued interest receivable on investment securities                    36,650         77,833
Prepaid expenses and other assets                                    1,448,647      1,342,633
Deferred income taxes, net                                             354,339        349,223
Goodwill                                                             1,676,446      1,596,446
                                                                 -------------  -------------
                              TOTAL ASSETS                       $ 202,377,680  $ 191,972,779
                                                                 =============  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Savings deposits                                              $ 154,880,994  $ 149,571,086
   Notes payable                                                     1,067,576      1,140,296
   Note payable - ESOP                                                 107,420        107,420
   Advances from Federal Home Loan Bank                             26,644,248     21,145,669
   Accounts payable and other liabilities                            1,614,420      1,568,612
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares                                             666,707        479,412
  Capital securities                                                 5,000,000      5,000,000
                                                                 -------------  -------------
                              TOTAL LIABILITIES                    189,981,365    179,012,495
                                                                 -------------  -------------

Commitments and Contingencies

Stockholders' Equity:
    Commonstock, par value $.01 per share; authorized 5,000,000
          shares; 1,053,678 issued and 1,049,838 outstanding
          shares at March 31, 2004 and June 30, 2003                    10,537         10,537
   Additional paid-in capital                                        4,647,922      4,619,570
   Retained earnings, substantially restricted                       7,761,962      8,346,320
   Accumulated other comprehensive income                               50,774         58,737
                                                                 -------------  -------------
                                                                    12,471,195     13,035,164
    Less the cost of 3,840 shares of treasury stock                    (74,880)       (74,880)
                                                                 -------------  -------------
             TOTAL STOCKHOLDERS' EQUITY                             12,396,315     12,960,284
                                                                 -------------  -------------
             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY          $ 202,377,680  $ 191,972,779
                                                                 =============  =============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

* The Condensed Consolidated Statement of Financial Condition as of June 30,
2003 has been derived from audited consolidated financial statements.

                                       1
<PAGE>
<TABLE>
<CAPTION>

AF FINANCIAL GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003


                                                                                   Three Months Ended            Nine Months Ended
                                                                                        March 31,                    March 31,
-------------------------------------------------------------------------------------------------------- ---------------------------
                                                                                 2004          2003          2004           2003
-------------------------------------------------------------------------------------------------------- ---------------------------
<S>                                                                          <C>           <C>            <C>            <C>
Interest and dividend income:
   Loans                                                                     $ 2,577,821   $ 2,623,889    $ 7,735,239    $ 8,213,007
   Investment securities                                                          50,117        87,477        167,925        276,942
   Interest-bearing deposits                                                       5,194        22,668         37,566         48,192
                                                                             -----------   -----------    -----------    -----------
                   TOTAL INTEREST INCOME                                       2,633,132     2,734,034      7,940,730      8,538,141
                                                                             -----------   -----------    -----------    -----------
Interest expense:
   Savings deposits                                                              649,244       834,985      2,065,421      2,621,429
   Federal Home Loan Bank advances                                               268,309       264,501        837,141        788,032
   Notes payable                                                                  12,378        17,232         45,835         51,778
   Capital securities                                                            125,668       123,152        386,130        382,979
                                                                             -----------   -----------    -----------    -----------
                   TOTAL INTEREST EXPENSE                                      1,055,599     1,239,870      3,334,527      3,844,218
                                                                             -----------   -----------    -----------    -----------
                   NET INTEREST INCOME                                         1,577,533     1,494,164      4,606,203      4,693,923
Provision for loan losses                                                           --          35,000        544,000        182,700
                                                                             -----------   -----------    -----------    -----------
                   NET INTEREST INCOME AFTER
                   PROVISION FOR LOAN LOSSES                                   1,577,533     1,459,164      4,062,203      4,511,223
                                                                             -----------   -----------    -----------    -----------

Noninterest income:
   Insurance commissions                                                         585,693       712,723      1,771,166      1,842,023
   Gain on investments available for sale                                           --           3,181           --            3,181
   Other                                                                         329,310       286,230      1,003,602        845,113
                                                                             -----------   -----------    -----------    -----------
                                                                                 915,003     1,002,134      2,774,768      2,690,317
                                                                             -----------   -----------    -----------    -----------
Noninterest expense:
   Compensation and employee benefits                                          1,377,132     1,188,733      4,122,339      3,757,990
   Occupancy and equipment                                                       329,245       299,424        946,318        861,841
   Computer processing charges                                                   157,553       122,183        454,059        391,039
   Other                                                                         557,133       502,745      1,794,934      1,562,503
                                                                             -----------   -----------    -----------    -----------
                                                                               2,421,063     2,113,085      7,317,650      6,573,373
                                                                             -----------   -----------    -----------    -----------
                   INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)                    71,473       348,213       (480,679)       628,167
   Income taxes (benefit)                                                         48,617       151,217       (128,963)       287,415
                                                                             -----------   -----------    -----------    -----------
                   NET INCOME (LOSS)                                              22,856       196,996       (351,716)       340,752
                                                                             -----------   -----------    -----------    -----------
   Other comprehensive income, net of tax:
     Unrealized (loss) gain on securities, net of tax                              9,193       (11,650)        (7,963)        14,204
             Less:  reclassification adjustment for gains
             included in net income, net of tax                                       --         2,195             --          2,195
                                                                             -----------   -----------    -----------    -----------
                  COMPREHENSIVE INCOME (LOSS)                                $    32,049   $   183,151    $  (359,679)   $   352,761
                                                                             ===========   ===========    ===========    ===========

   Basic Earnings per share of common stock (Note 3)                         $      0.02   $      0.19    $     (0.34)   $      0.33
                                                                             ===========   ===========    ===========    ===========
   Diluted Earnings per share of common stock (Note 3)                       $      0.02   $      0.19    $     (0.34)   $      0.33
                                                                             ===========   ===========    ===========    ===========

   Basic weighted average shares outstanding                                   1,041,560     1,041,708      1,040,628      1,040,776
                                                                             ===========   ===========    ===========    ===========
   Diluted weighted average shares outstanding                                 1,044,342     1,041,708      1,040,628      1,040,776
                                                                             ===========   ===========    ===========    ===========

   Cash dividends declared per share                                         $      0.05   $      0.05    $      0.15    $      0.15
                                                                             ===========   ===========    ===========    ===========

</TABLE>

  See Notes to Condensed Consolidated Financial Statements.

                                       2
<PAGE>

AF FINANCIAL GROUP AND SUBSIDIARIES

<TABLE>
<CAPTION>


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003

                                                                                                           Nine Months Ended
                                                                                                                 March 31,
                                                                                                           2004               2003
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>                <C>
Cash Flows from Operating Activities
    Net income (loss)                                                                               $   (351,716)      $    340,752
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
         Provision for loan losses                                                                       544,000            182,700
         Depreciation                                                                                    655,075            579,461
         ESOP Expense                                                                                     56,128             38,667
    Change in operating assets and liabilities:
         Accrued interest receivable                                                                      18,099            149,917
         Accrued interest payable                                                                       (131,566)            (3,110)
         Prepaid expense and other assets                                                                (30,277)           (71,657)
         Accounts payable and other liabilities                                                          141,619           (223,266)
                                                                                                    ------------       ------------
                         NET CASH PROVIDED BY OPERATING ACTIVITIES                                       901,362            993,464
                                                                                                    ------------       ------------
Cash Flows from Investing Activities
    Increase in Federal Home Loan Bank stock                                                            (275,000)          (308,000)
    Purchases of investments held to maturity                                                           (380,000)               -
    Proceeds from maturities of investments held to maturity                                              95,000                -
    Purchases of securities available for sale                                                        (2,000,000)        (3,230,687)
    Proceeds from principal repayment and maturities of securities available for sale                  4,383,994          6,114,711
    Net originations of loans receivable                                                             (16,415,153)       (12,352,964)
    Investment in insurance agency assets                                                                (80,000)               -
    Purchases of office properties and equipment                                                      (2,540,151)        (2,742,948)
    Proceeds from sale of real estate owned                                                               47,145            273,520
                                                                                                    ------------       ------------
                         NET CASH USED IN INVESTING ACTIVITIES                                       (17,164,165)       (12,246,368)
                                                                                                    ------------       ------------
Cash Flows from Financing Activities
    Net increase in savings deposits                                                                   5,345,663         12,297,971
    FHLB Advances, net                                                                                 5,498,579          2,236,198
    Notes Payable (repayments), net                                                                      (72,720)            16,836
    Dividends paid                                                                                       (73,123)          (154,399)
                                                                                                    ------------       ------------
                         NET CASH PROVIDED BY FINANCING ACTIVITIES                                    10,698,399         14,396,606
                                                                                                    ------------       ------------
                         NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         (5,564,404)         3,143,702
Cash and cash equivalents:
    Beginning                                                                                         14,072,018         11,219,573
                                                                                                    ------------       ------------

    Ending                                                                                          $  8,507,614       $ 14,363,275
                                                                                                    ============       ============
</TABLE>

                                       3

<PAGE>


                               AF FINANCIAL GROUP
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.NATURE OF BUSINESS

AF Financial Group (the "Company") is a federally chartered stock holding
company for AF Bank (the "Bank"), AF Insurance Services, Inc. (an independent
insurance agency) and AF Brokerage, Inc. (a registered broker/dealer, member
NASD and SIPC). AF Bank conducts business from its main office located in West
Jefferson, North Carolina, with branches in Boone, Jefferson, Sparta,
Warrensville, and West Jefferson, North Carolina. Headquartered in West
Jefferson, North Carolina, AF Insurance Services, Inc., has branches in Boone,
Elkin, Jefferson, Lenoir, Sparta, West Jefferson, and North Wilkesboro, North
Carolina. AF Brokerage, Inc. serves Ashe, Alleghany, Wilkes and Watauga counties
in North Carolina.

NOTE 2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements (except
for the condensed consolidated statement of financial condition at June 30,
2003, which is derived from audited consolidated financial statements) have been
prepared in accordance with accounting principles generally accepted in the
United States ("US GAAP") for interim financial information and with the
instructions to Form 10-QSB of Regulation S-B. Accordingly, they do not include
all of the information and footnotes required by US GAAP 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 and nine month periods ended
March 31, 2004 are not necessarily indicative of the results of operations that
may be expected for the Company's fiscal year ending June 30, 2004.

Certain amounts in the three and nine month periods ended March 31, 2003
financial statements have been reclassified to conform to the three and nine
month periods ended March 31, 2004 presentation. The reclassifications had no
effect on net income or stockholders' equity as previously reported.

The accounting policies which follow are as set forth in Note 1 of the Notes to
Consolidated Financial Statements in the Company's 2003 audited consolidated
financial statements, which are included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2003. This quarterly report should be read in
conjunction with such annual report.

NOTE 3. EARNINGS PER SHARE

The Company's basic and dilutive earnings per share for the three month period
ended March 31, 2004 are based on weighted averages of 1,041,560 and 1,044,342
shares, respectively, assumed to be outstanding for the period. The Company's
basic and dilutive earnings per share for the nine month period ended March 31,
2004 are based on a weighted average of 1,040,628 shares assumed to be
outstanding for the period. Basic earnings per share amounts are based on the
weighted average shares of common stock outstanding. Diluted earnings per share
assumes the exercise or issuance of all potential common stock instruments such
as options, unless the effect is antidilutive (to reduce a loss or increase
earnings per share) as was the case for the nine-month period ended March 31,
2004. Shares owned by the Company's ESOP that have not been committed to be


                                       4
<PAGE>

released are not considered to be outstanding for the purposes of computing
earnings per share. Earnings per share have been calculated in accordance with
Statement of Position 93-6 "Employers' Accounting for Employee Stock Ownership
Plans" and Statement of Financial Accounting Standards Number 128.

Earnings per share have been computed using the weighted average number of
shares of common stock and potentially dilutive common stock equivalents
outstanding as follows:


<TABLE>
<CAPTION>


                                                           Three Months                      Nine Months
                                                          Ended March 31,                  Ended March 31,
                                                       2004          2003              2004               2003
                                                     ---------     ---------         ---------          ---------
<S>                                                  <C>           <C>               <C>                <C>
Weighted average shares outstanding                  1,041,560     1,040,708         1,040,628          1,040,776

Potentially Dilutive effect of stock options             2,782             -                 -                  -
                                                     ---------     ---------         ---------          ---------
Weighted average shares outstanding, including
potentially dilutive effect of stock options         1,044,342     1,040,708         1,040,628          1,040,776
                                                     =========     =========         =========          =========
</TABLE>


NOTE 4. CAPITAL SECURITIES

On July 16, 2001, AF Capital Trust (the "Trust"), a Delaware business trust
formed by the Company, completed the sale of $5.0 million of 10.25% Capital
Securities (liquidation amount of $1,000 per security) (the "Capital
Securities") in a private placement as part of a pooled capital securities
transaction. The Trust also issued Common Securities to the Company and used the
net proceeds from the offering to purchase a like amount of 10.25% Junior
Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") of
the Company. The Subordinated Debentures are the sole assets of the Trust and
are eliminated, along with the related income statement effects, from the
consolidated financial statements of the Company. The Company contributed $3.0
million of the proceeds from the sale of the Subordinated Debentures to the Bank
as Tier I Capital to support the Bank's growth. Total expenses associated with
the offering approximating $177,040 at March 31, 2004 are included in other
assets and are being amortized on a straight-line basis over the life of the
Subordinated Debentures.

The Capital Securities accrue and pay distributions semi-annually on January
25th and July 25th of each year, commencing on January 25, 2002, at a fixed
annual rate of 10.25% of the stated liquidation amount of $1,000 per Capital
Security. The Company has fully and unconditionally guaranteed all of the
obligations of the Trust, including the semi-annual distributions and payments
on liquidation or redemption of the Capital Securities.

The Capital Securities are mandatorily redeemable upon the maturing of the
Subordinated Debentures on July 25, 2031 or upon earlier redemption as provided
in the Indenture. The Company has the right to redeem the Subordinated
Debentures, in whole or in part, on any January 25th or July 25th on or after
July 25, 2006 at the liquidation amount, plus any accrued but unpaid interest to
the redemption date.

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. This interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
interpretation. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R)
to clarify some of the provisions of FIN 46 and to exempt certain



                                       5
<PAGE>

entities from its requirements. FIN 46 is effective for public entities that
have interests in structures that are commonly referred to as special-purpose
entities for periods ending after December 15, 2003.

Adoption of FIN 46R will result in deconsolidation of the Company's trust
preferred subsidiary, AF Capital Trust. Upon deconsolidation, the junior
subordinated debentures issued by the Company to the trust will be included in
long-term debt (instead of the trust preferred securities) and the Company's
equity interest in the trust will be included in other assets. If this trust was
deconsolidated as of March 31, 2004 and June 30, 2003, the effect on the
Company's balance sheets for both dates would be an increase in other assets of
$155,000 with a corresponding increase in long-term debt. The deconsolidation of
the trust will not materially impact net income.

The trust preferred securities presently qualify as Tier 1 regulatory capital.
The junior subordinated debentures do not qualify as Tier 1 regulatory capital.
On July 2, 2003, the Board of Governors of the Federal Reserve issued a letter,
SR 03-13, stating that notwithstanding FIN 46, trust preferred securities will
continue to be included in Tier 1 capital until notice is given to the contrary.
There can be no assurance that the regulators will continue to allow
institutions to include trust preferred securities in Tier I capital for
regulatory capital purposes. In the event of a disallowance, there would be a
reduction in the Company's consolidated capital ratios. However, the Company
believes that its subsidiary bank would still exceed the regulatory required
minimums for capital adequacy purposes.

NOTE 5. DIVIDENDS DECLARED

On March 26, 2004, the Board of Directors of the Company declared a dividend of
$0.05 a share for stockholders of record as of April 5, 2004 and payable on
April 16, 2004. The dividends declared were accrued and reported in accounts
payable and other liabilities in the March 31, 2004 Consolidated Statement of
Financial Condition. AsheCo, MHC, the mutual holding company, waived the receipt
of dividends declared by the Company.

NOTE 6. INCOME TAXES

Income taxes resulted from applying normal, expected tax rates on income earned
and on losses during the three and nine months ended March 31, 2004 and 2003.
The income tax expense was $48,617 for the three months ended March 31, 2004
compared to the income tax expense of $151,217 for the three months ended March
31, 2003. The income tax credit was $128,963 for the nine months ended March 31,
2004 compared to the income tax expense of $287,415 for the nine months ended
March 31, 2003. The effective tax rate was higher than expected tax rates,
resulting primarily from the fact that North Carolina corporations may not file
consolidated income tax returns. This had the effect of taxing all income in a
particular member of a consolidated group without permitting an offsetting
benefit for losses incurred in another member of the same group, creating a
higher than expected "overall" state income tax expense.

NOTE 7. COMMITMENTS AND CONTINGENCIES

The Company has executed a contract with a general contractor to construct the
Financial Center in Boone, North Carolina at a cost of approximately $5.4
million. The Company expects the construction project to be completed in
September 2004.

NOTE 8.  BUSINESS COMBINATIONS

On November 3, 2003, we purchased the assets of an insurance agency in Sparta,
North Carolina. No net tangible assets were acquired in the purchase and
Goodwill of $80,000 was recorded.



                                       6
<PAGE>

NOTE 9.  SEGMENT REPORTING

The Company has additional reportable segments, AF Bank, AF Insurance Services,
Inc. and AF Brokerage, Inc. AF Bank is a federally chartered stock savings bank.
The principal activities of the Bank consist of obtaining savings deposits and
providing credit to customers in its primary market area. AF Insurance Services,
Inc. and AF Brokerage, Inc. provide insurance and noninsured investment services
respectively. Information about reportable segments and reconciliation of such
information to the condensed consolidated financial statements as of the three
and nine month periods ended March 31, 2004 is as follows (dollars in
thousands):


<TABLE>
<CAPTION>


                                           REPORTABLE SEGMENTS
                           FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

                                 AF FINANCIAL GROUP             AF BANK           AF INSURANCE SERVICES
                                 ------------------             -------           ---------------------
                                 2004         2003         2004         2003        2004         2003
                                 ----         ----         ----         ----        ----         ----
<S>                            <C>          <C>          <C>           <C>         <C>        <C>
Net interest income            $ (126)      $ (115)      $  1,719      $  1,626    $  (15)    $  (17)
Other revenue                     -              1            355           283       600        728
Provision for loan losses         -            -              -              35       -          -
Net income (loss)                  23          197            202           240         5        109

Assets as of March 31,            303          282        199,852       189,081     2,412      2,428


<CAPTION>

                                                             INTER-SEGMENT
                                    AF BROKERAGE              ELIMINATION          CONSOLIDATED TOTALS
                                    ------------              -----------          -------------------
                                 2004         2003         2004         2003        2004         2003
                                 ----         ----         ----         ----        ----         ----
<S>                             <C>          <C>          <C>          <C>       <C>         <C>
Net interest income             $ -          $ -          $ -          $ -       $  1,578    $  1,494
Other revenue                      38           64          (78)         (74)         915       1,002
Provision for loan losses         -            -            -            -            -            35
Net income (loss)                 (27)          (3)        (180)        (346)          23         197

Assets as of March 31,            186          292         (375)        (327)     202,378     191,756
</TABLE>



                                        7
<PAGE>


<TABLE>
<CAPTION>


                               REPORTABLE SEGMENTS
                FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003

                                 AF FINANCIAL GROUP             AF BANK           AF INSURANCE SERVICES
                                 ------------------             -------           ---------------------
                                 2004         2003         2004         2003        2004         2003
                                 ----         ----         ----         ----        ----         ----
<S>                             <C>          <C>           <C>          <C>        <C>          <C>
Net interest income             $(387)       $(368)        $5,038       $5,114     $  (45)      $  (53)
Other revenue                       -            -          1,056          831      1,803        1,882
Provision for loan losses           -            -            544            -          -            -
Net income (loss)                (352)        (341)           178          694         33          139

<CAPTION>

                                                               INTER-SEGMENT
                                      AF BROKERAGE              ELIMINATION          CONSOLIDATED TOTALS
                                      ------------              -----------          -------------------
                                   2004         2003         2004         2003        2004         2003
                                   ----         ----         ----         ----        ----         ----
<S>                              <C>            <C>         <C>           <C>        <C>          <C>
Net interest income              $  -           $  1        $   -         $   -      $ 4,606      $ 4,694
Other revenue                     136            137         (220)         (160)       2,775        2,690
Provision for loan losses         -              -            -             -            544          -
Net income (loss)                 (71)           (36)        (140)         (797)        (352)        (341)
</TABLE>



                                       8
<PAGE>


                               AF FINANCIAL GROUP

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS

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 COMPANY, THAT ARE SUBJECT TO VARIOUS FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE ESTIMATES. THESE FACTORS
INCLUDE: CHANGES IN GENERAL, ECONOMIC AND MARKET CONDITIONS; THE DEVELOPMENT OF
AN INTEREST RATE ENVIRONMENT THAT ADVERSELY AFFECTS THE INTEREST RATE SPREAD OR
OTHER INCOME ANTICIPATED FROM THE COMPANY'S OPERATIONS AND INVESTMENTS; OUR
ABILITY TO OFFER NEW PRODUCTS AND INCREASE LOWER COST CORE DEPOSITS; AND
DEPOSITOR AND BORROWER PREFERENCES. THE COMPANY DISCLAIMS ANY OBLIGATION TO
PUBLICLY ANNOUNCE FUTURE EVENTS OR DEVELOPMENTS THAT MAY AFFECT THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.

OVERVIEW

AF Financial Group is a financial services company that provides banking,
insurance and investment services to residents in the northwest corner of North
Carolina. The Company was chartered in 1939 and the historical operations of the
Company have been to provide fixed rate loans for the residents of Ashe County,
North Carolina. Over the past several years, we have expanded the market area of
the Company to include Alleghany, Caldwell, Surry, Watauga and Wilkes counties
and have diversified our product lines by engaging in non-residential mortgage
and non-mortgage lending and offering insurance and brokerage products. In July
1997, we started offering traditional property and casualty, life and health
insurance products through AF Insurance Services, Inc., a wholly-owned
subsidiary of the Company, headquartered in West Jefferson, North Carolina and
operating in Boone, Elkin, Jefferson, Lenoir, Sparta, West Jefferson and
Wilkesboro, North Carolina. We also have a broker/dealer subsidiary, AF
Brokerage, Inc., which serves Ashe, Alleghany, Wilkes and Watauga counties. AF
Brokerage offers a full array of uninsured investment products, including
fixed-rate and variable annuities and mutual funds. We believe that our strategy
of expanding our market area and diversifying our product lines will enhance our
franchise value and strengthen earnings in the future.

We have long recognized the dramatically changing dynamics of the delivery
system for financial services in this country. It is our view that the Company's
success depends in large part upon its ability to compete beyond the narrow
boundaries imposed upon banking prior to the passage of the Gramm-Leach-Bliley
Financial Services Modernization Act. In fact, the transition permitted by the
Act from "banking" to "financial services provider" has impacted every major
competitor of the Company to some degree. Both individuals and businesses now
look to a broadening array of sources for needed (or wanted) financial products.
Individuals and families are opening FDIC insured savings accounts at brokerage
houses; they are purchasing mutual funds and annuities through offices of
banking organizations; and they are using the services of non-bank financial
planners to plan their retirements and their children's education needs.
Companies are increasingly taking their cash management function to independent
brokers or insurance company representatives; they are investing idle cash
through discount brokerages on the internet; and they are establishing letters
and lines of credit with investment bankers, indirect credit companies and
others. We are aware of the increasing expectations of our customers for more
immediate delivery of their financial services.

We believe we have the foundation in place to successfully compete in our
established markets. In all AF Bank markets, we have the capability to deliver
comprehensive insurance services through our insurance subsidiary and the
potential to deliver securities services through AF Brokerage, Inc. Additionally
(and as mentioned earlier), during the year ended June 30, 2003, we acquired
land in Boone, North Carolina to construct a financial service center. The new
Financial Center




                                       9
<PAGE>

will combine banking, insurance and investments into one convenient location in
the Watauga County market. The challenge facing us is to provide the most
economical, efficient - and most importantly - DESIRABLE platform to offer AF
customers, clients and prospects these services. It is a challenge we are
working hard to meet.

There are a number of other positive factors and recent events, which reflect
our progress toward our long-term goals during the nine months ended March 31,
2004:

         o        An increase in net loans of $15.8 million or 10.1%;

         o        Asset growth of $10.4 million or 5.4%;

         o        Deposit growth of $5.3 million or 3.6%;

         o        Nonperforming assets as a percentage of total assets decreased
                  to .10%;

         o        Loans to deposit ratio increased to 111.1%; and

         o        The acquisition of another insurance agency in Sparta, North
                  Carolina which will expand our market share in an existing
                  market and will increase the revenue stream for the Sparta
                  insurance operation while expanding our customer base in
                  Alleghany County.

The cost of the infrastructure that we now have in place that allows us to
successfully compete in our established markets has also had a negative impact
on our short term earnings. However, we believe that our established foundation
and emerging platform will drive our long-term viability as a competitively
superior financial services provider in all markets.

As mentioned above, during the nine months ended March 31, 2004, we experienced
asset growth of $10.4 million consisting primarily of increases in net loan
balances of approximately $15.8 million. While the Company is currently
"well-capitalized" under the regulatory guidelines, a continuing (and expected)
increase in assets would result in the Company falling below regulatory capital
levels required to be considered "well capitalized". The maintenance of
appropriate levels of capital is a priority of ours and is monitored on an
ongoing basis.

The Company's operating results are primarily dependent upon net interest
income, fees and charges and insurance commissions. Net interest income is the
difference between interest earned on loans and investments and the interest
paid on savings deposits and borrowings of the Company. The primary
interest-earning asset of the Company is its loan portfolio representing 85.0%
of total assets. The net interest income of the Company is affected by changes
in economic conditions that influence market interest rates and to a large
extent by the monetary actions by the Federal Reserve. This exposure to changes
in interest rates contributes to a moderate degree of interest rate risk,
because of the negative impact of changing rates to the Bank's earnings and to
the market value of its assets and liabilities. Historically, mortgage lenders
have made loans with long terms to maturity and funded those loans with core and
short term deposits, exposing the lender to a higher level of interest rate risk
in a rising rate scenario. The Company has reduced the exposure to rising rates
by limiting the term or the time to reprice the loans that the Company retains
in its portfolio. Consequently, declining rates during the nine months ending
March 31, 2004, were less favorable to the Bank than rising rates would have
been.

We believe it is important to view the quarterly financial results of the
Company within the larger context of the Company's long-term strategic business
plan. Doing so helps keep short-term



                                       10
<PAGE>

results in clearer perspective, and underscores management's commitment to the
long-term profitability and success of the Company.

Net income decreased $692,468, or 203.2%, to a net loss of $351,716 for the nine
months ended March 31, 2004 from net income of $340,752 for the nine-month
period ended March 31, 2004. This change is primarily due to operating in a
declining interest rate environment as discussed above and a $349,580 charge-off
of one commercial line of credit. While future charge-offs are uncertain, we
believe that this charge-off was an isolated event and not an indication of the
overall quality of our loan portfolio.

We believe that a positive upturn in economic indicators will have a positive
impact on our net income. Many economic advisors are predicting a 25 basis point
rate hike by August 2004 and an overall 100 basis point rate hike by February
2005. At March 31, 2004 we had approximately $55.8 million in loans priced at
prime or a margin thereto which provides for adjusting rates immediately when
market rates change. A 25 basis points increase in the prime rate of interest
would result in an annual increase in interest income of approximately $140,000
as of March 31, 2004. In a rising rate environment, our ability to make
immediate rate adjustments serves to protect the interest margin against
increases in rates at a more rapid speed than the increase in funding costs.

Our commitment to the long-term profitability and success of the Company
prompted our decision not to place long-term fixed rate mortgages in our
portfolio, particularly in a low interest rate environment, due to the interest
rate risk associated with an eventual rise in market rates. We have continued to
minimize our exposure to rising interest rates by selling long-term fixed rate
mortgages and retaining the servicing. This strategy reduces short-term earnings
but will provide protection when rates begin to rise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The notes to our audited consolidated financial statements for the year ended
June 30, 2003 included in the Company's 2003 Annual Report on Form 10-KSB
contain a summary of our significant accounting policies. We believe that our
policies with respect to the methodology for our determination of the allowance
for loan losses, and asset impairment judgments, including the recoverability of
goodwill, involve a higher degree of complexity and require management to make
difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or
estimates could cause reported results to differ materially. These critical
policies and their application are periodically reviewed with the Audit
Committee and our Board of Directors. We consider the following accounting
policies to be most critical in their potential effect on our financial position
or results of operations:

ALLOWANCE FOR LOAN LOSSES

The Allowance for Loan Losses ("ALL") is established through a provision for
loan losses based on our evaluation of the risks inherent in the Bank's loan
portfolio, prior loss history and the general economy. The ALL is maintained at
an amount we consider adequate to cover loan losses which are deemed probable
and estimable. The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, our assessment of the
credit risk inherent in the portfolio, historical loan loss experience, and the
Bank's underwriting policies. Our methodology for assessing the appropriations
of the ALL consists of two components, which are specific allowance for
identified problem or impaired loans and a formula allowance for the remainder
of the portfolio. Although we believe we have established and maintained the ALL
at appropriate



                                       11
<PAGE>

levels, future adjustments may be necessary if economic, real estate and other
conditions differ substantially from the current operating environment. We will
continue to monitor and modify our ALL as conditions dictate.

GOODWILL

On July 1, 2002, we adopted the provisions of Financial Accounting Standards
Board Statement 142, Goodwill and Other Intangible Assets. Under the provisions
of the Statement, on July 1, 2002, we ceased to amortize goodwill. We will
reevaluate the carrying value of goodwill annually by comparing the present
value of expected future cash flows discounted at a spread to the 30-Year US
Treasury bond to the carrying value of goodwill at the reporting unit level.
Impairment would then be determined if the carrying amount of goodwill exceeds
the fair value of the reporting unit. This evaluation is subjective as it
requires material estimates that may be susceptible to significant change.


COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2004 AND JUNE 30, 2003:

Total assets increased by $10.4 million to $202.4 million at March 31, 2004 from
$192.0 million at June 30, 2003. The increase in assets was primarily the result
of an increase of $15.8 million, or 10.1%, in net loans receivable and an
increase of $1.9 million, or 21.5%, in net office properties and equipment from
June 30, 2003 to March 31, 2004. The increase in net loans receivable and net
office properties and equipment was partially offset by a decrease of $5.6
million, or 39.5%, in cash and cash equivalents and a decrease of $2.4 million,
or 32.1%, in securities available for sale from June 30, 2003 to March 31, 2004.
The decrease in cash and cash equivalents and securities available for sale was
used to fund the $15.8 million increase in net loans receivable. 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. The increase in
office properties and equipment, net was primarily due to the costs to construct
a new Financial Services Center in Boone, North Carolina and the addition of new
equipment to assure our delivery capabilities in the event of a disaster
affecting our computer systems. These back up facilities will be re-located to
the Boone Financial Center that is currently under construction. Prior to
completion, backup equipment has been positioned in various branch locations
that are away from the primary IT location. These investments in backup capacity
allow us to assure our customers of our stability in the event of a disastrous
occurrence as well as to comply with regulatory requirements for business
continuity.

Securities available for sale decreased $2.4 million, or 32.1%, to $5.2 million
at March 31, 2004 from $7.6 million at June 30, 2003. This decrease was due to
maturing investments. At March 31, 2004, the Company's investment portfolio had
approximately $83,394 in net unrealized gains as compared to net unrealized
gains of $96,473 at June 30, 2003.

As mentioned above, net loans increased $15.8 million, or 10.1%, to $172.1
million at March 31, 2004 from $156.3 million at June 30, 2003. The following
table sets forth the composition of the Company's mortgage and other loan
portfolios in dollar amounts and percentages at the dates indicated.



                                       12
<PAGE>

<TABLE>
<CAPTION>

                                         -----------------------------------------------------------------------------------
                                                  AT MARCH 31,                                      AT JUNE 30,
                                                      2004                                              2003
                                         --------------------------------                -----------------------------------
                                              AMOUNT        % OF TOTAL                         AMOUNT          % OF TOTAL
                                              ------        ----------                         ------          ----------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                      <C>                     <C>                     <C>                       <C>
Mortgage loans:
   One-to four-family...............     $   89,982              52.29%                  $   88,725                56.78%
   Multi-family.....................          5,850               3.40%                       6,226                 3.98%
   Non-residential..................         28,561              16.59%                      18,873                12.08%
   Land.............................         12,770               7.42%                       7,961                 5.11%
   Construction.....................         12,124               7.04%                       9,383                 6.00%
                                         ----------        ------------                  ----------          ------------
     Total mortgage loans...........     $  149,287              86.74%                  $  131,168                83.95%
                                         ----------        ------------                  ----------          ------------

Other loans:
   Commercial.......................     $   12,648               7.35%                  $   15,186                 9.72%
   Consumer loans...................         11,525               6.70%                      11,227                 7.18%
                                         ----------        ------------                  ----------          ------------
     Total other loans..............     $   24,173              14.05%                  $   26,413                16.90%
                                         ----------        ------------                  ----------          ------------

   Gross loans......................     $  173,460             100.79%                  $  157,581               100.85%
                                         ----------        ------------                  ----------          ------------

Less:
   Unearned discounts and net
      deferred loan fees............     $      211               0.13%                  $      212                 0.14%
   Allowance for loan losses........          1,142               0.66%                       1,111                 0.71%
                                          ---------        ------------                   ---------          ------------
                                              1,353               0.79%                       1,323                 0.85%
                                         ----------        ------------                  ----------          ------------
   Loans, net.......................     $  172,107             100.00%                  $  156,258               100.00%
                                         ==========        ============                  ==========          ============
</TABLE>


The Bank's savings deposits increased by $5.3 million, or 3.6%, from $149.6
million at June 30, 2003 to $154.9 million at March 31, 2004. We believe the
increase in deposits is attributable to our continuing marketing efforts
directed towards increasing balances in savings and transaction accounts and in
smaller, stable certificates of deposits. We intend to further focus our
marketing efforts and to offer new products to increase lower cost core
deposits. During the nine-month period ended March 31, 2004, the Bank entered an
agreement with Promontory Interfinancial Network which allows us to provide FDIC
insurance coverage beyond the normal limits by using its network. The agreement
allows us to maintain large deposit relationships when the customer desires FDIC
coverage on all deposit balances.

Advances from the Federal Home Loan Bank increased $5.5 million, or 26.0%, to
$26.6 million at March 31, 2004 from $21.1 million at June 30, 2003. The
increase in advances from the Federal Home Loan Bank was used to provide a
portion of the funding for the $15.8 million increase in net loans receivable.
We borrowed $5.5 million from the Federal Home Loan Bank ("FHLB") during the
nine month period ended March 31, 2004 under the FHLB's daily rate credit
program. Under this program we can pay the advance off during any business day
without prepayment fees and the rate of interest on the advance is set daily.

Total stockholders' equity decreased $563,969, or 4.4%, to $12.4 million at
March 31, 2004 from $13.0 million at June 30, 2003. The decrease in
stockholders' equity was the primarily the result of the net loss of $351,716,
the increase in the value of redeemable common stock held by the ESOP of
$187,295, or 39.1%, dividends of $73,123 and the decrease in other comprehensive
income of $7,963. These decreases were partially offset by ESOP expenses of
$56,128. At March 31, 2004, the Bank's regulatory capital amounted to $16.7
million compared to $16.9 million at June 30, 2003, which was in excess of
regulatory capital requirements at both such dates.

The Bank's level of non-performing loans, defined as loans past due 90 days or
more, decreased to $196,356 at March 31, 2004 compared to $442,696 at June 30,
2003. The Bank recognized net



                                       13
<PAGE>

charge-offs of approximately $513,059 during the nine-month period ended March
31, 2004 compared to net charge-offs of $178,700 for the comparable period ended
March 31, 2003. The increase in net charge-offs was primarily attributable to a
$349,580 charge-off related to one commercial line of credit in the second
quarter of fiscal 2004. While future loan loss provision requirements are
uncertain, management believes that similar provisions are unlikely.

The following table sets forth activity in the Bank's ALL at or for the dates
indicated.


<TABLE>
<CAPTION>

                                                                              FOR THE NINE       FOR THE NINE
                                                                              MONTHS ENDED       MONTHS ENDED
                                                                                MARCH 31,          MARCH 31,
                                                                                   2004               2003
                                                                              -----------         -----------
<S>                                                                           <C>                   <C>
                                                                                    (DOLLARS IN THOUSANDS)
Balance at beginning of year..........................................        $     1,111           $     1,131
Provision for loan losses.............................................                544                   183
                                                                              -----------           -----------

Charge-offs:
     One- to four-family residential..................................                (84)                   (6)
     Multi-family residential.........................................                  -                     -
     Non-residential and land.........................................                (18)                   (3)
     Construction.....................................................                  -                     -
     Commercial.......................................................               (399)                  (69)
     Consumer loans...................................................                (71)                 (224)
                                                                              -----------           ------------
         Total charge-offs............................................               (572)                 (302)
                                                                              -----------           ------------

Recoveries............................................................                 59                   123
                                                                              -----------           -----------

Balance at end of period..............................................        $     1,142           $     1,135
                                                                              ===========           ===========


Total loans outstanding at end of period..............................        $   173,460           $   157,075
                                                                              ===========           ===========


Allowance for loan losses to total loans
     at end of period.................................................                0.66%                 0.72%
                                                                              ============          ============

Allowance for loan losses to total non-performing
     assets at end of period..........................................              581.41%               138.58%
                                                                              ============          ============

Allowance for loan losses to total non-performing
     loans at end of period........................................                 581.41%               148.95%
                                                                              ============          ============
</TABLE>






                                       14
<PAGE>





COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED MARCH 31,
2004 AND 2003:

The Company had net income for the three-month period ended March 31, 2004 of
$22,856 compared to net income of $196,996 during the same period in 2003. The
Company had a net loss for the nine-month period ended March 31, 2004 of
$351,716 compared to net income of $340,752 during same period in 2003. Changes
in net income during the comparable three month periods were attributable to a
decrease in noninterest income and an increase in noninterest expense. Changes
in net income during the comparable nine month periods were attributable to: an
increase in the provision for loan losses; a decrease in net interest income;
and an increase in noninterest expense, which is explained below.

INTEREST INCOME. Interest income decreased by $100,902, or 3.7%, from $2,734,034
for the three-month period ended March 31, 2003 to $2,633,132 for the
three-month period ended March 31, 2004. Interest income decreased by $597,411,
or 7.0%, from $8,538,141 for the nine-month period ended March 31, 2003 to
$7,940,730 for the nine-month period ended March 31, 2004. Interest income from
loans decreased $46,068, or 1.8%, from $2,623,889 for the three-month period
ended March 31, 2003 to $2,577,821 for the three-month period ended March 31,
2004. Interest income from loans decreased $477,768, or 5.8%, from $8,213,007
for the nine-month period ended March 31, 2003 to $7,735,239 for the nine-month
period ended March 31, 2004. The decrease in interest income from loans for the
three and nine month periods was attributable to a decrease in the weighted
average rate of net loans receivable due to the low interest rate environment
during the period. The weighted average rate on portfolio loans declined .61%
from 6.55% at March 31, 2003 to 5.94% at March 31, 2004.

INTEREST EXPENSE. Interest expense decreased by $184,271, or 14.9%, to
$1,055,599 for the three-month period ended March 31, 2004 from $1,239,870 for
the three months ended March 31, 2003. Interest expense decreased by $509,691,
or 13.3%, to $3,334,527 for the nine-month period ended March 31, 2004 from
$3,844,218 for the nine-month period ended March 31, 2003. Interest expense on
deposits decreased by $185,741, or 22.2%, to $649,244 for the three months ended
March 31, 2004 from $834,985 for the three months ended March 31, 2003. Interest
expense on deposits decreased by $556,008, or 21.2%, to $2,065,421 for the
nine-month period ended March 31, 2004 from $2,621,429 for the nine-month period
ended March 31, 2003. These decreases are the result of the 0.6% decrease in the
institution's weighted average rate of deposits during the twelve-month period
ended March 31, 2004.

NET INTEREST INCOME. Net interest income increased by $83,369, or 5.6%, from
$1,494,164 for the three-month period ended March 31, 2003 to $1,577,533 for the
three-month period ended March 31, 2004. Net interest income decreased by
$87,720, or 1.9%, from $4,693,923 for the nine-month period ended March 31, 2003
to $4,606,203 for the nine-month period ended March 31, 2004. The changes in net
interest income are a result of a drop in the institution's weighted average
rate paid for deposits and the reduction of the weighted average loan rates,
partially offset by the increase in savings deposits and Federal Home Loan Bank
borrowings. We do not believe that there has been a material change in interest
rate risk from the end of the Company's most recent fiscal year.

PROVISION FOR LOAN LOSSES. We did not make a provision to the allowance for loan
losses during the three-month period ended March 31, 2004, compared to a $35,000
provision for loan losses made during the three-month period ended March 31,
2003. We made provisions in the amount of $544,000 to the allowance for loan
losses during the nine-month period ended March 31, 2004, compared to a $182,700
provision for loan losses made during the nine-month period ended March 31,
2003. As previously noted, provisions to the allowance for loan losses in the
nine-month period ended March 31, 2004 include a charge-off of $349,580 related
to one commercial loan. Provisions for loan losses, which are charged to
operations and resulting loan loss allowances, are amounts



                                       15
<PAGE>

that we believe will be adequate to absorb probable losses on existing loans
that may become uncollectible. Loans are charged off against the allowance when
we believe collection is unlikely. The evaluation to increase or decrease the
provisions for loan losses 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.

We made provisions for loan loss allowances during the nine month period ended
March 31, 2004 based upon an analysis of the quality of our loan portfolio. At
March 31, 2004, our level of allowance for loan losses amounted to $1,141,625,
or 0.66% of total loans, as compared to $1,135,267 of allowance for loan losses,
or 0.72% of total loans at March 31, 2003, which we believe is adequate to
absorb any probable losses inherent in our loan portfolio.

NONINTEREST INCOME. Noninterest income decreased by $87,131, or 8.7%, from
$1,002,134 for the three-month period ended March 31, 2003 to $915,003 for the
three months ended March 31, 2004. Noninterest income increased by $84,451, or
3.1%, from $2,690,317 for the nine-months ended March 31, 2003 to $2,774,768 for
the nine-months ended March 31, 2004. The changes in noninterest income during
the three and nine month periods ended March 31, 2004 were primarily
attributable to increases in transaction fees on deposit accounts and a decrease
in revenue generated from insurance commissions. The increase in transaction
fees on deposit accounts is primarily attributable to an increase in the number
of transaction accounts. These trends are expected to continue to produce growth
in non-interest income. Insurance commissions decreased by $127,030, or 17.8%,
from $712,723 for the three-month period ended March 31, 2003 to $585,693 for
the three months ended March 31, 2004. Insurance commissions decreased by
$70,857, or 3.9%, from $1,842,023 for the nine-months ended March 31, 2004 to
$1,771,166 for the nine months ended March 31, 2004. The decrease in insurance
commissions is primarily due to a decrease in contingency income received from
the insurance companies we represent as compared to the same time period in
2003. The decrease in contingency income is due to the insurance companies we
represent paying higher claims to our clients in calendar year 2003 as compared
to calendar year 2002, resulting in lower profit sharing payments.

NON-INTEREST EXPENSE. Non-interest expense increased by $307,978, or 14.6%, from
$2,113,085 for the three months ended March 31, 2003 to $2,421,063 for the three
months ended March 31, 2004. Non-interest expense increased by $744,277, or
11.3%, from $6,573,373 for the nine months ended March 31, 2003 to $7,317,650
for the nine months ended March 31, 2004. The increase in non-interest expense
for the three and nine month periods ended March 31, 2004 is primarily
attributable to an increase in compensation costs and occupancy expenses
associated with adding computer equipment to provide backup facilities in case
of a disaster and increased staffing for the Financial Service Center in Boone,
North Carolina. Compensation costs increased by $188,399, or 15.9%, for the
three-month period ended March 31, 2004. Compensation costs increased by
$364,349, or 9.7%, for the nine-month period ended March 31, 2004. Occupancy and
equipment costs increased by $29,821 or 10.0% for the three-month period ended
March 31, 2004. Occupancy and equipment costs increased by $84,477 or 9.8% for
the nine-month period ended March 31, 2004.

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 demand and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service, dividends to stockholders, and other institutional commitments.
The Company's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales and participations of loans, maturities
of securities and interest-bearing deposits, and



                                       16
<PAGE>

funds provided from operations. While scheduled repayments of loans and
maturities of securities are predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by the general level of interest rates,
economic conditions, and competition. The Company uses its liquid resources
primarily to fund existing and future loan commitments, to fund net deposit
outflows, to invest in other interest-earning assets, to maintain liquidity, and
to meet operating expenses. For additional information about cash flows from the
Company's operating, financing and investing activities, see "Condensed
Consolidated Statements of Cash Flow."

Liquidity management is both a daily and long-term function of management. If we
require funds beyond our ability to generate them internally, we believe we
could borrow additional funds from the Federal Home Loan Bank of Atlanta (the
"FHLB") and use the wholesale deposit markets. At March 31, 2004, we had
borrowings of $26.6 million from the FHLB. The Bank also maintains borrowing
agreements with the Federal Reserve Bank of Richmond, VA.

The Company anticipates that it will have sufficient funds available to meet its
current loan origination commitments. Certificates of deposit scheduled to
mature in one year or less totaled $58.1 million at March 31, 2004. Based upon
historical experience, we believe that a significant portion of such deposits
will remain with the Bank.

As of March 31, 2004, cash and cash equivalents, a significant source of
liquidity, totaled $8.5 million. The OTS regulations require the Company to
maintain sufficient liquidity to ensure its safe and sound operation. Given our
level of liquidity and our ability to borrow from the FHLB, we believe that we
will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, and other cash requirements.

Capital management is another important daily and long-term function of
management. While we currently meet all regulatory capital levels, we monitor
this level on an ongoing basis. Our principal goals related to capital
management are to provide an adequate return to shareholders while retaining a
sufficient foundation from which to support future growth and to comply with all
regulatory guidelines.

OFF BALANCE-SHEET ARRANGEMENTS.

The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, revenues or expenses, results of operations, liquidity, capital
resources or expenditures that is material to investors.



                                       17
<PAGE>



ITEM 3. CONTROLS AND PROCEDURES

The Company maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our published financial
statements and other disclosures included in this report. The Company's Board of
Directors, operating through its audit committee, which is composed entirely of
independent outside directors, provides oversight of the Company's financial
reporting process.

Management, including the Company's President and Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based upon
that evaluation, the President and Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.

There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.




                                       18
<PAGE>



Part II. OTHER INFORMATION

Item 1.Legal Proceedings

         The Company is not a party to, and its property is not the subject of,
any pending legal proceedings at the present time other than routine litigation
that is incidental to the business.

Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities

(e) During the three and nine months ended March 31, 2004, the Company did not
repurchase any of its common stock. The Company does not have a stock repurchase
program in place at the present time.

Item 3. Defaults Upon Senior Securities

         None

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

         None

Item 5. Other Information

(a)  Not applicable
(b)  Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

         31.1 Rule 13a-14(a)/15d-14(a) Certifications
         32.1 Section 1350 Certifications

(b) Reports on Form 8-K

         None




                                       19
<PAGE>




SIGNATURES

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

                                    AF FINANCIAL GROUP

Dated MAY 14, 2004                  By:  /s/ James A. Todd
                                         --------------------------------------
                                         James A. Todd
                                         President and Chief Executive Officer

Dated MAY 14, 2004

                                    By:  /s/ Melanie Paisley Miller
                                         --------------------------------------
                                         Melanie Paisley Miller
                                         Executive Vice President, Secretary,
                                         Treasurer and Chief Financial Officer




                                       20
<PAGE>



                                                                   EXHIBIT 31.1

                                 CERTIFICATIONS

I, James A. Todd, certify that:

         1.       I have reviewed this quarterly report on Form 10-QSB of AF
                  Financial Group;

         2.       Based on my knowledge, this report does not contain any untrue
                  statement of a material fact or omit to state a material fact
                  necessary to make the statements made, in light of the
                  circumstances under which such statements were made, not
                  misleading with respect to the period covered by this report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this report, fairly present
                  in all material respects the financial condition, results of
                  operations and cash flows of the registrant as of, and for,
                  the periods presented in this report;

         4.       The registrant's other certifying officer and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-15(e) and 15d-15 (e)) for the registrant and have:

                  (a) Designed such disclosure controls and procedures, or
                  caused such disclosure controls and procedures to be designed
                  under our supervision, to ensure that material information
                  relating to the registrant, including its consolidated
                  subsidiaries, is made known to us by others within those
                  entities, particularly during the period in which this report
                  is being prepared;

                  (b) Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

                  (c) Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonable likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

         5.       The registrant's other certifying officer and I have
                  disclosed, based on our most recent evaluation of internal
                  control over financial reporting, to the registrant's auditors
                  and the audit committee of the registrant's board of directors
                  (or persons performing the equivalent functions):

                  (a) All significant deficiencies and material weaknesses in
                  the design or operation of internal control over financial
                  reporting which are reasonable likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

                  (b) Any fraud, whether or not material, that involves
                  management or other employees who have a significant role in
                  the registrant's internal control over financial reporting.


Date:  May 14, 2004                     /s/ James A. Todd
                                        ---------------------------------------
                                        James A. Todd
                                        Chairman, President and Chief Executive
                                        Officer


<PAGE>



                                                                    EXHIBIT 31.1

                                 CERTIFICATIONS

I, Melanie Paisley Miller, certify that:

         1.       I have reviewed this quarterly report on Form 10-QSB of AF
                  Financial Group;

         2.       Based on my knowledge, this report does not contain any untrue
                  statement of a material fact or omit to state a material fact
                  necessary to make the statements made, in light of the
                  circumstances under which such statements were made, not
                  misleading with respect to the period covered by this report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this report, fairly present
                  in all material respects the financial condition, results of
                  operations and cash flows of the registrant as of, and for,
                  the periods presented in this report;

         4.       The registrant's other certifying officer and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-15(e) and 15d-15 (e)) for the registrant and have:

                  (a) Designed such disclosure controls and procedures, or
                  caused such disclosure controls and procedures to be designed
                  under our supervision, to ensure that material information
                  relating to the registrant, including its consolidated
                  subsidiaries, is made known to us by others within those
                  entities, particularly during the period in which this report
                  is being prepared;

                  (b) Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

                  (c) Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonable likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

         5.       The registrant's other certifying officer and I have
                  disclosed, based on our most recent evaluation of internal
                  control over financial reporting, to the registrant's auditors
                  and the audit committee of the registrant's board of directors
                  (or persons performing the equivalent functions):

                  (a) All significant deficiencies and material weaknesses in
                  the design or operation of internal control over financial
                  reporting which are reasonable likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

                  (b) Any fraud, whether or not material, that involves
                  management or other employees who have a significant role in
                  the registrant's internal control over financial reporting.


Date:  May 14, 2004     /s/ Melanie Paisley Miller
                        --------------------------
                        Melanie Paisley Miller
                        Executive Vice President, Secretary, Treasurer and Chief
                        Financial Officer




<PAGE>

EXHIBIT 32.1

CERTIFICATION
(PURSUANT TO 18 U.S.C. SECTION 1350)

         The undersigned, James A. Todd, is the President and Executive Officer
of AF Financial Group (the "Company").

         This statement is being furnished in connection with the filing by the
Company of the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 2004 (the "Report").

         By execution of this statement, I certify that:

         A)       the Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934 (15
                  U.S.C. 78m(a) or 78o(d)); and

         B)       the information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company as of the dates and for the periods
                  covered by the Report.

         This statement is authorized to be attached as an exhibit to the Report
so that this statement will accompany the Report at such time as the Report is
filed with the Securities and Exchange Commission, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that
this statement be deemed to be filed for purposes of the Securities Exchange Act
of 1934, as amended.

         A signed original of this written statement required by Section 1350
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.

                                     AF FINANCIAL GROUP


Dated MAY 14, 2004                   By:  /s/ James A. Todd
                                          -------------------------------------
                                          James A. Todd
                                          President and Chief Executive Officer


                                       22
<PAGE>




EXHIBIT 32.1

CERTIFICATION
(PURSUANT TO 18 U.S.C. SECTION 1350)

         The undersigned, Melanie Paisley Miller, is the Executive Vice
President, Secretary, Treasurer and Chief Financial Officer of AF Financial
Group (the "Company").

         This statement is being furnished in connection with the filing by the
Company of the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 2004 (the "Report").

         By execution of this statement, I certify that:

         A)       the Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934 (15
                  U.S.C. 78m(a) or 78o(d)); and

         B)       the information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company as of the dates and for the periods
                  covered by the Report.

         This statement is authorized to be attached as an exhibit to the Report
so that this statement will accompany the Report at such time as the Report is
filed with the Securities and Exchange Commission, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that
this statement be deemed to be filed for purposes of the Securities Exchange Act
of 1934, as amended.

         A signed original of this written statement required by Section 1350
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.

                                       AF FINANCIAL GROUP


Dated MAY 14, 2004                     By: /s/ Melanie Paisley Miller
                                          ----------------------------------
                                          Melanie Paisley Miller
                                          Executive Vice President, Secretary,
                                          Treasurer and Chief Financial Officer