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   December 31, 1999
                                          -----------------
                                       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 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 U 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 U No

As of January 31, 2000 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  U
                                                   ---     ---




<PAGE>



                               AF BANKSHARES, INC.
                                    CONTENTS


<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                                                Pages
------------------------------                                                                                -----
<S>                                                                                                           <C>
         Item 1.  Financial Statements

Condensed Consolidated Statements of Financial Condition as of
December 31, 1999 (unaudited) and June 30, 1999                                                               1

Condensed Consolidated Statements of Income and Comprehensive Income for
the Three and Six Months ended  December 31, 1999 and 1998 (unaudited)                                        2

Condensed Consolidated Statements of Cash Flows for the Six Months ended
December 31, 1999 and 1998 (unaudited)                                                                        3 - 4

Condensed notes to financial statements                                                                       5 - 8

         Item 2.  Management's Discussion and Analysis of Financial
         Condition And Results of Operations                                                                  9 - 14

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                                           15
         Item 2.  Changes in Securities and Use of Proceeds                                                   15
         Item 3.  Defaults upon Senior Securities                                                             15
         Item 4.  Submission of Matters to a Vote of Security Holders                                         15
         Item 5.  Other Information                                                                           15
         Item 6.  Exhibits and Reports on Form 8-K                                                            15
         Signatures                                                                                           16
</TABLE>

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES


CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND JUNE 30, 1999


<TABLE>
<CAPTION>
ASSETS
                                                                                    December              June 30,
                                                                                      1999                  1999
-------------------------------------------------------------------------------------------------------------------
                                                                                   (Unaudited)              Note
<S>                                                                        <C>                  <C>
Cash and cash equivalents:
   Interest-bearing deposits                                               $           385,697  $         4,173,311
   Noninterest-bearing deposits                                                     11,085,544            8,221,749
Certificates of deposit, at cost                                                        99,000              198,000
Securities held to maturity                                                            100,000              100,000
Securities available for sale                                                        9,404,116           10,976,170
Federal Home Loan Bank stock                                                           652,600              523,600
Loans receivable, net                                                               97,729,569           81,156,766
Real estate owned                                                                       47,500               59,000
Office properties and equipment, net                                                 3,130,090            2,544,777
Accrued interest receivable on loans                                                   512,273              398,918
Accrued interest receivable on investment securities                                    98,430               97,598
Prepaid expenses and other assets                                                      380,265              546,721
Deferred income taxes, net                                                             534,295              425,100
Intangible assets                                                                    1,163,478              509,716
                                                                              --------------------------------------
                              TOTAL ASSETS                                 $       125,322,857  $       109,931,426
                                                                              ======================================
LIABILITIES AND EQUITY
Liabilities:
   Savings deposits                                                        $        97,490,880  $        93,106,090
   Note payable-ESOP                                                                   255,420              255,420
   Advances from Federal Home Loan Bank                                             13,038,697            2,564,358
   Accounts payable and other liabilities                                            2,106,548            1,636,362
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares                                                              95,558              150,942
                                                                              --------------------------------------
                              TOTAL LIABILITIES                                    112,987,103           97,713,172
                                                                              ======================================
Commitments and Contingencies
Stockholders Equity:
    Commonstock, par value $.01 per share; authorized 5,000,000 shares;
          1,053,678 issued and outstanding at December 31, 1999
          and June 30, 1999                                                             10,537               10,537
   Additional paid-in capital                                                        4,594,330            4,593,516
   Retained earnings, substantially restricted                                       8,157,119            7,974,373
   Deferred recognition and retention plan                                            (380,652)            (479,960)
   Accumulated other comprehensive income, unrealized gain
          on securities available for sale                                              38,270              203,638
                                                                              --------------------------------------
                                                                                    12,419,604           12,302,104
    Less the cost of 4,300 shares of treasury stock                                    (83,850)             (83,850)
                                                                              --------------------------------------
                              TOTAL STOCKHOLDERS' EQUITY                            12,335,754           12,218,254
                                                                              --------------------------------------
                              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $       125,322,858  $       109,931,426
                                                                              ======================================
</TABLE>

See Notes to Condensed Financial Statements.

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                     Three Months Ended              Six Months Ended
                                                                         December 31,                   December 31,
----------------------------------------------------------------------------------------------------------------------------
                                                                    1999            1998            1999           1998
----------------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
<S>                                                            <C>              <C>              <C>             <C>
  Loans                                                        $      2,055,109 $     1,679,318  $    3,926,776  $   3,364,600
  Investment securities                                                 144,620         116,725         313,348        243,953
  Interest-bearing deposits                                              31,442         153,195         102,566        310,788
                                                                --------------------------------- -----------------------------
                  TOTAL INTEREST INCOME                               2,231,170       1,949,238       4,342,689      3,919,341
                                                                --------------------------------- -----------------------------
Interest expense:
  Deposits                                                              999,146         960,772       1,935,698      1,942,509
  Federal Home Loan Bank advances                                       177,957          17,826         258,833         75,807
  Note payable, ESOP                                                      4,880           4,416          10,685         10,308
                                                                --------------------------------- -----------------------------
                                                                      1,181,983         983,014       2,205,216      2,028,624
                                                                --------------------------------- -----------------------------
                  NET INTEREST INCOME                                 1,049,187         966,224       2,137,473      1,890,717
Provision for loan losses                                                   -             5,000           9,000         10,000
                                                                --------------------------------- -----------------------------
                  NET INTEREST INCOME AFTER PROVISION FOR
                   LOAN LOSSES                                        1,049,187         961,224       2,128,473      1,880,717
                                                                --------------------------------- -----------------------------

Noninterest income:
  Insurance commissions                                                 186,474         126,489         412,911        240,598
  Gain on sale on investments available for sale                         63,994          41,929          63,994         41,929
  Other                                                                 168,983         143,748         329,865        244,065
                                                                --------------------------------- -----------------------------
                                                                        419,451         312,166         806,770        526,591
                                                                --------------------------------- -----------------------------
Noninterest expense:
  Compensation and employee benefits                                    748,658         568,722       1,461,398      1,076,559
  Occupancy and Equipment                                               131,573         117,079         258,294        215,200
  Deposit insurance premiums                                             13,520          17,588          26,455         23,374
  Computer processing charges                                            62,865          46,921         136,259         94,022
  Amortization                                                           14,226           9,543          28,452         19,914
  Other                                                                 365,605         312,130         679,708        541,488
                                                                --------------------------------- -----------------------------
                                                                      1,336,447       1,071,983       2,590,566      1,970,557
                                                                --------------------------------- -----------------------------
                  INCOME BEFORE INCOME TAXES                            132,191         201,407         344,677        436,751
  Income taxes                                                           50,144          69,191         132,973        157,260
                                                                --------------------------------- -----------------------------
                  NET INCOME                                             82,047         132,216         211,704        279,491
                                                                --------------------------------- -----------------------------
  Other comprehensive loss, net of tax:
    Unrealized gain (loss) on securities, net of tax                    (60,604)         89,840        (121,468)        93,703
       Less:  reclassification adjustment for gains included
         in net income, net of tax                                       43,900          28,763          43,900         28,763
                                                                ---------------- ---------------- --------------- -------------
                 COMPREHENSIVE INCOME                          $        (22,457)$       193,293  $       46,336  $     344,431
                                                                ================ ================ =============== =============

  Basic Earnings per share of common stock (Note 3)            $           0.08 $          0.13  $         0.21  $        0.28
                                                                ================ ================ =============== =============
  Diluted Earnings per share of common stock (Note 3)          $           0.08 $          0.13  $         0.21  $        0.28
                                                                ================ ================ =============== =============
  Cash dividends per share                                     $           0.05 $          0.05  $         0.10  $        0.10
                                                                ================ ================ =============== =============
</TABLE>

  See Notes to Condensed Financial Statements.



                                       2

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                                 Six Months Ended
                                                                                             1999                 1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                  <C>
Cash Flows from Operating Activities
    Net income                                                                  $            211,704 $            279,491
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Provision for loan losses and REO                                                       9,000               10,000
       Provision for depreciation                                                            182,099              154,132
       Amortization of goodwill and nonccompete covenant                                      28,452               19,914
       Change in operating assets and liabilities:
           Accrued interest receivable                                                      (114,187)               2,416
           Accrued interest payable                                                            6,265              (25,529)
           Prepaid and other assets                                                          166,456              (90,400)
           Accounts payable and other liabilities                                            470,186              (95,777)
           Other                                                                            (544,206)             646,073
                                                                                 -----------------------------------------
                         NET CASH PROVIDED BY OPERATING ACTIVITIES                           415,769              900,320
                                                                                 -----------------------------------------
Cash Flows from Investing Activities
    Proceeds from certificates of deposit                                                     99,000                    -
    Increase in Federal Home Loan Bank stock                                                (129,000)                   -
    Purchases of securities available for sale                                              (500,000)          (2,985,810)
    Proceeds from securities available for sale                                            1,778,122            3,134,097
    Net originations of loans receivable                                                 (16,581,803)          (1,312,623)
    Purchases of office properties and equipment                                            (767,411)            (351,637)
    Proceeds from foreclosed real estate                                                      11,500               38,115
                                                                                 -----------------------------------------
                         NET CASH USED IN INVESTING ACTIVITIES                           (16,089,592)          (1,477,858)
                                                                                 -----------------------------------------
Cash Flows from Financing Activities
    Net increase in savings deposits                                                       4,378,525            5,419,477
    FHLB Advances                                                                         10,474,339           (1,525,605)
    Repurchase Stock                                                                               -             (113,750)
    Dividends paid                                                                          (102,860)             (98,166)
                                                                                 -----------------------------------------
                         NET CASH PROVIDED BY FINANCING ACTIVITIES                        14,750,004            3,681,956
                                                                                 -----------------------------------------
                         NET INCREASE IN CASH AND CASH EQUIVALENTS                          (923,819)           3,104,418
Cash and cash equivalents:
    Beginning                                                                             12,395,060           14,308,009
                                                                                 -----------------------------------------
    Ending                                                                      $         11,471,241 $         17,412,427
                                                                                 =========================================
</TABLE>



                                       3

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                       1999                  1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                   <C>
Supplemental Schedule of Cash and Cash Equivalents
    Cash:
       Interest-bearing deposits                                            $             385,697 $          12,409,563
       Noninterest-bearing                                                             11,085,544             5,002,864
                                                                              ------------------------------------------
                                                                            $          11,471,241 $          17,412,427
                                                                              ==========================================

Supplemental Disclosures of Cash Flow Information
    Cash payments for:
       Interest                                                             $           2,198,951 $           2,043,845
                                                                              ==========================================
       Income taxes                                                         $              87,769 $             209,500
                                                                              ==========================================

See Notes to Condensed Financial Statements.

</TABLE>



                                       4

<PAGE>

                               AF BANKSHARES, INC.
                     NOTES TO CONDENSED 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 West Jefferson, Jefferson
and Warrensville, North Carolina operating under the trade name Ashe Federal
Bank, one branch in Alleghany County, North Carolina operating under the trade
name, Alleghany First Bank and one branch in Watauga County, North Carolina
operating under the trade name Appalachian First Bank. The Company has an
insurance subsidiary operating under the trade name AF Ashelande Insurance
Service, in West Jefferson, AF Brown Insurance Agency in Wilkesboro, AF Blair
Insurance Agency in Lenoir, AF Insurance Service Center in Elkin, and AF
Insurance Services, Inc. in Sparta, West Jefferson and Jefferson, North
Carolina. The Company has a brokerage service subsidiary, operating as AF
Brokerage, Inc., which serves Ashe, Alleghany, Wilkes and Watauga Counties. On
April 15, 1996, the Board of Directors of Ashe Federal 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 owned 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 Office of Thrift
Supervision ("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 then allowed under OTS regulations; therefore the OTS notified
the Bank that it had no objection to the planned branch on January 15, 1997. The
Bank opened the new office, Alleghany First Bank, on March 18, 1997.
Additionally, the Bank's insurance agency subsidiary offers property, casualty,
health and life insurance products within the Alleghany facility.




                                        5

<PAGE>



On January 27, 1999, the Bank filed notice with the OTS of its intention to open
a branch office in Watauga County to operate under the name Appalachian First
Bank, and published public notice. No public objection was filed; therefore the
OTS notified the Bank that it had no objection to the planned branch on March 1,
1999. The Bank opened the new branch office, in Watauga County operating under
the trade name Appalachian First Bank, on March 1, 1999. Two experienced loan
officers, a loan customer service representative, and a teller from the Watagua
County market operate this branch office. Entry in the Watauga market
significantly expands the Company's potential to expand the market for its
banking products and to market its insurance and non-insured investment products
to a larger and more diverse market.

During the third quarter of the fiscal year ending June 30, 1999, the Company
entered into an agreement to purchase an insurance agency located in Lenoir,
North Carolina. The purchase of assets was completed on April 1, 1999. The
insurance office in Lenior operates under the trade name, AF Blair Insurance
Agency. On October 11, 1999 the Company entered an agreement to purchase the
assets of an insurance agency in Elkin, North Carolina. The purchase of assets
closed on December 1, 1999. Management believes that penetration into other
markets increases the opportunity to deliver products from all of the Company's
subsidiaries to a broader market and will make the insurance subsidiary a more
profitable investment by increasing revenues, providing economies of scale and
adding to the products that are available for delivery to the Company's
customers.

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 impair the
Company's growth and make retention of existing customers more difficult. The
Company continues to seek opportunities to increase it's market penetration for
insurance services, primarily in northwestern North Carolina. During the three
month period ending September 30, 1998, the Company established a securities
brokerage subsidiary, AF Brokerage, Inc. which currently conducts brokerage
services as a branch of a third party broker dealer. AF Brokerage, Inc. applied
to the NASD for membership in the third quarter of 1998 and was granted
membership on October 22, 1999. AF Brokerage, Inc. will commence operation in
the third quarter of 2000 as an independent broker dealer once the transition
with their clearing agent has been completed. Management continues to evaluate
acquisitions and business opportunities that it believes will provide access to
customers and markets that enhance the Company's value and earnings potential in
the long term.

During the year ended June 30, 1999, the Company purchased 6,300 shares of its
common stock for a total price of $113,750. During the year ended June 30, 1999,
the Company issued 2,000 of these shares. Management does not plan to acquire
additional shares until it has a specific purpose for additional stock
purchases.

NOTE 2.  BASIS OF PRESENTATION

The accompanying unaudited financial statements (except for the statement of
financial condition at June 30, 1999, 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


                                        6

<PAGE>




(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 six
month periods ended December 31, 1999 are not necessarily indicative of the
results of operations that may be expected for the Company's fiscal year ending
June 30, 2000.

The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 1999 financial statements, which are
included in the Company's form 10-KSB for the year ended June 30, 1999.

NOTE 3.  EARNINGS PER SHARE

The Bank's basic and diluted earnings per share for the three and six month
periods ended December 31, 1999 are based on a weighted average of 1,008,210 and
1,006,399 shares, respectively, 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 second quarter of fiscal year ending June 2000, 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 Company'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 have 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 Company's stock to be issued as the
shares are vested by the eligible participants in the plan. On the same date,
the Company'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 Bankshares, Inc. 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.  COMPREHENSIVE INCOME

The Company was required to adopt Financial Accounting Standards Board Statement
No. 130, "Reporting Comprehensive Income", during the fiscal year ended June 30,
1999. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements.


                                        7

<PAGE>



NOTE 6.  FEDERAL HOME LOAN BANK ADVANCES

The Company had advances outstanding of $13,038,697 and $2,564,358 at December
31, 1999 and June 30, 1999 respectively, from the Federal Home Loan Bank ("the
FHLB"). Interest is payable at rates ranging from 4.95% to 6.87%. Pursuant to
collateral agreements with the FHLB, advances are collateralized by all the
Bank's stock in the FHLB and qualifying first mortgage loans. $887,500 of the
advances are due by August of 2002, $151,197 is due January 2007, $5.0 million
is due August 2009, $5.0 million is due September 2009, and the remaining
$2,000,000 is due on demand.




                                        8

<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.

BACKGROUND AND INTRODUCTION
Management believes it is important to view the quarterly financial results of
the Company within the perspective of the Company's long-term strategic business
plan. In general, the plan calls for positioning the Company now to take
advantage of the dramatically changing nature of the financial services industry
and the effects of those changes on the Company, its shareholders, its
customers, and its overall markets IN THE LONG TERM.

Perhaps the best example of the ongoing revolution in financial services was the
signing into law on November 12th of the Gramm-Leach-Bliley Act of 1999, also
known as the Financial Services Modernization Act. With this one piece of
legislation, Congress has enacted the most sweeping regulatory makeover of the
banking, securities, and insurance industries since the 1930s. It gives
financial services firms approval to enter a wide range of activities previously
prohibited by law, a notable example being the repeal of the separation between
banking and securities businesses. In addition to being fully cognizant of the
pending changes contained in the new legislation, management has been equally
aware of the underlying market forces which ultimately led to passage of the
Act.

Given the excellent capital position of the Company, management views the
continued implementation of its strategic plan to be both prudent and
appropriate. The short-term effects, while dampening current earnings, really
represent an investment in the achievement of the Company's larger goal: to
become the pre-eminent financial services provider in every market served by the
Company. By reaching that goal, management believes the Company will be able to
produce significant, sustainable earnings and profitability well into the 21st
Century.

Recent examples of the Company's progress toward the long-term goal of the
strategic business plan include:

     o   Increased net loans by $16.6 million or 20.4%;

     o   Increased assets by $15.4 million or 14.0% as a means of leveraging the
         Company's capital;

     o   Approval of the Company's broker/dealer license;

     o   The addition of the Company's fourth insurance agency to the AF
         Insurance network;

     o   Adding additional markets with major emphasis in commercial property
         and casualty that gives the Company a better mix between personal and
         commercial coverages;



                                        9

<PAGE>



     o   The nearing completion of the Company's new administrative and
         corporate headquarters building.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND JUNE 30, 1999:

Total assets increased by $15.4 million or 14.0% to $125.3 million at December
31, 1999 from $109.9 million at June 30, 1999. The increase in assets was the
result of an increase of $16.6 million, or 20.4%, in loans receivable, net,
partially offset by a decrease of $923,819 in cash and cash equivalents, from
June 30, 1999 to December 31, 1999. 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 and the result of the Bank beginning to
penetrate the Boone market which is a more highly commercialized market.
Management believes that the decrease in cash and cash equivalents is a result
of the institution's increased liquidity needs in order to meet customer's year
2000 needs. This increased liquidity demand also resulted in changing the mix of
cash and cash equivalents by moving interest-bearing deposits into more liquid
noninterest-bearing deposits. Increases in net loans outstanding, was primarily
funded by both an increase of $4.4 million in deposits and an increase of $10.5
million in advances from the Federal Home Loan Bank.

The Company's net investment in property and equipment increased $585,313 or
23.0% to $3.1 million at December 31, 1999, and was primarily a result of
building renovations at 111 South Jefferson Avenue, West Jefferson, North
Carolina, and from the purchase of AF Insurance Center in Elkin, North Carolina.
When completed, the building at 111 South Jefferson Avenue will be used for the
corporate offices for the Company and as an operation center for AF Bank.

The Bank's deposits increased by $4.4 million, or 4.7%, from $93.1 million at
June 30, 1999 to $97.5 million at December 31, 1999. Management believes that
the increase in deposits is attributable to its marketing efforts directed
towards increasing balances in savings and transaction accounts and in smaller,
stable certificates of deposits. During the six month period ending December 31,
1999, the Bank's savings and transaction accounts increased $1.5 million from a
net gain of 623 new accounts. Management intends to continue its marketing
efforts to increase these lower cost core deposits.

At December 31, 1999, retained earnings had increased $182,746 or 2.3% to $8.2
million as a result of earnings of $211,704, a decrease for the fair market
value adjustment for ESOP stock in the amount of $73,902 and a reduction for
dividends of $102,860. Deferred recognition and retention plan ("RRP") decreased
by $99,308 as a result of recognizing the vesture of additional RRP shares. At
December 31, 1999, the Bank's regulatory capital amounted to $12.4 million
compared to $12.2 million at June 30, 1999, which 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 to $342,600 at December 31, 1999 compared to $59,600 at June 30,
1999. 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 $27,393 during the six month period ended December 31, 1999
compared to, net charge offs, of $19,800 for the comparable period ended
December 31, 1998. As a result and based on management's analysis of its
allowances, a $9,000 provision for additional loan loss allowance was made for
the six month period ended December 31, 1999.


                                       10

<PAGE>






COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31,
1999 AND 1998:

GENERAL. Net income for the three and six month period ended December 31, 1999
was $82,047 and $211,704, respectively, or $50,169 less than the $132,216 and
$67,787 less than the $279,491 earned during the same periods in 1998. Changes
in net income during the comparable three and six month periods were primarily
attributable to decreased interest income on interest bearing deposits due to
the increased level of non-interest bearing deposits that the institution
maintained to prepare for potential customer withdrawals resulting from year
2000 concerns. Changes were also attributable to costs associated with the
Bank's branch office in Watagua County, Appalachian First Bank, the costs
associated with the purchase of AF Insurance Service Center, in Elkin North
Carolina and the addition of employees in order to prepare the Company for
future expansion. Management believes that these initial costs of expansion will
better position the Company for the future. 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 $281,932 or 14.5% from $1,949,238
for the three month period ended December 31, 1998 to $2,231,170 for the three
month period ended December 31, 1999. Interest income increased $423,348 or
10.8% from $3,919,341 for the six month period ended December 31, 1998 to
$4,342,689 for the six month period ended December 31, 1999. This increase was
attributable to a change in the volume and mix of net loans receivable, offset
by the decrease in interest-bearing deposits. Interest income from loans
increased $375,791 or 22.4% from $1,679,318 for the three months ended December
31, 1998 to $2,055,108 for the three months ended December 31, 1999. Interest
income from loans increased $562,176 or 16.7% to $3,926,775 for the six month
period ended December 31, 1999 from $3,364,600 for the six month period ended
December 31, 1998. This increase was offset by a decrease of $121,753, or 79.5%,
in interest income on interest-bearing deposits to $31,442 for the three month
period ended December 31, 1999 from $153,195 for the three month period ended
December 31, 1998. Interest income on interest-bearing deposits decreased
$208,222 or 67.0% to $102,566 for the six month period ended December 31, 1999
from $310,788 for the six month period ended December 31, 1998. Management
believes that the decrease in interest earned on interest-bearing deposits is
primarily a result of a shift in funds away from interest-bearing into
noninterest earning deposit balances due to the Bank's increased liquidity needs
in order to meet customer's potential year 2000 needs.

INTEREST EXPENSE. Interest expense increased by $198,968 or 20.2% to $1,181,983
for the three month period ended December 31, 1999 from $983,014 for the three
months ended December 31, 1998. Interest expense increased by $176,591 or 8.7%
from $2,028,624 for the six month period ended December 31, 1998 to $2,205,216
for the six month period ended December 31, 1999. The increase is the result of
the increase in advances outstanding at the Federal Home Loan Bank to fund loan
demand and increased liquid deposit balances.

NET INTEREST INCOME. Net interest income increased by $82,965 or 8.6% from
$966,224 for the three month period ended December 31, 1998 to $1,049,187 for
the three months ended December 31, 1999. Net interest income increased by
$246,756 or 13.1% from $1,890,717 for the six month period ended December 31,
1998 to $2,137,473 for the six month period ended December 31, 1999. The
increase is a result of increased average outstanding balances in net loans
receivable and an improved interest rate spread in effect during the period.


                                       11

<PAGE>





PROVISION FOR LOAN LOSSES. Management did not make an additional provision for
loan losses during the three month period ended December 31, 1999. An additional
$9,000 provision for loan losses was made during the six month period ended
December 31, 1999. During the three month period ended December 31, 1998, an
additional provision of $5,000 was made and during the six month period ended
December 31, 1998, an additional $10,000 provision was 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 six
month period ended December 31, 1999 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 six month period ended
December 31, 1999; however, due to changes in the mix of the Bank's loan
portfolio, management determined it was necessary to make an additional
provision. At December 31, 1999, 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 $107,285 from $312,166 for
the three month period ended December 31, 1998 to $419,451 for the three months
ended December 31, 1999. Non-interest income increased by $280,179 from $526,591
for the six month period ended December 31, 1998 to $806,770 for the six month
period ended December 31, 1999. The increase was primarily attributable to
increased revenues generated from insurance sales and income generated from the
Company's brokerage activities during the three and six months ended December
31, 1999.

It is significant to note that during the quarter ended December 31, 1999, the
Company's broker/dealer license was approved by regulatory authorities. As
growth in non-interest income continues to be a pivotal strategy in the
Company's long-term strategic plan, this development should add both momentum
and incremental income in the future. Plus, operating the ONLY locally-based
broker/dealer in our markets further enhances the Company's image and stature in
its primary service areas.

NON-INTEREST EXPENSE. Non-interest expense increased by $264,464 or 24.7% from
$1,071,983 for the three months ended December 31, 1998 to $1,336,447 for the
three months ended December 31, 1999. Non-interest expense increased by $620,009
or 31.5% from $1,970,557 for the six months ended December 31, 1998 to
$2,590,566 for the six months ended December 31, 1999. Increases in non-interest
expense for the three and six month periods ended December 31, 1999 are
primarily attributable to an increase in occupancy expenses and in compensation
costs. Compensation costs increased by $179,936 or 31.6% for the three month
period ended December 31, 1999 and $384,839 or 35.8% for the six month period
ended December 31, 1999, primarily as the result of adding employees in the
Bank' newest branch, Appalachian First Bank, the Company's subsidiary, AF
Brokerage, Inc. and additional insurance employees. Occupancy cost increased by
$14,494, or 12.4% for the three month period ended December 31, 1999, and
$43,094 or 20.0% for the six month period ended December 31, 1999, due to the
costs associated with the new branch, Appalachian First Bank, and costs
associated with renovations on the new corporate and administrative building.



                                       12

<PAGE>



Although non-interest expenses increased, management views the increase as an
investment in the future growth and success of the Company. Indeed, particularly
with regard to the new corporate and administrative building, a notable portion
of non-interest expense reflects the Company's past growth and success.

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.
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.

As of December 31, 1999, cash and cash equivalents, a significant source of
liquidity, totaled $11.5 million. A significant portion of this amount is a
direct result of the Bank preparing for year 2000 cash and liquidity needs and
increases in FHLB advances.

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 March 31, 1998, 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 December 31, 1999, as computed under OTS regulations,
was considerably in excess of such requirements. Given its level of liquidity
and its ability to borrow from the FHLB, the Bank believes that it will have
sufficient funds available to meet anticipated future loan commitments,
unexpected deposit withdrawals, and other cash requirements.

Because of the Company's excellent capital position and liquidity, management
feels the long-term strategic plan for the Company is not only prudent and in
the best interests of shareholders, but also affordable and reasonable in light
of the short-term investments required for its attainment.


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


                                       13

<PAGE>



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 the originations of three
and five-year fixed rate balloon 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.

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.

The Company conducted business as usual on January 3, 2000. No disruptions from
the century date change were experienced. The institution's currency supplies
were more than adequate to meet demand.

In part due to the need for adequate liquidity and expenses associated with Y2K
compliance, the Company's preparations for the year 2000 have temporarily
reduced short-term earnings. However, management is pleased with the Company's
preparedness and believes this downward pressure on short-term earnings will be
reduced, if not completely eliminated, during the first calendar quarter of
2000. The Company's liquidity substantially exceeds all regulatory requirements.



                                       14

<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

     The Company held an Annual Meeting of Stockholders on November 1, 1999. The
     purpose of the meeting was to vote on the following proposals.

         1. Election of three directors, William O. Ashley, Jr., Wayne R.
            Burgess and John D. Weaver, for terms of three years each;

         2. Ratification of the appointment of McGladrey & Pullen, LLP as
            independent auditors for the fiscal year ending June 30 2000;

         Both proposals were approved at the meeting.


Item 5.  Other Information
         Not applicable

Item 6.  Exhibits and Reports on Form 8-K
         Not applicable




                                       15

<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 February 8, 2000                     By: /s/ James A. Todd
     -------------------                      ----------------------------------
                                           James A. Todd
                                           President and Chief Executive Officer

Dated February 8, 2000                     By: /s/ Melanie Paisley Miller
     -------------------                      ----------------------------------
                                           Melanie Paisley Miller
                                           Executive Vice President, Secretary,
                                           Treasurer and Chief Financial Officer




                                       16