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, 2001
                                       --------------
                                            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)

                               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)

Indicate by check U whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the 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 April 30, 2001 there were 1,053,679 shares of the Registrant's common
stock issued and 1,049,379 shares of the Registrant's common stock outstanding,
$.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
March 31, 2001 (unaudited) and June 30, 2000                                            1

Condensed Consolidated Statements of Income and Comprehensive Income for
the Three and Nine Months ended March 31, 2001 and 2000 (unaudited)                     2

Condensed Consolidated Statements of Cash Flows for the Nine Months ended
March 31, 2001 and 2000 (unaudited)                                                     3 - 4

Notes to Condensed Consolidated financial statements                                    5 - 7

         Item 2.  Management's Discussion and Analysis                                  8 - 13

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                     14
         Item 2.  Changes in Securities and Use of Proceeds                             14
         Item 3.  Defaults upon Senior Securities                                       14
         Item 4.  Submission of Matters to a Vote of Security Holders                   14
         Item 5.  Other Information                                                     14
         Item 6.  Exhibits and Reports on Form 8-K                                      14-15
         Signatures                                                                     16
</TABLE>

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2001 and June 30, 2000

<TABLE>
<CAPTION>

ASSETS
                                                                            March 31,           June 30,
                                                                               2001               2000
-------------------------------------------------------------------------------------------------------------
                                                                           (Unaudited)            Note
<S>                                                                   <C>                  <C>
Cash and cash equivalents:
   Interest-bearing deposits                                              $     8,857,000  $       2,599,071
   Noninterest-bearing deposits                                                 7,110,906          4,823,781
Certificates of deposit, at cost                                                   99,000             99,000
Securities held to maturity                                                       100,000            100,000
Securities available for sale                                                   7,102,720          8,860,452
Federal Home Loan Bank stock                                                    1,049,400            775,700
Loans receivable, net                                                         123,736,372        108,778,257
Real estate owned                                                                 248,323            289,441
Office properties and equipment, net                                            4,225,219          4,183,610
Accrued interest receivable on loans                                              892,327            605,749
Accrued interest receivable on investment securities                               49,965             82,647
Prepaid expenses and other assets                                                 756,088            562,317
Deferred income taxes, net                                                        416,326            499,045
Intangible assets                                                               1,614,893          1,111,333
                                                                          ----------------------------------
                              TOTAL ASSETS                                $   156,258,539  $     133,370,403
                                                                          ==================================
LIABILITIES AND EQUITY
Liabilities:
   Savings deposits                                                       $   123,303,533  $     102,679,834
   Note payable                                                                 1,388,118            700,000
   Note payable - ESOP                                                            216,236            229,878
   Advances from Federal Home Loan Bank                                        16,974,413         15,513,007
   Accounts payable and other liabilities                                       1,145,934          1,630,313
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares                                                        215,692             77,116
                                                                          ----------------------------------
                              TOTAL LIABILITIES                               143,243,926        120,830,148
                                                                          ==================================
Commitments and Contingencies
Stockholders' Equity:
    Common stock, par value $.01 per share; authorized 5,000,000
          shares; 1,053,679 issued and 1,049,379 outstanding shares
          at March 31, 2001 and June 30, 2000                                      10,537             10,537
   Additional paid-in capital                                                   4,588,546          4,591,555
   Retained earnings, substantially restricted                                  8,528,829          8,331,965
   Deferred recognition and retention plan                                       (132,382)          (281,344)
   Accumulated other comprehensive income (loss)                                  102,933            (28,608)
                                                                          -----------------------------------
                                                                               13,098,463         12,624,105
    Less the cost of 4,300 shares of treasury stock                               (83,850)           (83,850)
                                                                          -----------------------------------
                              TOTAL STOCKHOLDERS' EQUITY                       13,014,613         12,540,255
                                                                          -----------------------------------
                              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $   156,258,539 $      133,370,403
                                                                          ==================================

</TABLE>
See Notes to Condensed Consolidated Financial Statements.

Note: The Condensed Consolidated Statement of Financial Condition as of June 30,
2000 has been taken from audited financial statements at that date.


                                       1

<PAGE>


<TABLE>
<CAPTION>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000

-------------------------------------------------------------------------------------------------------------------------
                                                                  Three Months Ended             Nine Months Ended
                                                                      March 31,                       March 31,
-------------------------------------------------------------------------------------------------------------------------
                                                                 2001           2000            2001           2000
-------------------------------------------------------------------------------------------------------------------------

<S>                                                        <C>            <C>             <C>               <C>
Interest and dividend income:
  Loans                                                    $    2,736,908 $     2,203,593 $     8,050,117   $  6,130,369
  Investment securities                                           154,107         126,689         461,059        440,037
  Interest-bearing deposits                                       103,901          68,907         187,868        171,472
                                                           ------------------------------ ------------------------------
                TOTAL INTEREST INCOME                           2,994,916       2,399,189       8,699,044      6,741,878
                                                           ------------------------------ ------------------------------

Interest expense:
  Deposits                                                      1,399,762       1,051,461       3,874,693      2,987,159
  Federal Home Loan Bank advances                                 266,193         155,346         792,761        414,179
  Notes payable                                                    32,430          18,520          60,883         29,205
                                                           ------------------------------ ------------------------------
                                                                1,698,385       1,225,327       4,728,337      3,430,543
                                                           ------------------------------ ------------------------------
                NET INTEREST INCOME                             1,296,531       1,173,862       3,970,707      3,311,335
Provision for loan losses                                         111,000          39,000        190,000          48,000
                                                           ------------------------------ ------------------------------
                NET INTEREST INCOME AFTER PROVISION FOR
                LOAN LOSSES                                     1,185,531       1,134,862       3,780,707      3,263,335
                                                           ------------------------------ ------------------------------

Noninterest income:
  Insurance commissions                                           540,131         285,488       1,241,793        698,399
  Gain on sale of investments available for sale                  104,391          30,609         104,391         94,603
  Other                                                           184,657         226,110         570,071        555,975
                                                           ------------------------------ ------------------------------
                                                                  829,179         542,207       1,916,255      1,348,977
                                                           ------------------------------ ------------------------------

Noninterest expense:
  Compensation and employee benefits                            1,021,024         817,679       2,889,800      2,279,077
  Occupancy and Equipment                                         201,794         152,847         614,618        411,141
  Deposit insurance premiums                                        5,188           4,922          15,502         31,377
  Computer processing charges                                      81,458          79,384         238,480        215,643
  Amortization                                                     35,989          26,073          91,440         54,525
  Other                                                           384,580         370,182       1,091,582      1,049,890
                                                           ------------------------------ ------------------------------
                                                                1,730,033       1,451,087       4,941,422      4,041,653
                                                           ------------------------------ ------------------------------
                INCOME BEFORE INCOME TAXES                        284,677         225,982         755,540        570,659
  Income taxes                                                    110,517          89,635         292,323        222,608
                                                           ------------------------------ ------------------------------
                NET INCOME                                        174,160         136,347         463,217        348,051
                                                           ------------------------------ ------------------------------
  Other comprehensive income (loss), net of tax:
   Unrealized gain (loss) on securities, net of tax                44,055         (38,312)        203,571       (159,780)
    Less:  reclassification adjustment for
    gains included in net income, net of tax                       72,030          20,998          72,030         64,898
                                                           ------------------------------ ------------------------------
               COMPREHENSIVE INCOME                        $      146,185 $        77,037 $       594,758  $     123,373
                                                           ============== =============== ===============  =============

  Basic Earnings per share of common stock (Note 3)        $         0.17 $          0.13 $          0.45           0.35
                                                           ============== =============== ===============  =============
  Diluted Earnings per share of common stock (Note 3)      $         0.17 $          0.13 $          0.45           0.35
                                                           ============== =============== ===============  =============
  Cash dividends per share                                 $         0.05 $          0.05 $          0.15           0.15
                                                           ============== =============== ===============  =============
</TABLE>


                                       2

<PAGE>

<TABLE>
<CAPTION>

AF BANKSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
                                                                                               Nine Months Ended
                                                                                           2001                 2000
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                  <C>
Cash Flows from Operating Activities
    Net income                                                                  $            463,217 $            348,051
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Provision for loan losses and REO                                                     190,000               48,000
       Provision for depreciation                                                            428,450              280,494
       Loss on disposition of office properties and equipment                                  7,886                    -
       Amortization of goodwill and non-compete covenants                                     91,440               54,525
       Change in operating assets and liabilities:
         Accrued interest receivable                                                        (253,896)             (93,444)
         Accrued interest payable                                                            102,226               37,697
         Prepaid and other assets                                                           (193,771)             (32,241)
         Accounts payable and other liabilities                                             (484,379)             634,675
         Other                                                                               161,696              225,578
                                                                                ------------------------------------------
                         NET CASH PROVIDED BY OPERATING ACTIVITIES                           512,869            1,503,335
                                                                                ------------------------------------------
Cash Flows from Investing Activities
    Proceeds from certificates of deposit                                                          -               99,000
    Increase in Federal Home Loan Bank stock                                                (273,700)             (58,600)
    Purchases of securities available for sale                                            (1,400,000)          (1,500,000)
    Proceeds from securities available for sale                                            3,384,027            2,518,423
    Net originations of loans receivable                                                 (15,148,115)         (21,282,016)
    Purchases of office properties and equipment                                            (477,945)          (1,332,844)
    Purchase of goodwill and noncompete agreements                                          (595,000)                   -
    Proceeds from foreclosed real estate                                                      41,118               11,500
                                                                                ------------------------------------------
                         NET CASH USED IN INVESTING ACTIVITIES                           (14,469,615)         (21,544,537)
                                                                                ------------------------------------------
Cash Flows from Financing Activities
    Net increase in savings deposits                                                      20,521,473            9,942,631
    FHLB Advances                                                                          1,461,406            6,461,498
    Notes Payable                                                                            674,476                    -
    Dividends paid                                                                          (155,555)            (154,359)
                                                                                ------------------------------------------
                         NET CASH PROVIDED BY FINANCING ACTIVITIES                        22,501,800           16,249,770
                                                                                ------------------------------------------
                         NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              8,545,054           (3,791,432)
Cash and cash equivalents:
    Beginning                                                                              7,422,852           12,395,060
                                                                                ------------------------------------------

    Ending                                                                      $         15,967,906 $          8,603,628
                                                                                =========================================
</TABLE>


                                       3

<PAGE>


<TABLE>
<CAPTION>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Nine Months Ended March 31, 2001 and 2000

                                                                                     2001                  2000
---------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>
Supplemental Schedule of Cash and Cash Equivalents
    Cash:
       Interest-bearing deposits                                            $        8,857,000 $           1,701,158
       Noninterest-bearing                                                           7,110,906             6,902,470
                                                                             ----------------------------------------
                                                                            $       15,967,906 $           8,603,628
                                                                             ========================================
Supplemental Disclosures of Cash Flow Information
    Cash payments for:
       Interest                                                             $        4,533,320 $           3,392,846
                                                                             ========================================
       Income taxes                                                         $          169,653 $             171,855
                                                                             ========================================
</TABLE>

See Notes to Condensed Consolidated Financial Statements.



                                       4

<PAGE>

                               AF BANKSHARES, INC.
              NOTES TO CONDENSED CONSOLIDATED 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 names 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, Jefferson, and Boone, 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.

Management believes that the Company's customers perceive "financial services"
to encompass five broad categories: funds transfer including checking accounts;
insured savings instruments; credit/lending services; insurance; and securities
brokerage. Further, management believes that failure to offer insurance and
brokerage services in addition to the more normal banking services will impair
the Company's growth and make retention of existing customers more difficult.
The Company continues to seek opportunities to increase market penetration for
its products and 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. that currently conducts
brokerage services


                                       5

<PAGE>

from offices in West Jefferson and Jefferson and by appointment in the Company's
other office locations. 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. commenced operation in the fourth quarter of 2000 as an
independent broker/dealer. Management continues to evaluate acquisitions and
business opportunities that it believes will provide access to customers and
markets, which enhance the Company's value and earnings potential in the long
term.

On November 1, 2000, the Company purchased the assets of an insurance agency in
Boone, North Carolina. 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 and brokerage
subsidiaries more profitable investments by increasing the economies of scale,
as well as improving the economies of scope, and adding to the products that are
available for delivery to the Company's customers. Of course, management is
equally committed to protecting and expanding market share in the Company's
existing markets. As evidence of the commitment, a definitive agreement has been
executed to allow AF Bank to be the only financial institution located inside
the new Wal-Mart under construction in West Jefferson, North Carolina. In
addition, plans call for the bank to build a freestanding, full-service branch
adjacent to Wal-Mart. Thus, customers will enjoy the convenience of banking
where they shop - - as well as having access to a comprehensive array of
financial services at the freestanding branch office (including drive-through
lanes and a commercial depository). The Company continues to seek opportunities
for increasing market penetration of its services.

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, 2000, 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-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The results of operations for the three and nine
month periods ended March 31, 2001 are not necessarily indicative of the results
of operations that may be expected for the Company's fiscal year ending June 30,
2001.

The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 2000 financial statements, which are
included in the Company's Form 10-KSB for the year ended June 30, 2000.

NOTE 3.   EARNINGS PER SHARE

The Company's basic and diluted earnings per share for the three and nine month
period


                                       6

<PAGE>

ended March 31, 2001 are based on weighted averages of 1,026,262, and 1,022,620,
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
third quarter of fiscal year ending June 2001, 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 Accounting 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 rate of 20% annually beginning at the date of
grant. 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.  FEDERAL HOME LOAN BANK ADVANCES AND NOTES PAYABLE

The Company had advances outstanding of $16,974,413 and $15,513,007 at March 31,
2001 and June 30, 2000 respectively, from the Federal Home Loan Bank ("the
FHLB"). Interest at March 31, 2001 is payable at rates ranging from 5.02% to
6.87%. Pursuant to collateral agreements with the FHLB, advances are
collateralized by the Bank's stock in the FHLB and qualifying first mortgage
loans. Advances in the amount of $825,000 are due August 2002, $149,413 is due
January 2007, $5.0 million is due September 2010, $7.0 million is due November
2010 and $4.0 million is due January 2011.

The Company had Notes Payable outstanding of $1,388,118 and $700,000 at March
31, 2001 and June 30, 2000 respectively. Interest at March 31, 2001 is payable
at rates ranging from 5.50% to 8.00% with maturities between 9 and 10 years.


                                       7

<PAGE>

                               AF BANKSHARES, INC.
                      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 ADVERSE INTEREST RATE ENVIRONMENT THAT ADVERSELY AFFECTS THE INTEREST RATE
SPREAD OR OTHER INCOME ANTICIPATED FROM THE COMPANY'S OPERATIONS AND
INVESTMENTS; AND DEPOSITOR AND BORROWER PREFERENCES. THE COMPANY DISCLAIMS ANY
OBLIGATION TO PUBLICLY ANNOUNCE FUTURES EVENTS OR DEVELOPMENTS THAT MAY AFFECT
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.

BACKGROUND AND INTRODUCTION

Management believes 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 results in better perspective, and
underscores management's commitment to the LONG-TERM profitability and success
of the Company.

It has long been management's view that the Company's success in the 21st
Century will depend in large part upon its ability to compete far beyond the
narrow boundaries imposed upon banking during the majority of the 20th Century.
In fact, the transition from "banking" to "financial services provider" impacted
every major competitor of the Company. The Gramm-Leach-Bliley Financial Services
Modernization Act is an excellent example of regulatory and governmental support
of this viewpoint.

As noted in Note 1 of the Notes To Condensed Consolidated Financial Statements,
management believes that the Company's customers perceive "financial services"
to encompass five broad categories: funds transfer including checking accounts;
insured savings instruments; credit/lending services; insurance; and securities
brokerage. Preparing the Company to compete on a competitively superior basis in
all these categories has had a negative impact on short-term earnings. However,
it is well worth noting that -- given these planned and uncontrollable dampening
factors -- the COMPANY'S EARNINGS FOR THE MOST RECENTLY COMPLETED QUARTER REMAIN
POSITIVE AND REPRESENT AN INCREASE OVER THE SIMILAR PERIOD IN THE PRIOR YEAR.

Management has long recognized the dramatically changing dynamics of the
delivery system for financial services in this country. 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're purchasing mutual funds and annuities
through offices of banking organizations; and they're utilizing the services of
a financial planner at an insurance company to plan their retirements. 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.

The Company now has a foundation to successfully compete in our established
markets. In all AF Bank markets, we now have the capability to deliver
comprehensive insurance services through our insurance subsidiary and the
potential to deliver securities services through AF Brokerage, Inc. The
challenge facing us is to provide the most economical, efficient - and


                                       8

<PAGE>

most importantly - DESIRABLE platform to offer our customers, clients, and
prospects these services. It is a challenge management is working hard to meet.
In coming years, it is management's firm belief that the Company's established
foundation and emerging platform will drive the Company's long-term viability as
a competitively superior financial service provider in all markets.

There are a number of significantly positive factors and recent events, which
reflect the Company's progress toward its long-term goals in the just ended
period:

o        An increase in net loans of $15.0 million or 13.8%;

o        Asset growth of $22.9 million or 17.2%;

o        An increase of $567,278 or 42.1% in noninterest income, as compared to
         the corresponding nine month period ended March 31, 2000, reflecting
         the Company's continuing emphasis in the areas of insurance and
         securities services;

o        Growth in stockholders' equity to $13,014,613 from $12,540,255 at June
         30, 2000.

o        The addition of new insurance markets with major emphasis in commercial
         property and casualty business, thereby providing the Company with an
         even better mix between personal and commercial lines of business.

One exciting development is the execution of an exclusive agreement to allow AF
Bank to be the sole financial institution located inside the new Wal-Mart now
under construction in West Jefferson. That office, as well as a full-service AF
Bank branch planned adjacent to the Wal-mart property, will offer local
individuals, families, and businesses enhanced access and convenience
unparalleled by other financial services providers in Ashe County.

Management is optimistic about the future of the Company. Overall, management
and the board of directors are indeed pleased with the continued positive
short-term earnings of the Company, particularly in light of the investments
required (i.e., slightly lower short-term earnings) to accomplish the goals of
the long-term strategic plan.



COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND JUNE 30, 2000:

Total assets increased by $22.9 million, or 17.2%, to $156.3 million at March
31, 2001 from $133.4 million at June 30, 2000. The increase in assets was the
result of both an increase of $15.0 million, or 13.8%, in loans receivable, net,
from June 30, 2000 to March 31, 2001 and an increase of $8.5 million in cash and
cash equivalents from June 30, 2000 to March 31, 2001. 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. Increases in net loans
outstanding and cash and cash equivalents were primarily funded by an increase
of $20.6 million in deposits.

The Company's investment in net intangible assets increased $503,560 from $1.1
million at June 30, 2000 to $1.6 million at March 31, 2001. This increase was
due to the purchase of an insurance agency in Boone, North Carolina. The
Company's net investment in property and equipment increased $41,609 or 1.0% to
$4.2 million at March 31, 2001, and was primarily a result of purchasing a
previously leased building in Lenoir, North Carolina, that is occupied by a
branch of the insurance subsidiary, as well as purchasing equipment for the
insurance

                                       9

<PAGE>


agency acquisition in Boone, North Carolina.

The Bank's deposits increased by $20.6 million, or 20.1%, from $102.7 million at
June 30, 2000 to $123.3 million at March 31, 2001. Management believes that the
increase in deposits is attributable to its continuing marketing efforts
directed towards increasing balances in savings and transaction accounts and in
smaller, stable certificates of deposits. During the nine-month period ending
March 31, 2001, the Bank's savings and transaction accounts increased $7.9
million for a net gain of 650 new accounts, while the Bank's certificates of
deposits increased $12.5 million representing a net gain of 222 new accounts.
Management intends to continue its marketing efforts and to offer new products
to increase the lower cost core deposits. The increase in deposit accounts
helped fund the $15.0 million growth in net loans and the growth of $8.5 million
in cash and cash equivalents.

At March 31, 2001, retained earnings had increased $196,864 or 2.4% to $8.5
million as a result of earnings of $463,217, a decrease for the fair market
value for ESOP stock in the amount of $110,798 and a reduction for dividends of
$155,555. Deferred recognition and retention plan ("RRP") decreased by $148,962
as a result of recognizing the vesture of additional RRP shares. At March 31,
2001, the Bank's regulatory capital amounted to $12.4 million compared to $11.7
million at June 30, 2000, which was 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, decreased to $341,500 at March 31, 2001 compared to $411,900 at June 30,
2000. 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 approximately $162,900 during the nine-month period ended March
31, 2001 compared to net charge offs of $183,900 for the comparable period ended
March 31, 2000. The net charge off amount during the nine months ended March 31,
2001 is primarily attributable to one large commercial loan that the institution
charged off during the third quarter of the current fiscal year. As a result and
based on management's analysis of its allowances, a $190,000 provision for
additional loan loss allowance was made for the nine-month period ended March
31, 2001.


COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED MARCH 31,
2001 AND 2000:

GENERAL. Net income for the three and nine month periods ended March 31, 2001
was $174,160 and $463,217, respectively, or $37,813 more than the $136,347 and
$115,166 more than the $348,051 earned during the same periods in 2000. Changes
in net income during the comparable three and nine month periods were primarily
attributable to an increase in interest income on loans due to both the volume
of the institution's loan portfolio and the increase in noninterest income due
to increased commission income from the insurance subsidiary. These increases
were partially offset by the increase in interest expense in order to fund loan
growth, and increased compensation and employee benefit expenses due to the
addition of employees in order to prepare the Company for current and 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 $595,727 or 24.8% from $2,399,189
for the three-month period ended March 31, 2000 to $2,994,916 for the
three-month period ended


                                       10

<PAGE>

March 31, 2001. Interest income increased by $1,957,166 million or 29.0% from
$6,741,878 for the nine-month period ended March 31, 2000 to $8,699,044 for the
nine-month period ended March 31, 2001. Interest income from loans increased
$533,315 or 24.2% from $2,203,593 for the three months ended March 31, 2000 to
$2,736,908 for the three months ended March 31, 2001. Interest income from loans
increased $1,919,748 or 31.3% from $6,130,369 for the nine-month period ended
March 31, 2000 to $8,050,117 for the nine-month period ended March 31, 2001.
This increase was attributable to a change in the volume, rate and mix of net
loans receivable.

INTEREST EXPENSE. Interest expense increased by $473,058 or 38.6% to $1,698,385
for the three-month period ended March 31, 2001 from $1,225,327 for the three
months ended March 31, 2000. Interest expense increased by $1,297,794 or 37.8%
to $4,728,337 for the nine-month period ended March 31, 2001 from $3,430,543 for
the nine-month period ended March 31, 2000. The increase is the result of both
the increase in advances outstanding at the Federal Home Loan Bank, and the
$20.6 million increase in savings deposits for the nine-month period ended March
31, 2001, both of which were used to fund loan demand and to increase the
balance in cash and cash equivalents.

NET INTEREST INCOME. Net interest income increased by $122,669 or 10.5% from
$1,173,862 for the three-month period ended March 31, 2000 to $1,296,531 for the
three-month period ended March 31, 2001. Net interest income increased by
$659,372 or 19.9% from $3,311,335 for the nine-month period ended March 31, 2000
to $3,970,707 for the nine-month period ended March 31, 2001. The increase is a
result of increased average outstanding balances in net loans receivable.
Interest income from loans increased at the rate of 24.2% for the three-month
period ended March 31, 2001, compared to an increase of 38.6% in interest
expense for the same period. During this three-month period, the Federal Reserve
Open Market Committee reduced certain rates that it controls that resulted in a
reduction in the prime rate of interest by 1.5%. The Bank had average loan
balances outstanding during the quarter of $122.3 million that declined in yield
during the period, resulting in a lower percentage increase in interest income
in the most recent period.

PROVISION FOR LOAN LOSSES. Management made an additional $39,000 provision for
loan losses during the three-month period ended March 31, 2000, compared to a
$111,000 provision for loan losses made during the three-month period ended
March 31, 2001. Management made a $48,000 provision for loan losses during the
nine-month period ended March 31, 2000, compared to a $190,000 provision made
during the nine-month period ended March 31, 2001. 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 provisions for loan loss allowances during the three and
nine-month period ended March 31, 2001 based upon an analysis of the quality of
its loan portfolio. The Bank's level of non-performing loans remained
consistently low in relation to prior periods and total loans outstanding during
the three and nine month period ended March 31, 2001, with the exception of one
large charged off commercial loan; therefore, due to changes in the mix of the
Bank's loan portfolio, management determined it was necessary to make an
additional


                                       11

<PAGE>

provision. At March 31, 2001, the Bank's level of general valuation allowances
for loan losses amounted to $1.0 million which management believes is adequate
to absorb any existing losses in its loan portfolio.


NON-INTEREST INCOME. Non-interest income increased by $286,972, or 52.9% from
$542,207 for the three-month period ended March 31, 2000 to $829,179 for the
three months ended March 31, 2001. Non-interest income increased by $567,278, or
42.1% from $1,348,977 for the nine-month period ended March 31, 2000 to
$1,916,255 for the nine-month period ended March 31, 2001. The increase was
primarily attributable to increased revenues generated from insurance sales and
from gain on sale of investments available for sale during the three and nine
months ended March 31, 2001. The increased revenue generated for insurance sales
and income generated form the Brokerage subsidiary is due to widening market
penetration and should continue to produce new growth in non-interest income.


NON-INTEREST EXPENSE. Non-interest expense increased by $278,946 or 19.2% from
$1,451,087 for the three months ended March 31, 2000 to $1,730,033 for the three
months ended March 31, 2001. Non-interest expense increased by $899,769 or 22.3%
from $4,041,653 for the nine months ended March 31, 2000 to $4,941,422 for the
nine months ended March 31, 2001. Increases in non-interest expense for the
three and nine-month periods ended March 31, 2001 are primarily attributable to
an increase in compensation costs and in occupancy expenses. Compensation costs
increased by $203,345 or 24.9% for the three-month period ended March 31, 2001
and increased by $610,723 or 26.8% for the nine-month period ended March 31,
2001. This increase is primarily the result of additional insurance employees
acquired with the Company's newest insurance acquisition. Occupancy costs
increased by $48,947, or 32.0% for the three-month period ended March 31, 2001
and $203,477 or 49.5% for the nine-month period ended March 31, 2001, primarily
due to the costs associated with the new insurance offices.

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 March 31, 2001, cash and cash equivalents, a significant source of
liquidity, totaled $16.0 million. The Company's capital position and liquidity
are in excellent shape, by any objective benchmark or comparison.


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,


                                       12

<PAGE>

may also have an impact on the management of interest rate risk.

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

In order to minimize the potential effects of adverse material and prolonged
increases in market interest rates on the Company's operations, management has
implemented an asset/liability program designed to improve the Company's
interest rate risk exposure. The program emphasizes 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
residual effect of reducing the Company's historical exposure to interest rate
increases is a heightened exposure to interest rate decreases. Additionally, a
decline in rates for earning assets may occur more rapidly than a decline in
funding costs. Certificate of Deposits represent the most interest sensitive
funding products and typically have terms ranging from three to thirty six
months. Consequently, the rates paid for these deposits cannot be adjusted until
the maturity date. Loans priced at prime or a margin thereto provide for
adjusting rates immediately when market rates change. In a rising rate
environment, that ability to make immediate rate adjustments serves to protect
the net interest margin against increases in rates at a more rapid speed than
the increase in funding. In a declining rate environment, the rates on prime
rate based loans decrease immediately while certificate rates lag causing the
interest margin to decline until the certificates mature offering an opportunity
for repricing.


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.





                                       13

<PAGE>



                               AF BANKSHARES, INC.


Part II.  OTHER INFORMATION


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

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

Item 3.  Defaults Upon Senior Securities
         Not applicable

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

Item 5.  Other Information
         Not applicable

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

2.1        Agreement and Plan of Reorganization dated September 15, 1997 by and
           among Ashe Federal Bank, AF Bankshares, Inc. and Ashe Interim Savings
           Bank (incorporated by reference to the Registration Statement on Form
           8-A, as filed with the SEC on June 16, 1998 (the "Form 8-A")).

3.1        Federal Stock Charter of the Company (Incorporated by reference to
           Exhibit 3.1 of the Form 8-A).

3.2        Bylaws of the Company (Incorporated by reference to Exhibit 3.2 of
           the Form 8-A).

4.1        Common Stock Certificate of the Company (Incorporated by reference to
           Exhibit 4.3 of the Form 8-A).

10.1       Employment Agreement with James A. Todd, President and Chief
           Executive Officer (incorporated by reference to the 10-KSB for the
           year ended June 30,1998).*

10.2       Employment Agreement with Melanie Paisley Miller, Executive Vice
           President, Chief Financial Officer, Secretary and Treasurer
           (incorporated by reference to the 10-KSB for the year ended June 30,
           1998).*


                                       14

<PAGE>

10.3       Employment Agreement with Martin G. Little, Senior Vice President and
           Chief Lending Officer (incorporated by reference to the 10-KSB for
           the year ended June 30, 1998).

10.4       Employee Stock Ownership Plan of Ashe Federal Bank (incorporated by
           reference to the Company's Annual Report on Form 10-KSB for the year
           ended June 30, 1998).

(b)  Reports on Form 8-K

           There were no reports on Form 8-K filed during the quarter for which
this report is filed.






                                       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 May 9, 2001                      By:/s/ James A. Todd
      ---------------------------         --------------------------------------
                                       James A. Todd
                                       President and Chief Executive Officer

Dated May 9, 2001                      By:/s/ Melanie Paisley Miller
      ---------------------------         --------------------------------------
                                       Melanie Paisley Miller
                                       Executive Vice President, Secretary,
                                       Treasurer and Chief Financial Officer






                                       16