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   September 30, 1999
                                           ------------------

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

      For the transition period from _________________ to _________________


               Office of Thrift Supervision Docket Number: H-2736

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

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

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

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

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

Indicate by check 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 October 31, 1999 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>

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


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

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

Condensed Consolidated Statements of Income and Comprehensive Income for
the Three Months ended  September 30, 1999 and 1998 (unaudited)                         2

Condensed Consolidated Statements of Cash Flows for the Three Months ended
September 30, 1999 and 1998 (unaudited)                                                 3 - 4

Condensed notes to financial statements                                                 5 - 7

         Item 2.  Management's Discussion and Analysis of Financial
         Condition And Results of Operations                                            8 - 12

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                     13
         Item 2.  Changes in Securities and Use of Proceeds                             13
         Item 3.  Defaults upon Senior Securities                                       13
         Item 4.  Submission of Matters to a Vote of Security Holders                   13
         Item 5.  Other Information                                                     13
         Item 6.  Exhibits and Reports on Form 8-K                                      13
         Signatures                                                                     14
</TABLE>

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES


CONDENSED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1999 AND JUNE 30, 1999

<TABLE>
<CAPTION>
ASSETS
                                                                                  September 30,          June 30,
                                                                                      1999                 1999
-------------------------------------------------------------------------------------------------------------------
                                                                                   (Unaudited)             Note
<S>                                                                              <C>                  <C>
Cash and cash equivalents:
   Interest-bearing deposits                                                     $   3,943,829        $   4,173,311
   Noninterest-bearing deposits                                                     10,813,024            8,221,749
Certificates of deposit, at cost                                                       198,000              198,000
Securities held to maturity                                                            100,000              100,000
Securities available for sale                                                       10,353,452           10,976,170
Federal Home Loan Bank stock                                                           627,600              523,600
Loans receivable, net                                                               88,714,830           81,156,766
Real estate owned                                                                       59,000               59,000
Office properties and equipment, net                                                 2,653,239            2,544,777
Accrued interest receivable on loans                                                   483,769              398,918
Accrued interest receivable on investment securities                                   100,079               97,598
Prepaid expenses and other assets                                                      531,833              546,721
Deferred income taxes, net                                                             467,241              425,100
Intangible assets                                                                      495,490              509,716
                                                                                 ----------------------------------
                              TOTAL ASSETS                                       $ 119,541,386        $ 109,931,426
                                                                                 ==================================
LIABILITIES AND EQUITY
Liabilities:
   Savings deposits                                                              $  94,416,698        $  93,106,090
   Note payable-ESOP                                                                   255,420              255,420
   Advances from Federal Home Loan Bank                                             11,051,531            2,564,358
   Accounts payable and other liabilities                                            1,370,503            1,636,362
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares                                                             183,266              150,942
                                                                                 ----------------------------------
                              TOTAL LIABILITIES                                    107,277,418           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 September 30, 1999
          and June 30, 1999                                                             10,537               10,537
   Additional paid-in capital                                                        4,595,255            4,593,516
   Retained earnings, substantially restricted                                       8,029,558            7,974,373
   Deferred recognition and retention plan                                            (430,306)            (479,960)
   Accumulated other comprehensive income, unrealized gain
          on securities available for sale                                             142,774              203,638
                                                                                 -----------------------------------
                                                                                    12,347,818           12,302,104
    Less the cost of 4,300 shares of treasury stock                                    (83,850)             (83,850)
                                                                                 ----------------------------------
                              TOTAL STOCKHOLDERS' EQUITY                            12,263,968           12,218,254
                                                                                 ----------------------------------
                              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $ 119,541,386        $ 109,931,426
                                                                                 ==================================
</TABLE>

See Notes to Condensed Financial Statements.

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                          September 30,
--------------------------------------------------------------------------------------------------------------
                                                                                     1999               1998
--------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>
Interest and dividend income:
  Loans                                                                         $ 1,871,667        $ 1,685,282
  Investment securities                                                             168,728            127,228
  Interest-bearing deposits                                                          71,124            157,593
                                                                                ------------------------------
                TOTAL INTEREST INCOME                                             2,111,519          1,970,103
                                                                                ------------------------------

Interest expense:
  Deposits                                                                          936,552            981,737
  Federal Home Loan Bank advances                                                    80,876             57,981
  Note payable, ESOP                                                                  5,805              5,892
                                                                                ------------------------------
                                                                                  1,023,233          1,045,610
                                                                                ------------------------------
                NET INTEREST INCOME                                               1,088,286            924,493
                                                                                      9,000              5,000
Provision for loan losses                                                       ------------------------------
                NET INTEREST INCOME AFTER PROVISION FOR
                 LOAN LOSSES                                                      1,079,286            919,493
                                                                                ------------------------------
Noninterest income:
  Insurance commissions                                                             226,437            114,109
  Other                                                                             160,882            100,316
                                                                                ------------------------------
                                                                                    387,319            214,425
                                                                                ------------------------------
Noninterest expense:
  Compensation and employee benefits                                                712,740            507,837
  Occupancy and Equipment                                                           126,721             98,949
  Deposit insurance premiums                                                         12,935              5,786
  Computer processing charges                                                        73,394             47,101
  Amortization                                                                       14,226              9,543
  Other                                                                             314,103            229,358
                                                                                ------------------------------
                                                                                  1,254,119            898,574
                                                                                ------------------------------
                INCOME BEFORE INCOME TAXES                                          212,486            235,344
  Income taxes                                                                       82,829             88,069
                                                                                ------------------------------
                NET INCOME                                                          129,657            147,275
                                                                                ------------------------------
  Other comprehensive loss, net of tax:
    Unrealized loss on securities, net of tax                                       (60,864)             3,863
                                                                                ===========         ==========
               COMPREHENSIVE INCOME                                             $    68,793        $   151,138
                                                                                ===========         ==========
  Basic Earnings per share of common stock (Note 3)                             $      0.13        $      0.15
                                                                                ===========         ==========
  Diluted Earnings per share of common stock (Note 3)                           $      0.13        $      0.15
                                                                                ===========         ==========
  Cash dividends per share                                                      $      0.05        $      0.05
                                                                                ===========         ==========
</TABLE>

  See Notes to Condensed Financial Statements.

<PAGE>

<TABLE>
<CAPTION>


CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                                                                              Three Months Ended
                                                                                          1999                 1998
                                                                                          ----                 ----
Cash Flows from Operating Activities
<S>                                                                                   <C>                 <C>
    Net income                                                                        $      129,657      $       147,275
    Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
       Provision for loan losses and REO                                                       9,000                5,000
       Provision for depreciation                                                            104,798               83,131
       Change in operating assets and liabilities:
           Accrued interest receivable                                                       (87,332)             (91,343)
           Accrued interest payable                                                           10,644               (6,922)
           Prepaid and other assets                                                           14,888                6,959
           Accounts payable and other liabilities                                           (265,859)             (44,527)
           Other                                                                              70,451              393,004
                                                                                      --------------      ---------------
                         NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                 (13,753)             492,577
                                                                                      --------------      ---------------
Cash Flows from Investing Activities
    Purchases of securities available for sale                                              (104,000)           (799,564)
    Proceeds from securities available for sale                                              509,915              800,000
    Net originations of loans receivable                                                  (7,567,064)          (2,567,022)
    Purchases of office properties and equipment                                            (199,035)            (121,932)
    Proceeds from foreclosed real estate                                                           -               38,115
                                                                                      --------------      ---------------
                         NET CASH USED IN INVESTING ACTIVITIES                            (7,360,184)          (2,650,403)
                                                                                      --------------      ---------------
Cash Flows from Financing Activities
    Net increase in savings deposits                                                       1,299,964            2,705,356
    FHLB Advances                                                                          8,487,173           (1,512,799)
    Repurchase Stock                                                                               -              (97,450)
    Dividends paid                                                                           (51,407)             (49,060)
                                                                                      --------------      ---------------
                         NET CASH PROVIDED BY FINANCING ACTIVITIES                         9,735,730            1,046,047
                                                                                      --------------      ---------------
                         NET INCREASE IN CASH AND CASH EQUIVALENTS                         2,361,793           (1,111,779)
Cash and cash equivalents:
    Beginning                                                                             12,395,060           14,308,009
                                                                                      --------------      ---------------
    Ending                                                                            $   14,756,853      $    13,196,230
                                                                                      ==============      ===============
</TABLE>

<PAGE>

AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

                                                        1999             1998
Supplemental Schedule of Cash and Cash Equivalents
    Cash:
       Interest-bearing deposits                    $   3,943,829   $  7,954,112
       Noninterest-bearing                             10,813,024      5,242,118
                                                    ----------------------------
                                                    $  14,756,853   $ 13,196,230
                                                    ============================
Supplemental Disclosures of Cash Flow Information
    Cash payments for:
       Interest                                     $   1,006,784   $  1,046,640
                                                    ============================
       Income taxes                                 $      15,000   $     76,500
                                                    ============================

See Notes to Condensed Financial Statements.

<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 Lenior, 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.

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


                                        5

<PAGE>

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 Lenior,
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 is expected
to close during the second quarter of the fiscal year ending June 30, 2000.
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 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 has applied to become a member
of the National Association of Securities Dealers, Inc. ("NASD"). The Company
currently conducts brokerage services as a branch of a third party broker dealer
but will operate independently once its regulatory applications are accepted.
The Company expects to be accepted into membership in the NASD prior to the end
of the fiscal year. 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
(none of which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The results of operations for the three month
period ended September 30, 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 month period ended
September 30, 1999 are based on a weighted average of 1,004,588 and 1,004,588
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


                                       6

<PAGE>

the first quarter of fiscal year ended 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 Bank's ESOP that have not been committed
to be released are not considered to be outstanding for the purposes of
computing earnings per share. Earnings per share has been calculated in
accordance with Statement of Position 93-6 "Employers' Accounting for Employee
Stock Ownership Plans and Statement of Financial Standards Number 128.


NOTE 4.     INCENTIVE PLAN

On August 19, 1998 the Bank's board of directors approved the AF Bank 1997
Recognition and Retention Plan (RRP), established a Recognition and Retention
Plan Trust to be used to hold awards to be made under the RRP and agreed to
issue an additional 53,678 shares of the Bank's stock to be issued as the shares
are vested by the eligible participants in the plan. On the same date, the
Bank's board of directors approved the AF Bank 1997 Stock Option Plan (Option
Plan) and approved the allocation of 21,322 authorized but unissued shares of AF
Bank Common Stock to be reserved for issuance upon exercise of options granted
under the Option Plan. Both the RRP and the Option Plan were approved by the
minority shareholders of AF Bank at the December 8, 1998 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.


NOTE 6.    FEDERAL HOME LOAN BANK ADVANCES

The Company had advances outstanding of $11,051,531 and $2,564,358 at September
30, 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. $900,000 of the
advances are due by August of 2002, $151,531 is due January 2007, $5.0 million
is due August 2009, and the remaining $5.0 million is due September 2009.


                                       7

<PAGE>

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

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

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND JUNE 30, 1999:

Total assets increased by $9.6 million or 8.7% to $119.5 million at September
30, 1999 from $109.9 million at June 30, 1999. The increase in assets was the
result of an increase of $7.6 million, or 9.3%, in loans receivable, net, and an
increase of $2.6 million or 31.5% in noninterest-bearing deposits, from June 30,
1999 to September 30, 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 increase in noninterest-bearing deposits is necessary to cover
the institution's increased liquidity needs in order to meet customer's year
2000 needs. Increases in noninterest-bearing deposits and net loans outstanding,
is primarily a result of both an increase of $1.3 million in deposits and an
increase of $8.5 million in advances from the Federal Home Loan Bank.

The Company's net investment in property and equipment increased $108,000 or
4.3% to $2.7 million at September 30, 1999, primarily a result of building
renovations at 111 South Jefferson Avenue, West Jefferson, North Carolina. When
completed this building will be used for the corporate offices for the Company
and as an operation center for AF Bank.

The Bank's deposits increased by $1.3 million, or 1.4%, from $93.1 million at
June 30, 1999 to $94.4 million at September 30, 1999. Management believes that
the increase in deposits is attributable to its marketing efforts directed
towards increasing balances in savings and transaction accounts. During the
three month period ending September 30, 1999, the Bank's savings and transaction
accounts increased $1.1 million from a net gain of 354 new accounts. Management
intends to continue its marketing efforts to increase these lower cost core
deposits.

At September 30, 1999, retained earnings had increased $55,000 or 0.7% to $8.0
million dollars as a result of earnings of $129,657, a decrease for the fair
market value adjustment for ESOP stock in the amount of $32,324 and a reduction
for dividends of $51,400. Additional paid in capital increased by $1,739 or 0.4%
to $4.6 million at September 30, 1999 as a result of by recognizing a market
adjustment for ESOP stock. Deferred recognition and retention plan ("RRP")
decreased by $49,700 as a result of recognizing the vesture of additional RRP
shares. At September 30, 1999, the Bank's regulatory capital amounted to $12.3
million compared to $12.2 million at June 30, 1999, which as a percentage of
total assets was 8.8% and was considerably in excess of regulatory capital
requirements at such date.

The Bank's level of non-performing loans, defined as loans past due 90 days or
more, increased to $123,000 at September 30, 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 $13,200 during the three month period ended September 30,
1999 compared to, net charge offs, of $6,000 for the comparable period ended
September 30, 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 three month period ended September 30, 1999.


                                       8

<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998:

GENERAL. Net income for the three month period ended September 30, 1999 was
$129,657 or $17,618 less than the $147,275 earned during the same periods in
1998. Changes in the net income during the comparable three month periods were
primarily attributable to the start up expenses for the Company's brokerage
division, AF Brokerage, Inc., the costs associated with the Bank's branch office
in Watagua County, Appalachian First Bank, and the addition of employees in
order to prepare the Company for future expansion. The expenses incurred during
the three month period ended September 30, 1999, from Appalachian First and AF
Brokerage, Inc. are projected to decrease during the future periods of the
fiscal year ending June 30, 2000. 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 $141,416 or 7.18% from $1,970,103
for the three month period ended September 30, 1998 to $2,111,519 for the three
month period ended September 30, 1999. This increase was attributable to a
change in the volume and mix of interest-earning assets outstanding. Interest
income from loans increased $186,385 or 11.06% from $1,685,282 for the three
months ended September 30, 1998 to $1,871,667 for the three months ended
September 30, 1999. This increase was offset by a decrease of $86,469, or 54.9%,
in interest income on interest-bearing deposits from $157,593 for the three
month period ended September 30, 1998 to $71,124 for the three month period
ended September 30, 1999. 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 year 2000 needs.

INTEREST EXPENSE. Interest expense decreased by $22,377 or 2.14% from $1,045,610
for the three months ended September 30, 1998 to $1,023,233 for the three month
period ended September 30, 1999. The decrease is the result of a change in the
mix of deposits resulting in the average rate for deposits being lower at
September 30, 1999 than for the comparable period in 1998.

NET INTEREST INCOME. Net interest income increased by $163,793 or 17.7% from
$924,493 for the three month period ended September 30, 1998 to $1,088,286 for
the three months ended September 30, 1999. The increase is a result of increased
average outstanding balances in interest-earning assets and an improved interest
rate spread in effect during the period.

PROVISION FOR LOAN LOSSES. Management made an additional $9,000 provision for
loan losses during the three month period ended September 30, 1999. During the
three month period ended September 30, 1998, an additional provision of $5,000
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 three
month period ended September 30, 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 three month period ended
September 30, 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 September 30, 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 $172,894 from $214,425 for
the three month period ended September 30, 1998 to $387,319 for the three months
ended September 30, 1999. The increase was primarily attributable to increased
revenues generated from insurance sales and income generated from the


                                       9

<PAGE>

Company's brokerage activities during the three months ended September 30, 1999.

NON-INTEREST EXPENSE. Non-interest expense increased by $355,545 or 39.6% from
$898,574 for the three months ended September 30, 1998 to $1,254,119 for the
three months ended September 30, 1999. Increases in non-interest expense for the
three month period ended September 30, 1999 are primarily attributable to an
increase in occupancy expenses and in compensation costs. Compensation costs
increased by $204,903 or 40.4% for the three month period ended September 30,
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 $27,772, or 28.07%
for the three month period ended September 30, 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.

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 September 30, 1999, cash and cash equivalents, a significant source of
liquidity, totaled $14.8 million. A significant portion of this amount is a
direct result of the Bank preparing for year 2000 cash and liquidity needs.

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 September 30, 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.

ASSET/LIABILITY MANAGEMENT.

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

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

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


                                       10

<PAGE>

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.

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

The Company's year 2000 project remains on schedule according to the guidelines
set forth by the FFIEC. The Company replaced all of its computer systems in the
fall of 1998 with year 2000 compliant systems. The Company's internal software
remediation, replacement, and testing efforts are substantially complete with
full completion scheduled for July 1999. The Company's most critical external
exposure to year 2000 lies with its data processing provider, Fiserv Orlando.
Fiserv renovated its systems in June 1998 and tested its remediation efforts in
October 1998. The test results, which were made available in March 1998,
revealed that there were two minor problems which have since been corrected. The
first problem occurred in the General Ledger portion of the program, and the
second problem occurred mainly because of the way the test loan accounts were
aged. The General Ledger fixes, which have already been applied, were re-tested
in February 1999, and no problems were found. The loan test conditions are being
modified and will be re-tested in October 1999. Fiserv estimates that it has
completed with it's remediation and testing efforts of the Company's mission
critical systems. In addition, the Company tested its systems online with
Fiserv's system in November 1998. One purpose of the test was to test all
transactions using test data created in a test institution to validate Fiserv's
remediation efforts to date. The second purpose of the test was to test the
communication hardware under the direct control of the testing parties. The test
was successful and correctly validated the testing objectives. In addition, the
Company has contacted its major customers and vendors to inquire about their
progress in addressing the year 2000 problem and does not believe that the
problems of such customers and vendors will have a material adverse effect on
the Company or its operations. The Company will continue to monitor the progress
of these parties in addressing the year 2000 problem as the new millennium
approaches.

As noted, the Company has replaced all of its computers and printers at a cost
of $244,000. Software costs amounted to $101,000 and include internal software
for accounts payable, fixed assets, payroll and insurance


                                       11

<PAGE>

agency management. Management believes that all material costs to prepare for
the year 2000 that are under the direct control of the Company have been
incurred. The remaining costs are expected to amount to less than $5,000.

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

The Company is in contact with its electric utility and the utility's staff
regularly updates the Company as to its progress. Assurances have been given
that no major problems exist and that the electric company will have all year
2000 problems addressed before June 30, 1999. The utility company has further
assured the Company that contingency plans are in place for any unforeseen
problems that may exist. The Company has installed a fixed generator with
sufficient capacity to run the system servers and workstations at the West
Jefferson branch office in case that the Company experiences power outages The
generator was tested and performed as expected.

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

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

Fiserv Orlando has responded to the Company that renovation of its program is
virtually complete. In the event that Fiserv Orlando experiences some unforeseen
problems related to the year 2000, the Company will convert its data to one of
the other Fiserv programs that is able to operate in the 2000 environment.

The Company is continuously evaluating its liquidity needs for the year 2000 and
believes that its plan provides for the sufficient funding to meet customers
demands. If additional funding needs become necessary due to unanticipated
customer cash demands, the Company has in place a borrowing agreement with the
FHLB and is pursuing agreements with the Federal Reserve Bank of Richmond, that
management believes will exceed any customer demands for cash.


                                       12

<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
                 Not applicable






                                       13

<PAGE>

SIGNATURES


        Pursuant to the requirements of the Securities Exchange Act of 1934, the
        Registrant has duly caused this report to be signed on its behalf by the
        undersigned thereunto duly authorized.

                                     AF BANKSHARES, INC.


       Dated: November 9, 1999      By: /s/ James A. Todd
              ----------------          ----------------------------------------
                                           James A. Todd
                                           President and Chief Executive Officer

       Dated: November 9, 1999      By: /s/ Melanie Paisley Miller
              ----------------          ----------------------------------------
                                           Melanie Paisley Miller
                                           Executive Vice President, Secretary,
                                           Treasurer and Chief Financial Officer


                                       14