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, 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 Jefrferson, 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 October 31, 2001 there were 1,053,678 shares of the Registrant's common
stock issued and 1,049,378 shares of the Registrant's common stock outstanding,
$.01 par value

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


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                               AF BANKSHARES, INC.
                                    CONTENTS


PART I - FINANCIAL INFORMATION                                                          Pages
                                                                                        -----

         Item 1.  Financial Statements
<S>                                                                                    <C>
Condensed Consolidated Statements of Financial Condition as of
September 30, 2001 (unaudited) and June 30, 2001                                        1
Condensed Consolidated Statements of Income and Comprehensive Income for
the Three Months ended September 30, 2001 and 2000 (unaudited)                          2
Condensed Consolidated Statements of Cash Flows for the Three Months ended
September 30, 2001 and 2000 (unaudited)                                                 3 - 4

Notes to Condensed Consolidated financial statements                                    5 - 8

Item 2.  Management's Discussion and Analysis                                           9 - 14

PART II - OTHER INFORMATION

         Item 1.  Legal Proceedings                                                     15
         Item 2.  Changes in Securities and Use of Proceeds                             15
         Item 3.  Defaults upon Senior Securities                                       15
         Item 4.  Submission of Matters to a Vote of Security Holders                   15
         Item 5.  Other Information                                                     15
         Item 6.  Exhibits and Reports on Form 8-K                                      15-16
         Signatures                                                                     17
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AF BANKSHARES, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2001 AND JUNE 30, 2001


ASSETS
                                                                                    September 30,           June 30,
                                                                                         2001                 2001
--------------------------------------------------------------------------------------------------------------------------
                                                                                     (Unaudited)              Note
<S>                                                                             <C>                  <C>
Cash and cash equivalents:
   Interest-bearing deposits                                                    $         7,449,218  $          7,809,583
   Noninterest-bearing deposits                                                           6,571,085             4,758,182
Certificates of deposit, at cost                                                             99,000                99,000
Securities held to maturity                                                                 100,000               100,000
Securities available for sale                                                             9,722,360             6,596,052
Federal Home Loan Bank stock                                                              1,049,400             1,049,400
Loans receivable, net                                                                   129,776,712           124,674,509
Real estate owned                                                                           248,323               248,323
Office properties and equipment, net                                                      4,524,095             4,171,804
Accrued interest receivable on loans                                                        955,889               859,840
Accrued interest receivable on investment securities                                         85,398                71,188
Prepaid expenses and other assets                                                         1,097,068               945,079
Deferred income taxes, net                                                                  448,033               485,987
Intangible assets                                                                         1,732,915             1,578,904
                                                                                   ---------------------------------------
                              TOTAL ASSETS                                      $       163,859,496  $        153,447,851
                                                                                   =======================================

LIABILITIES AND EQUITY
Liabilities:
   Savings deposits                                                             $       125,854,098  $        120,073,932
   Note payable                                                                           1,261,870             1,525,078
   Note payable - ESOP                                                                      181,420               181,420
   Advances from Federal Home Loan Bank                                                  16,948,643            16,961,533
   Accounts payable and other liabilities                                                 1,342,225             1,444,223
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares                                                                  248,969               234,178
                                                                                   ---------------------------------------
                              TOTAL LIABILITIES                                         145,837,225           140,420,364
                                                                                   ---------------------------------------
                                                                                   ---------------------------------------
Guaranteed preferred beneficial interest in junior subordinated debentures                5,000,000                     -
                                                                                   =======================================

Commitments and Contingencies
Stockholders' Equity:
    Commonstock, par value $.01 per share; authorized 5,000,000 shares;
          1,053,678 issued and 1,049,378 outstanding shares
          at September 30, 2001 and June 30, 2001                                            10,537                10,537
   Additional paid-in capital                                                             4,590,995             4,589,702
   Retained earnings, substantially restricted                                            8,378,655             8,493,919
   Deferred recognition and retention plan                                                  (33,074)              (82,728)
   Accumulated other comprehensive income (loss)                                            159,008                99,907
                                                                                   ---------------------------------------
                                                                                         13,106,121            13,111,337
    Less the cost of 4,300 shares of treasury stock                                         (83,850)              (83,850)
                                                                                   ---------------------------------------
                              TOTAL STOCKHOLDERS' EQUITY                                 13,022,271            13,027,487
                                                                                   ---------------------------------------
                              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $       163,859,496  $        153,447,851
                                                                                   =======================================

See Notes to Condensed Consolidated Financial Statements.

Note: The Condensed Consolidated Statement of Financial Condition as of June 30,
2001 has been taken from audited financial statements at that date.
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                               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, with branches in Boone, Jefferson,
Sparta, Warrensville, and West Jefferson, North Carolina. The Company has an
insurance subsidiary headquartered in West Jefferson, North Carolina, operating
as AF Insurance Services, Inc. with branches in Boone, Elkin, Jefferson, Lenoir,
Sparta, West Jefferson, and Wilkesboro, North Carolina. The Company has a
brokerage service subsidiary headquartered in West Jefferson, North Carolina,
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 and 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 as 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 traditional `banking only' services would
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 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.

                                       5
<PAGE>

Management continues to evaluate acquisitions and business opportunities that
will provide access to new customers and expanded markets, which would enhance
the Company's long term value and earnings potential.

On November 1, 2000, the Company purchased the assets of an insurance agency in
Boone, North Carolina, adding insurance products to the banking services offered
by the Company in Watauga County. On October 1, 2001, the Company purchased the
assets of an insurance agency in Sparta, North Carolina. Management believes
that penetration into new (especially contiguous) markets increases the
opportunity to deliver products from all of the Company's subsidiaries to a
broader market base, thereby making the insurance and brokerage subsidiaries
more profitable investments by increasing the economies of scale, as well as
improving the economies of scope, and at the same time adding to the products
that are available for delivery to the Company's customers. Of course,
management is equally committed to protecting and expanding the Company's market
share in existing markets. As evidence of this continuing 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. The in-store branch will open on October 24, 2001.
Also, 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 an ATM),
drive-through lanes, and a commercial depository. The Company continues to seek
opportunities to increase the 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. In the same year, 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, 2001, 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 month
period ended September 30, 2001 are not necessarily indicative of the results of
operations that may be expected for the Company's fiscal year ending June 30,
2002.

The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Company's 2001 financial statements, which are
included by reference in the Company's Form 10-KSB for the year ended June 30,
2001.

NOTE 3.   EARNINGS PER SHARE

The Company's basic and diluted earnings per share for the three month period
ended September 30, 2001 are based on weighted averages of 1,034,687, assumed to
be outstanding

                                       6
<PAGE>

for the period. Options to purchase 21,322 shares of common stock at $18.50 per
share were outstanding during the first quarter of fiscal year ending June 2002,
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 $16,948,643 and $16,961,533 at September
30, 2001 and June 30, 2001 respectively, from the Federal Home Loan Bank ("the
FHLB"). Interest at September 30, 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 of $800,000 are due August 2002, $148,643 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 $1,261,870 and $1,525,078 at
September 30, 2001 and June 30, 2001 respectively. Interest at September 30,
2001 is payable at rates ranging from 5.50% to 8.00% with maturities between 4
and 10 years.

NOTE 6.  CAPITAL SECURITIES

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

                                       7
<PAGE>


expenses associated with the offering approximating $193,233 were included in
other assets and are being amortized on a straight-line basis over the life of
the Subordinated Debentures.

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

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






                                       8
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                               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 damping impact on short-term earnings.

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 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

                                       9
<PAGE>

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
quarter:

o        An increase in net loans of $5.1 million or 4.1%;

o        Asset growth of $10.4 million or 6.8%; and

o        An increase of $135,989 or 24.8% in noninterest income, as compared to
         the corresponding three month period ended September 30, 2000,
         reflecting the Company's continuing emphasis in the areas of insurance
         and securities services.

One recent development was the execution of an exclusive agreement to allow AF
Bank to be the sole financial institution located inside the new Wal-Mart in
West Jefferson, scheduled to open during the second quarter of this current
fiscal year. 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 believes that growth in the Bank is necessary to support the level of
services that is expected by the customer base. The plan for the bank includes
asset growth over a three-year period ending June 30, 2005 of just over $100
million or approximately 65.1%. Prudent capital planning and regulatory
requirements stipulate that minimum levels of capital must be maintained. A part
of the aforementioned plan required acquisition of capital beyond that created
from earnings. Management reviewed the options and determined that participating
in a trust preferred issuance was the most efficient and economical means of
generating additional capital. In addition, this strategy does not dilute the
current stockholders' holdings in the Company.

Management is optimistic about the future of the Company. Although the Company
experienced a slight loss in the first quarter, management and the board of
directors continue to be pleased with the progess 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 SEPTEMBER 30, 2001 AND JUNE 30, 2001:

Total assets increased by $10.4 million, or 6.8%, to $163.9 million at September
30, 2001 from $153.4 million at June 30, 2001. The increase in assets was the
result of both an increase of $5.1 million, or 4.1%, in loans receivable, net,
from June 30, 2001 to September 30, 2001 and an increase of $3.1 million or
47.4%, in securities available for sale from June 30, 2001 to September 30,
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 securities available for
sale were primarily funded by an increase of $5.8 million in deposits and the
$5.0 million received as a result of issuing subordinated debt during the three
month period ended September 30, 2001, in order to provide additional capital
for the Company and its banking subsidiary.

                                       10
<PAGE>

The Company's investment in net intangible assets increased $154,011 from $1.6
million at June 30, 2001 to $1.7 million at September 30, 2001. This increase
was due to the purchase of an insurance agency in Sparta, North Carolina. The
Company's net investment in property and equipment increased $352,291, or 7.8%,
to $4.5 million at September 30, 2001, and was primarily a result of costs
associated with the new bank branch location scheduled to open during the second
quarter of the current fiscal year.

The Bank's deposits increased by $5.8 million, or 4.8%, from $120.1 million at
June 30, 2001 to $125.9 million at September 30, 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 three-month period ending
September 30, 2001, the Bank's savings and transaction accounts increased $4.5
million for a net gain of 124 new accounts, while the Bank's certificates of
deposits increased $1.3 million. 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 $5.1 million growth in net loans.

At September 30, 2001, retained earnings had decreased $115,264, or 1.4%, to
$8.4 million as a result of a net loss of $57,943, a decrease for the fair
market value for ESOP stock in the amount of $5,532 and a reduction for
dividends of $51,790. Deferred recognition and retention plan ("RRP") decreased
by $49,653 as a result of recognizing the vesture of additional RRP shares. At
September 30, 2001, the Bank's regulatory capital amounted to $15.9 million
compared to $12.7 million at June 30, 2001, which was in excess of regulatory
capital requirements at such date. The increase in regulatory capital reflects a
$3.0 million capital contribution by the Company to the Bank. This capital
contribution was funded by the proceeds from the sale of the capital securities.

The Bank's level of non-performing loans, defined as loans past due 90 days or
more, increased to $659,000 at September 30, 2001 compared to $479,000 at June
30, 2001. The Bank recognized net charge offs of approximately $101,000 during
the three-month period ended September 30, 2001 compared to net charge offs of
$13,900 for the comparable period ended September 30, 2000. This relatively
higher level of net charge offs was attributable to recent negative economic
events on the local level, principally related to factory closings in two of the
Company's primary markets and the higher unemployment due to the closings. As a
result and based on management's analysis of its allowances, a $152,900
provision for loan loss allowance was made during the three-month period ended
September 30, 2001. Although other causative factors were involved in producing
the net earnings loss for the quarter, without the noted (and in management's
opinion, prudent) provision for loan loss allowance, net earnings for the period
would have been positive.

Similar loan loss provisions in future periods are uncertain; however,
management expects to have a similar level of provision expense for the second
quarter. Beyond that period, management has no specific need for future
provision at a comparable level; however, in a volatile environment, additional
allowances for losses cannot be discounted.


COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000:

GENERAL. The Company had a net loss for the three-month period ended September
30, 2001 of $57,943 and net income of $173,226 during the same period in 2000.
Changes in net income during the comparable three-month period were attributable
to an increase in interest

                                       11

<PAGE>

expense due to an increase in savings deposits and interest paid on the capital
securities that the Company issued during the quarter in order to provide
additional capital for the Company and its banking subsidiary, increased
compensation expense due to the addition of employees added primarily by the
acquisition of the Boone insurance agency and staffing for the Wal-Mart in-store
branch and an increase in the provision for loan losses Management believes that
these initial costs of expansion will better position the Company for the
future. The increased expenses were partially offset by an increase in interest
income on loans due to the volume of the institution's loan portfolio and the
increase in noninterest income due to increased commission income from the
insurance subsidiary. 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 $225,872 or 8.3% from $2,737,371
for the three-month period ended September 30, 2000 to $2,963,243 for the
three-month period ended September 30, 2001. Interest income from loans
increased $192,128 or 7.5% from $2,554,392 for the three months ended September
30, 2000 to $2,746,520 for the three months ended September 30, 2001. This
increase was attributable to a change in the volume, rate and mix of net loans
receivable.

INTEREST EXPENSE. Interest expense increased by $221,056 or 15.6% to $1,639,738
for the three-month period ended September 30, 2001 from $1,418,682 for the
three months ended September 30, 2000. The increase is the result of both the
issuance of Capital Securities, and the $5.8 million increase in savings
deposits for the three-month period ended September 30, 2001, both of which were
used to fund loan demand and to fund the increase in securities available for
sale.

NET INTEREST INCOME. Net interest income increased by $4,816 or 0.4% from
$1,318,689 for the three-month period ended September 30, 2000 to $1,323,505 for
the three-month period ended September 30, 2001. The increase is a result of
increased average outstanding balances in net loans receivable, partially offset
by an increase in the volume of savings deposits and the issuance of the Capital
Securities. Interest income from loans increased at the rate of 7.5% for the
three-month period ended September 30, 2001, compared to an increase of 9.2% in
interest expense for the same 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 4.0% during the twelve months ending September 30, 2001. The
Bank had average loan balances outstanding during the quarter of $129.5 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 additional provision in the amount of
$152,900 to the allowance for loan losses during the three-month period ended
September 30, 2001, compared to a $59,000 provision for loan losses made during
the three-month period ended September 30, 2000. 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-month period
ended


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<PAGE>


September 30, 2001 based upon an analysis of the quality of its loan portfolio.
The Bank's level of non-performing loans increased in relation to prior periods
and total loans outstanding during the three-month period ended September 30,
2001 and 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,
2001, 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 $135,989, or 24.8%, from
$548,333 for the three-month period ended September 30, 2000 to $684,322 for the
three months ended September 30, 2001. The increase was primarily attributable
to increased revenues generated from insurance sales during the three months
ended September 30, 2001. The increased revenue generated for insurance sales
and income generated form the brokerage subsidiary is due to widening market
penetration and is expected continue to produce new growth in non-interest
income.

 NON-INTEREST EXPENSE. Non-interest expense increased by $427,217 or 28.1% from
$1,522,934 for the three months ended September 30, 2000 to $1,950,151 for the
three months ended September 30, 2001. Increases in non-interest expense for the
three-month periods ended September 30, 2001 are primarily attributable to an
increase in compensation costs and in occupancy expenses associated with the
acquisition of the Boone insurance agency and increased staffing for the
Wal-Mart in-store branch. Compensation costs increased by $282,578 or 30.9% for
the three-month period ended September 30, 2001. Occupancy costs increased by
$45,083, or 24.3%, for the three-month period ended September 30, 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 September 30, 2001, cash and cash equivalents, a significant source of
liquidity, totaled $14.0 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, may also have an impact on the management of
interest rate risk.

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<PAGE>

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; which happened to be exactly the case for the three-month period
ended September 30, 2001. Certificates of deposit 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.

The most recent quarterly results notwithstanding, management believes the
Company's asset/liability management program continues to function as a useful
financial management tool; adequately providing for the safe, sound, and prudent
management of the Company's exposure to changes in interest rates.


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.

                               AF BANKSHARES, INC.

                                       14
<PAGE>




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")).

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

3.1.2 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).*

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).*




                                       15
<PAGE>





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

           On August 7, 2001, the Company filed a current report on Form 8-K
announcing a change in its independent accountants. This report was amended on
August 16, 2001 and October 4, 2001.

                                       16
<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 2, 2001                By: /s/ James A. Todd
      ---------------------------        -------------------------------------
                                      James A. Todd
                                      President and Chief Executive Officer



Dated November 2, 2001                By: /s/ Melanie Paisley Miller
      ---------------------------        -------------------------------------
                                      Melanie Paisley Miller
                                      Executive Vice President, Secretary,
                                      Treasurer and Chief Financial Officer





                                       17