SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                   FORM 10-QSB

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

   For the quarterly period ended   MARCH 31, 2002
                                    --------------
                                           Or
   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

   For the transition period from ________________________________ to
                           Commission File No: 0-24479

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

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

                               21 East Ashe Street
                      West Jefferson, North Carolina 28694
                      ------------------------------------
               (Address of principal executive office) (Zip code)

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

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

Indicate by check U whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes  U       No
               -----

As of April 30, 2002 there were 1,053,678 shares of the Registrant's common
stock issued and 1,049,838 shares of the Registrant's common stock outstanding,
$.01 par value

Transitional Small Business Disclosure Format: Yes     No  U
                                                  ---     ----
<PAGE>


17

                               AF BANKSHARES, INC.
                                    CONTENTS
PART I - FINANCIAL INFORMATION                                           Pages
                                                                         -----

   Item 1. Financial Statements

Condensed Consolidated Statements of Financial Condition as of
March 31, 2002 (unaudited) and June 30, 2001                             1

Condensed Consolidated Statements of Income and Comprehensive Income for
the Three and Nine Months ended March 31, 2002 and 2001 (unaudited)      2

Condensed Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 2002 and 2001 (unaudited)                                3 -  4

Notes to Condensed Consolidated financial statements                     5 -  8

   Item 2.  Management's Discussion and Analysis                         9 - 15

PART II - OTHER INFORMATION

   Item 1.  Legal Proceedings                                            16
   Item 2.  Changes in Securities and Use of Proceeds                    16
   Item 3.  Defaults upon Senior Securities                              16
   Item 4.  Submission of Matters to a Vote of Security Holders          16
   Item 5.  Other Information                                            16
   Item 6.  Exhibits and Reports on Form 8-K                             16 - 17
   Signatures                                                            18
<PAGE>
AF BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2002 AND JUNE 30, 2001

ASSETS
                                                                                 March 31,         June 30,
                                                                                   2002              2001
                                                                            ---------------------------------
                                                                               (Unaudited)           Note
<S>                                                                         <C>                 <C>
Cash and cash equivalents:
   Interest-bearing deposits                                                $   9,686,974       $   7,809,583
   Noninterest-bearing deposits                                                 5,682,514           4,758,182
Certificates of deposit, at cost                                                        -              99,000
Securities held to maturity                                                       100,000             100,000
Securities available for sale                                                  10,234,599           6,596,052
Federal Home Loan Bank stock                                                    1,049,400           1,049,400
Loans receivable, net                                                         136,448,912         124,674,509
Real estate owned                                                                 380,861             248,323
Office properties and equipment, net                                            5,455,892           4,171,804
Accrued interest receivable on loans                                              817,310             859,840
Accrued interest receivable on investment securities                               84,013              71,188
Prepaid expenses and other assets                                                 993,554             945,079
Deferred income taxes, net                                                        580,707             485,987
Intangible assets                                                               1,654,602           1,578,904
                                                                            ---------------------------------
                              TOTAL ASSETS                                  $ 173,169,338       $ 153,447,851
                                                                            =================================
LIABILITIES AND EQUITY
Liabilities:
   Savings deposits                                                         $ 135,618,497       $ 120,073,932
   Note payable                                                                 1,228,871           1,525,078
   Note payable - ESOP                                                            181,420             181,420
   Advances from Federal Home Loan Bank                                        16,922,839          16,961,533
   Accounts payable and other liabilities                                       1,179,288           1,444,223
   Redeemable common stock held by the ESOP, net of
      unearned ESOP shares                                                        372,754             234,178
                                                                            ---------------------------------
                              TOTAL LIABILITIES                               155,503,669         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 1,049,838 outstanding shares
          at December 31, 2001 and June 30, 2001                                   10,537              10,537
   Additional paid-in capital                                                   4,598,768           4,589,702
   Retained earnings, substantially restricted                                  8,178,779           8,493,919
   Deferred recognition and retention plan                                              -             (82,728)
   Accumulated other comprehensive income (loss)                                  (47,535)             99,907
                                                                            ---------------------------------
                                                                               12,740,549          13,111,337
    Less the cost of 3,840 shares of treasury stock                               (74,880)            (83,850)
                                                                            ---------------------------------
                              TOTAL STOCKHOLDERS' EQUITY                       12,665,669          13,027,487
                                                                            ---------------------------------
                              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $ 173,169,338       $ 153,447,851
                                                                            =================================
</TABLE>

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.
<PAGE>

<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
Three and Nine Months Ended March 31, 2002 and 2001

                                                        Three Months Ended           Nine Months Ended
                                                               March 31,                  March 31,
-----------------------------------------------------------------------------------------------------------
                                                          2002         2001          2002           2001
-----------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>           <C>            <C>
Interest and dividend income:
  Loans                                                $2,646,340   $2,736,908    $8,054,120     $8,050,117
  Investment securities                                   140,365      154,107       432,837        461,059
  Interest-bearing deposits                                39,704      103,901       164,565        187,868
                                                       -----------------------    -------------------------
       TOTAL INTEREST INCOME                            2,826,409    2,994,916     8,651,522      8,699,044
                                                       -----------------------    -------------------------
Interest expense:
  Deposits                                                960,043    1,399,762     3,355,209      3,874,693
  Federal Home Loan Bank advances                         233,192      266,193       700,695        792,761
  Notes payable                                            17,809       32,430        55,936         60,883
  Capital Securities                                      125,923          -         367,372             -
                                                       -----------------------    -------------------------
                                                        1,336,967    1,698,385     4,479,212      4,728,337
                                                       -----------------------    -------------------------
       NET INTEREST INCOME                              1,489,442    1,296,531     4,172,310      3,970,707
Provision for loan losses                                 111,500      111,000       400,400        190,000
                                                       -----------------------    -------------------------
       NET INTEREST INCOME AFTER PROVISION FOR
       LOAN LOSSES                                      1,377,942    1,185,531     3,771,910      3,780,707
                                                       -----------------------    -------------------------
Noninterest income:
  Insurance commissions                                   571,266      540,131     1,562,462      1,241,793
  Gain on sale of investments available for sale                -      104,391       138,997        104,391
  Other                                                   215,946      184,657       630,656        570,071
                                                       -----------------------    -------------------------
                                                          787,212      829,179     2,332,115      1,916,255
                                                       -----------------------    -------------------------
Noninterest expense:
  Compensation and employee benefits                    1,164,340    1,021,024     3,715,108      2,889,800
  Occupancy and Equipment                                 252,256      201,794       732,047        614,618
  Deposit insurance premiums                                5,608        5,188        16,677         15,502
  Computer processing charges                             129,517       81,458       366,356        238,480
  Amortization                                             39,156       35,989       114,301         91,440
  Other                                                   430,330      384,580     1,241,478      1,091,582
                                                       -----------------------    -------------------------
                                                        2,021,207    1,730,033     6,185,967      4,941,422
                                                       -----------------------    -------------------------
       INCOME (LOSS) BEFORE INCOME TAXES                  143,947      284,677       (81,942)       755,540
  Income taxes                                             53,068      110,517       (35,166)       292,323
                                                       -----------------------    -------------------------
       NET INCOME (LOSS)                                   90,879      174,160       (46,776)       463,217
                                                       -----------------------    -------------------------
  Other comprehensive income (loss), net of tax:
    Unrealized gain (loss) on securities, net of tax:     (76,849)      44,055      (147,442)       203,571
     Less:  reclassification adjustment for
     gains included in net income, net of tax                 -         72,030        95,908         72,030
                                                       -----------------------    -------------------------
       COMPREHENSIVE INCOME (LOSS)                     $   14,030   $  146,185    $ (290,126)    $  594,758
                                                       ==========   ==========    ==========     ==========
  Basic Earnings per share of common stock (Note 3)    $     0.09   $     0.17    $    (0.05)    $     0.45
                                                       ==========   ==========    ==========     ==========
  Diluted Earnings per share of common stock (Note 3)  $     0.09   $     0.17    $    (0.05)    $     0.45
                                                       ==========   ==========    ==========     ==========
  Cash dividends per share                             $     0.05   $     0.05    $     0.15     $     0.15
                                                       ==========   ==========    ==========     ==========
</TABLE>

   See Notes to Condensed Consolidated Financial Statements.


<PAGE>


<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2002 AND 2001
                                                                         Nine Months Ended
                                                                    2002                 2001
-----------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>
Cash Flows from Operating Activities
  Net income (loss)                                            $    (46,776)      $     463,217
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
     Provision for loan losses and REO                               400,400            190,000
     Provision for depreciation                                      456,403            428,450
     Loss on disposition of office properties and equipment                -              7,886
     Amortization of goodwill and non-compete covenants              114,302             91,440
     Change in operating assets and liabilities:
         Accrued interest receivable                                 29,705            (253,896)
         Accrued interest payable                                   (73,595)            102,226
         Prepaid and other assets                                   (48,475)           (193,771)
         Accounts payable and other liabilities                    (264,935)           (484,379)
         Other                                                      (59,631)            161,696
                                                                -------------------------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                     507,398             512,869
                                                                -------------------------------
Cash Flows from Investing Activities
  Proceeds from certificates of deposit                              99,000                   -
  Increase in Federal Home Loan Bank stock                                -            (273,700)
  Purchases of securities available for sale                     (7,703,681)         (1,400,000)
  Proceeds from securities available for sale                     3,876,304           3,384,027
  Net originations of loans receivable                          (12,174,803)       (15,148,115)
  Purchases of office properties and equipment                   (1,740,491)           (477,945)
  Purchase of goodwill and noncompete agreements                   (190,000)           (595,000)
  Proceeds from foreclosed real estate                                    -              41,118
                                                                -------------------------------
      NET CASH USED IN INVESTING ACTIVITIES                     (17,833,671)        (14,469,615)
                                                                -------------------------------
Cash Flows from Financing Activities
  Net increase in savings deposits                               15,618,160          20,521,473
  FHLB Advances                                                     (38,694)          1,461,406
  Notes Payable                                                    (296,207)            674,476
  Proceeds from capital securities                                5,000,000                   -
  Dividends paid                                                   (155,263)           (155,555)
                                                                -------------------------------
      NET CASH PROVIDED BY FINANCING ACTIVITIES                  20,127,996          22,501,800
                                                                -------------------------------
      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS        2,801,723           8,545,054
Cash and cash equivalents:
  Beginning                                                      12,567,765           7,422,852
                                                                -------------------------------

  Ending                                                       $ 15,369,488       $  15,967,906
                                                                ===============================
</TABLE>







<PAGE>

<TABLE>
<CAPTION>
AF BANKSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) NINE
MONTHS ENDED MARCH 31, 2002 AND 2001

                                                          2002             2001
-----------------------------------------------------------------------------------
<S>                                                   <C>              <C>
Supplemental Schedule of Cash and Cash Equivalents
    Cash:
       Interest-bearing deposits                      $ 9,686,974      $ 8,857,000
       Noninterest-bearing                              5,682,514        7,110,906
                                                      -------------  -------------
                                                      $15,369,488      $15,967,906
Supplemental Disclosures of Cash Flow Information
    Cash payments for:
       Interest                                       $ 4,456,615      $ 4,533,320
                                                       ============  =============
       Income taxes                                   $   265,772      $   169,653
                                                       ============  =============
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

<PAGE>




                               AF BANKSHARES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.NATURE OF BUSINESS

AF Bankshares, Inc. (the "Company") is a federally chartered stock holding
company for AF Bank (the "Bank"), which conducts business from its main office
located in West Jefferson, North Carolina, 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; as well as Union County, North Carolina, through a third party
arrangement with a bank in Monroe, North Carolina.

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


                                       5

<PAGE>

services from offices in West 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. During the current fiscal year, AF Brokerage entered
into a service contract with a non-affiliated community bank in Monroe, North
Carolina, to provide investment services to the bank's customers through a dual
employee arrangement. This move signals the first step in the brokerage firm's
intent to enter and expand its business into the arena of third party providers
for non-competitive client financial institutions in North Carolina. 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, on October
24, 2001 AF Bank opened the only financial institution outlet located inside the
new Wal-Mart in West Jefferson, North Carolina. Also, a freestanding,
full-service branch adjacent to Wal-Mart is currently under construction and is
expected to open in the fourth quarter of the current fiscal year. 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. During the quarter ended March 31, 2002, the Company
issued 460 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 and nine
month periods ended March 31, 2002 are not necessarily indicative of the results
of operations that may be expected for the Company's


                                        6

<PAGE>

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 and nine month
period ended March 31, 2002 are based on weighted averages of 1,038,008, and
1,036,074, respectively, assumed to be outstanding for the period. Options to
purchase 21,322 shares of common stock at $18.50 per share were outstanding
during the third quarter of fiscal year ending June 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. At March 31, 2002 all
rights under the RRP were vested and transferred to the participants and no
additional plan was anticipated at that date.

NOTE 5.  FEDERAL HOME LOAN BANK ADVANCES AND NOTES PAYABLE

The Company had advances outstanding of $16,922,839 and $16,961,533 at March 31,
2002 and June 30, 2001 respectively, from the Federal Home Loan Bank ("the
FHLB"). Interest at March 31, 2002 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 $775,000 are due August 2002, $147,839 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 $1,228,871 and $1,525,078 at March
31, 2002 and June 30, 2001 respectively. Interest at March 31, 2002 is payable
at rates ranging from 5.50% to 8.00% with maturities between 4 and 10 years.


                                       7

<PAGE>


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 expenses associated
with the offering approximating $189,994 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

<PAGE>

                               AF BANKSHARES, INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

THIS FORM 10-QSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONSISTING OF
ESTIMATES WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
OTHER BUSINESS OF THE COMPANY, THAT ARE SUBJECT TO VARIOUS FACTORS WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE ESTIMATES. THESE FACTORS
INCLUDE: CHANGES IN GENERAL, ECONOMIC AND MARKET CONDITIONS; THE DEVELOPMENT OF
AN ADVERSE INTEREST RATE ENVIRONMENT THAT ADVERSELY AFFECTS THE INTEREST RATE
SPREAD OR OTHER INCOME ANTICIPATED FROM THE COMPANY'S OPERATIONS AND
INVESTMENTS; AND DEPOSITOR AND BORROWER PREFERENCES. THE COMPANY DISCLAIMS ANY
OBLIGATION TO PUBLICLY ANNOUNCE FUTURES EVENTS OR DEVELOPMENTS THAT MAY AFFECT
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.

BACKGROUND AND INTRODUCTION

Management believes it is important to view the quarterly financial results of
the Company within the larger context of the Company's long-term strategic
business plan. Doing so helps keep short-term results in better perspective, and
underscores management's commitment to the LONG-TERM profitability and success
of the Company.

It is 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 most 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 dampening 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 are purchasing mutual funds and annuities
through offices of banking organizations; and they are utilizing the services of
non-bank financial planners 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 its established
markets. In all AF Bank markets, the Company now has the capability to deliver
comprehensive insurance services through its insurance subsidiary and the
potential to deliver securities services through AF Brokerage, Inc. The
challenge facing management is to provide the most economical, efficient - and
most importantly - DESIRABLE platform to offer AF customers, clients, and
prospects these services. It is a challenge management is working hard to meet.
In coming years, management believes the Company's established foundation and
emerging platform will drive the Company's long-term viability as a
competitively superior financial


                                       9

<PAGE>


service provider in all markets.

There are a number of positive factors and recent events, which reflect the
Company's progress toward its long-term goals during the nine months ended March
31, 2002:

   o  An increase in net loans of $11.8 million or 9.4%;

   o  Asset growth of $19.7 million or 12.9%; and

   o  An increase of $415,860 or 21.7% in noninterest income, as compared to the
      corresponding nine month period ended March 31, 2001, reflecting the
      Company's continuing emphasis in the areas of insurance and securities
      services.

One recent development was the opening of a new bank branch office during the
second quarter of the current fiscal year allowing AF Bank to be the sole
financial institution located inside the new Wal-Mart in West Jefferson. That
office, as well as a full-service financial service center under construction
adjacent to the Wal-Mart property, offers 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 business 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
current stockholders' holdings in the Company.

Management is optimistic about the future of the Company. Although the Company
experienced a slight loss in the nine month period ended March 31, 2002,
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. This is especially true when the events of September 11, 2001, subsequent
market fluctuations AND their negative influence upon the financial industry are
taken into account.


COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2002 AND JUNE 30, 2001:

Total assets increased by $19.7 million, or 12.9%, to $173.2 million at March
31, 2002 from $153.4 million at June 30, 2001. The increase in assets was
primarily the result of an increase of $11.8 million, or 9.4%, in loans
receivable, net, from June 30, 2001 to March 31, 2002, an increase of $3.6
million or 55.2%, in securities available for sale from June 30, 2001 to March
31, 2002 and an increase of $2.8 million or 22.3% in cash and cash equivalents.
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, securities available for sale, and cash and
cash equivalents, were primarily funded by an increase of $15.5 million in
deposits and the $5.0 million received as a result of issuing subordinated debt
during the nine month period ended March 31, 2002, in order to provide


                                       10

<PAGE>


additional capital for the Company and its banking subsidiary.

The Company's investment in net intangible assets increased $75,698 from $1.6
million at June 30, 2001 to $1.7 million at March 31, 2002. This increase was
due to the purchase of an insurance agency in Sparta, North Carolina during the
first quarter of the current fiscal year. The Company's net investment in
property and equipment increased $1.3 million, or 30.8%, to $5.5 million at
March 31, 2002, and was primarily a result of costs associated with the new bank
branch location inside the Wal-Mart store and the new financial services center
location scheduled to open during the fourth quarter of the current fiscal year.

The Bank's deposits increased by $15.5 million, or 13.0%, from $120.1 million at
June 30, 2001 to $135.6 million at March 31, 2002. Management believes that the
increase in deposits is attributable to its continuing marketing efforts
directed towards increasing balances in savings and transaction accounts and in
smaller, stable certificates of deposits. During the nine-month period ending
March 31, 2002, the Bank's savings and transaction accounts increased $16.4
million for a net gain of 642 new accounts. This increase was partially offset
by a decrease of $2.1 million in the Bank's certificates of deposits. 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
$11.8 million growth in net loans.

At March 31, 2002, retained earnings had decreased $315,140, or 3.7%, to $8.2
million as a result of a net loss of $46,776, a decrease for the fair market
value for ESOP stock in the amount of $110,801, a reduction for dividends of
$155,263, and a decrease for the issuance of 460 shares of treasury stock in the
amount of $2,300. Deferred recognition and retention plan ("RRP") decreased by
$82,728 as a result of recognizing the vesture of the remaining RRP shares. At
March 31, 2002, the Bank's regulatory capital amounted to $16.3 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, decreased to $214,000 at March 31, 2002 compared to $479,000 at June 30,
2001. The Bank recognized net charge offs of approximately $242,700 during the
nine-month period ended March 31, 2002 compared to net charge offs of $162,900
for the comparable period ended March 31, 2001. 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 $400,400 provision for loan loss
allowance was made during the nine-month period ended March 31, 2002.

Similar loan loss provisions in future periods are uncertain; however,
management expects to have a similar level of provision expense for the fourth
quarter. Beyond that period, management anticipates no specific need for future
provision at levels comparable to the provisions made during the nine months
ended March 31, 2002; however, in a volatile environment, additional allowances
for losses are possible.

Comparison of Operating Results for the Three and Nine Months Ended March 31,
2002 AND 2001:

The Company had net income for the three period ended March 31, 2002 of $90,879
compared


                                       11

<PAGE>

to net income of $174,160 during the same period in 2001. The Company had a net
loss of $46,776 for the nine-month period ended March 31, 2002 compared to net
income of $463,217 during the nine-month period ended March 31, 2001. Changes in
net income during the comparable three and nine month periods were attributable
to: increased compensation expense due to the addition of employees (added
primarily by the acquisition of the Sparta insurance agency); staffing for the
Wal-Mart in-store branch; the interest expense due to the issuance of Capital
Securities, and the previously mentioned increase in the provision for loan
losses. The increased expenses were partially offset by an increase in
noninterest income due to increased commission income from the insurance
subsidiary and the gain on sale of investments available for sale. 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 decreased by $168,507 or 5.6% from $2,994,916
for the three-month period ended March 31, 2001 to $2,826,409, for the
three-month period ended March 31, 2002. Interest income decreased by $47,522 or
0.6% from $8,699,044 for the nine-month period ended March 31, 2001 to
$8,651,522 for the nine-month period ended March 31, 2002. Interest income from
loans decreased $90,568 or 3.3% from $2,736,908 for the three months ended March
31, 2001 to $2,646,340 for the three months ended March 31, 2002. Interest
income from loans increased $4,003 or 0.1% from $8,050,117 for the nine-month
period ended March 31, 2001 to $8,054,120 for the nine-month period ended March
31, 2002. The decrease in interest income was due primarily to the reduction in
interest rates during the periods. During the nine months ended March 31, 2002,
the Federal Reserve Open Market Committee (FOMC) reduced certain rates that it
controls, resulting in a reduction in the prime rate of interest by 2% during
the period. Although the decrease in interest income due to declines in interest
rates was offset in part by loan growth, the Company believes that, as discussed
above, loan growth was adversely impacted by the negative economic events on the
local level and related higher unemployment. Although the events of September
11, 2001 did not have a direct impact on the Company, management believes that
such events exacerbated the economic slowdown discussed above. The direct impact
of the reduction in interest income is seen as temporary and will not have a
material impact on the future operations of the Company.

INTEREST EXPENSE. Interest expense decreased by $361,418 or 21.3% to $1,336,967
for the three-month period ended March 31, 2002 from $1,698,385 for the three
months ended March 31, 2001. Interest expense decreased by $249,125 or 5.3% to
$4,479,212 for the nine-month period ended March 31, 2002 from $4,728,337 for
the nine-month period ended March 31, 2001. Interest expense on deposits
decreased by $439,719 or 31.4% to $960,043 for the three months ended March 31,
2002 from $1,399,762 for the three months ended March 31, 2001. Interest expense
on deposits decreased by $519,484 or 13.4% to $3,355,209 for the nine months
ended March 31, 2002 from $3,874,693 for the nine-month period ended March 31,
2001. This decrease is the result of the 1.37% decrease in the institution's
weighted average rate of deposits during the nine-month period ended March 31,
2002, partially offset by the $15.5 million increase in savings deposits.

NET INTEREST INCOME. Net interest income increased by $192,911 or 14.9% from
$1,296,531 for the three-month period ended March 31, 2001 to $1,489,442 for the
three-month period ended March 31, 2002. Net interest income increased by
$201,603 or 5.1% from $3,970,707 for the nine-month period ended March 31, 2001
to $4,172,310 for the nine-month period ended March 31, 2002. The increase is a
result of a drop in the institution's weighted average rate paid for deposits,
partially offset by an increase in the volume of savings deposits, the reduction
of the weighted average loan rates and the issuance of the Capital Securities.
The


                                       12

<PAGE>


FOMC reduced certain rates that it controls, resulting in a reduction in the
prime rate of interest by a staggering 4.25% during the twelve months ending
December 31, 2001. The ensuing, historically low relative interest rates have
had a negative effect on the Company's earnings, due to the fact that earning
assets typically re-price quicker than the interest costs on deposits. This
negative impact was partially offset by the Company's asset/liability management
program, as discussed in more detail later in this document under the heading
"Asset/Liability Management".

PROVISION FOR LOAN LOSSES. Management made additional provision in the amount of
$111,500 to the allowance for loan losses during the three-month period ended
March 31, 2002, compared to a $111,000 provision for loan losses made during the
three-month period ended March 31, 2001. Management made additional provision in
the amount of $400,400 to the allowance for loan losses during the nine-month
period ended March 31, 2002, compared to a $190,000 provision for loan losses
made during the nine-month period ended March 31, 2001. Provisions, which are
charged to operations and resulting loan loss allowances, are amounts that the
Bank's management believes will be adequate to absorb potential losses on
existing loans that may become uncollectible. Loans are charged off against the
allowance when management believes that collection is unlikely. The evaluation
to increase or decrease the provisions and resulting allowances is based both on
prior loan loss experience and other factors, such as changes in the nature and
volume of the loan portfolio, overall portfolio quality and current economic
conditions.

The Bank made provisions for loan loss allowances during the three and
nine-month periods ended March 31, 2002 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 and nine
month periods ended March 31, 2002 and due to changes in the mix of the Bank's
loan portfolio, management determined it was necessary to make an additional
provision. At March 31, 2002, the Bank's level of general valuation allowances
for loan losses amounted to $1.2 million which management believes is adequate
to absorb any existing losses in its loan portfolio.

NON-INTEREST INCOME. Non-interest income decreased by $41,967, or 5.1% from
$829,179 for the three-month period ended March 31, 2001 to $787,212 for the
three months ended March 31, 2002. Non-interest income increased by $415,860, or
21.7% from $1,916,255 for the nine-month period ended March 31, 2001 to
$2,332,115 for the nine-month period ended March 31, 2002. The increase for the
nine months ended March 31, 2002, was primarily attributable to increased
revenues generated from insurance sales during the three and nine months ended
March 31, 2002. The increased revenue generated from insurance sales is due to
widening market penetration and is expected to continue to produce new growth in
non-interest income.

 NON-INTEREST EXPENSE. Non-interest expense increased by $291,174 or 16.8% from
$1,730,033 for the three months ended March 31, 2001 to $2,021,207 for the three
months ended March 31, 2002. Non-interest expense increased by $1,244,545 or
25.2% from $4,941,422 for the nine months ended March 31, 2001 to $6,185,967 for
the nine months ended March 31, 2002. Increases in non-interest expense for the
three and nine month periods ended March 31, 2002 are primarily attributable to
an increase in compensation costs and in occupancy expenses and computer
processing charges associated with the acquisition of the Sparta insurance
agency and increased staffing for the Wal-Mart in-store branch. Compensation
costs increased by $143,316 or 14.0% for the three-month period ended March 31,
2002. Compensation costs increased by $825,308 or 28.6% for the nine-month
period ended March 31, 2002. Occupancy costs increased by $50,462, or 25.0%, and
$117,429 or 19.1%, respectively for the three and


                                       13

<PAGE>


nine month period ended March 31, 2002 primarily due to the costs associated
with the new insurance offices and the new bank 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.
The Company's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales and participations of loans, maturities
of securities and interest-bearing deposits, and funds provided from operations.
While scheduled repayments of loans and maturities of securities are predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
the general level of interest rates, economic conditions, and competition. The
Company uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, to maintain liquidity, and to meet operating expenses. For additional
information about cash flows from the Company's operating, financing and
investing activities, see "Condensed Consolidated Statements of Cash Flow."

Liquidity management is both a daily and long-term function of management. If
the Company requires funds beyond its ability to generate them internally, the
Company believes it could borrow additional funds from the FHLB. At March 31,
2002, the Company had borrowings of $16.9 million from the FHLB. During the nine
month period ended March 31, 2002, the Company received $5.0 million as a result
of issuing subordinated debt, in order to provide additional capital for the
Company and its banking subsidiary.

The Company anticipates that it will have sufficient funds available to meet its
current loan origination commitments. Certificates of deposit which are
scheduled to mature in one year or less totaled $40.5 million at March 31, 2002.
Based upon historical experience, management believes that a significant portion
of such deposits will remain with the Bank.

As of March 31, 2002, cash and cash equivalents, a significant source of
liquidity, totaled $15.4 million. The OTS regulations require the Company to
maintain sufficient liquidity to ensure its safe and sound operation. 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.

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


                                       14

<PAGE>


assets and interest-bearing liabilities over given periods of time. One of the
Company's tools to monitor interest rate risk is the measurement of sensitivity
of its net portfolio value to changes in interest rates.

In order to minimize the potential effects of adverse material and prolonged
increases in market interest rates on the Company's operations, management has
implemented an asset/liability program designed to improve the Company's
interest rate risk exposure. The program emphasizes the originations of three
and five-year fixed rate balloon mortgages, adjustable rate mortgages, selling
long term fixed rate loans to the secondary market, shorter term consumer and
commercial loans, the investment of excess cash in short or intermediate term
interest-earning assets, and the solicitation of deposit accounts that can be
repriced rapidly.

Although the Company's asset/liability management program has generally helped
to decrease the exposure of its earnings to interest rate increases, the
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 nine-month period
ended March 31, 2002. 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 that 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.



                                       15

<PAGE>

                               AF BANKSHARES, INC.


Part II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

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

Item 3.  Defaults Upon Senior Securities
         Not applicable

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

Item 5.  Other Information
         Not applicable

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

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

3.1.1   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). *


                                       16

<PAGE>

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

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

(b)  Reports on Form 8-K

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


                                       17


<PAGE>




SIGNATURES

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

                                           AF BANKSHARES, INC.


Dated May 14, 2002                         By: /s/ James A. Todd
      -------------                         ----------------------------------
                                           James A. Todd
                                           President and Chief Executive Officer

Dated May 14, 2002                         By: /s/ Melanie Paisley Miller
      -------------                         ----------------------------------
                                           Melanie Paisley Miller
                                           Executive Vice President, Secretary,
                                           Treasurer and Chief Financial Officer






                                       18