U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

| | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934
| | -------------------------------------------------------------------------------
| | For the fiscal year ended March 31, 2002                                       

OR

| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from ______ to _______                                  

Commission file number 0-18265.

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|Virginia(State or other jurisdiction ofincorporation or organization)               |  | 54-1532044(I.R.S. EmployerIdentification No.)/TD>
|----------------------------------------------------------------------------------- |  | -------------------------------------------------
|                                                                                    |  |                                                  
|                                                                                    |  |                                                  
|                                                                                    |  |                                                  
|38 North Central Avenue, Staunton, Virginia(Address of principal executive offices) |  | 24401(Zip Code)                                  

Issuer's telephone number, including area code: (540) 886-0796

Securities Registered Pursuant to Section 12(b) of the Act:  None

Securities Registered Pursuant to Section 12(g) of the Act:

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Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES    NO

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained
in this form, and no disclosure will be contained, to the best of Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB.

The Issuer had $22,323,275 in gross income for the fiscal year ended March 31, 2002

As of May 31, 2002, there were issued and outstanding 2,253,147 shares of the Issuer's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Issuer, computed by reference to the average of the closing bid and asked price of such stock as of May 31, 2002, was approximately $22,900,000. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Issuer that such person is an affiliate of the Issuer.)

**DOCUMENTS INCORPORATED BY REFERENCE**

Part II of Form 10-KSB--Portions of the Annual Report to Stockholders for the fiscal year ended March 31, 2002.

Part III of Form 10-KSB--Proxy Statement for the 2002 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format:

Yes      No

***PART  I***

Item 1.  Description of Business

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General

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Community Financial Corporation ("Community" or the "Company") is a Virginia corporation, which
owns Community Bank (the "Bank" or "Community Bank").  The Bank was organized in 1928 as a
Virginia-chartered building and loan association, converted to a federally-chartered savings and loan association
in 1955 and to a federally-chartered savings bank in 1983. In 1988, Community Bank converted to the stock
form of organization through the sale and issuance of shares of our common stock. References throughout this Form 10-KSB to the Company generally include the
Bank, unless the context otherwise requires.

Our principal asset is the outstanding stock of Community Bank, our wholly owned subsidiary. Our
common stock trades on The Nasdaq Stock Market under the symbol "CFFC." In November, 1997 Community
Bank established Community First Mortgage Corporation ("Community First"), a wholly owned mortgage
banking subsidiary to originate and sell mortgage loans.

Community and Community Bank are subject to comprehensive regulation, examination and supervision
by the Office of Thrift Supervision, Department of the Treasury ("OTS") and by the Federal Deposit Insurance
Corporation ("FDIC").  The Bank is a member of the Federal Home Loan Bank ("FHLB") System and our
deposits are backed by the full faith and credit of the United States Government and are insured by the Savings
Association Insurance Fund ("SAIF") to the maximum extent permitted by the FDIC.

At March 31, 2002, Community had $263.4 million in assets, deposits of $204.5 million and
stockholders' equity of $26.7 million. Community's primary business consists of attracting deposits from the
general public and originating real estate loans and other types of investments through our offices located in Staunton, Waynesboro, Stuart Drafts, Raphine and Virginia Beach, Virginia.

Like all financial institutions, Community's operations are materially affected by general economic
conditions, the monetary and fiscal policies of the federal government and the policies of the various regulatory
authorities, including the OTS and the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). Our results of operations are largely dependent upon our net interest income, which is the difference
between the interest we receive on our loan portfolio and our investment securities portfolio, and the interest we pay on our deposit accounts and borrowings.

Our main office is located at 38 North Central Avenue, Staunton, Virginia 24401. Our telephone number is (540) 886-0796.

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Forward-Looking Statements

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This document, including information incorporated by reference, contains, and future filings by the
Company on Form 10-QSB and Form 8-K and future oral and written statements by the Company and its
management may contain, forward-looking statements about the Company and its subsidiary which we believe
are within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking
statements include, without limitation, statements with respect to anticipated future operating and financial
performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated
to be realized by management.  Words such as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions are intended to identify these forward-looking
statements.  Forward-looking statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of
future performance.  The Company disclaims any obligation to update or revise any forward-looking statements
based on the occurrence of future events, the receipt of new information, or otherwise.  The important factors
we discuss below and elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Operations" in our Annual Report to Stockholders and identified in
our filings with the SEC and those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking statements made in this
document:

The following factors, many of which are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements:

- the strength of the United States economy in general and the strength of the local economies in
which we conduct our operations;
- the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate
policies of the Federal Reserve Board;
- inflation, interest rate, market and monetary fluctuations;
- the timely development of and acceptance of new products and services of Community Bank and the
perceived overall value of these products and services by users, including the features, pricing and
quality compared to competitors' products and services;
- the willingness of users to substitute competitors' products and services for our products and
services;
- the success of Community Bank in gaining regulatory approval of its products and services, when
required;
- the impact of changes in financial services' laws and regulations (including laws concerning taxes,
banking, securities and insurance);
- the impact of technological changes;
- acquisitions;
- changes in consumer spending and saving habits; and
- our success at managing the risks involved in the foregoing.

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Lending Activities

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**General.** We, like most other thrift institutions, concentrate our lending activities on first mortgage
conventional loans secured by residential and, to a lesser extent, commercial and multi-family real estate with an
emphasis on multi-family housing.  We make construction loans secured by commercial and multi-family real
estate and one-to four-family residential properties. Additionally, we make consumer loans in order to increase
the diversification and decrease the interest rate sensitivity of our loan portfolio and to increase interest income.
Substantially all of our loans are originated within our market area which includes Shenandoah, Rockingham,
Page, Highland, Augusta, Albemarle, Bath, Rockbridge and Nelson Counties, the city of Richmond and the Hampton Roads area in Virginia.

Residential loan originations come primarily from walk-in customers, real estate brokers and builders.
Commercial and multi-family real estate loan originations are obtained through broker referrals, direct
solicitation of developers and continued business from customers. All completed loan applications are reviewed
by our salaried loan officers. As part of the application process, information is obtained concerning the income,
financial condition, employment and credit history of the applicant. If commercial or multi-family real estate is
involved, information is also obtained concerning cash flow after debt service. The quality of loans is analyzed
based on our experience and on guidelines with respect to credit underwriting as well as the guidelines issued by
Freddie Mac and Fannie Mae and other purchasers of loans, depending on the type of loans involved. The
one-to four-family, adjustable-rate mortgage loans originated by us, however, are not readily saleable in the
secondary market due to the fact that we do not typically require surveys, title insurance or written verifications
of employment history and deposit relationships. All real estate is appraised by independent fee appraisers who have been pre-approved by the Board of Directors.

Our loan commitments are approved at different levels, depending on the size and type of the loan being
sought. One-to four-family and commercial and multi-family real estate loans in the amount of $225,000 or less
may be approved by the President of the Bank. Loans in excess of $225,000 but less than $750,000 must be approved by a majority
of our Loan Committee. All mortgage loans in excess of $750,000 must be approved by the Board of Directors.
Consumer loans in excess of $250,000 on a secured basis and $150,000 on an unsecured basis require the
approval of three members of senior management. Regardless of the individual loan approval authority, the Board of Directors generally approves or ratifies all loans.

The aggregate amount of loans that we are permitted to make to any one borrower, including related
entities, and the aggregate amount that we may invest in any one real estate project, with certain exceptions, is
limited to the greater of 15% of the Bank's unimpaired capital and surplus or $500,000. At March 31, 2002, the
maximum amount which we could have loaned to one borrower and the borrower's related entities or invested
in any one project was approximately $3.8 million. At March 31, 2002, we had no borrower, or groups of borrowers, with loans outstanding in excess of $3.3 million.  We had three loans to one borrower, or a
group of related borrowers, with an outstanding balance at March 31, 2002, in excess of $2.0, each of which is
performing in accordance to its payment terms.

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**Loan Portfolio Composition.** The following table sets forth the composition of our total loan portfolio
in dollars and percentages as of the dates indicated.

|                                     | March 31,             
|------------------------------------ | ----------------------
|                                     | 2002                  
|                                     |                       
|                                     | Amount                
|                                     | (Dollars in Thousands)
|Real Estate Loans:                   |                       
|Residential                          | $107,425              
|Commercial and multi-family          | 45,154                
|Construction                         | 26,878                
|Total real estate                    | 179,457               
|Consumer loans:                      |                       
|Home equity                          | 19,475                
|Automobile                           | 12,701                
|Secured personal                     | 4,331                 
|Unsecured personal                   | 2,149                 
|Deposit account                      | 942                   
|Other                                | --                    
|Total consumer                       | 39,598                
|Commercial business                  | 14,737                
|Total loans receivable               | 233,792               
|Less:                                |                       
|Undisbursed loans in process         | 8,142                 
|Deferred fees and unearned discounts | 131                   
|Allowance for losses                 | 1,676                 
|Total net items                      | 9,949                 
|Total loans receivable, net          | $223,843              

The following table shows the composition of our loan portfolio by fixed and adjustable rate at the dates indicated.

|                             | March 31,             
|---------------------------- | ----------------------
|                             | 2002                  
|                             |                       
|                             | Amount                
|                             | (Dollars in Thousands)
|Fixed-Rate Loans:            |                       
|Real Estate:                 |                       
|Residential                  | $21,931               
|Commercial and multi-family  | 14,446                
|Total real estate loans (1)  | 36,377                
|Consumer                     | 30,506                
|Commercial business          | 7,653                 
|Total fixed-rate loans       | 74,536                
|Adjustable-Rate loans:       |                       
|Real Estate:                 |                       
|Residential                  | 111,190               
|Commercial and multi-family  | 31,890                
|Total real estate loans (2)  | 143,080               
|Consumer                     | 9,092                 
|Commercial Business          | 7,084                 
|Total adjustable-rate loans  | 159,256               
|Total loans receivable       | 233,792               
|Less:                        |                       
|Undisbursed loans in process | 8,142                 
|Deferred fees and unearned   | 131                   
|Allowance for losses         | 1,676                 
|Total net items              | 9,949                 
|Total loans receivable, net  | $223,843              

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(1) Includes residential real estate construction loans of $295,000, $297,000, $1.0 million, $2.7 million, and $818,000, and
commercial and multi-family real estate construction loans of $0, $680,000, $1.1 million, $2.6 million, and $4.3 million,  at March 31, 2002, 2001, 2000, 1999 and 1998, respectively.

(2) Includes residential real estate construction loans of $25.1 million, $20.4 million, $12.2 million, $7.4 million, and $3.8 million and
commercial and multi-family real estate construction loans of $1.2 million, $2.2 million, $4.6 million, $1.0 million, and $1.1 million at
March 31, 2002, 2001, 2000, 1999 and 1998 respectively.

**Loan Maturity and Repricing**

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We originate fixed and adjustable rate construction loans both of which generally mature in one year or
less. At March 31, 2002, we had total construction loans of $26.9 million, all of which mature in the fiscal year ending March 31, 2003.

One- to Four-Family Residential Real Estate Lending

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Our primary lending program is the origination of loans secured by one-to four-family residences,
substantially all of which are located in our market area. We evaluate both the borrower's ability to make
principal and interest payments and the value of the property that will secure the loan. Although federal law
permits us to make loans in amounts of up to 100% of the appraised value of the underlying real estate, we
generally make one-to four-family residential real estate loans in amounts of 80% or less of the appraised value.
In certain instances, we will lend up to 90% of the appraised value of the underlying real estate and require the
borrower to purchase private mortgage insurance in an amount sufficient to reduce our exposure to 80% or less.

In order to reduce our exposure to changes in interest rates, we originate and sell most of our 30-year
fixed-rate, one-to four-family residential mortgage loans. For the year ended March 31, 2002, 26.5% of all one-to four-family residential loans we originated had adjustable interest rates. Although, due to competitive market pressures, we do originate
fixed-rate mortgage loans, we currently underwrite and document all such loans to permit their sale in the
secondary mortgage market, with a third-party purchase commitment for the loan being required prior to
origination. At March 31, 2002, $21.6 million (excluding $295,000 of residential construction loans) or 9.3%,
of our one-to four-family residential mortgage loan portfolio consisted of fixed-rate mortgage loans.

Our current one-to four-family residential adjustable-rate mortgage ("ARM") loans primarily have
interest rates that adjust annually, based on a stated interest margin over the yields on one year U.S. Treasury
Bills.  Although our primary one-to four-family residential loan is the one year adjustable, we offer a residential
loan which adjusts every three or five years generally in accordance with the rates based on a stated margin over
the yields on one or three year U.S. Treasury Bills. Our ARM loans generally limit interest rate increases to 2%
each rate adjustment period and have an established ceiling rate at the time the loans are made of up to 6% over
the original interest rate. To compete with other lenders in our market area, we make one, three and five-year
ARMs at interest rates which, for the initial period, are below the index rate which would otherwise apply to
these loans. Borrowers are qualified, however, at the fully indexed interest rate. At March 31, 2002, residential
ARM loans totaled $111.2 million, or 47.6%, of our total loans receivable before net items. ARM loans
generally pose different credit risks than fixed-rate loans primarily because during periods of rising interest
rates, the risk of defaults on ARM loans may increase due to the upward adjustment of interest costs to borrowers.

All one-to four-family real estate mortgage loans being originated by us contain a "due-on-sale" clause
providing that we may declare the unpaid principal balance due and payable upon the sale of the mortgaged
property. It is our policy to enforce these due-on-sale clauses concerning fixed-rated loans and to permit assumptions of ARM loans, for a fee, by qualified borrowers.

We require, in connection with the origination of residential real estate loans, title opinions and fire and
casualty insurance coverage, as well as flood insurance where appropriate, to protect our interests. The cost of
this insurance coverage is paid by the borrower. We generally do not require escrows for taxes and insurance.

Commercial and Multi-Family Real Estate, and Construction Lending

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We have originated and, in the past have purchased, commercial real estate loans and loan participations.
We also make commercial real estate construction loans. Our commercial real estate and construction loans are

secured by various types of commercial real estate, including multi-family residential buildings, hotels and
motels, convenience stores, commercial and industrial buildings, shopping centers and churches. We have in
recent years placed more emphasis on multi-family housing loans for our commercial real estate loan portfolio.
At March 31, 2002, commercial real estate, land and construction loans aggregated $72.0 million or 30.8% of
our total loans receivable before net items. Our commercial real estate and construction loans are secured
primarily by properties located in our market area.

Our commercial real estate loans are generally made at interest rates that adjust based on yields for
one-year U.S. Treasury securities, with a 2% annual cap on rate adjustments and a 6% cap on interest rates over
the life of the loan. Typically, we charge origination fees ranging from 1% to 2% on these loans. At March 31,
2002, we had $14.4 million in fixed-rate commercial real estate and construction loans. Commercial real estate loans made by us are fully amortizing with maturities ranging from five to 30 years.

At March 31, 2002, we had $1.2 million or 0.51% of our total loans receivable before net items invested
in commercial construction loans compared to $2.9 million or 1.3% at March 31, 2001. At March 31, 2002, we
had two commercial construction loans, the largest one having an outstanding balance of $650,000. These two
loans are presently performing in accordance with their payment terms. Our commercial construction loans are
generally made for a one year term or less, with a requirement that the borrower have a commitment for
permanent financing prior to funding the construction loan. Our construction loans generally provide for a fixed
rate of interest at the prevailing prime rate or slightly above. Such loans are secured by the personal guarantees
of the borrowers and by first mortgages on the projects.

In our underwriting of commercial real estate and construction loans, we may lend, under federal
regulations, up to 100% of the security property's appraised value, although the loan to original appraised value
ratio on such properties is generally 80% or less. Our commercial real estate and construction loan underwriting
require an examination of debt service coverage ratios, the borrower's creditworthiness and prior credit history
and reputation, and we generally require personal guarantees or endorsements of borrowers. We also carefully consider the location of the security property.

At March 31, 2002, we had 22 commercial real estate loans (or multiple loans to one borrower) in excess
of $1.0 million with an aggregate balance of $32.6 million. The largest relationship was to a single borrower for
$2.2 million secured by a combination of multi-family and single family rental property, personal residence, improved land
and residential construction.

The following table presents information as to the Company's commercial real estate and construction
lending portfolio as of March 31, 2002 by type of project.

|                                        | Number
of loans        | Principal
Balance
|--------------------------------------- | ---------------------- | -----------------
|                                        | (Dollars in Thousands)
|Permanent financing:                    |                        |                  
|Multi-family residential buildings      | 43                     | $17,728          
|Hotel and motel                         | 9                      | 6,268            
|Commercial and industrial buildings     | 77                     | 14,577           
|Raw land                                | 58                     | 5,733            
|Church                                  | 4                      | 848              
|                                        | 191                    | 45,154           
|Acquisition and construction financing: |                        |                  
|Commercial and industrial buildings     | 2                      | 1,182            
|                                        |                        |                  
|Total                                   | 193                    | $46,336          

Commercial real estate and construction lending is generally considered to involve a higher level of
credit risk than one-to four-family residential lending due to the concentration of principal in a limited number
of loans and borrowers and the effects of general economic conditions on real estate developers and managers.
Our risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the
property's sale value upon completion of the project and the estimated cost of the project. If the estimated cost
of construction or development proves to be inaccurate, we may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate of value proves to be
inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project with value which is
insufficient to assure full repayment. Because we usually provide loans to a developer for the entire estimated
cost and interest of the project, defaults in repayment generally do not occur during the construction period and
it is therefore difficult to identify problem loans at an early stage. When loan payments become due, borrowers
may experience cash flow from the project which is not adequate to service total debt. This cash flow shortage
can result in the failure to make loan payments. In such cases, we may be compelled to modify the terms of the
loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor.

Consumer Lending

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We offer various secured and unsecured consumer loans, including unsecured personal loans,
automobile loans, deposit account loans, installment and demand loans, and home equity. At March 31, 2002,
we had $39.6 million or 16.9% of our total loans receivable before net items invested in consumer loans. With
the exception of $9.1 million of home equity loans at March 31, 2002, our consumer loans have fixed interest
rates and generally have terms ranging from 90 days to five years. The largest component of consumer loans are
home equity loans. We originate all of our consumer loans in our market area and intend to continue our
consumer lending in this geographic area.

We offer VISA credit card accounts. At March 31, 2002, 1,226 credit card accounts had been issued,
with an aggregate outstanding balance of $472,000 and unused credit available of $2.8 million. We presently charge no annual membership fee and an annual rate of interest of 15.98%.

Consumer loans do not include unused lines of credit on credit card accounts opened by us and lines of
credit on home equity loans. The total unused credit available under our home equity and credit card programs was $6.5 million at March 31, 2002.

The underwriting standards employed by us for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally from any verifiable secondary
income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also
includes a comparison of the value of the security in relation to the proposed loan amount.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of
consumer loans which are unsecured, such as credit card receivables, or secured by rapidly depreciable assets
such as automobiles.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts
against

the borrower. In addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an assignee of such loan such as us,
and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of
the underlying collateral. We add general provisions to our loan loss allowance, in amounts determined in
accordance with industry standards, at the time the loans are originated. Consumer loan delinquencies often
increase over time as the loans age. Accordingly, although the level of non-performing assets in our consumer
loan portfolio has generally been low ($42,000 at March 31, 2002), there can be no assurance that delinquencies will not increase in the future.

Commercial Business Lending

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We also originate commercial business loans. At March 31, 2002 we had $14.7 million in commercial
business loans outstanding, representing 6.3% of our gross loan portfolio. We offer commercial business loans
to service existing customers, to consolidate our banking relationships with these customers, and to further our asset/liability management goals.

Unlike residential mortgage loans which generally are made on the basis of the borrower's ability to
make repayment from his or her employment and other income, and which are secured by real property whose
value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made
on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial business loans may be dependent upon the
success of the business itself. Our commercial business loans almost always include personal guarantees and are
usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At
March 31, 2002, we had $12.2 million of secured commercial business loans and $2.5 million of unsecured commercial business loans.

We recognize the generally increased credit risk associated with commercial business lending. Our
commercial business lending practice emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy of the borrower's capital and
collateral. Analysis of the borrower's past, present and future cash flows is also an important aspect of our credit analysis.

Loan Originations, Purchases and Sales

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Federal regulations authorize us to make real estate loans anywhere in the United States. However, at
March 31, 2002, substantially all of our real estate loans were secured by real estate located in our market area.

Management believes that purchases of loans and loan participations are generally desirable only when
local mortgage demand is less than the supply of funds available for local mortgage origination. We did not
purchase any loans in fiscal 2002.

Generally, we originate fixed-rate residential mortgage loans for sale in the secondary market and retain
adjustable-rate mortgage loans for our portfolio. Prior to fiscal 1997 we retained the servicing for mortgage
loans sold. During fiscal 1997 we began to sell loans with servicing released to be more competitive in that market.

During fiscal 2002, many commercial and multi-family loans were refinanced as a result of favorable
market interest rates, resulting in a high volume of commercial and multi-family loan originations as reflected in
the table below.

The following table shows our loan origination, purchase, sale and repayment activities for the periods indicated.

|                                                          | Year Ended March 31,
|--------------------------------------------------------- | --------------------
|                                                          | 2002                
|                                                          | (In Thousands)      
|Origination by Type:                                      |                     
|Adjustable Rate:                                          |                     
|Real estate:                                              |                     
|one- to four-family - residential                         | $27,407             
|- commercial                                              | 27,419              
|Non-real estate - consumer and    commercial business     | 104                 
|Total adjustable rate                                     | 54,930              
|Fixed Rate:                                               |                     
|Real estate:                                              |                     
|one- to four-family - residential                         | 76,111              
|- commercial                                              | 3,904               
|Non-real estate ­ consumer and    commercial business (1) | 23,021              
|Total fixed rate                                          | 103,036             
|Sales and Repayments:                                     |                     
|Real estate loans                                         | 74,938              
|Principal repayments                                      | 64,951              
|Total reductions                                          | 139,889             
|Decrease in other items, net                              | (8,792              
|Net increase                                              | $9,285              

(1) Consumer loans include the amounts outstanding on credit card accounts opened by us and outstanding lines of credit on home equity loans.

Delinquent and Problem Loans

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When a borrower fails to make a required payment on a loan, we attempt to cause the deficiency to be
cured by contacting the borrower. A notice is mailed to the borrower after a payment is 16 days past due and
again when the loan is 28 days past due. For most loans, if the delinquency is not cured within 30 days we issue

a notice of intent to foreclose on the property and if the delinquency is not cured within 60 days, we may
institute foreclosure action. If foreclosed on, real property is sold at a public sale and may be purchased by us.  Historically, deficiencies have been cured promptly.

The following table sets forth information concerning delinquent mortgage and other loans at March 31,
2002. The amounts presented represent the total remaining principal balances of the related loans, rather than
the actual payment amounts which are overdue.

|                       | Residential RealEstate | Commercial andMulti-FamilyReal Estate | Consumer | CommercialBusiness
|---------------------- | ---------------------- | ------------------------------------- | -------- | ------------------
|                       | Number                 | Amount                                | Number   | Amount            
|                       | (Dollars in Thousands)
|Loans Delinquent for:  |                        |                                       |          |                   
|30-59 days             | 5                      | $186                                  | 5        | $432              
|60-89 days             | 3                      | 264                                   | 1        | 11                
|90 days and over       | 2                      | 76                                    | --       | --                
|Total delinquent loans | 10                     | $526                                  | 6        | $443              
|                       |                        |                                       |          |                   

Federal regulations provide for the classification of loans, debt, equity securities and other assets
considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. The regulations require insured
institutions to classify their own assets and to establish prudent general allowances for losses for assets
classified "substandard" or "doubtful." For the portion of assets classified as "loss," an institution is required to
either establish specific allowances of 100% of the amount classified or charge such amount off its books.
Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess potential weaknesses are required to be designated "special mention"
by management. In addition, the OTS may require the establishment of a general allowance for losses based on
assets classified as "substandard" and "doubtful" or based on the general quality of the asset portfolio of an
institution. In connection with the filing of our periodic reports with the OTS and in accordance with our
classification of assets policy, we regularly review the loans in our portfolio to determine whether any loans
require classification in accordance with applicable regulations.

On the basis of management's review of our assets, at March 31, 2002, we had classified $941,000 of
our assets as substandard, none as doubtful and none as loss. Loans classified as special mention by
management at March 31, 2002, totaled approximately $2.7 million.  All assets that have been classified are
included below in either the table of non-performing assets or under "Other Loans of Concern."

Non-Performing Assets

---

The table below sets forth the amounts and categories of non-performing assets in our loan portfolio.
Non-performing assets include non-accruing loans, accruing loans delinquent 90 days or more as to principal or
interest payments and real estate acquired through foreclosure, which include assets acquired in settlement of
loans. Typically, a loan becomes nonaccruing when it is 90 days delinquent. All consumer loans more than 120

days delinquent are charged against the consumer loan allowance for loan losses. Accruing mortgage loans
delinquent more than 90 days are loans that we consider to be well secured and in the process of collection. For
the years presented, we have no accruing loans 90 days or more delinquent and no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates).

|                                             | March 31,             
|-------------------------------------------- | ----------------------
|                                             | 2002                  
|                                             | (Dollars in Thousands)
|Non-accruing loans:                          |                       
|Commercial and Consumer                      | $   66                
|Real Estate                                  | 76                    
|Accruing loans delinquent more than 90 Days: |                       
|Residential                                  | ---                   
|Commercial                                   | ---                   
|Consumer                                     | ---                   
|Real estate acquired through foreclosure     | 794                   
|Total                                        | $  936                
|Total as a percentage of total assets        | .36%                  
|Unallocated allowance for loan losses        | $1,634                

Non-performing assets at March 31, 2002 were comprised primarily property acquired through foreclosure. At
March 31, 2002 the largest property in non-performing assets was a single-family residential property with an
approximate value of $81,000. Based on current market values of the properties securing these loans,
management anticipates no significant losses in excess of the reserves for losses previously recorded.

Other Loan Of Concern

---

As of March 31, 2002, there were $2.7 million in loans with respect to which known information about
the possible credit problems of the borrowers or the cash flows of the security properties have caused
management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing asset categories.

The $2.7 million in other loans of concern is comprised primarily of commercial and  residential real
estate loans. Included in the commercial real estate loans of concern is one loan in the amount of $1.2 million
which is current as to interest and principal payments. We are closely monitoring the status of this loan due to prior slow payment history and a prior bankrupcty.

Although management believes that these loans are adequately secured and no material loss is expected,
certain circumstances may cause the borrower to be unable to comply with the present loan repayment terms at some future date.

Allowance for Losses on Loans and Real Estate

---

We provide valuation reserves for anticipated losses on loans and real estate when management
determines that a significant decline in the value of the collateral has occurred, as a result of which the value of
the collateral is less than the amount of the unpaid principal of the related loan plus estimated costs of
acquisition and sale. In addition, we also provide reserves based on the dollar amount and type of collateral
securing our loans, in order to protect against unanticipated losses. Although management believes that it uses
the best information available to make such determinations, future adjustments to reserves may be necessary,
and net income could be significantly affected, if circumstances differ substantially from the assumptions used
in making the initial determinations. During 2002, our net increase in allowance for losses on loans was
$198,000 due primarily to an increase in loans. At March 31, 2002, we had an allowance for loan losses of
$1,676,000 which is predominantly a general allowance of $1,634,000.

The following table sets forth an analysis of our allowance for loan losses.

|                                                                                          | Year Ended March 31,  
|----------------------------------------------------------------------------------------- | ----------------------
|                                                                                          | 2002                  
|                                                                                          | (Dollars in Thousands)
|Balance at beginning of period                                                            | $1,477                
|Provision charged to operations                                                           | 373                   
|Charge-offs:                                                                              |                       
|Residential real estate                                                                   | 147                   
|Consumer                                                                                  | 155                   
|Recoveries:                                                                               |                       
|Real Estate                                                                               | 69                    
|Consumer                                                                                  | 59                    
|Net charge-offs                                                                           | 174                   
|Balance at end of period                                                                  | $1,676                
|Ratio of net charge-offs during the
period to average loans outstanding
during the period | .08%                  
|                                                                                          |                       

The distribution of the allowance for losses on loans at the dates indicated is summarized as follows:

|                                                 | Residential            |   | Commercialand Multi-FamilyReal Estate |   | Construction |   | Consumer andCommercialBusiness |   | Total   |  
|------------------------------------------------ | ---------------------- | - | ------------------------------------- | - | ------------ | - | ------------------------------ | - | ------- | -
|                                                 | (Dollars in Thousands)
|March 31,2002                                    |                        |   |                                       |   |              |   |                                |   |         |  
|Amount of loan loss allowance                    | $377                   |   | $465                                  |   | $267         |   | $567                           |   | $1,676  |  
|Loan amounts by category                         | 107,425                |   | 45,154                                |   | 26,878       |   | 54,335                         |   | 233,792 |  
|Percent of loans in eachcategory to total loans  | 45.95                  | % | 19.31                                 | % | 11.50        | % | 23.24                          | % | 100.00  | %
|March 31,2001                                    |                        |   |                                       |   |              |   |                                |   |         |  
|Amount of loan loss allowance                    | $350                   |   | $409                                  |   | $230         |   | $488                           |   | $1,477  |  
|Loan amounts by category                         | 105,257                |   | 46,514                                |   | 23,507       |   | 47,909                         |   | 223,187 |  
|Percent of loans in each
category to total loans | 47.16                  | % | 20.84                                 | % | 10.53        | % | 21.47                          | % | 100.00  | %
|March 31, 2000                                   |                        |   |                                       |   |              |   |                                |   |         |  
|Amount of loan loss allowance                    | $238                   |   | $246                                  |   | $136         |   | $598                           |   | $1,218  |  
|Loan amounts by category                         | 97,409                 |   | 42,318                                |   | 20,687       |   | 40,145                         |   | 200,559 |  
|Percent of loans in each
category to total loans | 48.57                  | % | 21.10                                 | % | 10.31        | % | 20.02                          | % | 100.00  | %
|March 31, 1999                                   |                        |   |                                       |   |              |   |                                |   |         |  
|Amount of loan loss allowance                    | $375                   |   | $306                                  |   | $123         |   | $512                           |   | $1,316  |  
|Loan amounts by category                         | 91,396                 |   | 38,545                                |   | 13,712       |   | 33,594                         |   | 177,247 |  
|Percent of loans in each
category to total loans | 51.56                  | % | 21.75                                 | % | 7.74         | % | 18.95                          | % | 100.00  | %
|March 31, 1998                                   |                        |   |                                       |   |              |   |                                |   |         |  
|Amount of loan loss allowance                    | $376                   |   | $161                                  |   | $116         |   | $464                           |   | $1,117  |  
|Loan amounts by category                         | 94,962                 |   | 40,115                                |   | 10,071       |   | 21,690                         |   | 166,838 |  
|Percent of loans in each
category to total loans | 56.92                  | % | 24.04                                 | % | 6.04         | % | 13.00                          | % | 100.00  | %
|                                                 |                        |   |                                       |   |             

Subsidiary Activities

---

We established Community First Mortgage Corporation, a mortgage banking subsidiary, in November
1997 and began operations in June 1998. The primary business of Community First is to originate fixed-rate
mortgage loans to sell to third party investors to generate fee income and gains on the sale of mortgage loans.
The success of a mortgage banking operation such as Community First is generally dependent on increasing the
volume of mortgage loans originated and sold to investors. For the year ended March 31, 2002, our mortgage banking subsidiary originated $77.6 million
in fixed-rate mortgage loans for resell.

Investment Activities

---

As a member of the FHLB System, Community Bank must maintain minimum levels of investments that
qualify as liquid assets to meet the safety and soundness requirements under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. See "Regulation - Liquidity."

Historically, we have maintained our liquid assets at a level believed adequate to meet requirements of
normal daily activities, repayment of maturing debt and potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained. As of March 31, 2002, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 10.9%.

The contractual maturities and weighted average yields of the investment securities portfolio, excluding
FHLB of Atlanta stock and Freddie Mac stock, are indicated in the following table.

|                                              | March 31, 2002
|--------------------------------------------- | --------------
|                                              | Within 1 year 
|                                              | Book Value    
|                                              |               
|Federal agency obligations                    | $    250      
|State agency obligations
and commercial paper | 72            
|Total investment securities                   | $ 1,022       
|Weighted average yield                        | 4.54%         
|                                              |               

Included in the above table are $9.7 million of securities that are callable in 3 years or less.

The following table sets forth the composition of our available for sale (at fair value) and held to
maturity securities portfolios at the dates indicated.

|                                                                                                                                   | March 31,             
|---------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                                                                                                                                   | 2002                  
|                                                                                                                                   | BookValue             
|                                                                                                                                   | (Dollars in Thousands)
|Interest-bearing deposits with banks:                                                                                              | $ 1,931               
|Investment securities:                                                                                                             |                       
|Federal agency obligations                                                                                                         | $11,250               
|State agencies and commercial paper                                                                                                | 5,524                 
|Freddie Mac common and       preferred stock                                                                                       | 8,399                 
|Subtotal                                                                                                                           | 25,173                
|FHLB stock                                                                                                                         | 2,600                 
|Total investment securities and       FHLB stock                                                                                   | $27,773               
|Average remaining life or term to
repricing, excluding Freddie Mac
common stock, FHLB stock and other
marketable equity securities |                       

During fiscal 2002 the market rates paid on investment securities decreased.  During fiscal 2002 we
invested primarily in federal and state agency securities with maturities of one to five years, some of which are
callable within one to three years from date of purchase.

Sources of Funds

---

**General**. Deposits have traditionally been the principal source of our funds for use in lending and for
other general business purposes. In addition to deposits, we derive funds from loan repayments, cash flows
generated from operations, which includes interest credited to deposit accounts, repurchase agreements entered into with commercial banks and FHLB of Atlanta advances.

Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows
and the related cost of such funds have varied widely. Borrowings may be used on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded lending activities.

**Deposits**. We attract both short-term and long-term deposits from the general public by offering a wide
assortment of accounts and rates. We have been required by market conditions to rely on short-term accounts
and other deposit alternatives that are more responsive to market interest rates than the passbook accounts and
fixed interest rate, fixed-term certificates that were our primary source of deposits in the past. We offer regular
passbook accounts, checking accounts, various money market accounts, fixed-rate long-term certificates with
varying maturities, $100,000 or above jumbo certificates of deposit and individual retirement accounts. Certain
of our jumbo certificates which have matured revert to a passbook rate and are reflected in the tables as
passbook accounts. We do not solicit brokered deposits due to our ability historically to attract funds from our local markets or borrow from the FHLB at lower rates.

The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by us at the periods indicated.

|                                         | At March 31,  
|---------------------------------------- | --------------
|                                         | 2002          
|                                         | (In Thousands)
|Passbook and statement accounts          | $ 36,143      
|NOW and Super NOW accounts               | 30,968        
|Money market accounts                    | 13,416        
|One-to five-year fixed-rate certificates | 91,076        
|Six-month and 91 day certificates        | 32,932        
|Total                                    | $204,535      

The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and has
allowed us to respond with flexibility (by paying rates of interest more closely approximating market rates of
interest) to, although not eliminate the threat of, disintermediation (the flow of funds away from depository
institutions such as thrift institutions into direct investment vehicles such as government and corporate
securities). In addition, we have become much more subject to short-term fluctuations in deposit flows, as

customers have become more interest rate conscious. Our ability to attract and maintain deposits, and our cost of
funds, has been, and will continue to be, significantly affected by money market conditions.

The following table sets forth our deposit flows during the periods indicated.

|                           | Year Ended March 31,  
|-------------------------- | ----------------------
|                           | 2002                  
|                           | (Dollars in Thousands)
|Opening balance            | $174,307              
|Net deposits (withdrawals) | 24,342                
|Interest credited          | 5,886                 
|Ending balance             | 204,535               
|Net increase               | $  30,228             
|Percent increase           | 17.34%                

During the fiscal years ended March 31, 2002, 2001 and 2000 we emphasized free checking accounts,
offered a more competitive rate on savings accounts  and remained competitive in regard to the rates offered by
competitors. Due to these efforts we experienced an increase in both non-interest bearing demand and savings
accounts during fiscal 2002. We may use borrowings as an alternative source of funds. See "- Borrowings."

The following table sets forth the change in the dollar amount of savings deposits in the various types of
deposit programs offered by us for the periods indicated.

|                                         | Year Ended March 31,
|---------------------------------------- | --------------------
|                                         | 2002                
|                                         | (In Thousands)      
|Passbook and statement accounts          | $21,729             
|NOW and Super NOW accounts               | 4,627               
|Money market accounts                    | 4,407               
|One-to five-year fixed-rate certificates | (1,534)             
|Six-month and 91 day certificates        | 999                 
|Total increase                           | $30,228             

The following table contains information pertaining to the average amount of and the average rate paid
on each of the following deposit categories for the periods indicated.

|                                     | Year Ended March 31,  
|------------------------------------ | ----------------------
|                                     | 2002                  
|                                     | AverageBalance        
|                                     | (Dollars in Thousands)
|Deposit Category                     |                       
|Non-interest bearing demand deposits | $ 10,888              
|Interest bearing demand deposits     | 28,488                
|Savings deposits                     | 18,494                
|Time deposits                        | 127,169               
|Total deposits                       | $185,039              

The following table shows rate information for our certificates of deposit as indicated.

|2.00-3.00%     | 3.01-5.00%     | 5.01-6.00% | 6.01-7.00% | Total  
|-------------- | -------------- | ---------- | ---------- | -------
|               | (In Thousands)
|March 31, 2002 | $22,640        | $83,833    | $14,186    | $3,349 
|March 31, 2001 | ---            | $26,181    | $26,325    | $72,037
|March 31, 2000 | $21            | $37,443    | $49,368    | $19,142

The following table indicates the amount of the certificates of deposit by time remaining until maturity as of March 31, 2002.

|                                            | Maturity        |                          
|------------------------------------------- | --------------- | -------------------------
|                                            | 3 Months orless | Over 3Months thru6 Months
|                                            | (In Thousands) 
|Certificates of deposit less than $100,000  | $14,655         | $10,218                  
|Certificates of deposit of $100,000 or more | 2,787           | 1,612                    
|Total certificates of deposit               | $17,442         | $11,830                  

Borrowings

---

As a member of the FHLB of Atlanta, we are required to own capital stock in the FHLB of Atlanta and
are authorized to apply for advances from the FHLB of Atlanta. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe the acceptable
uses to which these advances may be put, as well as limitations on the size of the advances and repayment
provisions. Our borrowings, from time to time, also include securities sold under agreements to repurchase, with
mortgage-backed securities or other securities pledged as collateral. The proceeds are utilized by us for general
corporate purposes. At March 31, 2002, we had $950,805 of securities sold under agreements to repurchase.

We generally utilize borrowings to supplement deposits when they are available at a lower overall cost
to us or they can be invested at a positive rate of return.

The following table sets forth information as to the our borrowings and the weighted average interest rate paid on such borrowings at the dates indicated.  For additional information on our
borrowings, see Note 6 of the Notes to Consolidated Financial Statements contained in the Annual Report to
Shareholders which is incorporated by reference in Part II, Item 7 of this report.

|                                               | At March 31,          
|---------------------------------------------- | ----------------------
|                                               | 2002                  
|                                               | (Dollars in Thousands)
|Securities sold under agreements to repurchase | $   951               
|FHLB advances                                  | 28,000                
|Total Borrowings                               | $28,951               
|Weighted average interest rate of borrowings   | 1.95%                 

Competition

---

Community faces strong competition both in originating real estate loans and in attracting deposits.
Competition in originating real estate loans comes primarily from other thrift institutions, commercial banks and
mortgage bankers who also make loans secured by real estate located in our market area. We compete for real
estate loans principally on the basis of our interest rates and loan fees, the types of loans and the quality of services provided to borrowers.

We face substantial competition in attracting deposits from other thrift institutions, commercial banks,
money market and mutual funds, credit unions and other investment vehicles. Our ability to attract and retain
deposits depends on our ability to provide an investment opportunity that satisfies the requirements of investors
as to rate of return, liquidity, risk and other factors. We compete for these deposits by offering a variety of
deposit accounts at competitive rates and convenient business hours.

We consider our primary markets for deposits to be Augusta County and Hampton Roads and for
mortgage loans to be Augusta and Rockingham Counties and the Hampton Roads area.  We estimate that our
market share of savings deposits in Augusta County is approximately 10% and our share of mortgage loans in
Augusta and Rockingham Counties is less than 10%. The opening of an office by the Bank in April, 1997 in
Virginia Beach, Virginia expanded the Bank's market area to the Hampton Roads area of Virginia.

Regulation

---

**General.** Community Bank is a federally chartered financial institution, the deposits of which are
federally insured. Accordingly, Community Bank is subject to broad federal regulation and oversight extending
to all its operations. The Bank is a member of the FHLB of Atlanta and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve Board").  As the savings and loan
holding company of Community Bank, Community Financial also is subject to federal regulation and oversight.

Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document.

**Federal Regulation of Savings Associations.** The OTS has extensive authority over the operations of
savings associations. As part of this authority, we are required to file periodic reports with the OTS and we are
subject to periodic examinations by the OTS. When an examination is conducted by the OTS, the examiners
may require us to provide for higher general or specific loan loss reserves.

**Regulatory Capital Requirements**. Federally insured savings associations, such as Community Bank, are required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards on individual associations on a
case-by-case basis. See Note 10 of the Notes to Consolidated Financial Statements in our Annual Report to
Stockholders which is incorporated by reference in Part II, Item 7 of this report for information on our
regulatory capital levels and applicable OTS requirements.

The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions
against savings associations that fail to meet their capital requirements.

**Limitations on Dividends and Other Capital Distributions.** OTS regulations impose various
restrictions on savings associations with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion.

Generally, savings associations, such as Community Bank that before and after the proposed distribution
meet their capital requirements, may make capital distributions during any calendar year equal to net income for
the current year plus the previous two years net income, less capital distributions paid over that same period.
However, an association deemed to be in need of more than normal supervision by the OTS may have its
dividend authority restricted by the OTS.  Community Bank may pay dividends in accordance with this general authority.

**Qualified Thrift Lender Test**. All savings associations, including Community Bank, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a
savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the
savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the
Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and
investments. At March 31, 2001, Community Bank met the test and has always met the test since its effectiveness.

Any savings institution that fails to meet the QTL test must convert to a national bank, unless it
requalifies as a QTL and thereafter remains a QTL. If an institution has not yet requalified or converted to a
national bank, it's new investments and activities are limited to those permissible for both a savings institution
and

a national bank, and it is limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB borrowings. If the institution has not requalified
or converted to a national bank within three years after the failure, it must sell all investments and stop all
activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB
borrowings, which may result in prepayment penalties. If any institution that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies. See"-Holding Company
Regulation,"

**Community Reinvestment Act**. Under the Community Reinvestment Act ("CRA"), every FDIC
insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices
to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination
of Community Bank, to assess the institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a merger or the establishment of a
branch, by Community Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS.

The federal banking agencies, including the OTS, have recently revised the CRA regulations and the
methodology for determining an institution's compliance with the CRA. Due to the heightened attention being
given to the CRA in the past few years, Community Bank may be required to devote additional funds for
investment and lending in our local community. We were examined for CRA compliance in October, 2000 and received a rating of "Satisfactory".

**Holding Company Regulation.** Community Financial is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, we are required to register and file reports with the OTS
and are subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over
us and our non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association.

As a unitary savings and loan holding company, we generally are not subject to activity restrictions. If
we acquire control of another savings association as a separate subsidiary, we would become a multiple savings
and loan holding company, and our activities and any of our subsidiaries (other than Community Bank or any
other SAIF-insured savings association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory acquisition.

Federal and State Taxation

---

**Federal Taxation.** Savings associations such as Community Bank that meet certain definitional tests
relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as
amended (the "Code"), had been permitted to establish reserves for bad debts and to make annual additions
thereto which could, within specified formula limits, be taken as a deduction in computing taxable income for
federal income tax purposes. The amount of the bad debt reserve deduction for "non-qualifying loans" was
computed under the experience method. The amount of the bad debt reserve deduction is now computed under the
experience method. As a result, the Bank must recapture as taxable income that portion of the reserve that

exceeds the amount that could have been taken under
the experience method for post- 1987 tax years. At March 31, 2002, Community Bank's post-1987 excess
reserves still to be recaptured amounted to approximately $422,000. This amount will be recaptured into taxable income ratably over the next two years.

In addition to the regular income tax, corporations, including savings associations such as Community
Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with
certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no
more than 90% of alternative minimum taxable income.

To the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real
property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves
computed under the experience method and to the extent of the association's supplemental reserves for losses
on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of
cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or
liquidation) or for any other purpose (except to absorb bad debt losses). As of March 31, 2002, Community
Bank's Excess for tax purposes totaled approximately $2.3 million.

Community Financial and Community Bank file consolidated federal income tax returns on a fiscal year
basis. Savings associations, such as the Community Bank, that file federal income tax returns as part of a
consolidated group are required by applicable Treasury regulations to reduce their taxable income for purposes
of computing the percentage bad debt deduction for losses attributable to activities of the non-savings
association members of the consolidated group that are functionally related to the activities of the savings
association member.

Our federal income tax returns and our consolidated subsidiary for the last three years are open to
possible audit by the Internal Revenue Service (the "IRS"). In the opinion of management, any examination of
still open returns (including returns of subsidiaries and predecessors of, or entities merged into, Community
Bank) would not result in a deficiency which could have a material adverse effect on the financial condition of
Community Financial and our consolidated subsidiaries.

**Virginia Taxation**. We conduct our business in Virginia and consequently are subject to the Virginia
corporate income tax. The Commonwealth of Virginia imposes a corporate income tax on a basis similar to
federal income tax at a rate of 6% on Virginia taxable income.

Executive Officers

---

The following information as to the business experience during the past five years is supplied with
respect to executive officers of Community Financial. Except as otherwise indicated, the persons named have
served as officers of Community Financial since it became the holding company of Community Bank, and all
offices and positions described below are also with Community Bank. There are no arrangements or
understandings between the persons named and any other person pursuant to which such officers were selected.

P. Douglas Richard, age 58, is President and Chief Executive Officer of the Company. He was appointed
in April, 2000 and was previously a Senior Vice President and Regional President of the Hampton Roads

division. Prior to joining the Company, Mr. Richard was Chief Executive Officer of Seaboard Savings Bank in Virginia Beach, Virginia.

R. Jerry Giles, age 53, is our Chief Financial Officer and Senior Vice President. He was appointed in
April 1994. Prior to joining the Company, Mr. Giles was a Certified Public Accountant in public accounting and
the Chief Financial Officer with a savings bank for eleven years.

Chris P. Kyriakides, age 39, is our Senior Vice President and Regional President, a position he has held since January, 1997.  Prior to joining the Company, Mr. Kyriakides
was Chief Operations Officer of Seaboard Savings Bank in Virginia Beach, Virginia.

Benny N. Werner, age 53, is our Senior Vice President of Retail Banking, a position he has held since
May 1998. Prior to joining the Company, Mr. Werner was employed by Crestar for three years as
President-Warrenton area and employed by Jefferson Savings and Loan, Warrenton, Virginia as Senior Vice President of Retail Banking for seventeen years.

Norman C. Smiley, III., age 40, is our Chief Lending Officer and Senior Vice President, a position he
has held since November 2000. We have employed Mr. Smiley since April 1996. Prior to joining the Company,
Mr. Smiley was a Branch Manager for First Virginia where he was employed for 14 years.

Employees

---

At March 31, 2002, we had a total of 130 employees, including 17 hourly employees. None of our
employees are represented by any collective bargaining group. Management considers our employee relations to be good.

Item 2.  Description of Property

---

The following table sets forth information at March 31, 2002, with respect to our offices, furniture and equipment.

|Location                                                           | Opened | Owned orLeasedExpiration | Gross SquareFootage | Net Book Valueat March 31,2002
|------------------------------------------------------------------ | ------ | ------------------------ | ------------------- | ------------------------------
|38 North Central Avenue
Staunton, Virginia                         | 1965   | Owned                    | 17,000              | $2,197,000                    
|Rte 250 West
Waynesboro, Virginia                                  | 1989   | Owned                    | 5,300               | 703,000                       
|Route 340 and 608
Stuarts Draft, Virginia                          | 1993   | Owned                    | 2,074               | 311,000                       
|5300 Kemps River Drive
Virginia Beach, Virginia                    | 1997   | 2002                     | 2,400               | 31,000                        
|621 Nevan Road
Virginia Beach, Virginia                            | 1998   | 2038                     | 13,000              | 895,000                       
|101 Community Way
Staunton, Virginia                               | 1999   | 2039                     | 4,500               | 799,000                       
|2134 Raphine Road,
Raphine, Virginia                               | 2001   | 2006                     | 2,308               | 66,000                        
|Community First Mortgage
9011 Arboretum Parkway
Richmond, Virginia | 1997   | 2003                     | 1,800               | 48,000                        

We believe that our current facilities are adequate to meet our present and foreseeable need. We are in
the process of opening a branch in Verona, Virginia. This branch is anticipated to be completed in December
2002 and will cost approximately $1,000,000.

Our accounting and record-keeping activities are maintained on an in-house computer system. The net
book value of our computer equipment at March 31, 2002 was $519,483.

Item 3.  Legal Proceedings

---

There are no material pending legal proceedings to which we or our subsidiary is a party or to which any of our property is subject.

Item 4.  Submission of Matters to a Vote of Security Holders

---

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended March 31, 2002.

***PART II***

Item 5.  Market for Common Equity and Related Security Holder Matters

---

The information contained under the caption "Common Stock" on page 36 of the Registrant's Annual Report
to Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation

---

The information under the caption "Management's Discussion and Analysis of Operations" on pages 5
through 12 of the Registrant's Annual Report to Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.

Item 7.  Financial Statements

---

The Financial Statements on pages 13 through 34 in the Registrant's Annual Report to Stockholders
attached hereto as Exhibit 13 are incorporated herein by reference.

Item 8.  Changes in and Disagreements with Accountants on
       Accounting and Financial Disclosure

---

The information required by Item 304 of Regulation S-B was previously filed as part of the Company's
Current Reports on Form 8-K filed on June 7, 2002, as amended on July 5, 2001.

***PART III***

Item 9.  Directors and Executive Officers, Promoters and Control
       Persons; Compliance with Section 16(a) of the Exchange Act

---

Information concerning directors of the Registrant is incorporated herein by reference from our
definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, copy of which will be filed not later
than 120 days after the close of the fiscal year.

Information concerning executive officers is set forth in Part I of this report under the caption "Executive Officers."

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive
officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities.
Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies
of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written
representations that no other reports were required, during the last fiscal year ended March 31, 2002, all Section
16(a) filing requirements applicable to our officers, directors and greater than 10 percent beneficial owners were complied with except as disclosed in the Proxy Statement for the 2002 Annual Meeting
of Stockholders.

Item 10.  Executive Compensation

---

Information concerning executive compensation is incorporated herein by reference from our definitive
Proxy Statement for the 2002 Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.

Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

---

Information concerning security ownership of certain beneficial owners and management is incorporated
herein by reference from our definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal year.

The following table sets forth the securities authorized for issuance under the Company's equity
compensation plans.

|Plan Category                                            | Number of securitiesto be issued uponexercise of out-standing options,warrants and rights | Weighted-averageexercise price ofoutstanding options,warrants and rights | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesoutstanding)
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------
|                                                        
|Equity compensationplans approved bysecurity holders     | 204,750                                                                                   | $11.56                                                                   | 42,300                                                                                                                   
|Equity compensationplans not approvedby security holders | --                                                                                        | --                                                                       | --                                                                                                                       
|                                                        
|Total                                                    | 204,750                                                                                   | $11.56                                                                   | 42,300                                                                                                                   

The number of shares available for issuance are adjusted for changes in capitalization due to reorganization,
recapitalization, stock splits, stock dividends combination or exchange of shares, merger, consolidation or any
change in the corporate structure.

Item 12.  Certain Relationships and Related Transactions

---

Information concerning certain relationships and transactions is incorporated herein by reference from
our definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, a copy of which will be filed not
later than 120 days after the close of the fiscal year.

Item 13.  Exhibits and Reports on Form 8-K

---

(a)	Exhibits:

|RegulationS-B ExhibitNumber | Document                                                                                                                                                   | Reference to
Prior Filing or
Exhibit Number
Attached Hereto
|--------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------
|2                           | Plan of acquisition, reorganization, arrangement, liquid, or
succession                                                                                    | None                                                       
|3.1                         | Amended and Restated Articles of Incorporation and
Bylaws                                                                                                  | *                                                          
|3.2                         | Bylaws, as amended an currently in effect                                                                                                                  | **                                                         
|4                           | Instruments defining the rights of security holders,
including indentures:  Common Stock Certificates                                                      | ***                                                        
|9                           | Voting trust agreement                                                                                                                                     | None                                                       
|10                          | Material contracts:
Stock Option and Incentive Plan
Employment Agreement for P. Douglas Richard
1996 Incentive Plan
Supplemental Executive Retirement Plan | **********                                                 
|11                          | Statement re computation of per share earnings                                                                                                             | None                                                       
|13                          | Annual Report to Security Holders                                                                                                                          | 13                                                         
|16                          | Letter on change in certifying accountant                                                                                                                  | None                                                       
|18                          | Letter on change in accounting principles                                                                                                                  | None                                                       
|21                          | Subsidiaries of Registrant                                                                                                                                 | ****                                                       
|22                          | Published report regarding matters submitted to vote of
security holders                                                                                   | None                                                       
|23.1                        | Consent of Yount, Hyde & Barbour, P.C.                                                                                                                     | 23.1                                                       
|23.2                        | Consent of BDO Seidman                                                                                                                                     | 23.2                                                       
|24                          | Power of Attorney                                                                                                                                          | Not required                                               
|99.1                        | Audit Report of BDO Seidman                                                                                                                                | 99.1                                                       

*Filed on July 5, 1996 as an exhibit to the Registrant's Definitive Proxy Statement (File Number 000-18265) on Schedule
14A. Such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.

**Filed on November 14, 2000 as Exhibits to the Registrant's Quarterly Report on Form 10-QSB (file no, 000-18205), for
the quarter ended September 30, 2000.  Such previously filed documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.

***Filed on June 29, 2000, as Exhibit 10 to the Annual Report on Form 10-KSB for the fiscal year ended March 31, 2000.
Such previously filed document is hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.

****Filed on May 19, 1989 as exhibits to the Registrant's Registration Statement No. 33-28817 on Form S-4. All of such
previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.

(b)	Reports on Form 8-K:

No reports on Form 8-K have been filed during the three-month period ended 	March 31, 2002.

******SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

***COMMUNITY FINANCIAL CORPORATION***

|Date:  June 26, 2002 |  | By: /s/ P. Douglas RichardP. Douglas Richard(Duly Authorized Representative)
|-------------------- |  | ----------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.

|By: /s/ P. Douglas RichardP. Douglas RichardPresident and ChiefExecutive Officer(Principal Executive Officer) |  | By: /s/ James R. Cooke, Jr.James R. Cooke, Jr.Chairman of the Boardand Director
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------
|Date:  June 26, 2002                                                                                          |  | Date:  June 26, 2002                                                           
|By: /s/ Jane C. HickokJane C. HickokVice Chairman of the Boardand Director                                    |  | By: /s/ Charles F. AndersenCharles F. AndersenDirector                         
|Date:  June 26, 2002                                                                                          |  | Date:  June 26, 2002                                                           
|By: /s/ Dale C. SmithDale C. SmithDirector                                                                    |  | By: /s/ Morgan N. Trimyer, Jr.Morgan N. Trimyer, Jr.Director                   
|Date:  June 26, 2002                                                                                          |  | Date:  June 26, 2002                                                           
|By: /s/ R. Jerry GilesChief Financial Officer(Principal Financial andAccounting Officer)                      |  | By: Charles W. FairchildsDirector                                              
|Date:  June 26, 2002                                                                                          |  | Date:  June 26, 2002                                                           

INDEX TO EXHIBITS

|Exhibit No. | Description                           
|----------- | --------------------------------------
|13          | Annual Report to Security Holders     
|23.1        | Consent of Yount, Hyde & Barbour, P.C.
|23.2        | Consent of BDO Seidman                
|99.1        | Audit Report of BDO Seidman