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, 2004                                      

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 of
incorporation or organization)              |  | 54-1532044
(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------ |  | -----------------------------------------------
|                                                                                     |  |                                                
|                                                                                     |  |                                                
|                                                                                     |  |                                                
|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:

---

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 $20,748,773 in gross income for the fiscal year ended March 31, 2004.

As of June 1, 2004, there were issued and outstanding 2,078,906 shares of the Issuer's Common Stock. The aggregate market value of the
voting  and non-voting common stock equity 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 June 1, 2004, was approximately $40.4 million. (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, 2003.

Part III of Form 10-KSB--Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format:
Yes      No

**PART I**

**Item  1.  Description of Business**

**General**

---

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
First was sold on June 30, 2003.

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, 2004, Community had
$336.9 million in assets, deposits of $260.2 million and stockholders' equity of $29.3 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, Verona 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.

**Forward-Looking Statements**

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

Words such as may, could, should, would, believe, anticipate, estimate, expect, intend,
plan and similar expressions are intended to identify these forward-looking statements.  The
important factors discussed below, as well as other factors discussed elsewhere in this document
and factors identified in our filings with the Securities and Exchange Commission 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.
Among the factors that could cause our actual results to differ from the these forward-looking
statements are:

- the strength of the United States economy in general and the strength of the local
economies in which we conduct our operations; general economic conditions,
either nationally or regionally, may be less favorable than expected, resulting in,
among other things, a deterioration in the credit quality of our loans and other
assets;
- the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Federal Reserve Board;
- financial market, monetary and interest rate fluctuations, particularly the relative
relationship of short-term interest rates to long-term interest rates;
- the timely development of and acceptance of new products and services of
Community Financial Corporation and 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 impact of changes in financial services laws and regulations (including laws
concerning taxes, accounting standards, banking, securities and insurance);
legislative or regulatory changes may adversely affect the business in which we
are engaged;
- the impact of technological changes;
- changes in consumer spending and saving habits; and
- our success at managing the risks involved in the foregoing.

Community Financial Corporation 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.

**Lending Activities**

**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 as these loans
typically carry higher interest rates than mortgage loans. Substantially all of our loans are
originated within our market area which includes Shenandoah, Rockingham, Page, Highland,
Augusta, Albemarle, Bath, Rockbridge and Nelson Counties, 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. The Board of Directors has authorized loan limits for individual loan
officers depending on the types of loans being approved. One-to four-family real estate loans not
exceeding $350,000 and commercial and multi-family real estate loans not exceeding $225,000
or less may be approved by the President of the Bank. All mortgage loans in excess of $750,000
must be approved by the Board of Directors. Consumer loans in excess of $175,000 on a secured
basis and $50,000 on an unsecured basis require the approval of three members of senior
management.  Loans in excess of individual loan officer or collective senior management loan
authority but less than $750,000 must be approved by a majority of our Loan Committee.
Regardless of the individual loan approval authority, the Board of Directors generally approves
or ratifies all loans.

The aggregate amount of loans that the Bank is permitted to make to any one borrower,
including related entities, and the aggregate amount that the Bank may invest in any one real
estate project, with certain exceptions, is limited to the greater of 15% of unimpaired capital and
surplus or $500,000. At March 31, 2004, the maximum amount which the Bank could have
loaned to one borrower and the borrower's

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,             
|------------------------------------ | ----------------------
|                                     | 2004                  
|                                     |                       
|                                     | Amount                
|                                     | (Dollars in Thousands)
|Real Estate Loans:                   |                       
|Residential                          | $121,143              
|Commercial and multi-family          | 73,107                
|Construction                         | 25,321                
|Total real estate                    | 219,571               
|Consumer Loans:                      |                       
|Home equity                          | 14,557                
|Automobile                           | 31,297                
|Secured personal                     | 2,241                 
|Unsecured personal                   | 7,332                 
|Deposit account                      | 512                   
|Other                                | --                    
|Total consumer                       | 55,939                
|Commercial business                  | 16,361                
|Total loans receivable               | 291,871               
|Less:                                |                       
|Undisbursed loans in process         | 10,480                
|Deferred fees and unearned discounts | (556)                 
|Allowance for losses                 | 2,646                 
|Total net items                      | 12,570                
|Total loans receivable, net          | $279,301              
|                                     |                       
|Loans held for sale                  | $--                   

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

|                             | March 31,             
|---------------------------- | ----------------------
|                             | 2004                  
|                             |                       
|                             | Amount                
|                             | (Dollars in Thousands)
|Fixed-Rate Loans:            |                       
|Real Estate:                 |                       
|Residential                  | $27,775               
|Commercial and multi-family  | 11,482                
|Total real estate loans (1)  | 39,257                
|Consumer                     | 42,990                
|Commercial business          | 6,218                 
|Total fixed-rate loans       | 88,465                
|Adjustable-Rate loans:       |                       
|Real Estate:                 |                       
|Residential                  | 116,709               
|Commercial and multi-family  | 63,605                
|Total real estate loans (2)  | 180,314               
|Consumer                     | 12,949                
|Commercial Business          | 10,143                
|Total adjustable-rate loans  | 203,406               
|Total loans receivable       | 291,871               
|Less:                        |                       
|Undisbursed loans in process | 10,480                
|Deferred fees and unearned   | (556)                 
|Allowance for losses         | 2,646                 
|Total net items              | 12,570                
|Total loans receivable, net  | $279,301              
|                             |                       
|Loans held for sale          | $--                   

|(1) | Includes residential real estate construction loans of $643,000, $840,000, $295,000,
$297,000, and $1.0 million, and commercial and multi-family real estate construction loans of
$0, $0, $0, $680,000, and $1.1 million at March 31, 2004, 2003, 2002, 2001, and 2000,
respectively.                                                 
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes residential real estate construction loans of $22.7 million, $23.7 million, $25.1
million, $20.4 million, and $12.2 million, and commercial and multi-family real estate
construction loans of $2.0 million, $530,000, $1.2 million, $2.2 million, and $4.6 million at
March 31, 2004, 2003, 2002, 2001 and 2000 respectively.

Loan Maturity and Repricing

---

The following schedule illustrates the contractual maturity of our real estate construction
and commercial business loan portfolios as of March 31, 2004, before net items.  Loans that have
adjustable or renegotiable interest rates are shown as maturing in the period during which the
contract is due.  The schedule does not reflect the effects of possible prepayments or enforcement
of due-on-sale clauses.

|                                   | Real Estate Construction
or Development | Commercial
Business | Total  
|---------------------------------- | --------------------------------------- | ------------------- | -------
|                                   | AMOUNT                                  | AMOUNT              | AMOUNT 
|                                   |                                        
|                                   | (Dollars in Thousands)                 
|                                   |                                        
|Due during periodsending March 31, |                                         |                     |        
|                                   |                                         |                     |        
|2005                               | $25,321                                 | $7,582              | $32,903
|2006 to 2009                       | --                                      | 8,039               | 8,039  
|After 2009                         | --                                      | 740                 | 740    
|                                   |                                         |                     |        
|Totals                             | $25,321                                 | $16,361             | $41,682

The total amount of loans in the above table due after March 31, 2005, which have fixed
interest rates is $5.2 million, while the total amount of loans due after such date which have
floating or adjustable interest rates is $3.6 million.

One-to Four-Family Residential Real Estate Lending

---

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 areas. 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, 2004, 61.5% 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

To compete with other lenders in our market area, we make one, three, five, seven and
ten-year adjustable-rate mortgage loans ("ARM") loans 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.Our one-to four-family residential 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 one- to four-family ARM loans primarily
adjust annually after the initial period, we offer a residential ARM 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. At March 31, 2004, residential ARM loans
totaled $116.7 million, or 40.0%, 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

---

We have originated and, in the past have purchased, commercial real estate loans and
loan participations. We also make commercial and residential 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, 2004, commercial real estate, land and construction loans aggregated
$98.4 million or 33.7% 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

At March 31, 2004, we had $2.0 million or 0.68% of our total loans receivable before net
items invested in commercial construction loans compared to $530,000 or 0.20% at March 31,
2003. At March 31, 2004, we had six commercial construction loans, the largest one having an
outstanding balance of $450,000. These six loans are presently performing in accordance with
their 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 generally secured by the personal
guarantees of the borrowers and by first mortgages on the projects.

The Bank makes construction loans to individuals for the construction of their residences
as well as to builders and developers for the construction of one-to four-family residences and the
development of one-to-four family lots in Virginia. These construction loans are generally for a
term of twelve months or less with interest only due monthly. Construction loans are generally
made with permanent financing to be provided by the Bank, although not required. Construction
loans to builders may be made on a basis where a buyer has contracted to buy the house or the
construction may be on a speculative basis. Limits are set by the Bank as to the number of each
type of construction for each builder, whether speculative or pre-sold, dependent on the
determination made by the Bank during the underwriting process.

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  requires 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, 2004, we had $23.3 million or 8.0% of our total
loans receivable before net items in residential construction loans compared to $24.5 or 9.6% at
March 31, 2003.

During fiscal 2004 lending rates declined.  The Bank was actively pursuing commercial
real estate loans in this lower rate environment while borrowers were seeking funding secured by
commercial real estate.  In a rising rate environment the volume of loans is likely to decline due
to borrowers unwillingness to seek funding at higher interest rates.

At March 31, 2004, we had 42 commercial real estate loans (or multiple loans to one
borrower) in excess of $1.0 million with an aggregate balance of $73.1 million. The largest
relationship was to a single borrower for $3.8 million secured by a combination of residential and
multi-family construction loans.

The following table presents information as to the Company's commercial real estate and
construction lending portfolio as of March 31, 2004 by type of project.

|                                    | Number
of loans        | Principal
Balance
|----------------------------------- | ---------------------- | -----------------
|                                    | (Dollars in Thousands)
|Permanent financing:                |                        |                  
|Multi-family residential buildings  | 49                     | $15,912          
|Hotel and motel                     | 8                      | 5,980            
|Commercial and industrial buildings | 76                     | 18,686           
|Raw land                            | 25                     | 7,129            
|Church                              | 8                      | 1,785            
|Restaurant                          | 10                     | 2,918            
|Warehouse                           | 20                     | 9,372            
|Retail Store                        | 31                     | 8,671            
|School/Recreational                 | 16                     | 4,634            
|Total                               | 243                    | $75,087          
|                                    |                        |                  
|                                    |                        |                  
|                                    |                        |                  
|                                    |                        |                  



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

---

We offer various secured and unsecured consumer loans, including unsecured personal
loans, automobile loans, deposit account loans, installment and demand loans, and home equity
loans. At March 31, 2004, we had $55.9 million or 19.2% of our total loans

We offer VISA credit card accounts. We presently charge no annual membership fee and
an annual rate of interest of 15.96%.  At March 31, 2004, 1,136 credit card accounts had been
issued, with an aggregate outstanding balance of $390,000 and unused credit available of $2.9
million. The total unused credit available under our home equity loans was $7.0 million at March
31, 2004. Consumer loans do not include unused lines of credit on our credit card accounts  and
home equity lines.

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 ($37,000 at March 31, 2004), there can be no assurance
that delinquencies will not increase in the future.

Commercial Business Lending

---

We also originate commercial business loans. At March 31, 2004, we had $16.4 million
in commercial business loans outstanding, representing 5.6% of our total loans receivable, before
net items. 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.

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. An 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

---

Federal regulations authorize us to make real estate loans anywhere in the United States.
However, at March 31, 2004, substantially all of our real estate loans were secured by real estate
located in our market area.

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.

We have not purchased any loans during the last three fiscal years.  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.

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

|                                        | Year Ended March 31,
|--------------------------------------- | --------------------
|                                        | 2004                
|                                        | (In Thousands)      
|Origination by Type:                    |                     
|Adjustable Rate:                        |                     
|Real estate -  1-4 family residential   | $56,724             
|- commercial                            | 28,600              
|Non-real estate - consumer              | 216                 
|Total adjustable rate                   | 85,540              
|Fixed Rate:                             |                     
|Real estate -  1-4 family residential   | 35,533              
|- commercial                            | 3,558               
|Non-real estate  consumer               | 22,748              
|Total fixed rate                        | 61,839              
|Sales and Repayments:                   |                     
|Real estate loans                       | 22,675              
|Principal repayments                    | 93,567              
|Total reductions                        | 116,242             
|Increase/(Decrease) in other items,
net | 2,526               
|Net increase                            | $33,663             



Delinquent and Problem Loans

---

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 15 days past due and again when the loan is 30 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, 2004. 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 Real Estate | Construction | Consumer | CommercialBusiness | Total 
|---------------------- | ---------------------- | ---------------------- | ------------ | -------- | ------------------ | ------
|                       | Number                 | Amount                 | Number       | Amount   | Number             | Amount
|                       | (Dollars in Thousands)
|                       |                        |                        |              |          |                    |       
|Loans
Delinquent for: 
|30-59 days             | 6                      | $364                   | 2            | $1,207   | --                 | $--   
|60-89 days             | --                     | --                     | --           | --       | --                 | --    
|90 days and
over       | 8                      | 592                    | 1            | 410      | 1                  | 68    
|Total
delinquent
loans | 14                     | $956                   | 3            | $1,617   | 1                  | $68   

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, 2004, we had classified
$1,117,000 of our assets as substandard, none as doubtful and none as loss. In addition, $3.6
million of loans have been designated as special mention. 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

|                                                  | March 31,             
|------------------------------------------------- | ----------------------
|                                                  | 2004                  
|                                                  | (Dollars in Thousands)
|Non-accruing loans:                              
|Commercial business and consumer                  | $ 37                  
|Real Estate                                       | 1,076                 
|Total non-accruing loans                          | 1,113                 
|Real estate acquired through foreclosure          | 621                   
|Total non-performing assets                       | $ 1,734               
|Total as a percentage of total             assets | .51%                  
|Allowance for loan losses                         | $2,646                

Non-performing assets at March 31, 2004 were comprised primarily of real estate in foreclosure and
loans delinquent 90 days or more. 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.

Nonaccrual loans amounted to $1,112,790 at March 31, 2004.  If interest on these loans had
been accrued, such income would have approximated $48,000 for the year ended March 31, 2004,
none of which is included in interest income.

Other Loans Of Concern

---

As of March 31, 2004, there were $3.6 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 $3.6 million in other loans of concern is comprised primarily of commercial real estate
loans, which includes one commercial real estate loan in the amount of $1.1 million. This loan was
30 days past due as to interest and principal payments as of March 31, 2004, and we are closely
monitoring its status due to prior slow payment history and a prior bankruptcy.

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 allowances 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 allowances 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 allowances may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the assumptions used in making the
initial determinations. During 2004, our net increase in allowance for losses on loans was $706,000,
due primarily to an increase in loans. At March 31, 2004, we had an allowance for loan losses of
$2,646,000. See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - Provision for Loan Losses."The following table sets forth an analysis of our allowance for loan losses.

|                                                                                          | Year Ended March 31,  
|----------------------------------------------------------------------------------------- | ----------------------
|                                                                                          | 2004                  
|                                                                                          | (Dollars in Thousands)
|Balance at beginning of period                                                            | $1,940                
|Provision charged to operations                                                           | 846                   
|Charge-offs:                                                                              |                       
|Residential real estate                                                                   | (24)                  
|Consumer                                                                                  | (265)                 
|Recoveries:                                                                               |                       
|Real Estate                                                                               | 69                    
|Consumer                                                                                  | 80                    
|Net charge-offs                                                                           | (140)                 
|Balance at end of period                                                                  | $2,646                
|Ratio of net charge-offs during the
period to average loans outstanding
during the period | .05%                  

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

|                                                 | Residential            | Commercial
and Multi-Family
Real Estate | Construction | CommercialBusiness | Consumer | Total    
|------------------------------------------------ | ---------------------- | --------------------------------------- | ------------ | ------------------ | -------- | ---------
|                                                 | (Dollars in Thousands) |                                        
|March 31, 2004                                  
|Amount of loan loss
allowance                    | $     283              | $   889                                 | $     299    | $    286           | $    889 | $   2,646
|Loan amounts by category                         | 121,143                | 73,107                                  | 25,321       | 16,361             | 55,939   | 291,871  
|Percent of loans in each
category to total loans | 41.49%                 | 25.05%                                  | 8.68%        | 5.61%              | 19.17%   | 100.00%  
|                                                
|March 31, 2003                                  
|Amount of loan loss allowance                    | $     257              | $   532                                 | $     295    | $    212           | $    644 | $   1,940
|Loan amounts by category                         | 127,774                | 51,548                                  | 25,105       | 12,110             | 42,815   | 259,352  
|Percent of loans in each
category to total loans | 49.26%                 | 19.88%                                  | 9.68%        | 4.67%              | 16.51%   | 100.00%  
|                                                
|March 31, 2002                                  
|Amount of loan loss
allowance                    | $     259              | $    465                                | $     267    | $    258           | $    427 | $   1,676
|Loan amounts by category                         | 107,425                | 45,154                                  | 26,878       | 14,737             | 39,598   | 233,792  
|Percent of loans in each
category to total loans | 45.95%                 | 19.31%                                  | 11.50%       | 6.30%              | 16.94%   | 100.00%  
|                                                
|March 31, 2001                                  
|Amount of loan loss
allowance                    | $     214              | $     409                               | $     230    | $    248           | $    376 | $   1,477
|Loan amounts by category                         | 105,794                | 46,514                                  | 23,507       | 14,167             | 33,061   | 223,043  
|Percent of loans in each
category to total loans | 47.46%                 | 20.84%                                  | 10.53%       | 6.35%              | 14.82%   | 100.00%  
|                                                
|March 31, 2000                                  
|Amount of loan loss
allowance                    | $    238               | $    246                                | $    136     | $    164           | $    434 | $   1,218
|Loan amounts by category                         | 97,409                 | 42,318                                  | 20,687       | 9,392              | 30,753   | 200,559  
|Percent of loans in each
category to total loans | 48.57%                 | 21.10%                                  | 10.31%       | 4.68%              | 15.34%   | 100.00%  

Subsidiary ActivitiesWe established Community First Mortgage Corporation, a mortgage banking subsidiary,
in November 1997, began operations in June 1998 and sold the subsidiary in June 2004. The
primary business of Community First was 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, 2004,
our mortgage banking subsidiary originated $24.7 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.

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, 2004, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 10.2%.

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, 2004        
|--------------------------------------------- | ----------------------
|                                              | Within 1
Year         
|                                              | Book Value            
|                                              | (Dollars in Thousands)
|Federal agency obligations                    | $500                  
|State agency obligations
and commercial paper | 890                   
|Total Investment Securities                   | $1,390                
|Weighted Average Yield
(1)                    | 5.40%                 

(1) The weighted average yield is not computed on a tax equivalent basis.Included in the
above table are $16.0 million of securities that are callable in three years or less.

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

|                                                   | March 31,             
|-------------------------------------------------- | ----------------------
|                                                   | 2004                  
|                                                   | BookValue             
|                                                   | (Dollars in Thousands)
|Interest-bearing deposits with
banks:              | $ 1,658               
|Investment securities:                            
|Federal agency obligations                         | $17,335               
|State agencies and commercial paper                | 3,313                 
|United States agency equity securities             | 15,013                
|Subtotal                                           | 35,661                
|FHLB stock                                         | 2,300                 
|Total investment securities and
        FHLB stock | $37,961               
|Average remaining life or term
    to repricing(1) |                       

(1)     Excludes Freddie Mac common stock and other marketable equity securities.

During fiscal 2004, the market rates paid on investment securities decreased.  During
fiscal 2004, we invested primarily in federal and state agency securities with maturities of one to
five years and federal agency equity securities, some of which are callable within three months 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 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 more
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,  
|---------------------------------------- | --------------
|                                         | 2004          
|                                         | (In Thousands)
|Passbook and statement accounts          | $ 52,267      
|NOW and Super NOW accounts               | 49,742        
|Money market accounts                    | 22,734        
|One-to five-year fixed-rate certificates | 129,374       
|Six-month and 91 day certificates        | 6,114         
|Total                                    | $260,231      

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,  
|-------------------------- | ----------------------
|                           | 2004                  
|                           | (Dollars in Thousands)
|Opening balance            | $247,212              
|Net deposits (withdrawals) | 8,353                 
|Interest credited          | 4,666                 
|Ending balance             | 260,231               
|Net increase               | $ 13,019              
|Percent increase           | 5.27%                 

During the fiscal years ended March 31, 2004, 2003 and 2002, 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 time deposits during fiscal 2004. We may use
borrowings from time to time as an alternative source of funds. See "- Borrowings."

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,  
|------------------------------------ | ----------------------
|                                     | 2004                  
|                                     |                       
|                                     | AverageBalance        
|                                     |                       
|                                     | (Dollars in Thousands)
|Deposit Category:                   
|Non-interest bearing demand deposits | $ 19,547              
|Interest bearing demand deposits     | 47,069                
|Savings deposits                     | 53,486                
|Time deposits                        | 132,954               
|Total deposits                       | $253,056              

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

|               | Less Than2.00% | 2.00-3.00%             | 3.01-5.00% | 5.01-6.00% | 6.01-7.00% | Total   
|-------------- | -------------- | ---------------------- | ---------- | ---------- | ---------- | --------
|               |                | (Dollars in Thousands)
|March 31, 2004 | $39,521        | $28,833                | $61,254    | $5,668     | $212       | $135,488
|March 31, 2003 | $5,595         | $42,035                | $70,013    | $10,408    | $419       | $128,470
|March 31, 2002 | ---            | $22,640                | $83,833    | $14,186    | $3,349     | $124,008

The following table indicates the amount of the certificates of deposit by time remaining
until maturity as of March 31, 2004.

|                                            | Maturity              
|------------------------------------------- | ----------------------
|                                            |                       
|                                            | 3 Monthsorless        
|                                            | (Dollars In Thousands)
|Certificates of deposit less than $100,000  | $12,103               
|Certificates of deposit of $100,000 or
more | 2,285                 
|Total certificates of deposit               | $14,388               

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, 2004, we had $428,920 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 our borrowings, all of which are short-
term,  and the weighted average interest rate paid on such borrowings at the dates indicated.  For
additional information on our borrowings, see Note 7 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,          
|---------------------------------------------- | ----------------------
|                                               | 2004                  
|                                               |                       
|                                               | (Dollars in Thousands)
|Securities sold under agreements to repurchase | $     429             
|FHLB advances                                  | 46,000                
|Total Borrowings                               | $46,429               
|Weighted average interest rate of borrowings   | 1.24%                 

CompetitionCommunity 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 11 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, which can
impose limitations on the operations of the savings association.

**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.

Generally, savings associations, such as Community Bank that are well capitalized 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, subject to filing a
prior notice with the OTS.  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

**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, 2004, Community Bank met the test and has always met the test since its effective date.

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, its 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. 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. 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. Community Bank was examined for CRA
compliance in January, 2004 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 that acquired Community Bank before
May 4, 1999, we generally are not subject to activity restrictions. If we acquire control of one or
more savings associations as a separate subsidiary, our activities and those of 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
actual net charge-offs. 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, 2004, Community Bank's had no excess reserves to be
recaptured.

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, 2004, 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 60, 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 55, 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 41, 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 55, 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 42, 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, 2004, we had a total of 126 employees, including 22 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, 2004, with respect to our offices,
furniture and equipment.  We believe that our current facilities are adequate to meet our present
and foreseeable need.

|Location                                       | Opened | Owned orLeasedExpiration | Gross SquareFootage | Net Book Valueat March 31,2004
|---------------------------------------------- | ------ | ------------------------ | ------------------- | ------------------------------
|38 North Central AvenueStaunton, Virginia      | 1965   | Owned                    | 17,000              | $1,740,000                    
|Rte 250 WestWaynesboro, Virginia               | 1989   | Owned                    | 5,300               | 571,000                       
|Route 340 and 608Stuarts Draft, Virginia       | 1993   | Owned                    | 2,074               | 293,000                       
|5300 Kemps River DriveVirginia Beach, Virginia | 1997   | 2007                     | 2,400               | 43,000                        
|621 Nevan RoadVirginia Beach, Virginia         | 1998   | 2038                     | 13,000              | 918,000                       
|101 Community WayStaunton, Virginia            | 1999   | 2039                     | 4,500               | 697,000                       
|2134 Raphine Road,Raphine, Virginia            | 2001   | 2006                     | 2,308               | 62,000                        
|21 Dick Huff LaneVerona, Virginia              | 2002   | Owned                    | 3,850               | 1,495,000                     
|123 West Frederick StreetStaunton, Virginia    | 2003   | Owned                    | 22,000              | 1,462,000                     

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, 2004 was $160,616.

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, 2004.

***PART II***

Item 5.  Market for Common Equity, Related Security Holder Matters and SmallBusiness
Issuer Purchases of Equity Securities

---

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. In
addition, the Equity Compensation Plan information contained in Part III, Item 11 of this Form 10-KSB 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" 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 35 in the Registrant's Annual Report to
Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.

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

---

There has been no current report on Form 8-K filed within 48 months prior to the date of the
most recent financial statements reporting a change in accountants and/or reporting disagreements
on any matter of accounting principle on financial statements disclosure.

Item 8A.  Controls and Procedures

---

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of March 31, 2004, was carried out
under the supervision and with the participation of the Company's Chief Executive Officer, Chief
Financial Officer and several other members of the Company's senior management. The Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures currently in effect are effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and
communicated to the Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. In addition, there have been no changes in
our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred
during the quarter ended March 31, 2004, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

The Company intends to continually review and evaluate the design and effectiveness of its
disclosure and control procedures and to improve its controls and procedures over time and to correct
any deficiencies that it may discover in the future. The goal is to ensure that

***PART III***

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

---

Directors and Executive Officers

Information concerning directors of the Registrant is incorporated herein by reference from
our definitive Proxy Statement for the 2004 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."

Compliance with Section 16(a)

Information concerning compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated herein by reference from our definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the
fiscal year.

Code of Ethics

On April 28, 2004, the Company adopted a written Code of Ethics based upon the standards
set forth under Item 406 of Regulation S-B of the Securities Exchange Act. The Code of Ethics
applies to all of the Company's directors, officers and employees. A copy of the Company's Code
of Ethics is being filed with the SEC as Exhibit 14 to this Annual Report on Form 10-KSB.

Item 10.  Executive Compensation

---

Information concerning executive compensation is incorporated herein by reference from our
definitive Proxy Statement for the 2004 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 andRelated
Stockholder MattersInformation concerning security ownership of certain beneficial owners and management is incorporated herein by reference from our definitive Proxy Statement for the 2004 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 summarizes our equity compensation plans as of March 31, 2004.

Equity Compensation Plans

|Plan Category                                             | Number of securities
to be issued upon
exercise of out-standing options,
warrants and rights | Weighted-average
exercise price of
outstanding options,
warrants and rights | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(1))
|--------------------------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensationplans approved by
security holders     | 257,850                                                                                      | $13.77                                                                      | 64,700                                                                                                                                     
|                                                         
|Equity compensationplans approved by
security holders    
|                                                         
|Equity compensation
plans not approvedby security holders | 0                                                                                            | 0                                                                           | 0                                                                                                                                          
|                                                         
|Total                                                     | 257,850                                                                                      | $13.77                                                                      | 64,700                                                                                                                                     

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 2004 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 of Form 8-K

---

(a)  See Exhibit Index

(b) Reports on Form 8-K: No reports on Form 8-K have been filed during the three month period ended March 31, 2004.

Item 14. Principal Accountant Fees and Services

---

Information concerning fees and services by our principal accountants is incorporated herein by reference from our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

**SIGNATURES**

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has  caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                        | ***COMMUNITY FINANCIAL CORPORATION***
|----------------------- | -------------------------------------
|                       
|Date:     June 28, 2004 | By:                                  

In accordance with 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.

SIGNATURES

In accordance with 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  it behalf by the undersigned, thereunto duly authorized.

|By: /s/ P. Douglas Richard

P. Douglas Richard
President and Chief
Executive Officer
(Principal Executive Officer) |  | By: /s/ James R. Cooke, Jr.

James R. Cooke, Jr.
Chairman of the Board
and Director
|------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------
|Date:  June 28, 2004                                                                                               |  | Date:  June 28, 2004                                                               
|By: /s/ Jane C. Hickok

Jane C. Hickok
Vice Chairman of the Board
and Director                                     |  | By: /s/ Charles F. Andersen

Charles F. Andersen
Director                          
|Date:  June 28, 2004                                                                                               |  | Date:  June 28, 2004                                                               
|By: /s/ Dale C. Smith

Dale C. Smith
Director                                                                      |  | By: /s/ Morgan N. Trimyer, Jr.

Morgan N. Trimyer, Jr.
Director                    
|Date:  June 28, 2004                                                                                               |  | Date:  June 28, 2004                                                               
|By: /s/ R. Jerry Giles

Chief Financial Officer
(Principal Financial and
Accounting Officer)                       |  | By:
/s/ Charles W. Fairchilds
Charles W. Fairchilds
Director                       
|Date:  June 28, 2004                                                                                               |  | Date:  June 28, 2004                                                               



|Regulation
S-B ExhibitNumber | Document                                                                                                                                                                                                                                                                                                     
|---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            
|                            
|3.1                          | Amended and Restated Articles of Incorporation, filed on July 5, 1996 as an
exhibit to the Registrant's Definitive Proxy Statement on Schedule 14A (SEC
File No. 000-18265), are incorporated herein by reference.                                                                                           
|3.2                          | Bylaws, as amended and currently in effect                                                                                                                                                                                                                                                                   
|4                            | Registrant's Specimen Common Stock Certificate, filed on June 29, 1999, as
Exhibit 10 to the Annual Report on Form 10-KSB (SEC File No. 000-18265) for
the fiscal fiscal year ended March 31, 1999, is incorporated herein by reference.                                                                     
|10.1                         | Registrant's Stock Option and Incentive Plan, filed on May 19, 1989 as an exhibit
to the Registrant's Registration Statement on Form S-4 (SEC File No. 33-28817),
is incorporated herein by reference.                                                                                                       
|10.2                         | Employment Agreement by and between Community Bank and P. Douglas
Richard, filed on August 14, 2002 as an exhibit to the Registrant's Quarterly
Report on Form 10-QSB (SEC File No. 000-18265) for the quarter ended
September 30, 2000, is incorporated herein by reference.                                
|10.3                         | Amendments No. One and Two to the Employment Agreement between the Bank
and P. Douglas Richard, filed on August 14, 2002 as exhibits to the Registrant's
Quarterly Report on Form 10-QSB (SEC File No. 000-18265) for the quarter
ended June 30, 2002, are incorporated herein by reference.                 
|10.4                         | Registrant's 1996 Incentive Plan, filed on July 5, 1996 as an exhibit to the
Registrant's Definitive Proxy Statement on Schedule 14A (SEC File No.
000-18265), is incorporated herein by reference.                                                                                                          
|10.5                         | Employment Agreement by and between Community Bank and Chris P.
Kyriakides, as amended, filed on August 14, 2002 as an exhibit to the
Registrant's Quarterly Report on Form 10-QSB (SEC File No. 000-18265) for the
quarter ended June 30, 2002, is incorporated herein by reference.                        
|10.6                         | Severance Agreements by and between Community Bank and each of R. Jerry
Giles, Norman C. Smiley, Benny N. Werner, filed on June 30, 2003 as exhibit to
the Registrant's Annual Report on Form 10-KSB (SEC File No. 000-18265) for
the fiscal year ended March 31, 2003, are incorporated herein by reference.
|10.7                         | Amendments to the Severance Agreements by and between the Bank and each of
R. Jerry Giles, Norman C. Smiley, III  and Benny N. Werner.                                                                                                                                                                       
|10.8                         | Retirement Agreements by and between Community Bank and Non-Employee
Directors Hickok, Smith, Andersen, Cooke, Fairchilds and Trimyer                                                                                                                                                                        
|10.9                         | Salary Continuation Agreements by and between Community
Bank and Officers Richard, Kyriakides, Giles, Smiley and Werner.                                                                                                                                                                                     
|11                           | Statement re computation of per share earnings (see Note 12****of the Notes to
Consolidated Financial Statements included in the Annual Report to Stockholders
filed as Exhibit 13 to this Annual Report on Form 10-KSB).                                                                                    
|13                           | Annual Report to Security Holders                                                                                                                                                                                                                                                                            
|14                           | Code of Ethics                                                                                                                                                                                                                                                                                               
|21                           | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                              
|23                           | Consent of Independent Auditors                                                                                                                                                                                                                                                                              
|31.1                         | Rule 13(a)-14(a) Certification (Chief Executive Officer)                                                                                                                                                                                                                                                     
|31.2                         | Rule 13(a)-14(a) Certification (Chief Financial Officer)                                                                                                                                                                                                                                                     
|32                           | Section 1350 Certifications