| | **2003 Annual Report**
| | ----------------------

``

|
|

``

|**Selected Consolidated**
|-------------------------

---

|                                                    | At March 31,  
|--------------------------------------------------- | --------------
|                                                    | 2003          
|                                                    |               
|                                                    | (In Thousands)
|Selected Financial Condition Data:                 
|Total assets                                        | $297,991      
|Loans receivable, net                               | 245,638       
|Investment securities and other earning assets(1)   | 35,550        
|Real estate owned, net                              | 720           
|Deposits                                            | 247,212       
|Advances and other borrowed money                   | 22,774        
|Stockholders' equity                                | 26,342        
|                                                    | At March 31,  
|                                                    | 2003          
|                                                    |               
|                                                    | (In Thousands)
|Selected Operations Data:                          
|Total interest income                               | $17,661       
|Total interest expense                              | 6,746         
|Net interest income                                 | 10,915        
|Provision for loan losses                           | 451           
|Net interest income after provision for loan losses | 10,464        
|Service charges and fees on loans                   | 3,490         
|Gain on sale of securities                          | -             
|Other noninterest income(2)                         | 159           
|Noninterest expenses                                | 9,954         
|Income before income taxes                          | 4,159         
|Income taxes                                        | 1,253         
|Net income                                          | $2,906        

|                                                                      | At March 31,  
|--------------------------------------------------------------------- | --------------
|                                                                      | 2003          
|                                                                      |               
|                                                                      | (In Thousands)
|Other Data:                                                          
|Average interest-earning assets to average                            | 107.41        
|Average interest rate spread during year                              | 3.86          
|Non-performing assets to total assets                                 | .63           
|Return on assets (ratio of net income to average
   total assets)     | 1.03          
|Return on equity (ratio of net income to average
   total equity)     | 10.96         
|Equity-to-assets ratio (ratio of average equity to
   average assets) | 9.94          
|Per Share Data:                                                      
|Net income-diluted                                                    | $1.33         
|Book value                                                            | 12.78         
|Dividends                                                             | .35           
|Dividend payout ratio                                                 | 25.95         
|Number of full-service offices                                        | 8             

(1) Includes federal funds sold, securities purchased under resale agreements and overnight deposits.(2) Other income includes customer service fees and commissions, gain or loss on disposal of property and other items.

---

1

|**President's Letter**
|----------------------

---

**Dear Stockholder:**

It is indeed a privilege to review with you Community Financial's operating results for the year ended March 31, 2003. This has been another
unprecedented year for your Corporation as we continue to show strong balance sheet growth while enjoying record profitability. We hope that as you read this report you will feel the same pride and
enthusiasm for Community Financial Corp and its subsidiary, Community Bank, that we do.

Net income for this past fiscal year ended March 31, 2003 was $2.9 million compared to $2.6 million for the previous year, an increase of 11.5%.
Earnings per diluted share were $1.33 compared to $1.14 the previous year, a 17% increase. This increase in earnings is attributable primarily to the increase in spread between our interest-earning
assets and interest-bearing liabilities coupled with the increase in our average loans outstanding during the year.

Loans outstanding increased by $26.2 million or 12%, resulting in a portfolio of $245.6 million at year-end. To achieve this growth we closed over
$128 million in loans, which to date has been our most productive year. Loan growth was impacted by the low interest rate environment, which resulted in the continued high volume loan payoffs as
borrowers refinanced adjustable-rate loans taking advantage of lower priced fixed-rate loans.

Community also enjoyed very healthy growth in deposits, which increased by $42.7 million or 20.9% to $247.2 million. This growth was primarily in
lower rate deposits, which enabled the Bank to maintain and improve its spread during the year. Total assets increased by $34.6 million or 13%, ending the year at $297.9 million.

The Hampton Roads Region, which is comprised of two full service offices in Virginia Beach, is an integral part of our operation and continues to
contribute to the overall profitability of the Corporation. The Region has enjoyed strong growth ending the year with a loan portfolio exceeding $87 million, an increase of $22 million or 35% for the
year. Deposits increased by $20 million or 59% resulting in total deposits at year-end of $55 million.

Community's stock price also experienced strong improvement during Fiscal 2003. At March 31, 2002 our stock price was $11.13. The closing price of the
stock at March 31, 2003 was $15.50, a 39% increase. Your Board and Management are pleased with this improvement and we will strive to continue this favorable trend.



This has truly been an extraordinary year for your Company. Not withstanding our record operating results and balance sheet growth, Community has expanded its franchise in the valley
to six full-service locations with the opening of a new office in Verona. This office, which compliments the Staunton market, was opened in December 2002, and is expected to be a positive addition to
our franchise. We announced last July that Community had contracted to purchase the Post Office Building directly across Frederick Street from our main office in Staunton. This location is well
suited to house the Bank's operations center and we are pleased to inform you that renovations of the building have been completed and our operations department was relocated in May. The Post Office
will continue to have a branch operation on a portion of the first floor. The remainder of this floor is currently leased and will be available for future expansion of the Bank. This transaction
further illustrates Community Bank's strong commitment to downtown Staunton and the surrounding community.

In addition to the capital improvements that Community has made, we continue to evaluate our products and services to ensure that we are providing for
the needs of the markets we serve. The most notable addition this year has been our internet banking product. "Community Online" allows our customers 24-hour access to their accounts at no additional
cost. This product also has a bill payment feature, for a small monthly fee, which allows customers to pay their bills with the click of a computer mouse. We invite you to visit our web site at
www.cbnk.com or come in and talk with our staff to learn more about this safe, secure and convenient form of banking.

As we enter our 75th year of operation we can look back at many changes that our industry has experienced. Accounting systems have migrated from
ledger cards to computer systems. We have seen the advent of passbook and statement savings, certificates of deposits, checking accounts, telephone banking and now internet banking. Initially, and
for many years, Community's lending was exclusively to provide for and promote home ownership with a very limited product line. Over the years our business has changed to include 30 year fixed and
adjustable rate mortgages, consumer, commercial and construction loans and lines of credit just to mention a few. The one constant during the past 75 years has been Community's


---

2

|**President's Letter**
|----------------------

---

commitment to give the best possible service to the customers we serve. We realize that without the support of our customers and stockholders we cannot succeed. We
also recognize the need to be a good corporate citizen. We have and will continue to be a leader in the communities we serve through our financial support and through the participation of our
Community Family members in various civic organizations, charitable endeavors and community activities. "Our name really does say it all".

We have compiled a brief history of the past 75 years of Community Bank, which is included as an insert to this report. We hope that you enjoy reading it. For those of you that
are

James R. Cooke Jr
Chairman of the Board

from the Staunton area it will bring back some fond memories and for those not as familiar with the institution we hope that you will have a better sense of
Community's heritage.

There is much uncertainty in the economic environment as we begin this year and there will be many challenges on the horizon. However, your Board, Management and Staff are
committed to the successful operation of your Corporation. We would like to thank the Community Family for all the efforts that they have put forth to make this a successful year and thank our
stockholders, customers and friends for their continued support.
P. Douglas Richard
President & CEO


---

3

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

|***Officers*** | ***Board of Directors***
|-------------- | ------------------------

P. Douglas Richard
President & CEOR. Jerry Giles
Chief Financial OfficerBenny N. Werner
Senior Vice PresidentNorman C. (Butch) Smiley, III
Senior Vice PresidentChris P. Kyriakides
Senior Vice PresidentGary L. Davenport
Vice PresidentKay T. Dean
Vice PresidentDanny R. Fields
Vice PresidentDarlene A. Hall
Vice PresidentRobert M. (Bobby) Hoffman
Vice PresidentRichard J. Mayer
Vice PresidentLyle A. Moffett
Vice PresidentJane P. Orem
Vice PresidentRobert Pennington
Vice PresidentRamona W. Savidge
Vice President


Charles F. Andersen, M.D. Dr. Andersen is an orthopedic surgeon in private practice in Waynesboro, Virginia.James R. Cooke, Jr.,D.D.S. Dr. Cooke has been a practicing dentist in Staunton, Virginia since 1965.Charles W. Fairchilds. Mr. Fairchilds has been the President of Allied Ready Mix in Waynesboro, Virginia since 1987.Jane C. Hickok. Mrs. Hickok was elected Vice Chairman of the Board in October 1994 and secretary of Community Financial in October 1998. She retired as President and Chief Executive Officer
of Community Bank in October 1994 after serving since 1984. Mrs. Hickok also retired as President and Chief Executive Officer of Community Financial Corporation in January 1995, but continues to
serve as a director of Community Financial and Community Bank. Mrs. Hickok was elected as a director of Community Bank in 1983 and as a director of Community Financial in 1990 when it became the
holding company of Community Bank.



*Pictured front row, left to right: P. Douglas Richard,
Jane C. Hickok, James R. Cooke, Jr., D.D.S.
Back row, left to right: Charles F. Andersen, M.D.,
Dale C. Smith, Charles W. Fairchilds, Morgan N. Trimyer, Jr.*


Thomas R. Wagner
Vice PresidentKathy H. Willis
Vice PresidentJoseph P. Zakaib
Vice PresidentF. Marie Biser
Assistant Vice PresidentMichele T. Bartley
Assistant Vice PresidentDianne F. Campbell
Assistant Vice PresidentVirginia M. McCormack
Assistant Vice President



P. Douglas Richard. Mr. Richard was appointed the Acting President and Chief Executive Officer of Community Financial and Community Bank on January 12, 2000,
and became the President and Chief Executive Office of Community Financial and Community Bank on April 26, 2000. He was appointed to the Board of Directors of Community Financial on April 26, 2000.
From January 1, 1997, to January 12, 2000, Mr. Richard was a Senior Vice President of Community Bank. From December 1993 to January 1996 he was President and Chief Executive Officer of Seaboard
Bancorp.Dale C. Smith. Mr. Smith was the General Manager and Chief Executive Officer of Augusta Cooperative-Farm Bureau, Inc., a farm supply and retail store, for thirty-nine years until his
retirement September 1, 2002.Morgan N. Trimyer, Jr. Mr. Trimyer served as Vice President and Partner of Welton, Duke ∓mp;mp; Hawks, Inc., an insurance company headquartered in Portsmouth, Virginia from 1984 to
2001. He was also a Vice President with Valley Insurance Agency, Inc. located in Lexington, Virginia, and has 30 years of experience in the insurance industry in Virginia. He currently serves as Vice
President of Bankers Insurance, LLC and is the Director of Marketing.


Lovetta L. Moore
Assistant Vice PresidentConnie R. Savage
Assistant Vice PresidentBrenda L. Sayre
Assistant Vice PresidentLinda B. Wood
Assistant Vice PresidentMartha B. Chandler
Assistant SecretaryCharlott C. Dean
Assistant SecretaryTeresa W. Layne
Assistant SecretaryJanet R. Redifer
Assistant SecretaryBarbara M. Wood
Assistant Secretary
Hampton
Roads Board of Directors
*Pictured front row, left to right:
Robert M. Thornton,
James R. Cooke, Jr.
P. Douglas Richard.
Back row, left to right:
Chris P. Kyriakides,
William R. Waddell,
Berard Harrison,
Leslie Watson.
Not pictured: Morgan N. Trimyer, Jr.*


4

---

|**Management'sDiscussion & Analysis**
|-------------------------------------

---

**Introduction**

C ommunity Financial Corporation ("Community Financial") is a Virginia corporation. Certain of the information presented herein relates to Community Bank, a
wholly owned subsidiary of Community Financial, and Community First Mortgage Corporation, a wholly owned subsidiary of Community Bank. References in this Annual Report to "we", "us" and "our" refer
to Community Financial and/or Community Bank as the context requires.

Community Financial and Community Bank, like all thrift institutions and their holding companies, are subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision and the Federal Deposit Insurance Corporation.

Our net income is primarily dependent on the difference or spread between the average yield earned on loans and investments and the average rate paid on deposits and borrowings, as
well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and
deposit flows. Like other financial institutions, we are subject to interest rate risk to the degree that our interest-bearing liabilities, primarily deposits and borrowings with short- and
medium-term maturities, mature or reprice more rapidly, or on a different basis, than interest-earning assets, primarily loans with longer term maturities than deposits and borrowings. While having
liabilities that mature or reprice more frequently on average than assets may be beneficial in times of declining interest rates, such an asset/liability structure may result in lower net income or
net losses during periods of rising interest rates, unless offset by other noninterest income. Our net income is also affected by, among other things, gains on sale of loans, mortgage-backed
securities and investment securities, fee income,

provision for loan and real estate losses, operating expenses and income taxes.

**Critical Accounting Policies**General

T he Corporation's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The financial
information contained within our financial statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have
already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In
addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our
transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement
of Financial Accounting Standard ("SFAS") No.5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable
in the secondary market, and the loan balance.We maintain an allowance for loan losses to provide for estimated probable losses

in our loan portfolio. Management determines the level of reserves based on loan performance, the value of the collateral, economic and market conditions, and previous
experience. Management reviews the adequacy of the allowance at least quarterly, utilizing its internal loan classification system. Management believes that the allowance for loan loss is adequate at
March 31, 2003. Although management believes it uses the best information available, future adjustments to the allowance may be necessary.

**Asset/Liability Management**

M anagement believes it is important to manage the relationship between interest rates and the effect on our net portfolio value. This approach calculates the
difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts.
Management of our assets and liabilities is done within the context of the marketplace, but also within limits established by the board of directors on the amount of change in net portfolio value
which is acceptable given certain interest rate changes.

Presented in the following table, as of March 31, 2003 and 2002, is an analysis of our interest rate risk as measured by changes in net portfolio value for instantaneous and
sustained parallel shifts in the yield curve and compared to our board policy limits. Information is presented in accordance with Office of Thrift Supervision regulations and based on its
assumptions. The Board limits have been established with consideration of the dollar impact of various rate changes and our strong capital position. As illustrated in the table, net portfolio value
is not significantly impacted by rising or falling rates due to our asset/liability management policies.


5

---

|**Community FinancialCorporation**
|----------------------------------

---

**March 31, 2002**
March 31, 2001Change in
Interest Rate
(Basis Points)
Board Limit
% Change
**$ Change
in NPV**
**% Change
in NPV**
$ Change
in NPV
% Change
in NPV(Dollars in Thousands)+300
-40%
**$-1,403**
**-4%**
$-3,798
-11%+200
-30
**-527**
**-1**
-2,175
-6+100
-20
**-41**
**0**
-943
-3-0-
---
**---**
**---**
---
----100
-20
**-588**
**-2**
351
1


Management generally works to maintain a neutral position regarding interest rate risk. In the current interest rate environment, our customers are interested in
obtaining long-term credit products and short-term savings products. Management has taken action to counter this trend. A significant effort has been made to reduce the duration and average life of
our interest-earning assets. As of March 31, 2003, approximately 66% of our gross loan portfolio consisted of loans which reprice during the life of the loan. We emphasize adjustable-rate mortgage
loans and have increased our portfolio of short-term consumer loans. Longer term fixed-rate mortgage loans, 20 to 30 years, are generally sold in the secondary market. We are currently originating
fixed-rate loans for immediate sale only through our subsidiary, Community First Mortgage.

On the deposit side, management has worked to reduce the impact of interest rate changes by emphasizing non-interest bearing or low interest deposit prod-

ucts and maintaining competitive pricing on longer term certificates of deposit. We have also used Federal Home Loan Bank advances to provide funding for loan
originations and to provide liquidity as needed.

In managing our asset/liability mix depending on the relationship between long- and short-term interest rates, market conditions, and consumer preference, we may place somewhat
greater emphasis on maximizing our net interest income than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe the increased net income that may result from
an acceptable mismatch in the actual maturity or repricing of our asset and liability portfolio can provide sufficient returns to justify the increased exposure to sudden and unexpected increases in
interest rates which may result from such a mismatch. We have established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in

interest rates, our efforts to limit interest rate risk will be successful.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table.


6

---

|**Management'sDiscussion & Analysis**
|-------------------------------------

---

**Average Balances, Interest Rates and Yields**

The following table sets forth certain information relating to categories of our interest-earning assets and interest-bearing liabilities for the periods indicated. All average
balances are computed on a monthly basis. Non-accruing loans have been included in the table as loans carrying a zero yield.

**Year Ended March 31,****2003**
2002
2001**Average
Balance**
**Interest**
**Yield/
Cost**
Average
Balance
Interest
Yield/
Cost
Average
Balance
Interest
Yield/
Cost(Dollars in Thousands)Interest-Earning AssetsLoans
**$235,125**
**$16,051**
**6.83**
%
$215,598
$16,870
7.82
%
$204,475
$17,347
8.48
%Investment securities
   and other investments
**34,451**
**1,610**
**4.67**

34,270
2,071
6.04

41,737
2,700
6.48Total interest-earning assets
**269,576**
**17,661**
**6.55**

249,868
18,941
7.58

246,212
20,047
8.14Non-interest earning assets
**10,814**



9,253



10,888Total assets
**$280,390**



$259,121



$257,100Interest-Bearing LiabilitiesDeposits
**$225,576**
**6,296**
**2.79**

185,039
7,450
4.03

164,959
7,710
4.67FHLB advances and
   other borrowings
**25,391**
**450**
**1.77**

45,929
1,607
3.50

65,055
4,204
6.46Total interest-bearing liabilities
**250,967**
**6,746**
**2.69**

230,968
9,057
3.92

230,014
11,914
5.18Other Liabilities
**2,096**



2,141



1,562Total Liabilities
**253,063**



233,109



231,576Stockholders' equity
**27,327**



26,012



257,524Total liabilities and
   stockholders equity
**$280,390**



$259,121



$257,100Net interest income/interest
   rate spread
**$10,915**

**3.86**


$9,884
3.66


$8,133
2.96Net interest-earning
   assets/net yield on
   interest-earning assets
**$18,609**

**4.05**

$18,900

3.96

$16,198

3.30Percentage of interest-
   earning assets to interest-
   bearing liabilities
107.41%



108.18%



107.04%


7

---

|**Community FinancialCorporation**
|----------------------------------

---

The following table sets forth our interest rate spread on the last day of the year as indicated.

|                                            | March 31,
|------------------------------------------- | ---------
|                                            | **2003** 
|Yield On                                   
|Loans                                       | **6.33%**
|Investment securities and other investments | **4.50%**
|Total interest-earning assets               | **6.11%**
|Cost Of                                    
|Deposits                                    | **2.44%**
|FHLB advances and other borrowings          | **1.57%**
|Total interest-bearing liabilities          | **2.35%**
|**Interest rate spread**                    | **3.76%**

**Rate/Volume Analysis**

The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected our interest income and
expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total changes in rate and volume. The combined effect of changes in both
volume and rate, which cannot be separately identified, has been allocated proportionately to the change due to volume and the change due to rate.

|                                             | Year Ended March 31,          
|-------------------------------------------- | ------------------------------
|                                             | **2003 v. 2002**              
|                                             |                               
|                                             | **Increase
(Decrease)
Due to**
|                                             | **Volume**                    
|                                             | (Dollars in Thousands)        
|Interest-Earning Assets                     
|Loans                                        | **$ 1,333**                   
|Investments securities
and other investments | **8**                         
|Total interest-earnings assets               | **$ 1,341**                   
|Interest-Bearing Liabilities                 | ****                          
|Deposits                                     | **$1,131**                    
|FHLB advances and other borrowings           | **(364**                      
|Total interest-bearing liabilities           | **$767**                      
|Net interest income                          | ****                          

8

---

|**Management'sDiscussion & Analysis**
|-------------------------------------

---

**Asset Quality**

A sset quality is an important factor in the successful operation of a financial institution. The loss of interest income and principal that may result from
non-performing assets has an adverse effect on earnings, while the resolution of those assets requires the use of capital and managerial resources.

At March 31, 2003, total non-performing assets, consisting of non-performing loans and real estate owned, were $1,839,000 or .62% of total assets compared to
$941,000 or .36% at March 31, 2002. Non-performing assets at March 31, 2003 were comprised primarily of residential construction properties delinquent 90 days or more. At March 31, 2003, the largest
property in non-performing assets was a residential construction loan with an approximate value of $375,000. Based on current market values of the collateral securing these loans, management
anticipates no significant losses in excess of the reserves for losses previously recorded. Due to an uncertain real estate market and the economy in general, no assurances can be given that our
level of non-performing assets may not increase in the future.

We maintain an allowance for loan losses to provide for estimated potential losses in our loan portfolio. We determine the level of reserves based on loan
performance, the value of the collateral, economic and market conditions, and previous experience. We review the adequacy of the allowance at least quarterly, utilizing our internal loan
classifications system. During fiscal 2003, we increased our allowance for loan losses $265,000 to $1,940,000. Management believes that the loan loss allowance is adequate. We had net charge-offs of
$186,000, $175,000, and $61,000 , for the years ended March 31, 2003, 2002 and 2001, respectively. The increase in net charge-

offs from 2002 to 2003 is related primarily to increased charge-offs on consumer loans. While consumer loans provide a greater yield they generally have a higher
rate of charge-offs than mortgage loans. Although management believes it uses the best information available, future adjustments to the allowance may be necessary.

**Financial Condition**

T otal assets increased $34.6 million to $298.0 million at March 31, 2003 as a result of increases in both investment securities of $5.5 million and in loans
of $25.5 million. These increases were funded by a $42.7 million increase in deposits with the balance being used to pay down $6.2 million of borrowings. The increase in deposits can be attributed
primarily to an increase in demand deposits of $38.2 million. Management believes the increase in demand deposits is primarily attributable to maintaining competitive rates. The increase in loans
receivable was due primarily to competitive pricing on both mortgage and consumer loans.

Stockholders' equity decreased $353,000 to $26.3 million at March 31, 2003 compared to March 31, 2002. The decrease was the result of dividends paid to stockholders
of $754,000 and common stock repurchased of $2.4 million offset by $2.9 million of net income in fiscal 2003.

**Results of Operations**

O ur results of operations depend primarily on the level of our net interest income and noninterest income and the level of our operating expenses. Net
interest income depends upon the value of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.**Comparison of Years endedMarch 31, 2003 and 2002**

**General.**  Net income for the year ended March 31, 2003 was $2,906,000 or $1.33 diluted earnings per share compared to $2,607,000 or $1.14
diluted earnings per share for the year ended March 31, 2002. Net income increased due primarily to an increase in net interest income of $1.0 million.

Our return on average assets was 1.03% for the fiscal years ended 2003 and 2002. Return on average equity was 10.96% for fiscal year ended 2003 compared to 10.01%
for fiscal year 2002. Average equity to average assets was 9.94% for the fiscal year ended 2003 compared to 10.27% for the fiscal year ended 2002. We paid dividends to stockholders of $754,000 during
2003 and $732,000 during fiscal 2002 representing a dividend payout ratio of 25.95% and 28.08% respectively.

**Interest Income.**

Total interest income decreased to $17,661,000 for the year ended March 31, 2003 as compared to $18,941,000 for the year ended March 31, 2002. The decrease in total
interest income can be attributed to a decrease in the yield on interest earning assets offset by an increase in the average dollar volume of interest-earning assets, primarily $19.5 million in loans
receivable. Average yields on total interest-earning assets decreased from 7.58% in fiscal 2002 to 6.55% for the current fiscal year due primarily to a lower rate environment.

**Interest Expense.**

Total interest expense decreased to $6,746,000 for the year ended March 31, 2003 from $9,057,000 for the year ended March 31, 2002. The decrease in total interest
expense is primarily attributable to a decrease in the cost of interest


9

---

|**Community FinancialCorporation**
|----------------------------------

---

bearing liabilities. The cost of funds decreased from 3.92% for the year ended March 31, 2002 to 2.69% for the current year.
The increase in deposit balances was due primarily to increases in demand deposits for the current fiscal year.

**Provision for Loan Losses.**

The provision increased to $451,000 for the fiscal ended March 31, 2003 from $373,000 for the fiscal year ended March 31, 2002 due both to an increase in loan
growth and an increase in nonmortgage loan charge-offs for fiscal 2003. We monitor our loan loss allowance on a quarterly basis and make allocations as necessary. Management believes that the level
of our loan loss allowance is adequate. As of March 31, 2003, the total allowance for loan losses amounted to $1,940,000. At March 31, 2003, our allowance as a percentage of total loans receivable
was .79% and as a percentage of total non-performing loans was 105%.

**Noninterest Income.**

Noninterest income increased to $3,650,000 in fiscal 2003 as compared to $3,382,000 for the year ended March 31, 2002, primarily due to increased fees on sale of
secondary mortgage loans by the Bank's mortgage subsidiary.

**Noninterest Expense.**

Total noninterest expense increased to $9,954,000 for the year ended March 31, 2003 from $9,164,000 for the year ended March 31, 2002 due primarily to an increase
in compensation expense and data processing expense associated with the opening of a new branch during 2003.**Taxes.**

Total taxes increased to $1,254,000 during the year ended March 31, 2003 from $1,123,000 during fiscal 2002. The effective tax rate for the years ended March 31,
2003 and 2002 was 30.1%.

**Comparison of Years ended
March 31, 2002 and 2001**

General. Net income for the year ended March 31, 2002 was $2,607,000 or $1.14 diluted earnings per share compared to $1,743,000 or $.72 diluted earnings per share
for the year ended March 31, 2001. Net income increased due primarily to an increase in net interest income of $1.8 million.

Our return on average assets was 1.03% for the fiscal year ended 2002 compared to .68% for the fiscal year ended 2001. Return on average equity was 10.01% for
fiscal year ended 2002 compared to 6.81% for fiscal year 2001. Average equity to average assets was 10.27% for the fiscal year ended 2002 compared to 9.97% for the fiscal year ended 2001. We paid
dividends to stockholders of $732,000 during 2002 and $780,000 during fiscal 2001 representing a dividend payout ratio of 28.08% and 44.75% respectively.

**Interest Income.**

Total interest income decreased to $18,941,000 for the year ended March 31, 2002 as compared to $20,047,000 for the year ended March 31, 2001. The decrease in total
interest income can be attributed to a decrease in the yield on interest earning assets offset by an increase in the average dollar volume ofinterest-earning assets, primarily $11.1 million in loans receivable. Average yields on total interest-earning assets decreased from 8.14% in fiscal 2001 to 7.58%
for the 2002 fiscal year due primarily to a lower rate environment.

**Interest Expense.**

Total interest expense decreased to $9,057,000 for the year ended March 31, 2002 from $11,914,000 for the year ended March 31, 2001. The decrease in total interest
expense is attributable to a decrease in both the average dollar volume of borrowings and the cost of interest bearing liabilities. The cost of funds decreased from 5.18% for the year ended March 31,
2001 to 3.92% for the 2002 fiscal year. The increase in deposit balances was due primarily to increases in demand deposits for the 2002 fiscal year.

**Provision for Loan Losses.**

The provision increased to $373,000 for the fiscal year ended March 31, 2002 from $321,000 for the fiscal year ended March 31, 2001 due primarily to an increase in
loan growth for fiscal 2002. We monitor our loan loss allowance on a quarterly basis and make allocations as necessary. Management believes that the level of our loan loss allowance is adequate. As
of March 31, 2002, the total allowance for loan losses amounted to $1,676,000. At March 31, 2002, total allowance as a percentage of total loans receivable was .75% and as a percentage of total
non-performing loans was 178%.


10

---

|**Management'sDiscussion & Analysis**
|-------------------------------------

---

**Noninterest Income.**

Noninterest income increased to $3,382,000 in fiscal 2002 as compared to $2,899,000 for the year ended March 31, 2001, primarily due to increased fees on sale of
secondary mortgage loans by the Bank's mortgage subsidiary.

**Noninterest Expense.**

Total noninterest expense increased to $9,164,000 for the year ended March 31, 2002 from $8,241,000 for the year ended March 31, 2001 due primarily to an increase
in compensation expense and data processing expense associated with the opening of a new branch location.

**Taxes.**

Total taxes increased to $1,123,000 during the year ended March 31, 2002 from $728,000 during fiscal 2001. The effective tax rate for the year ended March 31, 2002
was 30.1% as compared to 29.4% for the year ended March 31, 2001.

**Liquidity and Capital Resources**

Our principal sources of funds are customer deposits, advances from the Federal Home Loan Bank of Atlanta, amortization and prepayment of loans, proceeds from the
sale of loans and funds provided from operations. Management maintains investments in liquid assets based upon its assessment of (i) our need for funds, (ii) expected deposit flows, (iii) the yields
available on short-term liquid assets, (iv) the liquidity of our loan portfolio and (v) the objectives of our asset/liability management program.Liquidity represents our ability to meet our on-going funding requirements for contractual obligations, the credit needs of customers, withdrawal of customers'
deposits and operating expenses.

Our dominant source of funds during the year ended March 31, 2003 was from deposits which increased by $42.7 million.

Our cash increased $1.6 million from $3.2 million at March 31, 2002 to $4.8 million at March 31, 2003. The increase in cash was related to the increase in
deposits.

At March 31, 2003, we had commitments to purchase or originate $17.9 million of loans. Certificates of deposit scheduled to mature in one year or less at March 31,
2003 totaled $56.7 million. Based on our historical experience, management believes that a significant portion of such deposits will remain with us. Management further believes that loan repayments
and other sources of funds will be adequate to meet our foreseeable short- and long-term liquidity needs.

At March 31, 2003, we had tangible and core capital of 8.00% of adjusted total assets, which was in excess of their respective requirements of 1.5% and 4.0%. We
also had risk-based capital of 12.22% of risk weighted assets, which also exceeded its requirement of 8.0%. The Bank was considered "well capitalized" as of March 31, 2003.**Impact of Inflation andChanging Prices**

The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United
States of America which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money
over time because of inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same magnitude as
the price of goods and services. In the current interest-rate environment, equity, maturity structure and quality of our assets and liabilities are critical to the maintenance of acceptable
performance levels.


11

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|**Community FinancialCorporation**
|----------------------------------

---

**Accounting Pronouncements**

For a discussion of certain accounting pronouncements implemented by us during fiscal 2003 and new pronouncements which will be implemented in the future, see
Summary of Accounting Policies to Consolidated Financial Statements.

**Forward-Looking StatementsThis document, including information incorporated by reference, contains, and future filings by Community Financial Corporation on Form 10-KSB, Form 10-QSB and Form
8-K and future oral and written statements by Community Financial Corporation and its management may contain, forward-looking statements about Community Financial Corporation which we believe are
within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and
financial performance, including revenue creation, lending origination, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates, acquisition and
divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages. These forward-looking statements are based on currently available competitive, financial and economic data
and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ**from those
expressed or implied in the forward-looking statements. Accordingly, Community Financial Corporation cautions readers not to place undue reliance on any forward-looking statements. Many of these
forward-looking statements appear in this document in the President's Letter and Management's Discussion and Analysis. 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 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; andour 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.


12

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|**Report ofIndependent Accountants**
|------------------------------------

---

To the Board of Directors and Stockholders
Community Financial Corporation
Staunton, Virginia

We have audited the accompanying consolidated balance sheets of Community Financial Corporation and subsidiary as of March 31, 2003 and 2002 and the related
consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility
is to express an opinion on these financial statements based on our audits. The financial statements of Community Financial Corporation for the year ended March 31, 2001 were audited by other
auditors whose report, dated April 22, 2001, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community
Financial Corporation as of March 31, 2003 and 2002 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.



Winchester, Virginia
April 29, 2003

|50 S. Cameron St.P.O. Box 2560Winchester, VA 22604(540) 662-3417 |  | Offices located in: Winchester, Middleburg, Leesburg, and Culpeper, VirginiaMember: American Institute of Certified Public Accountants / Virginia Society of Certified Public Accountants
|---------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

|***March 31,***                                                                                                 | **2003**         | 2002
|--------------------------------------------------------------------------------------------------------------- | ---------------- | ----
|                                                                                                               
|                                                                                                                |                  |     
|**Assets**                                                                                                      |                  |     
|                                                                                                                |                  |     
|Cash (including interest bearing deposits of approximately
   **$ 2,299,000** and $1,931,000)                   | **$ 4,836,129**  |     
|Securities                                                                                                      |                  |     
|Held to maturity (fair value approximates **$21,671,024**
     and $16,780,677)                                 | **21,028,862**   |     
|Available for sale, at fair value                                                                               | **10,522,566**   |     
|Restricted investment in Federal Home Loan Bank stock, at cost                                                  | **1,700,000**    |     
|Loans receivable, net of allowance for loan losses of
   **$1,940,425** and $1,675,679                          | **245,638,070**  |     
|Loans held for sale                                                                                             | **3,669,914**    |     
|Real estate owned, net                                                                                          | **719,935**      |     
|Property and equipment, net                                                                                     | **7,464,889**    |     
|Accrued interest receivable                                                                                     | **1,359,631**    |     
|Prepaid expenses and other assets                                                                               | **1,051,313**    |     
|                                                                                                               
|Total assets                                                                                                    | **$297,991,309** |     
|                                                                                                               
|**Liabilities and Stockholders' Equity**                                                                        |                  |     
|                                                                                                                |                  |     
|**Liabilities**                                                                                                 |                  |     
|Deposits                                                                                                        | **$247,212,193** |     
|Advances from Federal Home Loan Bank                                                                            | **22,000,000**   |     
|Securities sold under agreement to repurchase                                                                   | **773,725**      |     
|Advance payments by borrowers for taxes and insurance                                                           | **185,416**      |     
|Other liabilities                                                                                               | **1,477,827**    |     
|                                                                                                               
|Total liabilities                                                                                               | **271,649,161**  |     
|                                                                                                               
|**Commitments and Contingencies**                                                                               | **-**            |     
|                                                                                                               
|Stockholders' Equity                                                                                            |                  |     
|Preferred stock, $.01 par value, authorized 3,000,000
     shares, none outstanding                             | **-**            |     
|Common stock, $.01 par value, 10,000,000 authorized
     shares, **2,064,347** and 2,253,147 shares outstanding | **20,643**       |     
|Additional paid-in capital                                                                                      | **4,065,694**    |     
|Retained earnings                                                                                               | **20,343,660**   |     
|Accumulated other comprehensive income, net                                                                     | **1,912,151**    |     
|                                                                                                               
|Total stockholders' equity                                                                                      | **26,342,148**   |     
|                                                                                                               
|Total liabilities and stockholders' equity                                                                      | **$297,991,309** |     
|                                                                                                               

*See accompanying summary of accounting policies and notes to consolidated financial statements.*

14

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

|**Consolidated Statements of Income**                     
|----------------------------------------------------------
|***Year Ended March 31,***                                
|                                                          
|**Interest income**                                       
|Loans                                                     
|Investment securities                                     
|Other investments                                         
|                                                          
|Total interest income                                     
|                                                          
|**Interest expense**                                      
|Deposits                                                  
|Borrowed money                                            
|                                                          
|Total interest expense                                    
|                                                          
|**Net interest income**                                   
|                                                          
|Provision for loan losses                                 
|                                                          
|**Net interest income after provision for
   loan losses**
|                                                          
|**Noninterest income**                                    
|Service charges, fees and commissions                     
|Gain on sale of loans                                     
|Other                                                     
|                                                          
|Total noninterest income                                  
|                                                          
|**Noninterest expense**                                   
|Compensation and employee benefits                        
|Occupancy                                                 
|Data processing                                           
|Deposit insurance                                         
|Other                                                     
|                                                          
|Total noninterest expense                                 
|                                                          
|**Income before income taxes**                            
|                                                          
|Income taxes                                              
|                                                          
|**Net income**                                            
|                                                          
|Earnings per share                                        
|Basic                                                     
|Diluted                                                   
|                                                          

*See accompanying summary of accounting policies and notes to consolidated financial statements.*

15

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

|**Consolidated Statements of Stockholders' Equity**                               
|----------------------------------------------------------------------------------
|                                                                                  
|                                                                                  
|**Balance, March 31, 2000**                                                       
|                                                                                  
|Comprehensive income:                                                             
|Net income                                                                        
|Change in unrealized gain
      on available for sale
      securities, net of tax
|Total comprehensive income                                                        
|Cash dividends, $.32 per share                                                    
|Exercise of stock options                                                         
|Repurchase of stock
   (168,774 shares)                                           
|                                                                                  
|**Balance, March 31, 2001**                                                       
|                                                                                  
|Comprehensive income:                                                             
|Net income                                                                        
|Change in unrealized gain
      on available for sale
      securities, net of tax
|Total comprehensive income                                                        
|Cash dividends, $.32 per share                                                    
|Exercise of stock options                                                         
|Repurchase of stock
   (96,685 shares)                                            
|                                                                                  
|**Balance, March 31, 2002**                                                       
|                                                                                  
|Comprehensive income:                                                             
|Net income                                                                        
|Change in unrealized gain
      on available for sale
      securities, net of tax
|Total comprehensive income                                                        
|Cash dividends, $.35 per share                                                    
|Exercise of stock options                                                         
|Repurchase of stock
   (200,300 shares)                                           
|                                                                                  
|**Balance, March 31, 2003**                                                       
|                                                                                  

*See accompanying summary of accounting policies and notes to consolidated financial statements.*

|***Year Ended March 31,***                                                             | **2003**        | 2002 | 2001       
|-------------------------------------------------------------------------------------- | --------------- | ---- | -----------
|                                                                                      
|**Operating activities**                                                               |                 |      |            
|Net income                                                                             | **$2,905,792**  |      | $ 2,607,196
|Adjustments to reconcile net income to
      net cash provided by operating activities |                 |      |            
|Provision for loan losses                                                              | **450,836**     |      | 372,708    
|Depreciation                                                                           | **737,630**     |      | 683,259    
|Amortization of premium and accretion
            of discount on securities, net       | **42,302**      |      | (111,759   
|(Decrease) in net deferred loan
            origination fees                           | **(23,850**     | )    | (56,390    
|Loans originated for sale                                                              | **(72,357,946** | )    | (77,568,899
|Proceeds from loan sales                                                               | **73,097,154**  |      | 77,167,790 
|Deferred income taxes                                                                  | **60,260**      |      | (218,567   
|(Increase) decrease in other assets                                                    | **(74,780**     | )    | 376,696    
|Increase (decrease) in other liabilities                                               | **(1,534,480**  | )    | 778,524    
|                                                                                      
|Net cash provided by operating activities                                              | **$3,302,918**  |      | $4,030,558 
|                                                                                      

16

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|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

|***Year Ended March 31,***                                                  | **2003**        | 2002  | 2001       
|--------------------------------------------------------------------------- | --------------- | ----- | -----------
|                                                                           
|**Investing activities**                                                    |                 |       |            
|Proceeds from maturities of held to
      maturity securities               | **$9,520,000**  |       | $25,240,000
|Purchase of held to maturity securities                                     | **(13,817,361** | )     | (11,996,864
|Purchase of available for sale securities                                   | **(2,462,500**  | )     | -          
|Net increase in loans                                                       | **(27,399,577** | )     | (10,587,213
|Purchase of property and equipment                                          | **(2,781,336**  | )     | (277,422   
|Improvements to other real estate owned                                     | -               |       | (49,096)   
|Proceeds from sale of real estate owned                                     | **915,715**     |       | 1,075,232  
|Redemption of FHLB stock                                                    | **900,000**     |       | 650,000    
|Purchase of FHLB stock                                                      | -               |       | (100,000)  
|                                                                           
|Net cash provided (absorbed) by
   investing activities                     | **(35,125,059** | **)** | 3,954,637  
|                                                                           
|**Financing activities**                                                    |                 |       |            
|Net increase (decrease) in certificates
      of deposit                    | **$ 4,461,065** |       | $ (534,215 
|Net increase (decrease) in savings and
      checking deposits              | **38,215,672**  |       | 30,762,199 
|Proceeds from issuance of common stock                                      | **119,890**     |       | 9,750      
|Repurchase of stock                                                         | **(2,414,006**  | **)** | (980,839   
|(Decrease) in securities sold under
      agreements to repurchase          | **(177,080**    | **)** | (3,471,584 
|Dividends paid                                                              | **(754,197**    | **)** | (732,079   
|Proceeds from (repayments of) advances                                      | **(6,000,000**  | **)** | (35,000,000
|                                                                           
|Net cash provided (absorbed) by
   financing activities                     | **33,451,344**  |       | (9,946,768 
|                                                                           
|Increase (decrease) in cash and cash
   equivalents                         | **1,629,203**   |       | (1,961,573 
|Cash and cash equivalents - beginning of year                               | **3,206,926**   |       | 5,168,499  
|                                                                           
|Cash and cash equivalents - end of year                                     | **$ 4,836,129** |       | $ 3,206,926
|                                                                           
|**Supplemental Disclosure of Cash Flow
   Information**                     |                 |       |            
|                                                                           
|Cash payments of interest expense                                           | **$7,903,965**  |       | $ 7,846,883
|                                                                           
|Cash payments of income taxes                                               | **$1,547,515**  |       | $ 1,442,418
|                                                                           
|**Supplemental Schedule of Non-Cash
   Investing and Financing Activities** |                 |       |            
|                                                                           
|Net change in unrealized gain on
   securities available for sale           | **$ (339,421**  | **)** | $ (21,947  
|                                                                           
|Transfers from loans to real estate acquired
   through foreclosure         | **$ 768,205**   |       | $ 1,386,996
|                                                                           

*See accompanying summary of accounting policies and notes to consolidated financial statements.*

17

---

|**Summary ofAccounting Policies**
|---------------------------------

---

**Principles of Consolidation**

The accompanying consolidated financial statements include the accounts of Community Financial Corporation (the "Corporation") and its wholly-owned subsidiary,
Community Bank (the "Bank") and Community First Mortgage Corporation ("Community First Mortgage"), a wholly-owned subsidiary of the Bank. All material intercompany accounts and transactions have been
eliminated in consolidation.

**Nature of Business andRegulatory Environment**

The Bank is a federally chartered thrift and the primary asset of the Corporation. The Corporation provides a full range of banking services to individual and
corporate customers through its wholly-owned subsidiary. Community First Mortgage originates mortgage loans to sell to third party investors.

The Office of Thrift Supervision ("OTS") is the primary regulator for federally chartered savings associations, as well as well as savings and loan holding
companies.

The Bank's deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). The FDIC has specific authority to prescribe and enforce such regulations and issue such orders as it deems necessary to prevent actions or practices by savings associations
that pose a serious threat to the SAIF.

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was effective January 1, 1993. FDICIA contained provisions which allow regulators to
impose prompt corrective action on undercapitalized institutions in accordance with a categorized capital-based system.

**Estimates**

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for
loan losses, the valuation of foreclosed real estate and deferred tax assets (liabilities).

**Cash and Cash Equivalents**

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits and federal funds
sold.

**Securities**

Investments in debt securities classified as held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts using the level
yield method. Management has a positive intent and ability to hold these securities to maturity and, accordingly, adjustments are not made for temporary declines in their market value below amortized
cost. Investment in Federal Home Loan Bank stock is stated at cost.

Investments in debt and equity securities classified as available-for-sale are stated at market value with unrealized holding gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of tax effect, until realized.

Declines in the fair value of held-to-maturity and available-for-sale securities below

their costs that are deemed to be other than temporary are reflected in
earnings as realized losses. Gains and losses on the sale of securities are determined using the specific identification method.

**Loans Receivable**

Loans receivable consists primarily of long-term real estate loans secured by first deeds of trust on single family residences, other residential property, commercial
property and land located primarily in the state of Virginia. Interest income on mortgage loans is recorded when earned and is recognized based on the level yield method. The Corporation provides an
allowance for accrued interest deemed to be uncollectible, which is netted against accrued interest receivable in the consolidated balance sheets.

The Corporation defers loan origination and commitment fees, net of certain direct loan origination costs, and the net deferred fees are amortized into interest
income over the lives of the related loans as yield adjustments. Any unamortized net fees on loans fully repaid or sold are recognized as income in the year of repayment or sale.

The Corporation places loans on nonaccrual status after being delinquent greater than 90 days or earlier if the Corporation becomes aware that the borrower has
entered bankruptcy proceedings, or in situations in which the loans have developed inherent problems prior to being 90 days delinquent that indicate payments of principal or interest will not be made
in full. Whenever the accrual of interest is stopped, previously accrued but uncollected interest income is reversed. Thereafter, interest is recognized only as cash is received until the loan is
reinstated to accrual status.


18

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**Allowance for Loan Losses**

The allowance for loan losses is maintained at a level considered by management to be adequate to absorb future loan losses currently inherent in the loan portfolio.
Management's assessment of the adequacy of the allowance is based upon type and volume of the loan portfolio, past loan loss experience, existing and anticipated economic conditions, and other
factors which deserve current recognition in estimating future loan losses. Additions to the allowance are charged to operations. Loans are charged-off partially or wholly at the time management
determines collectibility is not probable. Management's assessment of the adequacy of the allowance is subject to evaluation and adjustment by the Corporation's regulators.

The allowance for loan losses related to loans identified as impaired is primarily based on the excess of the loan's current outstanding principal balance over the estimated fair market value
of the related collateral. A loan is considered to be impaired when it is probable that the Corporation will be unable to collect all principal and interest amounts according to the contractual terms
of the loan agreement. A performing loan may be considered impaired. For a loan that is not collateral-dependent, the allowance is recorded at the amount by which the outstanding principal balance
exceeds the current best estimate of the future cash flows on the loan discounted at the loan's original effective interest rate.Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.

For impaired loans that are on nonaccrual status, cash payments received are generally applied to reduce the outstanding principal balance. However, all or a portion
of a

cash payment received on a nonaccrual loan may be recognized as interest income to the extent allowed by the loan contract, assuming management expects to fully collect the remaining principal
balance on the loan.

**Real Estate Owned**

Real estate acquired through foreclosure is initially recorded at the lower of fair value, less selling costs, or the balance of the loan on the property at the date
of foreclosure. Costs relating to the development and improvement of property are capitalized, whereas those relating to holding the property are charged to expense.

Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds
its estimated net realizable value.

**Sale of Loans andParticipation in Loans**

The Corporation is able to generate funds by selling loans and participations in loans to the Federal Home Loan Mortgage Corporation and other investors. Under
participation service agreements, the Corporation continues to service the loans and the participant is paid its share of principal and interest collections.

**Property and Equipment**

Property and equipment is stated at cost less accumulated depreciation. Provisions for depreciation are computed using the straight-line method over the estimated
useful lives of the individual assets. Expenditures for betterments and major renewals are capitalized and ordinary maintenance and repairs are charged to operations as incurred. Estimated useful
lives are three to ten years for furniture and equipment and five to fifty years for buildings and improvements.

**Income Taxes**

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined
based on the tax effects of the temporary difference between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and
laws.

**Earnings Per Share**

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would
result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock
method.

**Advertising Costs**

The Corporation follows the policy of charging the costs of advertising to expense as incurred.

**Comprehensive Income**

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income
are components of comprehensive income.


19

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**Recent AccountingPronouncements**

On March 13, 2002, the Financial Accounting Standard Board determined that commitments for the origination of mortgage loans that will be held for sale must be accounted for as derivatives
instruments, effective for fiscal quarters beginning after April 10, 2002. The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding.
Such rate lock commitments on mortgage loans to be sold in the secondary market are considered derivatives. Accordingly, these commitments including any fees received from the potential borrower are
recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to
enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. The cumulative effect of adopting
Statement No. 133 for rate lock commitments as of December 31, 2002, was not material. The Corporation originally adopted Statement No. 133, *Accounting for Derivative
Instruments and Hedging Activities* on January 1, 2001.

In April 2002, the Financial Accounting Standards Board issued Statement 145, *Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.* The amendment to Statement 13 eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after
May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002, with early application encouraged.

In June 2002, the Financial Accounting Standards Board issued Statement 146, *Accounting for Costs Associated with Exit or Disposal Activities.* This Statement
requires recognition of a liability, when incurred, for costs associated with an exit or disposal activity. The liability should be measured at fair value. The provisions of the Statement are
effective for exit or disposal activities initiated after December 31, 2002.

Effective January 1, 2002, the Corporation adopted Financial Accounting Standards Board Statement No. 142, *Goodwill and Other Intangible Assets.* Accordingly,
goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally,
Statement 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or
exchanged, and amortized over their estimated useful life. Branch acquisition transactions were outside the scope of the Statement and therefore any intangible asset arising from such transactions
remained subject to amortization over their estimated useful life.

In October 2002, the Financial Accounting Standards Board issued Statement No. 147, *Acquisitions of Certain Financial Institutions.* The Statement amends previous
interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of Statement No. 141, *Business
Combinations,* and Statement No. 142 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the Statement do not apply to transactions
between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, *Accounting for the Impairment of Long-Lived Assets,* to include in its scope core deposit
intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement
provisions required for other long-lived assets held and used.The adoption of Statement No. 142, 145, 146 and 147 did not have a material impact on the Corporation's consolidated financial statements.

The Financial Accounting Standards Board issued Statement No. 148, *Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of Statement
No. 123,* in December 2002. The Statement amends Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, the Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, this Statement amends APB Opinion No. 28, *Interim Financial Reporting,* to
require disclosure about the effects of stock options in interim financial information. The amendments to Statement No. 123 are effective for financial statements for fiscal years ending after
December 15, 2002. The amendments to APB No. 28 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. Early application
is encouraged for both amendments. The Corporation continues to record stock options under APB Opinion No. 25, *Accounting for Stock Issued to Employees,* and has not adopted the alternative
methods allowable under Statement No. 148.

In April 2003, the Financial Accounting Standards Board issued Statement No. 149, *Amendment of Statement 133 on Derivative Instruments and Hedging
Activities*. This Statement amends and clarifies financial accounting and reporting for the derivative instruments, including certain derivative instruments embedded in other contracts and for
hedging activities under Statement No. 133, *Accounting for Derivative Instruments and Hedging Activities*. This Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of this Statement is not expected to have a material impact on the Corporation's consolidated financial statements.


20

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**1.    Stock-Based Employee Compensation Plan**

At March 31, 2003, the Corporation had a stock-based employee compensation plan which is described more fully in Note 14. The Corporation accounts for the plan under
the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, to stock-based
employee compensation. In determining the pro forma amounts below, the value of each grant is estimated at the grant date using the Black-Scholes option-pricing model, with the following
weighted-average assumptions for grants in 2003, 2002 and 2001; dividend rate of 2.78%, 2.79%, and 2.00%; risk-free interest rate of 4.25%, 5.51%, and 6.19%; expected lives of 10 years; and expected
price volatility of 18.46%, 18.88% and 25.00%.

|***Year Ended March 31,***                                                                                            | **2003**          | 2002          | 2001         
|--------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------- | -------------
|                                                                                                                     
|Net income, as reported                                                                                               | **$2,905,792**    | $2,607,196    | $1,743,391   
|Deduct: Total stock-based employee
   compensation expense determined under
   fair value based method for all awards | **22,083**        | 26,330        | 51,120       
|                                                                                                                     
|Pro forma net income                                                                                                  | **$2,883,709**    | $2,580,866    | $1,692,271   
|Earnings per share:                                                                                                   |                   |               |              
|Basic - as reported                                                                                                   | **$        1.34** | $        1.14 | $        0.72
|Basic - pro forma                                                                                                     | **1.33**          | 1.13          | 0.69         
|Diluted - as reported                                                                                                 | **1.33**          | 1.14          | 0.72         
|Diluted - pro forma                                                                                                   | **1.32**          | 1.13          | 0.69         

**2.    Securities**

A summary of the amortized cost and estimated market values of securities is as follows:

|***March 31, 2003***                                   
|-------------------------------------------------------
|                                                       
|                                                       
|                                                       
|**Held to Maturity**                                   
|United States government and
      agency obligations  
|Other                                                  
|                                                       
|                                                       
|**Available for Sale**                                 
|Federal Home Loan Mortgage
      Corporation securities
|                                                       
|                                                       
|                                                       
|**Held to Maturity**                                   
|United States government and
      agency obligations  
|Other                                                  
|                                                       
|                                                       
|**Available for Sale**                                 
|Federal Home Loan Mortgage
      Corporation securities
|                                                       
|                                                       
|                                                       

21

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**2.    Securities (continued)**

The amortized cost and estimated market value of securities at March 31, 2003, by contractual maturity, are as follows:

|                                                 
|-------------------------------------------------
|                                                 
|                                                 
|**Held to Maturity**                             
|Due in one year or less                          
|Due in one through five years                    
|                                                 
|                                                 
|                                                 
|**Available for Sale**                           
|Federal Home Loan Mortgage Corporation Securities
|                                                 
|                                                 
|                                                 

Securities having a market value of $2,333,896 and $1,517,417 at March 31, 2003 and 2002, respectively, were pledged by the Corporation for purposes required by
law.

**3.    Loans Receivable, Net**

Loans receivable are summarized as follows

|***March 31,***                 | **2003**         | 2002 
|------------------------------- | ---------------- | -----
|                               
|Residential real estate         | **$139,990,684** |      
|Commercial real estate          | **51,547,669**   |      
|Construction and land           | **25,105,028**   |      
|Commercial business             | **12,109,844**   |      
|Consumer                        | **26,929,473**   |      
|                               
|                                | **255,682,698**  |      
|                               
|Less:                           |                  |      
|Loans in process                | **8,309,856**    |      
|Deferred loan fees (costs), net | **(205,653**     | **)**
|Allowance for loan losses       | **1,940,425**    |      
|                               
|                                | **10,044,628**   |      
|                               
|                                | **$245,638,070** |      
|                               

Loans serviced for others amounted to approximately $2,402,871 and $3,377,689 at March 31, 2003 and 2002, respectively. The loans are not included in the accompanying
consolidated balance sheets.

A summary of the allowance for loan losses is as follows:

|***Year Ended March 31,***                            | **2003**       | 2002 | 2001      
|----------------------------------------------------- | -------------- | ---- | ----------
|                                                     
|Balance at beginning of year                          | **$1,675,679** |      | $1,477,649
|Provision charged to expense                          | **450,836**    |      | 372,708   
|Losses charged to the allowance,
   net of recoveries | **(186,090**   | )    | (174,678  
|                                                     
|Balance at end of year                                | **$1,940,425** |      | $1,675,679
|                                                     

There were no loans considered impaired as of March 31, 2003 or 2002. Nonaccrual loans excluded from impaired loan disclosure amounted to $1,165,198 and $142,234 at
March 31, 2003 and 2002, respectively. If interest on these loans had been accrued, such income would have approximated $80,098 and $5,098 for the years ended March 31, 2003 and 2002,
respectively.

22

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**4.    Property and Equipment**

Property and equipment are summarized as follows:

|***March 31,***                                | **2003**       | 2002      
|---------------------------------------------- | -------------- | ----------
|                                              
|Buildings                                      | **$5,705,634** | $4,248,900
|Land and improvements                          | **2,172,933**  | 2,020,133 
|Furniture and equipment                        | **3,561,951**  | 2,867,938 
|Construction in progress                       | **486,669**    | 8,546     
|                                              
|                                               | **11,927,187** | 9,145,517 
|Less accumulated depreciation and amortization | **4,462,298**  | 3,724,334 
|                                              
|Property and equipment, net                    | **$7,464,889** | $5,421,183
|                                              

Depreciation expense for the years ended March 31, 2003, 2002 and 2001 amounted to $737,630, $683,259 and $742,575, respectively.

**5.    Deposits**

|***March 31,***               | **2003**         | 2002        
|----------------------------- | ---------------- | ------------
|                             
|**Demand deposits**           |                  |             
|Noninterest bearing           | **$16,250,573**  | $ 12,206,035
|Savings accounts              | **56,178,463**   | 36,142,520  
|NOW accounts                  | **22,233,253**   | 18,762,080  
|Money market deposit accounts | **24,080,110**   | 13,416,092  
|                             
|Total demand deposits         | **118,742,399**  | 80,526,727  
|**Time deposits**             | **128,469,794**  | 124,008,729 
|                             
|                              | **$247,212,193** | $204,535,456
|                             

The aggregate amount of time deposit accounts with a minimum denomination of $100,000 was $25,956,464 and $22,616,987 at March 31, 2003 and 2002,
respectively.

Time deposits mature as follows:

|***Years Ended March 31,*** |                  | 
|--------------------------- | ---------------- | 
|                           
|2004                        | **$ 56,697,213** | 
|2005                        | **32,946,709**   | 
|2006                        | **17,174,078**   | 
|2007                        | **12,193,409**   | 
|2008                        | **9,458,385**    | 
|                           
|                            | **$128,469,794** | 
|                           

At March 31, 2003 and 2002, overdraft demand deposits reclassified to loans totaled $22,205 and $20,486, respectively.

Interest expense on deposits is summarized as follows:

|***Years Ended March 31,***           | **2003**       | 2002       | 2001      
|------------------------------------- | -------------- | ---------- | ----------
|                                     
|Time deposits                         | **$4,543,999** | $6,265,873 | $6,594,537
|Money market deposit and NOW accounts | **559,868**    | 623,481    | 685,805   
|Savings                               | **1,191,751**  | 560,399    | 429,272   
|                                     
|                                      | **$6,295,618** | $7,449,753 | $7,709,614
|                                     

23

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**6.    Fair Value of Financial Instruments**

The estimated fair values of the Corporation's financial instruments are as follows:

|***March 31,***                                | **2003**             | 2002           
|---------------------------------------------- | -------------------- | ---------------
|                                              
|***(In Thousands)***                           | ***CarryingAmount*** | ***FairValue***
|                                              
|**Financial assets**                           |                      |                
|Cash and cash equivalents                      | **$ 4,836**          | **$ 4,836**    
|Securities                                     | **31,551**           | **32,194**     
|Federal Home Loan Bank stock, restricted       | **1,700**            | **1,700**      
|Loans and loans held for sale, net             | **249,308**          | **254,116**    
|Accrued interest receivable                    | **1,360**            | **1,360**      
|**Financial liabilities**                      |                      |                
|Deposits                                       | **$247,212**         | **$253,740**   
|Advances from Federal Home Loan Bank           | **22,000**           | **22,000**     
|Securities sold under agreements to repurchase | **774**              | **774**        
|Accrued interest payable                       | **90**               | **90**         

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that
value.

Cash and cash equivalents

For those short-term investments, the carrying amount is a reasonable estimate of fair value.

Securities

Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home
Loan Bank.

Loans held for sale

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans receivable

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain
mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are
estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans
are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit liabilities

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of
deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

24

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**6.    Fair Value of Financial Instruments (continued)**

Advances from Federal Home Loan Bank

For advances that mature within one year of the balance sheet date, carrying value is considered a reasonable estimate of fair value. The fair values of all other
advances are estimated using discounted cash flow analysis based on the Corporation's current incremental borrowing rate for similar types of advances.

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase are treated as short-term borrowings and the carrying value approximates fair value.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

Off-balance sheet instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms
of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the
committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date. At March 31, 2003 and 2002, the carrying amounts of loan commitments and standby letters of credit approximated fair values.

**7.    Advances from Federal Home Loan Bank**

Advances from the Federal Home Loan Bank are summarized as follows:

|Due in year ending March 31, |                
|---------------------------- | ---------------
|2004                         | **$22,000,000**
|                            

The weighted average interest rate on advances was 1.57% and 1.94% at March 31, 2003 and 2002, respectively. These advances are collateralized by the investment in
FHLB stock and the Corporation's portfolio of first mortgage loans under a Blanket Floating Lien Agreement. Value of this collateral as of March 31, 2003 was $104,058,000.

Information related to borrowing activity from the Federal Home Loan Bank is as follows:

|***Year Ended March 31,***                 | **2003**        | 2002        | 2001       
|------------------------------------------ | --------------- | ----------- | -----------
|                                          
|Maximum amount outstanding during the year | **$30,000,000** | $65,000,000 | $63,000,000
|                                          
|Average amount outstanding during the year | **$23,428,100** | $44,122,346 | $48,339,373
|                                          
|Average interest rate during the year      | **1.78%**       | 3.48%       | 6.37%      
|                                          

**8.    Securities Sold Under Agreements to Repurchase**

The following is a summary of certain information regarding the Bank's repurchase agreements:

|***Year Ended March 31,***                                     | **2003**        | 2002       | 2001       
|-------------------------------------------------------------- | --------------- | ---------- | -----------
|                                                              
|Balance at end of year                                         | **$ 773,725**   | $ 950,805  | $ 4,422,389
|                                                              
|Weighted average interest rate during the year                 | **2.09%**       | 2.97%      | 6.58%      
|                                                              
|Average amount outstanding during the year                     | **$ 1,564,676** | $ 979,905  | $16,695,213
|                                                              
|Maximum amount outstanding at any month end
   during the year | **$ 3,057,918** | $2,091,152 | $20,000,000
|                                                              

25

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**9.    Income Taxes**

Deferred tax assets (liabilities), included in "Other liabilities" in the consolidated balance sheets are as follows:

|***March 31,***                                                                                                                    | **2003**       | 2002  |           
|---------------------------------------------------------------------------------------------------------------------------------- | -------------- | ----- | ----------
|                                                                                                                                  
|**Deferred tax assets**                                                                                                            |                |       |           
|Allowance for losses                                                                                                               | **$ 639,552**  |       | $ 476,262 
|Other                                                                                                                              | **18,927**     |       | 1,937     
|                                                                                                                                  
|                                                                                                                                   | **658,479**    |       | 478,199   
|                                                                                                                                  
|**Deferred tax liabilities**                                                                                                       |                |       |           
|Depreciable assets                                                                                                                 | **(274,797**   | **)** | (24,279   
|FHLMC stock                                                                                                                        | **(1,171,962** | **)** | (1,300,943
|FHLB stock                                                                                                                         | **(18,847**    | **)** | (28,825   
|                                                                                                                                  
|                                                                                                                                   | **(1,465,606** | **)** | (1,354,047
|                                                                                                                                  
|Net deferred tax liability                                                                                                         | **$ (807,127** | **)** | $ (875,848
|                                                                                                                                  
|The provision for income taxes charged to operations for the years ended March 31, 2003, 2002 and 2001, consists of the following:
|***Year Ended March 31,***                                                                                                         | **2003**       | 2002  | 2001      
|                                                                                                                                  
|Current                                                                                                                            | **$1,193,303** |       | $1,341,215
|Deferred                                                                                                                           | **60,260**     |       | (218,567  
|                                                                                                                                  
|                                                                                                                                   | **$1,253,563** |       | $1,122,648
|                                                                                                                                  
|Differences between the statutory and effective tax rates are summarized as follows:                                              
|***Year Ended March 31,***                                                                                                         | **2003**       | 2002  | 2001      
|                                                                                                                                  
|Tax at statutory rate                                                                                                              | **34.0**       | **%** | 34.0      
|Increases (decreases) in taxes resulting from:                                                                                     |                |       |           
|State income taxes, net of federal benefit                                                                                         | **2.8**        |       | 2.2       
|Non-taxable interest and dividend received deduction                                                                               | **(2.9**       | **)** | (8.0      
|Other                                                                                                                              | **(3.8**       | **)** | 1.9       
|                                                                                                                                  
|                                                                                                                                   | **30.1**       | **%** | 30.1      
|                                                                                                                                  

**10.    Comprehensive Income**

The components of other comprehensive income (loss) are summarized as follows:

|***Year Ended March 31,***                                                     | **2003**       | 2002  | 2001     
|------------------------------------------------------------------------------ | -------------- | ----- | ---------
|                                                                              
|Unrealized gains (losses) on securities:                                       |                |       |          
|Unrealized holding gain arising during the period                              | **$ (339,421** | **)** | $ (21,947
|Income tax (expense) benefit related to items of other
   comprehensive income | **128,980**    |       | 8,340    
|                                                                              
|Other comprehensive income (loss), net of tax                                  | **$ (210,441** | **)** | $ (13,607
|                                                                              

26

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**11.    Stockholders' Equity and Regulatory Capital Requirements**

Savings institutions must maintain specific capital standards that are no less stringent than the capital standards applicable to national banks. The OTS regulations
currently have three capital standards including (i) a tangible capital requirement, (ii) a core capital requirement, and (iii) a risk-based capital requirement. The tangible capital standard
requires savings institutions to maintain tangible capital of not less than 1.5% of adjusted total assets. The core capital standard requires a savings institution to maintain core capital of not
less than 4.0% of adjusted total assets. The risk-based capital standard requires risk-based capital of not less than 8.0% of risk-weighted assets.

The following table represents the Bank's regulatory capital levels, relative to the OTS requirements applicable at that date:

|***March 31, 2003*** | ***AmountRequired*** | ***PercentRequired*** | ***ActualAmount*** | ***ActualPercent*** | ***ExcessAmount***
|-------------------- | -------------------- | --------------------- | ------------------ | ------------------- | ------------------
|                    
|***(In Thousands)***
|Tangible Capital     | **$4,463**           | **1.50**              | **%**              | **$23,805**         | **8.00**          
|Core Capital         | **11,902**           | **4.00**              |                    | **23,805**          | **8.00**          
|Risk-based Capital   | **17,718**           | **8.00**              |                    | **27,059**          | **12.22**         
|*March 31, 2002*     | *AmountRequired*     | *PercentRequired*     | *ActualAmount*     | *ActualPercent*     | *ExcessAmount*    
|                    
|Tangible Capital     | $3,947               | 1.50                  | %                  | $23,870             | 9.07              
|Core Capital         | 10,525               | 4.00                  |                    | 23,870              | 9.07              
|Risk-based Capital   | 15,422               | 8.00                  |                    | 27,045              | 14.04             

The Bank may not declare or pay a cash dividend, or repurchase any of its capital stock if the effect thereof would cause the net worth of the Bank to be reduced
below certain requirements imposed by federal regulations.

Capital distributions by OTS-regulated savings banks are limited by regulation ("Capital Distribution Regulation"). Capital distributions are defined to include, in
part, dividends, stock repurchases and cash-out mergers. The Capital Distribution Regulation permits a "Tier 1" savings bank to make capital distributions during a calendar year equal to net income
for the current year plus the previous two years net income, less capital distributions paid over that same time period. Any distributions in excess of that amount require prior OTS notice, with the
opportunity for OTS to object to the distribution. A Tier 1 savings bank is defined as a savings bank that has, on a pro forma basis after the proposed distribution, capital equal to or greater than
the OTS fully phased-in capital requirement and has not been deemed by the OTS to be "in need of more than normal supervision". The Bank is currently classified as a Tier 1 institution for these
purposes. The Capital Distribution Regulation requires that savings banks provide the applicable OTS District Director with a 30-day advance written notice of all proposed capital distributions
whether or not advance approval is required by the regulation.

**12.    Earnings Per Share**

During the year ended March 31, 2000, the Board of Directors authorized a stock repurchase program under which up to 5%, or 128,607 shares, of the then outstanding
shares of the Corporation's stock may be repurchased. During the year ended March 31, 2001, the Board of Directors authorized an additional 10% or 244,354 shares of the Corporation's stock which may
be repurchased. An additional 184,353 shares were authorized for repurchase by the Board of Directors during the fiscal year ended March 31, 2003. During the years ended March 31, 2003, 2002, and
2001, 200,300, 96,685 and 168,774 shares, respectively, were repurchased for an aggregate amount of approximately $2,414,006, $980,839 and $1,541,962, respectively.

Earnings per share is calculated as follows:

|***Year Ended March 31,***              | **2003**          | 2002          | 2001          
|--------------------------------------- | ----------------- | ------------- | --------------
|                                       
|**Basic earnings per share**            |                   |               |               
|Income available to common shareholders | **$2,905,792**    | $2,607,196    | $1,743,391    
|                                       
|Weighted average shares outstanding     | **2,168,306**     | 2,285,975     | 2,435,180     
|                                       
|Basic earnings per share                | **$        1.34** | $        1.14 | $          .72
|                                       

27

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**12.    Earnings Per Share (continued)**

|***Year Ended March 31,***                | **2003**          | 2002          | 2001          
|----------------------------------------- | ----------------- | ------------- | --------------
|                                         
|**Diluted earnings per share**            |                   |               |               
|Income available to common shareholders   | **$2,905,792**    | $2,607,196    | $1,743,391    
|                                         
|Weighted average shares outstanding       | **2,168,306**     | 2,285,975     | 2,435,180     
|Dilutive effect of stock options          | **23,912**        | 6,212         | -             
|                                         
|Total weighted average shares outstanding | **2,192,218**     | 2,292,187     | 2,435,180     
|                                         
|Diluted earnings per share                | **$        1.33** | $        1.14 | $          .72

During the years ended March 31, 2003 and 2002, stock options representing 62,150 and 112,700 shares were not included in the calculation of earnings per share
because they would have been antidilutive.

**13.    Employee Benefit Plans**

**Pension Plan**

The Corporation has a noncontributory defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and final
average compensation. The Corporation's funding policy is to contribute amounts to the pension trust at least equal to the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 (ERISA), but not in excess of the maximum tax deductible amount. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be
earned in the future. The following is a summary of information with respect to the plan:

|***Years Ended March 31,***             | **2003**       | 2002  | 2001      
|--------------------------------------- | -------------- | ----- | ----------
|                                       
|**Change in benefit obligation:**       |                |       |           
|Benefit obligation at beginning of year | **$1,078,895** |       | $ 885,325 
|Service cost                            | **134,360**    |       | 90,161    
|Interest cost                           | **73,074**     |       | 64,504    
|Actuarial loss                          | **140,433**    |       | 95,585    
|Benefits paid                           | **(21,273**    | **)** | (56,680   
|                                       
|Benefit obligation at end of year       | **$1,405,489** |       | $1,078,895
|                                       

28

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**13.    Employee Benefit Plans (continued)**

|***Years Ended March 31,***                                 | **2003**       | 2002  | 2001     
|----------------------------------------------------------- | -------------- | ----- | ---------
|                                                           
|**Change in plan assets:**                                  |                |       |          
|Fair value of plan assets at beginning of year              | **$ 956,857**  |       | $ 836,978
|Actual return on plan assets                                | **59,189**     |       | 52,247   
|Employer contribution                                       | **161,941**    |       | 124,312  
|Benefits paid                                               | **(21,273**    | **)** | (56,680  
|                                                           
|Fair value of plan assets at end of year                    | **$1,156,714** |       | $ 956,857
|                                                           
|Funded status                                               | **(248,775**   | **)** | (122,038 
|Unrecognized net actuarial loss                             | **310,474**    |       | 162,565  
|Unrecognized net asset at transition                        | **(8,262**     | **)** | (16,529  
|Unrecognized prior service cost                             | **-**          |       | 3,104    
|                                                           
|Prepaid (accrued) pension cost                              | **$ 53,437**   |       | $ 27,102 
|                                                           
|***Years Ended March 31,***                                 | **2003**       | 2002  | 2001     
|                                                           
|The components of net periodic pension cost are as follows: |                |       |          
|Service cost                                                | **$ 134,360**  |       | $ 90,161 
|Interest cost                                               | **73,074**     |       | 64,504   
|Expected return on plan assets                              | **(70,933**    | )     | (60,471  
|Amortization of net asset at transition                     | **(8,267**     | )     | (8,267   
|Amortization of prior service cost                          | **3,104**      |       | 3,100    
|Recognized net actuarial loss                               | **4,268**      |       | **-**    
|                                                           
|                                                            | **$ 135,606**  |       | $ 89,027 
|                                                           

The following assumed rates were used in determining the projected benefit obligations:

|***Year Ended March 31,***                       | **2003**  | 2002  | 2001 
|------------------------------------------------ | --------- | ----- | -----
|                                                
|Weighted average discount rate                   | **6.25%** | 7.00% | 7.75%
|                                                
|Expected long-term rate of return on plan assets | **7.50%** | 7.50% | 7.50%
|                                                
|Increase in future compensation levels           | **5.00%** | 5.00% | 5.00%
|                                                

The measurement dates used to value the plan assets were December 31, 2003, 2002 and 2001.

29

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**Employee Stock Ownership Plan**

The Employee Stock Ownership and 401(k) Profit Sharing Plan (the "Plan") is a combination of a profit sharing plan with 401(k) and a stock bonus plan. The Plan
provides for retirement, death, and disability benefits for all eligible employees.

An employee becomes eligible for participation after completion of one year of service. After meeting the eligibility requirements, an employee becomes a member of
the Plan on the earliest January 1, April 1, July 1, or October 1 occurring on or after his qualification.

The contributions to the Plan are discretionary and are determined by the Board of Directors. The contributions are limited annually to the maximum amount permitted
as a tax deduction under the applicable Internal Revenue Code provisions.

Profit-sharing and retirement expenses were approximately $94,300, $78,900 and $67,500 for the years ended March 31, 2003, 2002 and 2001, respectively.

**14.    Stock Option Plan**

The Corporation has a noncompensatory stock option plan (the "Plan") designed to provide long-term incentives to employees. All options are exercisable upon grant
date.

The following table summarizes options outstanding:

|***Year Ending March 31,***                                        | **2003**    | 2002                               | 2001      
|------------------------------------------------------------------ | ----------- | ---------------------------------- | ----------
|                                                                  
|                                                                   | **Shares**  | **Weighted -AverageExercisePrice** | Shares    
|                                                                  
|Options outstanding at   beginning of year                         | **204,750** |                                    | **$11.56**
|Granted                                                            | **7,000**   |                                    | **14.52** 
|Forfeited                                                          | **(100**    | **)**                              | **12.00** 
|Exercised                                                          | **(11,500** | **)**                              | **10.43** 
|                                                                  
|Options outstanding at   end of year                               | **200,150** |                                    | **$11.73**
|                                                                  
|Weighted-average fair   value of options   granted during the year | **$3.15**   |                                    |           
|                                                                  

The following table summarizes information about stock options outstanding and exercisable at March 31, 2003:

|                        | Options Outstanding and Exercisable
|----------------------- | -----------------------------------
|                       
|Range of Exercise Price | Number                             
|                       
|$ 8.25 - $ 9.90         | **52,000**                         
|$10.00 - $15.63         | **148,150**                        
|                       
|                        | **200,150**                        
|                       

30

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**15.    Commitments and Contingencies**

The Corporation is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Corporation's exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.

At March 31, 2003 and 2002, the following financial instruments were outstanding whose contract amounts represent credit risk:

|                                           | Contract Amount
|------------------------------------------ | ---------------
|                                          
|***March 31,***                            | **2003**       
|                                          
|***(In Thousands)***                       |                
|Commitments to grant loans                 | **$ 17,936**   
|Unfunded commitments under lines of credit | **17,701**     
|Standby letters of credit                  | **1,418**      
|                                          

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total
commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management's credit evaluation
of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of
credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is
committed.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit
are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary.

**Leases**



The Corporation is obligated under several noncancellable operating leases. Future minimum annual rental commitments under the leases are as follows:

|***Year Ending March 31,*** | ***Amount***  
|--------------------------- | --------------
|                           
|**2004**                    | **$ 159,047** 
|**2005**                    | **126,130**   
|**2006**                    | **128,609**   
|**2007**                    | **131,162**   
|**2008**                    | **133,792**   
|**Thereafter**              | **916,077**   
|                           
|                            | **$1,594,817**
|                           

Total lease expense was approximately **$271,000**, $215,000 and $215,000 for the years ended March 31, 2003, 2002 and 2001, respectively.

In the normal course of business, the Corporation has entered into employment agreements with certain officers of the Bank.

31

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**15.    Commitments and Contingencies (continued)**

The Corporation maintains its cash accounts in several correspondent banks. As of March 31, 2003, deposits in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) were approximately $2,397,000.

**16.    Related Party Transactions**

The Corporation has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal shareholders,
executive officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties), on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with others. At March 31, 2003 and 2002, these loans totaled $1,132,385 and $996,397, respectively. During the year ended
March 31, 2003, total principal payments were $176,140. There were principal additions of $312,128 during the year.

**17.    Selected Quarterly Financial Data (Unaudited)**

Condensed quarterly consolidated financial data is shown as follows: (Dollars in thousands except per share data)

|***Year ended March 31, 2003***                       | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter
|----------------------------------------------------- | ------------ | ------------- | ------------ | -------------
|                                                     
|Total interest income                                 | **$4,436**   | **$4,427**    | **$4,462**   | **$4,336**   
|Total interest expense                                | **1,810**    | **1,743**     | **1,654**    | **1,539**    
|                                                     
|Net interest income                                   | **2,626**    | **2,684**     | **2,808**    | **2,797**    
|Provision for loan losses                             | **102**      | **72**        | **57**       | **219**      
|                                                     
|Net interest income after provision   for loan losses | **2,524**    | **2,612**     | **2,751**    | **2,578**    
|Other income                                          | **759**      | **949**       | **994**      | **947**      
|Other expenses                                        | **2,207**    | **2,458**     | **2,571**    | **2,719**    
|                                                     
|Income before income taxes                            | **1,076**    | **1,103**     | **1,174**    | **806**      
|Income tax expense                                    | **331**      | **335**       | **360**      | **226**      
|                                                     
|Net income                                            | **$ 745**    | **$ 768**     | **$ 814**    | **$ 580**    
|                                                     
|Earnings per share                                    |              |               |              |              
|Basic                                                 | **$ 0.33**   | **$ 0.34**    | **$ 0.39**   | **$ 0.28**   
|Diluted                                               | **0.33**     | **0.34**      | **0.38**     | **0.28**     
|                                                     

32

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**17.    Selected Quarterly Financial Data (Unaudited) (continued)**

Condensed quarterly consolidated financial data is shown as follows: (Dollars in thousands except per share data)

|*Year ended March 31, 2002*                           | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter
|----------------------------------------------------- | ------------ | ------------- | ------------ | -------------
|                                                     
|Total interest income                                 | $5,204       | $4,939        | $4,448       | $4,350       
|Total interest expense                                | 2,767        | 2,504         | 1,992        | 1,794        
|                                                     
|Net interest income                                   | 2,437        | 2,435         | 2,456        | 2,556        
|Provision for loan losses                             | 58           | 116           | 75           | 124          
|                                                     
|Net interest income after provision   for loan losses | 2,379        | 2,319         | 2,381        | 2,432        
|Other income                                          | 809          | 834           | 861          | 878          
|Other expenses                                        | 2,129        | 2,222         | 2,223        | 2,590        
|                                                     
|Income before income taxes                            | 1,059        | 931           | 1,019        | 720          
|Income tax expense                                    | 336          | 289           | 340          | 157          
|                                                     
|Net income                                            | $ 723        | $ 642         | $ 679        | $ 563        
|                                                     
|Earnings per share                                    |              |               |              |              
|Basic                                                 | $ 0.31       | $ 0.28        | $ 0.30       | $ 0.25       
|Diluted                                               | 0.31         | 0.28          | 0.30         | 0.25         
|                                                     

33

---

|**Community FinancialCorporation and Subsidiary**
|-------------------------------------------------

---

**18.    Condensed Financial Information of the Corporation (Parent Company Only)**

|**Condensed Balance Sheets**              
|------------------------------------------
|***March 31,***                           
|                                          
|**Assets**                                
|Investment in the Bank, at equity         
|Cash                                      
|Prepaid expenses and other assets         
|                                          
|Total assets                              
|                                          
|**Liabilities and Stockholders' Equity**  
|**Liabilities**                           
|                                          
|**Stockholders' Equity**                  
|Common stock                              
|Additional paid-in capital                
|Retained earnings                         
|Accumulated other comprehensive income    
|                                          
|Total stockholders' equity                
|                                          
|Total liabilities and stockholders' equity
|                                          

|**Condensed Statements of Income**                                
|------------------------------------------------------------------
|***Year Ended March 31,***                                        
|                                                                  
|**Income**                                                        
|Dividend from Bank                                                
|Interest income                                                   
|                                                                  
|Total income                                                      
|                                                                  
|**Noninterest expenses**                                          
|                                                                  
|**Income before equity in undistributed net   income of the Bank**
|Equity in earnings of Bank, net of distributions                  
|                                                                  
|**Income before income taxes**                                    
|Income tax (benefit)                                              
|                                                                  
|**Net income**                                                    
|                                                                  

34

---

|**Notes to ConsolidatedFinancial Statements**
|---------------------------------------------

---

**18.    Condensed Financial Information of the Corporation (Parent Company Only) (continued)**

|**Condensed Statements of Cash Flows**          
|------------------------------------------------
|***Year Ended March 31,***                      
|                                                
|**Operating activities**                        
|Net income                                      
|Adjustments                                     
|Equity in earnings of Bank, net of distributions
|(Increase) in prepaid and other assets          
|                                                
|Net cash provided by operating activities       
|                                                
|**Investing activities**                        
|Net cash provided by investing activities       
|                                                
|**Financing activities**                        
|Cash dividends paid on common stock             
|Repurchase of common stock                      
|Proceeds from issuance of common stock          
|                                                
|Net cash absorbed by financing activities       
|                                                
|**Increase (decrease) in cash**                 
|**Cash,** beginning of year                     
|                                                
|**Cash,** end of year                           
|                                                

35

|**Stockholder Information**
|---------------------------

---

**Form 10-KSB Report**A copy of the our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2003 including financial statements, as filed with the SEC, will
be furnished without charge to our stockholders of record upon written request to the Secretary, Community Financial Corporation, 38 North Central Avenue, Staunton, Virginia 24401.

**Independent Auditors Legal Counsel***Yount, Hyde & Barbour, P.C.*
50 South Cameron Street
Winchester, Virginia 22601

**Market Makers***Scott & Stringfellow, Inc
Knight Securities L.P.
Anderson & Strudwick, Inc.*

**Transfer Agent**
Community Bank
acts as Transfer Agent for
Community Financial Corporation**Legal Counsel**
*Nelson, McPherson, Summers
& Santos*
12 North New Street
Staunton, Virginia 24401

*Silver, Freedman & Taff, L.L.P.*
1700 Wisconsin Avenue, N.W.
Washington, D.C. 20007

*Williams, Mullen, Christian & Dobbins*
Two James Center
1021 East Cary Street
Richmond, Virginia 23210


As of May 31, 2003, there were approximately 495 holders of record of Community Financial common stock. Community Financial common stock is traded
on The Nasdaq Small Cap Market under the symbol "CFFC." The shareholders of record number does not reflect persons or entities who hold their stock in nominee or "street" name.

The following tables present the Corporation's high, low and closing sales prices as reported by the Nasdaq Stock Market during the last two fiscal
years and the dividends declared by us for the stated periods.

|Fiscal 2003    | High   | Low    | Close  | Dividend Declared
|-------------- | ------ | ------ | ------ | -----------------
|March 2003     | $15.72 | $12.55 | $15.50 | $ .09            
|December 2002  | 13.00  | 12.06  | 12.50  | .09              
|September 2002 | 12.88  | 11.54  | 12.21  | .09              
|June 2002      | 13.25  | 11.00  | 11.87  | .08              
|March 2002     | $11.50 | $10.88 | $11.13 | $ .08            
|December 2001  | 11.05  | 10.05  | 10.60  | .08              
|September 2001 | 10.90  | 9.90   | 10.60  | .08              
|June 2001      | 10.25  | 9.63   | 9.90   | .08              

The Board of Directors of Community Financial makes dividend payment decisions with consideration of a variety of factors, including earnings,
financial condition, market considerations and regulatory restrictions. Our ability to pay dividends is limited by restrictions imposed by the Virginia Stock Corporation Act, and indirectly, by the
Office of Thrift Supervision. Restrictions on dividend payments from Community Bank to Community Financial (Community Financial's primary source of funds for the payment of dividends to its
stockholders) are described in Note 11 of the Notes to Consolidated Financial Statements contained in this Annual Report.

36

|**Mortgage Corporation**
|------------------------

---

Community First Mortgage Corporation enjoyed its third consecutive year of profitability for the fiscal year ended March 31, 2003. The retail division of the Company closed
$72.3 million in permanent residential mortgage loans. Due to a slow first quarter, retail production was down slightly from the level experienced during Fiscal 2002; however, volume accelerated late
in the year and net income exceeded that of the previous year.

In Fiscal 2003, the construction lending division's builder loan and construction permanent loan programs continued to attract more new customers, thereby expanding the
Company's market share in these portfolios. At fiscal year end, the construction lending division had originated $12.8 million in new loans, with $9.1 million in outstanding commitments and $5.2
million disbursed.


***Community First Mortgage
Corporation Employees***

Tony Bottoms
*President*

**Staff**

Kerri Bliss
Lorey Bowles
Kimberly Brittain
Lisa Collins
Mary Jean Davis
Steve Davis
Debbie Giambanco

Chuck Goetz
Tom Gill
Becky Heldreth
Barbara Henderson
Lisa Kurtz
Debra Knott
Susan Miller

Rick Perkins
Karen Poe
Mickey Silberbauer
Molly Stout
Becky Tinsley
Dawn Warren


**Community First Mortgage Corporation:**

**Main Office**
9201 Arboretum Parkway, Suite 210
Richmond, Virginia 23236
(804) 330-9800



**Staunton Office**
101 Community Way
Staunton, Virginia 24401
(540) 213-3770


37

|**Community Bank Offices**
|--------------------------

---

**Valley Region**

**Richmond Road Branch**
101 Community Way Staunton, Virginia 24401
(540) 213-3888

**Waynesboro Branch**
2934 West Main Street Waynesboro, Virginia 22980
(540) 943-5000


**Executive and
Administrative Office
Retail Banking
Corporate
Headquarters,
Staunton**



38 North Central Avenue
Staunton, Virginia 24401
(540) 886-0796
Fax: (540) 885-0643
E-Mail:
cbnk@cbnk.com
Web Address: www.cbnk.com


**Raphine Branch**
2134 Raphine Road Raphine, Virginia 24472
(540) 377-5300

**Stuarts Draft Branch**
2658 Stuarts Draft Highway Stuarts Draft, Virginia 24477
(540) 337-1514


38

|**Community Bank Offices**
|--------------------------

---

**Valley Region**

**Verona Branch**
21 Dick Huff Lane Verona, Virginia 24482
(540) 248-0700

**Operations Center**
123 West Frederick Street Staunton, Virginia 24401


**Hampton Roads Region**

**Regional Headquarters, Hilltop, Virginia Beach**
621 Nevan Road Virginia Beach, Virginia 23451
(757) 491-8810

**Kemps River, Virginia Beach**
5300 Kemps River Drive, Suite 100 Virginia Beach, Virginia 23464
(757) 424-5600


---

G r e a t e r   A u g u s t a   R e g i o n a l

---

**"Business Of The Year"**

39

|**Corporate Profile**
|---------------------

---

Community 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 656,134 shares of
its common stock. Community Financial was organized in 1989 for the purpose of becoming a thrift institution holding company. Effective January 31, 1990, Community Bank completed the holding company
reorganization of the bank and Community Financial acquired all of the issued and outstanding shares of common stock of Community Bank. In 1996, Community Financial changed its place of incorporation
to the Commonwealth of Virginia from the State of Delaware.

The principal asset of Community Financial is the outstanding stock of Community Bank, its wholly owned subsidiary. Community Financial presently has no separate
operations and its business consists only of the business of Community Bank.

Community Bank's primary business is to meet the financial needs of individuals, businesses and community

organizations. Community Bank offers real estate, business
and personal loans with complementary deposit services such as checking, savings, certificates of deposit, money market and retirement accounts. Flexible, local and prompt decisions on loan and other
financial service needs are a primary advantage of banking with Community Bank.

Both Community Financial and Community Bank conduct business through a main office located at 38 North Central Avenue, Staunton, Virginia 24401, a second Staunton
office at 101 Community Way, Staunton, Virginia 24401,a Waynesboro office at 2934 West Main Street, Waynesboro, Virginia 22980, a Stuarts Draft office at Routes 340 and 608, Stuarts Draft, Virginia
24477, a Raphine office at 2134 Raphine Road, Raphine, Virginia 24472, a Verona office at 21 Dick Huff Lane, Verona, Virginia 24482 and two Virginia Beach offices at 5300 Kemps River Drive, Suite
100, Virginia Beach, Virginia 23467 and 621 Nevan Road, Virginia Beach, Virginia 23451. The Bank's subsidiary, Community First Mortgage Corporation, conducts business at 9201 Arboretum Parkway, Suite
210, Richmond, Virginia 23236.


**Community Bank Employees**

|Gretchen Abshire
Pam Addington
Kim Aldhizer
Michele T. Bartley
Cassie Beaty
Jennifer Brich
F. Marie Biser
Tysha Blackburn
Dianne Booth
Jennifer Boxler
Janet Braithwaite
Linda Brown
Tonya Brown
Danelle Bryant
Deborah Burnett
Garner Byram
Amanda Campbell
Dianne F. Campbell
Lona Cannon
Martha B. Chandler
Julie Chapell
Stacy Clemmer
Michelle Coffey
David Cropp
Ellen Cruce | Gary L. Davenport
Charlott C. Dean
Kay T. Dean
Grace Dick
Maria Dimapelis
Renee Fangman
Rebecca Fielding
Danny R. Fields
Ariel Fix
Thomas Fleisher
Jim Fordham
Kathleen Fornadel
Sara Fox
Wanda Garrison
R. Jerry Giles
Jessica Green
William Haessly
Jacelyn Hailstalk
Brenda Haley
Darlene A. Hall
Alisha Hammer
Pamela Harris
Norman Hart
Robert M. (Bobby)
      Hoffman | Ann Hottel
Carolyn Howell
Amy Johnson
Denia Jove
Heather Kidd
Teresa Knapton
Julie Krumpter
Chris P. Kyriakides
Crystal LaMay
Mary Laughbaum
Cheri Lawhorne
Teresa W. Layne
Stephanie Leach
Rose Lilly
Tonna Lotts
Don Luttrell
Richard J. Mayer
Virginia M. McCormack
Pam McGovern
Emilie Mehrtens
Hugh McMenamin
Beth Miller
Heather Miller
Peggy Miller
Lyle A. Moffett | Lovetta L. Moore
Rosalie Moster
Jane P. Orem
Jessie Palmieri
Janice Pappas
Catherine Pauly
Wendi Pell
Robert Pennington
Debra Poole
Sally Pritchett
Jennifer Raybin
Janet R. Redifer
P. Douglas Richard
Teresa Ridgeway
Theresa Riggs
Pamela Ritchie
Connie R. Savage
Ramona W. Savidge
Brenda L. Sayre
Marie Schmitt
Rachel Sellers
Lee Ralston Shaner
Karen Sheehan
Stephanie Shiflett
Malinda Simmons | Norman C. (Butch)
     Smiley, III
Sean Smoker
Fran Stauffer
Randy Sumey
Teresa Tolley
Linda Turner
Glenn VanLear
Laura Voss
Jeff Wagner
Thomas R. Wagner
Benny N. Werner
Ann Wescott
Heather West
Stacy Whaley
Courtney Williams
Kathy H. Willis
Dee Wimer
Barbara M. Wood
Linda B. Wood
Joe P. Zakaib
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

|                                                    
|----------------------------------------------------
|Our name                     really does say it all.

|Executive & Administrative Offices38 North Central AvenueStanton, Virginia 24401540-886-0796www.cbnk.com
|--------------------------------------------------------------------------------------------------------