U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549

FORM 10-KSB

| | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ------------------------------------------------------------------------------
| | For the fiscal year ended March 31, 2003                                      

OR

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

Commission file number 0-18265.

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

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

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

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

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

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

The Issuer had $21,310,559 in gross income for the fiscal year ended March 31, 2003.

As of June 2, 2003, there were issued and outstanding 2,074,347 shares of the Issuer's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Issuer, computed by reference to the average of the closing bid and asked price of such stock as of June 2, 2003, was approximately $28,000,000. (The
exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Issuer that such person is an affiliate of the Issuer.)

**DOCUMENTS INCORPORATED BY REFERENCE**

Part II of Form 10-KSB--Portions of the Annual Report to Stockholders for the fiscal year ended March 31, 2003.

Part III of Form 10-KSB--Proxy Statement for the 2003 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format:
Yes      No

***PART  I***

Item 1.  Description of Business

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General

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

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

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

At March 31, 2003, Community had $298.0 million in assets, deposits of $247.2 million and stockholders' equity of $26.3 million.
Community's primary business consists of attracting deposits from the general public and originating real estate loans and other types of investments through our offices located in Staunton,
Waynesboro, Stuart Drafts, Raphine, Verona and Virginia Beach, Virginia.

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

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

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Forward-Looking Statements

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This document, including information incorporated by reference, contains, and future filings by the Company on Form 10-QSB and Form 8-K and
future oral and written statements by the Company and its management may contain, forward-looking statements about the Company and its subsidiary which we believe are within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance,
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.

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

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

Community Financial Corporation disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information,
or otherwise.

Lending Activities

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

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

Our loan commitments are approved at different levels, depending on the size and type of the loan being sought. One-to four-family real
estate loans not exceeding $350,000 and commercial and multi-family real estate loans not exceeding $225,000 or less may be approved by the President of the Bank. All mortgage loans in excess of
$750,000 must be approved by the Board of Directors. Consumer loans in excess of $175,000 on a secured basis and $50,000 on an unsecured basis require the approval of three members of senior
management. Loans in excess of individual loan officer or collective senior management loan authority but less than $750,000 must be approved by a majority of our Loan Committee. Regardless of the
individual loan approval authority, the Board of Directors generally approves or ratifies all loans.

The aggregate amount of loans that the Bank is permitted to make to any one borrower, including related entities, and the aggregate amount
that the Bank may invest in any one real estate project, with certain exceptions, is limited to the greater of 15% of unimpaired capital and surplus or $500,000. At March 31, 2003, the maximum amount
which the Bank could have loaned to one borrower and the borrower's related entities or invested in any one project was approximately $4.1 million. At March 31, 2003, the Bank had no borrower, or
groups of borrowers, with loans outstanding in excess of $2.6 million. The bank had only three borrowers, or groups of related borrowers, with an aggregate outstanding loan balance at March 31, 2003,
in excess of $2.0 million, all of which loans are performing in accordance to their payment terms.

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

|                                     | March 31,             
|------------------------------------ | ----------------------
|                                     | 2003                  
|                                     |                       
|                                     | Amount                
|                                     | (Dollars in Thousands)
|Real Estate Loans:                   |                       
|Residential                          | $124,104              
|Commercial and multi-family          | 51,548                
|Construction                         | 25,105                
|Total real estate                    | 200,757               
|Consumer loans:                     
|Home equity                          | 15,886                
|Automobile                           | 19,214                
|Secured personal                     | 1,943                 
|Unsecured personal                   | 5,195                 
|Deposit account                      | 577                   
|Other                                | --                    
|Total consumer                       | 42,815                
|Commercial business                  | 12,110                
|Total loans receivable               | 255,682               
|Less:                                |                       
|Undisbursed loans in process         | 8,310                 
|Deferred fees and unearned discounts | (206)                 
|Allowance for losses                 | 1,940                 
|Total net items                      | 10,044                
|Total loans receivable, net          | $245,638              
|Loans held for sale                  | $3,670                

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

|                             | March 31,             
|---------------------------- | ----------------------
|                             | 2003                  
|                             |                       
|                             | Amount                
|                             | (Dollars in Thousands)
|Fixed-Rate Loans:            |                       
|Real Estate:                 |                       
|Residential                  | $26,221               
|Commercial and multi-family  | 16,010                
|Total real estate loans (1)  | 42,231                
|Consumer                     | 35,695                
|Commercial business          | 4,657                 
|Total fixed-rate loans       | 82,583                
|Adjustable-Rate loans:       |                       
|Real Estate:                 |                       
|Residential                  | 104,347               
|Commercial and multi-family  | 54,179                
|Total real estate loans (2)  | 158,526               
|Consumer                     | 7,120                 
|Commercial Business          | 7,453                 
|Total adjustable-rate loans  | 173,099               
|Total loans receivable       | 255,682               
|Less:                        |                       
|Undisbursed loans in process | 8,310                 
|Deferred fees and unearned   | (206)                 
|Allowance for losses         | 1,940                 
|Total net items              | 10,044                
|Total loans receivable, net  | $245,638              
|                            
|Loan held for sale           | $3,670                

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(1) Includes residential real estate construction loans of $840,000, $295,000, $297,000, $1.0 million and $2.7 million, and commercial and multi-family real estate
construction loans of $0, $0, $680,000, $1.1 million and $2.6 million at March 31, 2003, 2002, 2001, 2000 and 1999, respectively.

(2) Includes residential real estate construction loans of $23.7 million, $25.1 million, $20.4 million, $12.2 million and $7.4 million, and commercial and
multi-family real estate construction loans of $530,000, $1.2 million, $2.2 million, $4.6 million and $1.0 million at March 31, 2003, 2002, 2001, 2000 and 1999 respectively.

Loan Maturity and Repricing

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The following schedule illustrates the contractual maturity of our real estate construction and commercial business loan
portfolios as of March 31,2003, before net items. Loans that have been adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule
does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

|                                   | Real Estate
Construction or
Development | Commercial
Business | Total  
|---------------------------------- | --------------------------------------- | ------------------- | -------
|                                   |                                        
|                                   | AMOUNT                                  | AMOUNT              | AMOUNT 
|                                   |                                        
|                                   | (Dollars in Thousands)                 
|                                   |                                        
|Due during periodsending March 31, |                                         |                     |        
|                                   |                                         |                     |        
|2004                               | $24,451                                 | $7,545              | $31,996
|2005 to 2008                       | 654                                     | 4,518               | 5,172  
|After 2008                         | -                                       | 47                  | 47     
|                                   |                                         |                     |        
|Totals                             | $25,105                                 | $12,110             | $37,215

The total amount of loans in the above table due after March 31, 2004, which have fixed interest rates is $4.5 million,
while the total amount of loans due after such date which have floating or adjustable interest rates is $700,000.

One- to Four-Family Residential Real Estate Lending

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

In order to reduce our exposure to changes in interest rates, we originate and sell most of our 30-year fixed-rate, one-to
four-family residential mortgage loans. For the year ended March 31, 2003, 28.4% of all one-to four-family residential loans we originated had adjustable interest rates. Although, due to competitive
market pressures, we do originate fixed-rate mortgage loans, we currently underwrite and document substantially all such loans to permit their sale in the secondary mortgage market, with a
third-party purchase commitment for the loan being required prior to origination. At March 31, 2003, $29.1 million (excluding $840,000 of residential construction loans) or 11.2%, of our one-to
four-family residential mortgage loan portfolio consisted of fixed-rate mortgage loans.

Our current one-to four-family residential adjustable-rate mortgage loans ("ARM" loans) primarily have interest rates that
adjust annually, based on a stated interest margin over the yields on one year U.S. Treasury Bills. Although our primary one- to four-family ARM loan is the one year adjustable, we offer a
residential ARM loan which adjusts every three or five years generally in accordance with the rates based on a stated margin over the yields on one or three year U.S. Treasury Bills. Our ARM loans
generally limit interest rate increases to 2% each rate adjustment period and have an established ceiling rate at the time the loans are made of up to 6% over the original interest rate. To compete
with other lenders in our market area, we make one, three and five-year ARM loans at interest rates which, for the initial period, are below the index rate which would otherwise apply to these loans.
Borrowers are qualified, however, at the fully indexed interest rate. At March 31, 2003, residential ARM loans totaled $104.3 million, or 40.2%, of our total loans receivable before net items. ARM
loans generally pose different credit risks than fixed-rate loans primarily because during periods of rising interest rates, the risk of defaults on ARM loans may increase due to the upward
adjustment of interest costs to borrowers.

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

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

Commercial and Multi-Family Real Estate, and Construction Lending

---

We have originated and, in the past have purchased, commercial real estate loans and loan participations. We also make
commercial and residential real estate construction loans. Our commercial real estate and construction loans are secured by various types of commercial real estate, including multi-family residential
buildings, hotels and motels, convenience stores, commercial and industrial buildings, shopping centers and churches. We have in recent years placed more emphasis on multi-family housing loans for
our commercial real estate loan portfolio. At March 31, 2003, commercial real estate, land and construction loans aggregated $76.7 million or 29.6% of our total loans receivable before net items. Our
commercial real estate and construction loans are secured primarily by properties located in our market area.

Our commercial real estate loans are generally made at interest rates that adjust based on yields for one-year U.S. Treasury
securities, with a 2% annual cap on rate adjustments and a 6% cap on interest rates over the life of the loan. Typically, we charge origination fees ranging from 1% to 2% on these loans. At March 31,
2003, we had $16.0 million in fixed-rate commercial real estate and construction loans. Commercial real estate loans made by us are fully amortizing with maturities ranging from five to 30
years.

At March 31, 2003, we had $530,000 million or 0.20% of our total loans receivable before net items invested in commercial
construction loans compared to $1.2 million or 0.51% at March 31, 2002. At March 31, 2003, we had two commercial construction loans, the largest one having an outstanding balance of $350,000. These
two loans are presently performing in accordance with their terms. Our commercial construction loans are generally made for a one year term or less, with a requirement that the borrower have a
commitment for permanent financing prior to funding the construction loan. Our construction loans generally provide for a fixed rate of interest at the prevailing prime rate or slightly above. Such
loans are generally secured by the personal guarantees of the borrowers and by first mortgages on the projects.

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

During fiscal 2003 lending rates declined. The Bank was actively pursuing commercial real estate loans in this lower rate
environment while borrowers were seeking funding secured by commercial real estate. In a rising rate environment the volume of loans is likely to decline due to borrowers being unwilling to seek
funding at higher interest rates.

At March 31, 2003, we had 32 commercial real estate loans (or multiple loans to one borrower) in excess of $1.0 million with
an aggregate balance of $45.4 million. The largest relationship was to a single borrower for $2.6 million secured by a combination of multi-family and single family rental property, personal
residence, improved land and residential construction.

The following table presents information as to the Company's commercial real estate and construction lending portfolio as of
March 31, 2003 by type of project.

|                                        | Number
of loans        | Principal
Balance
|--------------------------------------- | ---------------------- | -----------------
|                                        | (Dollars in Thousands)
|Permanent financing:                    |                        |                  
|Multi-family residential buildings      | 31                     | $17,850          
|Hotel and motel                         | 7                      | 5,739            
|Commercial and industrial buildings     | 83                     | 17,951           
|Raw land                                | 74                     | 7,374            
|Church                                  | 5                      | 1,172            
|Restaurant                              | 9                      | 2,569            
|Warehouse                               | 16                     | 8,527            
|Retail Store                            | 25                     | 5,414            
|School/Recreational                     | 11                     | 3,405            
|                                        | 261                    | 70,001           
|Acquisition and construction financing: |                        |                  
|Commercial and industrial buildings     | 1                      | 188              
|                                        |                        |                  
|Total                                   | 262                    | $70,189          

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

Consumer Lending

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We offer various secured and unsecured consumer loans, including unsecured personal loans, automobile loans, deposit account
loans, installment and demand loans, and home equity loans. At March 31, 2003, we had $42.8 million or 16.5% of our total loans receivable before net items invested in consumer loans. With the
exception of $6.0 million of home equity loans at March 31, 2003, our consumer loans have fixed interest rates and generally have terms ranging from 90 days to five years. The largest component of
consumer loans are automobile loans. We originate all of our consumer loans in our market area and intend to continue our consumer lending in this geographic area.

We offer VISA credit card accounts. We presently charge no annual membership fee and an annual rate of interest of 15.98%.
At March 31, 2003, 1,136 credit card accounts had been issued, with an aggregate outstanding balance of $389,000 and unused credit available of $2.7 million. The total unused credit available under
our home equity loans was $7.0 million at March 31, 2003. Consumer loans do not include unused lines of credit on credit card accounts opened by us and lines of credit on home equity
loans.

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

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which
are unsecured, such as credit card receivables, or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit
the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loan such as us, and a borrower may be
able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral. We add general provisions to our loan loss allowance, in amounts determined in
accordance with industry standards, at the time the loans are originated. Consumer loan delinquencies often increase over time as the loans age. Accordingly, although the level of non-performing
assets in our consumer loan portfolio has generally been low ($51,000 at March 31, 2003), there can be no assurance that delinquencies will not increase in the future.

Commercial Business Lending

---

We also originate commercial business loans. At March 31, 2003, we had $12.1 million in commercial business loans
outstanding, representing 4.7% of our gross loan portfolio. We offer commercial business loans to service existing customers, to consolidate our banking relationships with these customers, and to
further our asset/liability management goals.

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

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

Loan Originations, Purchases and Sales

---

Federal regulations authorize us to make real estate loans anywhere in the United States. However, at March 31, 2003,
substantially all of our real estate loans were secured by real estate located in our market area.

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

We have not purchased any loans during the last three fiscal years. Management believes that purchases of loans and loan
participations are generally desirable only when local mortgage demand is less than the supply of funds available for local mortgage origination.

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

|                             | Year Ended March 31,
|---------------------------- | --------------------
|                             | 2003                
|                             | (In Thousands)      
|Origination by Type:         |                     
|Adjustable Rate:             |                     
|Real estate                  |                     
|- 1-4 family residential     | $36,061             
|- commercial                 | 19,856              
|Non-real estate - consumer   | 922                 
|Total adjustable rate        | 56,839              
|Fixed Rate:                  |                     
|Real estate:                 |                     
|- 1-4 family - residential   | 90,728              
|- commercial                 | 6,499               
|Non-real estate -  consumer  | 15,149              
|Total fixed rate             | 112,376             
|Sales and Repayments:        |                     
|Real estate loans            | 73,178              
|Principal repayments         | 69,928              
|Total reductions             | 143,106             
|Decrease in other items, net | 95                  
|Net increase                 | $26,204             

Delinquent and Problem Loans

---

When a borrower fails to make a required payment on a loan, we attempt to cause the deficiency to be cured by contacting the borrower. A
notice is mailed to the borrower after a payment is 15 days past due and again when the loan is 30 days past due. For most loans, if the delinquency is not cured within 30 days we issue a notice of
intent to foreclose on the property and if the delinquency is not cured within 60 days, we may institute foreclosure action. If foreclosed on, real property is sold at a public sale and may be
purchased by us. Historically, deficiencies have been cured promptly.

The following table sets forth information concerning delinquent mortgage and other loans at March 31, 2003. The amounts
presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.

|                       | Residential Real
Estate | Commercial
Real Estate | Construction | Consumer | Commercial
Business | Total 
|---------------------- | ----------------------- | ---------------------- | ------------ | -------- | ------------------- | ------
|                       | Number                  | Amount                 | Number       | Amount   | Number              | Amount
|                       | (Dollars in Thousands) 
|Loans Delinquent for:  |                         |                        |              |          |                     |       
|30-59 days             | 5                       | $533                   | --           | $--      | --                  | $--   
|60-89 days             | 9                       | 400                    | --           | --       | --                  | --    
|90 days and over       | 3                       | 198                    | 1            | 182      | 3                   | 734   
|Total delinquent loans | 17                      | $1,131                 | 6            | $182     | 3                   | $734  

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

On the basis of management's review of our assets, at March 31, 2003, we had classified $1,896,000 of our assets as
substandard, none as doubtful and none as loss. All assets that have been classified are included below in either the table of non-performing assets or under "Other Loans of
Concern.

Non-Performing Assets

---

The table below sets forth the amounts and categories of non-performing assets in our loan portfolio. Non-performing assets
include non-accruing loans, accruing loans delinquent 90 days or more as to principal or interest payments and real estate acquired through foreclosure, which include assets acquired in settlement of
loans. Typically, a loan becomes nonaccruing when it is 90 days delinquent. All consumer loans more than 120 days delinquent are charged against the consumer loan allowance for loan losses. Accruing
mortgage loans delinquent more than 90 days are loans that we consider to be well secured and in the process of collection. For the years presented, we have no accruing loans 90 days or more
delinquent and no troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market
rates).

|                                         | March 31,             
|---------------------------------------- | ----------------------
|                                         | 2003                  
|                                         |                       
|                                         | (Dollars in Thousands)
|Non-accruing loans:                      |                       
|Commercial and Consumer                  | $   51                
|Real Estate                              | 1,114                 
|Total non-accruing loans                 | 1,165                 
|Real estate acquired through foreclosure | 674                   
|Total non-performing assets              | $1,839                
|Total as a percentage of total assets    | .62%                  
|Allowance for loan losses                | $1,940                

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 properties
securing these loans, management anticipates no significant losses in excess of the reserves for losses previously recorded.

For the year ended March 31, 2003, gross interest income which would have been recorded had the non-accruing loans been
current in accordance with their original terms amount

Nonaccrual loans amounted to $1,165,198 at March 31, 2003. If interest on these loans had been accrued, such income would have approximated $80,000 for the year ended
March 31, 2003, none of which is included in interest income.

Other Loans Of Concern

---

As of March 31, 2003, there were $3.4 million in loans with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the security properties have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing asset categories.

The $3.4 million in other loans of concern is comprised primarily of commercial real estate loans, which includes one
commercial real estate loan in the amount of $1.2 million. While this loan is current as to interest and principal payments, we are closely monitoring its status due to prior slow payment history and
a prior bankruptcy.

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

Allowance for Losses on Loans and Real Estate

---

We provide valuation allowances for anticipated losses on loans and real estate when management determines that a
significant decline in the value of the collateral has occurred, as a result of which the value of the collateral is less than the amount of the unpaid principal of the related loan plus estimated
costs of acquisition and sale. In addition, we also provide allowances based on the dollar amount and type of collateral securing our loans in order to protect against unanticipated losses. Although
management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the initial determinations. During 2003, our net increase in allowance for losses on loans was $264,000, due primarily to an
increase in loans. At March 31, 2003, we had an allowance for loan losses of $1,940,000.

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

|                                                                                          | Year Ended March 31,  
|----------------------------------------------------------------------------------------- | ----------------------
|                                                                                          |                       
|                                                                                          | 2003                  
|                                                                                          | (Dollars in Thousands)
|Balance at beginning of period                                                            | $1,676                
|Provision charged to operations                                                           | 451                   
|Charge-offs:                                                                              |                       
|Residential real estate                                                                   | 20                    
|Consumer                                                                                  | 224                   
|Recoveries:                                                                               |                       
|Residential real Estate                                                                   | 23                    
|Consumer                                                                                  | 34                    
|Net charge-offs                                                                           | 187                   
|Balance at end of period                                                                  | $1,940                
|Ratio of net charge-offs during the
period to average loans outstanding
during the period | 0.08%                 

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

|                                                 | Residential            | Commercial
Real Estate | Construction | Consumer and
Commercial
Business | Total    
|------------------------------------------------ | ---------------------- | ---------------------- | ------------ | -------------------------------- | ---------
|                                                 |                       
|                                                 | (Dollars in Thousands)
|March 31,2003                                    |                        |                        |              |                                  |          
|Amount of loan loss allowance                    | $    378               | $    532               | $    295     | $    735                         | $   1,940
|Loan amounts by category                         | 127,774                | 51,548                 | 25,105       | 54,925                           | 259,352  
|Percent of loans in each category to total loans | 49.26%                 | 19.88%                 | 9.68%        | 21.18%                           | 100.00%  
|                                                 |                        |                        |              |                                  |          
|March 31, 2002                                   |                        |                        |              |                                  |          
|Amount of loan loss allowance                    | $    377               | $    465               | $    267     | $    567                         | $  1,676 
|Loan amounts by category                         | 107,425                | 45,154                 | 26,878       | 54,335                           | 233,792  
|Percent of loans in each category to total loans | 45.95%                 | 19.31%                 | 11.50%       | 23.24%                           | 100.00%  
|                                                 |                        |                        |              |                                  |          
|March 31, 2001                                   |                        |                        |              |                                  |          
|Amount of loan loss allowance                    | $    350               | $    409               | $    230     | $    488                         | $   1,477
|Loan amounts by category                         | 105,257                | 46,514                 | 23,507       | 47,909                           | 223,187  
|Percent of loans in each category to total loans | 47.16%                 | 20.84%                 | 10.53%       | 21.47%                           | 100.00%  
|                                                 |                        |                        |              |                                  |          
|March 31, 2000                                   |                        |                        |              |                                  |          
|Amount of loan loss allowance                    | $    238               | $    246               | $    136     | $    598                         | $   1,218
|Loan amounts by category                         | 97,409                 | 42,318                 | 20,687       | 40,145                           | 200,559  
|Percent of loans in each category to total loans | 48.57%                 | 21.10%                 | 10.31%       | 20.02%                           | 100.00%  
|                                                 |                        |                        |              |                                  |          
|March 31, 1999                                   |                        |                        |              |                                  |          
|Amount of loan loss allowance                    | $    375               | $    306               | $    123     | $    512                         | $   1,316
|Loan amounts by category                         | 91,396                 | 38,545                 | 13,712       | 33,594                           | 177,247  
|Percent of loans in each category to total loans | 51.56%                 | 21.75%                 | 7.74%        | 18.95%                           | 100.00%  

Subsidiary Activities

---

We established Community First Mortgage Corporation, a mortgage banking subsidiary, in November 1997 and began operations in
June 1998. The primary business of Community First is to originate fixed-rate mortgage loans to sell to third party investors to generate fee income and gains on the sale of mortgage loans. The
success of a mortgage banking operation such as Community First is generally dependent on increasing the volume of mortgage loans originated and sold to investors. For the year ended March 31, 2003,
our mortgage banking subsidiary originated $72.4 million in fixed-rate mortgage loans for resell.

Investment Activities

---

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

Historically, we have maintained our liquid assets at a level believed adequate to meet requirements of normal daily
activities, repayment of maturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. As of March 31, 2003,
the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 11.4%.

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

|                                              | March 31, 2003
|--------------------------------------------- | --------------
|                                              | Within 1 year 
|                                              | Book Value    
|                                              |               
|Federal agency obligations                    | $  500        
|State agency obligations
and commercial paper | 860           
|Total investment securities                   | $1,360        
|Weighted average yield (1)                    | 5.59%         

(1) The weighted average yield is not computed on a tax equivalent basis.

Included in the above table are $15.0 million of securities that are callable in three years or less.

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

|                                                                                                                                   | March 31,             
|---------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                                                                                                                                   | 2003                  
|                                                                                                                                   | BookValue             
|                                                                                                                                   | (Dollars in Thousands)
|Interest-bearing deposits with banks:                                                                                              | $ 2,299               
|Investment securities:                                                                                                            
|Federal agency obligations                                                                                                         | $16,336               
|State agencies and commercial paper                                                                                                | 4,693                 
|Freddie Mac common and
       preferred stock                                                                                      | 10,523                
|Subtotal                                                                                                                           | 31,552                
|FHLB stock                                                                                                                         | 1,700                 
|Total investment securities and
       FHLB stock                                                                                  | $33,252               
|Average remaining life or term to
repricing, excluding Freddie Mac
common stock, FHLB stock and other
marketable equity securities | 4 Years               

During fiscal 2003, the market rates paid on investment securities decreased. During fiscal 2003, we invested primarily in
federal and state agency securities with maturities of one to five years, some of which are callable within one to three years from date of purchase.

Sources of Funds

---

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

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

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

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

|                                         | At March 31,  
|---------------------------------------- | --------------
|                                         | 2003          
|                                         | (In Thousands)
|Passbook and statement accounts          | $ 56,178      
|NOW and Super NOW accounts               | 38,484        
|Money market accounts                    | 24,080        
|One-to five-year fixed-rate certificates | 122,506       
|Six-month and 91 day certificates        | 5,964         
|Total                                    | $247,212      

The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and has allowed us to respond
with flexibility (by paying rates of interest more closely approximating market rates of interest) to, although not eliminate the threat of, disintermediation (the flow of funds away from depository
institutions such as thrift institutions into direct investment vehicles such as government and corporate securities). In addition, we have become much more subject to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. Our ability to attract and maintain deposits, and our cost of funds, has been, and will continue to be, significantly affected by
money market conditions.

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

|                           | Year Ended March 31,  
|-------------------------- | ----------------------
|                           | 2003                  
|                           | (Dollars in Thousands)
|Opening balance            | $204,535              
|Net deposits (withdrawals) | 35,943                
|Interest credited          | 6,734                 
|Ending balance             | 247,212               
|Net increase               | $ 42,677              
|Percent increase           | 20.87%                

During the fiscal years ended March 31, 2003, 2002 and 2001, we emphasized free checking accounts, offered a more
competitive rate on savings accounts and remained competitive in regard to the rates offered by competitors. Due to these efforts we experienced an increase in both non-interest bearing demand and
savings accounts during fiscal 2003. We may use borrowings from time to time as an alternative source of funds. See "- Borrowings."

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

|                                     | Year Ended March 31,  
|------------------------------------ | ----------------------
|                                     |                       
|                                     | 2003                  
|                                     |                       
|                                     | Average
Balance       
|                                     |                       
|                                     | (Dollars in Thousands)
|Deposit Category                     |                       
|Non-interest bearing demand deposits | $ 13,944              
|Interest bearing demand deposits     | 39,079                
|Savings deposits                     | 53,408                
|Time deposits                        | 119,145               
|Total deposits                       | $225,576              

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

|               | Less Than2.00%         | 2.00-3.00% | 3.01-5.00% | 5.01-6.00% | 6.01-7.00% | Total   
|-------------- | ---------------------- | ---------- | ---------- | ---------- | ---------- | --------
|               | (Dollars in Thousands)
|March 31, 2003 | $5,595                 | $42,035    | $70,013    | $10,408    | $419       | $128,470
|March 31, 2002 | ---                    | $22,640    | $83,833    | $14,186    | $3,349     | $124,008
|March 31, 2001 | ---                    | ---        | $26,181    | $26,325    | $72,037    | $124,543

The following table indicates the amount of the certificates of deposit by time remaining until maturity as of March 31, 2003.

|                                            | Maturity              
|------------------------------------------- | ----------------------
|                                            | 3 Monthsorless        
|                                            | (Dollars In Thousands)
|Certificates of deposit less than $100,000  | $16,358               
|Certificates of deposit of $100,000 or more | 3,456                 
|Total certificates of deposit               | $19,814               

Borrowings

---

As a member of the FHLB of Atlanta, we are required to own capital stock in the FHLB of Atlanta and are authorized to apply
for advances from the FHLB of Atlanta. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe the acceptable
uses to which these advances may be put, as well as limitations on the size of the advances and repayment provisions. Our borrowings, from time to time, also include securities sold under agreements
to repurchase, with mortgage-backed securities or other securities pledged as collateral. The proceeds are utilized by us for general corporate purposes. At March 31, 2003, we had $773,725 of
securities sold under agreements to repurchase.

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

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

|                                               | At March 31,          
|---------------------------------------------- | ----------------------
|                                               |                       
|                                               | 2003                  
|                                               |                       
|                                               | (Dollars in Thousands)
|Securities sold under agreements to repurchase | $    774              
|FHLB advances                                  | 22,000                
|Total Borrowings                               | $22,774               
|Weighted average interest rate of borrowings   | 1.57%                 

Competition

---

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

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

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

Regulation

---

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

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

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

**Regulatory Capital Requirements**. Federally insured savings associations, such as Community Bank, are
required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. See Note 11 of the Notes to Consolidated Financial Statements in our
Annual Report to Stockholders which is incorporated by reference in Part II, Item 7 of this report for information on our regulatory capital levels and applicable OTS requirements.

The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings
associations that fail to meet their capital requirements, which can impose limitations on the operations of the savings association.

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

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

**Qualified Thrift Lender Test**. All savings associations, including Community Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and investments. At March 31, 2003,
Community Bank met the test and has always met the test since its effective date.

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

**Community Reinvestment Act**. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution
has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of Community Bank, to assess the institution's record of
meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by Community Bank. An
unsatisfactory rating may be used as the basis for the denial of an application by the OTS. We were examined for CRA compliance in October, 2000 and received a rating of
"Satisfactory".

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

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

Federal and State Taxation

---

**Federal Taxation.** Savings associations such as Community Bank that meet certain definitional tests relating
to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had been permitted to establish reserves for bad debts and to make annual
additions thereto which could, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction for
"non-qualifying loans" was computed under the experience method. The amount of the bad debt reserve deduction is now computed under the experience method. As a result, the Bank must recapture as
taxable income that portion of the reserve that exceeds the amount that could have been taken under the experience method for post- 1987 tax years. At March 31, 2003, Community Bank's post-1987
excess reserves still to be recaptured amounted to approximately $211,000. This amount will be recaptured into taxable income ratably over the next year.

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

To the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and
deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on
loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of March 31, 2003, Community Bank's Excess for tax purposes totaled approximately $2.3
million.

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

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

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

Executive Officers

---

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

P. Douglas Richard, age 59, is President and Chief Executive Officer of the Company. He was appointed in April, 2000 and was
previously a Senior Vice President and Regional President of the Hampton Roads division. Prior to joining the Company, Mr. Richard was Chief Executive Officer of Seaboard Savings Bank in Virginia
Beach, Virginia.

R. Jerry Giles, age 54, is our Chief Financial Officer and Senior Vice President. He was appointed in April 1994. Prior to
joining the Company, Mr. Giles was a Certified Public Accountant in public accounting and the Chief Financial Officer with a savings bank for eleven years.

Chris P. Kyriakides, age 40, is our Senior Vice President and Regional President, a position he has held since January,
1997. Prior to joining the Company, Mr. Kyriakides was Chief Operations Officer of Seaboard Savings Bank in Virginia Beach, Virginia.

Benny N. Werner, age 54, is our Senior Vice President of Retail Banking, a position he has held since May 1998. Prior to
joining the Company, Mr. Werner was employed by Crestar for three years as President-Warrenton area and employed by Jefferson Savings and Loan, Warrenton, Virginia as Senior Vice President of Retail
Banking for seventeen years.

Norman C. Smiley, III., age 41, is our Chief Lending Officer and Senior Vice President, a position he has held since
November 2000. We have employed Mr. Smiley since April 1996. Prior to joining the Company, Mr. Smiley was a Branch Manager for First Virginia where he was employed for 14 years.

Employees

---

At March 31, 2003, we had a total of 140 employees, including 21 hourly employees. None of our employees are represented by
any collective bargaining group. Management considers our employee relations to be good.

Item 2. Description of Property

---

The following table sets forth information at March 31, 2003, with respect to our offices, furniture and
equipment.

We believe that our current facilities are adequate to meet our present and foreseeable need.

|Location                                                           | Opened | Owned or
LeasedExpiration | GrossSquareFootage | Net Book Valueat March 31,
2003
|------------------------------------------------------------------ | ------ | ------------------------- | ------------------ | -------------------------------
|38 North Central Avenue
Staunton, Virginia                         | 1965   | Owned                     | 17,000             | $2,059,000                     
|Rte 250 West
Waynesboro, Virginia                                  | 1989   | Owned                     | 5,300              | 658,000                        
|Route 340 and 608
Stuarts Draft, Virginia                          | 1993   | Owned                     | 2,074              | 297,000                        
|5300 Kemps River Drive
Virginia Beach, Virginia                    | 1997   | 2002                      | 2,400              | 57,000                         
|621 Nevan Road
Virginia Beach, Virginia                            | 1998   | 2038                      | 13,000             | 869,000                        
|101 Community Way
Staunton, Virginia                               | 1999   | 2039                      | 4,500              | 744,000                        
|2134 Raphine Road,
Raphine, Virginia                               | 2001   | 2006                      | 2,308              | 73,000                         
|21 Dick Huff Lane
Verona, Virginia                                 | 2002   | Owner                     | 3,850              | 1,566,000                      
|123 West Frederick Street
Staunton, Virginia                       | 2003   | Owner                     | 22,000             | 1,093,000                      
|Community First Mortgage
9011 Arboretum Parkway Richmond, Virginia | 1997   | 2003                      | 1,800              | 49,000                         

Our accounting and record-keeping activities are maintained on an in-house computer system. The net book value of our computer equipment at March 31, 2003 was $372,520.

Item 3. Legal Proceedings

---

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

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

---

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter
ended March 31, 2003.

***PART II***

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

---

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

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

---

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

Item 7. Financial Statements

---

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

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

---

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

***PART III***

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

---

Information concerning directors of the Registrant is incorporated herein by reference from our definitive Proxy Statement
for the 2003 Annual Meeting of Stockholders, copy of which will be filed not later than 120 days after the close of the fiscal year.

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

Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by
reference from our definitive Proxy Statement for the 2003 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 10. Executive Compensation

---

Information concerning executive compensation is incorporated herein by reference from our definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

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

---

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference
from our definitive Proxy Statement for the 2003 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

|Equity Compensation Plans                                 
|----------------------------------------------------------
|Plan Category                                             
|                                                          
|Equity compensation
plans approved by
security holders    
|Equity compensation
plans not approved
by security holders
|                                                          
|Total                                                     

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

Item 12. Certain Relationships and Related Transactions

---

Information concerning certain relationships and related transactions is incorporated herein by reference from our definitive Proxy
Statement for the 2003 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits:

|Regulation S-B Exhibit Number | Document                                                                                             | Reference toPrior Filing orExhibit NumberAttached Hereto
|----------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------------------------------
|2                             | Plan of acquisition, reorganization, arrangement, liquid, or
succession                              | None                                                    
|3.1                           | Amended and Restated Articles of Incorporation                                                       | *                                                       
|3.2                           | Bylaws, as amended an currently in effect                                                            | **                                                      
|4                             | Instruments defining the rights of security holders, including indentures: Common Stock Certificates | ***                                                     
|9                             | Voting trust agreement                                                                               | None                                                    
|10                            | Material contracts:                                                                                 
|10.1                          | Stock Option and Incentive Plan                                                                      | ****                                                    
|10.2                          | Employment Agreement for P. Douglas Richard                                                          | **                                                      
|10.3                          | Amendment No. One and Two to the Employment Agreement                                                | *****                                                   
|10.4                          | 1996 Incentive Plan                                                                                  | *                                                       
|10.5                          | Supplemental Executive Retirement Plan                                                               | ***                                                     
|10.6                          | Employment Agreement for Chris P. Kyriakides, as amended                                             | *****                                                   
|10.7                          | Severance Agreement for R. Jerry Giles                                                               | 10.7                                                    
|10.8                          | Severance Agreement for Norman C. Smiley                                                             | 10.8                                                    
|10.9                          | Severance Agreement for Benny N. Werner                                                              | 10.9                                                    
|11                            | Statement re computation of per share earnings                                                       | None                                                    
|13                            | Annual Report to Security Holders                                                                    | 13                                                      
|16                            | Letter on change in certifying accountant                                                            | None                                                    
|18                            | Letter on change in accounting principles                                                            | None                                                    
|21                            | Subsidiaries of Registrant                                                                           | ****                                                    
|22                            | Published report regarding matters submitted to vote of security holders                             | None                                                    
|23.1                          | Consent of Yount, Hyde & Barbour, P.C.                                                               | 23.1                                                    
|23.2                          | Consent of BDO Seidman                                                                               | 23.2                                                    
|24                            | Power of Attorney                                                                                    | Not required                                            
|99.1                          | Audit Report of BDO Seidman                                                                          | 99.1                                                    
|99.2                          | Certification pursuant to 906 of Sarbanes Oxley Act of 2002                                          | 99.2                                                    

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

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

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

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

*****Filed on August 14, 2002 as Exhibits to the Registrant's Quarterly Report on Form 10-QSB (file no. 000-18205), for the quarter ended June 30, 2002.  Such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.

(b) Reports on Form 8-K:

No reports on Form 8-K have been filed during the three-month period ended March 31, 2003.

Item 14. Controls and Procedures

---

Under the supervision and with the participation of our management, including our principal financial officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report. Based on the evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are effective. There were no significant changes in, or corrective action taken regarding, our internal controls or in other
factors that could significantly affect these controls subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure. While we believe the present design of our disclosure controls and procedures is effective to achieve its goal, future events affecting our
business may cause us to modify our disclosure controls and procedures.

SIGNATURES

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

***COMMUNITY FINANCIAL CORPORATION***

|Date:  June 30, 2003 |  | By: /s/ P. Douglas Richard

P. Douglas Richard
(Duly Authorized Representative)
|-------------------- |  | -------------------------------------------------------------------------------

In accordance with the requirements of the Securities Exchange Act of 1934, this Report to be signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

|By: /s/ P. Douglas Richard

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

James R. Cooke, Jr.
Chairman of the Board
and Director
|------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------
|Date:  June 30, 2003                                                                                               |  | Date:  June 30, 2003                                                               
|By: /s/ Jane C. Hickok

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

Charles F. Andersen
Director                          
|Date:  June 30, 2003                                                                                               |  | Date:  June 30, 2003                                                               
|By: /s/ Dale C. Smith

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

Morgan N. Trimyer, Jr.
Director                    
|Date:  June 30, 2003                                                                                               |  | Date:  June 30, 2003                                                               
|By: /s/ R. Jerry Giles

Chief Financial Officer
(Principal Financial and
Accounting Officer)                       |  | By:
/s/ Charles W. Fairchilds
Charles W. Fairchilds
Director                       
|Date:  June 30, 2003                                                                                               |  | Date:  June 30, 2003                                                               

**CERTIFICATIONS**

I, P. Douglas Richard, Principal Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-KSB of Community Financial Corporation (the
"Registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

> a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
> entities, particularly during the period in which this quarterly report is being prepared;
> 
> b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
> 
> c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):

> a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the
> Registrant's auditors any material weaknesses in internal controls; and
> 
> b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 30, 2003

/s/ P. Douglas Richard
P. Douglas Richard
President and Chief Executive Officer

I, R. Jerry Giles, Principal Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-KSB of Community Financial Corporation (the "Registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
annual report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

> a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
> entities, particularly during the period in which this quarterly report is being prepared;
> 
> b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
> 
> c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions):

> a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the
> Registrant's auditors any material weaknesses in internal controls; and
> 
> b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 30, 2003

/s/ R. Jerry Giles
R. Jerry Giles
Senior Vice President and Chief Financial Officer

INDEX TO EXHIBITS

|Exhibit No. | Description                                                
|----------- | -----------------------------------------------------------
|10.7        | Severance Agreement for R. Jerry Giles                     
|10.8        | Severance Agreement for Norman C. Smiley                   
|10.9        | Severance Agreement for Benny N. Werner                    
|13          | Annual Report to Security Holders                          
|23.1        | Consent of Yount, Hyde & Barbour, P.C.                     
|23.2        | Consent of BDO Seidman                                     
|99.1        | Audit Report of BDO Seidman                                
|99.2        | Certification pursuant to 906 of Sarbanes Oxley Act of 2002