UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q


(Mark
      One)





[X]   QUARTERLY
      REPORT PURSUANT
      TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the quarterly period ended    December 31,
      2007.





OR





[  ]  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934





For
      the transition
      period from __________________________ to__________________________





Commission
      file number    000-18261








COMMUNITY
                FINANCIAL CORPORATION(Exact
                name of registrant as specified in its
                charter)








VIRGINIA
            
            54-1532044(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification Number)








38
                North Central Ave., Staunton, VA 24401(Address
                of principal executive offices)








(540)
                886-0796(Issuer’s
                telephone number)








(Former
                name, former address and former fiscal year, if changed since last
                report)





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a small reporting
      company.  See definition of “large accelerated filer, accelerated
      filer and small reporting company” in Rule 12b-2 of the Exchange
      Act  (Check one):





Large
      accelerated filer   [  
]     Accelerated filer  [ 
]     Non-Accelerated filer    [ 
]        Small reporting company 
[X]


(do
      not check
      if a small


reporting company)





Indicate
      by check mark whether the
      registrant is a shell company (as defined in Rule 12b-2 of the Exchange
      Act).





Yes  [  
      ]      No [X]





Number
      of
      shares of Common Stock, par value $.01 per share, outstanding at the close
      of
      business on February 8, 2008:  4,310,958.








COMMUNITY
      FINANCIAL CORPORATION








INDEX








PART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Consolidated
                Financial StatementsConsolidated
                Statements of Financial
              Condition
                at December 31, 2007 (unaudited)
              and
                March 31, 2007
            3Consolidated
                Statements of Income for the
              Three
                and Nine Months Ended December 31, 2007 and 2006
              (unaudited)
            4Consolidated
                Statements of Cash Flows for the
              Nine
                Months Ended December 31, 2007 and 2006(Unaudited)
            5Notes
                to Unaudited Interim Consolidated
              Financial
                Statements
            6Item
                2.
            Management's
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            12Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            21Item
                4.
            Controls
                and Procedures
            21PART
                II.
            OTHER
                INFORMATION
            23Signature
                Page
            
            24Exhibit
                Index
            
            25








2


Part
      I.
      Financial Information


Item
      1.
      Financial Statements





COMMUNITY
                FINANCIAL CORPORATIONCONSOLIDATED
                STATEMENTS OF FINANCIAL CONDITIONDecember
                31,
            
            
            March
                31,2007
            
            
            2007(Unaudited)ASSETSCash(including
                interest-bearing deposits of approximately $1,894,000 and
                $1,045,000)
            
            $
            4,699,236
            
            
            $
            3,625,796SecuritiesHeld
                to maturity
            
            
            21,663,554
            
            
            
            23,585,975Available
                for sale, at fair value
            
            
            10,153,259
            
            
            
            14,250,095Restricted
                investment in Federal
              Home
                Loan Bank stock, at cost
            
            
            5,542,100
            
            
            
            4,822,100Loans
                receivable, net of allowance for loan
              losses
                of $3,174,360 and $3,078,397
            
            
            428,866,840
            
            
            
            399,252,394Repossessed
                assets
            
            
            334,579
            
            
            
            181,212Property
                and equipment, net
            
            
            7,758,977
            
            
            
            8,021,271Accrued
                interest receivableLoans
            
            
            2,052,260
            
            
            
            1,827,965Investments
            
            
            296,386
            
            
            
            404,300Prepaid
                expenses and other assets
            
            
            9,949,321
            
            
            
            7,141,113Total
                Assets
            
            $
            491,316,512
            
            
            $
            463,112,221LIABILITIES
                AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
            
            $
            342,542,344
            
            
            $
            330,537,704Advances
                from Federal Home Loan Bank
            
            
            104,000,000
            
            
            
            89,000,000Securities
                sold under agreement to repurchase
            
            
            2,431,685
            
            
            
            1,739,690Advance
                payments by borrowers for
              taxes
                and insurance
            
            
            84,944
            
            
            
            142,511Other
                liabilities
            
            
            4,111,374
            
            
            
            3,121,904Total
                Liabilities
            
            
            453,170,347
            
            
            
            424,541,809Stockholders’
                EquityPreferred
                stock $.01 par value,authorized
                3,000,000 shares,
            
            
            ---
            
            
            
            ---none
                outstandingCommon
                stock, $0.01 par value,authorized
                20,000,000 shares,4,310,958
                and 4,295,732
              shares
                outstanding
            
            
            43,110
            
            
            
            42,957Additional
                paid in capital
            
            
            5,204,452
            
            
            
            5,097,321Retained
                earnings
            
            
            34,268,935
            
            
            
            32,277,332Accumulated
                other comprehensive
              income
                (loss)
            
            
            (1,370,332
            )
            
            
            1,152,802Total
                Stockholders’ Equity
            
            
            38,146,165
            
            
            
            38,570,412Total
                Liabilities and Stockholders’ Equity
            
            $
            491,316,512
            
            
            $
            463,112,221








See
      accompanying notes to unaudited interim consolidated financial
      statements.






3





COMMUNITY
                FINANCIAL CORPORATIONCONSOLIDATED
                STATEMENTS OF INCOMEThree
                Months Ended
              December
                31
            
            
            Nine
                Months Ended
              December
                312007
            
            
            2006
            
            
            2007
            
            
            2006(Unaudited)
            
            
            (Unaudited)INTEREST
                INCOMELoans
            
            $
            7,562,839
            
            
            $
            6,944,366
            
            
            $
            22,730,883
            
            
            $
            20,059,578Investment
                securities
            
            
            232,144
            
            
            
            250,235
            
            
            
            712,500
            
            
            
            767,569Other
            
            
            291,785
            
            
            
            296,966
            
            
            
            885,518
            
            
            
            873,307Total
                Interest Income
            
            
            8,086,768
            
            
            
            7,491,567
            
            
            
            24,328,901
            
            
            
            21,700,454INTEREST
                EXPENSEDeposits
            
            
            3,223,827
            
            
            
            2,671,418
            
            
            
            9,273,818
            
            
            
            7,224,198Borrowed
                money
            
            
            1,207,798
            
            
            
            1,203,931
            
            
            
            3,751,701
            
            
            
            3,559,561Total
                interest expense
            
            
            4,431,625
            
            
            
            3,875,349
            
            
            
            13,025,519
            
            
            
            10,783,759NET
                INTEREST INCOME
            
            
            3,655,143
            
            
            
            3,616,218
            
            
            
            11,303,382
            
            
            
            10,916,695PROVISION
                FOR LOAN LOSSES
            
            
            102,586
            
            
            
            100,631
            
            
            
            455,287
            
            
            
            222,892NET
                INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            3,552,557
            
            
            
            3,515,587
            
            
            
            10,848,095
            
            
            
            10,693,803NONINTEREST
                INCOMEService
                charges, fees and commissions
            
            
            812,737
            
            
            
            747,578
            
            
            
            2,279,289
            
            
            
            2,149,780Other
            
            
            103,967
            
            
            
            92,078
            
            
            
            323,188
            
            
            
            277,667Total
                noninterest income
            
            
            916,704
            
            
            
            839,656
            
            
            
            2,602,477
            
            
            
            2,427,447NONINTEREST
                EXPENSECompensation
                & benefits
            
            
            1,884,810
            
            
            
            1,710,762
            
            
            
            5,540,737
            
            
            
            5,091,753Occupancy
            
            
            360,347
            
            
            
            359,037
            
            
            
            1,074,810
            
            
            
            1,061,620Data
                processing
            
            
            352,370
            
            
            
            299,297
            
            
            
            1,046,439
            
            
            
            907,063Federal
                insurance premium
            
            
            9,634
            
            
            
            9,292
            
            
            
            28,959
            
            
            
            27,913Advertising
            
            
            128,891
            
            
            
            104,104
            
            
            
            348,299
            
            
            
            299,149Other
            
            
            372,664
            
            
            
            317,223
            
            
            
            1,227,128
            
            
            
            1,035,033Total
                noninterest expense
            
            
            3,108,716
            
            
            
            2,799,715
            
            
            
            9,266,372
            
            
            
            8,422,531INCOME
                BEFORE TAXES
            
            
            1,360,545
            
            
            
            1,555,528
            
            
            
            4,184,200
            
            
            
            4,698,719INCOME
                TAXES
            
            
            436,795
            
            
            
            513,845
            
            
            
            1,354,640
            
            
            
            1,551,062NET
                INCOME
            
            $
            923,750
            
            
            $
            1,041,683
            
            
            $
            2,829,560
            
            
            $
            3,147,657BASIC
                EARNINGS PER SHARE
            
            $
            0.21
            
            
            $
            0.24
            
            
            $
            0.66
            
            
            $
            0.74DILUTED
                EARNINGS PER SHARE
            
            $
            0.21
            
            
            $
            0.24
            
            
            $
            0.64
            
            
            $
            0.71DIVIDENDS
                PER SHARE
            
            $
            0.065
            
            
            $
            0.065
            
            
            $
            0.195
            
            
            $
            0.19





See
      accompanying notes to unaudited interim consolidated financial
      statements.







4







COMMUNITY
                FINANCIAL CORPORATIONCONSOLIDATED
                STATEMENTS OF CASH FLOWSNine
                Months EndedDecember
                312007
            
            
            2006OPERATING
                ACTIVITIESNet
                income
            
            $
            2,829,560
            
            
            $
            3,147,657Adjustments
                to reconcile net income tonet
                cash provided by operating activitiesProvision
                for loan losses
            
            
            455,287
            
            
            
            222,892Depreciation
            
            
            463,538
            
            
            
            440,538Amortization
                of premium and accretionof
                discount on securities, net
            
            
            5,277
            
            
            
            7,386Increase(decrease)
                in net deferred loan fees
            
            
            37,879
            
            
            
            (83,825
            )(Decrease)in
                deferred income taxes
            
            
            (120,243
            )
            
            
            (112,945
            )(Increase)in
                other assets
            
            
            (2,808,208
            )
            
            
            (268,736
            )Increase
                in other liabilities
            
            
            989,470
            
            
            
            1,398,585Net
                cash provided by operatingActivities
            
            
            1,852,560
            
            
            
            4,751,852INVESTING
                ACTIVITIESProceeds
                from maturities of held to maturitySecurities
            
            
            1,917,143
            
            
            
            1,170,000Net
                increase in loans
            
            
            (28,587,615
            )
            
            
            (26,376,917
            )Purchases
                of property and equipment
            
            
            (201,244
            )
            
            
            (358,866
            )(Purchase)of
                FHLB stock
            
            
            (720,000
            )
            
            
            (315,000
            )(Increase)in
                Repossessed assets
            
            
            (153,367
            )
            
            
            (20,937
            )Net
                cash absorbed by investing activities
            
            
            (27,745,083
            )
            
            
            (25,901,720
            )FINANCING
                ACTIVITIESDividends
                paid
            
            
            (837,957
            )
            
            
            (807,051
            )Net
                increase in deposits
            
            
            12,004,640
            
            
            
            15,608,778Proceeds
                from advances and other borrowedmoney
            
            
            15,691,995
            
            
            
            7,968,791Proceeds
                from issuance of common stock
            
            
            107,285
            
            
            
            254,252Net
                cash provided by financing activities
            
            
            26,965,963
            
            
            
            23,024,770INCREASE
                IN CASH AND CASH EQUIVALENTS
            
            
            1,073,440
            
            
            
            1,874,902CASH
                AND CASH EQUIVALENTS – beginning of period
            
            
            3,625,796
            
            
            
            3,507,261CASH
                AND CASH EQUIVALENTS – end of period
            
            $
            4,699,236
            
            
            $
            5,382,163See
                accompanying notes to unaudited interim consolidated financial
                statements


5





COMMUNITY
      FINANCIAL CORPORATION


NOTES
      TO
      UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





NOTE
      1. - BASIS OF PRESENTATION





The
      accompanying unaudited interim consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America for interim financial information and with the
      instructions to Form 10-Q and Regulation S-X.  Accordingly, they do
      not include all of the information and footnotes required by generally accepted
      accounting principles for complete financial statements.





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





In
      the
      opinion of management, all adjustments (consisting of normal recurring accruals)
      considered necessary for fair presentation have been included. Operating results
      for the three and nine months ended December 31, 2007, are not necessarily
      indicative of the results that may be expected for the year ending March 31,
      2008.





NOTE
      2. - STOCK SPLIT





On
      July
      26, 2006, the Company declared a 2 for 1 stock split in the form of a 100%
      stock
      dividend payable on August 23, 2006. Basic and diluted earnings per share have
      been retroactively adjusted for this split for all periods
      presented.





NOTE
      3. - STOCK-BASED COMPENSATION PLAN







In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment”
(SFAS 123R). SFAS 123R requires companies to recognize the cost of employee
      services received in exchange for awards of equity instruments, such as stock
      options and restricted stock, based on the fair value of those awards at the
      date of grant and eliminates the choice to account for employee stock options
      under Accounting Principles Board Opinion No. 25, “Accounting for Stock
      Issued to Employees” (APB 25). The Company adopted SFAS 123R effective April 1,
      2006 using the modified prospective method and as such, results for prior
      periods have not been restated. Prior to April 1, 2006, no compensation
      expense was recognized for stock option grants as all such grants had an
      exercise price not less than fair market value on the date of
      grant.




There
      were no stock options granted during the three and nine month periods ended
      December 31, 2007 and no stock-based compensation recognized as no options
      were
      granted or vested.


6




The
      following summarizes the stock option activity for the three months ended
      December 31, 2007:





Weighted
            
            IntrinsicWeighted
            
            
            Average
            
            Value
                ofAverage
            
            
            Remaining
            
            UnexercisedExercise
            
            
            Contractual
            
            In-the-MoneyShares
            
            
            Price
            
            
            Term
            
            OptionsOptions
                outstanding, September 30, 2007
            
            
            468,200
            
            
            $
            8.21Granted
            
            
            ---
            
            
            
            ---Exercised
            
            
            (13,000
            )
            
            $
            7.50Forfeited
            
            
            (1,200
            )
            
            
            5.06Options
                outstanding, December 31, 2007
            
            
            454,000
            
            
            $
            8.24
            
            
            
            4.6Options
                exercisable, December 31, 2007
            
            
            454,000
            
            
            $
            8.24
            
            
            
            4.6
            
            $633,991







Information
      in the above table has been restated to reflect the 2 for 1 split in the form
      of
      a 100% stock dividend described in Note 2.




The
      total
      intrinsic value of in-the-money options exercised during the three month ended
      December 31, 2007 was $ 15,150.





NOTE
      4. - EARNINGS PER SHARE





Basic
      earnings per share is based on net income divided by the weighted average number
      of common shares outstanding during the period.  Diluted earnings per
      share shows the dilutive effect of additional common shares issuable under
      stock
      option plans. Diluted earnings per share is computed by dividing net earnings
      by
      the weighted average number of common shares and common share equivalents
      outstanding. Basic and diluted earnings per share are computed in the following
      table.





For
                the Three Months EndedDecember
                31, 2007
            
            
            December
                31, 2006Weighted
                Average
            
            
            Per
                Share
            
            
            
            
            
            Weighted
                Average
            
            
            Per
                ShareIncome
            
            
            Shares
            
            
            Amount
            
            
            Income
            
            
            Shares
            
            
            AmountBasic
                EPSIncome
                available to common stockholders
            
            $
            923,750
            
            
            
            4,304,882
            
            
            $
            0.21
            
            
            $
            1,041,683
            
            
            
            4,252,395
            
            
            $
            0.24Effect
                of Dilutive SecuritiesOptions
            
            
            ---
            
            
            
            84,450
            
            
            
            
            
            
            
            ---
            
            
            
            148,689Diluted
                EPSIncome
                available to common stockholders
            
            $
            923,750
            
            
            
            4,389,332
            
            
            $
            0.21
            
            
            $
            1,041,683
            
            
            
            4,401,084
            
            
            $
            0.24







During
      the quarter ended December 31, 2007, stock options representing 114,000 shares
      were not included in the calculation of earnings per share because they would
      have been anti-dilutive. During the quarter ended December 31,






7






2006,
      stock options representing 47,000 shares were not included in the calculation
      of
      earnings per share because they would have been anti-dilutive.





For
                the Nine Months EndedDecember
                31, 2007
            
            
            December
                31, 2006Weighted
                Average
            
            
            Per
                Share
            
            
            
            
            
            Weighted
                Average
            
            
            Per
                ShareIncome
            
            
            Shares
            
            
            Amount
            
            
            Income
            
            
            Shares
            
            
            AmountBasic
                EPSIncome
                available to common stockholders
            
            $
            2,829,560
            
            
            
            4,299,257
            
            
            $
            0.66
            
            
            $
            3,147,657
            
            
            
            4,248,779
            
            
            $
            0.74Effect
                of Dilutive SecuritiesOptions
            
            
            ---
            
            
            
            103,461
            
            
            
            
            
            
            
            ---
            
            
            
            157,726Diluted
                EPSIncome
                available to common stockholders
            
            $
            2,829,560
            
            
            
            4,402,718
            
            
            $
            0.64
            
            
            $
            3,147,657
            
            
            
            4,406,505
            
            
            $
            0.71


Information
      in the above table has been restated to reflect the 2 for 1 stock split in
      the
      form of a 100% stock dividend described in Note 2.







NOTE
      5. - STOCKHOLDERS' EQUITY





The
      following table presents the Bank's regulatory capital levels at December 31,
      2007:





Amount
              Required
            
            
            Percent
              Required
            
            
            Actual
              Amount
            
            
            Actual
              Percent
            
            
            Excess
              AmountTangible
                Capital
            
            $
            7,456,000
            
            
            
            1.50
            %
            
            $
            37,795,000
            
            
            
            7.60
            %
            
            $
            30,339,000Core
                Capital
            
            
            19,882,000
            
            
            
            4.00
            
            
            
            37,795,000
            
            
            
            7.60
            
            
            
            17,913,000Risk-based
                Capital
            
            
            33,228,000
            
            
            
            8.00
            
            
            
            40,914,000
            
            
            
            9.85
            
            
            
            7,686,000





The
      Company’s primary source of funds for the payment of dividends to its
      stockholders are dividends from the Bank. Capital distributions by OTS-regulated
      savings banks, such as the Bank, are limited by regulation ("Capital
      Distribution Regulation").  Capital distributions are defined to
      include, in part, dividends, stock repurchases and cash-out
      mergers.  The Capital Distribution Regulation permits a savings bank
      to make capital distributions during a calendar year equal to net income for
      the
      current year plus the previous two years net income, less capital distributions
      paid over the same period. Any distributions in excess of that amount requires
      prior OTS approval. The Capital Distribution Regulation requires that savings
      banks in holding company structures provide the applicable OTS Regional Director
      with a 30-day advance written notice of all proposed capital distributions
      whether or not advance approval is required by the regulation. The OTS may
      object to capital distributions if the bank is not meeting its regulatory
      capital requirements, the distribution raises safety and soundness concerns
      or
      is otherwise in violation of law.







8





NOTE
      6. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS





Total
      interest paid for the nine months ended December 31, 2007 and 2006 was
      $12,694,780 and $9,954,910, respectively. Total income taxes paid for the nine
      months ended December 31, 2007 and 2006 was $1,474,213 and
      $1,988,362.








NOTE
      7. - COMPREHENSIVE INCOME





Comprehensive
      income is defined as "the change in equity (net assets) of a business enterprise
      during a period from transactions and other events and circumstances from
      non-owner sources. It includes all changes in equity during a period except
      those resulting from investments by owners and distributions to owners."
      Comprehensive income for the Company includes net income and unrealized gains
      and losses on securities available for sale. The following tables set forth
      the
      components of comprehensive income for the three-month periods ended December
      31, 2007 and 2006:





Nine
                months Ended December 31Nine
                months Ended
                December 31
            
            2007
            
            
            2006Net
                Income
            
            $
            2,829,560
            
            
            $
            3,147,657Other
                comprehensive income (loss), net of   tax unrealized
                gains(losses)on
              securities:Unrealized
                holding gains (losses)
              arising
                during the period
            
            
            (2,523,134
            )
            
            
            476,830Total
                comprehensive income
            
            $
            306,426
            
            
            $
            3,624,487








NOTE
      8. – DEFINED BENEFIT PENSION PLAN





The
      Company has a non-contributory defined benefit pension plan for which the
      components of net periodic benefit cost are as follows:





Three
                Months EndedDecember
                312007
            
            
            2006Service
                cost
            
            $
            77,336
            
            
            $
            72,011Interest
                cost
            
            
            44,055
            
            
            
            36,048Expected
                return on plan assets
            
            
            (43,935
            )
            
            
            (35,876
            )Recognized
                net actuarial loss
            
            
            6,608
            
            
            
            6,849$
            84,064
            
            
            $
            79,032














9










Nine
                Months EndedDecember
                312007
            
            
            2006Service
                cost
            
            $
            232,008
            
            
            $
            216,034Interest
                cost
            
            
            132,165
            
            
            
            108,143Expected
                return on plan assets
            
            
            (131,805
            )
            
            
            (107,628
            )Recognized
                net actuarial loss
            
            
            19,824
            
            
            
            20,547$
            252,192
            
            
            $
            237,096








The
      Company made a contribution of $1,065,840 to its pension plan for the current
      fiscal year on December 7, 2007.








NOTE
      9. – SECURITIES





Information
      pertaining to securities with gross unrealized losses at December 31, 2007,
      aggregated by investment category and length of time that individual securities
      have been in a continuous loss position, follows:





Less
                  Than Twelve Months
            
            
            Over
                  Twelve MonthsGross
            
            
            Estimated
              Market
              Value
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Market
              ValueUnrealized
              LossesHeld
                to MaturityUnited
                States government
                andagency
                obligations
            
            $
            -
            
            
            $
            -
            
            
            $
            22,925
            
            
            $
            8,557,400State
                and municipal
                obligations
            
            
            -
            
            
            
            -
            
            
            
            3,786
            
            
            
            396,586-
            
            
            
            -
            
            
            
            26,711
            
            
            
            8,953,986Available
                for SaleEquity
                securities
            
            
            1,376,500
            
            
            
            4,756,000
            
            
            
            1,895,418
            
            
            
            3,669,505$
            1,376,500
            
            
            $
            4,756,000
            
            
            $
            1,922,129
            
            
            $
            12,623,491





At
      December 31, 2007, 20 debt securities had unrealized losses with aggregate
      depreciation of 0.30% from the Corporation’s amortized cost
      basis.  These unrealized losses related principally to government
      agencies.  In analyzing an issuer’s financial condition, management
      considers whether the securities are issued by the federal government or its
      agencies and whether downgrades by bond debt rating agencies have
      occurred.  As management has the ability and intent to hold these debt
      securities until maturity or for a period of time sufficient to allow for any
      anticipated recovery in fair value, no declines are deemed to be other than
      temporary.





At
      December 31, 2007, four marketable equity securities had unrealized losses
      with
      aggregate depreciation of 27.97% from the Corporation’s cost
      basis.  One of the preferred stock issues is the Freddie Mac preferred
      series L with a par value of $50 per share. The dividend rate of this issue
      resets every five years based on the five year treasury rate. The next dividend
      reset date for this security is December 31, 2009. Management anticipates that
      the fair value of this issue will approximate the security’s par value on the
      next dividend reset date. The securities have an investment grade rating of
      AA
      or better.  These unrealized losses relate primarily to government
      agencies.  The movement in the market value of the securities is
      closely






10








related
      to changes in interest rates.  In analyzing the issuer’s financial
      condition, management considers whether the securities are issued by the federal
      government or its agencies and whether downgrades by bond debt rating agencies
      have occurred.  As management has the ability and intent to hold these
      equity securities for the foreseeable future, no declines are deemed to be
      other
      than temporary.





Management
      evaluates securities for other than temporary impairment at least on a quarterly
      basis, and more frequently when economic or market concerns warrant such
      evaluation.  Consideration is given to (1) the length of time and the
      extent to which the fair value has been less than cost, (2) the financial
      condition and near-term prospects of the issuer, and (3) the intent and ability
      of the Corporation to retain its investment in the issuer for a period of time
      sufficient to allow for any anticipated recovery in fair value.





11


Item
      2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND


RESULTS
      OF OPERATIONS.





EXECUTIVE
      SUMMARY





The
      following information is intended to provide investors a better understanding
      of
      the financial position and the operating results of Community Financial
      Corporation and its subsidiary, Community Bank. The following is primarily
      from
      management’s perspective and may not contain all information that is of
      importance to the reader. Accordingly, the information should be considered
      in
      the context of the consolidated financial statements and other related
      information contained herein.





Net
      income for the nine months ended December 31, 2007 decreased $318,000 or 10.1%
      to $2,830,000 compared to $3,148,000 for the nine months ended December 31,
      2006. Net income for the quarter ended December 31, 2007 decreased $117,000
      or
      11.2% to $924,000 compared to $1,042,000 for the December 31, 2006
      quarter.  Net income for the quarter and nine months decreased due
      primarily to an increase in noninterest expense resulting from higher expenses
      associated with compensation and benefits, data processing and a direct
      marketing campaign.  Net income for the nine month period was also
      affected by a higher provision for loan losses and expenses related to
      implementing the evaluation and monitoring of internal controls as required
      by
      Section 404 of the Sarbanes-Oxley Act, partially offset by an increase in net
      interest income and noninterest income.





Net
      interest income for the quarter ended December 31, 2007 increased $39,000,
      or
      1.08%, to $3.7 million and for the nine months ended December 31, 2007 increased
      $387,000, or 3.5%, to $11.3 million compared to the comparable periods last
      year. Net interest income, which is the difference between the interest income
      we earn on our interest-earning assets, such as loans and investment securities,
      and the interest we pay on interest-bearing liabilities, which are primarily
      deposits and borrowings was impacted by both the change in our volume of
      interest earning assets and the interest rate spread between interest-earning
      assets and interest-bearing liabilities. The primary factor contributing to
      the
      increase in net interest income for the quarter and nine months ended December
      31, 2007 was the growth in interest-earning assets, primarily loans, which
      was
      offset by a compressing interest rate spread. The decrease in the interest
      rate
      spread is due primarily to the current market relationship between short-term
      and long-term interest rates. We did not purchase any investment securities
      during the nine months ended December 31, 2007 and anticipate limited security
      purchases during the remainder of the current fiscal year.





Management
      will continue to monitor asset growth to manage the level of regulatory capital
      and funds acquisition. We continue to monitor the impact changing interest
      rates
      may have on both the growth in interest-earning assets and our interest rate
      spread. The Bank has approximately $282.3 million in adjustable rate loans
      or
      66% of total loans which reprice in five years or less, many of which are
      subject to annual and lifetime interest rate limits. The pace and extent of
      future interest rate changes will impact the Company’s interest rate spread as
      well as limitations on interest rate adjustments on certain adjustable rate
      loans.





Funding
      for the growth in interest-earning assets combined with a falling interest
      rate
      environment has impacted the composition of our interest-bearing liabilities.
      The primary source of funding for increases in assets during the December 31,
      2007 quarter was borrowings. Deposits were down due to the seasonal nature
      of
      transaction accounts. Management plans to remain competitive in our deposit
      pricing and anticipates that deposit growth will be the primary source of
      funding for asset growth during the remainder of the current fiscal year. As
      interest rates have decreased, deposit balances in savings and money market
      accounts have decreased as customers have transferred funds to time deposits
      or
      equities markets. Management is cognizant of the potential for additional
      compression in the Bank’s margin related to the need to acquire funds and the
      pace of interest rate changes. Management will continue to monitor the level
      of
      deposits and borrowings in relation to the current interest rate
      environment.







Growth
      in
      our loan portfolio so far this fiscal year has exceeded our expectations. While
      growth in the Bank's loan portfolio for the December 31, 2007 quarter was
      primarily in owner-occupied 1-4 family lending and commercial real estate,
      growth for the nine months ended December 31, 2007 has primarily been in
      commercial real estate lending. We anticipate that future loan growth will
      continue to be primarily in commercial real estate. At December 31, 2007, our
      assets totaled $491.3 million, including net loans receivable of $428.9 million,
      compared to total assets of $463.1 million, including net loans receivable
      of
      $399.3 million, at March 31, 2007.  Commercial real estate loans
      totaled $143.1 million or 33.4% and residential real estate loans totaled $121.0
      million or 28.2% of our total loan






12








portfolio
      at December 31, 2007 compared to commercial real estate loans of $119.4 million
      or 29.9% and residential real estate loans of $118.0 million or 30.0% at March
      31, 2007.






At
      December 31, 2007, non-performing assets totaled approximately $3.0 million
      or
      .62% of assets compared to $1.5 million or .32% of assets at March 31, 2007.
      Our
      allowance for loan losses to non-performing loans was 104.9% and to total loans
      was .73% at December 31, 2007. Subsequent to December 31, 2007, the Company
      disposed of one loan in the amount of $1.0 million which was 90 days delinquent
      at December 31, 2007. The Company anticipates recognizing approximately $117,000
      in pre-tax income during the March 31, 2008 quarter as a result of the
      disposition.






During
      our fiscal year 2008,we evaluated the benefits of the increased yields on our
      credit card portfolio with the higher risk and operating costs related to
      maintaining and servicing an unsecured credit card portfolio. We believed that
      offering a credit card product was important to our existing customer base
      and
      for obtaining new customers. As a result of this evaluation, we entered into
      an
      agent-bank relationship with an unaffiliated non-bank pursuant to which our
      customers can obtain credit cards with the Community Bank brand and for which
      we
      earn commissions for new accounts and a percentage of interchange fees, but
      for
      which we incur no liability or credit risk. At the same time, we sold our
      existing credit card portfolio to that unaffiliated organization. During the
      September 30, 2007 quarter, we sold our credit card portfolio with an
      approximate loan balance of $500,000 which resulted in a gain of
      $37,000.







CRITICAL
      ACCOUNTING POLICIES




General




The
      Company's financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America (GAAP). The
      financial information contained within our statements is, to a significant
      extent, financial information that is based on measures of the financial effects
      of transactions and events that have already occurred. A variety of factors
      could affect the ultimate value that is obtained either when earning income,
      recognizing an expense, recovering an asset or relieving a liability. In
      addition, GAAP itself may change from one previously acceptable method to
      another method. Although the economics of our transactions would be the same,
      the timing of events that would impact our transactions could
      change.




Allowance
      for Loan Losses




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




The
      allowance for loan losses is maintained at a level considered by management
      to
      be adequate to absorb future loan losses currently inherent in the loan
      portfolio.  Management's assessment of the adequacy of the allowance
      is based upon type and volume of the loan portfolio, past loan loss experience,
      existing and anticipated economic conditions, and other factors which deserve
      current recognition in estimating future loan losses.  This evaluation
      is inherently subjective as it requires estimates that are susceptible to
      significant revision as more information becomes available. Additions to the
      allowance are charged to operations.  Subsequent recoveries, if any,
      are credited to the allowance.  Loans are charged-off partially or
      wholly at the time management determines collectibility is not
      probable.  Management's assessment of the adequacy of the allowance is
      subject to evaluation and adjustment by the Company's regulators.





The
      allowance consists of specific, general and unallocated
      components.  The specific component relates to loans that are
      classified as doubtful, substandard or special mention.  For such
      loans that are also classified as impaired, an allowance is established when
      the
      discounted cash flows (or collateral value or observable market price) of the
      impaired loan is lower than the carrying value of that loan.  The
      general component covers non-classified loans and is based on historical loss
      experience adjusted for qualitative factors.  An unallocated component
      is maintained to cover uncertainties that could affect management’s estimate of
      probable losses.  The unallocated component of the allowance reflects
      the margin of imprecision inherent in the underlying assumptions used in the
      methodologies for estimating specific and general losses in the
      portfolio.






13





A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Corporation will be unable to collect the scheduled payments
      of principal or interest when due according to the contractual terms of the
      loan
      agreement.  Factors considered by management in determining impairment
      include payment status, collateral value, and the probability of collecting
      scheduled principal and interest payments when due. Loans that experience
      insignificant payment delays and payment shortfalls generally are not classified
      as impaired.  Management determines the significance of payment delays
      and payment shortfalls on a case-by-case basis, taking into consideration all
      of
      the circumstances surrounding the loan and the borrower, including the length
      of
      the delay, the reasons for the delay, the borrower’s prior payment record, and
      the amount of the shortfall in relation to the principal and interest
      owed.  Impairment is measured on a loan-by-loan basis for commercial
      and construction loans by either the present value of expected future cash
      flows
      discounted at the loan’s effective interest rate, the loan’s obtainable market
      price, or the fair value of the collateral if the loan is collateral
      dependent.







Large
      groups of smaller balance homogeneous loans are collectively evaluated for
      impairment.  Accordingly, the Corporation does not separately identify
      individual consumer and residential loans for impairment disclosures, unless
      such loans are the subject of a restructuring agreement.







FINANCIAL
      CONDITION





The
      Company's total assets increased $28.2 million to $491.3 million at December
      31,
      2007 from $463.1 million at March 31, 2007 due to an increase in loans
      receivable of $29.6 million. This increase was funded with increases in both
      borrowings and deposits which increased $15.7 million and $12.0 million,
      respectively at December 31, 2007, from March 31, 2007. Deposits increased
      due
      primarily to customers’ preferences for high interest rate time deposits
      compared to savings and money market accounts. The increase in deposits was
      due
      to an increase in time deposits of $17.7 million and money market accounts
      of
      $600,000 and partially offset by a decrease in non-interest bearing accounts
      of
      $4.5 million, checking accounts of $1.2 million, and savings accounts of
      $600,000. Stockholders’ equity decreased $500,000 to $38.1 million at December
      31, 2007, from $38.6 million at March 31, 2007, due to unrealized losses on
      securities available for sale and by three cash dividend payments, offset by
      earnings for the nine month period ended December 31, 2007.





At
      December 31, 2007, non-performing assets totaled approximately $3.0 million
      or
      .62% of assets compared to $1.5 million or .32% of assets at March 31,
      2007.Non-performing assets
      at
      December 31, 2007 were comprised primarily of loans 90 days or more delinquent
      which totaled $2.7 million. At December 31, 2007, our allowance for loan losses
      to non-performing loans was 104.9% and to total loans was .73%. Based on current
      market values of the properties securing these loans, management anticipates
      no
      significant losses in excess of the allowance for losses previously
      recorded.





As
      of
      December 31, 2007, there were also $2.8 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
      loan categories. These loans are comprised primarily of residential real estate
      loans. No individual loan in this category has a balance that exceeds
      $203,000.





LIQUIDITY
      AND CAPITAL RESOURCES





Our
      principal sources of funds are customer deposits, advances from the Federal
      Home
      Loan Bank of Atlanta, amortization and prepayment of loans and funds provided
      from operations. Management maintains investments in liquid assets based upon
      its assessment of (i) our need for funds, (ii) expected deposit flows, (iii)
      the
      yields available on short-term liquid assets, (iv) the liquidity of our loan
      portfolio and (v) the objectives of our asset/liability management program.
      Management believes that the Bank will continue to have adequate liquidity
      for
      the foreseeable future. Cash flow projections are regularly reviewed and updated
      to assure that adequate liquidity is provided. As of December 31, 2007, the
      Bank’s liquidity ratio (liquid assets as a percentage of net withdrawable
      savings and current borrowings) was 9.9%.




At
      December 31, 2007, we had commitments to purchase or originate $18.4million of loans.
      Certificates of deposit scheduled to mature in one year or less at December
      31,
      2007, totaled $207.5 million. Based on our historical






14








experience,
      management believes that a significant portion of such deposits will remain
      with
      us. Management further believes that loan repayments and other sources of funds
      will be adequate to meet our foreseeable short-term and long-term liquidity
      needs. At December 31, 2007, we did not have brokered or internet time
      deposits.





RESULTS
      OF OPERATIONS





Three
      Months Ended December
      31, 2007 and 2006.





General.  Net
      income for the three months ended December 31, 2007 decreased $118,000 or 11.2%
      to $924,000 from $1,042,000 for the three months ended December 31, 2006. Net
      interest income increased $39,000, and non-interest income increased $77,000
      during the three months ended December 31, 2007 compared to the same period
      in
      2006. Return on equity for the three months ended December 31, 2007 was 9.33%
      compared to 11.51% for the three month period ended December 31, 2006. Return
      on
      assets was 0.76% for quarter ended December 31, 2007 compared to 0.95% for
      the
      same period in the previous fiscal year.





Interest
      Income. Total interest income increased by $595,000 to $8.1 million for the
      three months ended December 31, 2007, from $7.5 million for the three months
      ended December 31, 2006, due to higher average loan balances. offset by lower
      yields. The decrease in yields was due to lower market interest rates generally.
      The average yield earned on interest-earning assets was 6.92% for the three
      months ended December 31, 2007 compared to 7.01% for the three months ended
      December 31, 2006.





Interest
      Expense.  Total interest expense increased by $556,000 to $4.4 million
      for the quarter ended December 31, 2007, from $3.9 million for the quarter
      ended
      December 31, 2006. Interest on deposits increased by $552,000 to $3.2 million
      for the quarter ended December 31, 2007 from $2.7 million for the quarter ended
      December 31, 2006 due to an increase in the average rate paid and higher average
      deposit balances. Interest expense on borrowed money increased by $4,000 to
      $1.2
      million for the quarter ended December 31, 2007 compared to the quarter ended
      December 31, 2006. An increase in the average balance of borrowings from $91.4
      million for the December 31, 2006 quarter to $98.3 million for the December
      31,
      2007, was offset by a decrease in the average rate paid on borrowings from
      5.23%
      to 4.88% for the same periods. The average rate paid on interest-bearing
      liabilities was 3.98% during the three months ended December 31, 2007 compared
      to 3.80% for the three months ended December 31, 2006.





Provision
      for Loan Losses.  The provision for loan losses increased by $2,000 to
      $103,000 for the three months ended December 31, 2007, from $101,000 for the
      three months ended December 31, 2006. The amount of the provision for loan
      losses for the quarter ended December 31, 2007 was based on management’s
      assessment of the inherent risk associated with the increase in our loan
      portfolio and the level of our allowance for loan losses. 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 or cash
      flows has occurred, as a result of which the value of the collateral or cash
      flows 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. At December 31, 2007, management believes
      its allowance for loan losses was adequate to absorb any probable losses
      inherent in the Company’s loan portfolio. 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.





Noninterest
      Income.  Noninterest income increased by $77,000 to $917,000 for the
      three months ended December 31, 2007, from $840,000 for the three months ended
      December 31, 2006 due primarily to an increase in service charges and fees
      on
      transaction accounts. The Bank has established relationships with other
      institutions where the Bank receives fees in return for completed customer
      mortgage loan applications for the institution’s approval and funding. We
      anticipate this relationship will continue to be a source of fee and service
      charge income for the Bank.





Noninterest
      Expense.  Noninterest expense increased by $309,000 to $3.1 million
      for the three months ended December 31, 2007 compared to the same period last
      year. The increase in noninterest expense resulted primarily from higher
      compensation and benefits associated with the addition of three full time
      equivalent employees, primarily in the areas of lending, information technology
      and compliance, as well as the expenses associated with our






15








checking
      account direct marketing campaigns and information technology purchases during
      the quarter.





Taxes.  Taxes
      decreased by $77,000 to $437,000 for the three months ended December 31, 2007,
      from $514,000 for the three months ended December 31, 2006. The effective tax
      rate decreased from 33.0% for the December 31, 2006 quarter to 32.1% for the
      December 31, 2007 quarter.





Nine
      Months Ended December
      31, 2007 and 2006





General.  Net
      income for the nine months ended December 31, 2007 decreased $318,000 or 10.1%
      to $2,830,000 compared to $3,148,000 for the nine months ended December 31,
      2006. The decline was due primarily to an increase in noninterest expense offset
      by an increase in net interest income and noninterest income. Return on equity
      for the nine months ended December 31, 2007 was 9.57% compared to 11.52% for
      the
      nine month period ended December 31, 2006. Return on assets was .79% for nine
      months ended December 31, 2007 compared to .96% for the same period in the
      previous fiscal year.





Interest
      Income.  Total interest income increased by $2.6 million to $24.3
      million for the nine months ended December 31, 2007, from $21.7 million for
      the
      nine months ended December 31, 2006, due to both an increase in the average
      loan
      balances and an increase in the yield on loans during the period. The yield
      on
      loans and securities increased from 6.88% to 7.06% for the same
      periods.





Interest
      Expense.  Total interest expense increased by $2.2 million to $13.0
      million for the nine months ended December 31, 2007, from the nine months ended
      December 31, 2006.  Interest on deposits increased by $2.1 million to
      $9.3 million for the nine months ended December 31, 2007, from $7.2 million
      for
      the same period last year due to both an increase in the average deposit
      balances and the average rate on deposit balances. The rate paid on deposits
      increased from 3.13% for the nine months ended December 31, 2006 to 3.68% for
      the same period in the current fiscal year. Interest expense on borrowed money
      increased to $3.8 million for the nine months ended December 31, 2007 from
      $3.6
      million for the nine months ended December 31, 2006, due to an increase in
      the
      average outstanding balance on borrowings offset by a decrease in the average
      rate on borrowing balances. The average balance on borrowings increased from
      $91.5 million for the nine months ended December 31, 2006 to $98.2 million
      for
      the current nine month period. The average rate paid on borrowings decreased
      from 5.19% for the nine months ended December 31, 2006 to 5.10% for the nine
      month period ended December 31, 2007.





Provision
      for Loan Losses.  The provision for loan losses increased to $445,000
      for the nine months ended December 31, 2007 from $223,000 for the same period
      last year. The increased provision was based on managements’ review of the
      inherent risks associated with the loan portfolio and the level of the allowance
      for loan losses, which included the increase in the commercial real estate
      portfolio and anticipated charge-offs related to certain loans for which we
      have
      established specific reserves.





Noninterest
      Income.  Noninterest income increased to $2.6 million for the nine
      months ended December 31, 2007, from $2.4 million for the nine months ended
      December 31, 2006, due primarily to an increase in fee income related to loan
      and transaction accounts.





Noninterest
      Expenses.  Noninterest expenses increased $844,000 for the nine months
      ended December 31, 2007, compared to the same period last year. The increase
      is
      attributable to compensation and benefits, which increased by $449,000 to $5.5
      million compared to the same period last year. The increases in noninterest
      expenses resulted primarily from higher compensation and benefits associated
      with the addition of three full time equivalent employees, primarily in loan,
      information technology and compliance; expenses related to implementing the
      evaluation and monitoring of internal controls as required by Section 404 of
      the
      Sarbanes-Oxley Act of 2002; direct marketing campaigns and information
      technology purchases.





Taxes.  Taxes
      decreased to $1,355,000 for the nine months ended December 31, 2007, from
      $1,551,000 for the nine months ended December 31, 2006. The effective tax rate
      decreased from 33.0% for the December 31, 2006 period to 32.4% for the same
      period ended December 31, 2007.







16






OFF
      BALANCE SHEET ARRANGEMENTS






There
      has
      not been a significant change in our off balance sheet arrangements from the
      information reported in our annual 10-K for the period ended March 31,
      2007.






CONTRACTUAL
      OBLIGATIONS






There
      has
      not been a significant change in our contractual obligations from the
      information reported in our annual 10-K for the period ended March 31,
      2007.




RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS
      157).  SFAS 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles, and expands
      disclosures about fair value measurements.  SFAS 157 does not require
      any new fair value measurements, but rather, provides enhanced guidance to
      other
      pronouncements that require or permit assets or liabilities to be measured
      at
      fair value.  This Statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007 and interim periods
      within those years.  As of December 1, 2007, the FASB has proposed a
      one-year deferral for the implementation of the Statement for nonfinancial
      assets and nonfinancial liabilities that are recognized or disclosed at fair
      value in the financial statements on a nonrecurring basis.  The
      Company does not expect the implementation of SFAS 157 to have a material impact
      on its consolidated financial statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS
      158).  This Statement requires that employers measure plan assets and
      obligations as of the balance sheet date.  This requirement is
      effective for fiscal years ending after December 15, 2008.  The other
      provisions of SFAS 158 were implemented by the [Company/Bank] as of December
      31,
      2006.  The Company does not expect the implementation of the
      measurement date provisions of SFAS 158 to have a material impact on its
      consolidated financial statements.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159).  This Statement permits entities to choose to measure many
      financial instruments and certain other items at fair value. The objective
      of
      this Statement is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. The fair value option established by this Statement
      permits all entities to choose to measure eligible items at fair value at
      specified election dates. A business entity shall report unrealized gains and
      losses on items for which the fair value option has been elected in earnings
      at
      each subsequent reporting date. The fair value option may be applied instrument
      by instrument and is irrevocable. SFAS 159 is effective as of the beginning
      of
      an entity’s first fiscal year that begins after November 15, 2007, with early
      adoption available in certain circumstances.  The Company does not
      expect the implementation of SFAS 159 to have a material impact on its
      consolidated financial statements.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly
      change the financial accounting and reporting of business combination
      transactions.  SFAS 141(R) establishes principles for how an acquirer
      recognizes and measures the identifiable assets acquired, liabilities assumed,
      and any noncontrolling interest in the acquiree; recognizes and measures the
      goodwill acquired in the business combination or a gain from a bargain purchase;
      and determines what information to disclose to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination.  SFAS 141(R) is effective for acquisition dates on or
      after the beginning of an entity’s first year that begins after December 15,
      2008.  The Company does not expect the implementation of SFAS 141(R)
      to have a material impact on its consolidated financial statements.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
      of ARB No. 51” (SFAS 160).  The Standard will significantly change the
      financial accounting and reporting of noncontrolling (or minority) interests
      in
      consolidated financial statements.  SFAS 160 is effective as of the
      beginning of an entity’s first fiscal year that begins after






17






December
      15, 2008, with early adoption permitted.  The Company does not expect
      the implementation of SFAS 160 to have a material impact on its consolidated
      financial statements.





In
      September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
      Endorsement Split-Dollar Life Insurance Arrangements.”  This consensus
      concludes that for a split-dollar life insurance arrangement within the scope
      of
      this Issue, an employer should recognize a liability for future benefits in
      accordance with SFAS 106 (if, in substance, a postretirement benefit plan
      exists) or APB Opinion No. 12 (if the arrangement is, in substance, an
      individual deferred compensation contract) based on the substantive agreement
      with the employee.  The consensus is effective for fiscal years
      beginning after December 15, 2007, with early application
      permitted.  The Company does not expect the implementation of EITF
      06-4 to have a material impact on its consolidated financial
      statements.





In
      November 2006, the EITF issued “Accounting for Collateral Assignment
      Split-Dollar Life Insurance Arrangements” (EITF 06-10).  In this
      Issue, a consensus was reached that an employer should recognize a liability
      for
      the postretirement benefit related to a collateral assignment split-dollar
      life
      insurance arrangement in accordance with either SFAS 106 or APB Opinion No.
      12,
      as appropriate, if the employer has agreed to maintain a life insurance policy
      during the employee's retirement or provide the employee with a death benefit
      based on the substantive agreement with the employee.  A consensus
      also was reached that an employer should recognize and measure an asset based
      on
      the nature and substance of the collateral assignment split-dollar life
      insurance arrangement.  The consensuses are effective for fiscal years
      beginning after December 15, 2007, including interim periods within those fiscal
      years, with early application permitted.  The Company does not expect
      the implementation of EITF 06-10 to have a material impact on its consolidated
      financial statements.





In
      February 2007, the FASB issued FSP No. FAS 158-1, “Conforming Amendments to the
      Illustrations in FASB Statements No. 87, No. 88 and No. 106 and to the Related
      Staff Implementation Guides.” This FSP provides conforming amendments to the
      illustrations in SFAS 87, 88, and 106 and to related staff implementation guides
      as a result of the issuance of SFAS 158.  The conforming amendments
      made by this FSP are effective as of the effective dates of SFAS
      158.  The unaffected guidance that this FSP codifies into SFAS 87, 88,
      and 106 does not contain new requirements and therefore does not require a
      separate effective date or transition method.  The Company does not
      expect the implementation of FSP No. FAS 158-1 to have a material impact on
      its
      consolidated financial statements.





In
      November 2007, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value
      Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff
      that the expected net future cash flows related to the associated servicing
      of
      the loan should be included in the measurement of all written loan commitments
      that are accounted for at fair value through earnings. SEC registrants are
      expected to apply the views in Question 1 of SAB 109 on a prospective basis
      to
      derivative loan commitments issued or modified in fiscal quarters beginning
      after December 15, 2007.  The Company does not expect the
      implementation of SAB 109 to have a material impact on its consolidated
      financial statements.





In
      December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a
      Simplified Method in Developing Expected Term of Share Options” (SAB
      110).   SAB 110 expresses the current view of the staff that it
      will accept a company’s election to use the simplified method discussed in SAB
      107 for estimating the expected term of “plain vanilla” share options regardless
      of whether the company has sufficient information to make more refined
      estimates. The staff noted that it understands that detailed information about
      employee exercise patterns may not be widely available by December 31,
      2007.  Accordingly, the staff will continue to accept, under certain
      circumstances, the use of the simplified method beyond December 31,
      2007.  The Company does not expect the implementation of SAB 110 to
      have a material impact on its consolidated financial statements.







Disclosure
      Regarding Forward-Looking
      Statements






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






18






sales,
      charge-offs and loan loss
      provisions, growth opportunities, interest rates, acquisition and divestiture
      opportunities, and synergies, efficiencies, cost savings and funding advantages.
      These forward-looking statements are based on currently available competitive,
      financial and economic data and management's views and assumptions regarding
      future events. These forward-looking statements are inherently uncertain, and
      investors must recognize that actual results may differ from those expressed
      or
      implied in the forward-looking statements. Accordingly, Community Financial
      Corporation cautions readers not to place undue reliance on any forward-looking
      statements.






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






·
            the
                strength of the United States
                economy in general and the strength of the local economies in which
                we
                conduct our operations; general economic conditions, either nationally
                or
                regionally, may be less favorable than expected, resulting in, among
                other
                things, a deterioration in the credit quality of our loans and other
                assets;






·
            the
                effects of, and changes in,
                trade, monetary and fiscal policies and laws, including interest
                rate
                policies of the Federal Reserve
                Board;






·
            financial
                market, monetary and
                interest rate fluctuations, particularly the relative relationship
                of
                short-term interest rates to long-term interest
                rates;






·
            the
                timely development of and
                acceptance of new products and services of Community Financial Corporation
                and Community Bank, and the perceived overall value of these products
                and
                services by users, including the features, pricing and quality compared
                to
                competitors' products and
                services;






·
            the
                impact of changes in financial
                services laws and regulations (including laws concerning taxes, accounting
                standards, banking, securities and insurance); legislative or regulatory
                changes may adversely affect the business in which we are
                engaged;






·
            the
                impact of technological
                changes;






·
            changes
                in consumer spending and
                saving habits; and






·
            our
                success at managing the risks
                involved in the foregoing.







ITEM
      3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK





There
      have been no material changes in market risk since March 31, 2007 year end.
      Market risk is discussed as part of management’s discussion and analysis under
      asset/liability management in the Company’s annual report for March 31,
      2007.





ITEM
      4.  CONTROLS AND PROCEDURES







An
      evaluation of our disclosure controls
      and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act
      of
      1934 (the "Act")) as of December 31, 2007, was carried out under the supervision
      and with the participation of the Company's Chief Executive Officer, Chief
      Financial Officer and several other members of the Company's senior management.
      The Company's Chief Executive Officer and Chief Financial Officer concluded
      that
      the Company's disclosure controls and procedures in effect were effective in
      ensuring that the information required to be disclosed by the Company in the
      reports it files or submits under the Act is: (i) accumulated and communicated
      to the Company's management (including the Chief Executive Officer and Chief
      Financial Officer) in a timely manner and (ii) recorded, processed, summarized
      and reported within the time periods specified in the SEC's rules and forms.
      In
      addition, there have been no changes in our internal control over financial
      reporting (as defined in Rule 13a-15(f) of






19






the
      Act) that occurred during the
      quarter ended December 31, 2007, that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial
      reporting.




The
      Company does not expect that its disclosure controls and procedures and internal
      control over financial reporting will prevent all error and all fraud. A control
      procedure, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control procedure
      are met. Because of the inherent limitations in all control procedures, no
      evaluation of controls can provide absolute assurance that all control issues
      and instances of fraud, if any, within the Company have been detected. These
      inherent limitations include the realities that judgments in decision-making
      can
      be faulty, and that breakdowns can occur because of simple error or mistake.
      Additionally, controls may be circumvented by the individual acts of some
      persons, by collusion of two or more people, or by override of the control.
      The
      design of any control procedure also is based in part upon certain assumptions
      about the likelihood of future events, and there can be no assurance that any
      design will succeed in achieving its stated goals under all potential future
      conditions; over time, controls may become inadequate because of changes in
      conditions, or the degree of compliance with the policies or procedures may
      deteriorate. Because of the inherent limitations in a cost-effective control
      procedure, misstatements due to error or fraud may occur and not be
      detected.





Section
      404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and
      annually report on their systems of internal control over financial reporting.
      In addition, our independent accountants must report on management's evaluation.
      We are in the process of evaluating, documenting and testing our system of
      internal control over financial reporting to provide the basis for our report
      that will, for the first time, be a required part of our annual report on Form
      10-K for the fiscal year ending March 31, 2008. Due to the ongoing evaluation
      and testing of our internal controls, there can be no assurance that if any
      control deficiencies are identified they will be remediated before the end
      of
      the 2008 fiscal year, or that there will not be significant deficiencies or
      material weaknesses that would be required to be reported.


20


PART
      II.  OTHER INFORMATION





Item
      1.  Legal Proceedings





Not
      Applicable.





Item
      1A. Risk Factors





No
      material changes from risk factors
      as previously disclosed in Form    10-K.





Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds





Not
      Applicable.





Item
      3.  Defaults Upon Senior Securities





Not
      Applicable.





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





Not
      Applicable.





Item
      5.  Other Information




Not
      Applicable.





Item
      6.  Exhibits





See
      Exhibit Index


21





SIGNATURES





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





COMMUNITY
                FINANCIAL CORPORATIONDate:
                February 12, 2008
            By:
            /s/
                R. Jerry
                GilesR.
                Jerry Giles
              Chief
                Financial Officer
              (Duly
                Authorized Officer)











22





EXHIBIT
      INDEX




Exhibit
                Number
            
            Document3.1
            
            Amended
                and Restated Articles of Incorporation, filed on July 5, 1996 as
                an
                exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A
                (SEC File No. 000-18265), are incorporated herein by
                reference.3.2
            
            Bylaws,
                as amended and restated, filed on December 20, 2007 as Exhibit 3.2
                to the
                Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is
                incorporated herein by reference.4
            
            Registrant’s
                Specimen Common Stock Certificate, filed on June 29, 1999 as Exhibit
                4 to
                the Annual Report on Form 10-KSB (SEC File No. 000-18265) for the
                fiscal
                year ended March 31, 1999, is incorporated herein by
                reference.10.1
            
            Amended
                and Restated Employment Agreement by and between Community Bank and
                P.
                Douglas Richard, filed on May 5, 2006, as Exhibit 99.2 to the Registrant’s
                Current Report on Form 8-K (SEC File No. 000-18265), is incorporated
                herein by reference.10.2
            
            Form
                of Change in Control Agreement by and between Community Financial
                Corporation and each of P. Douglas Richard and Chris P. Kyriakides,
                filed
                on May 5, 2006 as Exhibit 99.4 to the Registrant’s Current Report on Form
                8-K (SEC File No. 000-18265), is incorporated herein by
                reference.10.3
            
            Registrant’s
                1996 Incentive Plan, filed on July 5, 1996 as an exhibit to the
                Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No.
                000-18265), is incorporated herein by reference.10.4
            
            Amended
                and Restated Employment Agreement by and between Community Bank and
                Chris
                P. Kyriakides, filed on May 5, 2006 as Exhibit 99.3 to the Registrant’s
                Current Report on Form 8-K (SEC File No. 000-18265), is incorporated
                herein by reference.10.5
            
            Form
                of Change in Control Agreement by and between Community Bank and
                each of
                R. Jerry Giles, Norman C. Smiley, Benny N. Werner, filed on May 5,
                2006 as
                Exhibit 99.5 to the Registrant’s Current Report on Form 8-K (SEC File No.
                000-18265), is incorporated herein by reference.10.6
            
            Retirement
                Agreements by and between Community Bank and Non-Employee Directors
                filed
                on June 29, 2004 as an exhibit to the Registrant’s Annual Report on Form
                10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31,
                2004,
                and incorporated here by reference.10.7
            
            Form
                of First Amendment to the Retirement Agreements by and between Community
                Bank and Non-Employee Directors, filed on June 29, 2005 as an exhibit
                to
                the Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for
                the fiscal year ended March 31, 2005, is incorporated here by
                reference.10.8
            
            Salary
                Continuance Agreements by and between Community Bank and Officers
                Richard,
                Kyriakides, Giles, Smiley and Werner filed on June 29, 2004 as an
                exhibit
                to the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-18265)
                for the fiscal year ended March 31, 2004, and incorporated here by
                reference.10.9
            
            Form
                of Director Deferred Fee Agreement, as amended, filed on June 29,
                2005 as
                an exhibit to the Registrant’s Annual Report on Form 10-K (SEC File No.
                000-18265) for the fiscal year ended March 31, 2005, is incorporated
                here
                by reference.   
     10.10
            
            Registrant’s
                2003 Stock Option and Incentive Plan, filed on September27, 2003
                as an
                exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A
                (SEC File No. 000-18265), is incorporated herein by
                reference.10.11
            
            Form
                of Incentive Stock Option Agreement and Non-Qualified Stock Option
                Agreement for Registrant’s 2003 Stock Option and Incentive Plan, filed on
                August 12, 2005 as an exhibit to the Registrant’s Quarterly Report on Form
                10-Q (SEC File No. 000-18265) for the quarter ended June 30, 2005,
                are
                incorporated herein by reference.11
            
            Statement
                re computation of per share earnings (see Note 12 of the Notes to
                Consolidated Financial Statements included in Item 8 of this Annual
                Report
                on Form 10-K).31.1
            
            Rule
                13(a)-14(a) Certification (Chief Executive Officer)31.2
            
            Rule
                13(a)-14(a) Certification (Chief Financial Officer)32
            
            Section
                1350 Certifications