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    June 30,
2008.





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      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


(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





Number of
shares of Common Stock, par value $.01 per share, outstanding at the close of
business on July 31, 2008:4,349,958.








COMMUNITY
FINANCIAL CORPORATION








INDEX








PART
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Consolidated
      Financial StatementsConsolidated
      Balance Sheets at June 30, 2008 (unaudited)
              and
      March 31, 2008
            3Consolidated
      Statements of Income for the
              Three
      Months Ended June 30, 2008 and 2007
              (unaudited)
            4Consolidated
      Statements of Cash Flows for the
              Three
      Months Ended June 30, 2008 and 2007(Unaudited)
            5Notes
      to Unaudited Interim Consolidated
              Financial
      Statements
            6Item
      2.
            Management's
      Discussion and Analysis of Financial Condition
              and
      Results of Operations
            11Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            17Item
      4T.
            Controls
      and Procedures
            17PART
      II.
            OTHER
      INFORMATION
            19Signature
      Page
            
            20Exhibit
      Index
            
            21











Part I.
Financial Information


Item 1.
Financial Statements





COMMUNITY
      FINANCIAL CORPORATIONCONSOLIDATED
      BALANCE SHEETSJune
      30,
            
            
            March
      31,2008
            
            
            2008(Unaudited)ASSETSCash
      (including interest-bearing deposits of
              approximately
      $1,698,218 and $12,762,079)
            
            $
            7,777,323
            
            
            $
            15,998,041SecuritiesHeld
      to maturity
            
            
            3,540,061
            
            
            
            2,940,217Available
      for sale, at fair value
            
            
            8,669,772
            
            
            
            9,562,410Restricted
      investment in Federal
              Home
      Loan Bank stock, at cost
            
            
            5,075,800
            
            
            
            5,210,800Loans
      receivable, net of allowance for loan
              losses
      of $3,314,231 and $3,214,771
            
            
            449,029,521
            
            
            
            437,173,797Real
      estate owned and repossessed assets
            
            
            729,841
            
            
            
            592,609Property
      and equipment, net
            
            
            8,019,287
            
            
            
            7,923,481Accrued
      interest receivableLoans
            
            
            1,973,381
            
            
            
            1,953,550Investments
            
            
            97,824
            
            
            
            125,523Prepaid
      expenses and other assets
            
            
            10,039,181
            
            
            
            9,765,345Total
      Assets
            
            $
            494,951,991
            
            
            $
            491,245,773LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
            
            $
            356,651,796
            
            
            $
            350,730,834Borrowings
            
            
            94,000,000
            
            
            
            96,000,000Securities
      sold under agreement to repurchase
            
            
            2,609,071
            
            
            
            2,834,412Advance
      payments by borrowers for
              taxes
      and insurance
            
            
            78,512
            
            
            
            150,545Other
      liabilities
            
            
            2,708,518
            
            
            
            2,825,279Total
      Liabilities
            
            
            456,047,897
            
            
            
            452,541,070Stockholders’
      EquityPreferred
      stock $.01 par value,authorized
      3,000,000 shares,
            
            
            ---
            
            
            
            ---none
      outstandingCommon
      stock, $0.01 par value,authorized
      10,000,000 shares,4,346,358
      and 4,335,958
              shares
      outstanding
            
            
            43,464
            
            
            
            43,360Additional
      paid in capital
            
            
            5,460,306
            
            
            
            5,391,704Retained
      earnings
            
            
            35,675,651
            
            
            
            34,992,515Accumulated
      other comprehensive
              (loss)
            
            
            (2,275,327
            )
            
            
            (1,722,876
            )Total
      Stockholders’ Equity
            
            
            38,904,094
            
            
            
            38,704,703Total
      Liabilities and Stockholders’ Equity
            
            $
            494,951,991
            
            
            $
            491,245,773








See
accompanying notes to unaudited interim consolidated financial
statements.















COMMUNITY
      FINANCIAL CORPORATIONCONSOLIDATED
      STATEMENTS OF INCOME





Three
      Months Ended
              June 302008
            
            
            2007(Unaudited)
            
            
            (Unaudited)INTEREST
      INCOMELoans
            
            $
            7,153,169
            
            
            $
            7,522,956Investment
      securities
            
            
            34,833
            
            
            
            240,178Other
            
            
            291,790
            
            
            
            294,479Total
      Interest Income
            
            
            7,479,792
            
            
            
            8,057,613INTEREST
      EXPENSEDeposits
            
            
            2,876,332
            
            
            
            2,946,439Borrowed
      money
            
            
            596,622
            
            
            
            1,291,300Total
      interest expense
            
            
            3,472,954
            
            
            
            4,237,739NET
      INTEREST INCOME
            
            
            4,006,838
            
            
            
            3,819,874PROVISION
      FOR LOAN LOSSES
            
            
            151,998
            
            
            
            135,476NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            3,854,840
            
            
            
            3,684,398NONINTEREST
      INCOMEService
      charges, fees and commissions
            
            
            745,215
            
            
            
            737,132Other
            
            
            94,778
            
            
            
            91,905Total
      noninterest income
            
            
            839,993
            
            
            
            829,037NONINTEREST
      EXPENSECompensation
      & benefits
            
            
            1,945,252
            
            
            
            1,817,950Occupancy
            
            
            342,531
            
            
            
            355,917Data
      processing
            
            
            310,639
            
            
            
            334,192Federal
      insurance premium
            
            
            70,737
            
            
            
            9,747Advertising
            
            
            94,323
            
            
            
            60,025Other
            
            
            483,329
            
            
            
            401,808Total
      noninterest expense
            
            
            3,246,811
            
            
            
            2,979,639INCOME
      BEFORE TAXES
            
            
            1,448,022
            
            
            
            1,533,796INCOME
      TAXES
            
            
            482,606
            
            
            
            504,873NET
      INCOME
            
            $
            965,416
            
            
            $
            1,028,923BASIC
      EARNINGS PER SHARE
            
            $
            0.22
            
            
            $
            0.24DILUTED
      EARNINGS PER SHARE
            
            $
            0.22
            
            
            $
            0.23DIVIDENDS
      PER SHARE
            
            $
            0.065
            
            
            $
            0.065





See
accompanying notes to unaudited interim consolidated financial
statements.

















COMMUNITY
      FINANCIAL CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWSThree
      Months EndedJune
      302008
            
            
            2007(Unaudited)
            
            
            (Unaudited)OPERATING
      ACTIVITIESNet
      income
            
            $
            965,416
            
            
            $
            1,028,923Adjustments
      to reconcile net income tonet
      cash provided by operating activitiesProvision
      for loan losses
            
            
            151,998
            
            
            
            135,476Depreciation
            
            
            139,322
            
            
            
            150,611Amortization
      of premium and accretionof
      discount on securities, net
            
            
            156
            
            
            
            7,386Increase
      (decrease) in net deferred loan fees
            
            
            (
      28,046
            )
            
            
            29,714Increase
      (decrease) in deferred income taxes
            
            
            50,085
            
            
            
            (41,071
            )(Increase)
      in other assets
            
            
            (273,836
            )
            
            
            (527,251
            )(Decrease)
      increase in other liabilities
            
            
            (116,761
            )
            
            
            298,109Net
      cash provided by operatingActivities
            
            
            888,334
            
            
            
            1,081,897INVESTING
      ACTIVITIESProceeds
      from maturities of held to maturity securities
            
            
            1,000,000
            
            
            
            (1,600,000
            )Purchase
      of held to maturity securities
            
            
            ---
            
            
            
            ---Net
      increase in loans
            
            
            (11,751,955
            )
            
            
            (11,044,265
            )Purchases
      of property and equipment
            
            
            (235,129
            )
            
            
            (42,705
            )Redemption
      (purchase) of FHLB stock
            
            
            135,000
            
            
            
            (675,000
            )Decrease
      (increase) in repossessed assets and real estate owned
            
            
            (137,232
            )
            
            
            66,355Net
      cash absorbed by investing activities
            
            
            (12,589,316
            )
            
            
            (11,695,615
            )FINANCING
      ACTIVITIESDividends
      paid
            
            
            (282,279
            )
            
            
            (279,223
            )Net
      increase in deposits
            
            
            5,920,962
            
            
            
            3,265,355(Repayment)
      proceeds from advances and other borrowedMoney
            
            
            (2,225,341
            )
            
            
            12,423,325Proceeds
      from issuance of common stock
            
            
            66,922
            
            
            
            - - -Net
      cash provided by financing activities
            
            
            3,480,264
            
            
            
            15,409,457(DECREASE)
      INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            (8,220,718
            )
            
            
            4,795,739CASH
      AND CASH EQUIVALENTS – beginning of period
            
            
            15,998,041
            
            
            
            3,625,796CASH
      AND CASH EQUIVALENTS – end of period
            
            $
            7,777,323
            
            
            $
            8,421,535See
      accompanying notes to unaudited interim consolidated financial
      statements














COMMUNITY
FINANCIAL CORPORATION


NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





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 months ended June 30, 2008 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2009.








NOTE
2. - 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 month period ended June 30, 2008
and no stock-based compensation expense recognized as no options were granted or
vested.







The
following summarizes the stock option activity for the three months ended June
30, 2008:





Weighted
            
            IntrinsicWeighted
            
            
            Average
            
            Value
      ofAverage
            
            
            Remaining
            
            UnexercisedExercise
            
            
            Contractual
            
            In-the-MoneyShares
            
            
            Price
            
            
            Term
            
            OptionsOptions
      outstanding, March 31, 2008
            
            
            429,000
            
            
            $
            8.28Granted
            
            
            ---
            
            
            
            ---Exercised
            
            
            (10,400
            )
            
            $
            6.43Forfeited
            
            
            (13,000
            )
            
            $
            7.82Options
      outstanding, June 30, 2008
            
            
            405,600
            
            
            $
            8.35
            
            
            
            4.6Options
      exercisable, June 30, 2008
            
            
            405,600
            
            
            $
            8.35
            
            
            
            4.6
            
            $352,810




The total
intrinsic value of in-the-money options exercised during the three months ended
June 30, 2008 was $21,052.





NOTE
3. - 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 EndedJune 30, 2008
            
            
            June 30, 2007Weighted
      Average
            
            
            Per
      Share
            
            
            
            
            
            Weighted
      Average
            
            
            Per
      ShareIncome
            
            
            Shares
            
            
            Amount
            
            
            Income
            
            
            Shares
            
            
            AmountBasic
      EPSIncome
      available to common stockholders
            
            $
            965,416
            
            
            
            4,342,617
            
            
            $
            0.22
            
            
            $
            1,028,923
            
            
            
            4,295,732
            
            
            $
            0.24Effect
      of Dilutive SecuritiesOptions
            
            
            ---
            
            
            
            52,009
            
            
            
            
            
            
            
            ---
            
            
            
            142,219Diluted
      EPSIncome
      available to common stockholders
            
            $
            965,416
            
            
            
            4,394,626
            
            
            $
            0.22
            
            
            $
            1,028,923
            
            
            
            4,437,951
            
            
            $
            0.24







During
the quarter ended June 30, 2008, stock options representing 243,000 shares were
not included in the calculation of earnings per share because they would have
been anti-dilutive. During the quarter ended June 30, 2007, no stock options
were excluded in the calculation of earnings per share because they would have
been anti-dilutive.














NOTE
4. - STOCKHOLDERS' EQUITY





The
following table presents the Bank's regulatory capital levels at June 30,
2008:





Amount
              Required
            Percent
              Required
            Actual
              Amount
            Actual
              Percent
            Excess
              AmountTangible
      Capital
            $
      7,532,000
            1.50%
            $40,838,000
            8.13%
            $33,306,000Core
      Capital
            20,085,000
            4.00
            40,838,000
            8.13
            20,753,000Risk-based
      Capital
            34,056,000
            8.00
            44,121,000
            10.36
            10,065,000





The
Company’s primary source of funds for the payment of dividends to its
stockholders is 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.





NOTE
5. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS





Total
interest paid for the three months ended June 30, 2008 and 2007 was $ 3,952,581
and $4,482,058, respectively. Total income taxes paid for the three months ended
June 30, 2008 and 2007 was $38,564 and $97,000.





NOTE
6. - 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 June 30,
2008 and 2007:





Three
      months Ended June 30Three months Ended
      June 30
            2008
            
            2007Net
      Income
            $965,416
            
            $1,028,923Other
      comprehensive (loss), net of tax:Unrealized
      holding (losses) on available for sale securities
              arising
      during the period
            (552,451)
            
            (432,707)Total
      comprehensive income
            $  412,965
            
            $596,216











NOTE
7. – 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 EndedJune
      302008
            
            
            2007Service
      cost
            
            $
            87,669
            
            
            $
            77,336Interest
      cost
            
            
            53,010
            
            
            
            44,055Expected
      return on plan assets
            
            
            (64,175
            )
            
            
            (43,935
            )Recognized
      net actuarial loss
            
            
            4,888
            
            
            
            6,608$
            81,392
            
            
            $
            84,064







As
disclosed in the Company’s Form 10-K for the year ended March 31, 2008, a
contribution of $492,000 to its pension plan is expected during the current
fiscal year. As of June 30, 2008, no contributions have been made. The Company
anticipates making all required contributions prior to March 31,
2009.








NOTE
8. – SECURITIES





Information
pertaining to securities with gross unrealized losses at June 30, 2008,
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
            
            $
            9,425
            
            
            $
            2,090,575
            
            
            $
            -
            
            
            $
            -State and municipal
      obligations
            
            
            -
            
            
            
            -
            
            
            
            488
            
            
            
            199,5509,425
            
            
            
            2,090,575
            
            
            
            488
            
            
            
            199,550Available
      for SaleEquity securities
            
            
            -
            
            
            
            -
            
            
            
            3,857,947
            
            
            
            7,836,300$
            9,425
            
            
            $
            2,090,575
            
            
            $
            3,858,435
            
            
            $
            8,035,850





At June
30, 2008, 6 debt securities had unrealized losses with aggregate depreciation of
0.43% 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 June
30, 2008, four marketable equity securities had unrealized losses with aggregate
depreciation of 32.99% 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 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.





The
recent declines in the value of the Freddie Mac and Fannie Mae equities is
primarily related to reduced confidence by investors and consumers in the
economy as foreclosures and delinquencies have increased in general. Exaggerated
media coverage of these events has unnecessarily heightened concerns in regard
to the financial stability of many financial institutions, including Freddie Mac
and Fannie Mae. These are government sponsored organizations and both have
asserted that they have adequate capital and liquidity. Regulators for these
organizations and the Secretary of the Treasury have both publicly agreed with
this contention and have expressed confidence in the viability of these
entities. The U.S. Treasury has confirmed its support of Freddie Mac and Fannie
Mae and recent legislation has been enacted to strengthen the regulatory process
and provide additional sources of capital and liquidity to Freddie Mac and
Fannie Mae. Both organizations are current on their obligations, including
dividend payments. Considering the factors affecting the current valuation of
these securities, management does not consider these securities to be other than
temporarily impaired.





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.







NOTE 9 - FAIR VALUE
MEASUREMENTS




SFAS No. 157,Fair Value
Measurements, defines fair
value, establishes a framework for measuring fair value, establishes a
three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date. The three levels are defined as
follow:


•
            
            Level 1
            
            inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active markets.•
            
            Level 2
            
            inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      asset or liability, either directly or indirectly, for substantially the
      full term of the financial instrument.•
            
            Level 3
            
            inputs to the valuation
      methodology are unobservable and significant to the fair
      value
              measurement.




Following is a description of the
valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to the valuation
hierarchy:




Securities




Where quoted prices are available in an
active market, securities are classified within level 1 of the valuation
hierarchy. Level 1 securities would include highly liquid government bonds,
mortgage products and exchange traded equities. If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics, or discounted cash flow. Level 2
securities would include U.S.















agency securities, mortgage-backed
agency securities, obligations of states and political subdivisions and certain
corporate, asset backed and other securities.In certain cases where there is limited
activity or less transparency around inputs to the valuation, securities are
classified within level 3 of the valuation hierarchy.Currently, all of the Company’s
securities are considered to be Level 2 securities.




Impaired
loans




SFAS No. 157 applies to loans measured
for impairment using the practical expedients permitted by SFAS No. 114,Accounting by
Creditors for Impairment of a Loan, including impaired loans measured at
an observable market price (if available), or at the fair value of the loan’s
collateral (if the loan is collateral dependent). Fair value of the loan’s
collateral, when the loan is dependent on collateral, is determined by
appraisals or independent valuation which is then adjusted for the cost related
to liquidation of the collateral.




Other real
estate owned




Certain assets such as other real estate
owned (OREO) are measured at fair value less cost to sell. We believe that the
fair value component in its valuation follows the provisions of SFAS No.
157.





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 three months ended June 30, 2008 decreased $64,000 or 6.2% to
$965,000 compared to $1,029,000 for the three months ended June 30,
2007.  Net income for the quarter decreased due primarily to an
increase in noninterest expense resulting from higher expenses associated with
compensation.





Net
interest income for the quarter ended June 30, 2008 increased $187,000, or 4.9%,
to $4.0 million compared to the quarter ended June 30, 2007. 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 ended June 30, 2008 was the growth in
interest-earning assets, primarily loans, and lower rates on interest-bearing
liabilities. We purchased $1.6 million in investment securities during the three
months ended June 30, 2008 and anticipate limited securities 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 $309.9 million in adjustable rate loans or
69% 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 June 30, 2008
quarter was deposits and cash. Deposits were up 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. During
the June 30, 2008 quarter, we experienced increased competition for time
deposits primarily from financial institutions which reported reduced capital as
the result of losses related to subprime lending. These institutions’ sources of
funding have been reduced due to their reduced capital positions. 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. Growth
in the Bank's loan portfolio for the June 30, 2008 quarter was primarily in
construction and commercial business loans. We anticipate that future loan
growth will continue to be primarily in commercial real estate.  At
June 30, 2008, our assets totaled $495.0 million, including net loans receivable
of $449.0 million, compared to total assets of $491.2 million, including net
loans receivable of $437.2 million, at March 31, 2008.  Commercial
business loans totaled $48.1 million or 10.3% and construction loans totaled
$58.8 million or 12.6% of our total loan portfolio at June 30, 2008 compared to
commercial business loans of $41.6 million or 9.2% and construction loans of
$53.9 million or 11.9% at March 31, 2008.






At June
30, 2008, non-performing assets totaled approximately $1.1 million or .23% of
assets compared to $1.6 million or .33% of assets at March 31, 2008. Our
allowance for loan losses to non-performing assets was 289.4% and to total loans
was .73% at June 30, 2008.















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.





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 $3.8 million to $495.0 million at June 30, 2008
from $491.2 million at March 31, 2008 due to an increase in loans receivable of
$11.9 million. This increase was funded with an increase in deposits of $5.9
million and a decrease in cash of $8.2 million at June 30, 2008 from March 31,
2008. The increase in deposits was due to an increase in non-interest bearing
accounts of $2.9 million, savings accounts of $1.2 million, money market
accounts of $1.4 million, and time deposits of $642,000, partially offset by a
decrease in transaction accounts of $302,000. Stockholders’ equity increased
$200,000 to $38.9 million at June 30, 2008, from $38.7 million at March 31,
2008, due to earnings for the quarter, offset by unrealized losses on securities
available for sale and a cash dividend payment.





At June
30, 2008, non-performing assets totaled approximately $1.1 million or .23% of
assets compared to $1.6 million or .33% of assets at March 31, 2008.Non-performing assets at
June 30, 2008 were comprised primarily of repossessed assets which totaled
$700,000. At June 30, 2008, our allowance for loan losses to non-performing
assets was 289.4% and to total loans was .73% compared to 313.3% and .73%,
respectively at March 31, 2008. At June 30, 2008 delinquent loans to total loans
was .92% compared to .86% at March 31, 2008. 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
June 30, 2008, there were also $3.6 million in loans with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have doubts as to the
ability of the borrowers to comply with present loan repayment terms and which
may result in the future inclusion of such items in the non-performing loan
categories. These loans are comprised primarily of residential real estate
loans. No individual loan in this category has a balance that exceeds
$207,000.





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  June 30, 2008,
the Bank’s liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 4.0%.




At June
30, 2008 we had commitments to purchase or originate $20.4million of loans.
Certificates of deposit scheduled to mature in one year or less at June 30,
2008, totaled $211.4 million. Based on our historical experience, management
believes that a significant portion of such deposits will remain with us.
Management further believes that loan repayments and other sources of funds will
be adequate to meet our foreseeable short-term and long-term liquidity needs. At
June 30, 2008, we did not have brokered or internet time deposits.








RESULTS
OF OPERATIONS





Three Months Ended June 30,
2008 and 2007.





General.  Net
income for the three months ended June 30, 2008 decreased $64,000 or 6.2% to
$965,000 from $1,029,000 for the three months ended June 30, 2007. Net interest
income increased $187,000, and non-interest income increased $11,000 during the
three months ended June 30, 2008 compared to the same period in 2007. Return on
equity for the three months ended June 30, 2008 was 9.86% compared to 10.49% for
the three month period ended June 30, 2007. Return on assets was 0.80% for
quarter ended June 30, 2008 compared to 0.87% for the same period in the
previous fiscal year.














Interest
Income. Total interest income decreased by $578,000 to $7.5 million for the
three months ended June 30, 2008, from $8.1 million for the three months ended
June, 2007, due to lower yields partially offset by higher average loan
balances. The decrease in yields was due to lower market interest rates
generally. The average yield earned on interest-earning assets was 6.45% for the
three months ended June 30, 2008 compared to 7.11% for the three months ended
June 30, 2007.





Interest
Expense.  Total interest expense decreased by $765,000 to $3.5 million
for the quarter ended June 30, 2008, from $4.2 million for the quarter ended
June 30, 2007. Interest on deposits decreased by $70,000 to $2.9 million for the
quarter ended June 30, 2008 from $2.9 million for the quarter ended June 30,
2007 due to a decrease in the average rate paid partially offset by higher
average deposit balances. Interest expense on borrowed money decreased by
$695,000 to $597,000 for the quarter ended June 30, 2008 compared to the quarter
ended June 30, 2007. A decrease in the average balance of borrowings from $99.0
million for the June 30, 2007 quarter to $89.6 million for the June 30, 2008
quarter, and a decrease in the average rate paid on borrowings from 5.22% to
2.66% for the same periods accounted for the decrease. The average rate paid on
interest-bearing liabilities was 3.15% during the three months ended June 30,
2008 compared to 3.96% for the three months ended June 30, 2007.





Provision
for Loan Losses.  The provision for loan losses increased by $17,000
to $152,000 for the three months ended June 30, 2008, from $135,000 for the
three months ended June 30, 2007. The amount of the provision for loan losses
for the quarter ended June 30, 2008 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 June 30, 2008, 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 $11,000 to $840,000 for the
three months ended June 30, 2008, from $829,000 for the three months ended June
30, 2007 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 $267,000 to $3.2 million
for the three months ended June 30, 2008 compared to the same period last year.
The increase in noninterest expense resulted primarily from compensation related
expenses due generally to merit increases.





Taxes.  Taxes
decreased by $22,000 to $483,000 for the three months ended June 30, 2008, from
$505,000 for the three months ended June 30, 2007. The effective tax rate
increased from 32.9% for the June 30, 2007 quarter to 33.3% for the June 30,
2008 quarter.







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,
2008.









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,
2008.







RECENT
ACCOUNTING PRONOUNCEMENTS





In
December 2007, the Financial Accounting Standards Board (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 the criteria for how an acquiring entity in a business
combination recognizes the assets acquired and liabilities assumed in the
transaction; establishes the acquisition date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination.  Acquisition related costs including finder's fees,
advisory, legal, accounting valuation and other professional and consulting fees
are required to be expensed as incurred.  SFAS 141(R) is effective for
fiscal years beginning after December 15, 2008 and early implementation is not
permitted. The Company does not expect the implementation to have a material
impact on it’s consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS
160).  SFAS 160 requires the Company to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This Statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited.   The
Company does not expect the implementation of SFAS 160 to have a material impact
on its consolidated financial statements.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133”(SFAS
161).  SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities.  Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows.  SFAS 161 is effective
for fiscal years and interim periods beginning after November 15, 2008, with
early application permitted. The Company does not expect the implementation of
SFAS 161 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 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, 2008 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,
2008.





ITEM
4T.  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 ofJune 30, 2008, 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 the Act) that occurred during the
quarter endedJune
30, 2008, that have materially affected, or
arereasonably 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.








PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





Not Applicable.





Item
1A.  Risk Factors





Not required for smaller reporting
company





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








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:
      August 13, 2008
            By:
            /s/ R. Jerry
      GilesR.
      Jerry Giles
              Chief
      Financial Officer
              (Duly
      Authorized Officer)

















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 Financial
      Corporation and each of R. Jerry Giles and 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 September 27, 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.10.12
            
            Employment
      Agreement by and between Community Bank and Norman C. Smiley, III, filed
      on June 16, 2008 as Exhibit 10.1 to the Registrant’s Current Report on
      Form 8-K (SEC File No. 000-18265), is incorporated herein by
      reference.10.13
            
            Change
      in Control Agreement by and between Community Financial Corporation and
      Norman C. Smiley, III, filed on June 16, 2008 as an exhibit to the
      Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is
      incorporated herein by reference.10.14
            
            Form
      of Change in Control Agreement by and between Community Financial
      Corporation and Lyle Moffett, filed on July 1, 2008 as Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is
      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