<PAGE>



                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

          (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, 1998

                                       OR

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

                        For the transition period from to

                         Commission file number 0-18261

                         COMMUNITY FINANCIAL CORPORATION
        (Exact name of small business issuer as specified in its charter)

               VIRGINIA                             54-1532044
     (State of other jurisdiction of            (I.R.S. Employer
      incorporation or organization)            Identification No.)

                   38 North Central Ave., Staunton, Va. 24401
                (Address of principal executive offices zip code)

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


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act of 1934  during the  preceding  12
months (or for such  shorter  period  that the issuer was  required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.

              Yes    X               No

Number of shares of Common Stock, par value per share, $.01,  outstanding at the
close of business on February 8, 1999: 2,572,146.

Transitional Small Business Disclosure Format (Check one)

              Yes                    No    X




<PAGE>

                          COMMUNITY FINANCIAL CORPORATION


                                       INDEX



PART I.  FINANCIAL INFORMATION                                        PAGE

Item 1.  Financial Statements


         Consolidated Statements of Financial
         Condition at December 31, 1998 (unaudited)
         and March 31, 1998.............................................1

         Consolidated  Statements  of Income for the Three and Nine
         months Ended December 31, 1998 and 1997 (unaudited)............2

         Consolidated  Statements  of Cash  Flows  for  the  Nine
         Months Ended December 31, 1998 and 1997 (unaudited)............3

         Notes to Unaudited Interim Consolidated
         Financial Statements...........................................4

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations............................5


PART II. OTHER INFORMATION ............................................11

         Signature Page................................................12

         Exhibit Index.................................................13

















<PAGE>



                         COMMUNITY FINANCIAL CORPORATION
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                                         December 31,     March 31,
                                             1998           1998
                                         ------------   -------------
                                                  Unaudited)
<S>                                    <C>            <C>
ASSETS
Cash (including interest bearing
  deposits of approximately
  $6,980,231 and $2,866,000)           $ 12,428,964   $  7,266,145
Securities
  Held to maturity                        4,405,678      3,184,241
  Available for sale                      4,434,589      3,905,055
Investment in Federal Home Loan
  Bank stock, at cost                     1,600,000      1,600,000
Loans receivable, net                   161,151,103    162,471,219
Real estate owned                           226,310        303,365
Property and equipment, net               5,912,766      3,634,223
Accrued interest receivable
  Loans                                   1,008,420        945,365
  Investments                               133,554         86,424
Prepaid expenses and other assets         1,207,189        498,137

                                       $192,508,573   $183,894,174

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits                               $148,140,938   $138,164,173
Advances from Federal Home Loan
  Bank                                   15,000,000     18,000,000
Advance payments by borrowers for
  taxes and insurance                       148,238        175,053
Other liabilities                         2,412,423      2,040,188

        Total Liabilities               165,701,599    158,379,414

Stockholders' Equity
  Preferred stock $.01 par value,
    authorized 3,000,000 shares,
    none outstanding
  Common stock, $.01 par value,
    authorized 10,000,000 shares,
    2,572,146 and 2,559,446 shares
    outstanding                              25,721         25,594
  Additional paid in capital              4,897,207      4,773,634
  Retained earnings                      19,246,370     18,344,373
  Net unrealized gain on securities
    available for sale                    2,637,676      2,371,159
     Total Stockholders' Equity          26,806,974     25,514,760

                                       $192,508,573   $183,894,174
</TABLE>


     See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>


                         COMMUNITY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME


                               Three Months Ended    Nine Months Ended
                                 December 31,          December 31,
                               ------------------    -----------------
                                 1998       1997       1998       1997
                               --------    ------     ------     ------
                                   (Unaudited)             (Unaudited)
<S>                           <C>         <C>        <C>          <C> 

INTEREST INCOME
  Loans                        3,388,985  $3,387,279 $10,252,194  $9,940,155
  Investment securities           98,495     118,382     248,584     378,684
  Other                           86,831      32,472     187,847      92,946
    Total interest income      3,574,311   3,538,133  10,688,625  10,411,785

INTEREST EXPENSE
  Deposits                     1,669,592   1,520,598   4,821,221   4,299,177
  Borrowed money                 229,918     363,245     736,636   1,188,240
    Total interest expense     1,899,510   1,883,843   5,557,857   5,487,417

NET INTEREST INCOME            1,674,801   1,654,290   5,130,768   4,924,368

PROVISION FOR LOAN LOSSES         36,000      25,001     135,999     417,631

NET INTEREST INCOME AFTER
 PROVISION FOR LOAN LOSSES     1,638,801   1,629,289   4,994,769   4,506,737

NONINTEREST INCOME
  Service charges, fees
    and commissions              388,192     206,597   1,010,059     538,805
  Gain on sale of securities     639,581          --     808,516          --
  Miscellaneous                    1,805         636       3,272      11,422
    Total noninterest
      income                   1,029,578     207,233   1,821,847     550,227

NONINTEREST EXPENSE
  Compensation & benefits      1,016,665     488,816   2,396,537   1,355,513
  Occupancy                      164,913     125,311     507,574     351,663
  Data processing                128,948      99,581     355,960     307,233
  Federal insurance premium       19,638      18,235      60,747      54,521
  Miscellaneous                  304,792     252,132     915,316     819,912
    Total noninterest
      expense                  1,634,956     984,075   4,236,134   2,888,842

INCOME BEFORE TAXES            1,033,423     852,447   2,580,482   2,168,122

INCOME TAXES                     420,290     313,349   1,087,846     804,647

NET INCOME                   $   613,133   $ 539,098  $1,492,636  $1,363,475

BASIC EARNINGS PER SHARE           $0.24       $0.21       $0.58       $0.54
DILUTED EARNINGS PER SHARE         $0.24       $0.21       $0.58       $0.53
DIVIDENDS PER SHARE                $0.08       $0.07       $0.23       $0.21

</TABLE>


     See accompanying notes to consolidated financial statements.



<PAGE>

<TABLE>
<CAPTION>

                         COMMUNITY FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      Nine Months Ended
                                                         December 31,
                                                  ---------------------------
                                                      1998           1997
                                                  -----------     -----------
<S>                                             <C>            <C>    
                                                         (Unaudited)

OPERATING ACTIVITIES
  Net income                                    $  1,492,636    $  1,363,475
  Adjustments to reconcile net income to
   net cash provided by operating activities
     Provision for loan losses                       135,999         417,630
     Depreciation                                    191,385         171,278
     Amortization of premium and accretion
       of discount on securities, net                   (153)         (1,054)
    (Decrease) in net deferred loan fees             (20,859)        (85,313)
     Increase in deferred income taxes                 4,031          11,389
     Decrease (increase) in other assets            (742,182)       (252,926)
     Increase (decrease) in other liabilities        345,420        (252,892)
     (Gain)loss on sale of loans                    (145,496)          6,079
     Proceeds from sale of loans                  23,121,012       2,078,400
     Loans originated for resale                 (23,856,772)     (2,359,400)
     Gain on sale of available for sale
       securities                                   (808,516)             --
   Net cash provided (absorbed)by operating
       activities                                   (283,495)      1,096,666

INVESTING ACTIVITIES
  Proceeds from maturities of held for
    investment securities                          1,200,000       2,550,000
  Purchases of investment securities              (2,421,437)     (2,149,375)
  Proceeds from sale of available for
    sale securities                                  821,698              --
  Net decrease (increase) in loans                 1,806,154     (11,517,190)
  Purchases of property and equipment             (2,469,928)       (157,858)
  Redemption (purchase) of FHLB stock                     --        (200,000)
    Net cash provided (absorbed) by
      investing activities                        (1,063,513)    (11,474,423)

FINANCING ACTIVITIES
  Dividends paid                                    (590,638)       (535,898)
  Net increase in deposits                         9,976,765      16,367,632
  Proceeds from advances and other
   borrowed money                                  4,000,000      76,000,000
  Repayments of advances and other
   borrowed money                                 (7,000,000)    (79,000,000)
  Proceeds from issuance of common stock             123,700           9,501
Net cash provided (absorbed) by
  financing activities                             6,509,827      12,841,235

INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                      5,162,819       2,463,478

CASH AND CASH EQUIVALENT-beginning of period       7,266,145       4,922,213
CASH AND CASH EQUIVALENTS-end of period         $ 12,428,964    $  7,385,691

     See accompanying notes to consolidated financial statements.

</TABLE>

 
<PAGE>



                         COMMUNITY FINANCIAL CORPORATION
          NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1998

NOTE 1. - BASIS OF PRESENTATION

     The accompanying  unaudited interim consolidated  financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim financial  information and with the instructions to Form 10-QSB and Rule
10-01 of 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(the  "Company"),  its wholly-owned  subsidiary,
Community  Bank(the  "Bank")  and  Community  First  Mortgage   Corporation,   a
wholly-owned  subsidiary  of the Bank  ("First  Mortgage").  First  Mortgage was
incorporated  on November 12, 1997. 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,
1998, are not necessarily indicative of the results that may be expected for the
year ending March 31, 1999.

NOTE 2. - EARNINGS PER SHARE

     Basic and diluted earnings per share for the periods  presented in 1998 and
1997 are computed under a new accounting standard effective in the quarter ended
December 31, 1997. All prior amounts have been restated to be comparable.  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. Basic earnings per share for the three months ended December 31, 1998 and
1997 have been determined by dividing net income by the weighted  average number
of shares of common  stock  outstanding  during  these  periods  (2,571,694  and
2,553,482, respectively).The number of shares used to determine diluted earnings
per  share  for the  same  three  month  periods  is  2,573,226  and  2,578,370,
respectively. Earnings per share for the nine months ended December 31, 1998 and
1997 have been determined by dividing net income by the weighted  average number
of shares of common  stock  outstanding  during  these  periods  (2,568,691  and
2,551,650,  respectively).  The  number  of  shares  used to  determine  diluted
earnings per share for the same nine month  periods as above was  2,594,982  and
2,569,892, respectively.

NOTE 3. - REGULATORY CAPITAL AND DIVIDENDS DISCUSSION
   

     The  following  table  presents the Bank's  capital  levels at December 31,
1998,  relative  to the  Office of Thrift  Supervision  (the  "OTS")requirements
applicable at that date:

<TABLE>
<CAPTION>


                        Amount       Percent      Actual        Actual      Excess
                       Required     Required      Amount        Percent     Amount
                      ----------    ---------    ---------      -------   -----------
<S>                <C>               <C>         <C>             <C>       <C>

Tangible Capital    $ 2,870,000      1.50%       $23,151,000     12.10%    $20,281,000
Core Capital          7,654,000      4.00         23,151,000     12.10      15,497,000
Risk-based Capital   11,395,000      8.00         24,290,000     17.05      12,895,000

</TABLE>

    

NOTE 3. - REGULATORY CAPITAL AND DIVIDEND DISCUSSION (cont.)

     Capital  distributions  by the  Bank are  limited  by  federal  regulations
("Capital  Distribution  Regulation").  Capital  distributions  are  defined  to
include, in part, dividends, stock repurchases and cash-out mergers. The Capital
Distribution Regulation permits a "Tier 1" association to make capital

 

<PAGE>



distributions  during a calendar  year up to 100% of its net income to date plus
the amount  that would  reduce by  one-half  its  surplus  capital  ratio at the
beginning  of the  calendar  year.  Any  distributions  in excess of that amount
requires prior notice to the OTS with the  opportunity  for the OTS to object to
the  distribution.  A Tier 1 association is defined as an  association  that has
capital  immediately  prior  to and on a pro  forma  basis  after  the  proposed
distribution,  equal  to  or  greater  than  the  OTS  fully  phased-in  capital
requirement  and has not  been  deemed  by the OTS to be "in  need of more  than
normal  supervision".  The Bank is currently  classified as a Tier 1 institution
for  these  purposes.   The  Capital   Distribution   Regulation  requires  that
associations  provide the applicable OTS District Director with a 30-day advance
written  notice of all  proposed  capital  distributions  whether or not advance
approval is required by the regulation.


NOTE 4. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS

     Total  interest paid for the three months ended  December 31, 1998 and 1997
was $1,904,816 and  $1,902,043,  respectively.  Total interest paid for the nine
months ended  December 31, 1998 and 1997 was $5,582,318  and  $5,559,029.  Total
income  taxes paid for the three  months  ended  December  31, 1998 and 1997 was
$217,482  and  $375,382.  Total  income  taxes  paid for the nine  months  ended
December 31, 1998 and 1997 was $987,444 and $1,045,174.

NOTE 5. - COMPREHENSIVE INCOME

     FASB Statement No. 130, " Reporting  Comprehensive  Income",  effective for
fiscal years  beginning on or after January 1, 1998,  establishes  standards for
reporting and displaying comprehensive income and its components.  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 Bank 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- and nine-months ended December
31, 1998 and 1977:


<PAGE>

<TABLE>
<CAPTION>


                                                     Three Months Ended December 31
                                                    ---------------------------------
                                                       1998                   1997
                                                     ---------              ---------
                                                          (Amounts in thousands)
<S>                                                 <C>                   <C>   


Net income                                          $ 613,133              $ 539,098
Other comprehensive income,
  net of tax
    Unrealized gains on securities:
      Unrealized holding gains(losses)
        arising during the period                     698,555                341,320

      Less: Reclassification
        adjustment for gains(losses)
        included in net income                       (379,465)                   --
                                                     ---------             ---------
                                                    $ 932,223              $ 880,418
                                                    =========              =========
</TABLE>
<TABLE>
<CAPTION>

 
                                                      Nine Months Ended December 31
                                                    ---------------------------------
                                                       1998                 1997
                                                    ----------           ----------
                                                          (Amounts in thousands)
<S>                                                  <C>                  <C>    


Net income                                           $1,492,636           $1,363,475
Other comprehensive income,
  net of tax
    Unrealized gains on securities:
      Unrealized holding gains(losses)
        arising during the period                       805,262              749,627

      Less: Reclassification
        adjustment for gains(losses)
        included in net income                         (468,939)                 ---

                                                     -----------          ----------
                                                     $1,828,959           $2,113,102
                                                      ==========          ==========
</TABLE>


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

FINANCIAL CONDITION

     The  Company's  total assets  increased  $8.6 million to $192.5  million at
December  31, 1998,  due  primarily to an increase in cash of $5.2 million and a
$2.3 million  increase in property and  equipment  due to the  conversion of the
Bank's  computer  system and the opening of the  Virginia  Beach  branch.  These
increases were funded  primarily by an increase in interest bearing deposits and
the repayment of variable rate mortgage loans.  Deposits increased $10.0 million
to $148.1  million at December 31, 1998,  from $138.2 million at March 31, l998.
The  increase in deposits  was also used to repay $3.0  million of Federal  Home
Loan Bank ("FHLB") advances.  Stockholders' equity increased to $26.8 million at
December  31,  1998,  from $25.5  million at March 31,  1998,  due  primarily to
earnings for the nine month period ended  December 31, 1998 and an adjustment in
the market  value of Federal Home Loan  Mortgage  Corporation  stock,  which was
partially offset by the payment of cash dividends.

     At December 31, 1998, the Bank's  non-performing assets totaled $815,000 or
0.42% of total assets  compared to $1.1 million or .60% of total assets at March
31,  1998.  At  December  31,  1998 the  Company's  non-performing  assets  were
comprised of one mixed use commercial and residential property,  six residential
rental  properties  and two unsecured  consumer loans more than ninety days past
due.  Also  included in  non-performing  assets were  approximately  $220,000 of
single family  residential  rental  properties and one residential lot which was
acquired by foreclosure. In addition to the nonperforming loans, at December 31,
1998,  the Company had a concern in regard to a real estate loan to one borrower
with a total balance of $1.3

 
<PAGE>



million, secured primarily by commercial and rental property. The borrower is in
bankruptcy,  but the loan is performing in accordance with its repayment  terms.
Management  anticipates  no  significant  losses in excess of the  reserves  for
losses  previously  recorded.  At December 31, 1998 the Company's  allowance for
loan losses  totaled  $1.1 million or .70% of net loans  receivable  and 139% of
non-performing  loans.  See "Results of Operations  -Three Months Ended December
31, 1998 and 1997 - Provision for Loan Losses."

     Management establishes an allowance for loan losses based on an analysis of
risk factors in the loan  portfolio.  This analysis  includes the  evaluation of
concentrations  of credit,  past loss experience,  current economic  conditions,
amount and composition of the loan portfolio, estimated fair value of underlying
collateral,  loan  commitments  outstanding,  delinquencies,  and other factors.
Since  the  Company  has had  extremely  low loan  losses  during  its  history,
management  also considers loss  experience of similar  portfolios in comparable
lending markets.  Accordingly,  the calculation of the adequacy of the allowance
for loan losses was not based directly on the level of non-performing assets.

     Management  will continue to monitor the allowance for loan losses  through
the  provision  for loan losses as economic  conditions  dictate.  Although  the
Company maintains its allowance for loan losses at a level which it considers to
be adequate to provide for losses,  there can be no assurance that future losses
will not exceed estimated amounts or that additional  provisions for loan losses
will not be required in future periods. In addition,  management's determination
as to the amount of the  allowance  for loan  losses is subject to review by the
OTS and the Federal Deposit  Insurance  Corporation as part of their examination
process,  which may result in the establishment of an additional allowance based
upon their judgement of the  information  available to them at the time of their
examination.

LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  principal  sources  of funds are  deposits,  principal  and
interest repayments on loans, interest-bearing deposits and securities available
for  sale.  While  scheduled  loan  repayments  and  maturing   investments  are
relatively  predictable  ,  deposit  flows and early loan  prepayments  are more
influenced by interest rates, general economic conditions and competition.

     Historically,  the Bank has  maintained its liquid assets above the minimum
requirements  imposed by federal regulations and at a level believed adequate to
meet  requirements  of normal daily  activities,  repayment of maturing debt and
potential  deposit  outflows.  Cash flow projections are regularly  reviewed and
updated to assure that adequate liquidity is provided.  As of December 31, 1998,
the Bank's  liquidity  ratio (liquid assets as a percentage of net  withdrawable
savings  and  current  borrowings)  was 13.4%,  which  exceeded  the  regulatory
requirement of 4.00%.

     The  Company  uses its  liquidity  resources  principally  to meet  ongoing
commitments,  to fund maturing  certificates of deposit and deposit withdrawals,
and to meet  operation  expenses.  The  Company  anticipates  that it will  have
sufficient  funds  available to meet current loan  commitments.  At December 31,
1998, the Company had outstanding commitments to extend credit which amounted to
$19.6 million (including $1.5 million in available home equity lines of credit).
At  December  31,  1998,  the Company  had $15.0  million in  advances  from the
FHLB-Atlanta.  Management  believes  that loan  repayments  and other sources of
funds, including Federal Home Loan Bank borrowings, will be adequate to meet the
Company's foreseeable liquidity needs.

     The Bank is subject to certain capital to asset  requirements in accordance
with  Bank  regulations.  See  Note 3 of the  Notes  to  Consolidated  Financial
Statements contained in this report.


<PAGE>

RESULTS OF OPERATIONS

Three Months Ended December 31, 1998 and 1997.
----------------------------------------------

     General.  Net income  for the three  months  ended  December  31,  1998 was
$613,000  compared to $539,000 for the three months ended December 31, 1997. The
increase was due primarily to an increase in noninterest income which was offset
in part by an increase in noninterest expenses. Income before taxes increased to
$1,033,000  for the three months ended  December 31, 1998 from  $852,000 for the
three months ended December 31, 1997.

     Interest  Income.  Total interest income  increased to $3.6 million for the
three  months ended  December  31, 1998,  from $3.5 million for the three months
ended  December  31,  1997,  due  primarily  to an increase  in the  balances of
interest-earning  deposits  for the three  months  ended  December  31,  1998 as
compared to the period ended December 31, 1997.

     Interest Expense.  Total interest expense was relatively  unchanged for the
three months ended December 31, 1998 compared to the three months ended December
31,  1997.  Interest on deposits  increased to $1.7 million for the three months
ended  December 31, 1998 from $1.5  million for the three months ended  December
31, 1997 due  primarily  to an increase  in the average  outstanding  balance of
deposits,  primarily certificates of deposit. Interest expense on borrowed money
decreased to $230,000 for the quarter ended December 31, 1998, from $363,000 for
the  quarter  ended  December  31,  1997,  due  to a  decrease  in  the  average
outstanding balance of FHLB advances.  The average rate paid on interest-bearing
liabilities  was 4.65% for the three months ended  December 31, 1998 compared to
4.83% for the three months ended December 31, 1997.

     Provision  for Loan  Losses.  The  provision  for loan losses  increased to
$36,000 for the three months ended December 31, 1998, from $25,001 for the three
months ended  December 31, 1997.  The increase in the  provision for loan losses
was attributable  primarily to a change in the composition of the loan portfolio
with  an  increase  in  consumer  and  commercial  lending.  See  --  "Financial
Condition."

     Noninterest  Income.  Noninterest  income increased to $1.0 million for the
three months ended  December 31, 1998,  from $207,000 for the three months ended
December  31, 1997 due  primarily to a gain on the sale of  securities  and to a
lesser extent an increase in service charges, fees and commissions. The increase
in service charges is due to an increase in secondary mortgage loan sales.

     Noninterest Expenses. Noninterest expense increased to $1.6 million for the
three months ended  December 31, 1998,  from $984,000 for the three months ended
December  31,  1997.   The  increase  in   noninterest   expense  was  primarily
attributable  to an increase in compensation  and other expenses  related to the
conversion of the Bank's computer system, the opening in November, 1997 of First
Mortgage  which  operates in Richmond,  Virginia  and the general  growth of the
bank.  First  Mortgage was formed to originate  mortgage loans for resale on the
secondary market.

     Taxes.  Taxes increased to $420,000 for the three months ended December 31,
1998, from $313,000 for the three months ended December 31, 1997, due to both an
increase in income before taxes and an increase in the Company's effective state
income tax rate.

Nine Months Ended December 31, 1998 and 1997
--------------------------------------------

     General.  Net income for the nine months  ended  December 31, 1998 was $1.5
million  compared to $1.4 million for the nine months  ended  December 31, l997.
The  increase  was due  primarily  to an  increase in  noninterest  income and a
decrease  in the  provision  for loan  losses,  offset in part by an increase in
noninterest  expenses.  Income before income taxes increased to $2.6 million for
the nine months  ended  December  31, 1998 from $2.2 million for the nine months
ended December 31, 1997.

  

<PAGE>



     Interest  Income.  Total interest income increased to $10.7 million for the
nine months  ended  December 31,  1998,  from $10.4  million for the nine months
ended December 31, 1997, due primarily to an increase in the average  balance of
loans receivable.

     Interest Expense. Total interest expense increased slightly to $5.6 million
for the nine months  ended  December  31,  1998,  from $5.5 million for the nine
months ended December 31, 1997. Interest on deposits,  primarily certificates of
deposit,  increased to $4.8 million for the nine months ended December 31, 1998,
from $4.3 million for the same period last year due  primarily to an increase in
the average  outstanding  deposit  balances.  Interest expense on borrowed money
decreased  to $737,000  for the nine months  ended  December  31, 1998 from $1.2
million  for the nine  months  ended  December  31,  1997,  due to a decrease in
average borrowings from the FHLB-Atlanta.

     Provision  for Loan  Losses.  The  provision  for loan losses  decreased to
$136,000 for the nine months ended December 31, 1998, from $418,000 for the same
period last year.  The decrease was  attributable  primarily to slower growth in
the loan portfolio for the nine months ended December 31, 1998 and to chargeoffs
on one-to-four family loans during the nine months ended December 31, 1997.

     Noninterest  Income.  Noninterest  income increased to $1.8 million for the
nine months ended  December 31,  1998,  from  $550,000 for the nine months ended
December 31, 1997, due to gains  associated  with the increased  number of fixed
rate mortgage  loans sold,  gains on sales of securities  and an increase in the
fees and service  charges earned on checking  accounts as the volume of accounts
increased.

     Noninterest  Expenses.  Noninterest  expenses increased to $4.2 million for
the nine months ended  December 31, 1998,  from $2.9 million for the same period
last year.  The  increase in  noninterest  expense was  attributable  to both an
increase in  compensation  and other  expenses  related to the conversion of the
Bank's computer system and the opening of First Mortgage.

 
<PAGE>




     Taxes.  Taxes  increased to $1.1 million for the nine months ended December
31, 1998,  from $805,000 for the nine months ended  December 31, 1997, due to an
increase in income before taxes for the nine months ended  December 31, 1998 and
an increase in the Company's effective state income tax rate.


Impact of the Year 2000

     The Company has conducted a comprehensive review of its computer systems to
identify  applications  that could be affected by the "Year 2000" issue, and has
developed  an  implementation  plan to address  the issue.  The  Company's  data
processing  and other  critical  systems are  supplied by outside  vendors.  The
Company  converted to an in-house Year 2000  compliant  system in November 1998.
The Company has already  contacted  each vendor to request  time tables for Year
2000  compliance and expected  costs, if any, to be passed along to the Company.
To date,  the  Company  has  been  informed  that  most of its  primary  service
providers anticipate that all reprogramming  efforts will be completed in enough
time to allow  for  testing.  The  Company  plans to test the  mission  critical
systems by March 1999 and all non-mission critical systems by June 1999. Certain
other vendors have not yet certified  their system as Year 2000  compliant.  The
Company has identified alternative vendors if current vendors do not become Year
2000 compliant by June 1, 1999. The Company is preparing  contingency  plans for
all mission critical  systems.  Management does not expect these costs to have a
significant impact on its financial position or results of operations;  however,
there can be no assurance that the vendors' systems will be Year 2000 compliant,
consequently  the Company  could incur  incremental  costs to convert to another
vendor.  The Company  testing to date has not identified any of its hardware and
software that will not be Year 2000 compliant.  Any capital  expenditures solely
for the  purpose of being Year 2000  compliant  currently  are not  expected  to
exceed $50,000. The Company has spent approximately  $40,000 to date on becoming
Year 2000 compliant.

     In addition to expenses  related to the  Company's  own  systems,  it could
incur losses if loan  payments are delayed due to Year 2000  problems  affecting
any of its  significant  borrowers  or  impairing  the payroll  systems of large
employers  in its  market  area.  These  borrowers  were  selected  based on the
aggregate amounts owed to the Company,  the type of loans  outstanding,  and the
perceived Year 2000 risk based on  management's  knowledge of the loan customers
and their operations.  To date, the Company has not been advised by such parties
that  they do not have  plans  in  place  to  address  and  correct  the  issues
associated with the Year 2000 problem;  however, no assurance can be given as to
the  adequacy  of such  plans  or to the  timeliness  of  their  implementation.
Currently, due to the types of borrowers doing business with the Company and the
nature of its loans with such borrowers, the Company does consider the Year 2000
issue as part of its underwriting criteria.


Forward-Looking Statements

     This  Quarterly  Report on Form  10-QSB  contains  certain  forward-looking
statements  with respect to the financial  condition,  results of operations and
business of the Company. These forward-looking  statements involve certain risks
and uncertainties. When used in this Quarterly Report on Form 10-QSB or

<PAGE>



future filings by the Company with the Securities  and Exchange  Commission,  in
the Company's press releases or other public or shareholder  communications,  or
in oral  statements made with the approval of an authorized  executive  officer,
the words or phrases "will likely result",  "are expected to", "will  continue",
"is anticipated",  "estimate",  "project",  "believe" or similar expressions are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities  Litigation Reform Act of 1995. The Company wishes to caution
readers not to place  undue  reliance  on any such  forward-looking  statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest  rates,  credit  risks  of  lending  activities,  and  competitive  and
regulatory  factors could affect the Company's  financial  performance and could
cause the Company's actual results for future periods to differ  materially from
those anticipated or projected.

     The Company does not undertake and specifically disclaims any obligation to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.

<PAGE>



                            PART II.  OTHER INFORMATION


Item 1.  Legal Proceedings

         Not Applicable.

Item 2.  Changes in 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 and Reports on Form 8-K

         (a) See Exhibit Index

         (b) No Reports on Form 8-k were filed during the quarter ended December
             31, 1998.



<PAGE>



                                    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 CORPORATION

Date:  February 26, 1999
                             By:       (s) R. Jerry Giles
                                       -------------------------------
                                        R. Jerry Giles
                                        Chief Financial Officer
                                        (Duly Authorized Officer)






                         COMMUNITY FINANCIAL CORPORATION


                               EXHIBIT INDEX


Exhibit No.            Description


11                     Computation of Per Share Earnings.
27                     Financial Data Schedule (Edgar Only).