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 JUNE 30, 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 $.01 per share,  outstanding at the
close of business on August 7, 1998: 2,570,446.

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 June 30, 1998 (unaudited)
         and March 31, 1998................................................   1

         Consolidated Statements of Income for the
         Three Months Ended June 30, 1998 and 1997 (unaudited).............   2

         Consolidated Statements of Cash Flows for the
         Three Months Ended June 30, 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.................................................   8

<PAGE>

                         COMMUNITY FINANCIAL CORPORATION
                   CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


                                                     June 30,         March 31,
                                                       1998             1998
                                                   ------------     ------------
                                                    (Unaudited)
ASSETS

Cash (including interest bearing
  deposits of approximately
  $2,452,000 and $2,866,000) .................     $  6,610,010     $  7,266,145
Securities
  Held to maturity ...........................        2,970,484        3,184,241
  Available for sale .........................        3,775,354        3,905,055
Investment in Federal Home Loan
  Bank stock, at cost ........................        1,600,000        1,600,000
Loans receivable, net ........................      162,355,632      162,471,219
Real estate owned ............................          427,217          303,365
Property and equipment, net ..................        3,861,936        3,634,223
Accrued interest receivable
  Loans ......................................          975,644          945,365
  Investments ................................          102,393           86,424
Prepaid expenses and other assets ............          551,194          498,137
                                                   ------------     ------------
      Total Assets ...........................     $183,229,864     $183,894,174

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Deposits .....................................     $137,158,660     $138,164,173
Advances from Federal Home Loan
  Bank .......................................       18,000,000       18,000,000
Advance payments by borrowers for
  taxes and insurance ........................           94,324          175,053
Other liabilities ............................        2,159,625        2,040,188
                                                   ------------     ------------
      Total Liabilities ......................      157,412,609      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,
    2,568,946 and 2,559,446 shares
    outstanding ..............................           25,689           25,594
  Additional paid in capital .................        4,865,039        4,773,634
  Retained earnings ..........................       18,671,502       18,344,373
  Net unrealized gain on securities
    available for sale .......................        2,255,025        2,371,159
      Total Stockholders' Equity .............       25,817,255       25,514,760
                                                   ------------     ------------
      Total Liabilities and
        Shareholders' Equity .................     $183,229,864     $183,894,174
                                                   ============     ============

          See accompanying notes to consolidated financial statements.

<PAGE>

                         COMMUNITY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME


                                                         Three Months Ended
                                                              June 30,
                                                    ----------------------------
                                                       1998              1997
                                                    ----------        ----------
                                                    (Unaudited)
INTEREST INCOME
  Loans ....................................        $3,434,030        $3,211,542
  Investment securities ....................            66,967           122,595
  Other ....................................            50,360            29,148
                                                    ----------        ----------
    Total interest income ..................         3,551,357         3,363,285

INTEREST EXPENSE
  Deposits .................................         1,538,624         1,310,796
  Borrowed money ...........................           276,405           418,361
                                                    ----------        ----------
    Total interest expense .................         1,815,029         1,729,157

NET INTEREST INCOME ........................         1,736,328         1,634,128

PROVISION FOR LOAN LOSSES ..................            75,000            25,000

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES ................         1,661,328         1,609,128

NONINTEREST INCOME
  Service charges, fees
    and commissions ........................           295,264           168,309
  Gain on sale of securities ...............            99,174                --
  Miscellaneous ............................               811               402
                                                    ----------        ----------
    Total noninterest income ...............           395,248           168,711

NONINTEREST EXPENSE
  Compensation & benefits ..................           616,784           424,217
  Occupancy ................................           149,970           114,802
  Data processing ..........................           113,469           101,854
  Federal insurance premium ................            20,359            18,269
  Miscellaneous ............................           273,226           326,882
                                                    ----------        ----------
    Total noninterest expense ..............         1,173,808           986,024

INCOME BEFORE TAXES ........................           882,768           791,815

INCOME TAXES ...............................           376,408           296,641

NET INCOME .................................        $  506,360        $  495,174

BASIC EARNINGS PER SHARE ...................        $     0.20        $     0.20
DILUTED EARNINGS PER SHARE .................        $     0.19        $     0.20
DIVIDENDS PER SHARE ........................        $     0.07        $     0.07


          See accompanying notes to consolidated financial statements.


<PAGE>

                  COMMUNITY FINANCIAL CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                         Three Months Ended
                                                              June 30,
                                                    ----------------------------
                                                       1998              1997
                                                    ----------        ----------
                                                    (Unaudited)
OPERATING ACTIVITIES
  Net income .....................................   $   506,360    $   495,174
  Adjustments to reconcile net income to
    net cash provided by operating activities
      Provision for loan losses ..................        75,000         25,000
      Depreciation ...............................        68,576         59,747
      Amortization of premium and accretion
        of discount on securities, net ...........          (580)            13
      (Decrease) in net deferred loan fees .......       (17,475)       (13,848)
      Increase in deferred income taxes ..........         5,718         15,945
      Decrease (increase) in other assets ........       (99,305)       (93,496)
      Increase (decrease) in other liabilities ...        44,544        324,900
      (Gain)loss on sale of loans ................       (11,164)         4,606
      Proceeds from sale of loans ................     7,148,350        723,500
      Loans originated for resale ................    (7,187,850)       786,500
      Gain on sale of available for sale
        securities ...............................       (99,174)            --
  Net cash provided by operating activities ......       433,000        755,041

INVESTING ACTIVITIES
  Proceeds from maturities of held to
    maturity securities ..........................       250,000        250,000
  Proceeds from sale of available for
    sale securities ..............................       101,187             --
  Purchases of investment securities .............            --     (1,759,375)
  Net decrease (increase) in loans ...............        73,063     (5,837,844)
  Purchases of property and equipment ............      (296,289)       (82,901)
  Redemption (purchase) of FHLB stock ............            --       (200,000)
  Increasing Real Estate Owned ...................      (123,852)            --
    Net cash provided (absorbed) by
      investing activities .......................         4,109     (7,630,120)

FINANCING ACTIVITIES
  Dividends paid .................................      (179,231)      (178,549)
  Net increase (decrease) in deposits ............    (1,005,513)       653,410
  Proceeds from advances and other
   borrowed money ................................     4,000,000      8,000,000
  Repayments of advances and other
   borrowed money ................................    (4,000,000)    (2,000,000)
  Proceeds from issuance of common stock .........        91,500            500
Net cash provided (absorbed) by
  financing activities ...........................    (1,093,244)     6,475,361
INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS ....................................      (656,135)      (399,718)
CASH AND CASH EQUIVALENTS-beginning of period ....     7,266,145      4,922,213
CASH AND CASH EQUIVALENTS-end of period ..........   $ 6,610,010    $ 4,522,495


          See accompanying notes to consolidated financial statements.

<PAGE>

                         COMMUNITY FINANCIAL CORPORATION
          NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 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 ("Community" or the "Company"),its  wholly-owned
subsidiary,   Community   Bank  (the  "Bank")  and  Community   First   Mortgage
Corporation,  a  wholly-owned  subsidiary  of the Bank ("First  Mortgage").  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, 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 June 30, 1998 and
1997 have been determined by dividing net income by the weighted  average number
of shares of common  stock  outstanding  during  these  periods  (2,564,495  and
2,550,710, respectively).The number of shares used to determine diluted earnings
per  share  for the same  three  month  periods  was  2,610,156  and  2,572,790,
respectively.

NOTE 3. - STOCKHOLDERS' EQUITY

The following table presents the Bank's capital levels at June 30, 1998 relative
to the requirements applicable under the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ('FIRREA'):

                        Amount     Percent      Actual     Actual     Excess
                       Required   Required      Amount    Percent     Amount
                     -----------  ---------  -----------  -------  -----------
Tangible Capital     $ 2,736,000    1.50%    $22,147,000   12.14%  $19,411,000
Core Capital           7,295,000    4.00      22,147,000   12.14    14,852,000
Risk-based Capital    10,831,000    8.00      23,270,000   17.19    12,439,000

<PAGE>

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"  institution  to  make  capital
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
require  prior  notice  to the  Office of Thrift  Supervision  ("OTS")  with the
opportunity for the OTS to object to the  distribution.  A Tier 1 institution is
defined as an  institution  that has, on a pro forma  basis  after the  proposed
distribution,  capital equal to or greater than the OTS fully phased-in  capital
requirement  and has not  been  deemed  by the OTS to be "in  need of more  than
normal  supervision".  The Bank is currently  classified as a Tier 1 institution
for  these  purposes.   The  Capital   Distribution   Regulation  requires  that
institutions  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  June 30,  1998 and 1997 was
$1,822,582 and $1,723,894, respectively. There were no income taxes paid for the
three months ended June 30, 1998 and 1997.

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

FINANCIAL CONDITION

The  Company's  total assets  decreased  $644,000 to $183.2  million at June 30,
1998, due primarily to a decrease in cash of $656,000.  The decrease in cash was
related to a decrease in  deposits.  Deposits  decreased  $1.0 million to $137.2
million at June 30, 1998, from $138.2 million at March 31, 1998. The decrease in
deposits  was  due to the  maturity  of  higher  rate  certificates  of  deposit
originally  offered by the Company in  connection  with a  promotion  to attract
deposits which were not reinvested by depositors.  However, approximately 94% of
such  deposits  rolled over into new  certificates  of deposits at market rates.
Stockholders'  equity  increased to $25.8  million at June 30, 1998,  from $25.5
million at March 31, 1998,  due primarily to earnings for the three month period
ended June 30, 1998,  which was partially offset by a payment of $0.07 per share
in cash dividends.

At June  30,  1998,  the  Bank's  non-performing  assets  totaled  approximately
$444,000  or .24% of assets  compared to $938,000 or .51% of assets at March 31,
1998. Real estate acquired through foreclosure  included in nonperforming assets
totals $427,000 and is comprised of three single family residential  properties,
a  three  unit  rental  property  and a  residential  lot.  In  addition  to the
nonperforming  loans,  at June 30, 1998,  the Company had other loans of concern
consisting of two real estate loans to one borrower with a total balance of $1.5
million, secured primarily by commercial and rental property,

<PAGE>

and three consumer loans with a total balance of  approximately  $66,000.  These
loans were  current at June 30,  1998 but due to previous  delinquencies  by the
borrower are being  monitored by the Company.  At June 30, 1998,  the  Company's
allowance for loan losses to non-performing  assets was 259% and to total assets
was .63%.

The Company  maintains  an  allowance  for loan losses to provide for  estimated
potential  losses  in its loan  portfolio.  Management  determines  the level of
reserves based on loan  performance,  the value of the collateral,  economic and
market conditions,  and previous experience.  Management reviews the adequacy of
the allowance at least  quarterly,  utilizing its internal loan  classifications
system.  Management  believes that the loan loss reserve is adequate at June 30,
1998.  Although  management  believes  it uses the best  information  available,
future adjustments to reserves may be necessary.

LIQUIDITY

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 June 30, 1998, the
Bank's  liquidity  ratio  (liquid  assets as a  percentage  of net  withdrawable
savings  and  current  borrowings)  was  7.46%,  which  exceeds  the  regulatory
requirement.

RESULTS OF OPERATIONS

Three Months Ended June 30, 1998 and 1997.
------------------------------------------

General.  Net  income for the three  months  ended  June 30,  1998 was  $506,000
compared to $495,000 for the three months ended June 30, 1997,  due primarily to
an increase in net interest income and a gain realized on the sale of investment
securities,  which was offset in part by an  increase in  noninterest  expenses.
Income  before  taxes  increased to $883,000 for the three months ended June 30,
1998 from $792,000 for the three months ended June 30, 1997.

Interest  Income.  Total interest income increased to $3.6 million for the three
months  ended June 30,  1998,  from $3.4 million for the three months ended June
30, 1997, due to an increase in the average balance of loans outstanding for the
three months  ended June 30, 1998 as compared to the period ended June  30,1997.
The  average  yield  earned on  interest-earning  assets was 8.22% for the three
months ended June 30, 1998 compared to 8.25% for the three months ended June 30,
1997.

Interest  Expense.  Total  interest  expense  increased  to $1.8 million for the
quarter  ended June 30, 1998,  from $1.7 million for the quarter  ended June 30,
1997.  Interest on deposits increased to $1.5 million for the quarter ended June
30, 1998 from $1.3 million for the quarter  ended June 30, 1997 due primarily to
an  increase  in  deposits.  Interest  expense on borrowed  money  decreased  to
$276,000  for the quarter  ended June 30,  1998,  from  $418,000 for the quarter
ended June 30, 1997, due to a decrease in average  borrowings.  The average rate
paid on  interest-bearing  liabilities was 4.69% for the three months ended June
30, 1998 compared to 4.74% for the three months ended June 30, 1997.

<PAGE>

Provision for Loan Losses.  The  provision for loan losses  increased to $75,000
for the three  months  ended June 30,  1998,  from  $25,000 for the three months
ended  June 30,  1997 due to both  charge-off's  of  $33,000  and a shift in the
composition of the Bank's loan portfolio  during the quarter ended June 30, 1998
to higher yielding consumer and commercial business loans.

Noninterest  Income.  Noninterest  income  increased  to $395,000  for the three
months  ended June 30, 1998,  from  $169,000 for the three months ended June 30,
1997,  due primarily to gains realized on the sale of securities and an increase
in fees received in connection  with the  organization  of loans for sale in the
secondary market.

Noninterest  Expenses.  Noninterest  expense  increased  to $1.2 million for the
three months ended June 30, 1998,  from $986,000 for the three months ended June
30, 1997. The increase in noninterest  expense is primarily  attributable  to an
increase in  compensation  related to both the general growth of the Company and
the opening of First  Mortgage in November,  1997 in Richmond,  Virginia.  Since
June 30, 1997,  the Company has employed a total of an  additional  25 full-time
employees, most of which were employed during the last quarter.

Taxes.  Taxes  increased  to $376,000  for the three months ended June 30, 1998,
from  $297,000 for the three months ended June 30, 1997,  due to the increase in
income before taxes and an increase in the effective 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 is scheduled  to convert 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  December  1998 and all  non-mission  critical  systems by June 1999.
Certain  other  vendors  have  not yet  certified  their  system  as  Year  2000
compliant.  The  Company  will  pursue  other  options if it appears  that these
vendors will be unable to comply. The Company has prepared 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
currently are not expected to exceed $50,000.

<PAGE>

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
Community.   These   forward-looking   statements   involve  certain  risks  and
uncertainties.  When  used in this  Quarterly  Report  on Form  10-QSB or 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.


                           PART II. OTHER INFORMATION


Item 1.  Legal Proceedings

         Not Applicable.


Item 2.  Changes in Securities

         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.

<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

         a.  Exhibits

             See Exhibit Index.

         b.  Reports on Form 8k

             None to be reported.

<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: August 7, 1998
                                        By: /s/ R. Jerry Giles
                                            -------------------------------
                                            R. Jerry Giles
                                            Chief Financial Officer
                                            (Duly Authorized Officer)

<PAGE>

                                  EXHIBIT INDEX


Exhibit No.            Description
-----------            -----------

     11                Computation of Per Share Data

     27                Financial Data Schedule.