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 September 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 November 13, 1998: 2,572,046.

Transitional Small Business Disclosure Format (Check one)

                           Yes [ ]             No [X]


<PAGE>

                         COMMUNITY FINANCIAL CORPORATION


                                      INDEX

                                                                            PAGE
                                                                            ----
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Statements of Financial
         Condition at September 30, 1998 (unaudited)
         and March 31, 1998 ...............................................   1

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

         Consolidated Statements of Cash Flows for the
         Three Months Ended September 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 ..............................   6


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

<PAGE>

                          COMMUNITY FINANCIAL CORPORATION
                   CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                   September 30,      March 31,
                                                       1998             1998
                                                   -------------    ------------
                                                    (Unaudited)
<S>                                                <C>              <C>
ASSETS
Cash (including interest bearing
  deposits of approximately
  $466,000 and $2,866,000) ...................     $  5,505,611     $  7,266,145
Securities
  Held to maturity ...........................        4,399,463        3,184,241
  Available for sale .........................        3,911,443        3,905,055
Investment in Federal Home Loan
  Bank stock, at cost ........................        1,600,000        1,600,000
Loans receivable, net ........................      164,309,237      162,471,219
Real estate owned ............................          305,780          303,365
Property and equipment, net ..................        5,572,025        3,634,223
Accrued interest receivable
  Loans ......................................          962,498          945,365
  Investments ................................           99,985           86,424
Prepaid expenses and other assets ............          828,822          498,137
                                                   ------------     ------------
        Total Assets .........................     $187,494,864     $183,894,174
                                                   ------------     ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
Deposits .....................................     $144,243,375     $138,164,173
Advances from Federal Home Loan Bank .........       15,000,000       18,000,000
Advance payments by borrowers for
  taxes and insurance ........................          153,820          175,053
Other liabilities ............................        2,012,056        2,040,188
                                                   ------------     ------------
        Total Liabilities ....................      161,409,251      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,
    2,570,646 and 2,559,446 shares
    outstanding ..............................           25,706           25,594
  Additional paid in capital .................        4,882,022        4,773,634
  Retained earnings ..........................       18,839,009       18,344,373
  Net unrealized gain on securities
    available for sale .......................        2,338,876        2,371,159
                                                   ------------     ------------
        Total Stockholders' Equity ...........       26,085,613       25,514,760
                                                   ------------     ------------
        Total Liabilities and
          Shareholders' Equity ...............     $187,494,864     $183,894,174
                                                   ============     ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                        1

<PAGE>

                         COMMUNITY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                  Three Months Ended         Six Months Ended
                                     September 30              September 30
                               -----------------------   -----------------------
                                  1998         1997         1998         1997
                               ----------   ----------   ----------   ----------
                                     (Unaudited)               (Unaudited)
<S>                            <C>          <C>          <C>          <C>
INTEREST INCOME
  Loans ....................   $3,423,547   $3,341,335   $6,863,209   $6,552,877
  Investment securities ....       83,401      138,383      150,089      260,302
  Other ....................       50,376       30,650      101,016       60,473
                               ----------   ----------   ----------   ----------
    Total interest income ..    3,557,324    3,510,368    7,114,314    6,873,652
                               ----------   ----------   ----------   ----------
INTEREST EXPENSE
  Deposits .................    1,613,005    1,467,783    3,151,629    2,778,580
  Borrowed money ...........      224,685      406,634      506,718      824,994
                               ----------   ----------   ----------   ----------
    Total interest expense .    1,837,690    1,874,417    3,658,347    3,603,574
                               ----------   ----------   ----------   ----------

NET INTEREST INCOME ........    1,719,634    1,635,951    3,455,967    3,270,078

PROVISION FOR LOAN LOSSES ..       25,000      367,630       99,999      392,630
                               ----------   ----------   ----------   ----------
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES     1,694,634    1,268,321    3,355,968    2,877,448
                               ----------   ----------   ----------   ----------
NONINTEREST INCOME
  Service charges, fees
    and commissions ........      327,229      173,283      623,002      332,208
  Gain on sale of securities       69,761           --      168,935           --
  Miscellaneous ............           31        1,000          332       10,786
                               ----------   ----------   ----------   ----------
    Total noninterest
      income ...............      397,021      174,283      792,269      342,994
                               ----------   ----------   ----------   ----------
NONINTEREST EXPENSE
  Compensation & benefits ..      763,087      442,480    1,379,872      866,697
  Occupancy ................      192,692      111,550      342,661      226,352
  Data processing ..........      113,543      105,797      227,012      207,651
  Federal insurance premium        20,751       18,017       41,109       36,287
  Miscellaneous ............      337,297      240,899      610,524      567,780
                               ----------   ----------   ----------   ----------
    Total noninterest
      expense ..............    1,427,370      918,743    2,601,178    1,904,767
                               ----------   ----------   ----------   ----------

INCOME BEFORE TAXES ........      664,285      523,861    1,547,059    1,315,675

INCOME TAXES ...............      291,142      194,657      667,556      491,298
                               ----------   ----------   ----------   ----------
NET INCOME .................   $  373,143   $  329,204   $  879,503   $  824,377
                               ==========   ==========   ==========   ==========
BASIC EARNINGS PER SHARE ...   $     0.14   $     0.13   $     0.34   $     0.33
DILUTED EARNINGS PER SHARE .   $     0.13   $     0.13   $     0.33   $     0.33
DIVIDENDS PER SHARE ........   $     0.08   $     0.07   $     0.15   $     0.14
</TABLE>

           See accompanying notes to consolidated financial statement.


                                        2

<PAGE>

                         COMMUNITY FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                        Six Months Ended
                                                          September 30,
                                                   ----------------------------
                                                       1998            1997
                                                   ------------    ------------
                                                            (Unaudited)
<S>                                                <C>             <C>
OPERATING ACTIVITIES
  Net income ...................................   $    879,503    $    824,377
  Adjustments to reconcile net income to
    net cash provided by operating activities
      Provision for loan losses ................         99,999         392,630
      Depreciation .............................        147,214         112,728
      Amortization of premium and accretion
        of discount on securities, net .........           (124)            387
      (Decrease) in net deferred loan fees .....        (17,475)        (59,255)
      Increase in deferred income taxes ........         12,309          11,690
      Decrease (increase) in other assets ......       (361,393)       (179,982)
      Increase (decrease) in other liabilities .        (49,365)        (98,435)
      (Gain)loss on sale of loans ..............        (42,343)          7,174
      Proceeds from sale of loans ..............     13,228,720       1,318,800
      Loans originated for resale ..............    (14,750,319)     (1,764,800)
      Gain on sale of available for sale
        securities .............................       (168,935)             --
                                                   ------------    ------------
  Net cash provided by operating activities ....     (1,022,209)        565,314
                                                   ------------    ------------
INVESTING ACTIVITIES
  Proceeds from maturities of held to
    maturity securities ........................        650,000         750,000
  Proceeds from sale of available for
    sale securities ............................        172,319              --
  Purchases of held to maturity investment
    securities .................................     (1,861,793)     (2,149,375)
  Net decrease (increase) in loans .............       (414,255)    (11,940,842)
  Purchases of property and equipment ..........     (2,085,016)       (129,282)
  Redemption (purchase) of FHLB stock ..........             --        (200,000)
  Increase in Real Estate Owned ................         (2,415)             --
                                                   ------------    ------------
    Net cash provided (absorbed) by
      investing activities .....................     (3,541,160)    (13,669,499)
                                                   ------------    ------------
FINANCING ACTIVITIES
  Dividends paid ...............................       (384,867)       (357,101)
  Net increase (decrease) in deposits ..........      6,079,202      11,643,251
  Proceeds from advances and other
    borrowed money .............................      4,000,000      48,000,000
  Repayments of advances and other
    borrowed money .............................     (7,000,000)    (45,000,000)
  Proceeds from issuance of common stock .......        108,500             500
                                                   ------------    ------------
Net cash provided (absorbed) by
  financing activities .........................      2,802,835      14,286,650
                                                   ------------    ------------
INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS ..................................     (1,760,534)      1,182,465
CASH AND CASH EQUIVALENTS-beginning of period ..      7,266,145       4,922,213
                                                   ------------    ------------
CASH AND CASH EQUIVALENTS-end of period ........   $  5,505,611    $  6,104,678
                                                   ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>

                         COMMUNITY FINANCIAL CORPORATION
          NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                               September 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 and six months ended September 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  September 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 (2,569,837 and
2,550,746, respectively).The number of shares used to determine diluted earnings
per  share  for the same  three  month  periods  was  2,590,331  and  2,565,994,
respectively.  Basic  earnings per share for the six months ended  September 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
(2,567,181 and 2,550,728,  respectively).The  number of shares used to determine
diluted  earnings  per share for the same six month  periods was  2,604,921  and
2,566,379, respectively.


                                        4

<PAGE>

NOTE 3. -- STOCKHOLDERS' EQUITY

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

<TABLE>
<CAPTION>
                           Amount     Percent     Actual     Actual     Excess
                          Required   Required     Amount    Percent     Amount
                        -----------  --------  -----------  -------  -----------
<S>                     <C>            <C>     <C>           <C>     <C>
Tangible Capital .....  $ 2,792,000    1.50%   $22,540,000   12.11%  $19,748,000
Core Capital .........    7,445,000    4.00     22,540,000   12.11    15,095,000
Risk-based Capital ...   11,233,000    8.00     23,648,000   16.84    12,415,000
</TABLE>

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  September 30, 1998 and 1997 was
$1,849,282 and $1,933,092,  respectively. Total interest paid for the six months
ended  September 30, 1998 and 1997 was $3,677,502 and  $3,656,985.  Total income
taxes paid for the three months ended  September  30, 1998 and 1997 was $737,382
and  $566,392.  Total income taxes paid for the six months ended  September  30,
1998 and 1997 was $737,382 and $669,392.


                                        5

<PAGE>

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

FINANCIAL CONDITION

The  Company's  total  assets  increased  $ 3.6  million  to $187.5  million  at
September 30, 1998,  due primarily to a increase in loans of $ 1.8 million.  The
increase in loans receivable was due primarily to an increase in consumer loans.
Deposits  increased $ 6.1 million to $144.2 million at September 30, 1998,  from
$138.2 million at March 31, l998 while Federal Home Loan Bank advances decreased
during the same  period from $18.0  million to $15.0  million.  The  increase in
deposits was used  primarily to fund the increase in loans and reduce  advances.
Stockholders'  equity  increased to $26.1  million at September  30, 1998,  from
$25.5  million at March 31,  1998,  due  primarily to earnings for the six month
period ended September 30, 1998 which was partially offset by aggregate payments
of $0.15 per share in cash dividends.

At September 30, 1998,  the Bank's  non-performing  assets  totaled  $463,000 or
0.24% of assets compared to $1.1 million or .60% of assets at March 31, 1998. At
September 30, 1998 the  Company's  non-performing  assets were  comprised of one
combination farm and personal  residence,  a personal residence and two consumer
loans more than ninety days past due. Also included in non-performing  assets is
approximately  $280,000 of single  family  residential  rental  properties,  one
residential lot which was acquired by foreclosure  and one repossessed  vehicle.
In addition to the  nonperforming  loans, at September 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. The borrower is in bankruptcy, but the largest loan is current and the
smaller loan is anticipated to be paid off next quarter. The Company believes it
has adequate collateral and will not experience losses.  Based on current market
values  of the  collateral  securing  these  loans,  management  anticipates  no
significant losses in excess of the reserves for losses previously recorded.  At
September 30, 1998 the Company's  allowance for loan losses totaled $1.1 million
or .60% of net loans receivable and 239% of  non-performing  loans. See "Results
of Operations -- Six Months Ended  September 30, 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
Office  of  Thrift  Supervision   ("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.


                                        6

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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 September 30, 1998,
the Bank's  liquidity  ratio (liquid assets as a percentage of net  withdrawable
savings  and  current  borrowings)  was  8.50%,  which  exceeds  the  regulatory
requirement.

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.


RESULTS OF OPERATIONS

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

General.  Net income for the three months ended  September 30, 1998 was $373,143
compared to $329,204 for the three months ended September 30, 1997. 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 $664,285 for the three months
ended  September 30, 1998 from $523,861 for the three months ended September 30,
1997.

Interest  Income.  Total interest income increased to $3.6 million for the three
months ended  September  30, 1998,  from $3.5 million for the three months ended
September  30, 1997,  due to an increase in the average  balance of  outstanding
loans for the three  months ended  September  30, 1998 as compared to the period
ended  September 30, 1997. The average yield earned on  interest-earning  assets
was 8.24% for the three months ended  September  30, 1998  compared to 8.22% for
the three months ended  September 30, 1997.  The average yield  increased due to
the  Company's  shift in its asset mix from one-to  four-family  loans to higher
yielding consumer loans.

Interest Expense. Total interest expense decreased to $1.8 million for the three
months ended  September  30, 1998,  from $1.9 million for the three months ended
September 30, 1997. Interest on deposits increased to $1.6 million for the three
months  ended  September  30, 1998 from $1.5  million for the three months ended
September  30, 1997 due  primarily  to an  increase  in the average  outstanding
balance of deposits,  which was primarily certificates of deposit, for the three
months ended September 30, 1998. Interest expense on borrowed money decreased to
$224,685 for the quarter ended September 30, 1998, from $406,634 for the quarter
ended  September  30,  1997,  due to a decrease in average  borrowings  from the
Federal Home Loan Bank.  The average rate paid on  interest-bearing  liabilities
was 4.72% for the three months ended September 30, 1998 compared to 4.82% to the
three months ended September 30, 1997.


                                        7

<PAGE>

Provision for Loan Losses.  The  provision for loan losses  decreased to $25,000
for the three  months ended  September  30,  1998,  from  $367,630 for the three
months ended  September  30, 1997.  The decrease in provision for loan losses is
attributable  primarily to the slower  growth in the loan  portfolio and charge-
offs on one-to-four  family loans and  foreclosed  property for the three months
ended September 30, 1997. "See Financial Condition."

Noninterest  Income.  Noninterest  income  increased  to $397,021  for the three
months  ended  September  30,  1998,  from  $174,283  for the three months ended
September 30, 1997 due primarily to both an increase in service  charges and the
gain on the sale of securities.  The increase in service  charges is due to both
the increase in secondary mortgage loan sales in Community Bank (the "Bank") and
Community First Mortgage ("First  Mortgage") and an increase in checking account
charges which is related to an increase in account volume.

Noninterest  Expenses.  Noninterest  expense  increased  to $1.4 million for the
three months ended  September 30, 1998, from $918,743 for the three months ended
September 30, 1997. The increase in noninterest  expense is attributable to both
the  opening  of  First  Mortgage  in  Richmond,  Virginia  and an  increase  in
compensation and other expenses related to the conversion of the Bank's computer
system.

Taxes.  Taxes  increased to $291,142 for the three  months ended  September  30,
1998,  from $194,657 for the three months ended  September 30, 1997, due to both
an increase in income  before taxes and an increase in the  Company's  effective
state income tax rate.


Six Months Ended September 30, 1998 and 1997
--------------------------------------------

General.  Net income for the six months  ended  September  30, 1998 was $879,503
compared to $824,377  for the six months ended  September  30, l997 for the same
reasons  discussed  above.  Income before income taxes increased to $1.5 million
for the six months ended September 30, 1998 from $1.3 million for the six months
ended September 30, 1997.

Interest  Income.  Total interest  income  increased to $7.1 million for the six
months  ended  September  30,  1998,  from $6.9 million for the six months ended
September 30, 1997, due primarily to an increase in the average balance of loans
outstanding during the period.

Interest  Expense.  Total interest expense increased to $3.7 million for the six
months  ended  September  30,  1997,  from $3.6 million for the six months ended
September 30, 1997.  Interest on deposits,  primarily  certificates  of deposit,
increased to $3.2 million for the six months ended September 30, 1998, from $2.8
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 $506,718 for the six months ended  September 30, 1998 from $824,994
for the six  months  ended  September  30,  1997,  due  primarily  to  decreased
borrowings from the Federal Home Loan Bank of Atlanta.


                                        8

<PAGE>

Provision for Loan Losses.  The  provision for loan losses  decreased to $99,999
for the six months ended  September 30, 1998,  from $392,630 for the same period
last year. The decrease is  attributable  primarily to slower growth in the loan
portfolio  for the six months  ended  September  30, 1998 and to  chargeoffs  on
one-to-four family loans for the six months ended September 30, 1997.

Noninterest Income.  Noninterest income increased to $792,269 for the six months
ended  September 30, 1998,  from $342,994 for the six months ended September 30,
1997, due to an increase in the fees and service charges on checking accounts as
the volume of accounts increased,  gains associated with the increased number of
fixed rate mortgage loans sold and gains on securities transactions.

Noninterest Expenses. Noninterest expenses increased to $2.6 million for the six
months  ended  September  30,  1998,  from $1.9 million for the same period last
year. The increase in noninterest expense is 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 in Richmond, Virginia.

Taxes.  Taxes increased to $667,556 for the six months ended September 30, 1998,
from $491,298 for the six months ended September 30, 1997, due to an increase in
income before taxes for the six months ended  September 30, 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 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  has  identified  alternative  vendors if current
vendors do not become  Year 2000  compliant  by June 1, 1999.  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  solely for the purpose of being Year 2000
compliant currently are not expected to exceed $50,000.

         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


                                        9

<PAGE>

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
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,  technology,  acceptance of
new products in the market 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.


                                       10

<PAGE>

                            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.

         The Company held an annual meeting (the  "Meeting") of  stockholders on
July 29, 1998.  The  following  directors  were elected at the meeting:  Jane C.
Hickok and Dale C. Smith. The following directors term of office continued after
the  meeting:  Charles  F.  Anderson,  M.D.,  Charles W.  Fairchilds,  Thomas W.
Winfree, James R. Cooke, Jr., DDS and Kenneth L. Elmore.

         The matters voted on at the Meeting were

                  (1)  The election of two directors.

                                                            For      Abstentions
                                                         ---------   -----------
                       Jane C. Hickok ................   2,260,185      22,386
                       Dale C. Smith .................   2,266,575      15,996


                  (2)  Approval and  adoption of  an amendment to  the Company's
                       1996 Incentive plan to  increase by 120,000 the number of
                       shares reserved for issuance thereunder.

                           For                 Against              Abstentions
                        ---------              -------              -----------
                        2,122,069              129,134                 31,368


                  (3)   Ratification  of  the  appointment  of  BDO  Seidman  as
                        independent  accountants  for  the  Corporation  for the
                        fiscal year ending March 31, 1999.

                           For                 Against              Abstentions
                        ---------              -------              -----------
                        2,261,751               2,500                  18,320


                                       11

<PAGE>

Item 5.  Other Information

         Not Applicable.


Item 6.  Exhibits and Reports on Form 8-K

          a.  Exhibits

              See Exhibit Index.

          b.  Reports on Form 8k

              None to be reported.


                                       12

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



                                       13

<PAGE>

                                  EXHIBIT INDEX


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

     11           Computation of Per Share Data

     27           Financial Data Schedule.



                                       14