**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-K**

**[      X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF**

**THE      SECURITIES EXCHANGE ACT OF 1934**

**For      the fiscal year ended December 31, 2005 **

**or**

**[        ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE      SECURITIES EXCHANGE ACT OF 1934 **

**Commission      File Number **
**001-11663**

**COMMUNITY      BANKS, INC.**

**(Exact      name of registrant as specified in its charter)**

| **Pennsylvania**                                            |   | **23-2251762**                                          |
|-------------------------------------------------------------|--------|---------------------------------------------------------|
| **(State                of Incorporation)**                 |   | **(I.R.S.                Employer Identification No.)** |
|                                                        |   |                                                    |
| **750                East Park Drive, Harrisburg, PA**      |   | **17111**                                               |
| **(Address                of principal executive offices)** |   | **(Zip                Code)**                           |

**Registrant’s      telephone number, including area code: **
**(717)      920-1698**

**Securities      registered pursuant to Section 12 (b) of the Act: **
**None**

**Securities      registered pursuant to Section 12 (g) of the Act: **
**Common      Stock, par value $5 per share**

| Indicate                by check mark if the registrant is a well-known seasoned issuer,                as                defined in Rule 405 of the Securities Act. | Yes |   |   | No | X |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|--------|--------|----|---|

| Indicate                by check mark if the registrant is not required to file reports pursuant                to Section 13 or Section 15(d) of the Act. | Yes |   |   | No | X |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|--------|--------|----|---|

| such                filing requirements for the past 90 days. | Yes | X |   | No |   |
|---------------------------------------------------------------|-----|---|--------|----|--------|

| Indicate                by check mark whether the registrant is an accelerated filer (as                defined                in Rule 12b-2 of the Act). | Yes | X |   | No |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|-----|---|--------|----|--------|

| Indicate                by check mark whether the registrant is a shell company (as defined                in                Rule 12b-2 of the Act). | Yes |   |   | No | X |
|------------------------------------------------------------------------------------------------------------------------------------------------------|-----|--------|--------|----|---|

**Documents      Incorporated by Reference:**

----

----

**COMMUNITY      BANKS, INC. **

**FORM      10-K**

**INDEX**

| **PART                I**   |                                                                                                                                             | **Page**                            |
|-----------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|
|                        |                                                                                                                                             |                                |
| Item                1       | Business                                                                                                                                         | 4                -                7 |
| Item                1A      | Risk                Factors                                                                                                                      | 7                -                8 |
| Item                1B      | Unresolved                Staff Comments                                                                                                         | 9                                   |
| Item                2       | Properties                                                                                                                                       | 9                                   |
| Item                3       | Legal                Proceedings                                                                                                                 | 9                                   |
| Item                4       | Submission                of Matters to a Vote of Security                Holders                                                                | 9                                   |
|                        |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| **PART                II**  |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| Item                5       | Market                for Registrant’s Common Equity, Related Stockholder                Matters and Issuer Purchases of Equity Securities | 10                                  |
| Item                6       | Selected                Financial Data                                                                                                           | 11                                  |
| Item                7       | Management’s                Discussion and Analysis of Financial Condition                and Results of Operations                        | 12                - 50              |
| Item                7A      | Quantitative                and Qualitative Disclosures About Market                Risk                                                         | 51                - 53              |
| Item                8       | Financial                Statements and Supplementary                Data                                                                        | 54                - 84              |
| Item                9       | Changes                in and Disagreements with Accountants on Accounting                and Financial Disclosure                               | 85                                  |
| Item                9A      | Controls                and Procedures                                                                                                           | 85                                  |
| Item                9B      | Other                Information                                                                                                                 | 85                                  |
|                        |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| **PART                III** |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| Item                10      | Directors                and Executive Officers of the                Registrant                                                                 | 88                                  |
| Item                11      | Executive                Compensation                                                                                                            | 88                                  |
| Item                12      | Security                Ownership of Certain Beneficial Owners and                Management                                                     | 88                                  |
| Item                13      | Certain                Relationships and Related                Transactions                                                                     | 88                                  |
| Item                14      | Principal                Accountant Fees and Services                                                                                            | 88                                  |
|                        |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| **PART                IV**  |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| Item                15      | Exhibits,                Financial Statement Schedules                                                                                           | 89                - 90              |
|                        |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |
| **SIGNATURES**              |                                                                                                                                             | 91                                  |
|                        |                                                                                                                                             |                                |
|                        |                                                                                                                                             |                                |

----

**PART      I**

**Item      1. Business****:**

**Acquisition      of PennRock Financial Services Corp.**

----

**Supervision      and Regulation of**
** **
**Community      **
** **

----

**Capital      Adequacy**

**USA      Patriot Act**

**Sarbanes-Oxley      Act of 2002**

----

**Monetary      and Fiscal Policy**

**Other      Merger Activity**

**Operating      Segments**

**Concentrations,      Seasonality**

**Environmental      Compliance**

**Item      1A. Risk Factors**

*Community      may not fully realize the anticipated benefits of the PennRock      merger.*

----

*Future      loan losses may exceed Community’s allowance for loan losses.*

*Rapidly      changing interest rate environments could reduce Community’s net interest      margin, net interest income, fee income and net income. *

*Community’s      profitability depends significantly on economic conditions in its local      markets.*

*The      financial services industry is very competitive. *

*Supervision      and Regulation*

*Community’s      stock price can be volatile.*

----

**Item      1B. Unresolved Staff Comments**

**Item      2. Properties**

**Item      3.**** ****Legal      Proceedings:**

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

----

**PART      II**

**Item      5****.****Market      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases      of Equity Securities:**

**Market      Information**

|                          | **2005**                           |           | **2004**      |
|-------------------------------|------------------------------------|----------------|---------------|
|                          | **Price                Per Share** | **Dividends**  |          | **Price                Per Share** | **Dividends** |
|                          | **Low**                            | **High**       | **Declared**  |   | **Low** | **High** | **Declared** |
|                          |                               |           |          |   |   |   |   |
| First                Quarter  | **$****23.70**                     | **$****28.51** | **$****0.17** |   | $28.41 | $34.52 | $0.16 |
| Second                Quarter | **$****23.04**                     | **$****26.50** | **$****0.19** |   | $27.02 | $31.58 | $0.17 |
| Third                Quarter  | **$****26.66**                     | **$****28.85** | **$****0.19** |   | $25.35 | $29.73 | $0.17 |
| Fourth                Quarter | **$****25.09**                     | **$****29.84** | **$****0.20** |   | $27.77 | $31.47 | $0.17 |

**Issuer      Purchases of Equity Securities**

|             |   | **Shares****Purchased** |    | **Average                Price****Paid****Per                Share** |   | **Shares                Purchased****as                part of****Repurchase                Program** |   | **Capacity                to****Purchase****More                Shares** |    |
|------------------|--------|-------------------------|---------|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|---------|
|             |   |                    |    |                                                                 |   |                                                                                                  |   |                                                                     |    |   |   |   |   |
| 10/1/05-10/31/05 |   |                    | 209,400 |                                                                 | $      | 27.37                                                                                                 |   |                                                                     | 209,400 |   |   | 734,700 |   |
| 11/1/05-11/30/05 |   |                    | 50,000  |                                                                 | $      | 28.06                                                                                                 |   |                                                                     | 50,000  |   |   | 684,700 |   |
| 12/1/05-12/31/05 |   |                    | ---     |                                                                 |   | ---                                                                                                   |   |                                                                     | ---     |   |   | 684,700 |   |

----

**Item      6.**** ****Selected      Financial Data:**

|                                                                |   | **At                or for the Year Ended December 31,**        |           |
|---------------------------------------------------------------------|--------|-----------------------------------------------------------------|----------------|
|                                                                |   | **2005                ***                                       |           | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                |   | (dollars                in thousands except for per share data) |           |
| **BALANCE                SHEET DATA**                               |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At                Period End:                                       |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment                securities                                |   | **$**                                                           | **628,585**    |   | $ | 619,110 |   | $ | 646,961 |   | $ | 667,801 |   | $ | 543,901 |   |
| Total                loans                                          |   |                                                            | **2,234,497**  |   |   | 1,215,951 |   |   | 1,078,611 |   |   | 904,568 |   |   | 857,278 |   |
| Total                assets                                         |   |                                                            | **3,332,430**  |   |   | 1,954,799 |   |   | 1,861,063 |   |   | 1,680,362 |   |   | 1,509,734 |   |
| Total                deposits                                       |   |                                                            | **2,294,367**  |   |   | 1,305,537 |   |   | 1,230,685 |   |   | 1,132,913 |   |   | 1,003,225 |   |
| Long-term                debt                                       |   |                                                            | **430,719**    |   |   | 404,662 |   |   | 411,422 |   |   | 320,533 |   |   | 322,155 |   |
| Stockholders’                equity                           |   |                                                            | **476,673**    |   |   | 152,341 |   |   | 143,406 |   |   | 129,162 |   |   | 111,249 |   |
| Average:                                                            |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                         |   |                                                            | **2,668,605**  |   |   | 1,941,096 |   |   | 1,780,679 |   |   | 1,580,046 |   |   | 1,398,521 |   |
| Total                stockholders’ equity                     |   |                                                            | **318,768**    |   |   | 145,750 |   |   | 135,773 |   |   | 119,352 |   |   | 111,381 |   |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **EARNINGS                DATA:**                                   |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income                                  |   |                                                            | **82,645**     |   |   | 56,557 |   |   | 52,514 |   |   | 50,488 |   |   | 45,935 |   |
| Provision                for loan losses                            |   |                                                            | **2,300**      |   |   | 3,100 |   |   | 2,500 |   |   | 3,350 |   |   | 5,080 |   |
| Net                interest income after provision for loan losses  |   |                                                            | **80,345**     |   |   | 53,457 |   |   | 50,014 |   |   | 47,138 |   |   | 40,855 |   |
| Other                income                                         |   |                                                            | **26,437**     |   |   | 23,213 |   |   | 20,463 |   |   | 13,975 |   |   | 12,141 |   |
| Other                expense                                        |   |                                                            | **75,069**     |   |   | 49,993 |   |   | 45,718 |   |   | 39,300 |   |   | 36,521 |   |
| Provision                for income taxes                           |   |                                                            | **6,072**      |   |   | 4,879 |   |   | 4,359 |   |   | 3,367 |   |   | 2,879 |   |
| Net                income                                           |   |                                                            | **25,641**     |   |   | 21,798 |   |   | 20,400 |   |   | 18,446 |   |   | 13,596 |   |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PER                SHARE DATA:**                                  |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                             |   |                                                            | **1.44**       |   |   | 1.78 |   |   | 1.68 |   |   | 1.51 |   |   | 1.11 |   |
| Diluted                earnings per share                           |   |                                                            | **1.42**       |   |   | 1.73 |   |   | 1.63 |   |   | 1.48 |   |   | 1.09 |   |
| Cash                dividends declared                              |   |                                                            | **0.75**       |   |   | 0.67 |   |   | 0.63 |   |   | 0.54 |   |   | 0.48 |   |
| Book                value                                           |   |                                                            | **20.80**      |   |   | 12.45 |   |   | 11.73 |   |   | 10.67 |   |   | 9.05 |   |
| Average                diluted shares outstanding                   |   |                                                            | **18,071,833** |   |   | 12,574,908 |   |   | 12,497,372 |   |   | 12,491,320 |   |   | 12,461,996 |   |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **PROFITABILITY                RATIOS:**                            |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Return                on average assets                             |   |                                                            | **0.96**       | **%** |   | 1.12 | % |   | 1.15 | % |   | 1.17 | % |   | 0.97 | % |
| Return                on average stockholders’ equity         |   |                                                            | **8.04**       | **%** |   | 14.96 | % |   | 15.03 | % |   | 15.46 | % |   | 12.21 | % |
| Net                interest margin (FTE)                            |   |                                                            | **3.76**       | **%** |   | 3.44 | % |   | 3.50 | % |   | 3.78 | % |   | 3.83 | % |
| Efficiency                ratio                                     |   |                                                            | **57.51**      | **%** |   | 60.42 | % |   | 60.59 | % |   | 56.92 | % |   | 60.21 | % |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CAPITAL                AND LIQUIDITY RATIOS:**                    |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity to total assets           |   |                                                            | **14.30**      | **%** |   | 7.79 | % |   | 7.71 | % |   | 7.69 | % |   | 7.37 | % |
| Average                equity to average assets                     |   |                                                            | **11.95**      | **%** |   | 7.51 | % |   | 7.62 | % |   | 7.55 | % |   | 7.96 | % |
| Dividend                payout ratio                                |   |                                                            | **52.42**      | **%** |   | 37.69 | % |   | 37.35 | % |   | 36.07 | % |   | 43.25 | % |
| Net                loans to assets                                  |   |                                                            | **66.36**      | **%** |   | 61.47 | % |   | 57.25 | % |   | 53.10 | % |   | 55.98 | % |
|                                                                |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **ASSET                QUALITY RATIOS:**                            |   |                                                            |           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                for loan losses to total loans outstanding |   |                                                            | **1.03**       | **%** |   | 1.19 | % |   | 1.22 | % |   | 1.36 | % |   | 1.42 | % |
| Allowance                for loan losses to non-accrual loans       |   |                                                            | **253**        | **%** |   | 266 | % |   | 162 | % |   | 131 | % |   | 109 | % |
| Non-accrual                loans to total loans outstanding         |   |                                                            | **0.41**       | **%** |   | 0.45 | % |   | 0.76 | % |   | 1.04 | % |   | 1.29 | % |
| Non-performing                assets to total assets                |   |                                                            | **0.32**       | **%** |   | 0.38 | % |   | 0.70 | % |   | 0.63 | % |   | 0.78 | % |
| Net                charge-offs to average loans outstanding         |   |                                                            | **0.05**       | **%** |   | 0.16 | % |   | 0.17 | % |   | 0.35 | % |   | 0.39 | % |

----

**Item      7.**** ****Management’s      Discussion and Analysis of Financial Condition and Results of      Operations:**

**INTRODUCTION**

**Purpose      of this Presentation**

**Presentation      Format**

**2005      OVERVIEW**

**2005      Expansion**

| ·   | *Merger                Descriptio*n |
|--------------------|-------------------------------------|

----

| *·  * | *Assets                Acquired / “De-leverage”Strategy* |
|----------------------|----------------------------------------------------------------------|

| o   | Reduce                the combined company’s exposure to high cost, long-term wholesale                funding. |
|---------------|-----------------------------------------------------------------------------------------------------------------------|

| o   | Construct                a post-merger balance sheet posture that would reduce interest rate                risk                associated with certain short-term wholesale funding                sources. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Maximize                combined investment portfolio performance in the post-merger                environment. |
|---------------|------------------------------------------------------------------------------------------------------------------|

|                                 |   |  Net                Assets Acquired in Merger |    |  Purchase                AccountingAdjustments |   |   De-leverageStrategy |   | **“Pro                Forma”****Opening****PennRock****Balances** |     |
|--------------------------------------|--------|----------------------------------------------------|---------|-----------------------------------------------------|--------|---------------------------------|--------|-------------------------------------------------------------------------------|----------|
|                                 |   |                                               |    |                                                |   |                            |   |                                                                          |     |   |   |   |   |
| Investment                securities |   | $                                                  | 250,272 |                                                | $      | ---                             |   | $                                                                             | (100,000 | ) | **$** | **150,272** |   |
| Loans                                |   |                                               | 843,923 |                                                |   | (1,757                          | )      |                                                                          | ---      |   |   | **842,166** |   |
| Other                assets          |   |                                               | 106,515 |                                                |   | 7,976                           |   |                                                                          | ---      |   |   | **114,491** |   |
|                                 |   |                                               |    |                                                |   |                            |   |                                                                          |     |   |   |   |   |
| Total                Deposits        |   |                                               | 879,965 |                                                |   | 2,110                           |   |                                                                          | ---      |   |   | **882,075** |   |
| Short-term                borrowings |   |                                               | 91,010  |                                                |   | ---                             |   |                                                                          | (75,000  | ) |   | **16,010** |   |
| Long-term                debt        |   |                                               | 127,000 |                                                |   | 1,515                           |   |                                                                          | (25,000  | ) |   | **103,515** |   |
| Other                liabilities     |   |                                               | 13,196  |                                                |   | ---                             |   |                                                                          | ---      |   |   | **13,196** |   |

----

| *·  * | *Merger,                Conversion, and Restructuring                Issues* |
|----------------------|------------------------------------------------------------------------------|

**2005      Performance: Executive Summary**

----

**GAAP      REPORTING ISSUES**

**Forward-Looking      Statements**

----

**Critical      Accounting Policies**

| o   | Allowance                for Loan Losses: Adequacy of Allowance |
|---------------|-----------------------------------------------------------------|

| o   | Allowance                for Loan Losses: Accounting for Loans Acquired in a                Transfer |
|---------------|------------------------------------------------------------------------------------------------------|

| o   | Purchase                Accounting for Business                Combinations |
|---------------|-----------------------------------------------------------------------------|

| o   | “Other                than Temporary” Impairment of Investment                Securities |
|---------------|------------------------------------------------------------------------------------------------------|

| ·   | *Adequacy                of Allowance* |
|--------------------|----------------------------------------|

| *·  * | *Accounting                for Loans Acquired in a                Transfer* |
|----------------------|-----------------------------------------------------------------------------|

| *·  * | *Purchase                Accounting for Business                Combinations* |
|----------------------|-------------------------------------------------------------------------------|

----

| ·   | *“Other                than Temporary” Impairment of Investment                Securities* |
|--------------------|--------------------------------------------------------------------------------------------------------|

**GAAP      versus Non-GAAP**

----

| **Traditional                  GAAP Measures**  |   |   **Adjustments**                                                                                                          |   | **Comparable                  Non-GAAP Measures**                                                  |
|-------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                            |   |                                                                                                                                 |   |                                                                                               |
| **Balance                  Sheet:**             |   |                                                                                                                                 |   |                                                                                               |
| Average                  Assets                 |   | Excludes                  Intangible Assets from Assets                                                                              |   | Average                  “Tangible” Assets                                             |
| Average                  Equity                 |   | Excludes                  Intangible Assets from Equity                                                                              |   | Average                  “Tangible” Equity                                             |
| Equity                  to Assets               |   | Excludes                  Intangible Assets from Equity and Assets                                                                   |   | “Tangible”                  Equity to Assets                                           |
| Book                  Value per Share           |   | Excludes                  Intangible Assets from Equity                                                                              |   | “Tangible”                  Book Value per Share                                       |
|                                            |   |                                                                                                                                 |   |                                                                                               |
| **Performance:**                                |   |                                                                                                                                 |   |                                                                                               |
| Net                  Income / EPS               |   | Excludes                  After-Tax Effect of M&A and Other Special Charges                                                      |   | “Core”                  Net Income / EPS                                               |
| Net                  Income / EPS               |   | Excludes                  After-Tax Effect of CDI                  Amortization,                  M&A, and Other Special Charges |   | “Tangible”                  or “Operating” Income / EPS                    |
| Return                  on Average Assets (ROA) |   | “Tangible”                  Net Income divided by Average “Tangible” Assets                                  |   | Operating                  Return on Average “Tangible” Assets (ROTA)                  |
| Return                  on Average Equity (ROE) |   | “Tangible”                  Net Income divided by Average “Tangible” Equity                                  |   | Operating                  Return on Average “Tangible” Equity                  (ROTE) |

**Quarterly      Presentation of GAAP / Non-GAAP**

**2005      PERFORMANCE ANALYSIS**

**2005      Economic Conditions**

----

**Yield      Curve Dynamics and Banking**

| ·   |  *Yield                Curve Slope* |
|--------------------|------------------------------------------|

----

| *·  * | *Banking                and the Yield Curve* |
|----------------------|----------------------------------------------|

| *·  * | *Simulation* |
|----------------------|--------------|

| *·  * | *“Inverted”                Yield Curve* |
|----------------------|-----------------------------------------------------|

| *·  * | *“Flat”                Yield Curve* |
|----------------------|-------------------------------------------------|

----

**2005      Performance Summary and Review**

----

|                                 |   | 2005                Year                EndBalances |      | **Less:**“Pro                Forma” OpeningPennRock                Balances |   | **Equals:****“Pro                Forma” 2005 Year End Balances** |   | **2004****Year                End Balances** |          | Change |   |          |  % |   |
|--------------------------------------|--------|-----------------------------------------------------|-----------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|----------------------------------------------|---------------|--------|--------|---------------|---------|--------|
|                                 |   |                                                |      |                                                                                    |   |                                                                         |   |                                         |          |   |   |          |    |   |   |   |   |   |   |
| Investment                securities |   | $                                                   | 628,585   |                                                                                    | $      | 150,272                                                                      |   | **$**                                        | **478,313**   |   | **$**  | **619,110**   |    | $      | (140,797 | ) |   | (22.7 | )% |
| Loans                                |   |                                                | 2,234,497 |                                                                                    |   | 842,166                                                                      |   |                                         | **1,392,331** |   |   | **1,215,951** |    |   | 176,380 |   |   | 14.5 | % |
| Other                assets          |   |                                                | 469,348   |                                                                                    |   | 114,491                                                                      |   |                                         | **354,857**   |   |   | **119,738**   |    |   | 235,119 |   |   | 196.4 | % |
|  Total                Assets    |   | $                                                   | 3,332,430 |                                                                                    | $      | 1,106,929                                                                    |   | **$**                                        | **2,225,501** |   | **$**  | **1,954,799** |    | $      | 270,702 |   |   | 13.8 | % |
|                                 |   |                                                |      |                                                                                    |   |                                                                         |   |                                         |          |   |   |          |    |   |   |   |   |   |   |
| Total                Deposits        |   | $                                                   | 2,294,367 |                                                                                    | $      | 882,075                                                                      |   | **$**                                        | **1,412,292** |   | **$**  | **1,305,537** |    | $      | 106,755 |   |   | 8.2 | % |
| Short-term                borrowings |   |                                                | 87,253    |                                                                                    |   | 16,010                                                                       |   |                                         | **71,243**    |   |   | **47,116**    |    |   | 24,127 |   |   | 51.2 | % |
| Long-term                debt        |   |                                                | 461,647   |                                                                                    |   | 103,515                                                                      |   |                                         | **358,132**   |   |   | **435,590**   |    |   | (77,458 | ) |   | (17.8 | )% |
| Other                liabilities     |   |                                                | 12,490    |                                                                                    |   | 13,196                                                                       |   |                                         | **(706**      | **)**  |   | **14,215**    |    |   | (14,921 | ) |   | 105.0 | % |
| Total                Liabilities     |   | $                                                   | 2,855,757 |                                                                                    | $      | 1,014,796                                                                    |   | **$**                                        | **1,840,961** |   | **$**  | **1,802,458** |    | $      | 38,503 |   |   | 2.1 | % |
|                                 |   |                                                |      |                                                                                    |   |                                                                         |   |                                         |          |   |   |          |    |   |   |   |   |   |   |

| o   | Reductions                in investment balances were influenced by both the de-leveraging                strategy                and the utilization of scheduled investment portfolio runoff to fund                loan                growth. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Organic                loan growth reflected strong loan demand, which was affected by favorable                pricing conditions throughout the                year. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Growth                in other assets was driven almost exclusively by the effect of intangibles                added from the merger of Blue Ball. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Deposit                growth, though steady, was not sufficient to fully fund loan demand.                Interest rate conditions favored the utilization of scheduled investment                runoff to fund excess loan demand. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | While                short term borrowings increased, such borrowings were reduced from                the                combination of pre-merger balances at Community and Blue                Ball. |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Long-term                debt reductions were primarily effected by the prepayment of $60                million                of FHLB advances from pre-merger                Community. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Net                interest margin reached 3.76% for 2005, including margins of 3.89%                and                3.96% in the third and fourth quarters, respectively. This was a                marked                improvement over the full year 2004 margin of 3.44%. Despite the                impact of                an increasingly flat yield curve, net interest margin expanded in                the                post-merger, second half of the year. The de-leveraging and balance                sheet                restructuring near the time of the merger helped to boost performance                in                the second half of 2005. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | The                provision for loan losses dropped from $3.1 million in 2004 to $2.3                million in 2005. The provision for 2005 exceeded net charge-offs                of                $824,000 by nearly $1.5 million, as asset quality improved despite                higher                overall loan balances. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| o   | Non-interest                income reflected the revenue stream added from the Blue Ball merger                in the                second half of 2005. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | The                efficiency ratio fell to 57.5%, including 55.6% in the fourth quarter,                despite the fact that operating expenses included over $1.2 million                of                increased intangible amortization in the second half of the year.                This                represented a measurable improvement over the 60.42% recorded for                all of                2004. In addition, quarterly non-interest expenses declined from                $20.8                million in the third quarter to $20.2 million in the fourth quarter,                as                phased-in efficiencies from the integration of Blue Ball were reflected                in                linked-quarter expense reductions. |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**PERFORMANCE      COMPONENTS**

**Net      Interest Income**

|                                        |   | **2005**         |        | **2004**                        |   | **Change**       |   |
|---------------------------------------------|--------|------------------|-------------|---------------------------------|--------|------------------|--------|
|                                        |   |  **Amount** |        | **Yield                / Rate** |   |  **Amount** |   | **Yield                / Rate** |   |  **Amount** |   | **Yield                / Rate** |   |
|                                        |   |             |        |                            |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income              |   | **$**            | **149,456** |                            |   | **6.26**         | **%**  | $ | 106,338 |   |   | 5.80 | % | $ | 43,118 |   |   | 0.46 | % |
| Interest                expense             |   |             | **59,648**  |                            |   | **2.90**         | **%**  |   | 43,242 |   |   | 2.70 | % |   | 16,406 |   |   | 0.20 | % |
| Net                interest income          |   | **$**            | **89,808**  |                            |   |             |   | $ | 63,096 |   |   |   |   | $ | 26,712 |   |   |   |   |
|                                        |   |             |        |                            |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread              |   |             |        |                            |   | **3.36**         | **%**  |   |   |   |   | 3.10 | % |   |   |   |   | 0.26 | % |
| Impact                of non-interest funds |   |             |        |                            |   | **0.40**         | **%**  |   |   |   |   | 0.34 | % |   |   |   |   | 0.06 | % |
|                                        |   |             |        |                            |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest margin          |   |             |        |                            |   | **3.76**         | **%**  |   |   |   |   | 3.44 | % |   |   |   |   | 0.32 | % |

| ·   | *Influence                of Interest Rate Trends* |
|--------------------|----------------------------------------------------|

----

----

| *·  * | *Interest                Income / Earning Assets* |
|----------------------|---------------------------------------------------|

| *·  * | *Interest                Expense / Funding Sources* |
|----------------------|-----------------------------------------------------|

| *·  * | *Interest                Spread / Net Interest Margin* |
|----------------------|--------------------------------------------------------|

| *·  * | *Quarterly                Performance* |
|----------------------|----------------------------------------|

----

|                               |   | **2005**                          |       |
|------------------------------------|--------|-----------------------------------|------------|
|                               |   | **Fourth                Quarter** |       | **Third                Quarter** |   | **Second                Quarter** |   | **First                Quarter** |   |
| Asset                yield         |   |                              | **6.53**   | **%** |   | **6.25** | **%** |   | **6.06** | **%** |   | **6.04** | **%** |
| Funding                cost        |   |                              | **3.00**   | **%** |   | **2.76** | **%** |   | **2.97** | **%** |   | **2.86** | **%** |
| Interest                spread     |   |                              | **3.53**   | **%** |   | **3.49** | **%** |   | **3.09** | **%** |   | **3.18** | **%** |
| Net                interest margin |   |                              | **3.96**   | **%** |   | **3.89** | **%** |   | **3.46** | **%** |   | **3.55** | **%** |
|                               |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| Net                interest income |   | **$**                             | **28,571** |   | **$** | **28,208** |   | **$** | **16,650** |   | **$** | **16,379** |   |

|                               |   | 2004                          |   |
|------------------------------------|--------|-------------------------------|--------|
|                               |   | Fourth                Quarter |   | Third                Quarter |   | Second                Quarter |   | First                Quarter |   |
| Asset                yield         |   |                          | 5.90   | % |   | 5.79 | % |   | 5.75 | % |   | 5.77 | % |
| Funding                cost        |   |                          | 2.75   | % |   | 2.68 | % |   | 2.64 | % |   | 2.70 | % |
| Interest                spread     |   |                          | 3.15   | % |   | 3.11 | % |   | 3.11 | % |   | 3.07 | % |
| Net                interest margin |   |                          | 3.51   | % |   | 3.43 | % |   | 3.44 | % |   | 3.40 | % |
|                               |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income |   | $                             | 16,285 |   | $ | 15,906 |   | $ | 15,843 |   | $ | 15,062 |   |

**Provision      for Credit Losses**

----

**Non-Interest      Income **

|                                                       |   |     |       |     |   | **Change** |   |
|------------------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
|                                                       |   | **2005** |       | **2004** |   | Amount     |   |  % |   |
| Investment                management and trust services    |   | **$**    | **2,692**  |     | $      | 1,510      |   | $ | 1,182 |   |   | 78 | % |
| Service                charges on deposit accounts         |   |     | **9,413**  |     |   | 7,120      |   |   | 2,293 |   |   | 32 | % |
| Other                service charges, commissions and fees |   |     | **5,452**  |     |   | 3,357      |   |   | 2,095 |   |   | 62 | % |
| Insurance                premium income and commissions    |   |     | **3,350**  |     |   | 3,260      |   |   | 90 |   |   | 3 | % |
| Mortgage                banking activities                 |   |     | **2,354**  |     |   | 2,665      |   |   | (311 | ) |   | (12 | )% |
| Earnings                on investment in life insurance    |   |     | **2,063**  |     |   | 1,593      |   |   | 470 |   |   | 30 | % |
| Other                income                                |   |     | **854**    |     |   | 1,238      |   |   | (384 | ) |   | (31 | )% |
|                                                       |   |     |       |     |   |       |   |   |   |   |   |   |   |
|                                                       |   |     | **26,178** |     |   | 20,743     |   |   | 5,435 |   |   | 26 | % |
|                                                       |   |     |       |     |   |       |   |   |   |   |   |   |   |
| Investment                security gains                   |   |     | **259**    |     |   | 2,470      |   |   | (2,211 | ) |   | (90 | )% |
|                                                       |   |     |       |     |   |       |   |   |   |   |   |   |   |
| Total                non-interest income                   |   | **$**    | **26,437** |     | $      | 23,213     |   | $ | 3,224 |   |   | 14 | % |

----

**Non-Interest      Expenses**

|                                                |   |     |       |     |   | **Change** |   |
|-----------------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
|                                                |   | **2005** |       | **2004** |   | Amount     |   |  % |   |
| Salary                and benefits                  |   | **$**    | **36,998** |     | $      | 28,337     |   | $ | 8,661 |   |   | 31 | % |
| Occupancy                expense                    |   |     | **11,355** |     |   | 8,287      |   |   | 3,068 |   |   | 37 | % |
| Marketing                expense                    |   |     | **2,036**  |     |   | 2,325      |   |   | (289 | ) |   | (12 | )% |
| Telecommunications                expense           |   |     | **1,359**  |     |   | 1,285      |   |   | 74 |   |   | 6 | % |
| Amortization                of intangibles          |   |     | **1,424**  |     |   | 161        |   |   | 1,263 |   |   | 784 | % |
| Other                expenses                       |   |     | **13,692** |     |   | 9,598      |   |   | 4,094 |   |   | 43 | % |
|                                                |   |     |       |     |   |       |   |   |   |   |   |   |   |
| Subtotal                                            |   |     | **66,864** |     |   | 49,993     |   |   | 16,871 |   |   | 34 | % |
|                                                |   |     |       |     |   |       |   |   |   |   |   |   |   |
| Merger,                conversion and restructuring |   |     | **8,205**  |     |   | ---        |   |   | 8,205 |   |   | --- |   |
|                                                |   |     |       |     |   |       |   |   |   |   |   |   |   |
|                                                |   | **$**    | **75,069** |     | $      | 49,993     |   | $ | 25,076 |   |   | 50 | % |

| *·  * | *Overview                of Merger Impact—Operating                Expenses* |
|----------------------|------------------------------------------------------------------------------------|

----

| *·  * | *Salary                and Benefits* |
|----------------------|--------------------------------------|

*requires*

----

| *·  * | *Occupancy* |
|----------------------|-------------|

| *·  * | *Marketing                Expenses* |
|----------------------|-------------------------------------|

| *·  * | *Telecom                Expenses* |
|----------------------|-----------------------------------|

----

| ·   | *Amortization                of Intangibles* |
|--------------------|----------------------------------------------|

| *·  * | *Other                Expenses* |
|----------------------|---------------------------------|

| *·  * | *Income                Taxes* |
|----------------------|-------------------------------|

**STATEMENT      OF CONDITION**

**Overview**

**Investments**

----

| *·  * | *Investment                Classification* |
|----------------------|--------------------------------------------|

| *·  * | *2005                Activity* |
|----------------------|--------------------------------|

| o   | The                entire portfolio of investments acquired from the merger of Blue                Ball was                liquidated immediately after the                merger. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Proceeds                received from the liquidation of Blue Ball’s portfolio were coordinated                with the de-leveraging strategy, described                earlier. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Certain                of the liquidation proceeds were reinvested at higher yields in the                post-merger period. |
|---------------|-------------------------------------------------------------------------------------------------------------------------------|

| o   | Scheduled                runoff from the investment portfolio was utilized to accommodate                the                de-leverage strategy and to facilitate the demand for credit funding,                which outpaced the growth from deposit funding sources. |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *·  * | *Other                Than Temporary Impairment* |
|----------------------|--------------------------------------------------|

----

| o   | The                length of time and the extent to which the fair value has been less                than                cost, |
|---------------|---------------------------------------------------------------------------------------------------------------------------------|

| o   | The                financial condition and near-term prospects of the issuer,                and |
|---------------|--------------------------------------------------------------------------------------------------|

| o   | The                intent and ability of the Corporation to retain its investment in                the                issuer for a period of time sufficient to allow for any anticipated                recovery in fair value. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *·  * | *Investment                Summary* |
|----------------------|-------------------------------------|

|                                                     |   | **2005**                          |        | **2004**          |   | **2003**                          |   |
|----------------------------------------------------------|--------|-----------------------------------|-------------|-------------------|--------|-----------------------------------|--------|
|                                                     |   | **Amortized                Cost** |        | **Fair****Value** |   | **Amortized                Cost** |   | **Fair****Value** |   | **Amortized                Cost** |   | **Fair****Value** |   |
|                                                     |   |                              |        |              |   |                              |   |   |   |   |   |   |   |
| U.S.                government and federal agency        |   | **$**                             | **125,938** |              | **$**  | **123,124**                       |   | $ | 126,056 |   | $ | 125,541 |   | $ | 173,651 |   | $ | 173,292 |   |
| Mortgage-backed,                primarily federal agency |   |                              | **186,871** |              |   | **182,813**                       |   |   | 178,437 |   |   | 179,314 |   |   | 121,853 |   |   | 123,395 |   |
| State                and municipal                       |   |                              | **209,077** |              |   | **213,475**                       |   |   | 180,110 |   |   | 186,366 |   |   | 177,546 |   |   | 184,481 |   |
| Corporate                                                |   |                              | **40,351**  |              |   | **40,220**                        |   |   | 58,928 |   |   | 60,043 |   |   | 95,461 |   |   | 97,987 |   |
| Equity                                                   |   |                              | **68,909**  |              |   | **68,486**                        |   |   | 67,085 |   |   | 67,846 |   |   | 65,070 |   |   | 67,806 |   |
| Total                                                    |   | **$**                             | **631,146** |              | **$**  | **628,118**                       |   | $ | 610,616 |   | $ | 619,110 |   | $ | 633,581 |   | $ | 646,961 |   |

**Maturity      Distribution of Securities**

|                                                |   |  **Within                One Year** |   | **One****Through****Five                Years** |   | **Five****Through****Ten                Years** |   |  **After****Ten                Years** |    |   **Total** |   |  **Average****Maturity** |   | **Weighted****Average****Yield(a)** |    |
|-----------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|---------------------------------------------|---------|-----------------------|--------|-------------------------------|--------|-------------------------------------|---------|
| U.S.                Government and federal agencies |   | $                                        | 999    |                                            | $      | 41,597                                          |   | $                                           | 120,771 |                  | $      | 149,441                       |   | $                                   | 312,808 |   |   | 10yr.                7mos. |   |   | 4.69 | % |
| State                and municipal                  |   |                                     | 657    |                                            |   | 1,065                                           |   |                                        | 16,025  |                  |   | 188,330                       |   |                                | 206,077 |   |   | 15yr.                2mos. |   |   | 7.07 | % |
| Other                                               |   |                                     | 4,007  |                                            |   | 8,269                                           |   |                                        | 9,148   |                  |   | 21,928                        |   |                                | 43,352  |   |   | 13yr.                8 mos. |   |   | 6.49 | % |
| Total                                               |   | $                                        | 5,663  |                                            | $      | 50,931                                          |   | $                                           | 145,944 |                  | $      | 359,699                       |   | $                                   | 562,237 |   |   | 12yr.                6 mos. |   |   | 5.71 | % |
|                                                |   |                                     |   |                                            |   |                                            |   |                                        |    |                  |   |                          |   |                                |    |   |   |   |   |   |   |   |
| Percentage                of total                  |   |                                     | 1.00   | %                                               |   | 9.06                                            | %      |                                        | 25.96   | %                     |   | 63.98                         | %      |                                | 100.00  | % |   |   |   |   |   |   |
|                                                |   |                                     |   |                                            |   |                                            |   |                                        |    |                  |   |                          |   |                                |    |   |   |   |   |   |   |   |
| Weighted                average yield (a)           |   |                                     | 5.17   | %                                               |   | 4.82                                            | %      |                                        | 4.94    | %                     |   | 6.15                          | %      |                                | 5.71    | % |   |   |   |   |   |   |

----

**Loans**

|                                   |   |     |          |     |   | **Change** |   |
|----------------------------------------|--------|----------|---------------|----------|--------|------------|--------|
|                                   |   | **2005** |          | **2004** |   | Amount     |   |  % |   |
|                                   |   |     |          |     |   |       |   |   |   |   |   |   |   |
| Commercial                             |   | **$**    | **592,556**   |     | $      | 404,653    |   | $ | 187,903 |   |   | 46 | % |
| Commercial                real estate  |   |     | **562,852**   |     |   | 310,769    |   |   | 252,083 |   |   | 81 | % |
| Residential                real estate |   |     | **128,120**   |     |   | 95,547     |   |   | 32,573 |   |   | 34 | % |
| Consumer                               |   |     | **428,981**   |     |   | 342,964    |   |   | 86,017 |   |   | 25 | % |
| Total                                  |   | **$**    | **1,712,509** |     | $      | 1,153,933  |   | $ | 558,576 |   |   | 48 | % |

|                                                      |   | **2005** |    | **2004** |   |
|-----------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                      |   |     |    |     |   |   |   |
| Commercial                                                |   |     | **35**  | **%**    |   | 35 | % |
| Commercial                real estate                     |   |     | **33**  | **%**    |   | 27 | % |
| Residential                real estate                    |   |     | **7**   | **%**    |   | 8 | % |
| Consumer                                                  |   |     | **25**  | **%**    |   | 30 | % |
|                       Total |   |     | **100** | **%**    |   | 100 | % |

----

**Allowance      for Loan Losses and Credit Quality**

|                                                          |   | **2005** |       | **2004** |   | **2003** |   |
|---------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
|                                                          |   |     |       |     |   |     |   |   |   |   |
| Balance                at January 1,                          |   | **$**    | **14,421** |     | $      | 13,178   |   | $ | 12,343 |   |
| Loans                charged off                              |   |     | **(2,323** | **)**    |   | (2,910   | )      |   | (2,839 | ) |
| Recoveries                                                    |   |     | **1,499**  |     |   | 1,053    |   |   | 1,174 |   |
| Provision                charged to operations                |   |     | **2,300**  |     |   | 3,100    |   |   | 2,500 |   |
| Allowance                established for acquired credit risk |   |     | **7,068**  |     |   | ---      |   |   | --- |   |
| Balance                at December 31,                        |   | **$**    | **22,965** |     | $      | 14,421   |   | $ | 13,178 |   |
|                                                          |   |     |       |     |   |     |   |   |   |   |
| Allowance                for credit losses to loans           |   |     | **1.03**   | **%**    |   | 1.19     | %      |   | 1.22 | % |

| *·  * | *Loan                Quality Metrics* |
|----------------------|---------------------------------------|

----

|                                                                                                                                                                                                                                                      |   | **2005** |          | **2004** |   | **2003**  |   | **2002** |      | **2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------------|----------|--------|-----------|--------|----------|-----------|----------|--------|
| Loans                at year-end                                                                                                                                                                                                                          |   | **$**    | **2,234,497** |     | $      | 1,215,951 |   | $        | 1,078,611 |     | $      | 904,568 |   | $ | 857,278 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Average                loans balance                                                                                                                                                                                                                      |   | **$**    | **1,712,509** |     | $      | 1,153,933 |   | $        | 997,190   |     | $      | 886,808 |   | $ | 838,178 |   |
| Balance,                allowance for loan losses, January 1                                                                                                                                                                                              |   | **$**    | **14,421**    |     | $      | 13,178    |   | $        | 12,343    |     | $      | 12,132 |   | $ | 10,328 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Loans                charged off:                                                                                                                                                                                                                         |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                                                                                                                                                                                                     |   |     | **321**       |     |   | 300       |   |     | 253       |     |   | 1,878 |   |   | 2,275 |   |
| Real                estate-commercial mortgage                                                                                                                                                                                                            |   |     | **963**       |     |   | 1,087     |   |     | 1,336     |     |   | 1,337 |   |   | 484 |  * |
| Real                estate-retail mortgage                                                                                                                                                                                                                |   |     | **119**       |     |   | 160       |   |     | 212       |     |   | 110 |   |   | --- |   |
| Consumer                and other                                                                                                                                                                                                                         |   |     | **920**       |     |   | 1,363     |   |     | 1,038     |     |   | 855 |   |   | 1,017 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Total                                                                                                                                                                                                                                                     |   |     | **2,323**     |     |   | 2,910     |   |     | 2,839     |     |   | 4,180 |   |   | 3,776 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Loans                recovered:                                                                                                                                                                                                                           |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                                                                                                                                                                                                     |   |     | **286**       |     |   | 324       |   |     | 240       |     |   | 644 |   |   | 120 |   |
| Real                estate-commercial mortgage                                                                                                                                                                                                            |   |     | **703**       |     |   | 240       |   |     | 606       |     |   | 7 |   |   | 108 |  * |
| Real                estate-retail mortgage                                                                                                                                                                                                                |   |     | **68**        |     |   | 17        |   |     | 83        |     |   | 18 |   |   | --- |   |
| Consumer                and other                                                                                                                                                                                                                         |   |     | **442**       |     |   | 472       |   |     | 245       |     |   | 372 |   |   | 272 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Total                                                                                                                                                                                                                                                     |   |     | **1,499**     |     |   | 1,053     |   |     | 1,174     |     |   | 1,041 |   |   | 500 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Net                charge-offs                                                                                                                                                                                                                            |   |     | **(824**      | **)**    |   | (1,857    | )      |     | (1,665    | )        |   | (3,139 | ) |   | (3,276 | ) |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Provision                for loan losses                                                                                                                                                                                                                  |   |     | **2,300**     |     |   | 3,100     |   |     | 2,500     |     |   | 3,350 |   |   | 5,080 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Allowance                established for acquired credit risk                                                                                                                                                                                             |   |     | **7,068**     |     |   | ---       |   |     | ---       |     |   | --- |   |   | --- |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Balance,                allowance for loan losses,December                31                                                                                                                                                                              |   | **$**    | **22,965**    |     | $      | 14,421    |   | $        | 13,178    |     | $      | 12,343 |   | $ | 12,132 |   |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Net                charge-offs to loans at year end                                                                                                                                                                                                       |   |     | **0.04**      | **%**    |   | 0.15      | %      |     | 0.15      | %        |   | 0.35 | % |   | 0.38 | % |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Net                charge-offs to average loans                                                                                                                                                                                                           |   |     | **0.05**      | **%**    |   | 0.16      | %      |     | 0.17      | %        |   | 0.35 | % |   | 0.39 | % |
|                                                                                                                                                                                                                                                      |   |     |          |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Balance                of allowance for loan losses to                loans at year end                                                                                                                                                                   |   |     | **1.03**      | **%**    |   | 1.19      | %      |     | 1.22      | %        |   | 1.36 | % |   | 1.42 | % |
|  *                Prior breakouts of historical information could not be readily                reconstructed from predecessor banks’ records.Breakouts                from 2001 are assumed to approximate current mix                trends. |

| *·  * | *SOP                03-3* |
|----------------------|---------------------------|

----

| ·   | *Management                Process* |
|--------------------|-------------------------------------|

|                                                  |   | **2005** |       | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|----------|--------|----------|--------|
| **Loans:**                                            |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural |   | **$**    | **13,632** |     | $      | 7,899    |   | $        | 7,090  |     | $      | 6,305 |   | $ | 9,285 |   |
| Real                estate-construction               |   |     | **---**    |     |   | ---      |   |     | ---    |     |   | --- |   |   | 10 |   |
| Real                estate-mortgage                   |   |     | **2,186**  |     |   | 2,099    |   |     | 2,313  |     |   | 1,936 |   |   | 965 |   |
| Installment                                           |   |     | **3,520**  |     |   | 3,202    |   |     | 2,184  |     |   | 1,767 |   |   | 1,030 |   |
| Unallocated                                           |   |     | **3,627**  |     |   | 1,221    |   |     | 1,591  |     |   | 2,335 |   |   | 842 |   |
|                                                  |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Balance                                               |   | **$**    | **22,965** |     | $      | 14,421   |   | $        | 13,178 |     | $      | 12,343 |   | $ | 12,132 |   |

----

| ·   | *Risk                Elements* |
|--------------------|--------------------------------|

|                                                                     |   | **2005** |       | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|----------|--------|----------|--------|
| Loans                on which accrual of interest has been discontinued: |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                    |   | $        | 1,834      |     | $      | 1,748    |   | $        | 3,066  |     | $      | 2,257 |   | $ | 3,783 |   |
| Mortgages                                                                |   |     | 7,105      |     |   | 2,894    |   |     | 4,054  |     |   | 6,609 |   |   | 6,952 |   |
| Other                                                                    |   |     | 121        |     |   | 786      |   |     | 1,031  |     |   | 527 |   |   | 355 |   |
| Total                non-accrual loans                                   |   |     | **9,060**  |     |   | 5,428    |   |     | 8,151  |     |   | 9,393 |   |   | 11,090 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Foreclosed                real estate                                    |   |     | **1,447**  |     |   | 2,094    |   |     | 4,865  |     |   | 1,183 |   |   | 631 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Total                non-performing assets                               |   |     | **10,507** |     |   | 7,522    |   |     | 13,016 |     |   | 10,576 |   |   | 11,721 |   |
| Loans                past due 90 days or more:                           |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Commercial,                financial and agricultural                    |   |     | ---        |     |   | ---      |   |     | 4      |     |   | 97 |   |   | 1,002 |   |
| Mortgages                                                                |   |     | 6          |     |   | ---      |   |     | 40     |     |   | 770 |   |   | 405 |   |
| Consumer                and other                                        |   |     | 16         |     |   | ---      |   |     | 46     |     |   | 94 |   |   | 252 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
|                                                                     |   |     | **22**     |     |   | ---      |   |     | 90     |     |   | 961 |   |   | 1,659 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Total                risk elements                                       |   | **$**    | **10,529** |     | $      | 7,522    |   | $        | 13,106 |     | $      | 11,537 |   | $ | 13,380 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Ending                allowance for loan losses                          |   | **$**    | **22,965** |     | $      | 14,421   |   | $        | 13,178 |     | $      | 12,343 |   | $ | 12,132 |   |
|                                                                     |   |     |       |     |   |     |   |     |   |     |   |   |   |   |   |   |
| Ending                allowance to non-accrual loans                     |   |     | **253**    | **%**    |   | 266      | %      |     | 162    | %        |   | 131 | % |   | 109 | % |

| *·  * | *Overall                Assessment* |
|----------------------|-------------------------------------|

----

**Intangible      Assets**

**Other      Assets**

**Deposits**

|                                      |   |     |          |     |   | **Change** |   |
|-------------------------------------------|--------|----------|---------------|----------|--------|------------|--------|
|                                      |   | **2005** |          | **2004** |   | Amount     |   |  % |   |
|                                      |   |     |          |     |   |       |   |   |   |   |   |   |   |
| Demand                                    |   | **$**    | **271,319**   |     | $      | 178,084    |   | $ | 93,235 |   |   | 52 | % |
| Savings                & NOW accounts |   |     | **683,316**   |     |   | 495,968    |   |   | 187,348 |   |   | 38 | % |
| Time                                      |   |     | **701,776**   |     |   | 510,046    |   |   | 191,730 |   |   | 38 | % |
| Time                $100,000 or more      |   |     | **150,820**   |     |   | 111,879    |   |   | 38,941 |   |   | 35 | % |
|                                      |   | **$**    | **1,807,231** |     | $      | 1,295,977  |   | $ | 511,254 |   |   | 39 | % |

----

|                                      |   | **2005** |   | **2004** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|
|                                      |   |     |   |     |   |   |   |
| Demand                                    |   |     | 15     | %        |   | 14 | % |
| Savings                & NOW accounts |   |     | 38     | %        |   | 38 | % |
| Time                                      |   |     | 39     | %        |   | 39 | % |
| Time                $100,000 or more      |   |     | 8      | %        |   | 9 | % |
|                                      |   |     | 100    | %        |   | 100 | % |

| **Remaining                Time to Maturity:** |   |   |    |
|------------------------------------------------|--------|--------|---------|
| Less                than three months          |   | $      | 24,831  |   |
| Three                months to six months      |   |   | 24,742  |   |
| Six                months to twelve months     |   |   | 60,922  |   |
| More                than twelve months         |   |   | 80,530  |   |
|                                           |   | $      | 191,025 |   |

**Borrowed      Funds**

**Capital      Adequacy**

----

| *·  * | *Capital                Management Policy* |
|----------------------|--------------------------------------------|

| ·   | *Regulatory                Guidelines* |
|--------------------|----------------------------------------|

|                                          |   | **December                31,****2005** |     | **“Well****Capitalized”** |   | **“Regulatory****Minimums”** |   |
|-----------------------------------------------|--------|-----------------------------------------|----------|---------------------------------------|--------|------------------------------------------|--------|
| Leverage                ratio                 |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Community                Banks, Inc.          |   |                                    | **8.2**  | **%**                                 |   | 5                                        | %      |   | 4 | % |
| Bank                only                      |   |                                    | **8.0**  | **%**                                 |   | 5                                        | %      |   | 4 | % |
|                                          |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Tier                1 capital ratio           |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Community                Banks, Inc.          |   |                                    | **10.1** | **%**                                 |   | 6                                        | %      |   | 4 | % |
| Bank                only                      |   |                                    | **9.8**  | **%**                                 |   | 6                                        | %      |   | 4 | % |
|                                          |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Total                risk-based capital ratio |   |                                    |     |                                  |   |                                     |   |   |   |   |
| Community                Banks, Inc.          |   |                                    | **11.0** | **%**                                 |   | 10                                       | %      |   | 8 | % |
| Bank                only                      |   |                                    | **10.7** | **%**                                 |   | 10                                       | %      |   | 8 | % |

| *·  * | *Capital                Management* |
|----------------------|-------------------------------------|

----

**ASSET/LIABILITY      MANAGEMENT AND LIQUIDITY**

**Liquidity**

**Rate      Shock Simulation**

----

|  **Simultaneous****Rate****“Shock”** | **Annual****Change****in                Net Interest**** Income** |   **%****Change** |
|-------------------------------------------------------|------------------------------------------------------------------------|-----------------------------|
|                                                  |                                                                   |                        |
| +300bp                                                | +                $3.2 million                                          | +                3.01%      |
| +200bp                                                | +                $2.7 million                                          | +                2.50%      |
| +100bp                                                | +                $1.7 million                                          | +                1.57%      |
| -100bp                                                | -                $2.0 million                                          | -                1.87%      |

**GAP      and EVE**

|  **Interval**          | **Cumulative                GAP****(Expressed                as % of Assets)** |
|-----------------------------|--------------------------------------------------------------------------------|
|                        |                                                                           |
| 0-90                days    | +10.65%                                                                        |
|                        |                                                                           |
| 91-180                days  | +8.79%                                                                         |
|                        |                                                                           |
| 181-365                days | +4.91%                                                                         |

----

**CONTRACTUAL      OBLIGATIONS**

|                                          |   | **Payments                due by period** |      |
|-----------------------------------------------|--------|-------------------------------------------|-----------|
|  **Dollars                in thousands** |   |  **Total**                           |      | **Less                than****1                year** |   | **1-3****years** |   | **3-5****years** |   | **More                than****5                years** |   |
|                                          |   |                                      |      |   |   |   |   |   |   |   |   |
| Long-term                debt                 |   | $                                         | 430,719   |   | $ | 77,963 |   | $ | 86,161 |   | $ | 60,342 |   | $ | 206,253 |   |
| Operating                lease obligations    |   |                                      | 24,805    |   |   | 1,682 |   |   | 2,745 |   |   | 2,495 |   |   | 17,883 |   |
| Subordinated                debt              |   |                                      | 30,928    |   |   | --- |   |   | --- |   |   | --- |   |   | 30,928 |   |
| Time                deposits                  |   |                                      | 1,076,423 |   |   | 606,186 |   |   | 319,147 |   |   | 148,916 |   |   | 2,174 |   |
|                                          |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                         |   | $                                         | 1,562,875 |   | $ | 685,831 |   | $ | 408,053 |   | $ | 211,753 |   | $ | 257,238 |   |

**OFF-BALANCE-SHEET      COMMITMENTS**

**REGULATORY      MATTERS**

**INFLATION**

**PERFORMANCE      REVIEW: 2004 VERSUS 2003**

----

**Interest      Income /Earning Assets**

**Interest      Expense / Funding Sources**

**Interest      Spread and Net Interest Margin**

**Non-Interest      Income**

----

**Provision      for Loan Losses**

**Non-Interest      Expenses**

| ·   | Distribution                of Assets, Liabilities and Stockholders’ Equity; Interest Rates and                Interest Differential |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Rate/Volume                Analysis - Tax Equivalent Basis |
|--------------------|------------------------------------------------------------|

| ·   | Loan                Account Composition as of December 31, 2005, 2004, 2003, 2002, and                2001. |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | Maturities                and Sensitivity to Changes in Interest Rates for Commercial, Financial,                and Agricultural Loans as of December 31,                2005. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **Distribution                  of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and                  Interest Differential**                                                                                                      |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income                  and Rates on a Tax Equivalent Basis (b) for the Years Ended December                  31,                  2005, 2004, and 2003**                                                                                              |   |
|                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                     |   | **2005** |   | **2004** |   | **2003** |   |
|                                                                                                                                                                                                                                                     |   |   **Average****Balance(c)** |   |  **Interest****Income/****Expense(a)** |   | **Average****Rates****Earned/****Paid                  (a)** |   |   **Average****Balance(c)** |   |  **Interest****Income/****Expense(a)** |  | **Average****Rates****Earned/****Paid                  (a)** |   |   **Average****Balance(c)** |   |  **Interest****Income/****Expense(a)** |   | **Average****Rates****Earned/****Paid                  (a)** |   |
| **Assets:**                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning                  assets:                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                  deposits in other banks                                                                                                                                                                                                |   | $ | 39,241 |   | $ | 1,315 |   |   | 3.35 | % | $ | 2,325 |   | $ | 20 |   |   | 0.86 | % | $ | 1,160 |   | $ | 9 |   |   | 0.78 | % |
| Investment                  securities:                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                                                                                                                                                  |   |   | 392,962 |   |   | 17,904 |   |   | 4.56 |   |   | 456,478 |   |   | 19,624 |   |   | 4.30 |   |   | 466,316 |   |   | 18,607 |   |   | 3.99 |   |
| Tax-exempt                  (b)                                                                                                                                                                                                                          |   |   | 221,960 |   |   | 16,514 |   |   | 7.44 |   |   | 209,170 |   |   | 15,856 |   |   | 7.58 |   |   | 207,627 |   |   | 15,957 |   |   | 7.69 |   |
| Total                  investment  securities                                                                                                                                                                                                       |   |   | 614,922 |   |   |   |   |   |   |   |   | 665,648 |   |   |   |   |   |   |   |   | 673,943 |   |   |   |   |   |   |   |
| Federal                  funds sold                                                                                                                                                                                                                      |   |   | 19,732 |   |   | 583 |   |   | 2.95 |   |   | 7,801 |   |   | 117 |   |   | 1.50 |   |   | 4,015 |   |   | 40 |   |   | 1.00 |   |
| Loans                  (b) (d)                                                                                                                                                                                                                           |   |   | 1,714,536 |   |   | 113,140 |   |   | 6.60 |   |   | 1,156,107 |   |   | 70,721 |   |   | 6.12 |   |   | 1,001,086 |   |   | 66,604 |   |   | 6.65 |   |
| Total                  earning assets                                                                                                                                                                                                                    |   |   | 2,388,431 |   |   | 149,456 |   |   | 6.26 |   |   | 1,831,881 |   |   | 106,338 |   |   | 5.80 |   |   | 1,680,204 |   |   | 101,217 |   |   | 6.02 |   |
| Cash                  and due from banks                                                                                                                                                                                                                 |   |   | 48,721 |   |   |   |   |   |   |   |   | 37,316 |   |   |   |   |   |   |   |   | 36,451 |   |   |   |   |   |   |   |
| Allowance                  for loan losses                                                                                                                                                                                                               |   |   | (18,903 | ) |   |   |   |   |   |   |   | (14,156 | ) |   |   |   |   |   |   |   | (13,016 | ) |   |   |   |   |   |   |
| Premises,                  equipment, and                  other assets                                                                                                                                                                                  |   |   | 250,356 |   |   |   |   |   |   |   |   | 86,055 |   |   |   |   |   |   |   |   | 77,040 |   |   |   |   |   |   |   |
| Total                  assets                                                                                                                                                                                                                            |   | $ | 2,668,605 |   |   |   |   |   |   |   | $ | 1,941,096 |   |   |   |   |   |   |   | $ | 1,780,679 |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities:**                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                  liabilities:                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                  deposits                                                                                                                                                                                                                        |   | $ | 206,678 |   |   | 1,027 |   |   | 0.50 |   | $ | 167,428 |   |   | 413 |   |   | 0.25 |   | $ | 164,207 |   |   | 690 |   |   | 0.42 |   |
| Money                  market deposits                                                                                                                                                                                                                   |   |   | 181,279 |   |   | 3,668 |   |   | 2.02 |   |   | 62,591 |   |   | 377 |   |   | 0.60 |   |   | 74,156 |  |   | 624 |   |   | 0.84 |   |
| NOW                  accounts                                                                                                                                                                                                                            |   |   | 295,359 |   |   | 4,809 |   |   | 1.63 |   |   | 265,949 |   |   | 3,484 |   |   | 1.31 |   |   | 163,442 |   |   | 2,006 |   |   | 1.23 |   |
| Time                  deposits:                                                                                                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $100,000                  or greater                                                                                                                                                                                                                     |   |   | 150,820 |   |   |   |   |   |   |   |   | 111,879 |   |   |   |   |   |   |   |   | 110,231 |   |   |   |   |   |   |   |
| Other                                                                                                                                                                                                                                                    |   |   | 701,776 |   |   |   |   |   |   |   |   | 510,046 |   |   |   |   |   |   |   |   | 498,005 |   |   |   |   |   |   |   |
| Total                  time deposits                                                                                                                                                                                                                     |   |   | 852,596 |   |   | 26,927 |   |   | 3.16 |   |   | 621,925 |   |   | 18,249 |   |   | 2.93 |   |   | 608,236 |   |   | 19,777 |   |   | 3.25 |   |
| Total                  interest-bearing  deposits                                                                                                                                                                                              |   |   | 1,535,912 |   |   |   |   |   |   |   |   | 1,117,893 |   |   |   |   |   |   |   |   | 1,010,041 |  |   |   |   |   |   |   |
| Short-term                  borrowings                                                                                                                                                                                                                   |   |   | 49,494 |   |   | 1,479 |   |   | 2.99 |   |   | 59,303 |   |   | 739 |   |   | 1.25 |   |   | 97,837 |  |   | 1,243 |   |   | 1.27 |   |
| Long-term                  debt                                                                                                                                                                                                                          |   |   | 443,509 |   |   | 19,700 |   |   | 4.44 |   |   | 394,944 |   |   | 18,382 |   |   | 4.65 |   |   | 339,564 |   |   | 17,256 |   |   | 5.08 |   |
|                          Subordinated debt                                                                                                                                                                            |   |   | 30,928 |   |   | 2,038 |   |   | 6.59 |   |   | 30,928 |   |   | 1,598 |   |   | 5.17 |   |   | 16,148 |   |   | 755 |   |   | 4.68 |   |
| Total                  interest-bearing liabilities                                                                                                                                                                                                 |   |   | 2,059,843 |   |   | 59,648 |   |   | 2.90 |   |   | 1,603,068 |   |   | 43,242 |   |   | 2.70 |   |   | 1,463,590 |   |   | 42,351 |   |   | 2.89 |   |
| Demand                  deposits                                                                                                                                                                                                                         |   |   | 271,319 |   |   |   |   |   |   |   |   | 178,084 |   |   |   |   |   |   |   |   | 167,315 |   |   |   |   |   |   |   |
| Accrued                  interest, taxes and other liabilities                                                                                                                                                                                           |   |   | 18,675 |   |   |   |   |   |   |   |   | 14,194 |   |   |   |   |   |   |   |   | 14,001 |   |   |   |   |   |   |   |
| Total                  liabilities                                                                                                                                                                                                                       |   |   | 2,349,837 |   |   |   |   |   |   |   |   | 1,795,346 |   |   |   |   |   |   |   |   | 1,644,906 |   |   |   |   |   |   |   |
| Stockholders’                  equity                                                                                                                                                                                                              |   |   | 318,768 |   |   |   |   |   |   |   |   | 145,750 |   |   |   |   |   |   |   |   | 135,773 |   |   |   |   |   |   |   |
| Total                  liabilities and  stockholders’                  equity                                                                                                                                                            |   | $ | 2,668,605 |   |   |   |   |   |   |   | $ | 1,941,096 |   |   |   |   |   |   |   | $ | 1,780,679 |  |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  income to earning assets                                                                                                                                                                                                       |   |   |   |   | 6.26 | % |   |   |   |   |   |   |   | 5.80 | % |   |   |   |   |   |   |   | 6.02 | % |
| Interest                  expense to earning assets                                                                                                                                                                                                      |   |   |   |   | 2.50 |   |   |   |   |   |   |   |   | 2.36 |   |   |   |   |   |   |   |   | 2.52 |   |
|                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Effective                  interest differential                                                                                                                                                                                                         | $      | 89,808 |   |   | 3.76 | % |   |   |   | $ | 63,096 |   |   | 3.44 |  % |   |   |   | $ | 58,866 |   |   | 3.50 | % |
|                                                                                                                                                                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (a)                  Loan fees are included in interest income and rate                  calculations.                                                                                                                                                   |
| (b)                  Interest income on all tax-exempt securities and loans have been                  adjusted                  to a tax equivalent basis utilizing a Federal tax rate of 35% in                  2005,                  2004, and 2003 |
| (c)                  Averages are a combination of monthly and daily                  averages.                                                                                                                                                          |
| (d)                  Includes non-accrual loans and interest-earning education loans                  held for                  sale.                                                                                                                    |

----

| **Rate/Volume                Analysis-Tax Equivalent Basis (a)**            |   |
|-----------------------------------------------------------------------------|--------|
| **For                the Years Ended December 31, 2005, 2004 and 2003**     |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   | **2005                vs 2004** |   | **2004                vs 2003** |   |
|                                                                        |   | **Volume** |   | **Rate** |   | **Total** |   | **Volume** |   | **Rate** |   | **Total** |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   | **Favorable                (Unfavorable)** |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Increase                (decrease) in interest income:**                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                                       |   | **$** | **36,473** |   | **$** | **5,946** |   | **$** | **42,419** |   | $ | 9,767 |   | $ | (5,650 | ) | $ | 4,117 |   |
| Investment                securities:                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                     |   |   | **(2,845** | **)** |   | **1,125** |   |   | **(1,720** | **)** |   | (399 | ) |   | 1,416 |   |   | 1,017 |   |
| Tax                exempt                                                   |   |   | **956** |   |   | **(298** | **)** |   | **658** |   |   | 118 |   |   | (219 | ) |   | (101 | ) |
| Total                                                                       |   |   | **(1,889** | **)** |   | **827** |   |   | **(1,062** | **)** |   | (281 | ) |   | 1,197 |   |   | 916 |   |
| Federal                funds sold                                           |   |   | **286** |   |   | **180** |   |   | **466** |   |   | 50 |   |   | 27 |   |   | 77 |   |
| Interest-bearing                deposits in other   banks         |   |   | **1,095** |   |   | **200** |   |   | **1,295** |   |   | 10 |   |   | 1 |   |   | 11 |   |
| Total                                                                       |   |   | **35,965** |   |   | **7,153** |   |   | **43,118** |   |   | 9,546 |   |   | (4,425 | ) |   | 5,121 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Increase)                decrease in interest expense:                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings                deposits                                             |   |   | **(1,992** | **)** |   | **(3,238** | **)** |   | **(5,230** | **)** |   | (806 | ) |   | (148 | ) |   | (954 | ) |
| Time                deposits                                                |   |   | **(7,197** | **)** |   | **(1,481** | **)** |   | **(8,678** | **)** |   | (437 | ) |   | 1,965 |   |   | 1,528 |   |
| Short-term                borrowings                                        |   |   | **140** |   |   | **(880** | **)** |   | **(740** | **)** |   | 480 |   |   | 24 |   |   | 504 |   |
| Long-term                debt                                               |   |   | **(2,185** | **)** |   | **867** |   |   | **(1,318** | **)** |   | (2,658 | ) |   | 1,532 |   |   | (1,126 | ) |
| Subordinated                debt                                            |   |   | **---** |   |   | **(440** | **)** |   | **(440** | **)** |   | (757 | ) |   | (86 | ) |   | (843 | ) |
| Total                                                                       |   |   | **(11,234** | **)** |   | **(5,172** | **)** |   | **(16,406** | **)** |   | (4,178 | ) |   | 3,287 |   |   | (891 | ) |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase                (decrease) in effective interest  differential |   | **$** | **24,731** |   | **$** | **1,981** |   | **$** | **26,712** |   | $ | 5,368 |   | $ | (1,138 | ) | $ | 4,230 |   |

----

| **LOAN                ACCOUNT COMPOSITION**           |   |
|-------------------------------------------------------|--------|
| **as                of December 31**                  |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   | **2005** |   | **2004** |   | **2003** |   | **2002** |   | **2001** |   |
|                                                  |   | Amount |   | Percent |   | Amount |   | Percent |   | Amount |   | Percent |   | Amount |   | Percent |   | Amount |   | Percent |   |
| Commercial,                financial and agricultural |   | **$** | **782,946** |   |   | **35.0** | **%** | $ | 409,105 |   |   | 33.7 | % | $ | 367,444 |   |   | 34.1 | % | $ | 295,506 |   |   | 32.7 | % | $ | 158,223 |   |   | 18.4 | % |
| Real                estate-construction               |   |   | **4,532** |   |   | **0.2** |   |   | 8,703 |   |   | 0.7 |   |   | 7,338 |   |   | 0.7 |   |   | 2,615 |   |   | 0.3 |   |   | 21,225 |   |   | 2.5 |   |
| Real                estate-commercial mortgage        |   |   | **793,969** |   |   | **35.5** |   |   | 356,871 |   |   | 29.3 |   |   | 283,661 |   |   | 26.3 |   |   | 246,533 |   |   | 27.2 |   |   | 554,354 |   |   | 64.7 |   |
| Real                estate-retail mortgage            |   |   | **149,525** |   |   | **6.7** |   |   | 83,979 |   |   | 6.9 |   |   | 91,485 |   |   | 8.5 |   |   | 106,882 |   |   | 11.8 |   |   | --- |   |   | --- |   |
| Consumer-home                equity                   |   |   | **113,133** |   |   | **5.1** |   |   | 53,921 |   |   | 4.4 |   |   | 38,299 |   |   | 3.5 |   |   | 28,169 |   |   | 3.1 |   |   | --- |   |   | --- |   |
| Consumer-installment                and other         |   |   | **390,392** |   |   | **17.5** |   |   | 303,372 |   |   | 25.0 |   |   | 290,384 |   |   | 26.9 |   |   | 224,863 |   |   | 24.9 |   |   | 123,476 |   |   | 14.4 |   |
| Total                loans                            |   |   | **2,234,497** |   |   | **100.0** | **%** |   | 1,215,951 |   |   | 100.0 | % |   | 1,078,611 |   |   | 100.0 | % |   | 904,568 |   |   | 100.0 | % |   | 857,278 |   |   | 100.0 | % |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance                for loan losses              |   |   | **(22,965** | **)** |   |   |   |   | (14,421 | ) |   |   |   |   | (13,178 | ) |   |   |   |   | (12,343 | ) |   |   |   |   | (12,132 | ) |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans,                net                             |   | **$** | **2,211,532** |   |   |   |   | $ | 1,201,530 |   |   |   |   | $ | 1,065,433 |   |   |   |   | $ | 892,225 |   |   |   |   | $ | 845,146 |   |   |   |   |

| **MATURITIES                AND SENSITIVITY TO CHANGES IN INTEREST** |   |
|----------------------------------------------------------------------|--------|
| **RATES                FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL**  |   |
| **AND                REAL-ESTATE CONSTRUCTION LOANS**                |   |
| **as                of December 31, 2005**                           |   |
|                                                                 |   |   |   |   |   |   |   |   |   |
|                                                                 |   | **Maturity                Distribution** |   |
|                                                                 |   | **One                Year****or                Less** |   | **One                to****Five                Years** |   | **Over                Five****Years** |   |  **Total** |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial,                financial and agricultural                |   | $ | 163,591 |   | $ | 287,540 |   | $ | 331,815 |   | $ | 782,946 |   |
| Real                estate-construction                              |   |   | 549 |   |   | 1,208 |   |   | 2,775 |   |   | 4,532 |   |
| Real                estate-commercial mortgage                       |   |   | 62,029 |   |   | 202,741 |   |   | 529,199 |   |   | 793,969 |   |
|                                                                 |   | $ | 226,169 |   | $ | 491,489 |   | $ | 863,789 |   | $ | 1,581,447 |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   | **Interest                Sensitivity** |   |   |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                 |   |   | **Variable**  |   |   | **Fixed** |   |   | **Total** |   |   |   |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Due                in one year or less                               |   | $ | 137,461 |   | $ | 88,708 |   | $ | 226,169 |   |   |   |   |
| Due                after one year                                    |   |   | 1,000,234 |   |   | 355,044 |   |   | 1,355,278 |   |   |   |   |
|                                                                 |   | $ | 1,137,695 |   | $ | 443,752 |   | $ | 1,581,447 |   |   |   |   |
|                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| **RECONCILIATION                  OF GAAP TO NON-GAAP MEASURES**              |   |
|-------------------------------------------------------------------------------|--------|
|                                                                          |   |   |   |   |   |   |   |
|                                                                          |   | 2005 |   | 2004 |   | 2003 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                  statement data:**                                   |   |   |   |   |   |   |   |   |   |   |
| **Net                  income**                                               |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                   |   | $ | 25,641 |   | $ | 21,798 |   | $ | 20,400 |   |
| Amortization                  of core deposit and other intangible assets (1) |   |   | 1,153 |   |   | 105 |   |   | 94 |   |
| Merger,                  conversion and restructuring expenses (1)            |   |   | 5,333 |   |   | --- |   |   | --- |   |
| Net                  operating (tangible) income                              |   | $ | 32,127 |   | $ | 21,903 |   | $ | 20,494 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Earnings                  per share**                                       |   |   |   |   |   |   |   |   |   |   |
| Diluted                  earnings per common share                            |   | $ | 1.42 |   | $ | 1.73 |   | $ | 1.63 |   |
| Amortization                  of core deposit and other intangible assets (1) |   |   | 0.06 |   |   | 0.01 |   |   | 0.01 |   |
| Merger,                  conversion and restructuring expenses (1)            |   |   | 0.29 |   |   | --- |   |   | --- |   |
| Diluted                  operating (tangible) earnings per share              |   | $ | 1.77 |   | $ | 1.74 |   | $ | 1.64 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Balance                  sheet data:**                                      |   |   |   |   |   |   |   |   |   |   |
| **Average                  assets**                                           |   |   |   |   |   |   |   |   |   |   |
| Average                  assets                                               |   | $ | 2,668,605 |   | $ | 1,941,096 |   | $ | 1,780,679 |   |
| Goodwill                                                                      |   |   | (123,412 | ) |   | (3,405 | ) |   | (1,903 | ) |
| Core                  deposit and other intangible assets                     |   |   | (8,236 | ) |   | (1,492 | ) |   | (1,037 | ) |
| Average                  tangible assets                                      |   | $ | 2,536,957 |   | $ | 1,936,199 |   | $ | 1,777,739 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  return on average tangible assets**              |   |   | 1.27 | % |   | 1.13 | % |   | 1.15 | % |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Average                  equity**                                           |   |   |   |   |   |   |   |   |   |   |
| Average                  equity                                               |   | $ | 318,768 |   | $ | 145,750 |   | $ | 135,773 |   |
| Goodwill                                                                      |   |   | (123,412 | ) |   | (3,405 | ) |   | (1,903 | ) |
| Core                  deposit and other intangible assets                     |   |   | (8,236 | ) |   | (1,492 | ) |   | (1,037 | ) |
| Deferred                  taxes                                               |   |   | 862 |   |   | --- |   |   | --- |   |
| Average                  tangible equity                                      |   | $ | 187,982 |   | $ | 140,853 |   | $ | 132,833 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  return on average tangible equity**              |   |   | 17.09 | % |   | 15.55 | % |   | 15.43 | % |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **At                  end of year:**                                          |   |   |   |   |   |   |   |   |   |   |
| **Total                  assets**                                             |   |   |   |   |   |   |   |   |   |   |
| Total                  assets                                                 |   | $ | 3,332,430 |   | $ | 1,954,799 |   | $ | 1,861,063 |   |
| Goodwill                                                                      |   |   | (244,827 | ) |   | (3,570 | ) |   | (3,231 | ) |
| Core                  deposit and other intangible assets                     |   |   | (14,253 | ) |   | (1,481 | ) |   | (1,542 | ) |
| Total                  tangible assets                                        |   | $ | 3,073,350 |   | $ | 1,949,748 |   | $ | 1,856,290 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Total                  equity**                                             |   |   |   |   |   |   |   |   |   |   |
| Total                  equity                                                 |   | $ | 476,673 |   | $ | 152,341 |   | $ | 143,406 |   |
| Goodwill                                                                      |   |   | (244,827 | ) |   | (3,570 | ) |   | (3,231 | ) |
| Core                  deposit and other intangible assets                     |   |   | (14,253 | ) |   | (1,481 | ) |   | (1,542 | ) |
| Deferred                  taxes                                               |   |   | 1,734 |   |   | --- |   |   | --- |   |
| Total                  tangible equity                                        |   | $ | 219,327 |   | $ | 147,290 |   | $ | 138,633 |   |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Tangible                  book value at end of period**                     |   | $ | 9.57 |   | $ | 12.04 |   | $ | 11.90 |   |
| **Tangible                  equity to assets**                                |   |   | 7.14 | % |   | 7.55 | % |   | 7.47 | % |
|                                                                          |   |   |   |   |   |   |   |   |   |   |
|  (1)                  Net of related tax effect                          |   |   |   |   |   |   |   |   |   |   |

----

**Item      7A.**** ****Quantitative      and Qualitative Disclosures About Market Risk**

----

| **Interest                Rate Sensitivity**                  |   |     |    |       |   |        |   |                       |     |
|---------------------------------------------------------------|--------|----------|---------|------------|--------|-------------|--------|----------------------------|----------|
| **At                December 31, 2005**                       |   | **1-90** |    | **90-180** |   | **180-365** |   | **1                year**  |     |   |   |
| **Dollars                in thousands**                       |   | **days** |    | **days**   |   | **days**    |   | **or                more** |     | **Total** |   |
| **Assets**                                                    |   |     |    |       |   |        |   |                       |     |   |   |   |   |   |   |   |
| Interest-bearing                deposits in other banks       |   | $        | 4,423   |       | $      | ---         |   | $                          | ---      |   | $ | --- |   | $ | 4,423 |   |
| Loans                held for sale                            |   |     | 95      |       |   | ---         |   |                       | ---      |   |   | 2,473 |   |   | 2,568 |   |
| Investment                securities                          |   |     | 97,622  |       |   | 39,787      |   |                       | 68,880   |   |   | 422,296 |   |   | 628,585 |   |
| Loans                (a)                                      |   |     | 823,602 |       |   | 98,781      |   |                       | 184,373  |   |   | 1,127,741 |   |   | 2,234,497 |   |
| Earning                assets                                 |   |     | 925,742 |       |   | 138,568     |   |                       | 253,253  |   |   | 1,552,510 |   |   | 2,870,073 |   |
| Non-earning                assets                             |   |     | ---     |       |   | ---         |   |                       | ---      |   |   | 462,357 |   |   | 462,357 |   |
| Total                assets                                   |   | $        | 925,742 |       | $      | 138,568     |   | $                          | 253,253  |   | $ | 2,014,867 |   | $ | 3,332,430 |   |
|                                                          |   |     |    |       |   |        |   |                       |     |   |   |   |   |   |   |   |
| **Liabilities**                                               |   |     |    |       |   |        |   |                       |     |   |   |   |   |   |   |   |
| Savings                                                       |   | $        | 312,907 |       | $      | ---         |   | $                          | ---      |   | $ | 529,202 |   | $ | 842,109 |   |
| Time                                                          |   |     | 109,289 |       |   | 122,587     |   |                       | 265,368  |   |   | 388,154 |   |   | 885,398 |   |
| Time                in denominations of $100,000 or more      |   |     | 24,831  |       |   | 24,742      |   |                       | 60,922   |   |   | 80,530 |   |   | 191,025 |   |
| Short-term                borrowings                          |   |     | 87,253  |       |   | ---         |   |                       | ---      |   |   | --- |   |   | 87,253 |   |
| Long-term                debt                                 |   |     | 2,008   |       |   | 41,979      |   |                       | 33,778   |   |   | 352,954 |   |   | 430,719 |   |
| Subordinated                debt                              |   |     | 23,196  |       |   | ---         |   |                       | ---      |   |   | 7,732 |   |   | 30,928 |   |
| Interest                bearing liabilities                   |   |     | 559,484 |       |   | 189,308     |   |                       | 360,068  |   |   | 1,358,572 |   |   | 2,467,432 |   |
| Other                liabilities and equity                   |   |     | 11,274  |       |   | 11,276      |   |                       | 22,550   |   |   | 819,898 |   |   | 864,998 |   |
| Total                liabilities and equity                   |   | $        | 570,758 |       | $      | 200,584     |   | $                          | 382,618  |   | $ | 2,178,470 |   | $ | 3,332,430 |   |
|                                                          |   |     |    |       |   |        |   |                       |     |   |   |   |   |   |   |   |
| Interest                Sensitivity GAP                       |   |     |    |       |   |        |   |                       |     |   |   |   |   |   |   |   |
| Periodic                                                      |   | $        | 354,984 |       | $      | (62,016     | )      | $                          | (129,365 | ) | $ | (163,603 | ) |   |   |   |
| Cumulative                                                    |   |     |    |       | $      | 292,968     |   | $                          | 163,603  |   |   | --- |   |   |   |   |
| Cumulative                GAP as a percentage of total assets |   |     | 10.65   | %          |   | 8.79        | %      |                       | 4.91     | % |   | 0 | % |   |   |   |
|                                                          |   |     |    |       |   |        |   |                       |     |   |   |   |   |   |   |   |
| (a)                Includes non-accrual loans.                |

----

|                                                                               |   |                                      |      |    |   | **Base**                         |   |    |      |    |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|---------|--------|----------------------------------|--------|---------|-----------|---------|--------|
|                                                                               |   | **-2%**                                   |      | **-1%** |   | **Present                Value** |   | **+1%** |      | **+2%** |   |
| **Assets:**                                                                        |   | **(dollars                in thousands)** |      |
| Cash,                interest-bearing time deposits, and federal funds sold        |   | $                                         | 81,243    |    | $      | 81,243                           |   | $       | 81,243    |    | $      | 81,243 |   | $ | 81,243 |   |
| Loans                held for sale                                                 |   |                                      | 3,536     |    |   | 2,963                            |   |    | 2,568     |    |   | 2,161 |   |   | 1,879 |   |
| Investment                securities                                               |   |                                      | 677,536   |    |   | 653,110                          |   |    | 628,585   |    |   | 604,251 |   |   | 579,822 |   |
| Loans                                                                              |   |                                      | 2,248,320 |    |   | 2,230,771                        |   |    | 2,211,532 |    |   | 2,176,073 |   |   | 2,148,017 |   |
| Other                assets                                                        |   |                                      | 408,502   |    |   | 408,502                          |   |    | 408,502   |    |   | 408,502 |   |   | 408,502 |   |
|                                                                               |   |                                      |      |    |   |                             |   |    |      |    |   |   |   |   |   |   |
| Total                assets                                                        |   | $                                         | 3,419,137 |    | $      | 3,376,589                        |   | $       | 3,332,430 |    | $      | 3,272,230 |   | $ | 3,219,463 |   |
|                                                                               |   |                                      |      |    |   |                             |   |    |      |    |   |   |   |   |   |   |
| **Liabilities:**                                                                   |   |                                      |      |    |   |                             |   |    |      |    |   |   |   |   |   |   |
| Deposits                                                                           |   | $                                         | 2,319,600 |    | $      | 2,305,880                        |   | $       | 2,294,367 |    | $      | 2,279,757 |   | $ | 2,267,314 |   |
| Short-term                borrowings                                               |   |                                      | 87,254    |    |   | 87,254                           |   |    | 87,253    |    |   | 87,254 |   |   | 87,254 |   |
| Long-term                debt                                                      |   |                                      | 463,408   |    |   | 448,307                          |   |    | 430,719   |    |   | 424,549 |   |   | 421,241 |   |
| Subordinated                debt                                                   |   |                                      | 30,928    |    |   | 30,928                           |   |    | 30,928    |    |   | 30,928 |   |   | 30,928 |   |
| Other                liabilities                                                   |   |                                      | 12,490    |    |   | 12,490                           |   |    | 12,490    |    |   | 12,490 |   |   | 12,490 |   |
|                                                                               |   |                                      |      |    |   |                             |   |    |      |    |   |   |   |   |   |   |
| Total                liabilities                                                   |   |                                      | 2,913,680 |    |   | 2,884,859                        |   |    | 2,855,757 |    |   | 2,834,978 |   |   | 2,819,227 |   |
|                                                                               |   |                                      |      |    |   |                             |   |    |      |    |   |   |   |   |   |   |
| Total                stockholders’ equity                                    |   |                                      | 505,457   |    |   | 491,730                          |   |    | 476,673   |    |   | 437,252 |   |   | 400,236 |   |
|                    Total liabilities and stockholders’ equity |   | $                                         | 3,419,137 |    | $      | 3,376,589                        |   | $       | 3,332,430 |    | $      | 3,272,230 |   | $ | 3,219,463 |   |
|                                                                               |   |                                      |      |    |   |                             |   |    |      |    |   |   |   |   |   |   |

----

**Item      8. Financial Statements and Supplementary      Data:**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      BALANCE SHEETS**

**At      December 31, 2005 and 2004**

**(Dollars      in thousands except per share data)**

|                                                                                                   |   | **2005** |          | **2004** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------|---------------|----------|--------|
| **ASSETS**                                                                                             |   |     |          |     |   |
|                                                                                                   |   |     |          |     |   |   |   |
| Cash                and due from banks                                                                 |   | **$**    | **76,820**    |     | $      | 43,486 |   |
| Interest-bearing                deposits in other banks                                                |   |     | **4,423**     |     |   | 1,787 |   |
| Investment                securities, available for sale                                               |   |     | **605,555**   |     |   | 619,110 |   |
| Investment                securities, held to maturity (fair valueapproximates                $22,563) |   |     | **23,030**    |     |   | --- |   |
| Loans                held for sale                                                                     |   |     | **2,568**     |     |   | 1,505 |   |
| Loans,                net of allowance for loan losses of $22,965 and $14,421                          |   |     | **2,211,532** |     |   | 1,201,530 |   |
| Premises                and equipment, net                                                             |   |     | **43,283**    |     |   | 26,369 |   |
| Goodwill                and other intangible assets                                                    |   |     | **259,080**   |     |   | 5,051 |   |
| Accrued                interest receivable and other assets                                            |   |     | **106,139**   |     |   | 55,961 |   |
| Total                assets                                                                            |   | **$**    | **3,332,430** |     | $      | 1,954,799 |   |
|                                                                                                   |   |     |          |     |   |   |   |
| **LIABILITIES**                                                                                        |   |     |          |     |   |   |   |
|                                                                                                   |   |     |          |     |   |   |   |
| Deposits:                                                                                              |   |     |          |     |   |   |   |
| Non-interest                bearing                                                                    |   | **$**    | **375,835**   |     | $      | 184,359 |   |
| Interest                bearing                                                                        |   |     | **1,918,532** |     |   | 1,121,178 |   |
| Total                deposits                                                                          |   |     | **2,294,367** |     |   | 1,305,537 |   |
| Short-term                borrowings                                                                   |   |     | **87,253**    |     |   | 47,116 |   |
| Long-term                debt                                                                          |   |     | **430,719**   |     |   | 404,662 |   |
| Subordinated                debt                                                                       |   |     | **30,928**    |     |   | 30,928 |   |
| Accrued                interest payable and other liabilities                                          |   |     | **12,490**    |     |   | 14,215 |   |
| Total                liabilities                                                                       |   |     | **2,855,757** |     |   | 1,802,458 |   |
|                                                                                                   |   |     |          |     |   |   |   |
| **STOCKHOLDERS’                EQUITY**                                                          |   |     |          |     |   |   |   |
|                                                                                                   |   |     |          |     |   |   |   |
| Preferred                stock, no par value; 500,000 shares                                           |   |     |          |     |   |   |   |
| authorized;                no shares issued and outstanding                                            |   |     | **---**       |     |   | --- |   |
| Common                stock-$5.00 par value; 50,000,000 shares                                         |   |     |          |     |   |   |   |
| authorized;                23,314,000 and 12,421,000 shares issued                                     |   |     | **116,572**   |     |   | 62,107 |   |
| Surplus                                                                                                |   |     | **347,827**   |     |   | 73,304 |   |
| Retained                Earnings                                                                       |   |     | **27,031**    |     |   | 18,134 |   |
| Accumulated                other comprehensive income (loss), net of tax                               |   |     | **(3,779**    | **)**    |   | 3,211 |   |
| Treasury                stock; 399,000 and 185,000 shares, at cost                                     |   |     | **(10,978**   | **)**    |   | (4,415 | ) |
| Total                stockholders’ equity                                                        |   |     | **476,673**   |     |   | 152,341 |   |
| Total                liabilities and stockholders’ equity                                        |   | **$**    | **3,332,430** |     | $      | 1,954,799 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      STATEMENTS OF INCOME**

**For      the Years Ended December 31, 2005, 2004, and 2003 **

**(Dollars      in thousands except per share data)**

** **
** **

|                                                               |   | **2005** |        | **2004** |   | **2003** |   |
|--------------------------------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
| **INTEREST                INCOME:**                                |   |     |        |     |   |     |   |
| Loans,                including fees                               |   | **$**    | **111,757** |     | $      | 69,732   |   | $ | 65,837 |   |
| Investment                securities:                              |   |     |        |     |   |     |   |   |   |   |
| Taxable                                                            |   |     | **17,198**  |     |   | 18,999   |   |   | 17,532 |   |
| Tax                exempt                                          |   |     | **9,087**   |     |   | 8,847    |   |   | 8,957 |   |
| Dividends                                                          |   |     | **2,353**   |     |   | 2,084    |   |   | 2,490 |   |
| Other                                                              |   |     | **1,898**   |     |   | 137      |   |   | 49 |   |
| Total                interest income                               |   |     | **142,293** |     |   | 99,799   |   |   | 94,865 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **INTEREST                EXPENSE:**                               |   |     |        |     |   |     |   |   |   |   |
| Deposits                                                           |   |     | **36,431**  |     |   | 22,523   |   |   | 23,097 |   |
| Short-term                borrowings                               |   |     | **1,479**   |     |   | 739      |   |   | 1,243 |   |
| Long-term                debt                                      |   |     | **19,700**  |     |   | 18,382   |   |   | 17,256 |   |
| Subordinated                debt                                   |   |     | **2,038**   |     |   | 1,598    |   |   | 755 |   |
| Total                interest expense                              |   |     | **59,648**  |     |   | 43,242   |   |   | 42,351 |   |
| Net                interest income                                 |   |     | **82,645**  |     |   | 56,557   |   |   | 52,514 |   |
| Provision                for loan losses                           |   |     | **2,300**   |     |   | 3,100    |   |   | 2,500 |   |
| Net                interest income after provision for loan losses |   |     | **80,345**  |     |   | 53,457   |   |   | 50,014 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **NON-INTEREST                INCOME:**                            |   |     |        |     |   |     |   |   |   |   |
| Investment                management and trust services            |   |     | **2,692**   |     |   | 1,510    |   |   | 1,326 |   |
| Service                charges on deposit accounts                 |   |     | **9,413**   |     |   | 7,120    |   |   | 5,128 |   |
| Other                service charges, commissions and fees         |   |     | **5,452**   |     |   | 3,357    |   |   | 2,958 |   |
| Investment                security gains                           |   |     | **259**     |     |   | 2,470    |   |   | 1,927 |   |
| Insurance                premium income and commissions            |   |     | **3,350**   |     |   | 3,260    |   |   | 2,822 |   |
| Mortgage                banking activities                         |   |     | **2,354**   |     |   | 2,665    |   |   | 2,532 |   |
| Earnings                on investment in life insurance            |   |     | **2,063**   |     |   | 1,593    |   |   | 1,455 |   |
| Other                                                              |   |     | **854**     |     |   | 1,238    |   |   | 2,315 |   |
| Total                non-interest income                           |   |     | **26,437**  |     |   | 23,213   |   |   | 20,463 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                          |   |     |        |     |   |     |   |   |   |   |
| Salaries                and employee benefits                      |   |     | **36,998**  |     |   | 28,337   |   |   | 25,397 |   |
| Net                occupancy                                       |   |     | **11,355**  |     |   | 8,287    |   |   | 7,447 |   |
| Merger,                conversion and restructuring expenses       |   |     | **8,205**   |     |   | ---      |   |   | --- |   |
| Marketing                expense                                   |   |     | **2,036**   |     |   | 2,325    |   |   | 2,018 |   |
| Telecommunications                expense                          |   |     | **1,359**   |     |   | 1,285    |   |   | 1,302 |   |
| Amortization                of intangibles                         |   |     | **1,424**   |     |   | 161      |   |   | 94 |   |
| Other                                                              |   |     | **13,692**  |     |   | 9,598    |   |   | 9,460 |   |
| Total                non-interest expenses                         |   |     | **75,069**  |     |   | 49,993   |   |   | 45,718 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| Income                before income taxes                          |   |     | **31,713**  |     |   | 26,677   |   |   | 24,759 |   |
| Income                taxes                                        |   |     | **6,072**   |     |   | 4,879    |   |   | 4,359 |   |
| Net                income                                          |   | **$**    | **25,641**  |     | $      | 21,798   |   | $ | 20,400 |   |
|                                                               |   |     |        |     |   |     |   |   |   |   |
| **EARNINGS                PER SHARE:**                             |   |     |        |     |   |     |   |   |   |   |
| Basic                                                              |   | **$**    | **1.44**    |     | $      | 1.78     |   | $ | 1.68 |   |
| Diluted                                                            |   | **$**    | **1.42**    |     | $      | 1.73     |   | $ | 1.63 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**For      the Years Ended December 31, 2005, 2004, and 2003**

**(Dollars      in thousands except per share data)**

|                                                                                                           |   | **Outstanding** |       | **Common** |   |        |   | **Retained** |        | **Accumulated****Other****Comprehensive** |   | **Treasury** |   | **Total**  |       |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|------------|--------|-------------|--------|--------------|-------------|-------------------------------------------|--------|--------------|--------|------------|------------|
|                                                                                                           |   | **Shares**      |       | **Stock**  |   | **Surplus** |   | **Earnings** |        | **Income                (Loss)**          |   | **Stock**    |   | **Equity** |       |
| **Balance,                December 31, 2002**                                                                  |   |            | 9,151      |       | $      | 47,053      |   | $            | 46,418      |                                      | $      | 35,344       |   | $          | 6,538      |   | $ | (6,191 | ) | $ | 129,162 |   |
| Comprehensive                income:                                                                           |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Net                income                                                                                      |   |            |       |       |   |        |   |         |        |                                      |   | 20,400       |   |       |       |   |   |   |   |   | 20,400 |   |
| Unrealized                gain on securities, net of reclassification adjustment and tax                effect |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | 626        |   |   |   |   |   | 626 |   |
| Change                in unfunded pension liability, net of tax                                                |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | (568       | ) |   |   |   |   | (568 | ) |
| Total                comprehensive income                                                                      |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   | 20,458 |   |
| Cash                dividends ($.63 per share)                                                                 |   |            |       |       |   |        |   |         |        |                                      |   | (7,619       | )      |       |       |   |   |   |   |   | (7,619 | ) |
| 5%                stock dividend                                                                               |   |            | 458        |       |   | 2,346       |   |         | 10,612      |                                      |   | (12,984      | )      |       |       |   |   |   |   |   | (26 | ) |
| Stock                split paid in the form of a 20% stock dividend                                            |   |            | 1,944      |       |   | 9,878       |   |         |        |                                      |   | (9,878       | )      |       |       |   |   |   |   |   | --- |   |
| Purchases                of treasury stock                                                                     |   |            | (125       | )          |   |        |   |         |        |                                      |   |         |   |       |       |   |   | (3,627 | ) |   | (3,627 | ) |
| Stock                issued in connection with acquisition                                                     |   |            | 26         |       |   |        |   |         | 106         |                                      |   |         |   |       |       |   |   | 644 |   |   | 750 |   |
| Exercise                of common stock options and issuances under stock purchase                plan         |   |            | 194        |       |   | (21         | )      |         |        |                                      |   | (966         | )      |       |       |   |   | 4,868 |   |   | 3,881 |   |
| Tax                benefits from employee stock transactions                                                   |   |            |       |       |   |        |   |         | 427         |                                      |   |         |   |       |       |   |   |   |   |   | 427 |   |
| **Balance,                December 31, 2003**                                                                  |   |            | 11,648     |       |   | 59,256      |   |         | 57,563      |                                      |   | 24,297       |   |       | 6,596      |   |   | (4,306 | ) |   | 143,406 |   |
| Comprehensive                income:                                                                           |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Net                income                                                                                      |   |            |       |       |   |        |   |         |        |                                      |   | 21,798       |   |       |       |   |   |   |   |   | 21,798 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | (3,140     | ) |   |   |   |   | (3,140 | ) |
| Change                in unfunded pension liability, net of tax                                                |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | (245       | ) |   |   |   |   | (245 | ) |
| Total                comprehensive income                                                                      |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   | 18,413 |   |
| Cash                dividends ($.67 per share)                                                                 |   |            |       |       |   |        |   |         |        |                                      |   | (8,215       | )      |       |       |   |   |   |   |   | (8,215 | ) |
| 5%                stock dividend                                                                               |   |            | 584        |       |   | 2,949       |   |         | 15,103      |                                      |   | (18,110      | )      |       |       |   |   |   |   |   | (58 | ) |
| Purchases                of treasury stock                                                                     |   |            | (144       | )          |   |        |   |         |        |                                      |   |         |   |       |       |   |   | (4,151 | ) |   | (4,151 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan         |   |            | 148        |       |   | (98         | )      |         |        |                                      |   | (1,636       | )      |       |       |   |   | 4,042 |   |   | 2,308 |   |
| Tax                benefits from employee stock transactions                                                   |   |            |       |       |   |        |   |         | 638         |                                      |   |         |   |       |       |   |   |   |   |   | 638 |   |
| **Balance,                December 31, 2004**                                                                  |   |            | 12,236     |       |   | 62,107      |   |         | 73,304      |                                      |   | 18,134       |   |       | 3,211      |   |   | (4,415 | ) |   | 152,341 |   |
| Comprehensive                income:                                                                           |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Net                income                                                                                      |   |            |       |       |   |        |   |         |        |                                      |   | **25,641**   |   |       |       |   |   |   |   |   | **25,641** |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | **(7,043** | **)** |   |   |   |   | **(7,043** | **)** |
| Change                in unfunded pension liability, net of tax                                                |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       | **53**     |   |   |   |   |   | **53** |   |
| Total                comprehensive income                                                                      |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   | **18,651** |   |
| Cash                dividends ($.75 per share)                                                                 |   |            |       |       |   |        |   |         |        |                                      |   | **(13,440**  | **)**  |       |       |   |   |   |   |   | **(13,440** | **)** |
| Purchases                of treasury stock                                                                     |   |            | **(598**   | **)**      |   |        |   |         |        |                                      |   |         |   |       |       |   |   | **(16,489** | **)** |   | **(16,489** | **)** |
| Exercise                of common stock options and issuances under stock purchase                plan         |   |            | **423**    |       |   | **193**     |   |         | **873**     |                                      |   | **(2,980**   | **)**  |       |       |   |   | **9,926** |   |   | **8,012** |   |
| Tax                benefits from employee stock transactions                                                   |   |            |       |       |   |        |   |         | **514**     |                                      |   |         |   |       |       |   |   |   |   |   | **514** |   |
| Acquisition                of PennRock Financial Services Corp.:                                               |   |            |       |       |   |        |   |         |        |                                      |   |         |   |       |       |   |   |   |   |   |   |   |
| Common                stock issued                                                                             |   |            | **10,854** |       |   | **54,272**  |   |         | **269,733** |                                      |   |         |   |       |       |   |   |   |   |   | **324,005** |   |
| Fair                value of stock options                                                                     |   |            |       |       |   |        |   |         | **3,079**   |                                      |   |         |   |       |       |   |   |   |   |   | **3,079** |   |
| Other                                                                                                          |   |            |       |       |   |        |   |         | **324**     |                                      |   | **(324**     | **)**  |       |       |   |   |   |   |   | --- |   |
| **Balance,                December 31, 2005**                                                                  |   |            | **22,915** |       | **$**  | **116,572** |   | **$**        | **347,827** |                                      | **$**  | **27,031**   |   | **$**      | **(3,779** | **)** | **$** | **(10,978** | **)** | **$** | **476,673** |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**For      the Years Ended December 31, 2005 2004, and 2003**

**(Dollars      in thousands)**

|                                                                         |   | **2005** |         | **2004** |   | **2003** |   |
|------------------------------------------------------------------------------|--------|----------|--------------|----------|--------|----------|--------|
| **Operating                Activities:**                                     |   |     |         |     |   |     |   |
| Net                income                                                    |   | **$**    | **25,641**   |     | $      | 21,798   |   | $ | 20,400 |   |
| Adjustments                to reconcile net income to net cash               |   |     |         |     |   |     |   |   |   |   |
| provided                by operating activities:                             |   |     |         |     |   |     |   |   |   |   |
| Provision                for loan losses                                     |   |     | **2,300**    |     |   | 3,100    |   |   | 2,500 |   |
| Deferred                income tax expense (benefit)                         |   |     | **1,559**    |     |   | (481     | )      |   | (152 | ) |
| Depreciation                and amortization                                 |   |     | **5,344**    |     |   | 3,310    |   |   | 3,075 |   |
| Net                amortization of securities                                |   |     | **983**      |     |   | 1,106    |   |   | 2,431 |   |
| Realized                gains on sales of available-for-sale securities, net |   |     | **(259**     | **)**    |   | (2,470   | )      |   | (1,927 | ) |
| Loans                originated for sale                                     |   |     | **(8,163**   | **)**    |   | (10,959  | )      |   | (66,976 | ) |
| Proceeds                from sales of loans held for sale                    |   |     | **7,324**    |     |   | 15,923   |   |   | 73,957 |   |
| Gains                on loan sales                                           |   |     | **(225**     | **)**    |   | (1,125   | )      |   | (1,565 | ) |
| Earnings                on investment in life insurance                      |   |     | **(2,063**   | **)**    |   | (1,593   | )      |   | (1,455 | ) |
| Pension                curtailment gain                                      |   |     | **---**      |     |   | ---      |   |   | (497 | ) |
| Net                change in other assets                                    |   |     | **6,489**    |     |   | 3,646    |   |   | 1,799 |   |
| Net                change in accrued interest payable and other liabilities  |   |     | **(16,385**  | **)**    |   | (2,982   | )      |   | 2,848 |   |
| Tax                benefits from employee stock transactions                 |   |     | **514**      |     |   | 638      |   |   | 427 |   |
| Net                cash provided by operating activities                     |   |     | **23,059**   |     |   | 29,911   |   |   | 34,865 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| **Investing                Activities:**                                     |   |     |         |     |   |     |   |   |   |   |
| Net                change in interest-bearing deposits in other banks        |   |     | **3,740**    |     |   | 1,515    |   |   | (2,350 | ) |
| Activity                in available-for-sale securities:                    |   |     |         |     |   |     |   |   |   |   |
| Sales                                                                        |   |     | **307,874**  |     |   | 119,390  |   |   | 165,513 |   |
| Maturities,                prepayments and calls                             |   |     | **69,654**   |     |   | 125,440  |   |   | 145,221 |   |
| Purchases                                                                    |   |     | **(125,286** | **)**    |   | (220,501 | )      |   | (289,398 | ) |
| Purchases                of securities held to maturity                      |   |     | **(23,020**  | **)**    |   | ---      |   |   | --- |   |
| Net                increase in total loans                                   |   |     | **(178,220** | **)**    |   | (144,509 | )      |   | (180,725 | ) |
| Proceeds                from sale of credit card portfolio                   |   |     | **---**      |     |   | 4,556    |   |   | --- |   |
| Investment                in life insurance                                  |   |     | **---**      |     |   | (5,000   | )      |   | --- |   |
| Additions                to premises and equipment                           |   |     | **(6,892**   | **)**    |   | (4,206   | )      |   | (2,677 | ) |
| Cash                acquired in acquisition                                  |   |     | **34,564**   |     |   | ---      |   |   | --- |   |
| Other                                                                        |   |     | **(3,646**   | **)**    |   | (325     | )      |   | (2,717 | ) |
| Net                cash provided (used) by investing activities              |   |     | **78,768**   |     |   | (123,640 | )      |   | (167,133 | ) |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| **Financing                Activities:**                                     |   |     |         |     |   |     |   |   |   |   |
| Net                increase in deposits                                      |   |     | **106,755**  |     |   | 74,852   |   |   | 97,773 |   |
| Net                change in short-term borrowings                           |   |     | **(50,873**  | **)**    |   | (5,648   | )      |   | (41,361 | ) |
| Proceeds                from issuance of long-term debt                      |   |     | **50,000**   |     |   | 35,000   |   |   | 98,751 |   |
| Proceeds                from subordinated debt                               |   |     | **---**      |     |   | ---      |   |   | 15,464 |   |
| Repayment                of long-term debt                                   |   |     | **(152,458** | **)**    |   | (16,760  | )      |   | (7,862 | ) |
| Cash                dividends and cash paid in lieu of fractional shares     |   |     | **(13,440**  | **)**    |   | (8,273   | )      |   | (7,645 | ) |
| Payments                to acquire treasury stock                            |   |     | **(16,489**  | **)**    |   | (4,151   | )      |   | (3,627 | ) |
| Proceeds                from issuance of common stock                        |   |     | **8,012**    |     |   | 2,308    |   |   | 4,525 |   |
| Net                cash provided (used) by financing activities              |   |     | **(68,493**  | **)**    |   | 77,328   |   |   | 156,018 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| Net                change in cash and cash equivalents                       |   |     | **33,334**   |     |   | (16,401  | )      |   | 23,750 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| Cash                and cash equivalents at beginning of period              |   |     | **43,486**   |     |   | 59,887   |   |   | 36,137 |   |
| Cash                and cash equivalents at end of period                    |   | **$**    | **76,820**   |     | $      | 43,486   |   | $ | 59,887 |   |
|                                                                         |   |     |         |     |   |     |   |   |   |   |
| Cash                paid during the year for:                                |   |     |         |     |   |     |   |   |   |   |
| Interest                                                                     |   | **$**    | **57,452**   |     | $      | 42,426   |   | $ | 42,311 |   |
| Income                taxes                                                  |   | **$**    | **3,623**    |     | $      | 3,738    |   | $ | 4,170 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES:**

**ORGANIZATION      AND BASIS OF PRESENTATION:**

**USE      OF ESTIMATES:**

**CASH      FLOWS INFORMATION:**

**SIGNIFICANT      GROUP CONCENTRATIONS OF CREDIT RISK:**

**INVESTMENT      SECURITIES:**

----

**LOANS      HELD FOR SALE:**

**LOANS      AND REVENUE RECOGNITION:**

**ALLOWANCE      FOR LOAN LOSSES:**

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

**PREMISES      AND EQUIPMENT:**

**GOODWILL      AND OTHER INTANGIBLE ASSETS:**

**FORECLOSED      REAL ESTATE:**

----

**RETIREMENT      PLANS:**

**INCOME      TAXES:**

**STOCK-BASED      COMPENSATION:**

*“Accounting      for Stock Issued to Employees,”*
*“Accounting      for Stock-Based Compensation,”*

|                                                            |   | **Years                Ended December 31,**              |       |
|-----------------------------------------------------------------|--------|----------------------------------------------------------|------------|
|                                                            |   | **(In                Thousands, Except Per Share Data)** |       |
|                                                            |   | **2005**                                                 |       | **2004** |   | **2003** |   |
|                                                            |   |                                                     |       |   |   |   |   |
| Net                income, as reported                          |   | **$**                                                    | **25,641** |   | $ | 21,798 |   | $ | 20,400 |   |
| Deduct:                Total stock-based compensation           |   |                                                     |       |   |   |   |   |   |   |   |
| expense                determined under fair value based        |   |                                                     |       |   |   |   |   |   |   |   |
| method                for all awards, net of related tax effect |   |                                                     | **(1,488** | **)** |   | (1,418 | ) |   | (822 | ) |
|                                                            |   |                                                     |       |   |   |   |   |   |   |   |
| Pro                forma net income                             |   | **$**                                                    | **24,153** |   | $ | 20,380 |   | $ | 19,578 |   |
|                                                            |   |                                                     |       |   |   |   |   |   |   |   |
| Earnings                per share:                              |   |                                                     |       |   |   |   |   |   |   |   |
| Basic                - as reported                              |   | **$**                                                    | **1.44**   |   | $ | 1.78 |   | $ | 1.68 |   |
| Basic                - pro forma                                |   | **$**                                                    | **1.36**   |   | $ | 1.67 |   | $ | 1.61 |   |
|                                                            |   |                                                     |       |   |   |   |   |   |   |   |
| Diluted                - as reported                            |   | **$**                                                    | **1.42**   |   | $ | 1.73 |   | $ | 1.63 |   |
| Diluted                - pro forma                              |   | **$**                                                    | **1.34**   |   | $ | 1.62 |   | $ | 1.57 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

**EARNINGS      PER SHARE:**

|                                                         |   | **2005** |       | **2004** |   | **2003** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
|                                                         |   |     |       |     |   |     |   |
| Net                income                                    |   | **$**    | **25,641** |     | $      | 21,798   |   | $ | 20,400 |   |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |     | **17,757** |     |   | 12,231   |   |   | 12,139 |   |
| Effect                of dilutive stock options              |   |     | **315**    |     |   | 344      |   |   | 358 |   |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Weighted                average shares outstanding (diluted) |   |     | **18,072** |     |   | 12,575   |   |   | 12,497 |   |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Per                share information:                        |   |     |       |     |   |     |   |   |   |   |
| Basic                earnings per share                      |   | **$**    | **1.44**   |     | $      | 1.78     |   | $ | 1.68 |   |
| Diluted                earnings per share                    |   |     | **1.42**   |     |   | 1.73     |   |   | 1.63 |   |

----

**COMPREHENSIVE      INCOME:**

*Reporting      Comprehensive Income.”*

|                                                             |   | **2005** |        | **2004** |   | **2003** |   |
|------------------------------------------------------------------|--------|----------|-------------|----------|--------|----------|--------|
|                                                             |   |     |        |     |   |     |   |
| Unrealized                holding gains (losses)                 |   |     |        |     |   |     |   |   |   |   |
| on                available-for-sale securities                  |   | **$**    | **(10,576** | **)**    | $      | (2,362   | )      | $ | 2,891 |   |
| Reclassification                adjustments for                  |   |     |        |     |   |     |   |   |   |   |
| (gains)                included in net income                    |   |     | **(259**    | **)**    |   | (2,470   | )      |   | (1,927 | ) |
| Net                unrealized gains (losses)                     |   |     | **(10,835** | **)**    |   | (4,832   | )      |   | 964 |   |
| Tax                effect                                        |   |     | **3,792**   |     |   | 1,692    |   |   | (338 | ) |
|                                                             |   |     |        |     |   |     |   |   |   |   |
| Net-of-tax                amount                                 |   |     | **(7,043**  | **)**    |   | (3,140   | )      |   | 626 |   |
|                                                             |   |     |        |     |   |     |   |   |   |   |
| (Increase)                decrease in unfunded pension liability |   |     | **82**      |     |   | (377     | )      |   | (874 | ) |
| Tax                effect                                        |   |     | **(29**     | **)**    |   | 132      |   |   | 306 |   |
|                                                             |   |     |        |     |   |     |   |   |   |   |
| Net-of-tax                amount                                 |   |     | **53**      |     |   | (245     | )      |   | (568 | ) |
|                                                             |   |     |        |     |   |     |   |   |   |   |
|                                                             |   | **$**    | **(6,990**  | **)**    | $      | (3,385   | )      | $ | 58 |   |

|                                                         |   | **2005** |       | **2004** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|
| Net                unrealized gain (loss) on                 |   |     |       |     |   |   |   |
| available-for-sale                securities                 |   | **$**    | **(2,320** | **)**    | $      | 8,515 |   |
| Tax                effect                                    |   |     | **812**    |     |   | (2,980 | ) |
| Net-of-tax                amount                             |   |     | **(1,508** | **)**    |   | 5,535 |   |
|                                                         |   |     |       |     |   |   |   |
| Unfunded                pension liability                    |   |     | **(3,494** | **)**    |   | (3,576 | ) |
| Tax                effect                                    |   |     | **1,223**  |     |   | 1,252 |   |
| Net-of-tax                amount                             |   |     | **(2,271** | **)**    |   | (2,324 | ) |
|                                                         |   |     |       |     |   |   |   |
| Accumulated                other comprehensive income (loss) |   | **$**    | **(3,779** | **)**    | $      | 3,211 |   |

**SEGMENT      REPORTING:**

**TRANSFERS      OF FINANCIAL ASSETS:**

**OFF-BALANCE      SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:**

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES (Continued):**

**RECENT      ACCOUNTING PROUNCEMENTS:**

**FSP      SFAS No. 115-1 and SFAS No. 124-1**

**RECLASSIFICATIONS:**

**2.      ACQUISITIONS:**

| Assets:                                  |   |   |      |
|------------------------------------------|--------|--------|-----------|
| Cash                and due from banks   |   | $      | 34,564    |   |
| Investment                securities     |   |   | 250,272   |   |
| Net                loans                 |   |   | 835,126   |   |
| Core                deposit intangible   |   |   | 13,135    |   |
| Other                assets              |   |   | 73,832    |   |
| Total                identifiable assets |   | $      | 1,206,929 |   |
|                                     |   |   |      |   |
| Liabilities:                             |   |   |      |   |
| Total                deposits            |   | $      | 882,075   |   |
| Short-term                borrowings     |   |   | 91,010    |   |
| Long-term                borrowings      |   |   | 128,515   |   |
| Other                liabilities         |   |   | 13,196    |   |
| Total                liabilities         |   | $      | 1,114,796 |   |

----

| Community                common stock issued                              |   |   | 10,854,435 |   |   |    |   |
|---------------------------------------------------------------------------|--------|--------|------------|--------|--------|---------|--------|
| Average                purchase price per Community common share          |   | $      | 29.85      |   |   |    |   |
|                                                                      |   |   |       |   | $      | 324,005 |   |
| Transaction                costs                                          |   |   |       |   |   | 6,306   |   |
| Fair                value of vested employee stock options                |   |   |       |   |   | 3,079   |   |
| Total                Purchase Price                                       |   |   |       |   |   | 333,390 |   |
| Net                Assets Acquired:                                       |   |   |       |   |   |    |   |
| PennRock                stockholders’ equity                        |   |   | 103,690    |   |   |    |   |
| PennRock                goodwill and intangibles                          |   |   | (10,037    | )      |   |    |   |
| Adjustments                to reflect assets acquired at fair value:      |   |   |       |   |   |    |   |
| Investments                                                               |   |   | (6,330     | )      |   |    |   |
| Loans                (14 year weighted average life)                      |   |   | (1,757     | )      |   |    |   |
| Core                deposit intangible (10 year accelerated amortization) |   |   | 13,135     |   |   |    |   |
| Bank                premises (35 year weighted average life)              |   |   | (3,482     | )      |   |    |   |
| Deferred                tax assets (12 year weighted average life)        |   |   | 539        |   |   |    |   |
| Adjustments                to reflect liabilities acquired at fair value: |   |   |       |   |   |    |   |
| Time                deposits (2 year weighted average life)               |   |   | (2,110     | )      |   |    |   |
| FHLB                advances (2.5 year weighted average life)             |   |   | (1,515     | )      |   |    |   |
|                                                                      |   |   |       |   |   | 92,133  |   |
| Goodwill                resulting from merger                             |   |   |       |   | $      | 241,257 |   |

|                                                 |   | **Year                Ended December 31** |        |
|------------------------------------------------------|--------|-------------------------------------------|-------------|
| (in                thousands, except per share data) |   | **2005**                                  |        | **2004** |   |
|                                                 |   |                                      |        |   |   |   |   |
| Net                interest income                   |   | **$**                                     | **101,763** |   | $ | 95,425 |   |
| Other                income                          |   |                                      | **32,365**  |   |   | 35,448 |   |
| Net                income                            |   |                                      | **33,011**  |   |   | 34,632 |   |
| Diluted                earnings per common share     |   | **$**                                     | **1.41**    |   | $ | 1.48 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**3.      INVESTMENT SECURITIES:**

|                                                     |   | **2005**                    |        | **2004**                         |   |
|----------------------------------------------------------|--------|-----------------------------|-------------|----------------------------------|--------|
|                                                     |   |  **Amortized****Cost** |        | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   |  **Fair****Value** |   |  **Amortized****Cost** |   | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   |  **Fair****Value** |   |
| Securities                Available-For-Sale             |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                securities:                          |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and federal agency        |   | **$**                       | **125,938** |                             | **$**  | **---** |   | **$** | **(2,814** | **)** | **$** | **123,124** |   | $ | 126,056 |   | $ | 807 |   | $ | (1,322 | ) | $ | 125,541 |   |
| Mortgage-backed,                primarily federal agency |   |                        | **186,871** |                             |   | **102** |   |   | **(4,160** | **)** |   | **182,813** |   |   | 178,437 |   |   | 1,517 |   |   | (640 | ) |   | 179,314 |   |
| State                and municipal                       |   |                        | **186,047** |                             |   | **5,899** |   |   | **(1,034** | **)** |   | **190,912** |   |   | 180,110 |   |   | 6,616 |   |   | (360 | ) |   | 186,366 |   |
| Corporate                                                |   |                        | **40,351**  |                             |   | **830** |   |   | **(961** | **)** |   | **40,220** |   |   | 58,928 |   |   | 1,388 |   |   | (273 | ) |   | 60,043 |   |
| Total                debt securities                     |   |                        | **539,207** |                             |   | **6,831** |   |   | **(8,969** | **)** |   | **537,069** |   |   | 543,531 |   |   | 10,328 |   |   | (2,595 | ) |   | 551,264 |   |
| Equity                securities                         |   |                        | **68,909**  |                             |   | **789** |   |   | **(1,212** | **)** |   | **68,486** |   |   | 67,085 |   |   | 1,390 |   |   | (629 | ) |   | 67,846 |   |
| Total                securities available-for-sale       |   | **$**                       | **608,116** |                             | **$**  | **7,620** |   | **$** | **(10,181** | **)** | **$** | **605,555** |   | $ | 610,616 |   | $ | 11,718 |   | $ | (3,224 | ) | $ | 619,110 |   |
|                                                     |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                Held-to-Maturity               |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |   |                        |        |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State                and municipal                       |   | **$**                       | **23,030**  |                             | **$**  | **---** |   | **$** | **(467** | **)** | **$** | **22,563** |   | $ | --- |   | $ | --- |   | $ | --- |   | $ | --- |   |

|                                                     |   | **2005**                               |        | **2004**                             |   |
|----------------------------------------------------------|--------|----------------------------------------|-------------|--------------------------------------|--------|
|                                                     |   | **Less                Than 12 Months** |        | **12                Months or More** |   | **Less                Than 12 Months** |   | **12                Months or More** |   |
|                                                     |   | **Fair****Value**                      |        | **Unrealized                Losses** |   | **Fair****Value** |   | **Unrealized                Losses** |   | **Fair****Value** |   | **Unrealized****Losses** |   | **Fair****Value** |   | **Unrealized                Losses** |   |
| Securities                Available-For-Sale             |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                securities:                          |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                Government and federal agency        |   | **$**                                  | **87,614**  |                                 | **$**  | **(1,036** | **)** | **$** | **34,838** |   | **$** | **(1,777** | **)** | $ | 31,125 |   | $ | (315 | ) | $ | 29,866 |   | $ | (1,007 | ) |
| Mortgage-backed,                primarily federal agency |   |                                   | **128,799** |                                 |   | **(2,589** | **)** |   | **44,646** |   |   | **(1,572** | **)** |   | 84,099 |   |   | (552 | ) |   | 11,170 |   |   | (88 | ) |
| State                and municipal                       |   |                                   | **37,103**  |                                 |   | **(722** | **)** |   | **8,806** |   |   | **(312** | **)** |   | 20,171 |   |   | (185 | ) |   | 5,451 |   |   | (175 | ) |
| Corporate                                                |   |                                   | **9,270**   |                                 |   | **(396** | **)** |   | **6,116** |   |   | **(565** | **)** |   | 6,688 |   |   | (60 | ) |   | 6,189 |   |   | (213 | ) |
| Total                debt securities                     |   |                                   | **262,786** |                                 |   | **(4,743** | **)** |   | **94,406** |   |   | **(4,226** | **)** |   | 142,083 |   |   | (1,112 | ) |   | 52,676 |   |   | (1,483 | ) |
| Equity                securities                         |   |                                   | **26,919**  |                                 |   | **(808** | **)** |   | **1,497** |   |   | **(404** | **)** |   | 16,085 |   |   | (209 | ) |   | 1,080 |   |   | (420 | ) |
| Total                temporarily impaired securities     |   | **$**                                  | **289,705** |                                 | **$**  | **(5,551** | **)** | **$** | **95,903** |   | **$** | **(4,630** | **)** | $ | 158,168 |   | $ | (1,321 | ) | $ | 53,756 |   | $ | (1,903 | ) |
|                                                     |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities                Held-to-Maturity               |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                     |   |                                   |        |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State                and municipal                       |   | **$**                                  | **22,563**  |                                 | **$**  | **(467** | **)** | **$** | **---** |   | **$** | **---** |   | $ | --- |   | $ | --- |   | $ | --- |   | $ | --- |   |

----

|                                           |   | **Available                for Sale** |    | **Held                to Maturity** |   |
|------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                           |   | **Amortized****Cost**                 |    | **Fair****Value**                   |   | **Amortized****Cost** |   | **Fair****Value** |   |
|                                           |   | (in                thousands)         |    |
| Within                1 year                   |   | $                                     | 5,663   |                                | $      | 5,656 |   | $ | --- |   | $ | --- |   |
| Over                1 year and through 5 years |   |                                  | 45,311  |                                |   | 44,094 |   |   | --- |   |   | --- |   |
| Over                5 years through 10 years   |   |                                  | 108,624 |                                |   | 106,430 |   |   | 511 |   |   | 502 |   |
| Over                10 years                   |   |                                  | 192,738 |                                |   | 198,076 |   |   | 22,519 |   |   | 22,061 |   |
|                                           |   |                                  | 352,336 |                                |   | 354,256 |   |   | 23,030 |   |   | 22,563 |   |
| Mortgage-backed                securities      |   |                                  | 186,871 |                                |   | 182,813 |   |   | --- |   |   | --- |   |
|                                           |   | $                                     | 539,207 |                                | $      | 537,069 |   | $ | 23,030 |   | $ | 22,563 |   |

**4.      LOANS:**

|                                    |   | **2005** |          | **2004** |   |
|-----------------------------------------|--------|----------|---------------|----------|--------|
| Commercial                              |   | **$**    | **782,946**   |     | $      | 409,105 |   |
| Real                estate-construction |   |     | **4,532**     |     |   | 8,703 |   |
| Real                estate-mortgage     |   |     |          |     |   |   |   |
| Residential                             |   |     | **149,525**   |     |   | 83,979 |   |
| Commercial                              |   |     | **793,969**   |     |   | 356,871 |   |
| Consumer                                |   |     | **503,525**   |     |   | 357,293 |   |
|                                    |   | **$**    | **2,234,497** |     | $      | 1,215,951 |   |

|                                                          |   | **2005** |       | **2004** |   | **2003** |   |
|---------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Balance,                January 1                             |   | **$**    | **14,421** |     | $      | 13,178   |   | $ | 12,343 |   |
| Provision                for loan losses                      |   |     | **2,300**  |     |   | 3,100    |   |   | 2,500 |   |
| Loan                charge-offs                               |   |     | **(2,323** | **)**    |   | (2,910   | )      |   | (2,839 | ) |
| Recoveries                                                    |   |     | **1,499**  |     |   | 1,053    |   |   | 1,174 |   |
| Allowance                established for acquired credit risk |   |     | **7,068**  |     |   | ---      |   |   | --- |   |
| Balance,                December 31                           |   | **$**    | **22,965** |     | $      | 14,421   |   | $ | 13,178 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**4.      LOANS (Continued):**

|                                                                      |   | **2005** |       | **2004** |   |
|---------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Loans                on which accrual of interest has been discontinued   |   | **$**    | **9,060**  |     | $      | 5,428 |   |
| Foreclosed                real estate                                     |   |     | **1,447**  |     |   | 2,094 |   |
|                                                                      |   |     |       |     |   |   |   |
| Total                non-performing assets                                |   |     | **10,507** |     |   | 7,522 |   |
|                                                                      |   |     |       |     |   |   |   |
| Loans                past due 90 days or more and still accruing interest |   |     | **22**     |     |   | --- |   |
|                                                                      |   |     |       |     |   |   |   |
| Total                risk elements                                        |   | **$**    | **10,529** |     | $      | 7,522 |   |

|                                                         |   | **2005** |      | **2004** |   |
|--------------------------------------------------------------|--------|----------|-----------|----------|--------|
| Impaired                loans without a valuation allowance  |   | **$**    | **3,120** |     | $      | 1,927 |   |
| Impaired                loans with a valuation allowance     |   |     | **4,164** |     |   | 2,018 |   |
| Total                impaired loans                          |   | **$**    | **7,284** |     | $      | 3,945 |   |
|                                                         |   |     |      |     |   |   |   |
| Valuation                allowance related to impaired loans |   | **$**    | **1,848** |     | $      | 593 |   |

| Contractually                required payments receivable at acquisition: |   |   |   |
|---------------------------------------------------------------------------|--------|--------|--------|
| Commercial                                                                |   | $      | 17,351 |   |
| Commercial                mortgages                                       |   |   | 5,470  |   |
|                                                                      |   | $      | 22,821 |   |
| Cash                flows expected to be collected at acquisition         |   | $      | 20,151 |   |
| Basis                in acquired loans at acquisition                     |   | $      | 14,167 |   |

----

**5.      PREMISES AND EQUIPMEN**

|                                                          |   | **2005** |        | **2004** |   |
|---------------------------------------------------------------|--------|----------|-------------|----------|--------|
|                                                          |   |     |        |     |   |
| Banking                premises                               |   | **$**    | **41,684**  |     | $      | 27,017 |   |
| Furniture,                fixture, and equipment              |   |     | **28,526**  |     |   | 24,169 |   |
| Leasehold                improvements                         |   |     | **2,206**   |     |   | 1,924 |   |
| Construction-in-progress                                      |   |     | **1,746**   |     |   | 951 |   |
|                                                          |   |     | **74,162**  |     |   | 54,061 |   |
| Less                accumulated depreciation and amortization |   |     | **(30,879** | **)**    |   | (27,692 | ) |
|                                                          |   |     |        |     |   |   |   |
|                                                          |   | **$**    | **43,283**  |     | $      | 26,369 |   |

| 2006       |   | $      | 1,682  |   |
|------------|--------|--------|--------|--------|
| 2007       |   |   | 1,466  |   |
| 2008       |   |   | 1,279  |   |
| 2009       |   |   | 1,289  |   |
| 2010       |   |   | 1,206  |   |
| Thereafter |   |   | 17,883 |   |
|       |   |   |   |   |
|       |   | $      | 24,805 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

| **6.  ** | **GOODWILL                AND OTHER INTANGIBLE                ASSETS:** |
|--------------------|-------------------------------------------------------------------------|

|                                        |   | **2005** |        | 2004   |   | 2003  |   |
|---------------------------------------------|--------|----------|-------------|--------|--------|-------|--------|
|                                        |   |     |        |
| Balance                at beginning of year |   | **$**    | **3,570**   |   | $      | 3,231 |   | $ | 1,031 |   |
| Goodwill                acquired            |   |     | **241,257** |   |   | 339   |   |   | 2,200 |   |
| Balance                at end of year       |   | **$**    | **244,827** |   | $      | 3,570 |   | $ | 3,231 |   |

|                        |   | **2005**  |       | 2004                                        |   |
|-----------------------------|--------|-----------|------------|---------------------------------------------|--------|
|                        |   | **Gross** |       | **Accumulated                Amortization** |   | **Net** |   | Gross |   | Accumulated                Amortization |   | Net |   |
|                        |   |      |       |                                        |   |   |   |   |   |   |   |   |   |
| Core                deposit |   | **$**     | **14,236** |                                        | **$**  | **1,786** |   | **$** | **12,450** |   | $ | 1,101 |   | $ | 519 |   | $ | 582 |   |
| Other                       |   |      | **2,069**  |                                        |   | **265** |   |   | **1,804** |   |   | 1,008 |   |   | 108 |   |   | 900 |   |
| Total                       |   | **$**     | **16,305** |                                        | **$**  | **2,051** |   | **$** | **14,254** |   | $ | 2,109 |   | $ | 627 |   | $ | 1,482 |   |

| 2006 |   | $      | 2,500 |   |
|------|--------|--------|-------|--------|
| 2007 |   |   | 2,250 |   |
| 2008 |   |   | 2,025 |   |
| 2009 |   |   | 1,800 |   |
| 2010 |   |   | 1,550 |   |

----

**7.      DEPOSITS:**

|                                         |   | **2005** |          | **2004** |   |
|----------------------------------------------|--------|----------|---------------|----------|--------|
|                                         |   |     |          |     |   |
| Non-interest                bearing deposits |   | **$**    | **375,835**   |     | $      | 184,359 |   |
| Savings                deposits              |   |     | **243,174**   |     |   | 160,505 |   |
| Money                market deposits         |   |     | **288,418**   |     |   | 52,718 |   |
| NOW                accounts                  |   |     | **310,517**   |     |   | 284,152 |   |
| Time                deposits                 |   |     | **1,076,423** |     |   | 623,803 |   |
|                                         |   |     |          |     |   |   |   |
| Total                                        |   | **$**    | **2,294,367** |     | $      | 1,305,537 |   |

| 2006       |   | $      | 606,186   |   |
|------------|--------|--------|-----------|--------|
| 2007       |   |   | 222,493   |   |
| 2008       |   |   | 96,654    |   |
| 2009       |   |   | 65,367    |   |
| 2010       |   |   | 83,549    |   |
| Thereafter |   |   | 2,174     |   |
|       |   |   |      |   |
|       |   | $      | 1,076,423 |   |

**8.      SHORT-TERM BORROWINGS AND LONG-TERM DEBT:**

|                                                          |   | **2005** |       | **Rate** |   | **2004** |   | **Rate** |   |
|---------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|----------|--------|
|                                                          |   |     |       |     |   |     |   |     |   |
| Securities                sold under agreements to repurchase |   | **$**    | **62,631** |     |   | **4.78** | **%**  | $        | 25,472 |   |   | 1.81 | % |
| Treasury                tax and loan note                     |   |     | **1,804**  |     |   | **3.98** | **%**  |     | 1,926  |   |   | 1.94 | % |
| FHLB                borrowings                                |   |     | **17,818** |     |   | **4.23** | **%**  |     | 19,718 |   |   | 2.21 | % |
| Other                                                         |   |     | **5,000**  |     |   | **5.54** | **%**  |     | ---    |   |   | --- |   |
|                                                          |   | **$**    | **87,253** |     |   |     |   | $        | 47,116 |   |   |   |   |
|                                                          |   |     |       |     |   |     |   |     |   |   |   |   |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**8.      SHORT-TERM BORROWINGS AND LONG-TERM DEBT (Continued):**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2005** |        | **2004** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-------------|----------|--------|
| Outstanding                advances from the FHLB of Pittsburgh are currently fixed rate and                mature                from 2006 to 2016. The advances are collateralized by FHLB stock,                certain                first mortgage loans and both agency and mortgage-backed securities.                The                advance rates range from 2.41% to 6.35%, with a weighted average                interest                rate of 4.37%. Advances totaling $266.5 million are convertible advances.                Under the terms of these arrangements, the FHLB retains the option                to                convert the advances from fixed to variable rate. If the FHLB were                to                convert their options, Community has the ability to prepay the advances                at                no penalty. At the current time no advances have been converted,                and                remain at a fixed rate of interest. |   | **$**    | **430,428** |     | $      | 404,364 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |     |        |     |   |   |   |
| Other                long-term debt has an interest rate of 4% and matures in                2017.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |     | **291**     |     |   | 298 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **$**    | **430,719** |     | $      | 404,662 |   |

| 2006       |   | $      | 77,963  |   |
|------------|--------|--------|---------|--------|
| 2007       |   |   | 43,261  |   |
| 2008       |   |   | 42,900  |   |
| 2009       |   |   | 40,165  |   |
| 2010       |   |   | 20,177  |   |
| Thereafter |   |   | 206,253 |   |
|       |   | $      | 430,719 |   |

**9.      SUBORDINATED DEBT:**

----

**10.      INCOME TAXES:**

|     |   | **2005** |      | **2004** |   | **2003** |   |
|----------|--------|----------|-----------|----------|--------|----------|--------|
| Current  |   | **$**    | **4,513** |     | $      | 5,360    |   | $ | 4,511 |   |
| Deferred |   |     | **1,559** |     |   | (481     | )      |   | (152 | ) |
|     |   | **$**    | **6,072** |     | $      | 4,879    |   | $ | 4,359 |   |

|                                                         |   | **2005** |       | **2004** |   | **2003** |   |
|--------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Provision                on pre-tax income at statutory rate |   | **$**    | **11,100** |     | $      | 9,337    |   | $ | 8,666 |   |
| Tax-exempt                interest income                    |   |     | **(3,740** | **)**    |   | (3,409   | )      |   | (3,284 | ) |
| Earnings                on investment in insurance           |   |     | **(656**   | **)**    |   | (514     | )      |   | (473 | ) |
| Other,                net                                    |   |     | **(632**   | **)**    |   | (535     | )      |   | (550 | ) |
|                                                         |   |     |       |     |   |     |   |   |   |   |
| Total                provision for income taxes              |   | **$**    | **6,072**  |     | $      | 4,879    |   | $ | 4,359 |   |

|                                                            |   | **2005** |       | **2004** |   |
|-----------------------------------------------------------------|--------|----------|------------|----------|--------|
| Deferred                tax assets:                             |   |     |       |     |   |   |   |
| Allowance                for loan losses                        |   | **$**    | **8,972**  |     | $      | 5,047 |   |
| Non-accrual                loan interest income                 |   |     | **170**    |     |   | 136 |   |
| Unfunded                pension adjustment                      |   |     | **1,223**  |     |   | 1,252 |   |
| Deferred                loan fees                               |   |     | **340**    |     |   | 233 |   |
| Deferred                compensation                            |   |     | **1,856**  |     |   | 752 |   |
| Alternative                minimum tax                          |   |     | **900**    |     |   | 225 |   |
| Unrealized                loss on available for sale securities |   |     | **812**    |     |   | --- |   |
| Other                                                           |   |     | **488**    |     |   | 42 |   |
| Total                deferred tax assets                        |   |     | **14,761** |     |   | 7,687 |   |
|                                                            |   |     |       |     |   |   |   |
| Deferred                tax liabilities                         |   |     |       |     |   |   |   |
| Depreciation                                                    |   |     | **842**    |     |   | 898 |   |
| Unrealized                gain on available for sale securities |   |     | **---**    |     |   | 2,980 |   |
| Prepaid                pension cost                             |   |     | **785**    |     |   | 738 |   |
| Life                insurance company reserves                  |   |     | **87**     |     |   | 163 |   |
| Prepaid                expenses                                 |   |     | **529**    |     |   | 290 |   |
| Purchase                accounting adjustments                  |   |     | **1,736**  |     |   | --- |   |
| Other                                                           |   |     | **418**    |     |   | 144 |   |
| Total                deferred tax liabilities                   |   |     | **4,397**  |     |   | 5,213 |   |
|                                                            |   |     |       |     |   |   |   |
| Net                deferred tax asset                           |   | **$**    | **10,364** |     | $      | 2,474 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**11.      COMMITMENTS AND CONTINGENCIES:**

|                                                     |   | **Contract                Amount** |        |
|----------------------------------------------------------|--------|------------------------------------|-------------|
|                                                     |   | **2005**                           |        | **2004** |   |
| Commitments                to fund loans                 |   | **$**                              | **99,988**  |   | $ | 55,672 |   |
| Unused                lines of credit                    |   | **$**                              | **365,076** |   | $ | 338,313 |   |
| Standby                letters of credit                 |   | **$**                              | **100,523** |   | $ | 36,256 |   |
| Unadvanced                portions of construction loans |   | **$**                              | **129,845** |   | $ | 53,962 |   |

----

**12.      REGULATORY MATTERS:**

|                                          |   | **As                of December 31, 2005** |        |
|-----------------------------------------------|--------|--------------------------------------------|-------------|
|                                          |   | **Actual**                                 |        | **Regulatory                Minimum** |   | **“Well                Capitalized”** |   |
|                                          |   | **Amount**                                 |        | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| Leverage                ratio                 |   |                                       |        |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | **$**                                      | **249,692** |   |   | **8.2** | **%** | **$** | **122,231** |   |   | **4** | **%** | **$** | **152,789** |   |   | **5** | **%** |
| Bank                only                      |   | **$**                                      | **242,696** |   |   | **8.0** | **%** | **$** | **121,777** |   |   | **4** | **%** | **$** | **152,221** |   |   | **5** | **%** |
|                                          |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier                1 capital ratio           |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | **$**                                      | **249,692** |   |   | **10.1** | **%** | **$** | **99,207** |   |   | **4** | **%** | **$** | **148,811** |   |   | **6** | **%** |
| Bank                only                      |   | **$**                                      | **242,696** |   |   | **9.8** | **%** | **$** | **99,498** |   |   | **4** | **%** | **$** | **149,247** |   |   | **6** | **%** |
|                                          |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                risk-based capital ratio |   |                                       |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | **$**                                      | **272,657** |   |   | **11.0** | **%** | **$** | **198,414** |   |   | **8** | **%** | **$** | **248,018** |   |   | **10** | **%** |
| Bank                only                      |   | **$**                                      | **265,661** |   |   | **10.7** | **%** | **$** | **198,996** |   |   | **8** | **%** | **$** | **248,746** |   |   | **10** | **%** |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**12.      REGULATORY MATTERS (Continued):**

|                                          |   | **As                of December 31, 2004** |    |
|-----------------------------------------------|--------|--------------------------------------------|---------|
|                                          |   | **Actual**                                 |    | **Regulatory                Minimum** |   | **“Well                Capitalized”** |   |
|                                          |   | **Amount**                                 |    | **Ratio** |   | **Amount** |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| Leverage                ratio                 |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | $                                          | 171,755 |   |   | 8.8 | % | $ | 78,088 |   |   | 4 | % | $ | 97,609 |   |   | 5 | % |
| Bank                only                      |   | $                                          | 159,677 |   |   | 8.2 | % | $ | 77,712 |   |   | 4 | % | $ | 97,140 |   |   | 5 | % |
|                                          |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Tier                1 capital ratio           |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | $                                          | 171,755 |   |   | 11.6 | % | $ | 59,135 |   |   | 4 | % | $ | 88,702 |   |   | 6 | % |
| Bank                only                      |   | $                                          | 159,677 |   |   | 10.8 | % | $ | 58,881 |   |   | 4 | % | $ | 88,322 |   |   | 6 | % |
|                                          |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                risk-based capital ratio |   |                                       |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Community                Banks, Inc.          |   | $                                          | 186,513 |   |   | 12.6 | % | $ | 118,269 |   |   | 8 | % | $ | 147,837 |   |   | 10 | % |
| Bank                only                      |   | $                                          | 174,098 |   |   | 11.8 | % | $ | 117,762 |   |   | 8 | % | $ | 147,203 |   |   | 10 | % |

**13.      PENSION PLAN:**

| **(dollars                in thousands)**                                                         |   | **2005** |     | **2004** |   | **2003** |   |
|---------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Components                of net periodic benefit cost:                                           |   |     |     |     |   |     |   |   |   |   |
| Service                cost benefit earned during the year                                        |   | **$**    | **---**  |     | $      | ---      |   | $ | 115 |   |
| Interest                cost on projected benefit obligation                                      |   |     | **414**  |     |   | 416      |   |   | 428 |   |
| Expected                return on plan assets                                                     |   |     | **(448** | **)**    |   | (249     | )      |   | (549 | ) |
| Net                amortization and deferral:                                                     |   |     |     |     |   |     |   |   |   |   |
| Prior                service benefit                                                              |   |     | **---**  |     |   | ---      |   |   | (103 | ) |
| Net                loss                                                                           |   |     | **284**  |     |   | 252      |   |   | 239 |   |
| Gain                (loss) deferred                                                               |   |     | **16**   |     |   | (161     | )      |   | 150 |   |
| Pension                cost                                                                       |   | **$**    | **266**  |     | $      | 258      |   | $ | 280 |   |
|                                                                                              |   |     |     |     |   |     |   |   |   |   |
| Increase                in minimum liability included in othercomprehensive                income |   | **$**    | **82**   |     | $      | 377      |   | $ | 874 |   |

----

| **(dollars                in thousands)**                                       |   | **2005** |       | **2004** |   |
|---------------------------------------------------------------------------------|--------|----------|------------|----------|--------|
|                                                                            |   |     |       |     |   |
| Change                in benefit obligation:                                    |   |     |       |     |   |
| Benefit                obligation at beginning of year                          |   | **$**    | **7,400**  |     | $      | 6,807 |   |
| Interest                cost                                                    |   |     | **414**    |     |   | 416 |   |
| Benefits                paid                                                    |   |     | **(379**   | **)**    |   | (291 | ) |
| Change                in assumptions                                            |   |     | **242**    |     |   | 452 |   |
| Experience                (gain) loss                                           |   |     | **(23**    | **)**    |   | 16 |   |
| Benefit                obligation at end of year                                |   |     | **7,654**  |     |   | 7,400 |   |
| Change                in plan assets:                                           |   |     |       |     |   |   |   |
| Fair                value of plan assets at beginning of year                   |   |     | **5,794**  |     |   | 4,904 |   |
| Actual                return on plan assets                                     |   |     | **448**    |     |   | 249 |   |
| Employer                contributions                                           |   |     | **538**    |     |   | 932 |   |
| Benefits                paid                                                    |   |     | **(379**   | **)**    |   | (291 | ) |
| Fair                value of plan assets at end of year                         |   |     | **6,401**  |     |   | 5,794 |   |
|                                                                            |   |     |       |     |   |   |   |
| Funded                status, end of year                                       |   |     | **(1,253** | **)**    |   | (1,606 | ) |
| Unrecognized                net cost                                            |   |     | **3,494**  |     |   | 3,576 |   |
| Recognition                of additional minimum liability                      |   |     | **(3,494** | **)**    |   | (3,576 | ) |
| Accrued                pension liability                                        |   | **$**    | **(1,253** | **)**    | $      | (1,606 | ) |
|                                                                            |   |     |       |     |   |   |   |
| Amounts                recognized in the consolidated balance sheet consist of: |   |     |       |
| Prepaid                benefit cost                                             |   | **$**    | **2,241**  |     | $      | 1,970 |   |
| Accumulated                other comprehensive income adjustment                |   |     | **(3,494** | **)**    |   | (3,576 | ) |
| Net                accrued pension liability                                    |   | **$**    | **(1,253** | **)**    | $      | (1,606 | ) |
|                                                                            |   |     |       |     |   |   |   |
| Accumulated                benefit obligation                                   |   | **$**    | **7,654**  |     | $      | 7,400 |   |

|                                                    |   | **2005** |     | **2004** |   | **2003** |   |
|---------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Discount                rate                            |   |     | **5.50** | **%**    |   | 5.75     | %      |   | 6.25 | % |
| Expected                long-term return on plan assets |   |     | **7.5**  | **%**    |   | 8.5      | %      |   | 9.0 | % |
| Annual                salary increase                   |   |     | **n/a**  |     |   | n/a      |   |   | 4.0 | % |

| 2006                             |   | $      | 386   |   |
|----------------------------------|--------|--------|-------|--------|
| 2007                             |   |   | 382   |   |
| 2008                             |   |   | 394   |   |
| 2009                             |   |   | 396   |   |
| 2010                             |   |   | 423   |   |
| Years                2011 - 2015 |   |   | 2,370 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**13.      PENSION PLAN (Continued):**

|                                   |   | **Target****Asset** |   |      |   |  **At                December 31,** |   |
|----------------------------------------|--------|---------------------|--------|-----------|--------|------------------------------------------|--------|
|                                   |   | **Allocation**      |   | **Range** |   | **2005**                                 |   | **2004** |   |
| Equity                                 |   |                | 60     | %         |   | 50-70                                    | %      |   | **61** | **%** |   | 63 | % |
| Fixed                income            |   |                | 35     | %         |   | 25-45                                    | %      |   | **31** | **%** |   | 25 | % |
| Cash                and/or equivalents |   |                | 5      | %         |   | 2-10                                     | %      |   | **8** | **%** |   | 12 | % |
|                                   |   |                |   |      |   |                                     |   |   |   |   |   |   |   |
|                                   |   |                | 100    | %         |   |                                     |   |   |   |   |   |   |   |

|                            |   | **Targeted****Asset****Allocation** |   |   **Benchmarks** |   | **10                yrs (12/31/05)****Annualized****Returns** |   | **15                yrs (12/31/05)****Annualized****Returns** |   |
|---------------------------------|--------|-------------------------------------|--------|----------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
| Equities                        |   |                                | 60     | %                          |   | S&P                500                                    |   |                                                          | 9.07   | % |   | 11.52 | % |
| Fixed                income     |   |                                | 35     | %                          |   | Lehman                Bros Aggregate                          |   |                                                          | 6.16   | % |   | 7.26 | % |
| Cash                equivalents |   |                                | 5      | %                          |   | 3                mo T-Bill                                    |   |                                                          | 3.78   | % |   | 4.03 | % |
|                            |   |                                |   |                       |   |                                                          |   |                                                          |   |   |   |   |   |
| Total                pension    |   |                                | 100    | %                          |   |                                                          |   |                                                          | 7.78   | % |   | 9.66 | % |

----

**14.      STOCK-BASED PLANS:**

*Accounting      for Stock Issued to Employees”*
*Accounting      for Stock Based Compensation” *
*.      *
* *

|                                      |   | **2005**                                                                     |      | **2004**                                                                             |   | **2003**                                                                     |   |
|-------------------------------------------|--------|------------------------------------------------------------------------------|-----------|--------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|                                      |   |  **Shares                Under****Option                (000’s)** |      | **Weighted****Average****Exercise                Price****Per                Share** |   |  **Shares                Under****Option                (000’s)** |   | **Weighted****Average****Exercise                Price****Per                Share** |   |  **Shares****Under****Option                (000’s)** |   | **Weighted****Average****Exercise                Price****Per                Share** |   |
| Balance,                beginning of year |   |                                                                         | **1,073** |                                                                                 | **$**  | **20.44**                                                                    |   |   | 1,027 |   | $ | 17.90 |   |   | 1,040 |   | $ | 14.95 |   |
| Issued                                    |   |                                                                         | **14**    |                                                                                 |   | **27.01**                                                                    |   |   | 193 |   |   | 28.89 |   |   | 170 |   |   | 30.40 |   |
| Exercised                                 |   |                                                                         | **(254**  | **)**                                                                                |   | **14.82**                                                                    |   |   | (142 | ) |   | 13.34 |   |   | (173 | ) |   | 12.30 |   |
| Exchanged                in merger        |   |                                                                         | **229**   |                                                                                 |   | **16.53**                                                                    |   |   | --- |   |   | --- |   |   | --- |   |   | --- |   |
| Forfeited                                 |   |                                                                         | **(1**    | **)**                                                                                |   | **19.99**                                                                    |   |   | (5 | ) |   | 23.06 |   |   | (10 | ) |   | 17.87 |   |
| Balance,                end of year       |   |                                                                         | **1,061** |                                                                                 | **$**  | **21.02**                                                                    |   |   | 1,073 |   | $ | 20.44 |   |   | 1,027 |   | $ | 17.90 |   |

|                                                                          |   | **Options                Outstanding**                                 |   | **Options                Exercisable**                                   |   |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|     **Range                of exercise prices per share** |   |   **Number****Outstanding****(in                thousands)** |   | **Weighted****Average****Exercise****Price****Per                Share** |   | **Weighted****Average****Remaining****Contractual****Life                in Years** |   |   **Number****Exercisable****(in                thousands)** |   | **Weighted****Average****Exercise****Price****Per                Share** |   |
| Under                $12.16                                                   |   |                                                                   | 59     |                                                                     | $      | 8.06 |   |   | 1.6 |   |   | 59 |   | $ | 8.06 |   |
| $12.17                - $15.20                                                |   |                                                                   | 244    |                                                                     | $      | 14.02 |   |   | 4.0 |   |   | 244 |   | $ | 14.02 |   |
| $15.21                - $18.24                                                |   |                                                                   | 76     |                                                                     | $      | 15.70 |   |   | 3.0 |   |   | 76 |   | $ | 15.70 |   |
| $18.25                - $21.28                                                |   |                                                                   | 307    |                                                                     | $      | 20.06 |   |   | 6.6 |   |   | 238 |   | $ | 19.98 |   |
| $27.36                - $30.40                                                |   |                                                                   | 375    |                                                                     | $      | 29.50 |   |   | 8.4 |   |   | 361 |   | $ | 29.59 |   |
| $6.08                - $30.40                                                 |   |                                                                   | 1,061  |                                                                     | $      | 21.02 |   |   | 6.1 |   |   | 978 |   | $ | 20.99 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**14.      STOCK-BASED PLANS (Continued):**

**15.      RELATED PARTY TRANSACTIONS:**

**16.      FAIR VALUES OF FINANCIAL INSTRUMENTS:**

**CASH      AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS, AND FEDERAL FUNDS      SOLD:**

**INVESTMENT      SECURITIES:**

**ACCRUED      INTEREST RECEIVABLE AND PAYABLE:**

**LOANS:**

**DEPOSIT      LIABILITIES:**

----

**SHORT-TERM      BORROWINGS AND TRUST PREFERRED SECURITIES:**

**LONG-TERM      DEBT:**

**OFF-BALANCE      SHEET INSTRUMENTS:**

|                                                                                                                        |   | **2005**                                 |          | **2004**                       |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|--------------------------------|--------|
|                                                                                                                        |   |  **Carrying                Amount** |          | **Estimated****Fair****Value** |   |  **Carrying                Amount** |   | **Estimated****Fair****Value** |   |
|                                                                                                                        |   | **(in                thousands)**        |          |
| **Financial                assets:**                                                                                        |   |                                     |          |                           |   |   |   |   |   |
| Cash                and due from banks, interest-bearing deposits,                    and federal funds sold |   | **$**                                    | **81,243**    |                           | **$**  | **81,243** |   | $ | 45,273 |   | $ | 45,273 |   |
| Investment                securities                                                                                        |   |                                     | **628,585**   |                           |   | **628,118** |   |   | 619,110 |   |   | 619,110 |   |
| Loans                held for sale                                                                                          |   |                                     | **2,568**     |                           |   | **2,568** |   |   | 1,505 |   |   | 1,505 |   |
| Net                loans                                                                                                    |   |                                     | **2,211,532** |                           |   | **2,204,611** |   |   | 1,201,530 |   |   | 1,198,973 |   |
| Accrued                interest receivable                                                                                  |   |                                     | **13,316**    |                           |   | **13,316** |   |   | 9,077 |   |   | 9,077 |   |
|                                                                                                                        |   |                                     |          |                           |   |   |   |   |   |   |   |   |   |
| **Financial                liabilities:**                                                                                   |   |                                     |          |                           |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                    |   | **$**                                    | **2,294,367** |                           | **$**  | **2,292,606** |   | $ | 1,305,537 |   | $ | 1,305,486 |   |
| Short-term                borrowings                                                                                        |   |                                     | **87,253**    |                           |   | **87,253** |   |   | 47,116 |   |   | 47,116 |   |
| Long-term                debt                                                                                               |   |                                     | **430,719**   |                           |   | **435,065** |   |   | 404,662 |   |   | 408,168 |   |
| Subordinated                debt                                                                                            |   |                                     | **30,928**    |                           |   | **30,928** |   |   | 30,928 |   |   | 30,928 |   |
| Accrued                interest payable                                                                                     |   |                                     | **6,301**     |                           |   | **6,301** |   |   | 4,105 |   |   | 4,105 |   |
| Off-balance                sheet instruments                                                                                |   |                                     | **---**       |                           |   | **---** |   |   | --- |   |   | --- |   |

**17.      CONDENSED FINANCIAL INFORMATION OF COMMUNITY BANKS, INC. (PARENT      ONLY)**

|                                                            |   | **2005**                          |        | **2004** |   |
|-----------------------------------------------------------------|--------|-----------------------------------|-------------|----------|--------|
|                                                            |   | **(in                thousands)** |        |
| **Condensed                Balance Sheets:**                    |   |                              |        |     |   |   |   |
| Cash                                                            |   | **$**                             | **1,579**   |     | $      | 4,256 |   |
| Interest                bearing deposits in other banks         |   |                              | **53**      |     |   | 72 |   |
| Investment                securities, available for sale        |   |                              | **2,338**   |     |   | 1,324 |   |
| Investment                in banking subsidiary                 |   |                              | **499,508** |     |   | 169,773 |   |
| Investment                in nonbank subsidiaries               |   |                              | **6,440**   |     |   | 6,147 |   |
| Other                assets                                     |   |                              | **3,382**   |     |   | 1,906 |   |
| Total                assets                                     |   | **$**                             | **513,300** |     | $      | 183,478 |   |
|                                                            |   |                              |        |     |   |   |   |
| Short-term                borrowings                            |   | **$**                             | **5,000**   |     | $      | --- |   |
| Long-term                debt                                   |   |                              | **30,928**  |     |   | 30,928 |   |
| Other                liabilities                                |   |                              | **699**     |     |   | 209 |   |
| Stockholders’                equity                       |   |                              | **476,673** |     |   | 152,341 |   |
| Total                liabilities and stockholders’ equity |   | **$**                             | **513,300** |     | $      | 183,478 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**17.      CONDENSED FINANCIAL INFORMATION OF COMMUNITY BANKS, INC. (PARENT ONLY)      (Continued):**

|                                                                                |   | **2005**                          |        | **2004** |   | **2003** |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|----------|--------|----------|--------|
|                                                                                |   | **(in                thousands)** |        |
| **Condensed                Statements of Income:**                                  |   |                              |        |     |   |     |   |   |   |   |
| Dividends                from:                                                      |   |                              |        |     |   |     |   |   |   |   |
| Banking                subsidiary                                                   |   | **$**                             | **19,000**  |     | $      | ---      |   | $ | --- |   |
| Nonbank                subsidiaries                                                 |   |                              | **2,263**   |     |   | ---      |   |   | --- |   |
| Other                income (expense)                                               |   |                              | **(2,693**  | **)**    |   | (1,215   | )      |   | (830 | ) |
| Income(loss)                before equity in undistributed earnings of subsidiaries |   |                              | **18,570**  |     |   | (1,215   | )      |   | (830 | ) |
| Equity                in undistributed earnings of:                                 |   |                              |        |     |   |     |   |   |   |   |
| Banking                subsidiary                                                   |   |                              | **8,915**   |     |   | 21,861   |   |   | 20,118 |   |
| Nonbank                subsidiaries                                                 |   |                              | **(1,844**  | **)**    |   | 1,152    |   |   | 1,112 |   |
|                                                                                |   |                              | **7,071**   |     |   | 23,013   |   |   | 21,230 |   |
| Net                income                                                           |   | **$**                             | **25,641**  |     | $      | 21,798   |   | $ | 20,400 |   |
|                                                                                |   |                              |        |     |   |     |   |   |   |   |
| **Condensed                Statements of Cash Flows:**                              |   |                              |        |     |   |     |   |   |   |   |
| **Operating                activities:**                                            |   |                              |        |     |   |     |   |   |   |   |
| Net                income                                                           |   | **$**                             | **25,641**  |     | $      | 21,798   |   | $ | 20,400 |   |
| Adjustments                to reconcile net cash provided by operating activities:  |   |                              |        |     |   |     |   |   |   |   |
| Undistributed                earnings of:                                           |   |                              |        |     |   |     |   |   |   |   |
| Banking                subsidiary                                                   |   |                              | **(8,915**  | **)**    |   | (21,861  | )      |   | (20,118 | ) |
| Nonbank                subsidiaries                                                 |   |                              | **1,844**   |     |   | (1,152   | )      |   | (1,112 | ) |
| Other,                net                                                           |   |                              | **709**     |     |   | 391      |   |   | (398 | ) |
| Net                cash provided (used) by operating activities                     |   |                              | **19,279**  |     |   | (824     | )      |   | (1,228 | ) |
| **Investing                activities:**                                            |   |                              |        |     |   |     |   |   |   |   |
| Purchases                of investment securities                                   |   |                              | **(1,073**  | **)**    |   | (2,706   | )      |   | (17,304 | ) |
| Proceeds                from maturities and sales of investment securities          |   |                              | **---**     |     |   | 18,661   |   |   | 8,862 |   |
| Payments                for investments in and advances to subsidiaries             |   |                              | **(3,966**  | **)**    |   | ---      |   |   | --- |   |
| Investment                in unconsolidated trust subsidiaries                      |   |                              | **---**     |     |   | ---      |   |   | (464 | ) |
| Net                cash provided (used) by investing activities                     |   |                              | **(5,039**  | **)**    |   | 15,955   |   |   | (8,906 | ) |
| **Financing                activities:**                                            |   |                              |        |     |   |     |   |   |   |   |
| Net                change in short-term borrowings                                  |   |                              | **5,000**   |     |   | (2,000   | )      |   | 2,000 |   |
| Proceeds                from issuance of long term debt                             |   |                              | **---**     |     |   | ---      |   |   | 15,464 |   |
| Proceeds                from issuance of common stock                               |   |                              | **8,012**   |     |   | 2,308    |   |   | 4,525 |   |
| Purchases                of treasury stock                                          |   |                              | **(16,489** | **)**    |   | (4,151   | )      |   | (3,627 | ) |
| Cash                dividends                                                       |   |                              | **(13,440** | **)**    |   | (8,273   | )      |   | (7,645 | ) |
| Net                cash provided (used) by financing activities                     |   |                              | **(16,917** | **)**    |   | (12,116  | )      |   | 10,717 |   |
|                                                                                |   |                              |        |     |   |     |   |   |   |   |
| Net                change in cash and cash equivalents                              |   |                              | **(2,677**  | **)**    |   | 3,015    |   |   | 583 |   |
| Cash                and cash equivalents at beginning of period                     |   |                              | **4,256**   |     |   | 1,241    |   |   | 658 |   |
| Cash                and cash equivalents at end of period                           |   | **$**                             | **1,579**   |     | $      | 4,256    |   | $ | 1,241 |   |

----

**18.      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):**

|                                                                                                                                 |   | **Three                Months Ended**                            |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|------------|
|                                                                                                                                 |   | **2005**                                                         |       | **2004** |   |
|                                                                                                                                 |   | **Dec.                31**                                       |       | **Sept.                30 (1)** |   | **June                30** |   | **Mar.                31** |   | **Dec.                31** |   | **Sept.                30** |   | **June                30** |   | **Mar.                31** |   |
|                                                                                                                                 |   | **(dollars                in thousands, except per share data)** |       |
| Interest                income                                                                                                       |   | **$**                                                            | **45,242** |   | **$** | **43,478** |   | **$** | **27,390** |   | **$** | **26,183** |   | $ | 25,710 |   | $ | 25,227 |   | $ | 24,882 |   | $ | 23,980 |   |
| Interest                expense                                                                                                      |   |                                                             | **18,593** |   |   | **17,081** |   |   | **12,481** |   |   | **11,493** |   |   | 11,089 |   |   | 10,934 |   |   | 10,678 |   |   | 10,541 |   |
| Net                interest income                                                                                                   |   |                                                             | **26,649** |   |   | **26,397** |   |   | **14,909** |   |   | **14,690** |   |   | 14,621 |   |   | 14,293 |   |   | 14,204 |   |   | 13,439 |   |
| Provision                for loan losses                                                                                             |   |                                                             | **600**    |   |   | **400** |   |   | **750** |   |   | **550** |   |   | 750 |   |   | 750 |   |   | 750 |   |   | 850 |   |
| Net                interest income after provision for loan losses                                                                   |   |                                                             | **26,049** |   |   | **25,997** |   |   | **14,159** |   |   | **14,140** |   |   | 13,871 |   |   | 13,543 |   |   | 13,454 |   |   | 12,589 |   |
| Investment                security gains, net                                                                                        |   |                                                             | **12**     |   |   | **29** |   |   | **167** |   |   | **51** |   |   | 186 |   |   | 108 |   |   | 844 |   |   | 1,332 |   |
| Mortgage                banking activities                                                                                           |   |                                                             | **631**    |   |   | **660** |   |   | **548** |   |   | **515** |   |   | 652 |   |   | 558 |   |   | 828 |   |   | 627 |   |
| Other                income                                                                                                          |   |                                                             | **7,120**  |   |   | **7,177** |   |   | **4,883** |   |   | **4,644** |   |   | 4,584 |   |   | 5,346 |   |   | 4,484 |   |   | 3,664 |   |
| Other                expenses                                                                                                        |   |                                                             | **20,180** |   |   | **20,836** |   |   | **13,189** |   |   | **12,659** |   |   | 12,618 |   |   | 12,530 |   |   | 12,962 |   |   | 11,883 |   |
| Merger,                conversion and restructuring expenses                                                                         |   |                                                             | **---**    |   |   | **248** |   |   | **7,957** |   |   | **---** |   |   | --- |   |   | --- |   |   | --- |   |   | --- |   |
| Income                (loss) before income taxes                                                                                     |   |                                                             | **13,632** |   |   | **12,779** |   |   | **(1,389** | **)** |   | **6,691** |   |   | 6,675 |   |   | 7,025 |   |   | 6,648 |   |   | 6,329 |   |
| Income                taxes                                                                                                          |   |                                                             | **2,671**  |   |   | **2,447** |   |   | **(250** | **)** |   | **1,204** |   |   | 1,135 |   |   | 1,379 |   |   | 1,211 |   |   | 1,154 |   |
| Net                income (loss)                                                                                                     |   | **$**                                                            | **10,961** |   | **$** | **10,332** |   | **$** | **(1,139** | **)** | **$** | **5,487** |   | $ | 5,540 |   | $ | 5,646 |   | $ | 5,437 |   | $ | 5,175 |   |
|                                                                                                                                 |   |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings (loss) per share                                                                                       |   | **$**                                                            | **0.48**   |   | **$** | **0.44** |   | **$** | **(0.09** | **)** | **$** | **0.45** |   | $ | 0.45 |   | $ | 0.46 |   | $ | 0.45 |   | $ | 0.42 |   |
| Diluted                earnings (loss) per share                                                                                     |   | **$**                                                            | **0.47**   |   | **$** | **0.44** |   | **$** | **(0.09** | **)** | **$** | **0.44** |   | $ | 0.44 |   | $ | 0.45 |   | $ | 0.43 |   | $ | 0.41 |   |
| Cash                dividends declared                                                                                               |   | **$**                                                            | **0.20**   |   | **$** | **0.19** |   | **$** | **0.19** |   | **$** | **0.17** |   | $ | 0.17 |   | $ | 0.17 |   | $ | 0.17 |   | $ | 0.16 |   |
| (1)                Results beginning with the quarter ended September 30, 2005 include                PennRock acquired July 1, 2005 |

**19.      **
**MERGER,      CONVERSION AND RESTRUCTURING EXPENSES **

----

*Internal      Control—Integrated Framework*

|  Beard                Miller Company LLP |   |
|-----------------------------------------------|--------|
| Harrisburg,                Pennsylvania       |   |
| March                9, 2006                  |   |

----

**Ite****m      9.**** ****Changes      in and Disagreements With Accountants on Accounting and Financial Disclosure:**

**Item      9A.**** ****Controls      and Procedures:**

**Item      9B.**** ****Other      Information:**

----

**Management’s      Report on Internal Controls**

| ·   | maintain                records that accurately reflect the company’s transactions; |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | prepare                financial statement and footnote disclosures in accordance with GAAP                that                can be relied upon by external users; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | prevent                and detect unauthorized acquisition, use, or disposition of the company’s                assets that could have a material effect on the financial                statements. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Community      Banks, Inc. • 750 East Park Drive, 2**
**nd**

**      Floor • Harrisburg, PA 17111 • Phone 717-920-1698**

----

*Management’s      Report on Internal Control*
*Internal      Control—Integrated Framework*

*Internal      Control—Integrated Framework*
*Internal      Control—Integrated Framework*

|  Beard                Miller Company LLP |   |
|-----------------------------------------------|--------|
| Harrisburg,                Pennsylvania       |   |
| March                9, 2006                  |   |

----

**PART      III**

**Item      10.**** ****Directors      and Executive Officers of the Registrant:**

**Item      11****.****Executive      Compensation****:**

**Item      12.**** ****Security      Ownership of Certain Beneficial Owners and Management and Related Stockholder      Matters:**

**Item      13.**** ****Certain      Relationships and Related Transactions:**

**Item      14****.****Principal      Accountant Fees and Services:**

----

**PART      IV**

**Item      15.**** ****Exhibits,      Financial Statements Schedules:**

| (a)    | The                following documents are filed as part of this report. |
|--------|--------------------------------------------------------------------------|
|   | 1.                                                                       | Financial                Statements - The following consolidated financial statements of Community                Banks, Inc. and Subsidiaries are incorporated herein by reference                in                response to Item 8 above: |
|   |                                                                     |   |
|   | (i)                                                                      | Consolidated                Balance Sheets at December 31, 2005 and 2004 |
|   | (ii)                                                                     | Consolidated                Statements of Income for the Years Ended December 31, 2005, 2004                and                2003 |
|   | (iii)                                                                    | Consolidated                Statements of Changes in Stockholders’ Equity for the Years Ended December                2005, 2004, and 2003. |
|   | (iv)                                                                     | Consolidated                Statements of Cash Flows for the Years Ended December 31, 2005, 2004                and                2003. |
|   | (v)                                                                      | Notes                to Consolidated Financial Statements |
|   | (vi)                                                                     | Report                of Beard Miller Company LLP, Independent Registered Public Accounting                Firm |
|   |                                                                     |   |
|   | 2.                                                                       | Financial                Statements Schedules - All financial statement schedules for which                provision is made in the applicable accounting regulations of the                Securities and Exchange Commission are not required under the related                instructions or are inapplicable and have therefore been                omitted. |
|   |                                                                     |   |
|   | 3.                                                                       | Exhibits |
|   |                                                                     |   |
|   | 2.1                                                                      | Agreement                and Plan of Reorganization, dated November 7, 2000, among Community                Banks,                Inc.; The Peoples State Bank; and The Glen Rock State Bank, not including                schedules. Community will furnish the omitted schedules to the Securities                and Exchange Commission upon request. (Incorporated by reference                to                Exhibit 2 to Community’s registration statement on Form S-4, filed on                January 17, 2001) |
|   | 2.2                                                                      | Merger                agreement between PennRock Financial Services Corp. and Community                Banks,                Inc., dated November 16, 2004, not including schedules. Community                will                furnish the omitted schedules to the Securities and Exchange Commission                upon request. (Incorporated by reference to Exhibit 10.1 to Community’s                Current Report on Form 8-K, filed with the Commission on November                22,                2004) |
|   | 3(i)                                                                     | Amended                and Restated Articles of Incorporation (Incorporated by reference                to Annex                B, attached to Community’s registration statement on Form S-4/A, filed on                April 26, 2005) |
|   | 3(ii)                                                                    | Amended                Bylaws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K, filed with the Commission on March                9, 2006) |
|   | 4                                                                        | Instruments                defining the rights of the holders of trust capital securities and                sold by                Community in December 2002, December 2003 and January 2006 are not                attached, as the amount of such securities is less than 10% of the                consolidated assets of Community and its subsidiaries, and the securities                have not been registered. Community agrees to provide copies of such                instruments to the SEC upon request. |
|   | 10.1                                                                     | 2000                Directors’ Stock Option Plan (Incorporated by reference to Exhibit 4 to                Community’s registration statement no. 333-37232 on Form S-8, filed on May                17, 2000) |
|   | 10.2                                                                     | 1998                Long-Term Incentive Plan (Incorporated by reference to Exhibit 4                to                Community’s registration statement no. 333-57121 on Form S-8 filed on June                18, 1998) |
|   | 10.3                                                                     | Form                of Stock Option Agreement - Directors Stock Option Plan (Incorporated                by                reference to 10.3 to Community’s Annual Report on Form 10-K for the year                ended December 31, 2002, filed with the Commission on March 28,                2003) |
|   | 10.4                                                                     | Form                of Stock Option Agreement - Long-Term Incentive Plan (Incorporated                by                reference to Exhibit 10.4 to Community’s Annual Report on Form 10-K for                the year ended December 31, 2002, filed with the Commission on March                28,                2003) |
|   | 10.5                                                                     | Employment                Agreement for Eddie L. Dunklebarger (Incorporated by reference to                Exhibit                10.1 to Community’s Quarterly Report on Form 10-Q for the quarter ended                September 30, 2004, filed with the Commission on November 9,                2004)* |
|   | 10.6                                                                     | Employment                Agreement for Donald F. Holt (Incorporated by reference to Exhibit                10.2 to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2004, filed with the Commission on November 9, 2004)* |
|   | 10.7                                                                     | Employment                Agreement for Robert W. Lawley (Incorporated by reference to Exhibit                10.3                to Community’s Quarterly Report on Form 10-Q for the quarter ended                September 30, 2004, filed with the Commission on November 9, 2004)* |
|   | 10.8                                                                     | Employment                Agreement for Anthony N. Leo (Incorporated by reference to Exhibit                10.4 to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2004, filed with the Commission on November 9, 2004)* |
|   | 10.9                                                                     | Employment                Agreement for Jeffrey M. Seibert (Incorporated by reference to Exhibit                10.5 to Community’s Quarterly Report on Form 10-Q for the quarter ended                September 30, 2004, filed with the Commission on November 9,                2004)*    |

----

|   | 10.10 | Amended                and Restated Salary Continuation Agreement of Eddie L. Dunklebarger                (Incorporated by reference to Exhibit 10.1 to Community’s Quarterly Report                on Form 10-Q for the quarter ended March 31, 2004, filed with the                Commission on May 10, 2004)*         |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.11 | Salary                Continuation Agreement of Donald F. Holt (Incorporated by reference                to                Exhibit 10.2 to Community’s Quarterly Report on Form 10-Q for the quarter                ended March 31, 2004, filed with the Commission on May 10,                2004)*                      |
|   | 10.12 | Amended                and Restated Salary Continuation Agreement of Robert W. Lawley                (Incorporated by reference to Exhibit 10.3 to Community’s Quarterly Report                on Form 10-Q for the quarter ended March 31, 2004, filed with the                Commission on May 10, 2004)*              |
|   | 10.13 | Amended                and Restated Salary Continuation Agreement of Anthony N. Leo (Incorporated                by reference to Exhibit 10.4 to Community’s Quarterly Report on Form 10-Q                for the quarter ended March 31, 2004, filed with the Commission on                May 10,                2004)* |
|   | 10.14 | Amended                and Restated Salary Continuation Agreement of Jeffrey M. Seibert                (Incorporated by reference to Exhibit 10.5 to Community’s Quarterly Report                on Form 10-Q for the quarter ended March 31, 2004, filed with the                Commission on May 10, 2004)*            |
|   | 10.15 | Rights                Agreement between Community Banks, Inc. and CommunityBanks, dated                February                28, 2002 (Incorporated by reference to Exhibit 1 to Community’s                registration on Form 8-A, filed on February 27, 2002)                                                       |
|   | 10.16 | Community                Banks, Inc. 401(k) Plan (Incorporated by reference to Exhibit 10.15                to                Community’s Annual Report on Form 10-K for the year ended December 31,                2002, filed with the Commission on March 28, 2003)                                                    |
|   | 10.17 | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Eddie L.                Dunklebarger (Incorporated by reference to Exhibit to 3.2, attached                to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2003)*         |
|   | 10.18 | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Donald F.                Holt                (Incorporated by reference to Exhibit to 10.6, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended March 31,                2004)*                   |
|   | 10.19 | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Robert W.                Lawley                (Incorporated by reference to Exhibit to 3.2, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended September 30,                2003)*              |
|   | 10.20 | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Anthony                N. Leo                (Incorporated by reference to Exhibit to 3.2, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended September 30,                2003)*                |
|   | 10.21 | Survivor                Income Agreement, with Split Dollar Addendum thereto, of Jeffrey                M.                Seibert (Incorporated by reference to Exhibit to 3.2, attached to                Community’s Quarterly Report on Form 10-Q for the quarter ended September                30, 2003)*            |
|   | 10.22 | Employment                and Consulting Agreement with Melvin Pankuch (Incorporated by reference                to                Exhibit 10.7 to Community’s registration statement on Form S-4, filed on                April 1, 2005)*                                                                                |
|   | 10.23 | Community                Banks, Inc. Substitute PennRock Financial Services Corp. Stock Incentive                Plan of 2002 (Incorporated by reference to Exhibit 4 to Community’s                registration statement no. 333-126508 on Form S-8, filed on July                11,                2005)              |
|   | 10.24 | Community                Banks, Inc. Substitute PennRock Financial Services Corp. Omnibus                Stock                Plan (Incorporated by reference to Exhibit 4 to Community’s registration                statement no. 333-126507 on Form S-8, filed on July 11,                2005)                        |
|   | 21    | Subsidiaries                of the Registrant (See Item 1, page #4)                                                                                                                                                                                                                                                             |
|   | 23.1  | Consent                of Independent Registered Public Accounting Firm - Beard Miller Company                LLP                                                                                                                                                                                                               |
|   | 31.1  | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                  |
|   | 31.2  | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                  |
|   | 32.1  | Section                1350 Certification (Chief Executive Officer)                                                                                                                                                                                                                                                             |
|   | 32.2  | Section                1350 Certification (Chief Financial                Officer)                                                                                                                                                                                                                                              |

| (b)   | Exhibits                - The exhibits required to be filed as part of this report are submitted                as a separate section of this                report. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (c)   | Financial                Statements Schedules - None                required. |
|-----------------|-------------------------------------------------------------------------------|

----

**SIGNATURES**

| /S/    | (Donald                F. Holt)      | Executive                Vice President and Chief                Financial Officer(Principal                Financial Officer and Principal Accounting Officer) | 3/16/06 |
|--------|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|   | (Donald                F. Holt)      |                                                                                                                                                            |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Ronald                E. Boyer)     | Director                                                                                                                                                        | 3/16/06 |
|   | (Ronald                E. Boyer)     |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Sandra                J, Bricker)   | Director                                                                                                                                                        | 3/16/06 |
|   | (Sandra                J. Bricker)   |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Peter                DeSoto)        | Director                                                                                                                                                        | 3/16/06 |
|   | (Peter                DeSoto)        |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Aaron                S. Kurtz)      | Director                                                                                                                                                        | 3/16/06 |
|   | (Aaron                S. Kurtz)      |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Earl                L. Mummert)     | Director                                                                                                                                                        | 3/16/06 |
|   | (Earl                L. Mummert)     |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Scott                J. Newkam)     | Director                                                                                                                                                        | 3/16/06 |
|   | (Scott                J. Newkam)     |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Melvin                Pankuch)      | Director                                                                                                                                                        | 3/16/06 |
|   | (Melvin                Pankuch)      |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Robert                W. Rissinger) | Director                                                                                                                                                        | 3/16/06 |
|   | (Robert                W. Rissinger) |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Christine                Sears)     | Director                                                                                                                                                        | 3/16/06 |
|   | (Christine                Sears)     |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Allen                Shaffer)       | Director                                                                                                                                                        | 3/16/06 |
|   | (Allen                Shaffer)       |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (John                W. Taylor, Jr.) | Director                                                                                                                                                        | 3/16/06 |
|   | (John                W. Taylor, Jr.) |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (James                A. Ulsh)       | Director                                                                                                                                                        | 3/16/06 |
|   | (James                A. Ulsh)       |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Dale                M. Weaver)      | Director                                                                                                                                                        | 3/16/06 |
|   | (Dale                M. Weaver)      |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Glenn                H. Weaver)     | Director                                                                                                                                                        | 3/16/06 |
|   | (Glenn                H. Weaver)     |                                                                                                                                                            |    |
|   |                                 |                                                                                                                                                            |    |
| /S/    | (Robert                K. Weaver)    | Director                                                                                                                                                        | 3/16/06 |
|   | (Robert                K. Weaver)    |                                                                                                                                                            |    |