**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**Washington,        D.C.  20549**

**FORM        10-Q**

**QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES**

**EXCHANGE        ACT OF 1934**

**For        the quarterly period ended June 30, 2007**

**001-11663**

**(Commission        File Number)**

**COMMUNITY        BANKS, INC.**

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

| **PENNSYLVANIA**                              | **23-2251762**                                                                |
|-----------------------------------------------|-------------------------------------------------------------------------------|
| **(State                  of incorporation)** | **(I.R.S.                  Employer Identification                  Number)** |

| **777                  East Park Dr., Harrisburg, PA**        | **17111**                       |
|---------------------------------------------------------------|---------------------------------|
| **(Address                  of principal executive offices)** | **(Zip                  Code)** |

**(717)        920-5800**

**(Registrant’s        telephone number, including area code)**

| Yes | X |   | No |   |   |
|-----|---|--------|----|--------|--------|

| Large                  accelerated filer |   |   | Accelerated                  filer | X |   | Non-accelerated                  filer |   |
|------------------------------------------|--------|--------|------------------------------------|---|--------|----------------------------------------|--------|

| Yes |   |   | No | X |   |
|-----|--------|--------|----|---|--------|

----

**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**FORM        10-Q**

**INDEX**

| **PART                  I – Financial                  Information** | **Page**                                                                                                |
|----------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                       |                                                                                                    |   |
| Item                  1.                                                   | Financial                  Statements                                                                   |   |
|                                                                       |                                                                                                    |   |
|                                                                       | Consolidated                  Interim Balance                  Sheets                                   | 3 |
|                                                                       | Consolidated                  Interim Statements of                  Income                             | 4 |
|                                                                       | Consolidated                  Interim Statements of Changes in Stockholders’ Equity               | 5 |
|                                                                       | Consolidated                  Interim Statements of Cash                  Flows                         | 6 |
|                                                                       | Notes                  to                  Consolidated Interim Financial Statements                    | 7-13 |
|                                                                       |                                                                                                    |   |
| Item                  2.                                                   | Management’s                  Discussion and Analysis of Financial Condition                  and |   |
|                                                                       | Results                  of                  Operations                                                 | 14-27 |
|                                                                       |                                                                                                    |   |
| Item                  3.                                                   | Quantitative                  and Qualitative Disclosures About Market                  Risk            | 28 |
|                                                                       |                                                                                                    |   |
| Item                  4.                                                   | Controls                  and Procedures                                                                | 29 |
|                                                                       |                                                                                                    |   |
|                                                                       |                                                                                                    |   |
| **PART                  II – Other                  Information**    |                                                                                                    |
|                                                                       |                                                                                                    |   |
| Item                  1.                                                   | Legal                  Proceedings                                                                      | 30 |
|                                                                       |                                                                                                    |   |
| Item                  1A.                                                  | Risk                  Factors                                                                           | 30 |
|                                                                       |                                                                                                    |   |
| Item                  2.                                                   | Unregistered                  Sales of Equity Securities and Use of                  Proceeds           | 30 |
|                                                                       |                                                                                                    |   |
| Item                  3.                                                   | Defaults                  Upon Senior Securities                                                        | 31 |
|                                                                       |                                                                                                    |   |
| Item                  4.                                                   | Submission                  of Matters to a Vote of Security                  Holders                   | 31 |
|                                                                       |                                                                                                    |   |
| Item                  5.                                                   | Other                  Information                                                                      | 31 |
|                                                                       |                                                                                                    |   |
| Item                  6.                                                   | Exhibits                                                                                                | 31 |
|                                                                       |                                                                                                    |   |
|                                                                       |                                                                                                    |   |
| **SIGNATURES**                                                             | 32                                                                                                      |
|                                                                       |                                                                                                    |   |

----

**PART        I – FINANCIAL INFORMATION**

**Item        1.  Financial        Statements**

**Community        Banks, Inc. and Subsidiaries**

**CONSOLIDATED        INTERIM BALANCE SHEETS**

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

|                                                                                                                            |   | **June                  30,** |      |   | **December                  31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-----------|--------|-----------------------------------|--------|
|                                                                                                                            |   | **2007**                      |      |   | **2006**                          |   |
| **ASSETS**                                                                                                                      |   |                          |      |   |                              |   |
|                                                                                                                            |   |                          |      |   |                              |   |
| Cash                  and due from banks                                                                                        |   | $                             | 74,983    |   |                              | $      | 73,608 |   |
| Interest-bearing                  deposits in other banks                                                                       |   |                          | 4,438     |   |                              |   | 3,561 |   |
| Trading                  assets                                                                                                 |   |                          | 19,750    |   |                              |   | --- |   |
| Investment                  securities, available for sale                                                                      |   |                          | 635,012   |   |                              |   | 636,066 |   |
| Investment                  securities, held to maturity (fair valueapproximates                  $22,420 and $23,415)          |   |                          | 23,090    |   |                              |   | 23,070 |   |
| Loans,                  net of allowance for loan losses of $25,010 and $23,626                                                 |   |                          | 2,542,628 |   |                              |   | 2,347,263 |   |
| Premises                  and equipment, net                                                                                    |   |                          | 50,232    |   |                              |   | 46,335 |   |
| Goodwill                  and other intangible assets                                                                           |   |                          | 279,963   |   |                              |   | 259,406 |   |
| Accrued                  interest receivable and other assets                                                                   |   |                          | 120,748   |   |                              |   | 107,061 |   |
| Total                  assets                                                                                                   |   | $                             | 3,750,844 |   |                              | $      | 3,496,370 |   |
|                                                                                                                            |   |                          |      |   |                              |   |   |   |
| **LIABILITIES**                                                                                                                 |   |                          |      |   |                              |   |   |   |
|                                                                                                                            |   |                          |      |   |                              |   |   |   |
| Deposits                                                                                                                        |   |                          |      |   |                              |   |   |   |
| Non-interest                  bearing                                                                                           |   | $                             | 379,624   |   |                              | $      | 368,329 |   |
| Interest                  bearing                                                                                               |   |                          | 2,228,540 |   |                              |   | 2,144,853 |   |
| Total                  deposits                                                                                                 |   |                          | 2,608,164 |   |                              |   | 2,513,182 |   |
| Short-term                  borrowings                                                                                          |   |                          | 72,724    |   |                              |   | 108,927 |   |
| Long-term                  debt (including $29,784 at fair value at June 30, 2007)                                              |   |                          | 455,104   |   |                              |   | 315,079 |   |
| Subordinated                  debt                                                                                              |   |                          | 75,260    |   |                              |   | 51,548 |   |
| Accrued                  interest payable and other liabilities                                                                 |   |                          | 22,399    |   |                              |   | 21,473 |   |
| Total                  liabilities                                                                                              |   |                          | 3,233,651 |   |                              |   | 3,010,209 |   |
|                                                                                                                            |   |                          |      |   |                              |   |   |   |
| **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;                  25,694,000 and 24,478,000 shares issued                                                            |   |                          | 128,471   |   |                              |   | 122,391 |   |
| Surplus                                                                                                                         |   |                          | 396,489   |   |                              |   | 373,142 |   |
| Retained                  Earnings                                                                                              |   |                          | 23,806    |   |                              |   | 17,609 |   |
| Accumulated                  other comprehensive loss, net of tax                                                               |   |                          | (8,300    | )      |                              |   | (1,806 | ) |
| Treasury                  stock; 889,000 and 959,000 shares, at cost                                                            |   |                          | (23,273   | )      |                              |   | (25,175 | ) |
| Total                  stockholders’ equity                                                                               |   |                          | 517,193   |   |                              |   | 486,161 |   |
| Total                  liabilities and stockholders’ equity                                                               |   | $                             | 3,750,844 |   |                              | $      | 3,496,370 |   |
|                                                                                                                            |   |                          |      |   |                              |   |   |   |
| The                  accompanying notes are an integral part of the consolidated interim                  financial statements. |   |

----

**Community        Banks, Inc. and Subsidiaries**

**CONSOLIDATED        INTERIM STATEMENTS OF        INCOME**

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

|                                                                                                                            |   | **Three                  Months Ended** |   |   | **Six                  Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------|---------------------------------------|--------|
|                                                                                                                            |   | **June                  30,**           |   |   | **June                  30,**         |   |
|                                                                                                                            |   | **2007**                                |   |   | **2006**                              |   |   | **2007** |   |   | **2006** |   |
| **INTEREST                  INCOME:**                                                                                           |   |                                    |   |   |                                  |   |   |   |   |   |   |   |
| Loans,                  including fees                                                                                          |   | $                                       | 46,797 |   |                                  | $      | 41,093 |   |   | $ | 90,317 |   |   | $ | 80,194 |   |
| Investment                  securities:                                                                                         |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                         |   |                                    | 5,597  |   |                                  |   | 4,381 |   |   |   | 10,997 |   |   |   | 8,794 |   |
| Tax                  exempt                                                                                                     |   |                                    | 2,661  |   |                                  |   | 2,205 |   |   |   | 5,293 |   |   |   | 4,573 |   |
| Dividends                                                                                                                       |   |                                    | 374    |   |                                  |   | 616 |   |   |   | 926 |   |   |   | 1,230 |   |
| Trading                  account securities                                                                                     |   |                                    | 232    |   |                                  |   | --- |   |   |   | 232 |   |   |   | --- |   |
| Other                                                                                                                           |   |                                    | 1,042  |   |                                  |   | 643 |   |   |   | 1,177 |   |   |   | 1,036 |   |
| Total                  interest income                                                                                          |   |                                    | 56,703 |   |                                  |   | 48,938 |   |   |   | 108,942 |   |   |   | 95,827 |   |
|                                                                                                                            |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **INTEREST                  EXPENSE:**                                                                                          |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                        |   |                                    | 20,719 |   |                                  |   | 15,784 |   |   |   | 39,605 |   |   |   | 29,205 |   |
| Short-term                  borrowings                                                                                          |   |                                    | 757    |   |                                  |   | 645 |   |   |   | 2,321 |   |   |   | 1,341 |   |
| Long-term                  debt                                                                                                 |   |                                    | 5,301  |   |                                  |   | 4,564 |   |   |   | 9,801 |   |   |   | 9,675 |   |
| Subordinated                  debt                                                                                              |   |                                    | 1,347  |   |                                  |   | 938 |   |   |   | 2,369 |   |   |   | 1,735 |   |
| Total                  interest expense                                                                                         |   |                                    | 28,124 |   |                                  |   | 21,931 |   |   |   | 54,096 |   |   |   | 41,956 |   |
| Net                  interest income                                                                                            |   |                                    | 28,579 |   |                                  |   | 27,007 |   |   |   | 54,846 |   |   |   | 53,871 |   |
| Provision                  for loan losses                                                                                      |   |                                    | 700    |   |                                  |   | 650 |   |   |   | 2,000 |   |   |   | 1,150 |   |
| Net                  interest income after provision for loan losses                                                            |   |                                    | 27,879 |   |                                  |   | 26,357 |   |   |   | 52,846 |   |   |   | 52,721 |   |
|                                                                                                                            |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                  INCOME:**                                                                                       |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Investment                  management and trust services                                                                       |   |                                    | 1,603  |   |                                  |   | 1,088 |   |   |   | 3,048 |   |   |   | 2,101 |   |
| Service                  charges on deposit accounts                                                                            |   |                                    | 4,677  |   |                                  |   | 2,855 |   |   |   | 7,673 |   |   |   | 5,386 |   |
| Other                  service charges, commissions and fees                                                                    |   |                                    | 2,257  |   |                                  |   | 1,903 |   |   |   | 4,285 |   |   |   | 3,603 |   |
| Insurance                  premium income and commissions                                                                       |   |                                    | 1,063  |   |                                  |   | 1,117 |   |   |   | 2,239 |   |   |   | 2,045 |   |
| Mortgage                  banking activities                                                                                    |   |                                    | 694    |   |                                  |   | 580 |   |   |   | 1,242 |   |   |   | 1,048 |   |
| Earnings                  on investment in life insurance                                                                       |   |                                    | 756    |   |                                  |   | 675 |   |   |   | 1,444 |   |   |   | 1,331 |   |
| Investment                  security gains (losses)                                                                             |   |                                    | ---    |   |                                  |   | 6 |   |   |   | (4,388 | ) |   |   | 289 |   |
| Trading                  activities loss                                                                                        |   |                                    | (34    | )      |                                  |   | --- |   |   |   | (34 | ) |   |   | --- |   |
| Other                                                                                                                           |   |                                    | 232    |   |                                  |   | 319 |   |   |   | 823 |   |   |   | 1,124 |   |
| Total                  non-interest income                                                                                      |   |                                    | 11,248 |   |                                  |   | 8,543 |   |   |   | 16,332 |   |   |   | 16,927 |   |
|                                                                                                                            |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                  EXPENSES:**                                                                                     |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Salaries                  and employee benefits                                                                                 |   |                                    | 13,069 |   |                                  |   | 11,251 |   |   |   | 25,078 |   |   |   | 22,669 |   |
| Net                  occupancy                                                                                                  |   |                                    | 3,980  |   |                                  |   | 3,386 |   |   |   | 7,774 |   |   |   | 6,898 |   |
| Payment                  card processing expense                                                                                |   |                                    | 774    |   |                                  |   | 556 |   |   |   | 1,387 |   |   |   | 839 |   |
| Marketing                  expense                                                                                              |   |                                    | 552    |   |                                  |   | 265 |   |   |   | 1,057 |   |   |   | 840 |   |
| Telecommunications                  expense                                                                                     |   |                                    | 612    |   |                                  |   | 566 |   |   |   | 1,137 |   |   |   | 1,117 |   |
| Amortization                  of intangibles                                                                                    |   |                                    | 811    |   |                                  |   | 702 |   |   |   | 1,472 |   |   |   | 1,356 |   |
| Other                                                                                                                           |   |                                    | 4,693  |   |                                  |   | 3,972 |   |   |   | 8,727 |   |   |   | 7,512 |   |
| Total                  non-interest expenses                                                                                    |   |                                    | 24,491 |   |                                  |   | 20,698 |   |   |   | 46,632 |   |   |   | 41,231 |   |
|                                                                                                                            |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Income                  before income taxes                                                                                     |   |                                    | 14,636 |   |                                  |   | 14,202 |   |   |   | 22,546 |   |   |   | 28,417 |   |
| Income                  taxes                                                                                                   |   |                                    | 3,686  |   |                                  |   | 3,698 |   |   |   | 5,009 |   |   |   | 7,344 |   |
| Net                  income                                                                                                     |   | $                                       | 10,950 |   |                                  | $      | 10,504 |   |   | $ | 17,537 |   |   | $ | 21,073 |   |
|                                                                                                                            |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                  PER SHARE DATA**                                                                                |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  earnings per share                                                                                       |   | $                                       | 0.44   |   |                                  | $      | 0.44 |   |   | $ | 0.73 |   |   | $ | 0.88 |   |
| Diluted                  earnings per share                                                                                     |   | $                                       | 0.44   |   |                                  | $      | 0.44 |   |   | $ | 0.72 |   |   | $ | 0.88 |   |
| Dividends                  declared                                                                                             |   | $                                       | 0.21   |   |                                  | $      | 0.20 |   |   | $ | 0.42 |   |   | $ | 0.39 |   |
|                                                                                                                            |   |                                    |   |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| The                  accompanying notes are an integral part of the consolidated interim                  financial statements. |   |                                    |   |   |                                  |

----

**Community        Banks, Inc. and Subsidiaries**

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

**For        the Six Months Ended June 30, 2007 and 2006**

**(Dollars        in Thousands)**

|                                                                                                                            |   | **Outstanding** |   |   | **Common** |   |    |        |   |   | **Retained** |   |   | **Accumulated****Other****Comprehensive** |    |   | **Treasury** |   |    | **Total**  |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|--------|------------|--------|---------|-------------|--------|--------|--------------|--------|--------|-------------------------------------------|---------|--------|--------------|--------|---------|------------|--------|
|                                                                                                                            |   | **Shares**      |   |   | **Stock**  |   |    | **Surplus** |   |   | **Earnings** |   |   | **Income                  (Loss)**        |    |   | **Stock**    |   |    | **Equity** |   |
| **Balance,                  January 1, 2006**                                                                                   |   |            | 22,915 |   |       | $      | 116,572 |        |   | $      | 347,827      |   |   | $                                         | 27,031  |   |         | $      | (3,779  | )          |   | $ | (10,978 | ) |   | $ | 476,673 |   |
| Comprehensive                  income:                                                                                          |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                     |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | 21,073  |   |         |   |    |       |   |   |   |   |   |   | 21,073 |   |
| Unrealized                  loss on securities,  net of reclassification adjustment and tax                  effect   |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   | (6,328  | )          |   |   |   |   |   |   | (6,328 | ) |
| Total                  comprehensive income                                                                                     |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   | 14,745 |   |
| Cash                  dividends ($0.39 per share)                                                                               |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | (9,281  | )      |         |   |    |       |   |   |   |   |   |   | (9,281 | ) |
| 5%                  stock dividend                                                                                              |   |            | 1,133  |   |       |   | 5,820   |        |   |   | 24,162       |   |   |                                      | (29,982 | )      |         |   |    |       |   |   |   |   |   |   | --- |   |
| Purchases                  of treasury stock                                                                                    |   |            | (656   | )      |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   | (17,626 | ) |   |   | (17,626 | ) |
| Exercise                  of common stock options   and issuances under stock                  purchase plan     |   |            | 63     |   |       |   |    |        |   |   |         |   |   |                                      | (905    | )      |         |   |    |       |   |   | 1,735 |   |   |   | 830 |   |
| Compensation                  and tax benefits from employee stock transactions                                                 |   |            |   |   |       |   |    |        |   |   | 419          |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   | 419 |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
| **Balance,                  June 30, 2006**                                                                                     |   |            | 23,455 |   |       | $      | 122,392 |        |   | $      | 372,408      |   |   | $                                         | 7,936   |   |         | $      | (10,107 | )          |   | $ | (26,869 | ) |   | $ | 465,760 |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
| **Balance,                  January 1, 2007**                                                                                   |   |            | 23,519 |   |       | $      | 122,391 |        |   | $      | 373,142      |   |   | $                                         | 17,609  |   |         | $      | (1,806  | )          |   | $ | (25,175 | ) |   | $ | 486,161 |   |
| Comprehensive                  income:                                                                                          |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                     |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | 17,537  |   |         |   |    |       |   |   |   |   |   |   | 17,537 |   |
| Unrealized                  loss on securities,  net of reclassification adjustment and tax                  effect   |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   | (6,494  | )          |   |   |   |   |   |   | (6,494 | ) |
| Total                  comprehensive income                                                                                     |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   | 11,043 |   |
| Cash                  dividends ($0.42 per share)                                                                               |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | (10,152 | )      |         |   |    |       |   |   |   |   |   |   | (10,152 | ) |
| Purchases                  of treasury stock                                                                                    |   |            | (12    | )      |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   | (299 | ) |   |   | (299 | ) |
| Exercise                  of common stock options   and issuances under stock                  purchase plan     |   |            | 82     |   |       |   |    |        |   |   |         |   |   |                                      | (1,188  | )      |         |   |    |       |   |   | 2,513 |   |   |   | 1,325 |   |
| Compensation                  and tax benefits from employee stock transactions                                                 |   |            |   |   |       |   |    |        |   |   | 402          |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   | 402 |   |
| Acquisition                  of BUCS Financial Corp                                                                             |   |            | 548    |   |       |   | 2,741   |        |   |   | 10,343       |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   | 13,084 |   |
| Acquisition                  of East Prospect State Bank                                                                        |   |            | 668    |   |       |   | 3,339   |        |   |   | 12,602       |   |   |                                      |    |   |         |   |    |       |   |   | (312 | ) |   |   | 15,629 |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
| **Balance,                  June 30, 2007**                                                                                     |   |            | 24,805 |   |       | $      | 128,471 |        |   | $      | 396,489      |   |   | $                                         | 23,806  |   |         | $      | (8,300  | )          |   | $ | (23,273 | ) |   | $ | 517,193 |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
|                                                                                                                            |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |    |       |   |   |   |   |   |   |   |   |
| The                  accompanying notes are an integral part of the consolidated interim                  financial statements. |   |

----

**Community        Banks, Inc. and Subsidiaries**

**CONSOLIDATED        INTERIM STATEMENTS OF CASH        FLOWS**

** (Dollars        in thousands)**

|                                                                                                                            |   | **Six                  Months Ended** |     |
|---------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|----------|
|                                                                                                                            |   | **June                  30,**         |     |
|                                                                                                                            |   | **2007**                              |     |   | **2006** |   |
|                                                                                                                            |   |                                  |     |   |   |   |
| **Operating                  Activities:**                                                                                      |   |                                  |     |   |   |   |
| Net                  income                                                                                                     |   | $                                     | 17,537   |   |   | $ | 21,073 |   |
| Adjustments                  to reconcile net income to net cash                                                                |   |                                  |     |   |   |   |   |   |
| provided                  by operating activities:                                                                              |   |                                  |     |   |   |   |   |   |
| Provision                  for loan losses                                                                                      |   |                                  | 2,000    |   |   |   | 1,150 |   |
| Depreciation                  and amortization                                                                                  |   |                                  | 3,950    |   |   |   | 3,690 |   |
| Stock                  option expense                                                                                           |   |                                  | 402      |   |   |   | 303 |   |
| Net                  amortization (accretion) of securities                                                                     |   |                                  | (386     | ) |   |   | 253 |   |
| Realized                  (gains) losses on sales of available-for-sale securities,                  net                        |   |                                  | 4,388    |   |   |   | (289 | ) |
| Loans                  originated for sale                                                                                      |   |                                  | (14,781  | ) |   |   | (3,917 | ) |
| Proceeds                  from sales of loans held for sale                                                                     |   |                                  | 13,756   |   |   |   | 2,626 |   |
| Gains                  on loan sales                                                                                            |   |                                  | (829     | ) |   |   | (47 | ) |
| Earnings                  on investment in life insurance                                                                       |   |                                  | (1,444   | ) |   |   | (1,331 | ) |
| Purchases                  of trading assets                                                                                    |   |                                  | (20,000  | ) |   |   | --- |   |
| Net                  change in fair value of trading assets and liabilities                                                     |   |                                  | 34       |   |   |   | --- |   |
| Net                  change in other assets and other liabilities, net                                                          |   |                                  | (833     | ) |   |   | 7,776 |   |
| Net                  cash provided by operating activities                                                                      |   |                                  | 3,794    |   |   |   | 31,287 |   |
|                                                                                                                            |   |                                  |     |   |   |   |   |   |
| **Investing                  Activities:**                                                                                      |   |                                  |     |   |   |   |   |   |
| Net                  change in interest-bearing deposits in other banks                                                         |   |                                  | 1,224    |   |   |   | 1,011 |   |
| Activity                  in available-for-sale securities:                                                                     |   |                                  |     |   |   |   |   |   |
| Sales                                                                                                                           |   |                                  | 225,149  |   |   |   | 46,627 |   |
| Maturities,                  prepayments and calls                                                                              |   |                                  | 44,976   |   |   |   | 27,000 |   |
| Purchases                                                                                                                       |   |                                  | (234,416 | ) |   |   | (29,134 | ) |
| Net                  increase in total loans                                                                                    |   |                                  | (67,946  | ) |   |   | (107,140 | ) |
| Proceeds                  from sales of loans                                                                                   |   |                                  | 1,441    |   |   |   | --- |   |
| Additions                  to premises and equipment                                                                            |   |                                  | (2,265   | ) |   |   | (2,590 | ) |
| Cash                  acquired in acquisitions                                                                                  |   |                                  | 8,208    |   |   |   | --- |   |
| Cash                  paid for acquisitions                                                                                     |   |                                  | (13,797  | ) |   |   | (882 | ) |
| Net                  cash used in investing activities                                                                          |   |                                  | (37,426  | ) |   |   | (65,108 | ) |
|                                                                                                                            |   |                                  |     |   |   |   |   |   |
| **Financing                  Activities:**                                                                                      |   |                                  |     |   |   |   |   |   |
| Net                  increase (decrease) in deposits                                                                            |   |                                  | (70,525  | ) |   |   | 112,184 |   |
| Net                  change in short-term borrowings                                                                            |   |                                  | (46,204  | ) |   |   | (9,968 | ) |
| Proceeds                  from issuance of long-term debt                                                                       |   |                                  | 175,621  |   |   |   | 75,620 |   |
| Repayment                  of long-term debt                                                                                    |   |                                  | (14,759  | ) |   |   | (121,903 | ) |
| Cash                  dividends and cash paid in lieu of fractional shares                                                      |   |                                  | (10,152  | ) |   |   | (9,281 | ) |
| Purchases                  of treasury stock                                                                                    |   |                                  | (299     | ) |   |   | (17,626 | ) |
| Tax                  benefits from employee stock transactions                                                                  |   |                                  | ---      |   |   |   | 116 |   |
| Proceeds                  from issuance of common stock                                                                         |   |                                  | 1,325    |   |   |   | 830 |   |
| Net                  cash provided by financing activities                                                                      |   |                                  | 35,007   |   |   |   | 29,972 |   |
|                                                                                                                            |   |                                  |     |   |   |   |   |   |
| Net                  change in cash and cash equivalents                                                                        |   |                                  | 1,375    |   |   |   | (3,849 | ) |
|                                                                                                                            |   |                                  |     |   |   |   |   |   |
| Cash                  and cash equivalents at beginning of period                                                               |   |                                  | 73,608   |   |   |   | 76,820 |   |
| Cash                  and cash equivalents at end of period                                                                     |   | $                                     | 74,983   |   |   | $ | 72,971 |   |
|                                                                                                                            |   |                                  |     |   |   |   |   |   |
| The                  accompanying notes are an integral part of the consolidated interim                  financial statements. |   |

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL        STATEMENTS**

**(Unaudited)**

**1.  Basis        of Presentation**

**2.        Fair Value Measurements**

*Fair Value Measurements*

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Unaudited)**

**2.        Fair Value Measurements (continued)**

*Fair        Value Measurements (SFAS No. 157)*

| Trading                  assets, consisting of Federal agency debt securities                                           | $   19,750 |
|-------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                    |                      |
| Federal                  Home Loan Bank (“FHLB”) advances (contractual principal;                  $30,000) | $   29,784 |

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Unaudited)**

**2.        Fair Value Measurements (continued)**

| Description                                                            | Level                  I | Level                  II | Total    |
|------------------------------------------------------------------------|--------------------------|---------------------------|----------|
| Trading                  assets – Federal agency debt securities | $                  ---   | $19,750                   | $19,750  |
| FHLB                  borrowings                                       | $                  ---   | $29,784                   | $29,784  |
| Available-for-sale                  securities                         | $                  ---   | $635,012                  | $635,012 |

**3.        Summary of Significant Accounting Policies**

***Cash        Flows Information –***

***Earnings        Per Share -***

|                                                                      |   | **Three                  Months Ended****June                  30,** |   |   | **Six                  Months Ended****June                  30,** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------|--------|
|                                                                      |   | **2007**                                                             |   |   | **2006**                                                           |   |   | **2007** |   |   | **2006** |   |
|                                                                      |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |
| Net                  income                                               |   | $                                                                    | 10,950 |   |                                                               | $      | 10,504 |   |   | $ | 17,537 |   |   | $ | 21,073 |   |
|                                                                      |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                  average shares outstanding  (basic)   |   |                                                                 | 24,766 |   |                                                               |   | 23,653 |   |   |   | 24,154 |   |   |   | 23,812 |   |
| Effect                  of dilutive stock options                         |   |                                                                 | 196    |   |                                                               |   | 205 |   |   |   | 196 |   |   |   | 216 |   |
|                                                                      |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                  average shares outstanding  (diluted) |   |                                                                 | 24,962 |   |                                                               |   | 23,858 |   |   |   | 24,350 |   |   |   | 24,028 |   |
|                                                                      |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Per                  share information:                                   |   |                                                                 |   |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  earnings per share                                 |   | $                                                                    | 0.44   |   |                                                               | $      | 0.44 |   |   | $ | 0.73 |   |   | $ | 0.88 |   |
| Diluted                  earnings per share                               |   |                                                                 | 0.44   |   |                                                               |   | 0.44 |   |   |   | 0.72 |   |   |   | 0.88 |   |

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Unaudited)**

**3.        Summary of Significant Accounting Policies        (continued)**

***Comprehensive        Income (Loss)***

|                                                   |   | **Three                  Months Ended****June                  30,** |    |   | **Six                  Months Ended****June                  30,** |   |
|--------------------------------------------------------|--------|----------------------------------------------------------------------|---------|--------|--------------------------------------------------------------------|--------|
|                                                   |   | **2007**                                                             |    |   | **2006**                                                           |   |   | **2007** |   |   | **2006** |   |
| Unrealized                  holding losses             |   |                                                                 |    |   |                                                               |   |   |   |   |   |   |   |
| on                  available-for-sale securities      |   | $                                                                    | (13,769 | )      |                                                               | $      | (8,823 | ) |   | $ | (14,379 | ) |   | $ | (9,446 | ) |
| Reclassification                  adjustments for      |   |                                                                 |    |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| losses                  (gains) included in net income |   |                                                                 | ---     |   |                                                               |   | (6 | ) |   |   | 4,388 |   |   |   | (289 | ) |
| Net                  unrealized losses                 |   |                                                                 | (13,769 | )      |                                                               |   | (8,829 | ) |   |   | (9,991 | ) |   |   | (9,735 | ) |
| Tax                  effect                            |   |                                                                 | 4,819   |   |                                                               |   | 3,090 |   |   |   | 3,497 |   |   |   | 3,407 |   |
|                                                   |   |                                                                 |    |   |                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Net-of-tax                  amount                     |   | $                                                                    | (8,950  | )      |                                                               | $      | (5,739 | ) |   | $ | (6,494 | ) |   | $ | (6,328 | ) |

|                                                                                               |   | **June                  30,****2007** |   |   | **December                  31,****2006** |   |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|-------------------------------------------|--------|
| Net                  unrealized gain (loss) on available-for-sale                  securities |   | $                                     | (9,557 | )      |                                      | $      | 434 |   |
| Tax                  effect                                                                        |   |                                  | 3,345  |   |                                      |   | (152 | ) |
| Net-of-tax                  amount                                                                 |   |                                  | (6,212 | )      |                                      |   | 282 |   |
|                                                                                               |   |                                  |   |   |                                      |   |   |   |
| Unfunded                  pension liability                                                        |   |                                  | (3,213 | )      |                                      |   | (3,213 | ) |
| Tax                  effect                                                                        |   |                                  | 1,125  |   |                                      |   | 1,125 |   |
| Net-of-tax                  amount                                                                 |   |                                  | (2,088 | )      |                                      |   | (2,088 | ) |
|                                                                                               |   |                                  |   |   |                                      |   |   |   |
| Accumulated                  other comprehensive loss                                              |   | $                                     | (8,300 | )      |                                      | $      | (1,806 | ) |

***Recent        Accounting Pronouncements***

***Reclassifications***

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Unaudited)**

**4.        Pending Merger**

**5.        Acquisitions**

|                                                   |   | **2007**                                      |   |   | **2006**                                        |   |
|--------------------------------------------------------|--------|-----------------------------------------------|--------|--------|-------------------------------------------------|--------|
| (in                  thousands, except per share data) |   | **Six                  Months Ended June 30** |   |   | **Three                  Months Ended June 30** |   |   | **Six                  Months Ended June 30** |   |
|                                                   |   |                                          |   |   |                                            |   |   |   |   |
| Net                  interest income                   |   | $                                             | 56,422 |   |                                            | $      | 28,572 |   |   | $ | 57,030 |   |
| Other                  income                          |   |                                          | 17,125 |   |                                            |   | 9,517 |   |   |   | 18,807 |   |
| Net                  income                            |   |                                          | 14,122 |   |                                            |   | 10,884 |   |   |   | 21,828 |   |
| Diluted                  earnings per common share     |   | $                                             | 0.57   |   |                                            | $      | 0.43 |   |   | $ | 0.86 |   |

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Unaudited)**

**6.   Guarantees**

**7.   Long-Term        Debt**

| (in                  thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **June                  30,**** 2007** |        |   | **December                  31, 2006** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|-------------|--------|----------------------------------------|--------|
| Outstanding                  advances from the FHLB of Pittsburgh mature from 2007 to                  2017.  The advances are collateralized by FHLB stock, certain                  first mortgage loans and both agency and mortgage-backed                  securities.  The advance rates range from 2.70% to 6.35%, with a                  weighted average interest rate of 4.62%.  Advances totaling $343                  million are convertible advances.  Convertible advances with an                  initial fixed-rate period are convertible to variable rate at the                  option                  of the FHLB.  Convertible advances with an initial variable-rate                  period at LIBOR-100 basis points are convertible to fixed-rate                  or to a                  variable rate tied to a spread over LIBOR. Under the terms of the                  arrangements, if the FHLB opts to convert advances to variable                  rate,                  Community has the ability to prepay the advances at no                  penalty.  At the current time no advances have been converted,                  and remain at the initial period rate. |   | **$**                                       | **455,104** |   |                                   | $      | 315,079 |   |

| June                  30, 2008 |   | $      | 40,615  |   |
|--------------------------------|--------|--------|---------|--------|
| June                  30, 2009 |   |   | 70,565  |   |
| June                  30, 2010 |   |   | 5,091   |   |
| June                  30, 2011 |   |   | 25,092  |   |
| June                  30, 2012 |   |   | 5,087   |   |
| Thereafter                     |   |   | 308,654 |   |
|                           |   | $      | 455,104 |   |

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

**(Unaudited)**

**8.        Stock-Based Plans**

| Dividend                  yield                  | 3.1%                    |
|--------------------------------------------------|-------------------------|
| Volatility                                       | 29.2%                   |
| Risk-free                  interest rate         | 4.5%                    |
| Expected                  life (years)           | 6.0                     |
| Resulting                  grant-date fair value | $                  6.33 |

----

**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**Part        1 - Item        2.   Management’s Discussion and Analysis of Financial Condition        and Results of Operations**

**INTRODUCTION**

**GAAP        REPORTING ISSUES**

**Forward-Looking        Statements**

----

**Critical        Accounting Policies**

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

| §   | Purchase                  Accounting for Business                  Combinations |
|--------------------|---------------------------------------------------------------------------------|

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

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

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

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

----

**GAAP        versus Non-GAAP**

**SUMMARY        OF FINANCIAL AND OPERATING RESULTS**

**Overview**

----

----

**BALANCE        SHEET**

**Three        Months Ended June 30:**

|                                                              |   | **June****30,** |      |   | **Change** |   |
|-------------------------------------------------------------------|--------|-----------------|-----------|--------|------------|--------|
|                                                              |   | **2007**        |      |   | **2006**   |   |   | **Volume** |   |   | **%** |   |
| Cash                  and due from banks                          |   | $               | 60,873    |   |       | $      | 59,461 |   |   | $ | 1,412 |   |   |   | 2 | % |
| Federal                  funds sold and interest-bearing deposits |   |            | 79,230    |   |       |   | 53,872 |   |   |   | 25,358 |   |   |   | 47 | % |
| Investments                  (including trading assets)           |   |            | 671,210   |   |       |   | 577,581 |   |   |   | 93,629 |   |   |   | 16 | % |
| Loans                                                             |   |            | 2,574,074 |   |       |   | 2,312,900 |   |   |   | 261,174 |   |   |   | 11 | % |
| Allowance                  for loan losses                        |   |            | 25,985    |   |       |   | 23,882 |   |   |   | 2,103 |   |   |   | 9 | % |
| Net                  loans                                        |   |            | 2,548,089 |   |       |   | 2,289,018 |   |   |   | 259,071 |   |   |   | 11 | % |
| Goodwill                  and identifiable intangible assets      |   |            | 278,950   |   |       |   | 259,003 |   |   |   | 19,947 |   |   |   | 8 | % |
| Other                  assets                                     |   |            | 167,442   |   |       |   | 152,973 |   |   |   | 14,469 |   |   |   | 9 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                  assets                                     |   | $               | 3,805,794 |   |       | $      | 3,391,908 |   |   | $ | 413,886 |   |   |   | 12 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                  deposits                     |   | $               | 363,298   |   |       | $      | 350,574 |   |   | $ | 12,724 |   |   |   | 4 | % |
| Interest-bearing                  deposits                        |   |            | 2,296,813 |   |       |   | 2,030,567 |   |   |   | 266,246 |   |   |   | 13 | % |
| Short-term                  borrowings                            |   |            | 65,019    |   |       |   | 57,903 |   |   |   | 7,116 |   |   |   | 12 | % |
| Long-term                  debt                                   |   |            | 456,769   |   |       |   | 405,705 |   |   |   | 51,064 |   |   |   | 13 | % |
| Subordinated                  debt                                |   |            | 75,260    |   |       |   | 51,548 |   |   |   | 23,712 |   |   |   | 46 | % |
| Other                  liabilities                                |   |            | 26,226    |   |       |   | 24,916 |   |   |   | 1,310 |   |   |   | 5 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                  liabilities                                |   |            | 3,283,385 |   |       |   | 2,921,213 |   |   |   | 362,172 |   |   |   | 12 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’                  equity                       |   |            | 522,409   |   |       |   | 470,695 |   |   |   | 51,714 |   |   |   | 11 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                  liabilities and stockholders’ equity |   | $               | 3,805,794 |   |       | $      | 3,391,908 |   |   | $ | 413,886 |   |   |   | 12 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |

----

|                                     |   |                                  |      |   |                                  |   |      | **Change**       |   |
|------------------------------------------|--------|---------------------------------------|-----------|--------|---------------------------------------|--------|-----------|------------------|--------|
| (in                  thousands)          |   | **June                  30,****2007** |      |   | **June                  30,****2006** |   |      |  **Amount** |   |   | **Annualized**** %** |   |
| Commercial                               |   | $                                     | 972,907   |   |                                  | $      | 827,586   |             |   | $ | 145,321 |   |   |   | 18 | % |
| Commercial                  real estate  |   |                                  | 800,711   |   |                                  |   | 817,099   |             |   |   | (16,388 | ) |   |   | (2 | )% |
| Residential                  real estate |   |                                  | 177,820,  |   |                                  |   | 150,653   |             |   |   | 27,167 |   |   |   | 18 | % |
| Consumer                                 |   |                                  | 622,636   |   |                                  |   | 517,562   |             |   |   | 105,074 |   |   |   | 20 | % |
| Total                                    |   | $                                     | 2,574,074 |   |                                  | $      | 2,312,900 |             |   | $ | 261,174 |   |   |   | 11 | % |

|                                        |   |                                  |      |   |                                        |   |      | **Change** |   |
|---------------------------------------------|--------|---------------------------------------|-----------|--------|---------------------------------------------|--------|-----------|------------|--------|
| (in                  thousands)             |   | **June                  30,****2007** |      |   | **June                  30,**** 2006** |   |      | **Amount** |   |   | **Annualized****%** |   |
| Demand                                      |   | $                                     | 363,298   |   |                                        | $      | 350,574   |       |   | $ | 12,724 |   |   |   | 4 | % |
| Savings                  & NOW accounts |   |                                  | 942,150   |   |                                        |   | 820,265   |       |   |   | 121,885 |   |   |   | 15 | % |
| Time                                        |   |                                  | 1,030,564 |   |                                        |   | 981,371   |       |   |   | 49,193 |   |   |   | 5 | % |
| Time                  $100,000 or more      |   |                                  | 324,099   |   |                                        |   | 228,931   |       |   |   | 95,168 |   |   |   | 42 | % |
|                                        |   | $                                     | 2,660,111 |   |                                        | $      | 2,381,141 |       |   | $ | 278,970 |   |   |   | 12 | % |

----

**Six        Months Ended June 30:**

|                                                              |   | **June****30,** |      |   | **Change** |   |
|-------------------------------------------------------------------|--------|-----------------|-----------|--------|------------|--------|
|                                                              |   | **2007**        |      |   | **2006**   |   |   | **Volume** |   |   | **%** |   |
| Cash                  and due from banks                          |   | $               | 58,222    |   |       | $      | 59,357 |   |   | $ | (1,135 | ) |   |   | (2 | )% |
| Federal                  funds sold and interest-bearing deposits |   |            | 45,155    |   |       |   | 44,431 |   |   |   | 724 |   |   |   | 2 | % |
| Investments                  (including trading assets)           |   |            | 676,869   |   |       |   | 595,635 |   |   |   | 81,234 |   |   |   | 14 | % |
| Loans                                                             |   |            | 2,489,770 |   |       |   | 2,301,503 |   |   |   | 188,267 |   |   |   | 8 | % |
| Allowance                  for loan losses                        |   |            | 25,008    |   |       |   | 23,529 |   |   |   | 1,479 |   |   |   | 6 | % |
| Net                  loans                                        |   |            | 2,464,762 |   |       |   | 2,277,974 |   |   |   | 186,788 |   |   |   | 8 | % |
| Goodwill                  and identifiable intangible assets      |   |            | 269,071   |   |       |   | 258,847 |   |   |   | 10,224 |   |   |   | 4 | % |
| Other                  assets                                     |   |            | 161,635   |   |       |   | 151,339 |   |   |   | 10,296 |   |   |   | 7 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                  assets                                     |   | $               | 3,675,714 |   |       | $      | 3,387,583 |   |   | $ | 288,131 |   |   |   | 9 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                  deposits                     |   | $               | 352,003   |   |       | $      | 362,042 |   |   | $ | (10,039 | ) |   |   | (3 | )% |
| Interest-bearing                  deposits                        |   |            | 2,209,670 |   |       |   | 1,979,696 |   |   |   | 229,974 |   |   |   | 12 | % |
| Short-term                  borrowings                            |   |            | 94,836    |   |       |   | 63,184 |   |   |   | 31,652 |   |   |   | 50 | % |
| Long-term                  debt                                   |   |            | 424,164   |   |       |   | 436,188 |   |   |   | (12,024 | ) |   |   | (3 | )% |
| Subordinated                  debt                                |   |            | 66,090    |   |       |   | 48,130 |   |   |   | 17,960 |   |   |   | 37 | % |
| Other                  liabilities                                |   |            | 24,184    |   |       |   | 23,763 |   |   |   | 421 |   |   |   | 2 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                  liabilities                                |   |            | 3,170,947 |   |       |   | 2,913,003 |   |   |   | 257,944 |   |   |   | 9 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’                  equity                       |   |            | 504,767   |   |       |   | 474,580 |   |   |   | 30,187 |   |   |   | 6 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                  liabilities and stockholders’ equity |   | $               | 3,675,714 |   |       | $      | 3,387,583 |   |   | $ | 288,131 |   |   |   | 9 | % |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
|                                                              |   |            |      |   |       |   |   |   |   |   |   |   |   |   |   |   |

**RESULTS        OF OPERATIONS**

**Net        Interest Income - Three Months Ended June 30:**

----

|                                                                                        |   | **Net                  Interest Margin – Quarter to Date** |      |   |                                          |   |
|---------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|-----------|--------|-----------------------------------------------|--------|
|                                                                                        |   |                                                             |      |   |                                          |   |
| (dollars                  in thousands)                                                     |   | June                  30, 2007                                   |      |   | June                  30, 2006                |   |
|                                                                                        |   | Average                  Balance                                 |      |   | FTE                  Interest Income/ Expense |   |   | Average                  Rate Earned/Paid |   |   | Average                  Balance |   |   | FTE                  Interest Income/ Expense |   |   | Average                  Rate Earned/Paid |   |
| Federal                  funds sold and interest-bearing                  deposits in banks |   | $                                                                | 79,230    |   |                                          | $      | 1,042 |   |   |   | 5.28 | % |   | $ | 53,872 |   |   | $ | 643 |   |   |   | 4.79 | % |
| Investment                  securities                                                      |   |                                                             | 671,210   |   |                                          |   | 10,438 |   |   |   | 6.24 | % |   |   | 577,581 |   |   |   | 8,622 |   |   |   | 5.99 | % |
| Loans                  - commercial                                                         |   |                                                             | 972,907   |   |                                          |   | 18,967 |   |   |   | 7.82 | % |   |   | 827,586 |   |   |   | 16,016 |   |   |   | 7.76 | % |
|  -                  commercial real estate                                             |   |                                                             | 800,711   |   |                                          |   | 14,499 |   |   |   | 7.26 | % |   |   | 817,099 |   |   |   | 14,326 |   |   |   | 7.03 | % |
|  -                  residential real estate                                            |   |                                                             | 177,820   |   |                                          |   | 2,786 |   |   |   | 6.28 | % |   |   | 150,653 |   |   |   | 2,272 |   |   |   | 6.05 | % |
|  -                  consumer                                                           |   |                                                             | 622,636   |   |                                          |   | 11,205 |   |   |   | 7.22 | % |   |   | 517,562 |   |   |   | 8,969 |   |   |   | 6.95 | % |
| Total                  earning assets                                                       |   | $                                                                | 3,324,514 |   |                                          | $      | 58,937 |   |   |   | 7.11 | % |   | $ | 2,944,353 |   |   | $ | 50,848 |   |   |   | 6.93 | % |
|                                                                                        |   |                                                             |      |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                  - savings and NOW accounts                                        |   | $                                                                | 942,150   |   |                                          |   | 5,651 |   |   |   | 2.41 | % |   | $ | 820,265 |   |   | $ | 3,893 |   |   |   | 1.90 | % |
| -  time                                                                           |   |                                                             | 1,354,663 |   |                                          |   | 15,068 |   |   |   | 4.46 | % |   |   | 1,210,302 |   |   |   | 11,891 |   |   |   | 3.94 | % |
| Short-term                  borrowings                                                      |   |                                                             | 65,019    |   |                                          |   | 757 |   |   |   | 4.67 | % |   |   | 57,903 |   |   |   | 645 |   |   |   | 4.47 | % |
| Long-term                  debt                                                             |   |                                                             | 456,769   |   |                                          |   | 5,301 |   |   |   | 4.65 | % |   |   | 405,705 |   |   |   | 4,564 |   |   |   | 4.51 | % |
| Subordinated                  debt                                                          |   |                                                             | 75,260    |   |                                          |   | 1,347 |   |   |   | 7.18 | % |   |   | 51,548 |   |   |   | 938 |   |   |   | 7.30 | % |
| Total                  interest-bearing liabilities                                         |   | $                                                                | 2,893,861 |   |                                          | $      | 28,124 |   |   |   | 3.90 | % |   | $ | 2,545,723 |   |   | $ | 21,931 |   |   |   | 3.46 | % |
|                                                                                        |   |                                                             |      |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  income to earning assets                                          |   |                                                             |      |   |                                          |   |   |   |   |   | 7.11 | % |   |   |   |   |   |   |   |   |   |   | 6.93 | % |
| Interest                  expense to paying liabilities                                     |   |                                                             |      |   |                                          |   |   |   |   |   | 3.90 | % |   |   |   |   |   |   |   |   |   |   | 3.46 | % |
|                                                                                        |   |                                                             |      |   |                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  spread                                                            |   |                                                             |      |   |                                          |   |   |   |   |   | 3.21 | % |   |   |   |   |   |   |   |   |   |   | 3.47 | % |
| Impact                  of non-interest funds                                               |   |                                                             |      |   |                                          |   |   |   |   |   | 0.51 | % |   |   |   |   |   |   |   |   |   |   | 0.47 | % |
| Net                  interest margin                                                        |   |                                                             |      |   |                                          | $      | 30,813 |   |   |   | 3.72 | % |   |   |   |   |   | $ | 28,917 |   |   |   | 3.94 | % |

| **o  ** | The                  existence of a generally higher level of short-term interest rates                  since                  mid-year 2006 and the prolonged presence of an “inverted” or “flat" yield                  curve throughout most of 2006 and into the first half of 2007.                  Interest                  rate trends contributed to an 18 basis point increase in earning                  asset                  yields between the two quarters shown, but were more than offset                  by a more                  substantial 44 basis point increase in the cost of interest-bearing                  liabilities. Consequently, interest spread declined by 26 basis                  points                  while net interest margin declined by 22 basis points in the above                  quarterly comparison. |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | A                  less robust pace of loan growth since mid-year                  2006. |
|---------------|------------------------------------------------------------------------------------------|

| **o  ** | Some                  favorable influence from enhanced investment yields and higher                  portfolio                  balances in the second quarter of                  2007. |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **o  ** | A                  steady increase in short-term interest rate offerings on time deposits                  that commenced in the first half of 2006, which contributed to                  the                  increase in the cost of funds through mid-year                  2007. |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **o  ** | Ongoing                  competitive pressure to sustain higher short-term time deposit                  pricing to                  maintain and increase funding balances necessary to meet the current                  level                  of earning asset growth. |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | Consumer                  preferences for higher-cost rate offerings on time                  deposits. |
|---------------|---------------------------------------------------------------------------------------------------------|

----

| **o  ** | The                  Federal Open Market Committee’s suspension of further tightening of the                  benchmark Federal Funds rate since June 30,                  2006. |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **o  ** | The                  pause in the re-pricing of rate sensitive assets since mid-year                  2006,                  while time deposits continued to price upward. The pause was influenced                  by                  the suspension of increases in the benchmark rate indices that                  are the                  primary influence on the pricing of those assets. At the same time,                  older,                  lower-cost time deposits continued to re-price at higher levels                  upon their                  maturity. |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Net        Interest Income - Six Months Ended June 30:**

|                                                                                        |   | **Net                  Interest Margin – Year to Date** |      |   |                                                           |   |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|-----------|--------|----------------------------------------------------------------|--------|
|                                                                                        |   |                                                          |      |   |                                                           |   |
| (dollars                  in thousands)                                                     |   | June                  30, 2007                                |      |   | June                  30, 2006                                 |   |
|                                                                                        |   | Average                  Balance                              |      |   | FTE                  Interest Income/                  Expense |   |   | Average                  Rate Earned/Paid |   |   | Average                  Balance |   |   | FTE                  Interest Income/                  Expense |   |   | Average                  Rate Earned/Paid |   |
| Federal                  funds sold and interest-bearing                  deposits in banks |   | $                                                             | 45,155    |   |                                                           | $      | 1,177 |   |   |   | 5.26 | % |   | $ | 44,431 |   |   | $ | 1,036 |   |   |   | 4.70 | % |
| Investment                  securities                                                      |   |                                                          | 676,869   |   |                                                           |   | 20,647 |   |   |   | 6.15 | % |   |   | 595,635 |   |   |   | 17,523 |   |   |   | 5.93 | % |
| Loans                  - commercial                                                         |   |                                                          | 933,845   |   |                                                           |   | 36,759 |   |   |   | 7.94 | % |   |   | 817,901 |   |   |   | 31,161 |   |   |   | 7.68 | % |
|  -                  commercial real estate                                             |   |                                                          | 805,799   |   |                                                           |   | 28,673 |   |   |   | 7.18 | % |   |   | 808,350 |   |   |   | 27,931 |   |   |   | 6.97 | % |
|  -                  residential real estate                                            |   |                                                          | 164,696   |   |                                                           |   | 5,183 |   |   |   | 6.35 | % |   |   | 151,960 |   |   |   | 4,569 |   |   |   | 6.06 | % |
|  -                  consumer                                                           |   |                                                          | 585,430   |   |                                                           |   | 20,990 |   |   |   | 7.23 | % |   |   | 523,292 |   |   |   | 17,495 |   |   |   | 6.74 | % |
| Total                  earning assets                                                       |   | $                                                             | 3,211,794 |   |                                                           | $      | 113,429 |   |   |   | 7.12 | % |   | $ | 2,941,569 |   |   | $ | 99,715 |   |   |   | 6.84 | % |
|                                                                                        |   |                                                          |      |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                  - savings and NOW accounts                                        |   | $                                                             | 900,540   |   |                                                           | $      | 10,486 |   |   |   | 2.35 | % |   | $ | 823,485 |   |   | $ | 7,394 |   |   |   | 1.81 | % |
| -  time                                                                           |   |                                                          | 1,309,130 |   |                                                           |   | 29,119 |   |   |   | 4.49 | % |   |   | 1,156,211 |   |   |   | 21,811 |   |   |   | 3.80 | % |
| Short-term                  borrowings                                                      |   |                                                          | 94,836    |   |                                                           |   | 2,321 |   |   |   | 4.94 | % |   |   | 63,184 |   |   |   | 1,341 |   |   |   | 4.28 | % |
| Long-term                  debt                                                             |   |                                                          | 424,164   |   |                                                           |   | 9,801 |   |   |   | 4.66 | % |   |   | 436,188 |   |   |   | 9,675 |   |   |   | 4.47 | % |
| Subordinated                  debt                                                          |   |                                                          | 66,090    |   |                                                           |   | 2,369 |   |   |   | 7.23 | % |   |   | 48,130 |   |   |   | 1,735 |   |   |   | 7.27 | % |
| Total                  interest-bearing liabilities                                         |   | $                                                             | 2,794,760 |   |                                                           | $      | 54,096 |   |   |   | 3.90 | % |   | $ | 2,527,198 |   |   | $ | 41,956 |   |   |   | 3.35 | % |
|                                                                                        |   |                                                          |      |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  income to earning assets                                          |   |                                                          |      |   |                                                           |   |   |   |   |   | 7.12 | % |   |   |   |   |   |   |   |   |   |   | 6.84 | % |
| Interest                  expense to paying liabilities                                     |   |                                                          |      |   |                                                           |   |   |   |   |   | 3.90 | % |   |   |   |   |   |   |   |   |   |   | 3.35 | % |
|                                                                                        |   |                                                          |      |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  spread                                                            |   |                                                          |      |   |                                                           |   |   |   |   |   | 3.22 | % |   |   |   |   |   |   |   |   |   |   | 3.49 | % |
| Impact                  of non-interest funds                                               |   |                                                          |      |   |                                                           |   |   |   |   |   | 0.51 | % |   |   |   |   |   |   |   |   |   |   | 0.47 | % |
| Net                  interest margin                                                        |   |                                                          |      |   |                                                           | $      | 59,533 |   |   |   | 3.73 | % |   |   |   |   |   | $ | 57,759 |   |   |   | 3.96 | % |

----

**Provision        for Loan Losses**

**Non-Interest        Income - Three Months Ended June 30:**

|                                                                                                                         |   | **Three                  Months Ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
| (in                  thousands)                                                                                              |   | **2007**                                         |   |   | **2006** |   |   | **Increase****(Decrease)** |   |
| Investment                  management and trust services                                                                    |   | $                                                | 1,603  |   |   | $ | 1,088 |   |   | $ | 515 |   |
| Service                  charges on deposit accounts                                                                         |   |                                             | 4,677  |   |   |   | 2,855 |   |   |   | 1,822 |   |
| Other                  service charges, commissions and fees                                                                 |   |                                             | 2,257  |   |   |   | 1,903 |   |   |   | 354 |   |
| Insurance                  premium income and commissions                                                                    |   |                                             | 1,063  |   |   |   | 1,117 |   |   |   | (54 | ) |
| Mortgage                  banking activities                                                                                 |   |                                             | 694    |   |   |   | 580 |   |   |   | 114 |   |
| Earnings                  on investment in life insurance                                                                    |   |                                             | 756    |   |   |   | 675 |   |   |   | 81 |   |
| Trading                  activities loss                                                                                     |   |                                             | (34    | ) |   |   | --- |   |   |   | (34 | ) |
| Other                                                                                                                        |   |                                             | 232    |   |   |   | 319 |   |   |   | (87 | ) |
| Total                  non-interest income, excluding available-for-sale                  investment security gains (losses) |   | $                                                | 11,248 |   |   | $ | 8,537 |   |   | $ | 2,711 |   |

----

**Non-Interest        Income - Six Months Ended June 30:**

|                                                                                                                         |   | **Six                  Months Ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
| (in                  thousands)                                                                                              |   | **2007**                                       |   |   | **2006** |   |   | **Increase****(Decrease)** |   |
| Investment                  management and trust services                                                                    |   | $                                              | 3,048  |   |   | $ | 2,101 |   |   | $ | 947 |   |
| Service                  charges on deposit accounts                                                                         |   |                                           | 7,673  |   |   |   | 5,386 |   |   |   | 2,287 |   |
| Other                  service charges, commissions and fees                                                                 |   |                                           | 4,285  |   |   |   | 3,603 |   |   |   | 682 |   |
| Insurance                  premium income and commissions                                                                    |   |                                           | 2,239  |   |   |   | 2,045 |   |   |   | 194 |   |
| Mortgage                  banking activities                                                                                 |   |                                           | 1,242  |   |   |   | 1,048 |   |   |   | 194 |   |
| Earnings                  on investment in life insurance                                                                    |   |                                           | 1,444  |   |   |   | 1,331 |   |   |   | 113 |   |
| Trading                  activities loss                                                                                     |   |                                           | (34    | ) |   |   | --- |   |   |   | (34 | ) |
| Other                                                                                                                        |   |                                           | 823    |   |   |   | 1,124 |   |   |   | (301 | ) |
| Total                  non-interest income, excluding available-for-sale                  investment security gains (losses) |   | $                                              | 20,720 |   |   | $ | 16,638 |   |   | $ | 4,082 |   |

**Non-Interest        Expenses - Three Months Ended June 30:**

|                                             |   | **Three                  Months Ended June 30,** |   |
|--------------------------------------------------|--------|--------------------------------------------------|--------|
| (in                  thousands)                  |   | **2007**                                         |   |   | **2006** |   |   | **Increase** |   |
| Salaries                  and employee benefits  |   | $                                                | 13,069 |   |   | $ | 11,251 |   |   | $ | 1,818 |   |
| Net                  occupancy                   |   |                                             | 3,980  |   |   |   | 3,386 |   |   |   | 594 |   |
| Payment                  card processing expense |   |                                             | 774    |   |   |   | 556 |   |   |   | 218 |   |
| Marketing                  expense               |   |                                             | 552    |   |   |   | 265 |   |   |   | 287 |   |
| Telecommunications                  expense      |   |                                             | 612    |   |   |   | 566 |   |   |   | 46 |   |
| Amortization                  of intangibles     |   |                                             | 811    |   |   |   | 702 |   |   |   | 109 |   |
| Other                                            |   |                                             | 4,693  |   |   |   | 3,972 |   |   |   | 721 |   |
| Total                  non-interest expenses     |   | $                                                | 24,491 |   |   | $ | 20,698 |   |   | $ | 3,793 |   |

----

**Non-Interest        Expenses - Six Months Ended June 30:**

|                                             |   | **Six                  Months Ended June 30,** |   |
|--------------------------------------------------|--------|------------------------------------------------|--------|
| (in                  thousands)                  |   | **2007**                                       |   |   | **2006** |   |   | **Increase** |   |
| Salaries                  and employee benefits  |   | $                                              | 25,078 |   |   | $ | 22,669 |   |   | $ | 2,409 |   |
| Net                  occupancy                   |   |                                           | 7,774  |   |   |   | 6,898 |   |   |   | 876 |   |
| Payment                  card processing expense |   |                                           | 1,387  |   |   |   | 839 |   |   |   | 548 |   |
| Marketing                  expense               |   |                                           | 1,057  |   |   |   | 840 |   |   |   | 217 |   |
| Telecommunications                  expense      |   |                                           | 1,137  |   |   |   | 1,117 |   |   |   | 20 |   |
| Amortization                  of intangibles     |   |                                           | 1,472  |   |   |   | 1,356 |   |   |   | 116 |   |
| Other                                            |   |                                           | 8,727  |   |   |   | 7,512 |   |   |   | 1,215 |   |
| Total                  non-interest expenses     |   | $                                              | 46,632 |   |   | $ | 41,231 |   |   | $ | 5,401 |   |

**Income        Taxes**

----

**CAPITAL**

|                                            | **June                  30,****2007** | **Regulatory****Minimum** | **“Well****Capitalized”** |
|-------------------------------------------------|---------------------------------------|---------------------------|---------------------------------------|
| Leverage                  ratio                 |                                  |                      |                                  |
| Community                  Banks, Inc.          | 9.03%                                 | 4%                        | 5%                                    |
| CommunityBanks                                  | 8.71%                                 | 4%                        | 5%                                    |
|                                            |                                  |                      |                                  |
| Tier                  1 capital ratio           |                                  |                      |                                  |
| Community                  Banks, Inc.          | 11.21%                                | 4%                        | 6%                                    |
| CommunityBanks                                  | 10.80%                                | 4%                        | 6%                                    |
|                                            |                                  |                      |                                  |
| Total                  risk-based capital ratio |                                  |                      |                                  |
| Community                  Banks, Inc.          | 12.09%                                | 8%                        | 10%                                   |
| CommunityBanks                                  | 11.68%                                | 8%                        | 10%                                   |

**CONTRACTUAL        OBLIGATIONS**

| Significant                  contractual obligations at June 30, 2007, are summarized as                  follows: |
|--------------------------------------------------------------------------------------------------------------------|

|                                         |   | **Payments                  due by period** |      |
|----------------------------------------------|--------|---------------------------------------------|-----------|
|   (in                  thousands)  |   | **Total**                                   |      |   | **Less                  than****1                  year** |   |   | **1-3****years** |   |   | **3-5****years** |   |   | **More                  than****5                  years** |   |
|                                         |   |                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                  debt              |   | $                                           | 455,104   |   |   | $ | 40,615 |   |   | $ | 75,656 |   |   | $ | 30,179 |   |   | $ | 308,654 |   |
| Operating                  lease obligations |   |                                        | 39,003    |   |   |   | 2,153 |   |   |   | 4,260 |   |   |   | 4,018 |   |   |   | 28,572 |   |
| Subordinated                  debt           |   |                                        | 75,260    |   |   |   | --- |   |   |   | --- |   |   |   | --- |   |   |   | 75,260 |   |
| Time                  deposits               |   |                                        | 1,331,978 |   |   |   | 928,488 |   |   |   | 355,625 |   |   |   | 45,105 |   |   |   | 2,760 |   |
|                                         |   |                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                        |   | $                                           | 1,901,345 |   |   | $ | 971,256 |   |   | $ | 435,541 |   |   | $ | 79,302 |   |   | $ | 415,246 |   |

----

**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**PART        I - Item 2.     Management’s Discussion and Analysis of        Financial Condition and Results of Operations        (continued)**

***Table        1: Reconciliation of GAAP to Non-GAAP Measures:(1)***

|                                                                                     |   | **Three                  Months Ended** |      |   | **Six                  Months Ended** |   |
|------------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|--------|---------------------------------------|--------|
|                                                                                     |   | **June                  30,**           |      |   | **June                  30,**         |   |
|                                                                                     |   | **2007**                                |      |   | **2006**                              |   |   | **2007** |   |   | **2006** |   |
| **Income                  statement data:**                                              |   |                                    |      |   |                                  |   |   |   |   |   |   |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |
| **Net                  income**                                                          |   |                                    |      |   |                                  |   |   |   |   |   |   |   |
| Net                  income                                                              |   | $                                       | 10,950    |   |                                  | $      | 10,504 |   |   | $ | 17,537 |   |   | $ | 21,073 |   |
| Amortization                  of core deposit and other intangible assets  (1) |   |                                    | 528       |   |                                  |   | 456 |   |   |   | 956 |   |   |   | 881 |   |
| Net                  operating (tangible) income                                         |   | $                                       | 11,478    |   |                                  | $      | 10,960 |   |   | $ | 18,493 |   |   | $ | 21,954 |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Balance                  sheet data:**                                                 |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Average                  assets**                                                      |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Average                  assets                                                          |   | $                                       | 3,805,794 |   |                                  | $      | 3,391,908 |   |   | $ | 3,675,714 |   |   | $ | 3,387,583 |   |
| Goodwill                                                                                 |   |                                    | (263,694  | )      |                                  |   | (245,749 | ) |   |   | (255,095 | ) |   |   | (245,265 | ) |
| Core                  deposit and other intangible assets                                |   |                                    | (15,256   | )      |                                  |   | (13,254 | ) |   |   | (13,976 | ) |   |   | (13,582 | ) |
|      Average                  tangible assets                   |   | $                                       | 3,526,844 |   |                                  | $      | 3,132,905 |   |   | $ | 3,406,643 |   |   | $ | 3,128,736 |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                  return on average tangible assets**                         |   |                                    | 1.31      | %      |                                  |   | 1.40 | % |   |   | 1.09 | % |   |   | 1.42 | % |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Average                  equity**                                                      |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Average                  equity                                                          |   | $                                       | 522,409   |   |                                  | $      | 470,695 |   |   | $ | 504,767 |   |   | $ | 474,580 |   |
| Goodwill                                                                                 |   |                                    | (263,694  | )      |                                  |   | (245,749 | ) |   |   | (255,095 | ) |   |   | (245,265 | ) |
| Core                  deposit and other intangible assets                                |   |                                    | (15,256   | )      |                                  |   | (13,254 | ) |   |   | (13,976 | ) |   |   | (13,582 | ) |
| Deferred                  taxes                                                          |   |                                    | 2,468     |   |                                  |   | 1,836 |   |   |   | 2,009 |   |   |   | 1,785 |   |
|      Average                  tangible equity                   |   | $                                       | 245,927   |   |                                  | $      | 213,528 |   |   | $ | 237,705 |   |   | $ | 217,518 |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                  return on average tangible equity**                         |   |                                    | 18.72     | %      |                                  |   | 20.59 | % |   |   | 15.69 | % |   |   | 20.35 | % |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **At                  end of quarter:**                                                  |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Total                  assets**                                                        |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Total                  assets                                                            |   | $                                       | 3,750,844 |   |                                  | $      | 3,385,599 |   |   | $ | 3,750,844 |   |   | $ | 3,385,599 |   |
| Goodwill                                                                                 |   |                                    | (265,129  | )      |                                  |   | (245,056 | ) |   |   | (265,129 | ) |   |   | (245,056 | ) |
| Core                  deposit and other intangible assets                                |   |                                    | (14,834   | )      |                                  |   | (13,550 | ) |   |   | (14,834 | ) |   |   | (13,550 | ) |
|      Total                  tangible assets                     |   | $                                       | 3,470,881 |   |                                  | $      | 3,126,993 |   |   | $ | 3,470,881 |   |   | $ | 3,126,993 |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Total                  equity**                                                        |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| Total                  equity                                                            |   | $                                       | 517,193   |   |                                  | $      | 465,760 |   |   | $ | 517,193 |   |   | $ | 465,760 |   |
| Goodwill                                                                                 |   |                                    | (265,129  | )      |                                  |   | (245,056 | ) |   |   | (265,129 | ) |   |   | (245,056 | ) |
| Core                  deposit and other intangible assets                                |   |                                    | (14,834   | )      |                                  |   | (13,550 | ) |   |   | (14,834 | ) |   |   | (13,550 | ) |
| Deferred                  taxes                                                          |   |                                    | 2,403     |   |                                  |   | 1,800 |   |   |   | 2,403 |   |   |   | 1,800 |   |
|      Total                  tangible equity                     |   | $                                       | 239,633   |   |                                  | $      | 208,954 |   |   | $ | 239,633 |   |   | $ | 208,954 |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
| **Tangible                  book value at end of period**                                |   | $                                       | 9.66      |   |                                  | $      | 8.91 |   |   | $ | 9.66 |   |   | $ | 8.91 |   |
|                                                                                     |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |
|  (1)  Net                  of related tax effect                          |   |                                    |      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |

----

**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**PART        I - Item 3.     Quantitative and        Qualitative Disclosures About Market Risk**

| **Interest                  Rate Sensitivity**                        |   |             |    |   |               |   |    |                |   |   |                                   |   |   |      |      |
|-----------------------------------------------------------------------|--------|------------------|---------|--------|--------------------|--------|---------|---------------------|--------|--------|----------------------------------------|--------|--------|-----------|-----------|
|  **(in                  thousands)**                             |   | **1-90****days** |    |   | **90-180****days** |   |    | **180-365****days** |   |   | **1                  year or****more** |   |   | **Total** |      |
|                                                                  |   |             |    |   |               |   |    |                |   |   |                                   |   |   |      |      |
| **Assets**                                                            |   |             |    |   |               |   |    |                |   |   |                                   |   |   |      |      |
| Interest-bearing                  deposits in other banks             |   | $                | 4,438   |   |               |   | ---     |                |   |   | ---                                    |   |   |      | ---       |   |   | $ | 4,438 |   |
| Investment                  securities (including trading assets)     |   |             | 67,409  |   |               |   | 16,254  |                |   |   | 29,940                                 |   |   |      | 564,249   |   |   |   | 677,852 |   |
| Loans(1)                                                              |   |             | 765,108 |   |               |   | 110,835 |                |   |   | 224,823                                |   |   |      | 1,466,872 |   |   |   | 2,567,638 |   |
| Earning                  assets                                       |   |             | 836,955 |   |               |   | 127,089 |                |   |   | 254,763                                |   |   |      | 2,031,121 |   |   |   | 3,249,928 |   |
| Non-earning                  assets                                   |   |             | 720     |   |               |   | 720     |                |   |   | 1,425                                  |   |   |      | 498,051   |   |   |   | 500,916 |   |
| Total                  assets                                         |   | $                | 837,675 |   |               | $      | 127,809 |                |   | $      | 256,188                                |   |   | $         | 2,529,172 |   |   | $ | 3,750,844 |   |
| ** Liabilities**                                                 |   |             |    |   |               |   |    |                |   |   |                                   |   |   |      |      |   |   |   |   |   |
| Savings                                                               |   | $                | 234,632 |   |               | $      | 38,531  |                |   | $      | 77,051                                 |   |   | $         | 546,348   |   |   | $ | 896,562 |   |
| Time                                                                  |   |             | 247,518 |   |               |   | 95,437  |                |   |   | 349,098                                |   |   |      | 317,955   |   |   |   | 1,010,008 |   |
| Time                  in denominations of  $100,000 or more |   |             | 101,136 |   |               |   | 37,887  |                |   |   | 97,650                                 |   |   |      | 85,297    |   |   |   | 321,970 |   |
| Short-term                  borrowings                                |   |             | 72,724  |   |               |   | ---     |                |   |   | ---                                    |   |   |      | ---       |   |   |   | 72,724 |   |
| Long-term                  debt                                       |   |             | 141,837 |   |               |   | 11,581  |                |   |   | 12,117                                 |   |   |      | 289,569   |   |   |   | 455,104 |   |
| Subordinated                  debt                                    |   |             | 23,196  |   |               |   | ---     |                |   |   | 3,093                                  |   |   |      | 48,971    |   |   |   | 75,260 |   |
| Interest                  bearing liabilities                         |   |             | 821,043 |   |               |   | 183,436 |                |   |   | 539,009                                |   |   |      | 1,288,140 |   |   |   | 2,831,628 |   |
| Other                  liabilities and equity                         |   |             | 11,389  |   |               |   | 11,389  |                |   |   | 22,777                                 |   |   |      | 873,661   |   |   |   | 919,216 |   |
| Total                  liabilities and equity                         |   | $                | 832,432 |   |               | $      | 194,825 |                |   | $      | 561,786                                |   |   | $         | 2,161,801 |   |   | $ | 3,750,844 |   |

| **Interest                  Sensitivity GAP**                                   |   |             |   |   |               |   |    |                |   |
|---------------------------------------------------------------------------------|--------|------------------|--------|--------|--------------------|--------|---------|---------------------|--------|
| **(in                  thousands)**                                             |   | **1-90****days** |   |   | **90-180****days** |   |    | **180-365****days** |   |
|                                                                            |   |             |   |   |               |   |    |                |   |
| Periodic                                                                        |   | $                | 5,243  |   |               | $      | (67,016 | )                   |   | $ | (305,598 | ) |
| Cumulative                                                                      |   |             |   |   |               |   | (61,773 | )                   |   |   | (367,371 | ) |
| Cumulative                  GAP as a percentageof                  total assets |   |             | 0.1    | %      |               |   | (1.6    | )%                  |   |   | (9.8 | )% |

----

**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

**PART        I - Item 4.  Controls and        Procedures**

----

**COMMUNITY        BANKS, INC. AND SUBSIDIARIES**

| **PART                  II - OTHER                  INFORMATION** |
|-------------------------------------------------------------------|

|   | **Item                    1 – Legal                    Proceedings** |
|--------|----------------------------------------------------------------------------|

**Item          1A – Risk Factors**

*During          the executory period of the pending merger with Susquehanna Bancshares,          Inc.,          employees may not be as focused on Community’s business as they have been in the          past*

|   | **Item                    2 – Unregistered Sales of Equity Securities and                    Use of Proceeds** |
|--------|----------------------------------------------------------------------------------------------------------------------|

|                                    |   | **Total                  Number of Shares****Purchased** |   |   | **Average                  Price****Paid****Per                  Share** |   |   | **Total                  Number of Shares Purchased****as                  Part of****Publicly                  Announced Plans or Programs** |   |   | **Capacity                  to****Purchase****More                  Shares Under Repurchase Program** |   |
|-----------------------------------------|--------|----------------------------------------------------------|--------|--------|--------------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------|--------|
|                                    |   |                                                     |   |   |                                                                     |   |   |                                                                                                                                               |   |   |                                                                                                  |   |
|  4/1/07                  - 4/30/07 |   |                                                     | 515    |   |                                                                     | $      | 24.20  |                                                                                                                                               |   |   | 515                                                                                                   |   |   |   | 41,600 |   |
|  5/1/07                  - 5/31/07 |   |                                                     | 509    |   |                                                                     |   | 31.84  |                                                                                                                                               |   |   | 509                                                                                                   |   |   |   | 41,600 |   |
|  6/1/07                  - 6/30/07 |   |                                                     | 319    |   |                                                                     |   | 33.60  |                                                                                                                                               |   |   | 319                                                                                                   |   |   |   | 41,600 |   |

----

|   | **PART                  II – Other Information                  (continued)** |
|--------|-------------------------------------------------------------------------------------|

|   | **Item                    3 – Defaults Upon Senior                    Securities** |
|--------|------------------------------------------------------------------------------------------|

|   | **Item                  4 – Submission of Matters to a Vote of Security                  Holders** |
|--------|----------------------------------------------------------------------------------------------------------|

| o   | To                  elect four (4) Class D directors to serve until the 2011 annual                  meeting of                  shareholders |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| **Name**                             | **For**    | **Withhold                  Authority** |
|--------------------------------------|------------|-----------------------------------------|
| Scott                  J. Newkam     | 17,343,480 | 923,572                                 |
| Robert                  W. Rissinger | 17,373,151 | 893,901                                 |
| Christine                  Sears     | 17,313,584 | 953,468                                 |
| Dale                  M. Weaver      | 17,386,415 | 880,637                                 |

**Item        5 – Other Information**

|   | **Item                  6 –Exhibits** |
|--------|---------------------------------------------|

| 2.1    | Agreement                  and Plan of Merger between Susquehanna Bancshares, Inc. and Community                  Banks, Inc., dated as of April 30, 2007. (Incorporated by reference                  to                  Exhibit 2.1, attached to Community’s Current Report on Form 8-K filed with                  the Commission on May 1, 2007)                                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    | Amended                  and Restated Articles of Incorporation  (Incorporated by                  reference to Appendix A to Community’s 2006 Proxy Statement filed with the                  Commission on March 31, 2006)                                                                                                                                                                                                                                                                                   |
| 3.2    | Amended                  By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                  Community’s Current Report on Form 8-K filed with the Commission on                  December 14, 2006)                                                                                                                                                                                                                                                                                                       |
| 4      | Instruments                  defining the rights of the holders of trust capital securities                  sold by                  Community in March, 2007, 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   |   Amendment                  to Survivor Income Agreement and Split Dollar Addendum to Survivor                  Income                  Agreement between Community Banks, Inc., and Donald F. Holt. (Incorporated                  by reference to Exhibit 10.1, attached to Community’s Current Report on                  Form 8-K filed with the Commission on May 4, 2007)*                                                                                                                              |
| 10.2   |   Amendment                  to Survivor Income Agreement and Split Dollar Addendum to Survivor                  Income                  Agreement between CommunityBanks and Robert W. Lawley. (Incorporated                  by                  reference to Exhibit 10.2, attached to Community’s Current Report on Form                  8-K filed with the Commission on May 4, 2007)*                                                                                                                   |
| 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     | Section                  1350 Certifications (Chief Executive Officer and Chief Financial                  Officer)                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | *                  identifies a management contract or compensatory plan or                  arrangement                                                                                                                                                                                                                                                                                                                                                                                                                       |

----

| **SIGNATURES** |
|----------------|

| **COMMUNITY                  BANKS, INC.** |
|--------------------------------------------|

| (Registrant) |
|--------------|

| Date   | August                  8, 2007 |   | /s/    | Eddie                  L. Dunklebarger     |
|--------|---------------------------------|--------|--------|--------------------------------------------|
|   |                            |   |   | **Eddie                  L. Dunklebarger** |
|   |                            |   |   | Chairman                  and President    |
|   |                            |   |   | (Chief                  Executive Officer) |
|   |                            |   |   |                                       |
| Date   | August                  8, 2007 |   | /s/    | Donald                  F. Holt            |
|   |                            |   |   | **Donald                  F. Holt**        |
|   |                            |   |   | Executive                  Vice President  |
|   |                            |   |   | (Chief                  Financial Officer) |

|   | **EXHIBIT                  INDEX** |
|--------|------------------------------------|

| 2.1    | Agreement                  and Plan of Merger between Susquehanna Bancshares, Inc. and Community                  Banks, Inc., dated as of April 30, 2007. (Incorporated by reference                  to                  Exhibit 2.1, attached to Community’s Current Report on Form 8-K filed with                  the Commission on May 1, 2007)                                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    | Amended                  and Restated Articles of Incorporation  (Incorporated by                  reference to Appendix A to Community’s 2006 Proxy Statement filed with the                  Commission on March 31, 2006)                                                                                                                                                                                                                                                                                   |
| 3.2    | Amended                  By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                  Community’s Current Report on Form 8-K filed with the Commission on                  December 14, 2006)                                                                                                                                                                                                                                                                                                       |
| 4      | Instruments                  defining the rights of the holders of trust capital securities                  sold by                  Community in March, 2007, 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   |   Amendment                  to Survivor Income Agreement and Split Dollar Addendum to Survivor                  Income                  Agreement between Community Banks, Inc., and Donald F. Holt. (Incorporated                  by reference to Exhibit 10.1, attached to Community’s Current Report on                  Form 8-K filed with the Commission on May 4, 2007)*                                                                                                                              |
| 10.2   |   Amendment                  to Survivor Income Agreement and Split Dollar Addendum to Survivor                  Income                  Agreement between CommunityBanks and Robert W. Lawley. (Incorporated                  by                  reference to Exhibit 10.2, attached to Community’s Current Report on Form                  8-K filed with the Commission on May 4, 2007)*                                                                                                                   |
| 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     | Section                  1350 Certifications (Chief Executive Officer and Chief Financial                  Officer)                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | *                  identifies a management contract or compensatory plan or                  arrangement                                                                                                                                                                                                                                                                                                                                                                                                                       |

----