**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 March 31, 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                                                                   | 14-25 |
|                                              |                                                                                                   |   |
| Item                3.                            | Quantitative                and Qualitative Disclosures About Market                Risk               | 26 |
|                                              |                                                                                                   |   |
| Item                4.                            | Controls                and Procedures                                                                 | 27 |
|                                              |                                                                                                   |   |
|                                              |                                                                                                   |   |
| **PART                II - Other Information**    |                                                                                                   |
|                                              |                                                                                                   |   |
| Item                1.                            | Legal                Proceedings                                                                       | 28 |
|                                              |                                                                                                   |   |
| Item                1A.                           | Risk                Factors                                                                            | 28 |
|                                              |                                                                                                   |   |
| Item                2.                            | Unregistered                Sales of Equity Securities and Use                of Proceeds              | 28 |
|                                              |                                                                                                   |   |
| Item                3.                            | Defaults                Upon Senior Securities                                                         | 28 |
|                                              |                                                                                                   |   |
| Item                4.                            | Submission                of Matters to a Vote of Security                Holders                      | 28 |
|                                              |                                                                                                   |   |
| Item                5.                            | Other                Information                                                                       | 28 |
|                                              |                                                                                                   |   |
| Item                6.                            | Exhibits                                                                                               | 29 |
|                                              |                                                                                                   |   |
|                                              |                                                                                                   |   |
| **SIGNATURES**                                    | 30                                                                                                     |
|                                              |                                                                                                   |   |

----

**PART      I - FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM BALANCE SHEETS**

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

|                                                                                                                        |   | **March                31,** |      | **December                31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|---------------------------------|--------|
|                                                                                                                        |   | **2007**                     |      | **2006**                        |   |
| **ASSETS**                                                                                                                  |   |                         |      |                            |   |
|                                                                                                                        |   |                         |      |                            |   |
| Cash                and due from banks                                                                                      |   | $                            | 70,128    |                            | $      | 73,608 |   |
| Federal                funds sold                                                                                           |   |                         | 10,199    |                            |   | --- |   |
| Cash                and cash equivalents                                                                                    |   |                         | 80,327    |                            |   | 73,608 |   |
| Interest-bearing                deposits in other banks                                                                     |   |                         | 32,964    |                            |   | 3,561 |   |
| Trading                assets                                                                                               |   |                         | 146,094   |                            |   | --- |   |
| Investment                securities, available for sale                                                                    |   |                         | 499,747   |                            |   | 636,066 |   |
| Investment                securities, held to maturity (fair value approximates                $23,353 and $23,415)         |   |                         | 23,080    |                            |   | 23,070 |   |
| Loans,                net of allowance for loan losses of $24,379 and $23,626                                               |   |                         | 2,417,939 |                            |   | 2,347,263 |   |
| Premises                and equipment, net                                                                                  |   |                         | 46,261    |                            |   | 46,335 |   |
| Goodwill                and other intangible assets                                                                         |   |                         | 258,812   |                            |   | 259,406 |   |
| Accrued                interest receivable and other assets                                                                 |   |                         | 124,162   |                            |   | 107,061 |   |
| Total                assets                                                                                                 |   | $                            | 3,629,386 |                            | $      | 3,496,370 |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| **LIABILITIES**                                                                                                             |   |                         |      |                            |   |   |   |
|                                                                                                                        |   |                         |      |                            |   |   |   |
| Deposits                                                                                                                    |   |                         |      |                            |   |   |   |
| Non-interest                bearing                                                                                         |   | $                            | 367,917   |                            | $      | 368,329 |   |
| Interest                bearing                                                                                             |   |                         | 2,161,270 |                            |   | 2,144,853 |   |
| Total                deposits                                                                                               |   |                         | 2,529,187 |                            |   | 2,513,182 |   |
| Short-term                borrowings                                                                                        |   |                         | 67,747    |                            |   | 108,927 |   |
| Long-term                debt                                                                                               |   |                         | 438,196   |                            |   | 315,079 |   |
| Subordinated                debt                                                                                            |   |                         | 72,167    |                            |   | 51,548 |   |
| Accrued                interest payable and other liabilities                                                               |   |                         | 31,525    |                            |   | 21,473 |   |
| Total                liabilities                                                                                            |   |                         | 3,138,822 |                            |   | 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;                24,478,000 shares issued                                                                         |   |                         | 122,391   |                            |   | 122,391 |   |
| Surplus                                                                                                                     |   |                         | 373,335   |                            |   | 373,142 |   |
| Retained                Earnings                                                                                            |   |                         | 18,646    |                            |   | 17,609 |   |
| Accumulated                other comprehensive income (loss), net of tax                                                    |   |                         | 650       |                            |   | (1,806 | ) |
| Treasury                stock; 933,000 and 959,000 shares, at cost                                                          |   |                         | (24,458   | )                               |   | (25,175 | ) |
| Total                stockholders’ equity                                                                             |   |                         | 490,564   |                            |   | 486,161 |   |
| Total                liabilities and stockholders’ equity                                                             |   | $                            | 3,629,386 |                            | $      | 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** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                        |   | **March                31,**          |   |
|                                                                                                                        |   | **2007**                              |   | **2006** |   |
| **INTEREST                INCOME:**                                                                                         |   |                                  |   |   |   |
| Loans,                including fees                                                                                        |   | $                                     | 43,520 |   | $ | 39,101 |   |
| Investment                securities:                                                                                       |   |                                  |   |   |   |   |   |
| Taxable                                                                                                                     |   |                                  | 3,701  |   |   | 4,413 |   |
| Tax                exempt                                                                                                   |   |                                  | 2,632  |   |   | 2,368 |   |
| Dividends                                                                                                                   |   |                                  | 552    |   |   | 614 |   |
| Trading                account securities                                                                                   |   |                                  | 1,869  |   |   | --- |   |
| Other                                                                                                                       |   |                                  | 135    |   |   | 393 |   |
| Total                interest income                                                                                        |   |                                  | 52,409 |   |   | 46,889 |   |
|                                                                                                                        |   |                                  |   |   |   |   |   |
| **INTEREST                EXPENSE:**                                                                                        |   |                                  |   |   |   |   |   |
| Deposits                                                                                                                    |   |                                  | 18,886 |   |   | 13,421 |   |
| Short-term                borrowings                                                                                        |   |                                  | 1,564  |   |   | 696 |   |
| Long-term                debt                                                                                               |   |                                  | 4,500  |   |   | 5,111 |   |
| Subordinated                debt                                                                                            |   |                                  | 1,022  |   |   | 797 |   |
| Total                interest expense                                                                                       |   |                                  | 25,972 |   |   | 20,025 |   |
| Net                interest income                                                                                          |   |                                  | 26,437 |   |   | 26,864 |   |
| Provision                for loan losses                                                                                    |   |                                  | 1,300  |   |   | 500 |   |
| Net                interest income after provision for loan losses                                                          |   |                                  | 25,137 |   |   | 26,364 |   |
|                                                                                                                        |   |                                  |   |   |   |   |   |
| **NON-INTEREST                INCOME:**                                                                                     |   |                                  |   |   |   |   |   |
| Investment                management and trust services                                                                     |   |                                  | 1,445  |   |   | 1,013 |   |
| Service                charges on deposit accounts                                                                          |   |                                  | 2,996  |   |   | 2,531 |   |
| Other                service charges, commissions and fees                                                                  |   |                                  | 2,028  |   |   | 1,700 |   |
| Insurance                premium income and commissions                                                                     |   |                                  | 1,176  |   |   | 928 |   |
| Mortgage                banking activities                                                                                  |   |                                  | 548    |   |   | 468 |   |
| Earnings                on investment in life insurance                                                                     |   |                                  | 688    |   |   | 656 |   |
| Investment                security gains                                                                                    |   |                                  | 2      |   |   | 283 |   |
| Trading                activities gain                                                                                      |   |                                  | 146    |   |   | --- |   |
| Other                                                                                                                       |   |                                  | 591    |   |   | 805 |   |
| Total                non-interest income                                                                                    |   |                                  | 9,620  |   |   | 8,384 |   |
|                                                                                                                        |   |                                  |   |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                                                                                   |   |                                  |   |   |   |   |   |
| Salaries                and employee benefits                                                                               |   |                                  | 12,009 |   |   | 11,418 |   |
| Net                occupancy and equipment expense                                                                          |   |                                  | 3,794  |   |   | 3,512 |   |
| Marketing                expense                                                                                            |   |                                  | 505    |   |   | 575 |   |
| Telecommunications                expense                                                                                   |   |                                  | 525    |   |   | 551 |   |
| Amortization                of intangibles                                                                                  |   |                                  | 661    |   |   | 654 |   |
| Other                                                                                                                       |   |                                  | 4,647  |   |   | 3,823 |   |
| Total                non-interest expenses                                                                                  |   |                                  | 22,141 |   |   | 20,533 |   |
|                                                                                                                        |   |                                  |   |   |   |   |   |
| Income                before income taxes                                                                                   |   |                                  | 12,616 |   |   | 14,215 |   |
| Income                taxes                                                                                                 |   |                                  | 2,970  |   |   | 3,646 |   |
| Net                income                                                                                                   |   | $                                     | 9,646  |   | $ | 10,569 |   |
| **CONSOLIDATED                PER SHARE DATA**                                                                              |   |                                  |   |   |   |   |   |
| Basic                earnings per share                                                                                     |   | $                                     | 0.41   |   | $ | 0.44 |   |
| Diluted                earnings per share                                                                                   |   | $                                     | 0.41   |   | $ | 0.44 |   |
| Dividends                declared                                                                                           |   | $                                     | 0.21   |   | $ | 0.19 |   |
| 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 Three Months Ended March 31, 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                                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   | 10,569       |   |       |   |   |   |   |   |   | 10,569 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (589   | ) |   |   |   |   | (589 | ) |
| Total                comprehensive income                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | 9,980 |   |
| Cash                dividends ($0.19 per share)                                                                             |   |            |   |       |   |        |   |         |    |                                      |   | (4,545       | )      |       |   |   |   |   |   |   | (4,545 | ) |
| 5%                stock dividend                                                                                            |   |            | 1,133  |       |   | 5,820       |   |         | 24,162  |                                      |   | (29,982      | )      |       |   |   |   |   |   |   | --- |   |
| Purchases                of treasury stock                                                                                  |   |            | (264   | )          |   |        |   |         |    |                                      |   |         |   |       |   |   |   | (7,349 | ) |   | (7,349 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 47     |       |   |        |   |         |    |                                      |   | (653         | )      |       |   |   |   | 1,292 |   |   | 639 |   |
| Compensation                and tax benefits from employee stock transactions                                               |   |            |   |       |   |        |   |         | 189     |                                      |   |         |   |       |   |   |   |   |   |   | 189 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                March 31, 2006**                                                                                  |   |            | 23,831 |       | $      | 122,392     |   | $            | 372,178 |                                      | $      | 2,420        |   | $          | (4,368 | ) | $ | (17,035 | ) | $ | 475,587 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                January 1, 2007**                                                                                 |   |            | 23,519 |       | $      | 122,391     |   | $            | 373,142 |                                      | $      | 17,609       |   | $          | (1,806 | ) | $ | (25,175 | ) | $ | 486,161 |   |
| Adjustment                to opening balance, net of tax, for the adoption of SFAS                No. 159 (see Note 4)      |   |            | ---    |       |   | ---         |   |         | ---     |                                      |   | (3,059       | )      |       | 3,059  |   |   | --- |   |   | --- |   |
| Adjusted                opening balance, January                1, 2007                                                     |   |            | 23,519 |       |   | 122,391     |   |         | 373,142 |                                      |   | 14,550       |   |       | 1,253  |   |   | (25,175 | ) |   | 486,161 |   |
| Comprehensive                income:                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   | 9,646        |   |       |   |   |   |   |   |   | 9,646 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (603   | ) |   |   |   |   | (603 | ) |
| Total                comprehensive income                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | 9,043 |   |
| Cash                dividends ($0.21 per share)                                                                             |   |            |   |       |   |        |   |         |    |                                      |   | (4,944       | )      |       |   |   |   |   |   |   | (4,944 | ) |
| Purchases                of treasury stock                                                                                  |   |            | (12    | )          |   |        |   |         |    |                                      |   |         |   |       |   |   |   | (298 | ) |   | (298 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 38     |       |   |        |   |         |    |                                      |   | (606         | )      |       |   |   |   | 1,015 |   |   | 409 |   |
| Compensation                and tax benefits from employee stock transactions                                               |   |            |   |       |   |        |   |         | 193     |                                      |   |         |   |       |   |   |   |   |   |   | 193 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                March 31, 2007**                                                                                  |   |            | 23,545 |       | $      | 122,391     |   | $            | 373,335 |                                      | $      | 18,646       |   | $          | 650    |   | $ | (24,458 | ) | $ | 490,564 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| 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)**

|                                                                                                                        |   | **Three                Months Ended** |     |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|----------|
|                                                                                                                        |   | **March                31,**          |     |
|                                                                                                                        |   | **2007**                              |     | **2006** |   |
| **Operating                Activities:**                                                                                    |   |                                  |     |   |   |
| Net                income                                                                                                   |   | $                                     | 9,646    |   | $ | 10,569 |   |
| Adjustments                to reconcile net income to net cash                                                              |   |                                  |     |   |   |   |   |
| provided                by operating activities:                                                                            |   |                                  |     |   |   |   |   |
| Provision                for loan losses                                                                                    |   |                                  | 1,300    |   |   | 500 |   |
| Depreciation                and amortization                                                                                |   |                                  | 1,830    |   |   | 1,817 |   |
| Stock                option expense                                                                                         |   |                                  | 193      |   |   | 118 |   |
| Net                amortization (accretion) of securities                                                                   |   |                                  | (41      | ) |   | 144 |   |
| Realized                gains on sales of available-for-sale securities, net                                                |   |                                  | (2       | ) |   | (283 | ) |
| Loans                originated for sale                                                                                    |   |                                  | (7,178   | ) |   | (1,335 | ) |
| Proceeds                from sales of loans held for sale                                                                   |   |                                  | 5,813    |   |   | 711 |   |
| Gains                on loan sales                                                                                          |   |                                  | (584     | ) |   | (14 | ) |
| Earnings                on investment in life insurance                                                                     |   |                                  | (688     | ) |   | (656 | ) |
| Net                change in fair value of trading assets                                                                   |   |                                  | (312     | ) |   | --- |   |
| Net                change in other assets and liabilities, net                                                              |   |                                  | (6,852   | ) |   | 9,384 |   |
| Net                cash provided by operating activities                                                                    |   |                                  | 3,125    |   |   | 20,955 |   |
|                                                                                                                        |   |                                  |     |   |   |   |   |
| **Investing                Activities:**                                                                                    |   |                                  |     |   |   |   |   |
| Net                change in interest-bearing deposits in other banks                                                       |   |                                  | (29,403  | ) |   | (71,447 | ) |
| Maturities                and prepayments in trading assets                                                                 |   |                                  | 5,171    |   |   | --- |   |
| Activity                in available-for-sale securities:                                                                   |   |                                  |     |   |   |   |   |
| Sales                                                                                                                       |   |                                  | 33,313   |   |   | 38,557 |   |
| Maturities,                prepayments and calls                                                                            |   |                                  | 14,229   |   |   | 13,030 |   |
| Purchases                                                                                                                   |   |                                  | (62,295  | ) |   | (12,593 | ) |
| Net                increase in total loans                                                                                  |   |                                  | (71,493  | ) |   | (49,726 | ) |
| Proceeds                from sale of loans                                                                                  |   |                                  | 1,441    |   |   | --- |   |
| Additions                to premises and equipment                                                                          |   |                                  | (1,096   | ) |   | (1,261 | ) |
| Net                cash used in investing activities                                                                        |   |                                  | (110,133 | ) |   | (83,440 | ) |
|                                                                                                                        |   |                                  |     |   |   |   |   |
| **Financing                Activities:**                                                                                    |   |                                  |     |   |   |   |   |
| Net                increase in deposits                                                                                     |   |                                  | 16,005   |   |   | 79,498 |   |
| Net                change in short-term borrowings                                                                          |   |                                  | (41,180  | ) |   | (32,249 | ) |
| Proceeds                from issuance of long-term debt                                                                     |   |                                  | 145,619  |   |   | 75,620 |   |
| Repayment                of long-term debt                                                                                  |   |                                  | (1,884   | ) |   | (42,444 | ) |
| Cash                dividends and cash paid in lieu of fractional shares                                                    |   |                                  | (4,944   | ) |   | (4,545 | ) |
| Purchases                of treasury stock                                                                                  |   |                                  | (298     | ) |   | (7,349 | ) |
| Tax                benefits from employee stock transactions                                                                |   |                                  | ---      |   |   | 71 |   |
| Proceeds                from issuance of common stock                                                                       |   |                                  | 409      |   |   | 639 |   |
| Net                cash provided by financing activities                                                                    |   |                                  | 113,727  |   |   | 69,241 |   |
|                                                                                                                        |   |                                  |     |   |   |   |   |
| Net                change in cash and cash equivalents                                                                      |   |                                  | 6,719    |   |   | 6,756 |   |
| Cash                and cash equivalents at beginning of period                                                             |   |                                  | 73,608   |   |   | 76,820 |   |
| Cash                and cash equivalents at end of period                                                                   |   | $                                     | 80,327   |   | $ | 83,576 |   |
|                                                                                                                        |
| 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.      **
**Summary      of Significant Accounting Policies**

***Basis      of Presentation***

***Trading      Activities -***

***Earnings      Per Share -***

|                                                         |   | **Three                Months Ended****March                31,** |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                         |   | **2007**                                                          |   | **2006** |   |
| Net                income                                    |   | $                                                                 | 9,646  |   | $ | 10,569 |   |
|                                                         |   |                                                              |   |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |                                                              | 23,535 |   |   | 23,974 |   |
| Effect                of dilutive stock options              |   |                                                              | 148    |   |   | 215 |   |
| Weighted                average shares outstanding (diluted) |   |                                                              | 23,683 |   |   | 24,189 |   |
|                                                         |   |                                                              |   |   |   |   |   |
| Per                share information:                        |   |                                                              |   |   |   |   |   |
| Basic                earnings per share                      |   | $                                                                 | 0.41   |   | $ | 0.44 |   |
| Diluted                earnings per share                    |   |                                                              | 0.41   |   |   | 0.44 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)**

**(Unaudited)**

***Comprehensive      Income (Loss)***

|                                                                         |   | **Three                Months Ended****March                31,** |   |
|------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                                                         |   | **2007**                                                          |   | **2006** |   |
| Unrealized                holding losses on available-for-sale securities    |   | $                                                                 | (926   | ) | $ | (623 | ) |
| Reclassification                adjustments for gains included in net income |   |                                                              | (2     | ) |   | (283 | ) |
| Net                unrealized losses                                         |   |                                                              | (928   | ) |   | (906 | ) |
| Tax                effect                                                    |   |                                                              | 325    |   |   | 317 |   |
|                                                                         |   |                                                              |   |   |   |   |   |
| Net-of-tax                amount                                             |   | $                                                                 | (603   | ) | $ | (589 | ) |

|                                                                     |   | **March                31,****2007** |   | **December                31,****2006** |   |
|--------------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------|--------|
| Net                unrealized gain on available-for-sale securities |   | $                                    | 4,212  |                                    | $      | 434 |   |
| Tax                effect                                                |   |                                 | (1,474 | )                                       |   | (152 | ) |
| Net-of-tax                amount                                         |   |                                 | 2,738  |                                    |   | 282 |   |
|                                                                     |   |                                 |   |                                    |   |   |   |
| Underfunded                pension liability                             |   |                                 | (3,213 | )                                       |   | (3,213 | ) |
| Tax                effect                                                |   |                                 | 1,125  |                                    |   | 1,125 |   |
| Net-of-tax                amount                                         |   |                                 | (2,088 | )                                       |   | (2,088 | ) |
|                                                                     |   |                                 |   |                                    |   |   |   |
| Accumulated                other comprehensive income (loss)             |   | $                                    | 650    |                                    | $      | (1,806 | ) |

***Accounting        Developments        -***

***SFAS        No. 159***
***-***
*The        Fair Value Option for Financial Assets and Financial        Liabilities*

----

**Community        Banks, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)**

**(Unaudited)**

***SFAS        No. 157***
***-***
*Fair        Value Measurements*

***FIN      48 -***
*Accounting      for Uncertainty in Income Taxes*

***EITF      06-11 -***

***EITF      06-10 -***

**2.      **
**Subsequent      Event / Pending Merger:**

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)**

**(Unaudited)**

**3.      **
**Subsequent      Event / Acquisitions:**
** **

**4.        **
**Fair        Value:**

***Fair        Value Measurements (SFAS No. 157)***

| Debt                  securities:                          |   |   |    |
|------------------------------------------------------------|--------|--------|---------|
| Federal                  agency                            |   | $      | 34,109  |   |
| Mortgage-backed,                  primarily federal agency |   |   | 108,474 |   |
| Corporate                                                  |   |   | 3,511   |   |
|                                                       |   | $      | 146,094 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)**

**(Unaudited)**

| Description                                   |        | Total  |    | Level                I  |   | Level                II  |   | Level                III  |    |
|----------------------------------------------------|--------|-------------|---------|------------------------------|--------|-------------------------------|--------|--------------------------------|---------|
| Trading                assets                 |   | $           | 146,094 |                         | $      | 146,094                       |   | $                              | ---     |   | $ | --- |   |
| Available-for-sale                securities  |   |        | 499,747 |                         |   | ---                           |   |                           | 499,747 |   |   | --- |   |

***Fair        Value Option (SFAS No. 159)***

*The        Fair Value Option for Financial Assets and Financial Liabilities*

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)**

**(Unaudited)**

| (in                thousands)                                                |   | January                1, 2007 (Carrying value prior to adoption) |    | Cumulative-effect                adjustment to January 1, 2007 Retained earnings-loss |   | January                1, 2007 Fair Value (Carrying value after adoption) |   |
|------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|---------|---------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                                                         |   |                                                              |    |                                                                                  |   |                                                                      |   |
| Available-for-sale                debt securities                            |   | $                                                                 | 151,048 |                                                                                  | $      | 4,707                                                                     |   | $ | 151,048 |   |
| Pretax                cumulative effect of adopting fair value accounting    |   |                                                              |    |                                                                                  | $      | 4,707                                                                     |   |   |   |   |
| After-tax                cumulative effect of adopting fair value accounting |   |                                                              |    |                                                                                  | $      | 3,059                                                                     |   |   |   |   |

**5.      **
**Guarantees:**

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS, (continued)**

**(Unaudited)**

**6.      **
**Long-Term      Debt:**

| (in                thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **March                31, 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 4.58%.                Advances totaling $354 million are convertible advances. Convertible                advances with an initial fixed-rate period are convertible to variable                rate at the option of the FHLB. Convertible advances with an initial                variable-rate period at LIBOR-100 basis points are convertible to                fixed-rate or to a variable rate tied to a spread over LIBOR. Under                the                terms of the arrangements, if the FHLB opts to convert advances to                variable rate, Community has the ability to prepay the advances at                no                penalty. At the current time no advances have been converted, and                remain                at the initial period rate. |   | **$**                             | **438,196** |                                 | $      | 315,079 |   |

| March                31, 2008 |   | $      | 52,439  |   |
|-------------------------------|--------|--------|---------|--------|
| March                31, 2009 |   |   | 41,822  |   |
| March                31, 2010 |   |   | 89      |   |
| March                31, 2011 |   |   | 30,090  |   |
| March                31, 2012 |   |   | 5,088   |   |
| Thereafter                    |   |   | 308,668 |   |
|                          |   | $      | 438,196 |   |

**7.      **
**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 |
|--------------------|------------------------------------------------------------------------------------------------------|

| §   | Adoption                of Fair Value Accounting |
|--------------------|--------------------------------------------------|

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

----

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

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

| ·   | *Adoption                of Fair Value Accounting* |
|--------------------|----------------------------------------------------|

----

**GAAP      versus Non-GAAP**

**SUMMARY      OF FINANCIAL AND OPERATING RESULTS**

**Overview**

----

|                                                         |   | **Three                Months Ended****March                31,** |      |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------|-----------|
| (Dollars                in thousands, except per share data) |   | **2007**                                                          |      | **2006** |   |
| Net                operating (tangible) income               |   | $                                                                 | 10,075    |   | $ | 10,994 |   |
| Average                tangible assets                       |   | $                                                                 | 3,284,976 |   | $ | 3,124,522 |   |
| Average                tangible equity                       |   | $                                                                 | 229,261   |   | $ | 221,552 |   |
| Operating                return on average tangible assets   |   |                                                              | 1.24      | % |   | 1.43 | % |
| Operating                return on average tangible equity   |   |                                                              | 17.82     | % |   | 20.12 | % |
| Tangible                book value at end of period          |   | $                                                                 | 9.91      |   | $ | 9.19 |   |

----

**MERGERS**

**BALANCE      SHEET**

|                                                            |   | **March** **31,** |      | **Change** |   |
|-----------------------------------------------------------------|--------|------------------------|-----------|------------|--------|
|                                                            |   | **2007**               |      | **2006**   |   | **Volume** | ** ** | ** %** |   |
| Cash                and due from banks                          |   | $                      | 55,542    |       | $      | 59,25335,187 |   | $ | (3,711 | ) |   | (6 | )% |
| Federal                funds sold and interest-bearing deposits |   |                   | 10,701    |       |   | 34,885 |   |   | (24,184 | ) |   | (69 | )% |
| Investments                and trading assets                   |   |                   | 682,395   |       |   | 613,891 |   |   | 68,504 |   |   | 11 | % |
| Loans                                                           |   |                   | 2,404,530 |       |   | 2,289,979 |   |   | 114,551 |   |   | 5 | % |
| Allowance                for loan losses                        |   |                   | (24,022   | )     |   | (23,172 | )  |   | (850 | )  |   | 4 | % |
| Net                loans                                        |   |                   | 2,380,508 |       |   | 2,266,807 |   |   | 113,701 |   |   | 5 | % |
| Goodwill                and identifiable intangible assets      |   |                   | 259,083   |       |   | 258,689 |   |   | 394 |   |   | --- |   |
| Other                assets                                     |   |                   | 155,830   |       |   | 149,686 |   |   | 6,144 |   |   | 4 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Total                assets                                     |   | $                      | 3,544,059 |       | $      | 3,383,211 |   | $ | 160,848 |   |   | 5 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Non-interest                bearing deposits                    |   | $                      | 340,580   |       | $      | 373,637 |   | $ | (33,057 | ) |   | (9 | )% |
| Interest-bearing                deposits                        |   |                   | 2,121,561 |       |   | 1,928,261 |   |   | 193,300 |   |   | 10 | % |
| Short-term                borrowings                            |   |                   | 124,985   |       |   | 68,524 |   |   | 56,461 |   |   | 82 | % |
| Long-term                debt                                   |   |                   | 391,196   |       |   | 467,010 |   |   | (75,814 | ) |   | (16 | )% |
| Subordinated                debt                                |   |                   | 56,817    |       |   | 44,674 |   |   | 12,143 |   |   | 27 | % |
| Other                liabilities                                |   |                   | 22,122    |       |   | 22,598 |   |   | (476 | ) |   | (2 | )% |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                |   |                   | 3,057,261 |       |   | 2,904,704 |   |   | 152,557 |   |   | 5 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity                       |   |                   | 486,798   |       |   | 478,507 |   |   | 8,291 |   |   | 2 | % |
|                                                            |   |                   |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders’ equity |   | $                      | 3,544,059 |       | $      | 3,383,211 |   | $ | 160,848 |   |   | 5 | % |

----

|                                   |   |     |      | **Change** |   |
|----------------------------------------|--------|----------|-----------|------------|--------|
|                                   |   | **2007** |      | **2006**   |   | **Amount** | ** ** | ** %** |   |
| Commercial                             |   | $        | 895,114   |       | $      | 808,108 |   | $ | 87,006 |   |   | 11 | % |
| Commercial                real estate  |   |     | 810,424   |       |   | 799,505 |   |   | 10,919 |   |   | 1 | % |
| Residential                real estate |   |     | 151,141   |       |   | 153,282 |   |   | (2,141 | ) |   | (1 | )% |
| Consumer                               |   |     | 547,851   |       |   | 529,084 |   |   | 18,767 |   |   | 4 | % |
| Total                                  |   | $        | 2,404,530 |       | $      | 2,289,979 |   | $ | 114,551 |   |   | 5 | % |

|                                      |   |     |      |     |   | **Change** |       |
|-------------------------------------------|--------|----------|-----------|----------|--------|------------|------------|
| (in                thousands)             |   | **2007** |      | **2006** |   | **Amount** | ** ** | ** %** |   |
| Demand                                    |   | $        | 340,580   |     | $      | 373,637    |       | $ | (33,057 | ) |   | (9 | )% |
| Savings                & NOW accounts |   |     | 858,469   |     |   | 826,742    |       |   | 31,727 |   |   | 4 | % |
| Time                                      |   |     | 994,824   |     |   | 900,698    |       |   | 94,126 |   |   | 10 | % |
| Time                $100,000 or more      |   |     | 268,268   |     |   | 200,821    |       |   | 67,447 |   |   | 34 | % |
|                                      |   | $        | 2,462,141 |     | $      | 2,301,898  |       | $ | 160,243 |   |   | 7 | % |

----

**RESULTS      OF OPERATIONS**

**Net      Interest Income**

| **Net                Interest Margin - Quarter to Date**                                |   |
|-----------------------------------------------------------------------------------------|--------|
|                                                                                    |   |   |   |   |   |
| (in                thousands)                                                           |   | March                31, 2007 |   | March                31, 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 |   | $ | 10,701 |   | $ | 135 |   |   | 5.12 | % | $ | 34,885 |   | $ | 393 |   |   | 4.57 | % |
| Investments                and trading assets                                           |   |   | 682,395 |   |   | 10,379 |   |   | 6.17 | % |   | 613,891 |   |   | 8,901 |   |   | 5.88 | % |
| Loans                - commercial                                                       |   |   | 895,114 |   |   | 17,792 |   |   | 8.06 | % |   | 808,108 |   |   | 15,145 |   |   | 7.60 | % |
| -                commercial real estate                                                 |   |   | 810,424 |   |   | 14,174 |   |   | 7.09 | % |   | 799,505 |   |   | 13,605 |   |   | 6.90 | % |
| -                residential real estate                                                |   |   | 151,141 |   |   | 2,397 |   |   | 6.43 | % |   | 153,282 |   |   | 2,297 |   |   | 6.08 | % |
| -                consumer                                                               |   |   | 547,851 |   |   | 9,785 |   |   | 7.24 | % |   | 528,976 |   |   | 8,526 |   |   | 6.54 | % |
| Total                earning assets                                                     |   | $ | 3,097,626 |   | $ | 54,662 |   |   | 7.16 | % | $ | 2,938,647 |   | $ | 48,867 |   |   | 6.74 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      |   | $ | 858,469 |   | $ | 4,835 |   |   | 2.28 | % | $ | 826,742 |   | $ | 3,501 |   |   | 1.72 | % |
| -                time                                                                   |   |   | 1,263,092 |   |   | 14,051 |   |   | 4.51 | % |   | 1,101,519 |   |   | 9,920 |   |   | 3.65 | % |
| Short-term                borrowings                                                    |   |   | 124,985 |   |   | 1,564 |   |   | 5.07 | % |   | 68,524 |   |   | 696 |   |   | 4.12 | % |
| Long-term                debt                                                           |   |   | 391,196 |   |   | 4,500 |   |   | 4.67 | % |   | 467,010 |   |   | 5,111 |   |   | 4.44 | % |
| Subordinated                debt                                                        |   |   | 56,817 |   |   | 1,022 |   |   | 7.29 | % |   | 44,674 |   |   | 797 |   |   | 7.24 | % |
| Total                interest-bearing liabilities                                       |   | $ | 2,694,559 |   | $ | 25,972 |   |   | 3.91 | % | $ | 2,508,469 |   | $ | 20,025 |   |   | 3.24 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |   |   |   |   |   |   |   | 7.16 | % |   |   |   |   |   |   |   | 6.74 | % |
| Interest                expense to paying liabilities                                   |   |   |   |   |   |   |   |   | 3.91 | % |   |   |   |   |   |   |   | 3.24 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |   |   |   |   |   |   |   | 3.25 | % |   |   |   |   |   |   |   | 3.50 | % |
| Impact                of non-interest funds                                             |   |   |   |   |   |   |   |   | 0.51 | % |   |   |   |   |   |   |   | 0.48 | % |
| Net                interest margin                                                      |   |   |   |   | $ | 28,690 |   |   | 3.76 | % |   |   |   | $ | 28,842 |   |   | 3.98 | % |

| **o  ** | The                existence of a generally higher level of short-term interest rates                since                the first quarter of 2006 and the prolonged presence of an inverted                yield                curve throughout most of 2006 and into the opening quarter of 2007.                Interest rate trends contributed to a 42 basis point increase in                earning                asset yields between the two periods shown, but were more than offset                by a                more substantial 67 basis point increase in the cost of interest-bearing                liabilities. Consequently, interest spread declined by 25 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 first 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 the end of the first quarter                of                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 and the                increased relative weighting of these deposits as a funding                source. |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **o  ** | The                Federal Open Market Committee’s (FOMC) 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 reprice at higher                levels. |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Provision      for Loan Losses**

**Non-Interest      Income**

----

|                                                                                                               |   | **Three                Months Ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
| (in                thousands)                                                                                      |   | **2007**                                        |   | **2006** |   | **Increase****(Decrease)** |   |
| Investment                management and trust services                                                            |   | $                                               | 1,445  |   | $ | 1,013 |   | $ | 432 |   |
| Service                charges on deposit accounts                                                                 |   |                                            | 2,996  |   |   | 2,531 |   |   | 465 |   |
| Other                service charges, commissions and fees                                                         |   |                                            | 2,028  |   |   | 1,700 |   |   | 328 |   |
| Insurance                premium income and commissions                                                            |   |                                            | 1,176  |   |   | 928 |   |   | 248 |   |
| Mortgage                banking activities                                                                         |   |                                            | 548    |   |   | 468 |   |   | 80 |   |
| Earnings                on investment in life insurance                                                            |   |                                            | 688    |   |   | 656 |   |   | 32 |   |
| Other                                                                                                              |   |                                            | 591    |   |   | 805 |   |   | (214 | ) |
| Total                non-interest income, excludinginvestment                security and trading activities gains |   | $                                               | 9,472  |   | $ | 8,101 |   | $ | 1,371 |   |

**Non-Interest      Expenses**

|                                          |   | **Three                Months Ended March 31,** |   |
|-----------------------------------------------|--------|-------------------------------------------------|--------|
| (in                thousands)                 |   | **2007**                                        |   | **2006** |   | **Increase****(Decrease)** |   |
| Salaries                and employee benefits |   | $                                               | 12,009 |   | $ | 11,418 |   | $ | 591 |   |
| Net                occupancy                  |   |                                            | 3,794  |   |   | 3,512 |   |   | 282 |   |
| Marketing                expense              |   |                                            | 505    |   |   | 575 |   |   | (70 | ) |
| Telecommunications                expense     |   |                                            | 525    |   |   | 551 |   |   | (26 | ) |
| Amortization                of intangibles    |   |                                            | 661    |   |   | 654 |   |   | 7 |   |
| Other                                         |   |                                            | 4,647  |   |   | 3,823 |   |   | 824 |   |
| Total                non-interest expenses    |   | $                                               | 22,141 |   | $ | 20,533 |   | $ | 1,608 |   |

----

**Income      Taxes**

** **

----

**CAPITAL**

|                                          | **March                31,****2007** | **Regulatory****Minimum** | **“Well****Capitalized”** |
|-----------------------------------------------|--------------------------------------|---------------------------|---------------------------------------|
| Leverage                ratio                 |                                 |                      |                                  |
| Community                Banks, Inc.          | 9.2%                                 | 4%                        | 5%                                    |
| CommunityBanks                                | 8.4%                                 | 4%                        | 5%                                    |
|                                          |                                 |                      |                                  |
| Tier                1 capital ratio           |                                 |                      |                                  |
| Community                Banks, Inc.          | 11.2%                                | 4%                        | 6%                                    |
| CommunityBanks                                | 10.2%                                | 4%                        | 6%                                    |
|                                          |                                 |                      |                                  |
| Total                risk-based capital ratio |                                 |                      |                                  |
| Community                Banks, Inc.          | 12.1%                                | 8%                        | 10%                                   |
| CommunityBanks                                | 11.2%                                | 8%                        | 10%                                   |

**CONTRACTUAL      OBLIGATIONS**

|                                       |   | **Payments                due by period** |      |
|--------------------------------------------|--------|-------------------------------------------|-----------|
|  (in                thousands)        |   |  **Total**                           |      | **Less                than****1                year** |   | **1-3****years** |   | **3-5****years** |   | **More                than****5                years** |   |
|                                       |   |                                      |      |   |   |   |   |   |   |   |   |
| Long-term                debt              |   | $                                         | 438,196   |   | $ | 52,439 |   | $ | 41,911 |   | $ | 35,178 |   | $ | 308,668 |   |
| Operating                lease obligations |   |                                      | 39,589    |   |   | 2,210 |   |   | 4,263 |   |   | 4,073 |   |   | 29,043 |   |
| Subordinated                debt           |   |                                      | 72,167    |   |   | --- |   |   | --- |   |   | --- |   |   | 72,167 |   |
| Time                deposits               |   |                                      | 1,278,667 |   |   | 926,621 |   |   | 289,074 |   |   | 60,380 |   |   | 2,592 |   |
|                                       |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                      |   | $                                         | 1,828,619 |   | $ | 981,270 |   | $ | 335,248 |   | $ | 99,631 |   | $ | 412,470 |   |

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**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)***

| (in                thousands)                                               |   | **Three                Months Ended****March                31,** |      |
|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------------|-----------|
|                                                                        |   | **2007**                                                          |      | **2006** |   |
| **Income                statement data:**                                   |   |                                                              |      |   |   |
|                                                                        |   |                                                         |      |    |   |
| **Net                income**                                               |   |                                                         |      |    |   |
| Net                income                                                   |   | $9,646                                                            |      | $10,569 |   |
| Amortization                of core deposit and other intangible assets (1) |   |  429                                                         |      |  425 |   |
| Net                operating (tangible) income                              |   | $10,075                                                           |      | $10,994 |   |
|                                                                        |   |                                                         |      |    |   |
| **Balance                sheet data:**                                      |   |                                                         |      |    |   |
|                                                                        |   |                                                         |      |    |   |
| **Average                assets**                                           |   |                                                         |      |    |   |
| Average                assets                                               |   | $3,544,059                                                        |      | $3,383,211 |   |
| Goodwill                                                                    |   |  (246,400)                                                   |      |  (244,775) |   |
| Core                deposit and other intangible assets                     |   |                                                              | (12,683   | ) |   | (13,914 | ) |
| Average                tangible assets                                      |   | $                                                                 | 3,284,976 |   | $ | 3,124,522 |   |
|                                                                        |   |                                                              |      |   |   |   |   |
| **Operating                return on average tangible assets**              |   |                                                              | 1.24      | % |   | 1.43 | % |
|                                                                        |   |                                                              |      |   |   |   |   |
| **Average                equity**                                           |   |                                                              |      |   |   |   |   |
| Average                equity                                               |   | $                                                                 | 486,798   |   | $ | 478,507 |   |
| Goodwill                                                                    |   |                                                              | (246,400  | ) |   | (244,775 | ) |
| Core                deposit and other intangible assets                     |   |                                                              | (12,683   | ) |   | (13,914 | ) |
| Deferred                taxes                                               |   |                                                              | 1,546     |   |   | 1,734 |   |
| Average                tangible equity                                      |   | $                                                                 | 229,261   |   | $ | 221,552 |   |
|                                                                        |   |                                                              |      |   |   |   |   |
| **Operating                return on average tangible equity**              |   |                                                              | 17.82     | % |   | 20.12 | % |
|                                                                        |   |                                                              |      |   |   |   |   |
| **At                end of quarter:**                                       |   |                                                              |      |   |   |   |   |
| **Total                assets**                                             |   |                                                              |      |   |   |   |   |
| Total                assets                                                 |   | $                                                                 | 3,629,386 |   | $ | 3,421,562 |   |
| Goodwill                                                                    |   |                                                              | (246,449  | ) |   | (244,760 | ) |
| Core                deposit and other intangible assets                     |   |                                                              | (12,363   | ) |   | (13,599 | ) |
| Total                tangible assets                                        |   | $                                                                 | 3,370,574 |   | $ | 3,163,203 |   |
|                                                                        |   |                                                              |      |   |   |   |   |
| **Total                equity**                                             |   |                                                              |      |   |   |   |   |
| Total                equity                                                 |   | $                                                                 | 490,564   |   | $ | 475,587 |   |
| Goodwill                                                                    |   |                                                              | (246,449  | ) |   | (244,760 | ) |
| Core                deposit and other intangible assets                     |   |                                                              | (12,363   | ) |   | (13,599 | ) |
| Deferred                taxes                                               |   |                                                              | 1,482     |   |   | 1,854 |   |
| Total                tangible equity                                        |   | $                                                                 | 233,234   |   | $ | 219,082 |   |
|                                                                        |   |                                                              |      |   |   |   |   |
| **Tangible                book value at end of period**                     |   | $                                                                 | 9.91      |   | $ | 9.19 |   |
|                                                                        |   |                                                              |      |   |   |   |   |
|  (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**                                               |   |             |    |               |   |                |   |                                 |    |      |   |   |   |   |   |   |
| Federal                funds sold                        |   | $                | 10,199  |               |   | ---                 |   |                                 | ---     |      |   | --- |   | $ | 10,199 |   |
| Interest-bearing                deposits in other banks  |   |             | 32,964  |               |   | ---                 |   |                                 | ---     |      |   | --- |   |   | 32,964 |   |
| Trading                assets                            |   |             | 7,162   |               |   | 6,909               |   |                                 | 13,059  |      |   | 118,964 |   |   | 146,094 |   |
| Investment                securities                     |   |             | 63,522  |               |   | 20,608              |   |                                 | 23,595  |      |   | 415,102 |   |   | 522,827 |   |
| Loans(1)                                                 |   |             | 749,291 |               |   | 102,502             |   |                                 | 190,591 |      |   | 1,399,934 |   |   | 2,442,318 |   |
| Earning                assets                            |   |             | 863,138 |               |   | 130,019             |   |                                 | 227,245 |      |   | 1,934,000 |   |   | 3,154,402 |   |
| Non-earning                assets                        |   |             | 630     |               |   | 571                 |   |                                 | 1,142   |      |   | 472,641 |   |   | 474,984 |   |
| Total                assets                              |   | $                | 863,768 |               | $      | 130,590             |   | $                                    | 228,387 |      | $      | 2,406,641 |   | $ | 3,629,386 |   |
| **Liabilities**                                          |   |             |    |               |   |                |   |                                 |    |      |   |   |   |   |   |   |
| Savings                                                  |   | $                | 241,737 |               | $      | 38,419              |   | $                                    | 76,806  |      | $      | 525,641 |   | $ | 882,603 |   |
| Time                                                     |   |             | 289,165 |               |   | 170,478             |   |                                 | 251,062 |      |   | 283,410 |   |   | 994,115 |   |
| Time                in denominations of $100,000 or more |   |             | 112,924 |               |   | 45,991              |   |                                 | 57,001  |      |   | 68,636 |   |   | 284,552 |   |
| Short-term                borrowings                     |   |             | 67,747  |               |   | ---                 |   |                                 | ---     |      |   | --- |   |   | 67,747 |   |
| Long-term                debt                            |   |             | 12,990  |               |   | 41,952              |   |                                 | 22,405  |      |   | 360,849 |   |   | 438,196 |   |
| Subordinated                debt                         |   |             | 23,196  |               |   | ---                 |   |                                 | ---     |      |   | 48,971 |   |   | 72,167 |   |
| Interest                bearing liabilities              |   |             | 747,759 |               |   | 296,840             |   |                                 | 407,274 |      |   | 1,287,507 |   |   | 2,739,380 |   |
| Other                liabilities and equity              |   |             | 11,038  |               |   | 11,038              |   |                                 | 22,075  |      |   | 845,855 |   |   | 890,006 |   |
| Total                liabilities and equity              |   | $                | 758,797 |               | $      | 307,878             |   | $                                    | 429,349 |      | $      | 2,133,362 |   | $ | 3,629,386 |   |

| **Interest                Sensitivity GAP**                                 |   |             |    |               |   |                |   |
|-----------------------------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------|--------|
| **(in                thousands)**                                           |   | **1-90****days** |    | **90-180****Days** |   | **180-365****days** |   |
|                                                                        |   |             |    |               |   |                |   |
| Periodic                                                                    |   | $                | 104,971 |               | $      | (177,288            | )      | $ | (200,962 | ) |
| Cumulative                                                                  |   |             |    |               |   | (72,317             | )      |   | (273,279 | ) |
| Cumulative                GAP as a percentageof                total assets |   |             | 2.9     | %                  |   | (2.0                | )%     |   | (7.5 | )% |

----

**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**

**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** |   |
|------------------|--------|--------------------------------------------------------|--------|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|
|             |   |                                                   |   |                                                                 |   |                                                                                                                                    |   |                                                                                              |   |
| 01/1/07-01/31/07 |   |                                                   | 13,069 |                                                                 | $      | 24.33                                                                                                                                   |   |                                                                                              | 13,069 |   |   | 41,600 |   |
| 02/1/07-02/28/07 |   |                                                   | 4,511  |                                                                 |   | 25.69                                                                                                                                   |   |                                                                                              | 4,511  |   |   | 41,600 |   |
| 03/1/07-03/31/07 |   |                                                   | 536    |                                                                 |   | 24.51                                                                                                                                   |   |                                                                                              | 536    |   |   | 41,600 |   |

**Item      3 - Defaults Upon Senior      Securities**

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

**Item      5 - Other Information**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**PART      II - OTHER INFORMATION**

**(continued)**

**Item      6 - Exhibits**

| 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                Bylaws (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 | Form                of First Amendment to Stock Option Agreement (Incorporated by reference                to                Exhibit 10.1 attached to Community’s Current Report on Form 8-K filed with                the Commission on January                31, 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)                                                                                                                                                                                                                                                                                                                                                                                     |

----

**SIGNATURES**

| Date   | May                10, 2007 |   | /s/    | Eddie                L. Dunklebarger     |
|--------|-----------------------------|--------|--------|------------------------------------------|
|   |                        |   |   | Eddie                L. Dunklebarger     |
|   |                        |   |   | Chairman                and President    |
|   |                        |   |   | (Chief                Executive Officer) |
|   |                        |   |   |                                     |
| Date   | May                10, 2007 |   | /s/    | Donald                F. Holt            |
|   |                        |   |   | Donald                F. Holt            |
|   |                        |   |   | Executive                Vice President  |
|   |                        |   |   | (Chief                Financial Officer) |

**EXHIBIT      INDEX**

| 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                Bylaws (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 | Form                of First Amendment to Stock Option Agreement (Incorporated by reference                to                Exhibit 10.1 attached to Community’s Current Report on Form 8-K filed with                the Commission on January 31, 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)                                                                                                                                                                                                                                                                                                                                                                                     |

----