**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 September 30, 2006**

**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                       | 7-14 |
|                                              |                                                                                                   |   |
| Item                2.                            | Management’s                Discussion and Analysis of Financial Condition                and    |   |
|                                              | Results                of Operations                                                                   | 15-27 |
|                                              |                                                                                                   |   |
| Item                3.                            | Quantitative                and Qualitative Disclosures About Market                Risk               | 28 |
|                                              |                                                                                                   |   |
| Item                4.                            | Controls                and Procedures                                                                 | 29 |
|                                              |                                                                                                   |   |
|                                              |                                                                                                   |   |
| **PART                II - Other Information**    |                                                                                                   |
|                                              |                                                                                                   |   |
| Item                1.                            | Legal                Proceedings                                                                       | 30 |
|                                              |                                                                                                   |   |
| Item                1A.                           | Risk                Factors                                                                            | 30 |
|                                              |                                                                                                   |   |
| Item                2.                            | Unregistered                Sales of Equity Securities and Use                of Proceeds              | 30 |
|                                              |                                                                                                   |   |
| Item                3.                            | Defaults                Upon Senior Securities                                                         | 30 |
|                                              |                                                                                                   |   |
| Item                4.                            | Submission                of Matters to a Vote of Security                Holders                      | 30 |
|                                              |                                                                                                   |   |
| Item                5.                            | Other                Information                                                                       | 30 |
|                                              |                                                                                                   |   |
| Item                6.                            | Exhibits                                                                                               | 31 |
|                                              |                                                                                                   |   |
|                                              |                                                                                                   |   |
| **SIGNATURES**                                    | 32                                                                                                     |
|                                              |                                                                                                   |   |

----

**PART      I - FINANCIAL INFORMATION**

**Item      1. Financial Statements**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM BALANCE SHEETS**

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

|                                                                                                                        |   | **September                30,** |      | **December                31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
|                                                                                                                        |   | **2006**                         |      | **2005**                        |   |
| **ASSETS**                                                                                                                  |   | **(Unaudited)**                  |      |                            |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| Cash                and due from banks                                                                                      |   | $                                | 71,418    |                            | $      | 76,820 |   |
| Federal                funds sold                                                                                           |   |                             | 21,401    |                            |   | --- |   |
| Cash                and cash equivalents                                                                                    |   |                             | 92,819    |                            |   | 76,820 |   |
| Interest-bearing                deposits in other banks                                                                     |   |                             | 34,774    |                            |   | 4,423 |   |
| Investment                securities, available for sale                                                                    |   |                             | 543,998   |                            |   | 605,555 |   |
| Investment                securities, held to maturity (fair value approximates                $23,160 and $22,563)         |   |                             | 23,059    |                            |   | 23,030 |   |
| Loans,                net of allowance for loan losses of $24,034 and $22,965                                               |   |                             | 2,324,125 |                            |   | 2,214,100 |   |
| Premises                and equipment, net                                                                                  |   |                             | 46,186    |                            |   | 43,283 |   |
| Goodwill                and other intangible assets                                                                         |   |                             | 259,505   |                            |   | 259,080 |   |
| Accrued                interest receivable and other assets                                                                 |   |                             | 106,742   |                            |   | 106,139 |   |
| Total                assets                                                                                                 |   | $                                | 3,431,208 |                            | $      | 3,332,430 |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| **LIABILITIES**                                                                                                             |   |                             |      |                            |   |   |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| Deposits                                                                                                                    |   |                             |      |                            |   |   |   |
| Non-interest                bearing                                                                                         |   | $                                | 346,043   |                            | $      | 375,835 |   |
| Interest                bearing                                                                                             |   |                             | 2,137,476 |                            |   | 1,918,532 |   |
| Total                deposits                                                                                               |   |                             | 2,483,519 |                            |   | 2,294,367 |   |
| Short-term                borrowings                                                                                        |   |                             | 57,566    |                            |   | 87,253 |   |
| Long-term                debt                                                                                               |   |                             | 336,954   |                            |   | 430,719 |   |
| Subordinated                debt                                                                                            |   |                             | 51,548    |                            |   | 30,928 |   |
| Accrued                interest payable and other liabilities                                                               |   |                             | 22,037    |                            |   | 12,490 |   |
| Total                liabilities                                                                                            |   |                             | 2,951,624 |                            |   | 2,855,757 |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| **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 and 23,314,000 shares issued                                                          |   |                             | 122,392   |                            |   | 116,572 |   |
| Surplus                                                                                                                     |   |                             | 372,710   |                            |   | 347,827 |   |
| Retained                Earnings                                                                                            |   |                             | 13,416    |                            |   | 27,031 |   |
| Accumulated                other comprehensive loss, net of tax                                                             |   |                             | (2,670    | )                               |   | (3,779 | ) |
| Treasury                stock; 1,000,000 and 399,000 shares, at cost                                                        |   |                             | (26,264   | )                               |   | (10,978 | ) |
| Total                stockholders’ equity                                                                             |   |                             | 479,584   |                            |   | 476,673 |   |
| Total                liabilities and stockholders’ equity                                                             |   | $                                | 3,431,208 |                            | $      | 3,332,430 |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM STATEMENTS OF      INCOME**

**(Unaudited)**

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

|                                                                                                                        |   | **Three                Months Ended** |   | **Nine                Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                        |   | **September                30,**      |   | **September                30,**     |   |
|                                                                                                                        |   | **2006**                              |   | **2005**                             |   | **2006** |   | **2005** |   |
| **INTEREST                INCOME:**                                                                                         |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Loans,                including fees                                                                                        |   | $                                     | 42,915 |                                 | $      | 35,325 |   | $ | 123,109 |   | $ | 74,370 |   |
| Investment                securities:                                                                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                     |   |                                  | 4,322  |                                 |   | 4,397 |   |   | 13,116 |   |   | 12,657 |   |
| Tax                exempt                                                                                                   |   |                                  | 2,205  |                                 |   | 2,299 |   |   | 6,778 |   |   | 6,687 |   |
| Dividends                                                                                                                   |   |                                  | 611    |                                 |   | 600 |   |   | 1,841 |   |   | 1,746 |   |
| Other                                                                                                                       |   |                                  | 390    |                                 |   | 857 |   |   | 1,426 |   |   | 1,591 |   |
| Total                interest income                                                                                        |   |                                  | 50,443 |                                 |   | 43,478 |   |   | 146,270 |   |   | 97,051 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **INTEREST                EXPENSE:**                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                    |   |                                  | 17,858 |                                 |   | 10,993 |   |   | 47,063 |   |   | 23,954 |   |
| Short-term                borrowings                                                                                        |   |                                  | 739    |                                 |   | 452 |   |   | 2,080 |   |   | 809 |   |
| Long-term                debt                                                                                               |   |                                  | 3,936  |                                 |   | 5,109 |   |   | 13,611 |   |   | 14,811 |   |
| Subordinated                debt                                                                                            |   |                                  | 972    |                                 |   | 527 |   |   | 2,707 |   |   | 1,481 |   |
| Total                interest expense                                                                                       |   |                                  | 23,505 |                                 |   | 17,081 |   |   | 65,461 |   |   | 41,055 |   |
| Net                interest income                                                                                          |   |                                  | 26,938 |                                 |   | 26,397 |   |   | 80,809 |   |   | 55,996 |   |
| Provision                for loan losses                                                                                    |   |                                  | 250    |                                 |   | 400 |   |   | 1,400 |   |   | 1,700 |   |
| Net                interest income after provision for loan losses                                                          |   |                                  | 26,688 |                                 |   | 25,997 |   |   | 79,409 |   |   | 54,296 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                INCOME:**                                                                                     |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Investment                management and trust services                                                                     |   |                                  | 968    |                                 |   | 796 |   |   | 3,069 |   |   | 1,741 |   |
| Service                charges on deposit accounts                                                                          |   |                                  | 3,037  |                                 |   | 2,799 |   |   | 8,423 |   |   | 6,620 |   |
| Other                service charges, commissions and fees                                                                  |   |                                  | 1,817  |                                 |   | 1,819 |   |   | 5,420 |   |   | 3,763 |   |
| Insurance                premium income and commissions                                                                     |   |                                  | 1,053  |                                 |   | 825 |   |   | 3,098 |   |   | 2,607 |   |
| Mortgage                banking activities                                                                                  |   |                                  | 533    |                                 |   | 660 |   |   | 1,581 |   |   | 1,723 |   |
| Earnings                on investment in life insurance                                                                     |   |                                  | 679    |                                 |   | 659 |   |   | 2,010 |   |   | 1,413 |   |
| Investment                security gains                                                                                    |   |                                  | 28     |                                 |   | 29 |   |   | 317 |   |   | 247 |   |
| Other                                                                                                                       |   |                                  | 725    |                                 |   | 279 |   |   | 1,849 |   |   | 560 |   |
| Total                non-interest income                                                                                    |   |                                  | 8,840  |                                 |   | 7,866 |   |   | 25,767 |   |   | 18,674 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                                                                                   |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Salaries                and employee benefits                                                                               |   |                                  | 11,611 |                                 |   | 11,808 |   |   | 34,280 |   |   | 26,537 |   |
| Net                occupancy                                                                                                |   |                                  | 3,452  |                                 |   | 3,364 |   |   | 10,350 |   |   | 7,788 |   |
| Merger,                conversion and restructuring expenses                                                                |   |                                  | ---    |                                 |   | 248 |   |   | --- |   |   | 8,205 |   |
| Marketing                expense                                                                                            |   |                                  | 354    |                                 |   | 528 |   |   | 1,194 |   |   | 1,439 |   |
| Telecommunications                expense                                                                                   |   |                                  | 542    |                                 |   | 309 |   |   | 1,659 |   |   | 870 |   |
| Amortization                of intangibles                                                                                  |   |                                  | 659    |                                 |   | 641 |   |   | 2,015 |   |   | 728 |   |
| Other                                                                                                                       |   |                                  | 4,554  |                                 |   | 4,186 |   |   | 12,905 |   |   | 9,322 |   |
| Total                non-interest expenses                                                                                  |   |                                  | 21,172 |                                 |   | 21,084 |   |   | 62,403 |   |   | 54,889 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Income                before income taxes                                                                                   |   |                                  | 14,356 |                                 |   | 12,779 |   |   | 42,773 |   |   | 18,081 |   |
| Income                taxes                                                                                                 |   |                                  | 3,798  |                                 |   | 2,447 |   |   | 11,142 |   |   | 3,401 |   |
| Net                income                                                                                                   |   | $                                     | 10,558 |                                 | $      | 10,332 |   | $ | 31,631 |   | $ | 14,680 |   |
| **CONSOLIDATED                PER SHARE DATA**                                                                              |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                                                                                     |   | $                                     | 0.45   |                                 | $      | 0.42 |   | $ | 1.34 |   | $ | 0.87 |   |
| Diluted                earnings per share                                                                                   |   | $                                     | 0.45   |                                 | $      | 0.42 |   | $ | 1.32 |   | $ | 0.86 |   |
| Dividends                declared                                                                                           |   | $                                     | 0.20   |                                 | $      | 0.18 |   | $ | 0.59 |   | $ | 0.52 |   |
|                                                                                                                        |   |                                  |   |
| 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 Nine Months Ended September 30, 2006 and 2005**

**(Unaudited:      Dollars in Thousands)**

|                                                                                                                        |   | **Outstanding** |   | **Common** |   |        |   | **Retained** |    | **Accumulated****Other****Comprehensive** |   | **Treasury** |   | **Total**  |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|-------------|--------|--------------|---------|-------------------------------------------|--------|--------------|--------|------------|--------|
|                                                                                                                        |   | **Shares**      |   | **Stock**  |   | **Surplus** |   | **Earnings** |    | **Income                (Loss)**          |   | **Stock**    |   | **Equity** |   |
| **Balance,                January 1, 2005**                                                                                 |   |            | 12,236 |       | $      | 62,107      |   | $            | 73,304  |                                      | $      | 18,134       |   | $          | 3,211  |   | $ | (4,415 | ) | $ | 152,341 |   |
| Comprehensive                income:                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   | 14,680       |   |       |   |   |   |   |   |   | 14,680 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (1,740 | ) |   |   |   |   | (1,740 | ) |
| Change                in unfunded pension liability, net of tax                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (90    | ) |   |   |   |   | (90 | ) |
| Total                comprehensive income                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | 12,850 |   |
| Cash                dividends ($0.52 per share)                                                                             |   |            |   |       |   |        |   |         |    |                                      |   | (8,859       | )      |       |   |   |   |   |   |   | (8,859 | ) |
| Purchases                of treasury stock                                                                                  |   |            | (339   | )          |   |        |   |         |    |                                      |   |         |   |       |   |   |   | (9,354 | ) |   | (9,354 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 345    |       |   | 196         |   |         | 873     |                                      |   | (2,339       | )      |       |   |   |   | 7,764 |   |   | 6,494 |   |
| Tax                benefits from employee stock transactions                                                                |   |            |   |       |   |        |   |         | 404     |                                      |   |         |   |       |   |   |   |   |   |   | 404 |   |
| Acquisition                of PennRock FinancialServices                Corp.:                                              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Common                stock issued                                                                                          |   |            | 10,854 |       |   | 54,272      |   |         | 269,733 |                                      |   |         |   |       |   |   |   |   |   |   | 324,005 |   |
| Fair                value of stock options                                                                                  |   |            |   |       |   |        |   |         | 3,079   |                                      |   |         |   |       |   |   |   |   |   |   | 3,079 |   |
| Other                                                                                                                       |   |            |   |       |   |        |   |         | 324     |                                      |   | (324         | )      |       |   |   |   |   |   |   | --- |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                September 30, 2005**                                                                              |   |            | 23,096 |       | $      | 116,575     |   | $            | 347,717 |                                      | $      | 21,292       |   | $          | 1,381  |   | $ | (6,005 | ) | $ | 480,960 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                January 1, 2006**                                                                                 |   |            | 22,915 |       | $      | 116,572     |   | $            | 347,827 |                                      | $      | 27,031       |   | $          | (3,779 | ) | $ | (10,978 | ) | $ | 476,673 |   |
| Comprehensive                income:                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   | 31,631       |   |       |   |   |   |   |   |   | 31,631 |   |
| Unrealized                gain on securities, net of reclassification adjustment and tax                effect              |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | 1,109  |   |   |   |   |   | 1,109 |   |
| Total                comprehensive income                                                                                   |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | 32,740 |   |
| Cash                dividends ($0.59 per share)                                                                             |   |            |   |       |   |        |   |         |    |                                      |   | (13,973      | )      |       |   |   |   |   |   |   | (13,973 | ) |
| 5%                stock dividend                                                                                            |   |            | 1,133  |       |   | 5,820       |   |         | 24,162  |                                      |   | (29,982      | )      |       |   |   |   |   |   |   | --- |   |
| Purchases                of treasury stock                                                                                  |   |            | (668   | )          |   |        |   |         |    |                                      |   |         |   |       |   |   |   | (17,922 | ) |   | (17,922 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                      |   |            | 98     |       |   |        |   |         |    |                                      |   | (1,291       | )      |       |   |   |   | 2,636 |   |   | 1,345 |   |
| Compensation                and tax benefits from employee stock transactions                                               |   |            |   |       |   |        |   |         | 721     |                                      |   |         |   |       |   |   |   |   |   |   | 721 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                September 30, 2006**                                                                              |   |            | 23,478 |       | $      | 122,392     |   | $            | 372,710 |                                      | $      | 13,416       |   | $          | (2,670 | ) | $ | (26,264 | ) | $ | 479,584 |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
|                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated interim                financial statements. |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED      INTERIM STATEMENTS OF CASH      FLOWS**

**(Unaudited)**

**(Dollars      in thousands)**

|                                                                                                                        |   | **Nine                Months Ended** |     |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                                                                        |   | **September                30,**     |     |
|                                                                                                                        |   | **2006**                             |     | **2005** |   |
| **Operating                Activities:**                                                                                    |   |                                 |     |   |   |   |   |
| Net                income                                                                                                   |   | $                                    | 31,631   |   | $ | 14,680 |   |
| Adjustments                to reconcile net income to net cash                                                              |   |                                 |     |   |   |   |   |
| provided                by operating activities:                                                                            |   |                                 |     |   |   |   |   |
| Provision                for loan losses                                                                                    |   |                                 | 1,400    |   |   | 1,700 |   |
| Depreciation                and amortization                                                                                |   |                                 | 5,475    |   |   | 3,446 |   |
| Stock                option expense                                                                                         |   |                                 | 478      |   |   | --- |   |
| Net                amortization of securities                                                                               |   |                                 | 321      |   |   | 831 |   |
| Realized                gains on sales of available-for-sale securities, net                                                |   |                                 | (317     | ) |   | (247 | ) |
| Loans                originated for sale                                                                                    |   |                                 | (8,665   | ) |   | (5,801 | ) |
| Proceeds                from sales of loans held for sale                                                                   |   |                                 | 6,444    |   |   | 4,541 |   |
| Gains                on loan sales                                                                                          |   |                                 | (599     | ) |   | (179 | ) |
| Earnings                on investment in life insurance                                                                     |   |                                 | (2,010   | ) |   | (1,413 | ) |
| Net                change in other assets                                                                                   |   |                                 | 1,357    |   |   | 8,087 |   |
| Net                change in accrued interest payable and other liabilities                                                 |   |                                 | 9,547    |   |   | (8,811 | ) |
| Tax                benefits from employee stock transactions                                                                |   |                                 | ---      |   |   | 404 |   |
| Net                cash provided by operating activities                                                                    |   |                                 | 45,062   |   |   | 17,238 |   |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| **Investing                Activities:**                                                                                    |   |                                 |     |   |   |   |   |
| Net                change in interest-bearing deposits in other banks                                                       |   |                                 | (30,351  | ) |   | (16,793 | ) |
| Activity                in available-for-sale securities:                                                                   |   |                                 |     |   |   |   |   |
| Sales                                                                                                                       |   |                                 | 64,914   |   |   | 282,857 |   |
| Maturities,                prepayments and calls                                                                            |   |                                 | 43,852   |   |   | 49,670 |   |
| Purchases                                                                                                                   |   |                                 | (45,518  | ) |   | (84,580 | ) |
| Maturities,                prepayments and calls in investment securities held to                maturity                   |   |                                 | (26      | ) |   | (19,368 | ) |
| Net                increase in total loans                                                                                  |   |                                 | (110,409 | ) |   | (108,740 | ) |
| Proceeds                from sale of loans                                                                                  |   |                                 | 1,267    |   |   | --- |   |
| Additions                to premises and equipment                                                                          |   |                                 | (6,364   | ) |   | (5,376 | ) |
| Cash                acquired in acquisition                                                                                 |   |                                 | ---      |   |   | 34,564 |   |
| Other                                                                                                                       |   |                                 | (2,440   | ) |   | (3,474 | ) |
| Net                cash provided by (used in) investing activities                                                          |   |                                 | (85,075  | ) |   | 128,760 |   |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| **Financing                Activities:**                                                                                    |   |                                 |     |   |   |   |   |
| Net                increase in deposits                                                                                     |   |                                 | 189,152  |   |   | 57,179 |   |
| Net                change in short-term borrowings                                                                          |   |                                 | (29,688  | ) |   | (80,039 | ) |
| Proceeds                from issuance of long-term debt                                                                     |   |                                 | 75,620   |   |   | 25,000 |   |
| Repayment                of long-term debt                                                                                  |   |                                 | (148,765 | ) |   | (100,448 | ) |
| Cash                dividends and cash paid in lieu of fractional shares                                                    |   |                                 | (13,973  | ) |   | (8,859 | ) |
| Purchases                of treasury stock                                                                                  |   |                                 | (17,922  | ) |   | (9,354 | ) |
| Tax                benefits from employee stock transactions                                                                |   |                                 | 243      |   |   | --- |   |
| Proceeds                from issuance of common stock                                                                       |   |                                 | 1,345    |   |   | 6,494 |   |
| Net                cash provided by (used in) financing activities                                                          |   |                                 | 56,012   |   |   | (110,027 | ) |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| Net                change in cash and cash equivalents                                                                      |   |                                 | 15,999   |   |   | 35,971 |   |
| Cash                and cash equivalents at beginning of period                                                             |   |                                 | 76,820   |   |   | 43,486 |   |
| Cash                and cash equivalents at end of period                                                                   |   | $                                    | 92,819   |   | $ | 79,457 |   |
|                                                                                                                        |
| 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***

***Stock-Based      Compensation***
** **

***Earnings      Per Share -***

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

|                                                         |   | **Three                Months Ended****September                30,** |     | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------|----------|----------------------------------------------------------------------|--------|
|                                                         |   |                                                                  | **2006** |                                                                 |   | **2005** |   |   | **2006** |   |   | **2005** |   |
|                                                         |   |                                                                  |     |                                                                 |   |   |   |   |   |   |   |   |   |
| Net                income                                    |   | $                                                                     | 10,558   |                                                                 | $      | 10,332 |   | $ | 31,631 |   | $ | 14,680 |   |
|                                                         |   |                                                                  |     |                                                                 |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |                                                                  | 23,459   |                                                                 |   | 24,389 |   |   | 23,693 |   |   | 16,804 |   |
| Effect                of dilutive stock options              |   |                                                                  | 204      |                                                                 |   | 361 |   |   | 233 |   |   | 351 |   |
|                                                         |   |                                                                  |     |                                                                 |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding (diluted) |   |                                                                  | 23,663   |                                                                 |   | 24,750 |   |   | 23,926 |   |   | 17,155 |   |
|                                                         |   |                                                                  |     |                                                                 |   |   |   |   |   |   |   |   |   |
| Per                share information:                        |   |                                                                  |     |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                      |   | $                                                                     | 0.45     |                                                                 | $      | 0.42 |   | $ | 1.34 |   | $ | 0.87 |   |
| Diluted                earnings per share                    |   | $                                                                     | 0.45     |                                                                 | $      | 0.42 |   | $ | 1.32 |   | $ | 0.86 |   |

***Comprehensive      Income(Loss)***

|                                             |   | **Three                Months Ended****September                30,** |   | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                             |   | **2006**                                                              |   | **2005**                                                             |   | **2006** |   | **2005** |   |
| Unrealized                holding gains (losses) |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| on                available-for-sale securities  |   | $                                                                     | 11,470 |                                                                 | $      | (245 | ) | $ | 2,023 |   | $ | (2,430 | ) |
| Reclassification                adjustments for  |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| gains                included in net income      |   |                                                                  | (28    | )                                                                    |   | (29 | ) |   | (317 | ) |   | (247 | ) |
| Net                unrealized gains (losses)     |   |                                                                  | 11,442 |                                                                 |   | (274 | ) |   | 1,706 |   |   | (2,677 | ) |
| Tax                effect                        |   |                                                                  | (4,005 | )                                                                    |   | 96 |   |   | (597 | ) |   | 937 |   |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                 |   |                                                                  | 7,437  |                                                                 |   | (178 | ) |   | 1,109 |   |   | (1,740 | ) |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Unfunded                pension liability        |   |                                                                  | ---    |                                                                 |   | --- |   |   | --- |   |   | (138 | ) |
| Tax                effect                        |   |                                                                  | ---    |                                                                 |   | --- |   |   | --- |   |   | 48 |   |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                 |   |                                                                  | ---    |                                                                 |   | --- |   |   | --- |   |   | (90 | ) |
|                                             |   | $                                                                     | 7,437  |                                                                 | $      | (178 | ) | $ | 1,109 |   | $ | (1,830 | ) |

|                                                                |   | **September                30,****2006** |   | **December                31,****2005** |   |
|---------------------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
| Net                unrealized loss on available-for-sale securities |   | $                                        | (614   | )                                       | $      | (2,320 | ) |
| Tax                effect                                           |   |                                     | 215    |                                    |   | 812 |   |
| Net-of-tax                amount                                    |   |                                     | (399   | )                                       |   | (1,508 | ) |
|                                                                |   |                                     |   |                                    |   |   |   |
| Unfunded                pension liability                           |   |                                     | (3,494 | )                                       |   | (3,494 | ) |
| Tax                effect                                           |   |                                     | 1,223  |                                    |   | 1,223 |   |
| Net-of-tax                amount                                    |   |                                     | (2,271 | )                                       |   | (2,271 | ) |
|                                                                |   |                                     |   |                                    |   |   |   |
| Accumulated                other comprehensive loss                 |   | $                                        | (2,670 | )                                       | $      | (3,779 | ) |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Recent      Accounting Pronouncements***

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

***SFAS      No. 158 -***
*Employers’      Accounting for Defined Benefit Pension and Other Postretirement      Plans*

***SAB      No. 108***
**-**

***Reclassifications***

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**2.      **
**Acquisitions:**
** **

| (in                thousands, except per share data) |   | **Nine                Months Ended September 30, 2005** |   |
|------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                 |   |                                                    |   |
| Net                interest income                   |   | $                                                       | 75,114 |   |
| Other                income                          |   |                                                    | 24,602 |   |
| Net                income                            |   |                                                    | 27,103 |   |
| Diluted                earnings per common share     |   | $                                                       | 1.10   |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**3.      **
**Allowance      for loan losses:**

|                                                          |   | **Nine                Months Ended September 30,****2006** |   | **Year                Ended December 31,****2005** |   | **Nine                Months Ended****September                30,****2005** |   |
|---------------------------------------------------------------|--------|------------------------------------------------------------|--------|----------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|                                                          |   |                                                       |   |                                               |   |                                                                         |   |
| Balance,                January 1                             |   | $                                                          | 22,965 |                                               | $      | 14,421                                                                       |   | $ | 14,421 |   |
| Provision                for loan losses                      |   |                                                       | 1,400  |                                               |   | 2,300                                                                        |   |   | 1,700 |   |
| Loan                charge-offs                               |   |                                                       | (1,154 | )                                                  |   | (2,323                                                                       | )      |   | (1,170 | ) |
| Recoveries                                                    |   |                                                       | 823    |                                               |   | 1,499                                                                        |   |   | 754 |   |
| Allowance                established for acquired credit risk |   |                                                       | ---    |                                               |   | 7,068                                                                        |   |   | 7,068 |   |
| Balance,                end of period                         |   | $                                                          | 24,034 |                                               | $      | 22,965                                                                       |   | $ | 22,773 |   |

|                                           |   | **September                30,****2006** |   | **December                31,****2005** |   | **September                30,****2005** |   |
|------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|
|                                           |   |                                     |   |                                    |   |                                     |   |   |   |   |
| Non-accrual                loans               |   | $                                        | 11,626 |                                    | $      | 9,060                                    |   | $ | 10,736 |   |
| Foreclosed                real estate          |   |                                     | 52     |                                    |   | 1,447                                    |   |   | 2,273 |   |
| Total                non-performing assets     |   |                                     | 11,678 |                                    |   | 10,507                                   |   |   | 13,009 |   |
| Accruing                loans 90 days past due |   |                                     | 685    |                                    |   | 22                                       |   |   | 7 |   |
| Total                risk elements             |   | $                                        | 12,363 |                                    | $      | 10,529                                   |   | $ | 13,016 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**4.      **
**Guarantees:**

**5.      **
**Long-Term      Debt:**

| (in                thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   | **September                30, 2006** |   |   | **December                31,****2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------------------------------------|--------|--------|-----------------------------------------|--------|
| Outstanding                advances from the FHLB of Pittsburgh are currently fixed rate and                mature                from 2006 to 2016. The advances are collateralized by FHLB stock,                certain                first mortgage loans and both agency and mortgage-backed securities.                The                advance rates range from 2.41% to 6.35%, with a weighted average                interest                rate of 4.53%. Advances totaling $229 million are convertible advances.                Under the terms of these arrangements, the FHLB retains the option                to                convert the advances from fixed to variable rate. If the FHLB were                to                convert their options, Community has the ability to prepay the advances                at                no penalty. At the current time no advances have been converted,                and                remain at a fixed rate of interest. |   | **$**  | 336,954                               |   | $      | 430,719                                 |   |

| September                30, 2007 |   | $      | 63,596  |   |
|-----------------------------------|--------|--------|---------|--------|
| September                30, 2008 |   |   | 14,415  |   |
| September                30, 2009 |   |   | 40,075  |   |
| September                30, 2010 |   |   | 5,085   |   |
| September                30, 2011 |   |   | 25,087  |   |
| Thereafter                        |   |   | 188,696 |   |
|                              |   | $      | 336,954 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**6.      **
**Stock-Based      Plans:**

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

|                                                            |   | **Three                Months Ended September 30,****2005** |   | **Nine                Months Ended September 30,****2005** |   |
|-----------------------------------------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                            |   |                                                        |   |                                                       |   |
| Net                income, as reported                          |   | $                                                           | 10,332 |                                                       | $      | 14,680 |   |
| Deduct:                Total stock-based compensation           |   |                                                        |   |                                                       |   |   |   |
| expense                determined under fair value based        |   |                                                        |   |                                                       |   |   |   |
| method                for all awards, net of related tax effect |   |                                                        | (39    | )                                                          |   | (1,526 | ) |
| Pro                forma net income                             |   | $                                                           | 10,293 |                                                       | $      | 13,154 |   |
|                                                            |   |                                                        |   |                                                       |   |   |   |
| Earnings                per share:                              |   |                                                        |   |                                                       |   |   |   |
| Basic                - as reported                              |   | $                                                           | 0.42   |                                                       | $      | 0.87 |   |
| Basic                - pro forma                                |   | $                                                           | 0.42   |                                                       | $      | 0.78 |   |
|                                                            |   |                                                        |   |                                                       |   |   |   |
| Diluted                - as reported                            |   | $                                                           | 0.42   |                                                       | $      | 0.86 |   |
| Diluted                - pro forma                              |   | $                                                           | 0.42   |                                                       | $      | 0.77 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

|                                                   |   |  Shares                UnderOption                (000’s) |   | WeightedAverageExercise                Price |   |  Weighted-Average                Remaining Contractual Life |   |
|--------------------------------------------------------|--------|----------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------------------------------|--------|
| Outstanding                options, December 31, 2005  |   |                                                                 | 1,110  |                                         | $      | 20.03                                                            |   |   |   |   |
| Granted                                                |   |                                                                 | 255    |                                         |   | 27.41                                                            |   |   |   |   |
| Exercised                                              |   |                                                                 | (88    | )                                            |   | 13.25                                                            |   |   |   |   |
| Canceled                                               |   |                                                                 | (1     | )                                            |   | 25.57                                                            |   |   |   |   |
| Outstanding                options, September 30, 2006 |   |                                                                 | 1,276  |                                         | $      | 21.96                                                            |   |   | 5.6                Years |   |
| Exercisable                options, September 30, 2006 |   |                                                                 | 951    |                                         | $      | 20.70                                                            |   |   | 5.4                Years |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**OVERVIEW**

**PREAMBLE**

**Forward-Looking      Statements**

**Critical      Accounting Policies**

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

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

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

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

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

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

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

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**GAAP      versus Non-GAAP**

**SUMMARY      OF FINANCIAL AND OPERATING RESULTS**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

|                                                         |   |                                  |      |
|--------------------------------------------------------------|--------|---------------------------------------|-----------|
|                                                         |   | **Three                Months Ended** |      | **Nine                Months Ended** |   |
|                                                         |   | **September                30,**      |      | **September                30,** |   |
| (Dollars                in thousands, except per share data) |   | **2006**                              |      | **2005** |   | **2006** |   | **2005** |   |
|                                                         |   |                                  |      |   |   |   |   |   |   |
| Net                operating (tangible) income               |   | $                                     | 10,986    |   | $ | 11,012 |   | $ | 32,940 |   | $ | 20,603 |   |
| Average                tangible assets                       |   | $                                     | 3,126,882 |   | $ | 3,061,813 |   | $ | 3,128,116 |   | $ | 2,361,995 |   |
| Average                tangible equity                       |   | $                                     | 214,643   |   | $ | 228,215 |   | $ | 216,553 |   | $ | 177,374 |   |
| Operating                return on average tangible assets   |   |                                  | 1.39      | % |   | 1.43 | % |   | 1.41 | % |   | 1.17 | % |
| Operating                return on average tangible equity   |   |                                  | 20.31     | % |   | 19.14 | % |   | 20.34 | % |   | 15.53 | % |
| Tangible                book value at end of period          |   | $                                     | 9.45      |   | $ | 9.26 |   | $ | 9.45 |   | $ | 9.26 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**BALANCE      SHEET**

|                                                            |   | **September** **30,** |      | **Change** |   |
|-----------------------------------------------------------------|--------|----------------------------|-----------|------------|--------|
|                                                            |   | **2006**                   |      | **2005**   |   | **Volume** |   | **%**  |   |
| Cash                and due from banks                          |   | $                          | 62,636    |       | $      | 59,405 |   | $ | 3,231 | ) |   | 5 | % |
| Federal                funds sold and interest-bearing deposits |   |                       | 29,324    |       |   | 100,263 |   |   | (70,939 | ) |   | (71 | )% |
| Investments                                                     |   |                       | 566,772   |       |   | 632,779 |   |   | (66,007 | ) |   | (10 | )% |
| Loans                                                           |   |                       | 2,339,352 |       |   | 2,140,930 |   |   | 198,422 |   |   | 9 | % |
| Allowance                for loan losses                        |   |                       | 24,385    |       |   | 22,778 |   |   | 1,607 |   |   | 7 | % |
| Net                loans                                        |   |                       | 2,314,967 |       |   | 2,118,152 |   |   | 196,815 |   |   | 9 | % |
| Goodwill                and identifiable intangible assets      |   |                       | 259,023   |       |   | 254,647 |   |   | 4,376 |   |   | 2 | % |
| Other                assets                                     |   |                       | 153,183   |       |   | 151,214 |   |   | 1,969 |   |   | 1 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Total                assets                                     |   | $                          | 3,385,905 |       | $      | 3,316,460 |   | $ | 69,445 |   |   | 2 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                deposits                     |   | $                          | 344,708   |       | $      | 356,733 |   | $ | (12,025 | ) |   | (3 | )% |
| Interest-bearing                deposits                        |   |                       | 2,093,349 |       |   | 1,891,571 |   |   | 201,778 |   |   | 11 | % |
| Short-term                borrowings                            |   |                       | 60,680    |       |   | 56,948 |   |   | 3,732 |   |   | 7 | % |
| Long-term                debt                                   |   |                       | 340,162   |       |   | 476,602 |   |   | (136,440 | ) |   | (29 | )% |
| Subordinated                debt                                |   |                       | 51,548    |       |   | 30,928 |   |   | 20,620 |   |   | 67 | % |
| Other                liabilities                                |   |                       | 23,547    |       |   | 22,493 |   |   | 1,054 |   |   | 5 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                |   |                       | 2,913,994 |       |   | 2,835,275 |   |   | 78,719 |   |   | 3 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity                       |   |                       | 471,911   |       |   | 481,185 |   |   | (9,274 | ) |   | (2 | )% |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders’ equity |   | $                          | 3,385,905 |       | $      | 3,316,460 |   | $ | 69,445 |   |   | 2 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

|                                   |   |     |      | **Change** |   |
|----------------------------------------|--------|----------|-----------|------------|--------|
| (in                thousands)          |   | **2006** |      | **2005**   |   | **Amount** | ** ** | ** %** |   |
| Commercial                             |   | $        | 831,951   |       | $      | 740,034 |   | $ | 91,917 |   |   | 12 | % |
| Commercial                real estate  |   |     | 831,288   |       |   | 731,449 |   |   | 99,839 |   |   | 14 | % |
| Residential                real estate |   |     | 150,926   |       |   | 176,263 |   |   | (25,337 | ) |   | (14 | )% |
| Consumer                               |   |     | 525,187   |       |   | 493,184 |   |   | 32,003 |   |   | 6 | % |
| Total                                  |   | $        | 2,339,352 |       | $      | 2,140,930 |   | $ | 198,422 |   |   | 9 | % |

|                                      |   |     |      |     |   | **Change** |       |
|-------------------------------------------|--------|----------|-----------|----------|--------|------------|------------|
| (in                thousands)             |   | **2006** |      | **2005** |   | **Amount** | ** ** | **%**  |   |
| Demand                                    |   | $        | 344,708   |     | $      | 356,733    |       | $ | (12,025 | ) |   | (3 | )% |
| Savings                & NOW accounts |   |     | 873,670   |     |   | 850,801    |       |   | 22,869 |   |   | 3 | % |
| Time                                      |   |     | 984,415   |     |   | 865,136    |       |   | 119,279 |   |   | 14 | % |
| Time                $100,000 or more      |   |     | 235,264   |     |   | 175,634    |       |   | 59,630 |   |   | 34 | % |
|                                      |   | $        | 2,438,057 |     | $      | 2,248,304  |       | $ | 189,753 |   |   | 8 | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**RESULTS      OF OPERATIONS**

**Net      Interest Income**

|                                                                                    |   | **Net                Interest Margin - Quarter to Date** |   |                              |   |
|-----------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                    |   |                                                     |   |                              |   |   |   |
| (dollars                in thousands)                                                   |   |                                                     |   | September                30, 2006 |   | September                30, 2005 |   |
|                                                                                    |   |                                                     |   | 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 |   |                                                     |   |                              | $      | 29,324 |   | $ | 390 |   |   | 5.28 | % | $ | 100,263 |   | $ | 857 |   |   | 3.39 | % |
| Investment                securities                                                    |   |                                                     |   |                              |   | 566,772 |   |   | 8,556 |   |   | 5.99 | % |   | 632,779 |   |   | 8,760 |   |   | 5.49 | % |
| Loans                - commercial                                                       |   |                                                     |   |                              |   | 831,950 |   |   | 16,687 |   |   | 7.76 | % |   | 740,034 |   |   | 12,665 |   |   | 6.79 | % |
| -                commercial real estate                                                 |   |                                                     |   |                              |   | 831,288 |   |   | 14,810 |   |   | 7.07 | % |   | 731,449 |   |   | 12,135 |   |   | 6.58 | % |
| -                residential real estate                                                |   |                                                     |   |                              |   | 150,926 |   |   | 2,364 |   |   | 6.21 | % |   | 176,263 |   |   | 2,731 |   |   | 6.15 | % |
| -                consumer                                                               |   |                                                     |   |                              |   | 525,188 |   |   | 9,552 |   |   | 7.22 | % |   | 492,367 |   |   | 8,141 |   |   | 6.56 | % |
| Total                earning assets                                                     |   |                                                     |   |                              | $      | 2,935,448 |   | $ | 52,359 |   |   | 7.08 | % | $ | 2,873,155 |   | $ | 45,289 |   |   | 6.25 | % |
|                                                                                    |   |                                                     |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      | $      | 873,670                                                  |   | $                                 | 4,969  |   |   | 2.26 | % | $ | 850,801 |   | $ | 3,048 |   |   | 1.42 | % |
| -                time                                                                   |   |                                                     |   |                              |   | 1,219,679 |   |   | 12,889 |   |   | 4.19 | % |   | 1,040,770 |   |   | 7,945 |   |   | 3.03 | % |
| Short-term                borrowings                                                    |   |                                                     |   |                              |   | 60,680 |   |   | 739 |   |   | 4.83 | % |   | 56,948 |   |   | 452 |   |   | 3.15 | % |
| Long-term                debt                                                           |   |                                                     |   |                              |   | 340,162 |   |   | 3,936 |   |   | 4.59 | % |   | 476,602 |   |   | 5,109 |   |   | 4.25 | % |
| Subordinated                debt                                                        |   |                                                     |   |                              |   | 51,548 |   |   | 972 |   |   | 7.48 | % |   | 30,928 |   |   | 527 |   |   | 6.76 | % |
| Total                interest-bearing liabilities                                       |   |                                                     |   |                              | $      | 2,545,739 |   | $ | 23,505 |   |   | 3.66 | % | $ | 2,456,049 |   | $ | 17,081 |   |   | 2.76 | % |
|                                                                                    |   |                                                     |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |                                                     |   |                              |   |   |   |   |   |   |   | 7.08 | % |   |   |   |   |   |   |   | 6.25 | % |
| Interest                expense to paying liabilities                                   |   |                                                     |   |                              |   |   |   |   |   |   |   | 3.66 | % |   |   |   |   |   |   |   | 2.76 | % |
|                                                                                    |   |                                                     |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |                                                     |   |                              |   |   |   |   |   |   |   | 3.42 | % |   |   |   |   |   |   |   | 3.49 | % |
| Impact                of non-interest funds                                             |   |                                                     |   |                              |   |   |   |   |   |   |   | 0.48 | % |   |   |   |   |   |   |   | 0.40 | % |
| Net                interest margin                                                      |   |                                                     |   |                              |   |   |   | $ | 28,854 |   |   | 3.90 | % |   |   |   | $ | 28,208 |   |   | 3.89 | % |

| Quarter                ended:     |   | Net                interest margin |   |
|-----------------------------------|--------|------------------------------------|--------|
| September                30, 2005 |   |                               | 3.89   | % |
| December                31, 2005  |   |                               | 3.96   | % |
| March                31, 2006     |   |                               | 3.98   | % |
| June                30, 2006      |   |                               | 3.94   | % |
| September                30, 2006 |   |                               | 3.90   | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

|                                                                                    |   | **Net                Interest Margin - Year to Date** |   |                              |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                    |   |                                                  |   |                              |   |   |   |
| (dollars                in thousands)                                                   |   |                                                  |   | September                30, 2006 |   | September                30, 2005 |   |
|                                                                                    |   |                                                  |   | 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 |   |                                                  |   |                              | $      | 39,340 |   | $ | 1,426 |   |   | 4.85 | % | $ | 67,706 |   | $ | 1,591 |   |   | 3.14 | % |
| Investment                securities                                                    |   |                                                  |   |                              |   | 585,909 |   |   | 26,085 |   |   | 5.95 | % |   | 609,754 |   |   | 25,349 |   |   | 5.56 | % |
| Loans                - commercial                                                       |   |                                                  |   |                              |   | 825,241 |   |   | 47,844 |   |   | 7.75 | % |   | 533,916 |   |   | 26,109 |   |   | 6.54 | % |
| -                commercial real estate                                                 |   |                                                  |   |                              |   | 819,887 |   |   | 42,741 |   |   | 6.97 | % |   | 489,780 |   |   | 23,616 |   |   | 6.45 | % |
| -                residential real estate                                                |   |                                                  |   |                              |   | 151,751 |   |   | 6,933 |   |   | 6.11 | % |   | 119,234 |   |   | 5,702 |   |   | 6.39 | % |
| -                consumer                                                               |   |                                                  |   |                              |   | 517,378 |   |   | 27,045 |   |   | 6.99 | % |   | 407,257 |   |   | 19,925 |   |   | 6.53 | % |
| Total                earning assets                                                     |   |                                                  |   |                              | $      | 2,939,506 |   | $ | 152,074 |   |   | 6.92 | % | $ | 2,227,647 |   | $ | 102,292 |   |   | 6.14 | % |
|                                                                                    |   |                                                  |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      | $      | 840,397                                               |   | $                                 | 12,363 |   |   | 1.97 | % | $ | 627,710 |   | $ | 6,081 |   |   | 1.30 | % |
| -                time                                                                   |   |                                                  |   |                              |   | 1,177,600 |   |   | 34,700 |   |   | 3.94 | % |   | 784,181 |   |   | 17,873 |   |   | 3.05 | % |
| Short-term                borrowings                                                    |   |                                                  |   |                              |   | 62,340 |   |   | 2,080 |   |   | 4.46 | % |   | 41,706 |   |   | 809 |   |   | 2.59 | % |
| Long-term                debt                                                           |   |                                                  |   |                              |   | 403,828 |   |   | 13,611 |   |   | 4.51 | % |   | 442,153 |   |   | 14,811 |   |   | 4.48 | % |
| Subordinated                debt                                                        |   |                                                  |   |                              |   | 49,282 |   |   | 2,707 |   |   | 7.34 | % |   | 30,928 |   |   | 1,481 |   |   | 6.40 | % |
| Total                interest-bearing liabilities                                       |   |                                                  |   |                              | $      | 2,533,447 |   | $ | 65,461 |   |   | 3.45 | % | $ | 1,926,678 |   | $ | 41,055 |   |   | 2.85 | % |
|                                                                                    |   |                                                  |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |                                                  |   |                              |   |   |   |   |   |   |   | 6.92 | % |   |   |   |   |   |   |   | 6.14 | % |
| Interest                expense to paying liabilities                                   |   |                                                  |   |                              |   |   |   |   |   |   |   | 3.45 | % |   |   |   |   |   |   |   | 2.85 | % |
|                                                                                    |   |                                                  |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |                                                  |   |                              |   |   |   |   |   |   |   | 3.47 | % |   |   |   |   |   |   |   | 3.29 | % |
| Impact                of non-interest funds                                             |   |                                                  |   |                              |   |   |   |   |   |   |   | 0.47 | % |   |   |   |   |   |   |   | 0.38 | % |
| Net                interest margin                                                      |   |                                                  |   |                              |   |   |   | $ | 86,613 |   |   | 3.94 | % |   |   |   | $ | 61,237 |   |   | 3.67 | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**Provision      for Loan Losses**

**Non-Interest      Income**

|                                                                                        |   | **Three                Months Ended September 30,** |   | **Nine                Months Ended September 30,** |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
| (in                thousands)                                                               |   | **2006**                                            |   | **2005**                                           |   | **Increase****(Decrease)** |   | **2006** |   | **2005** |   | **Increase****(Decrease)** |   |
| Investment                management and trust services                                     |   | $                                                   | 968    |                                               | $      | 796 |   | $ | 172 |   | $ | 3,069 |   | $ | 1,741 |   | $ | 1,328 |   |
| Service                charges on deposit accounts                                          |   |                                                | 3,037  |                                               |   | 2,799 |   |   | 238 |   |   | 8,423 |   |   | 6,620 |   |   | 1,803 |   |
| Other                service charges, commissions and fees                                  |   |                                                | 1,817  |                                               |   | 1,819 |   |   | (2 | ) |   | 5,420 |   |   | 3,763 |   |   | 1,657 |   |
| Insurance                premium income and commissions                                     |   |                                                | 1,053  |                                               |   | 825 |   |   | 228 |   |   | 3,098 |   |   | 2,607 |   |   | 491 |   |
| Mortgage                banking activities                                                  |   |                                                | 533    |                                               |   | 660 |   |   | (127 | ) |   | 1,581 |   |   | 1,723 |   |   | (142 | ) |
| Earnings                on investment in life insurance                                     |   |                                                | 679    |                                               |   | 659 |   |   | 20 |   |   | 2,010 |   |   | 1,413 |   |   | 597 |   |
| Other                                                                                       |   |                                                | 725    |                                               |   | 279 |   |   | 446 |   |   | 1,849 |   |   | 560 |   |   | 1,289 |   |
| Total                non-interest income, excludinginvestment                security gains |   | $                                                   | 8,812  |                                               | $      | 7,837 |   | $ | 975 |   | $ | 25,450 |   | $ | 18,427 |   | $ | 7,023 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**Non-Interest      Expenses**

|                                                                                                              |   | **Three                Months Ended September 30,** |   | **Nine                Months Ended September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
| (in                thousands)                                                                                     |   | **2006**                                            |   | **2005**                                           |   | **Increase****(Decrease)** |   | **2006** |   | **2005** |   | **Increase****(Decrease)** |   |
| Salaries                and employee benefits                                                                     |   | $                                                   | 11,611 |                                               | $      | 11,808 |   | $ | (197 | ) | $ | 34,280 |   | $ | 26,537 |   | $ | 7,743 |   |
| Net                occupancy                                                                                      |   |                                                | 3,452  |                                               |   | 3,364 |   |   | 88 |   |   | 10,350 |   |   | 7,788 |   |   | 2,562 |   |
| Marketing                expense                                                                                  |   |                                                | 354    |                                               |   | 528 |   |   | (174 | ) |   | 1,194 |   |   | 1,439 |   |   | (245 | ) |
| Telecommunications                expense                                                                         |   |                                                | 542    |                                               |   | 309 |   |   | 233 |   |   | 1,659 |   |   | 870 |   |   | 789 |   |
| Amortization                of intangibles                                                                        |   |                                                | 659    |                                               |   | 641 |   |   | 18 |   |   | 2,015 |   |   | 728 |   |   | 1,287 |   |
| Other                                                                                                             |   |                                                | 4,554  |                                               |   | 4,186 |   |   | 368 |   |   | 12,905 |   |   | 9,322 |   |   | 3,583 |   |
| Total                non-interest expenses, excludingmerger,                conversion and restructuring expenses |   |                                                | 21,172 |                                               |   | 20,836 |   |   | 336 |   |   | 62,403 |   |   | 46,684 |   |   | 15,719 |   |
| Merger,                conversion and restructuring expenses                                                      |   |                                                | ---    |                                               |   | 248 |   |   | (248 | ) |   | --- |   |   | 8,205 |   |   | (8,205 | ) |
| Total                non-interest expenses                                                                        |   | $                                                   | 21,172 |                                               | $      | 21,084 |   | $ | 88 |   | $ | 62,403 |   | $ | 54,889 |   | $ | 7,514 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**Income      Taxes**

**Capital**

|                                          | **September                30,****2006** | **Regulatory****Minimum** | **“Well****Capitalized”** |
|-----------------------------------------------|------------------------------------------|---------------------------|---------------------------------------|
| Leverage                ratio                 |                                     |                      |                                  |
| Community                Banks, Inc.          | 8.7%                                     | 4%                        | 5%                                    |
| CommunityBanks                                | 8.3%                                     | 4%                        | 5%                                    |
|                                          |                                     |                      |                                  |
| Tier                1 capital ratio           |                                     |                      |                                  |
| Community                Banks, Inc.          | 10.6%                                    | 4%                        | 6%                                    |
| CommunityBanks                                | 10.1%                                    | 4%                        | 6%                                    |
|                                          |                                     |                      |                                  |
| Total                risk-based capital ratio |                                     |                      |                                  |
| Community                Banks, Inc.          | 11.5%                                    | 8%                        | 10%                                   |
| CommunityBanks                                | 11.1%                                    | 8%                        | 10%                                   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**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              |   | $                                         | 336,954   |   | $ | 63,596 |   | $ | 54,490 |   | $ | 30,172 |   | $ | 188,696 |   |
| Operating                lease obligations |   |                                      | 30,321    |   |   | 2,052 |   |   | 3,765 |   |   | 3,630 |   |   | 20,874 |   |
| Subordinated                debt           |   |                                      | 51,548    |   |   | --- |   |   | --- |   |   | --- |   |   | 51,548 |   |
| Time                deposits               |   |                                      | 1,250,873 |   |   | 830,289 |   |   | 303,021 |   |   | 115,975 |   |   | 1,588 |   |
|                                       |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                      |   | $                                         | 1,669,696 |   | $ | 895,937 |   | $ | 361,276 |   | $ | 149,777 |   | $ | 262,706 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

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

|                                                                        |   | **Three                Months Ended** |      | **Nine                Months Ended** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
|                                                                        |   | **September                30,**      |      | **September                30,**     |   |
|                                                                        |   | **2006**                              |      | **2005**                             |   | **2006** |   | **2005** |   |
| **Income                statement data:**                                   |   |                                  |      |                                 |   |   |   |   |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |
| **Net                income**                                               |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Net                income                                                   |   | $                                     | 10,558    |                                 | $      | 10,332 |   | $ | 31,631 |   | $ | 14,680 |   |
| Amortization                of core deposit and other intangible assets (1) |   |                                  | 428       |                                 |   | 519 |   |   | 1,309 |   |   | 590 |   |
| Merger,                conversion and restructuring expenses (1)            |   |                                  | ---       |                                 |   | 161 |   |   | --- |   |   | 5,333 |   |
| Net                operating (tangible) income                              |   | $                                     | 10,986    |                                 | $      | 11,012 |   | $ | 32,940 |   | $ | 20,603 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Balance                sheet data:**                                      |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Average                assets**                                           |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Average                assets                                               |   | $                                     | 3,385,905 |                                 | $      | 3,316,460 |   | $ | 3,387,018 |   | $ | 2,451,131 |   |
| Goodwill                                                                    |   |                                  | (245,794  | )                                    |   | (239,395 | ) |   | (245,439 | ) |   | (83,043 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (13,229   | )                                    |   | (15,252 | ) |   | (13,463 | ) |   | (6,093 | ) |
| Average                tangible assets                                      |   | $                                     | 3,126,882 |                                 | $      | 3,061,813 |   | $ | 3,128,116 |   | $ | 2,361,995 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Operating                return on average tangible assets**              |   |                                  | 1.39      | %                                    |   | 1.43 | % |   | 1.41 | % |   | 1.17 | % |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Average                equity**                                           |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Average                equity                                               |   | $                                     | 471,911   |                                 | $      | 481,185 |   | $ | 473,680 |   | $ | 265,945 |   |
| Goodwill                                                                    |   |                                  | (245,794  | )                                    |   | (239,395 | ) |   | (245,439 | ) |   | (83,043 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (13,229   | )                                    |   | (15,252 | ) |   | (13,463 | ) |   | (6,093 | ) |
| Deferred                taxes                                               |   |                                  | 1,755     |                                 |   | 1,677 |   |   | 1,775 |   |   | 565 |   |
| Average                tangible equity                                      |   | $                                     | 214,643   |                                 | $      | 228,215 |   | $ | 216,553 |   | $ | 177,374 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Operating                return on average tangible equity**              |   |                                  | 20.31     | %                                    |   | 19.14 | % |   | 20.34 | % |   | 15.53 | % |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **At                end of quarter:**                                       |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Total                assets**                                             |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Total                assets                                                 |   | $                                     | 3,431,208 |                                 | $      | 3,291,232 |   | $ | 3,431,208 |   | $ | 3,291,232 |   |
| Goodwill                                                                    |   |                                  | (245,864  | )                                    |   | (243,107 | ) |   | (245,864 | ) |   | (243,107 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (13,641   | )                                    |   | (14,951 | ) |   | (13,641 | ) |   | (14,951 | ) |
| Total                tangible assets                                        |   | $                                     | 3,171,703 |                                 | $      | 3,033,174 |   | $ | 3,171,703 |   | $ | 3,033,174 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Total                equity**                                             |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Total                equity                                                 |   | $                                     | 479,584   |                                 | $      | 480,960 |   | $ | 479,584 |   | $ | 480,960 |   |
| Goodwill                                                                    |   |                                  | (245,864  | )                                    |   | (243,107 | ) |   | (245,864 | ) |   | (243,107 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (13,641   | )                                    |   | (14,951 | ) |   | (13,641 | ) |   | (14,951 | ) |
| Deferred                taxes                                               |   |                                  | 1,698     |                                 |   | 1,746 |   |   | 1,698 |   |   | 1,746 |   |
| Total                tangible equity                                        |   | $                                     | 221,777   |                                 | $      | 224,648 |   | $ | 221,777 |   | $ | 224,648 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Tangible                book value at end of period**                     |   | $                                     | 9.45      |                                 | $      | 9.26 |   | $ | 9.45 |   | $ | 9.26 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
|  (1)                Net of related tax effect                          |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |

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**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

| **Interest                Rate Sensitivity**             |   |             |    |               |   |                |   |                                                |    |      |   |
|----------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------|--------|-----------------------------------------------------|---------|-----------|--------|
|  **Dollars                in thousands**            |   | **1-90****days** |    | **90-180****days** |   | **180-365****days** |   | **1                year****or                more** |    | **Total** |   |
|                                                     |   |             |    |               |   |                |   |                                                |    |      |   |
| **Assets**                                               |   |             |    |               |   |                |   |                                                |    |      |   |   |   |   |   |   |
| Federal                funds sold                        |   | $                | 21,401  |               |   | ---                 |   |                                                | ---     |      |   | --- |   | $ | 21,401 |   |
| Interest-bearing                deposits in other banks  |   |             | 34,774  |               |   | ---                 |   |                                                | ---     |      |   | --- |   |   | 34,774 |   |
| Investment                securities                     |   |             | 57,441  |               |   | 26,249              |   |                                                | 35,725  |      |   | 447,642 |   |   | 567,057 |   |
| Loans(1)                                                 |   |             | 769,814 |               |   | 109,394             |   |                                                | 187,804 |      |   | 1,281,147 |   |   | 2,348,159 |   |
| Earning                assets                            |   |             | 883,430 |               |   | 135,643             |   |                                                | 223,529 |      |   | 1,728,789 |   |   | 2,971,391 |   |
| Non-earning                assets                        |   |             | 569     |               |   | 599                 |   |                                                | 1,139   |      |   | 457,510 |   |   | 459,817 |   |
| Total                assets                              |   | $                | 883,999 |               | $      | 136,242             |   | $                                                   | 224,668 |      | $      | 2,186,299 |   | $ | 3,431,208 |   |
| **Liabilities**                                          |   |             |    |               |   |                |   |                                                |    |      |   |   |   |   |   |   |
| Savings                                                  |   | $                | 251,495 |               | $      | 40,766              |   | $                                                   | 81,515  |      | $      | 512,827 |   | $ | 886,603 |   |
| Time                                                     |   |             | 162,853 |               |   | 178,664             |   |                                                | 312,626 |      |   | 347,289 |   |   | 1,001,432 |   |
| Time                in denominations of $100,000 or more |   |             | 64,989  |               |   | 51,127              |   |                                                | 60,028  |      |   | 73,297 |   |   | 249,441 |   |
| Short-term                borrowings                     |   |             | 57,566  |               |   | ---                 |   |                                                | ---     |      |   | --- |   |   | 57,566 |   |
| Long-term                debt                            |   |             | 21,875  |               |   | 1,883               |   |                                                | 54,712  |      |   | 258,484 |   |   | 336,954 |   |
| Subordinated                debt                         |   |             | 23,196  |               |   | ---                 |   |                                                | ---     |      |   | 28,352 |   |   | 51,548 |   |
| Interest                bearing liabilities              |   |             | 581,974 |               |   | 272,440             |   |                                                | 508,881 |      |   | 1,220,249 |   |   | 2,583,544 |   |
| Other                liabilities and equity              |   |             | 10,381  |               |   | 10,382              |   |                                                | 20,762  |      |   | 806,139 |   |   | 847,664 |   |
| Total                liabilities and equity              |   | $                | 592,355 |               | $      | 282,822             |   | $                                                   | 529,643 |      | $      | 2,026,388 |   | $ | 3,431,208 |   |

| **Interest                Sensitivity GAP**                                 |   |             |    |               |   |                |   |
|-----------------------------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------|--------|
| **Dollars                in thousands**                                     |   | **1-90****days** |    | **90-180****Days** |   | **180-365****days** |   |
|                                                                        |   |             |    |               |   |                |   |
| Periodic                                                                    |   | $                | 291,644 |               | $      | (146,580            | )      | $ | (304,975 | ) |
| Cumulative                                                                  |   |             |    |               |   | 145,064             |   |   | (159,911 | ) |
| Cumulative                GAP as a percentageof                total assets |   |             | 8.5     | %                  |   | 4.2                 | %      |   | (4.7 | )% |

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**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

*Evaluation        of Disclosure Controls and Procedures. *

*Evaluation        of Internal Controls*

*Changes        in Internal Controls over Financial Reporting*

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**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 **

|             |   | **Shares****Purchased** |   | **Average                Price****Paid****Per                Share** |   | **Shares                Purchased****as                part of****Repurchase                Program** |   | **Capacity                to****Purchase****More                Shares** |   |
|------------------|--------|-------------------------|--------|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|             |   |                    |   |                                                                 |   |                                                                                                  |   |                                                                     |   |
| 07/1/06-07/31/06 |   |                    | 12,000 |                                                                 | $      | 24.70                                                                                                 |   |                                                                     | 12,000 |   |   | 53,900 |   |
| 08/1/06-08/31/06 |   |                    | ---    |                                                                 |   | ---                                                                                                   |   |                                                                     | ---    |   |   | 53,900 |   |
| 09/1/06-09/30/06 |   |                    | ---    |                                                                 |   | ---                                                                                                   |   |                                                                     | ---    |   |   | 53,900 |   |
|             |   |                    |   |                                                                 |   |                                                                                                  |   |                                                                     |   |   |   |   |   |
|             |   |                    |   |                                                                 |   |                                                                                                  |

**Item      3 - Defaults Upon Senior      Securities**

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

**Item      5 - Other Information**

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**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**PART      II - OTHER INFORMATION**

**(continued)**

**Item      6 - Exhibits**

| 2.1  | Merger                agreement between BUCS Financial Corp. and Community Banks, Inc.,                dated                September 5, 2006, not including schedules. Community will furnish                the                omitted schedules to the Securities and Exchange Commission upon                request.                (Incorporated by reference to Exhibit 2.1 to Community’s Current Report on                Form 8-K, filed with the Commission on September 8, 2006)           |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2  | Merger                agreement between East Prospect State Bank and Community Banks, Inc.                and                CommunityBanks, dated September 12, 2006, not including schedules.                Community will furnish the omitted schedules to the Securities and                Exchange Commission upon request. (Incorporated by reference to Exhibit                2.1 to Community’s Current Report on Form 8-K, filed with the Commission                on September 18, 2006) |
| 3.1  | Amended                and Restated Articles of Incorporation (Incorporated by reference                to                Appendix A to Community’s 2006 Proxy Statement filed with the Commission                on March 31, 2006)                                                                                                                                                                                                                                                                   |
| 3.2  | Amended                By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K filed with the Commission on March                9, 2006)                                                                                                                                                                                                                                                                                               |
| 4    | Instruments                defining the rights of the holders of trust capital securities sold                by                Community in January, 2006, are not attached, as the amount of such                securities is less than 10% of the consolidated assets of Community                and                its subsidiaries, and the securities have not been registered. Community                agrees to provide copies of such instruments to the SEC upon                request.        |
| 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)                                                                                                                                                                                                                                                                                                                                                                                              |

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**SIGNATURES**

| Date   | November                9, 2006 |   | /s/    | Eddie                L. Dunklebarger     |
|--------|---------------------------------|--------|--------|------------------------------------------|
|   |                            |   |   | Eddie                L. Dunklebarger     |
|   |                            |   |   | Chairman                and President    |
|   |                            |   |   | (Chief                Executive Officer) |
|   |                            |   |   |                                     |
| Date   | November                9, 2006 |   | /s/    | Donald                F. Holt            |
|   |                            |   |   | Donald                F. Holt            |
|   |                            |   |   | Executive                Vice President  |
|   |                            |   |   | (Chief                Financial Officer) |

**EXHIBIT      INDEX**

| 2.1  | Merger                agreement between BUCS Financial Corp. and Community Banks, Inc.,                dated                September 5, 2006, not including schedules. Community will furnish                the                omitted schedules to the Securities and Exchange Commission upon                request.                (Incorporated by reference to Exhibit 2.1 to Community’s Current Report on                Form 8-K, filed with the Commission on September 8, 2006)           |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2  | Merger                agreement between East Prospect State Bank and Community Banks, Inc.                and                CommunityBanks, dated September 12, 2006, not including schedules.                Community will furnish the omitted schedules to the Securities and                Exchange Commission upon request. (Incorporated by reference to Exhibit                2.1 to Community’s Current Report on Form 8-K, filed with the Commission                on September 18, 2006) |
| 3.1  | Amended                and Restated Articles of Incorporation (Incorporated by reference                to                Appendix A to Community’s 2006 Proxy Statement filed with the Commission                on March 31, 2006)                                                                                                                                                                                                                                                                   |
| 3.2  | Amended                By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K filed with the Commission on March                9, 2006)                                                                                                                                                                                                                                                                                               |
| 4    | Instruments                defining the rights of the holders of trust capital securities sold                by                Community in January, 2006, are not attached, as the amount of such                securities is less than 10% of the consolidated assets of Community                and                its subsidiaries, and the securities have not been registered. Community                agrees to provide copies of such instruments to the SEC upon                request.        |
| 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)                                                                                                                                                                                                                                                                                                                                                                                              |

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