**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, 2005**

**0-15786**
** **

**(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)** |

| **750                East Park Dr., Harrisburg, PA**        | **17111**                     |
|-------------------------------------------------------------|-------------------------------|
| **(Address                of principal executive offices)** | **(Zip                Code)** |

**(717)      920-1698**

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

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

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

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

**Number      of shares outstanding as of October 31, 2005**

| **CAPITAL                STOCK-COMMON** | **22,932,000**                          |
|-----------------------------------------|-----------------------------------------|
| **(Title                of Class)**     | **(Outstanding                Shares)** |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**FORM      10-Q**

**INDEX      **

| **PART                I - Financial Information**                                                                                                     | **Page**                     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|
|                                                                                                                                                  |                         |
| Item                1. Financial Statements                                                                                                           |                         |
|                                                                                                                                                  |                         |
| Consolidated                Interim Balance                Sheets                                                                                     | 3                            |
| Consolidated                Interim Statements of                Income                                                                               | 4                            |
| Consolidated                Interim Statements of Changes in Stockholders’                Equity                                                | 5                            |
| Consolidated                Interim Statements of Cash                Flows                                                                           | 6                            |
| Notes                to Consolidated Interim Financial                Statements                                                                      | 7                - 13        |
|                                                                                                                                                  |                         |
| Item                2. Management’s Discussion and Analysis of Financial                Condition                and Results of Operations |  14                - 30 |
|                                                                                                                                                  |                         |
| Item                3. Quantitative and Qualitative Disclosures About                Market Risk                                                      | 31                           |
|                                                                                                                                                  |                         |
| Item                4. Controls and Procedures                                                                                                        | 32                           |
|                                                                                                                                                  |                         |
|                                                                                                                                                  |                         |
| **PART                II - Other Information**                                                                                                        |                         |
|                                                                                                                                                  |                         |
| Item                1. Legal Proceedings                                                                                                              | 33                           |
|                                                                                                                                                  |                         |
| Item                2. Unregistered Sales of Equity                Securities and Use of Proceeds                                                     | 33                           |
|                                                                                                                                                  |                         |
| Item                3. Defaults Upon Senior                Securities                                                                                 | 33                           |
|                                                                                                                                                  |                         |
| Item                4. Submission of Matters to a Vote of                Security Holders                                                             | 33                           |
|                                                                                                                                                  |                         |
| Item                5. Other Information                                                                                                              | 33                           |
|                                                                                                                                                  |                         |
| Item                6. Exhibits                                                                                                                       | 34                           |
|                                                                                                                                                  |                         |
|                                                                                                                                                  |                         |
| **SIGNATURES**                                                                                                                                        | 35                           |
|                                                                                                                                                  |                         |

----

**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,** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|---------------------------------|--------|
|                                                                                                                        |   | **2005**                         |      | **2004**                        |   |
| **ASSETS**                                                                                                                  |   | **(Unaudited)**                  |      |                            |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| Cash                and due from banks                                                                                      |   | $                                | 67,031    |                            | $      | 43,486 |   |
| Federal                funds sold                                                                                           |   |                             | 12,426    |                            |   | --- |   |
| Cash                and cash equivalents                                                                                    |   |                             | 79,457    |                            |   | 43,486 |   |
| Interest-bearing                deposits in other banks                                                                     |   |                             | 24,956    |                            |   | 1,787 |   |
| Investment                securities, available for sale                                                                    |   |                             | 618,228   |                            |   | 619,110 |   |
| Investment                securities, held to maturity (fair value approximates                $19,522)                     |   |                             | 19,368    |                            |   | --- |   |
| Loans                held for sale                                                                                          |   |                             | 2,944     |                            |   | 1,505 |   |
| Loans,                net of allowance for loan losses of $22,773 and $14,421                                               |   |                             | 2,142,657 |                            |   | 1,201,530 |   |
| Premises                and equipment, net                                                                                  |   |                             | 42,969    |                            |   | 26,369 |   |
| Goodwill                and identifiable intangible assets                                                                  |   |                             | 258,057   |                            |   | 5,051 |   |
| Accrued                interest receivable and other assets                                                                 |   |                             | 102,596   |                            |   | 55,961 |   |
| Total                assets                                                                                                 |   | $                                | 3,291,232 |                            | $      | 1,954,799 |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| **LIABILITIES**                                                                                                             |   |                             |      |                            |   |   |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| Deposits                                                                                                                    |   |                             |      |                            |   |   |   |
| Non-interest                bearing                                                                                         |   | $                                | 358,894   |                            | $      | 184,359 |   |
| Interest                bearing                                                                                             |   |                             | 1,885,897 |                            |   | 1,121,178 |   |
| Total                deposits                                                                                               |   |                             | 2,244,791 |                            |   | 1,305,537 |   |
| Short-term                borrowings                                                                                        |   |                             | 58,087    |                            |   | 47,116 |   |
| Long-term                debt                                                                                               |   |                             | 457,728   |                            |   | 404,662 |   |
| Subordinated                debt                                                                                            |   |                             | 30,928    |                            |   | 30,928 |   |
| Accrued                interest payable and other liabilities                                                               |   |                             | 18,738    |                            |   | 14,215 |   |
| Total                liabilities                                                                                            |   |                             | 2,810,272 |                            |   | 1,802,458 |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| **STOCKHOLDERS’                EQUITY**                                                                               |   |                             |      |                            |   |   |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| Preferred                stock, no par value; 500,000 shares                                                                |   |                             |      |                            |   |   |   |
| authorized;                no shares issued and outstanding                                                                 |   |                             | ---       |                            |   | --- |   |
| Common                stock-$5.00 par value; 50,000,000 shares                                                              |   |                             |      |                            |   |   |   |
| authorized;                23,315,000 and 12,421,000 shares issued                                                          |   |                             | 116,575   |                            |   | 62,107 |   |
| Surplus                                                                                                                     |   |                             | 347,717   |                            |   | 73,304 |   |
| Retained                Earnings                                                                                            |   |                             | 21,292    |                            |   | 18,134 |   |
| Accumulated                other comprehensive income,                                                                      |   |                             |      |                            |   |   |   |
| net                of tax                                                                                                   |   |                             | 1,381     |                            |   | 3,211 |   |
| Treasury                stock; 219,000 and 185,000 shares, at cost                                                          |   |                             | (6,005    | )                               |   | (4,415 | ) |
| Total                stockholders’ equity                                                                             |   |                             | 480,960   |                            |   | 152,341 |   |
| Total                liabilities and stockholders’ equity                                                             |   | $                                | 3,291,232 |                            | $      | 1,954,799 |   |
|                                                                                                                        |   |                             |      |                            |   |   |   |
| 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,**     |   |
|                                                                                                                        |   | **2005**                              |   | **2004**                             |   | **2005** |   | **2004** |   |
| **INTEREST                INCOME:**                                                                                         |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Loans,                including fees                                                                                        |   | $                                     | 35,325 |                                 | $      | 17,712 |   | $ | 74,370 |   | $ | 51,366 |   |
| Investment                securities:                                                                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                     |   |                                  | 4,397  |                                 |   | 4,816 |   |   | 12,657 |   |   | 14,469 |   |
| Tax                exempt                                                                                                   |   |                                  | 2,299  |                                 |   | 2,176 |   |   | 6,687 |   |   | 6,629 |   |
| Dividends                                                                                                                   |   |                                  | 600    |                                 |   | 501 |   |   | 1,746 |   |   | 1,564 |   |
| Other                                                                                                                       |   |                                  | 857    |                                 |   | 22 |   |   | 1,591 |   |   | 61 |   |
| Total                interest income                                                                                        |   |                                  | 43,478 |                                 |   | 25,227 |   |   | 97,051 |   |   | 74,089 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **INTEREST                EXPENSE:**                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                    |   |                                  | 10,993 |                                 |   | 5,669 |   |   | 23,954 |   |   | 16,802 |   |
| Short-term                borrowings                                                                                        |   |                                  | 452    |                                 |   | 202 |   |   | 809 |   |   | 524 |   |
| Long-term                debt                                                                                               |   |                                  | 5,109  |                                 |   | 4,655 |   |   | 14,811 |   |   | 13,664 |   |
| Subordinated                debt                                                                                            |   |                                  | 527    |                                 |   | 408 |   |   | 1,481 |   |   | 1,163 |   |
| Total                interest expense                                                                                       |   |                                  | 17,081 |                                 |   | 10,934 |   |   | 41,055 |   |   | 32,153 |   |
| Net                interest income                                                                                          |   |                                  | 26,397 |                                 |   | 14,293 |   |   | 55,996 |   |   | 41,936 |   |
| Provision                for loan losses                                                                                    |   |                                  | 400    |                                 |   | 750 |   |   | 1,700 |   |   | 2,350 |   |
| Net                interest income after provision for loan losses                                                          |   |                                  | 25,997 |                                 |   | 13,543 |   |   | 54,296 |   |   | 39,586 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                INCOME:**                                                                                     |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Investment                management and trust services                                                                     |   |                                  | 796    |                                 |   | 443 |   |   | 1,741 |   |   | 1,119 |   |
| Service                charges on deposit accounts                                                                          |   |                                  | 2,799  |                                 |   | 1,996 |   |   | 6,620 |   |   | 5,108 |   |
| Other                service charges, commissions and fees                                                                  |   |                                  | 1,819  |                                 |   | 888 |   |   | 3,763 |   |   | 2,565 |   |
| Insurance                premium income and commissions                                                                     |   |                                  | 825    |                                 |   | 708 |   |   | 2,607 |   |   | 2,387 |   |
| Mortgage                banking activities                                                                                  |   |                                  | 660    |                                 |   | 558 |   |   | 1,723 |   |   | 2,013 |   |
| Earnings                on investment in life insurance                                                                     |   |                                  | 659    |                                 |   | 433 |   |   | 1,413 |   |   | 1,210 |   |
| Investment                security gains                                                                                    |   |                                  | 29     |                                 |   | 108 |   |   | 247 |   |   | 2,284 |   |
| Other                                                                                                                       |   |                                  | 279    |                                 |   | 878 |   |   | 560 |   |   | 1,105 |   |
| Total                non-interest income                                                                                    |   |                                  | 7,866  |                                 |   | 6,012 |   |   | 18,674 |   |   | 17,791 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                                                                                   |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Salaries                and employee benefits                                                                               |   |                                  | 11,808 |                                 |   | 6,975 |   |   | 26,537 |   |   | 20,851 |   |
| Net                occupancy                                                                                                |   |                                  | 3,364  |                                 |   | 2,039 |   |   | 7,788 |   |   | 6,217 |   |
| Merger,                conversion and restructuring expenses                                                                |   |                                  | 248    |                                 |   | --- |   |   | 8,205 |   |   | --- |   |
| Marketing                expense                                                                                            |   |                                  | 528    |                                 |   | 611 |   |   | 1,439 |   |   | 1,900 |   |
| Telecommunications                expense                                                                                   |   |                                  | 309    |                                 |   | 318 |   |   | 870 |   |   | 979 |   |
| Amortization                of intangibles                                                                                  |   |                                  | 641    |                                 |   | 40 |   |   | 728 |   |   | 119 |   |
| Other                                                                                                                       |   |                                  | 4,186  |                                 |   | 2,547 |   |   | 9,322 |   |   | 7,309 |   |
| Total                non-interest expenses                                                                                  |   |                                  | 21,084 |                                 |   | 12,530 |   |   | 54,889 |   |   | 37,375 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Income                before income taxes                                                                                   |   |                                  | 12,779 |                                 |   | 7,025 |   |   | 18,081 |   |   | 20,002 |   |
| Income                taxes                                                                                                 |   |                                  | 2,447  |                                 |   | 1,379 |   |   | 3,401 |   |   | 3,744 |   |
| Net                income                                                                                                   |   | $                                     | 10,332 |                                 | $      | 5,646 |   | $ | 14,680 |   | $ | 16,258 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                PER SHARE DATA**                                                                              |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                                                                                     |   | $                                     | 0.44   |                                 | $      | 0.46 |   | $ | 0.92 |   | $ | 1.33 |   |
| Diluted                earnings per share                                                                                   |   | $                                     | 0.44   |                                 | $      | 0.45 |   | $ | 0.90 |   | $ | 1.29 |   |
| Dividends                declared                                                                                           |   | $                                     | 0.19   |                                 | $      | 0.17 |   | $ | 0.55 |   | $ | 0.50 |   |
|                                                                                                                        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| 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, 2005 and 2004**

**(Unaudited:      Dollars in Thousands)**

|                                                                                                                                             |   | **Outstanding** |   | **Common** |   |        |   | **Retained** |    | **Accumulated****Other****Comprehensive** |   | **Treasury** |   | **Total**  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|-------------|--------|--------------|---------|-------------------------------------------|--------|--------------|--------|------------|--------|
|                                                                                                                                             |   | **Shares**      |   | **Stock**  |   | **Surplus** |   | **Earnings** |    | **Income                (Loss)**          |   | **Stock**    |   | **Equity** |   |
| **Balance,                January 1, 2004**                                                                                                      |   |            | 11,648 |       | $      | 59,256      |   | $            | 57,563  |                                      | $      | 24,297       |   | $          | 6,596  |   | $ | (4,306 | ) | $ | 143,406 |   |
| Comprehensive                income (loss):                                                                                                      |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   | 16,258       |   |       |   |   |   |   |   |   | 16,258 |   |
| Unrealized                loss on securities, net of reclassification adjustment and tax                effect                                   |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       | (1,546 | ) |   |   |   |   | (1,546 | ) |
| Total                comprehensive income                                                                                                        |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   | 14,712 |   |
| Cash                dividends                                                                                                                    |   |            |   |       |   |        |   |         |    |                                      |   | (6,136       | )      |       |   |   |   |   |   |   | (6,136 | ) |
| 5%                stock dividend                                                                                                                 |   |            | 584    |       |   | 2,949       |   |         | 15,103  |                                      |   | (18,110      | )      |       |   |   |   |   |   |   | (58 | ) |
| Purchases                of treasury stock                                                                                                       |   |            | (144   | )          |   |        |   |         |    |                                      |   |         |   |       |   |   |   | (4,151 | ) |   | (4,151 | ) |
| Exercise                of common stock options and issuances under stock purchase                plan                                           |   |            | 96     |       |   | (97         | )      |         |    |                                      |   | (1,615       | )      |       |   |   |   | 2,795 |   |   | 1,083 |   |
| Tax                benefits from employee stock transactions                                                                                     |   |            |   |       |   |        |   |         | 563     |                                      |   |         |   |       |   |   |   |   |   |   | 563 |   |
|                                                                                                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                September 30, 2004**                                                                                                   |   |            | 12,184 |       | $      | 62,108      |   | $            | 73,229  |                                      | $      | 14,694       |   | $          | 5,050  |   | $ | (5,662 | ) | $ | 149,419 |   |
|                                                                                                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                January 1, 2005**                                                                                                      |   |            | 12,236 |       | $      | 62,107      |   | $            | 73,304  |                                      | $      | 18,134       |   | $          | 3,211  |   | $ | (4,415 | ) | $ | 152,341 |   |
| Comprehensive                income (loss):                                                                                                      |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| 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                                                                                                                    |   |            |   |       |   |        |   |         |    |                                      |   | (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 Financial Services Corp.:                                                                                 |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| Common                stock issued                                                                                                               |   |            | 10,854 |       |   | 54,272      |   |         | 269,733 |                                      |   |         |   |       |   |   |   |   |   |   | 324,005 |   |
| Fair                value of stock options                                                                                                       |   |            |   |       |   |        |   |         | 3,079   |                                      |   |         |   |       |   |   |   |   |   |   | 3,079 |   |
| Other                                                                                                                                            |   |            |   |       |   |        |   |         | 324     |                                      |   | (324         | )      |       |   |   |   |   |   |   | --- |   |
|                                                                                                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| **Balance,                September 30, 2005**                                                                                                   |   |            | 23,096 |       | $      | 116,575     |   | $            | 347,717 |                                      | $      | 21,292       |   | $          | 1,381  |   | $ | (6,005 | ) | $ | 480,960 |   |
|                                                                                                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
|                                                                                                                                             |   |            |   |       |   |        |   |         |    |                                      |   |         |   |       |   |   |   |   |   |   |   |   |
| 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,**     |     |
|                                                                                                                        |   | **2005**                             |     | **2004** |   |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| **Operating                Activities:**                                                                                    |   |                                 |     |   |   |   |   |
| Net                income                                                                                                   |   | $                                    | 14,680   |   | $ | 16,258 |   |
| Adjustments                to reconcile net income to net cash                                                              |   |                                 |     |   |   |   |   |
| provided                by operating activities:                                                                            |   |                                 |     |   |   |   |   |
| Provision                for loan losses                                                                                    |   |                                 | 1,700    |   |   | 2,350 |   |
| Depreciation                and amortization                                                                                |   |                                 | 3,446    |   |   | 2,480 |   |
| Net                amortization of securities                                                                               |   |                                 | 831      |   |   | 929 |   |
| Realized                gains on sales of available-for-sale securities, net                                                |   |                                 | (247     | ) |   | (2,284 | ) |
| Loans                originated for sale                                                                                    |   |                                 | (5,801   | ) |   | (9,331 | ) |
| Proceeds                from sales of loans held for sale                                                                   |   |                                 | 4,541    |   |   | 14,571 |   |
| Gains                on loan sales                                                                                          |   |                                 | (179     | ) |   | (1,065 | ) |
| Earnings                on investment in life insurance                                                                     |   |                                 | (1,413   | ) |   | (1,210 | ) |
| Net                change in other assets                                                                                   |   |                                 | 8,087    |   |   | 1,259 |   |
| Net                change in accrued interest payable and other liabilities                                                 |   |                                 | (8,811   | ) |   | (2,968 | ) |
| Tax                benefits from employee stock transactions                                                                |   |                                 | 404      |   |   | 563 |   |
| Net                cash provided by operating activities                                                                    |   |                                 | 17,238   |   |   | 21,552 |   |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| **Investing                Activities:**                                                                                    |   |                                 |     |   |   |   |   |
| Net                change in interest-bearing deposits in other banks                                                       |   |                                 | (16,793  | ) |   | 1,531 |   |
| Activity                in available-for-sale securities:                                                                   |   |                                 |     |   |   |   |   |
| Sales                                                                                                                       |   |                                 | 282,857  |   |   | 109,450 |   |
| Maturities,                prepayments and calls                                                                            |   |                                 | 49,670   |   |   | 100,908 |   |
| Purchases                                                                                                                   |   |                                 | (84,580  | ) |   | (207,978 | ) |
| Purchases                of securities held to maturity                                                                     |   |                                 | (19,368  | ) |   | --- |   |
| Net                increase in total loans                                                                                  |   |                                 | (108,740 | ) |   | (115,739 | ) |
| Proceeds                from sale of credit card portfolio                                                                  |   |                                 | ---      |   |   | 4,556 |   |
| Investment                in life insurance                                                                                 |   |                                 | ---      |   |   | (5,000 | ) |
| Net                additions to premises and equipment                                                                      |   |                                 | (5,376   | ) |   | (2,895 | ) |
| Cash                acquired in acquisition                                                                                 |   |                                 | 34,564   |   |   | --- |   |
| Other                                                                                                                       |   |                                 | (3,474   | ) |   | (382 | ) |
| Net                cash provided by (used in) investing activities                                                          |   |                                 | 128,760  |   |   | (115,549 | ) |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| **Financing                Activities:**                                                                                    |   |                                 |     |   |   |   |   |
| Net                increase in deposits                                                                                     |   |                                 | 57,179   |   |   | 89,791 |   |
| Net                change in short-term borrowings                                                                          |   |                                 | (80,039  | ) |   | (18,065 | ) |
| Proceeds                from issuance of long-term debt                                                                     |   |                                 | 25,000   |   |   | 35,000 |   |
| Repayment                of long-term debt                                                                                  |   |                                 | (100,448 | ) |   | (15,052 | ) |
| Cash                dividends and cash paid in lieu of fractional shares                                                    |   |                                 | (8,859   | ) |   | (6,194 | ) |
| Purchases                of treasury stock                                                                                  |   |                                 | (9,354   | ) |   | (4,151 | ) |
| Proceeds                from issuance of common stock                                                                       |   |                                 | 6,494    |   |   | 1,083 |   |
| Net                cash provided by (used in) financing activities                                                          |   |                                 | (110,027 | ) |   | 82,412 |   |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| Net                change in cash and cash equivalents                                                                      |   |                                 | 35,971   |   |   | (11,585 | ) |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                             |   |                                 | 43,486   |   |   | 59,887 |   |
| Cash                and cash equivalents at end of period                                                                   |   | $                                    | 79,457   |   | $ | 48,302 |   |
|                                                                                                                        |   |                                 |     |   |   |   |   |
| 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***

***Statement      of Cash Flows***

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

|                                                            |   | **Three                Months Ended** |   | **Nine                Months Ended** |   |
|-----------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                            |   | **September                30,**      |   | **September                30,**     |   |
|                                                            |   | **2005**                              |   | **2004**                             |   | **2005** |   | **2004** |   |
|                                                            |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Net                income, as reported                          |   | $                                     | 10,332 |                                 | $      | 5,646 |   | $ | 14,680 |   | $ | 16,258 |   |
| Deduct:                Total stock-based compensation           |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| expense                determined under fair value based        |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| method                for all awards, net of related tax effect |   |                                  | (39    | )                                    |   | (355 | ) |   | (1,526 | ) |   | (1,064 | ) |
|                                                            |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Pro                forma net income                             |   | $                                     | 10,293 |                                 | $      | 5,291 |   | $ | 13,154 |   | $ | 15,194 |   |
|                                                            |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Earnings                per share:                              |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Basic                - as reported                              |   | $                                     | 0.44   |                                 | $      | 0.46 |   | $ | 0.92 |   | $ | 1.33 |   |
| Basic                - pro forma                                |   |                                  | 0.44   |                                 |   | 0.43 |   |   | 0.82 |   |   | 1.24 |   |
|                                                            |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Diluted                - as reported                            |   | $                                     | 0.44   |                                 | $      | 0.45 |   | $ | 0.90 |   | $ | 1.29 |   |
| Diluted                - pro forma                              |   |                                  | 0.44   |                                 |   | 0.42 |   |   | 0.81 |   |   | 1.21 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Earnings      Per Share -***

|                                                         |   | **Three                Months Ended****September                30,** |   | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                         |   | **2005**                                                              |   | **2004**                                                             |   | **2005** |   | **2004** |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net                income                                    |   | $                                                                     | 10,332 |                                                                 | $      | 5,646 |   | $ | 14,680 |   | $ | 16,258 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding (basic)   |   |                                                                  | 23,228 |                                                                 |   | 12,189 |   |   | 16,004 |   |   | 12,235 |   |
| Effect                of dilutive stock options              |   |                                                                  | 344    |                                                                 |   | 319 |   |   | 334 |   |   | 347 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding (diluted) |   |                                                                  | 23,572 |                                                                 |   | 12,508 |   |   | 16,338 |   |   | 12,582 |   |
|                                                         |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Per                share information:                        |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                      |   | $                                                                     | 0.44   |                                                                 | $      | 0.46 |   | $ | 0.92 |   | $ | 1.33 |   |
| Diluted                earnings per share                    |   |                                                                  | 0.44   |                                                                 |   | 0.45 |   |   | 0.90 |   |   | 1.29 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Comprehensive      Income (Loss)***

|                                             |   | **Three                Months Ended****September                30,** |   | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                             |   | **2005**                                                              |   | **2004**                                                             |   | **2005** |   | **2004** |   |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Unrealized                holding gains (losses) |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| on                available-for-sale securities  |   | $                                                                     | (245   | )                                                                    | $      | 16,503 |   | $ | (2,430 | ) | $ | (94 | ) |
| Reclassification                adjustments for  |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| gains                included in net income      |   |                                                                  | (29    | )                                                                    |   | (108 | ) |   | (247 | ) |   | (2,284 | ) |
| Net                unrealized gains (losses)     |   |                                                                  | (274   | )                                                                    |   | 16,395 |   |   | (2,677 | ) |   | (2,378 | ) |
| Tax                effect                        |   |                                                                  | 96     |                                                                 |   | (5,738 | ) |   | 937 |   |   | 832 |   |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                 |   |                                                                  | (178   | )                                                                    |   | 10,657 |   |   | (1,740 | ) |   | (1,546 | ) |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Unfunded                pension liability        |   |                                                                  | ---    |                                                                 |   | --- |   |   | (138 | ) |   | --- |   |
| Tax                effect                        |   |                                                                  | ---    |                                                                 |   | --- |   |   | 48 |   |   | --- |   |
|                                             |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                 |   |                                                                  | ---    |                                                                 |   | --- |   |   | (90 | ) |   | --- |   |
|                                             |   | $                                                                     | (178   | )                                                                    | $      | 10,657 |   | $ | (1,830 | ) | $ | (1,546 | ) |

|                                                  |   | **September                30,****2005** |   | **December                31,****2004** |   |
|-------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
| Net                unrealized gain on                 |   |                                     |   |                                    |   |   |   |
| available-for-sale                securities          |   | $                                        | 5,838  |                                    | $      | 8,515 |   |
| Tax                effect                             |   |                                     | (2,043 | )                                       |   | (2,980 | ) |
| Net-of-tax                amount                      |   |                                     | 3,795  |                                    |   | 5,535 |   |
|                                                  |   |                                     |   |                                    |   |   |   |
| Unfunded                pension liability             |   |                                     | (3,714 | )                                       |   | (3,576 | ) |
| Tax                effect                             |   |                                     | 1,300  |                                    |   | 1,252 |   |
| Net-of-tax                amount                      |   |                                     | (2,414 | )                                       |   | (2,324 | ) |
|                                                  |   |                                     |   |                                    |   |   |   |
| Accumulated                other comprehensive income |   | $                                        | 1,381  |                                    | $      | 3,211 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

***Recent      Accounting Pronouncements***
**      - **
* *

** **

** **

***Reclassifications***

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**2.      **
**Allowance      for loan losses:**

|                                                          |   | **Nine                Months Ended September 30,****2005** |   | **Year                Ended****December                31, 2004** |   | **Nine                Months Ended****September                30,****2004** |   |
|---------------------------------------------------------------|--------|------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|                                                          |   |                                                       |   |                                                              |   |                                                                         |   |   |   |   |
| Balance,                January 1                             |   | $                                                          | 14,421 |                                                              | $      | 13,178                                                                       |   | $ | 13,178 |   |
| Provision                for loan losses                      |   |                                                       | 1,700  |                                                              |   | 3,100                                                                        |   |   | 2,350 |   |
| Loan                charge-offs                               |   |                                                       | (1,170 | )                                                                 |   | (2,910                                                                       | )      |   | (1,988 | ) |
| Recoveries                                                    |   |                                                       | 754    |                                                              |   | 1,053                                                                        |   |   | 896 |   |
| Allowance                established for acquired credit risk |   |                                                       | 7,068  |                                                              |   | ---                                                                          |   |   | --- |   |
| Balance,                end of period                         |   | $                                                          | 22,773 |                                                              | $      | 14,421                                                                       |   | $ | 14,436 |   |

|                                           |   | **September                30,****2005** |   | **December                31,**** 2004** |   | **September                30,****2004** |   |
|------------------------------------------------|--------|------------------------------------------|--------|-----------------------------------------------|--------|------------------------------------------|--------|
|                                           |   |                                     |   |                                          |   |                                     |   |   |   |   |
| Non-accrual                loans               |   | $                                        | 10,736 |                                          | $      | 5,428                                    |   | $ | 5,990 |   |
| Foreclosed                real estate          |   |                                     | 2,273  |                                          |   | 2,094                                    |   |   | 2,203 |   |
| Total                non-performing assets     |   |                                     | 13,009 |                                          |   | 7,522                                    |   |   | 8,193 |   |
| Accruing                loans 90 days past due |   |                                     | 7      |                                          |   | ---                                      |   |   | 16 |   |
| Total                risk elements             |   | $                                        | 13,016 |                                          | $      | 7,522                                    |   | $ | 8,209 |   |

**3.      **
**Guarantees:**

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

**4.      **
**Merger,      Conversion and Restructuring Expenses**
** **
** **

**5.      **
**Acquisition:**
** **

| Assets:                                  |   |   |      |
|------------------------------------------|--------|--------|-----------|
| Cash                and due from banks   |   | $      | 34,564    |   |
| Investment                securities     |   |   | 250,477   |   |
| Net                loans                 |   |   | 835,126   |   |
| Core                deposit intangible   |   |   | 13,135    |   |
| Other                assets              |   |   | 75,436    |   |
| Total                identifiable assets |   | $      | 1,208,738 |   |
|                                     |   |   |      |   |
| Liabilities:                             |   |   |      |   |
| Total                deposits            |   | $      | 882,075   |   |
| Short-term                borrowings     |   |   | 91,010    |   |
| Long-term                borrowings      |   |   | 128,515   |   |
| Other                liabilities         |   |   | 13,196    |   |
| Total                liabilities         |   | $      | 1,114,796 |   |

----

**Community      Banks, Inc. and Subsidiaries**

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

**(Unaudited)**

| Community                common stock issued                              |   |   | 10,854,435 |   |   |    |   |
|---------------------------------------------------------------------------|--------|--------|------------|--------|--------|---------|--------|
| Average                purchase price per Community common share          |   | $      | 29.85      |   |   |    |   |
|                                                                      |   |   |       |   | $      | 324,005 |   |
| Transaction                costs                                          |   |   |       |   |   | 6,395   |   |
| Fair                value of vested employee stock options                |   |   |       |   |   | 3,079   |   |
| Total                Purchase Price                                       |   |   |       |   |   | 333,479 |   |
| Net                Assets Acquired:                                       |   |   |       |   |   |    |   |
| PennRock                stockholders’ equity                        |   |   | 103,690    |   |   |    |   |
| PennRock                goodwill and intangibles                          |   |   | (10,037    | )      |   |    |   |
| Adjustments                to reflect assets acquired at fair value:      |   |   |       |   |   |    |   |
| Investments                                                               |   |   | (6,126     | )      |   |    |   |
| Loans                                                                     |   |   | (1,757     | )      |   |    |   |
| Core                deposit intangible                                    |   |   | 13,135     |   |   |    |   |
| Bank                premises                                              |   |   | (3,482     | )      |   |    |   |
| Deferred                tax assets                                        |   |   | 2,144      |   |   |    |   |
| Adjustments                to reflect liabilities acquired at fair value: |   |   |       |   |   |    |   |
| Time                deposits                                              |   |   | (2,110     | )      |   |    |   |
| FHLB                advances                                              |   |   | (1,515     | )      |   |    |   |
|                                                                      |   |   |       |   |   | 93,942  |   |
| Goodwill                resulting from merger                             |   |   |       |   | $      | 239,537 |   |

|                                                   |   | Pro                  forma                        |   |
|--------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                   |   | Three                  Months Ended September 30, |   |  Nine                  Months Ended September 30 |   |
| (in                  thousands, except per share data) |   | 2004                                              |   | 2005 |   | 2004 |   |
|                                                   |   |                                              |   |   |   |   |   |   |   |   |
| Net                  interest income                   |   | $                                                 | 23,299 |   | $ | 75,114 |   | $ | 69,098 |   |
| Other                  income                          |   |                                              | 9,402  |   |   | 24,602 |   |   | 28,320 |   |
| Net                  income                            |   |                                              | 9,255  |   |   | 27,403 |   |   | 27,105 |   |
| Diluted                  earnings per common share     |   | $                                                 | 0.40   |   | $ | 1.16 |   | $ | 1.16 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**OVERVIEW**

**Forward-Looking      Statements**

**Critical      Accounting Policies**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**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)**

**Supplemental      Reporting of Non-GAAP Results**

|                                                         |   |
|--------------------------------------------------------------|--------|
|                                                         |   |   |   |   |   |
|                                                         |   | Three                Months Ended |   | Nine                Months Ended |   |
|                                                         |   | September                30, |   | September                30, |   |
| (Dollars                in thousands, except per share data) |   | 2005 |   | 2004 |   | 2005 |   | 2004 |   |
|                                                         |   |   |   |   |   |   |   |   |   |
| Net                operating (tangible) income               |   | $ | 11,052 |   | $ | 5,672 |   | $ | 21,916 |   | $ | 16,335 |   |
| Average                tangible assets                       |   | $ | 3,061,813 |   | $ | 1,952,960 |   | $ | 2,361,995 |   | $ | 1,930,857 |   |
| Average                tangible equity                       |   | $ | 228,215 |   | $ | 136,833 |   | $ | 177,374 |   | $ | 138,957 |   |
| Operating                return on average tangible assets   |   |   | 1.43 | % |   | 1.16 | % |   | 1.24 | % |   | 1.13 | % |
| Operating                return on average tangible equity   |   |   | 19.21 | % |   | 16.49 | % |   | 16.52 | % |   | 15.70 | % |
| Tangible                book value at end of period          |   | $ | 9.73 |   | $ | 11.85 |   | $ | 9.73 |   | $ | 11.85 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**STATEMENT      OF CONDITION—Three Months Ended September 30, 2005**

|  (in                thousands)       |   | **Net                Assets Acquired in Merger** |          | Effect                of Purchase Accounting                Adjustments |   | De-leverage                Strategy |   | **Pro                Forma Opening PennRock Balances** |     |
|-------------------------------------------|--------|--------------------------------------------------|---------------|-------------------------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------------------|----------|
| Investment                securities      |   | **$**                                            | **250,477**   |                                                                    | $      | ---                                 |   | $                                                      | (100,000 | ) | **$** | **150,477** |   |
| Loans                                     |   |                                             | **843,923**   |                                                                    |   | (1,757                              | )      |                                                   | ---      |   |   | **842,166** |   |
| Other                assets               |   |                                             | **106,442**   |                                                                    |   | 9,653                               |   |                                                   | ---      |   |   | **116,095** |   |
| Total                assets acquired      |   | **$**                                            | **1,200,842** |                                                                    | $      | 7,896                               |   | $                                                      | (100,000 | ) | **$** | **1,108,738** |   |
|                                      |   |                                             |          |                                                                    |   |                                |   |                                                   |     |   |   |   |   |
| Total                deposits             |   | **$**                                            | **879,965**   |                                                                    | $      | 2,110                               |   | $                                                      | ---      |   | **$** | **882,075** |   |
| Short-term                borrowings      |   |                                             | **91,010**    |                                                                    |   | ---                                 |   |                                                   | (75,000  | ) |   | **16,010** |   |
| Long-term                debt             |   |                                             | **127,000**   |                                                                    |   | 1,515                               |   |                                                   | (25,000  | ) |   | **103,515** |   |
| Other                liabilities          |   |                                             | **13,196**    |                                                                    |   | ---                                 |   |                                                   | ---      |   |   | **13,196** |   |
| Total                liabilities acquired |   | **$**                                            | **1,111,171** |                                                                    | $      | 3,625                               |   | $                                                      | (100,000 | ) | **$** | **1,014,796** |   |
|                                      |   |                                             |          |                                                                    |   |                                |   |                                                   |     |   |   |   |   |
| Net                assets acquired        |   | **$**                                            | **89,671**    |                                                                    | $      | 4,271                               |   | $                                                      | ---      |   | **$** | **93,942** |   |

|                  (in thousands)                 |   | Average                Balance Sheet Third Qtr 2005 |          | **Less:                Pro Forma Opening PennRock Balances** |   | Adjusted                Average Balance Sheet Third Qtr 2005 |   | Average                Balance Sheet Third Qtr 2004 |          | Percent                Increase (Decrease) from 2004 |   |
|------------------------------------------------------|--------|-----------------------------------------------------|---------------|--------------------------------------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------------------------|---------------|------------------------------------------------------|--------|
| **Significant                assets acquired:**      |   |                                                |          |                                                         |   |                                                         |   |                                                |          |                                                 |   |
| Investment                securities                 |   | $                                                   | 632,779       |                                                         | **$**  | **150,477**                                                  |   | $                                                   | 482,302       |                                                 | $      | 663,153 |   |   | (27 | )% |
| **Loans**                                            |   |                                                | **2,138,081** |                                                         |   | **842,166**                                                  |   |                                                | **1,295,915** |                                                 |   | **1,175,562** |   |   | **10** | **%** |
| Total                assets                          |   |                                                | 3,316,460     |                                                         |   | **1,108,738**                                                |   |                                                | 2,207,722     |                                                 |   | 1,957,935 |   |   | 13 | % |
|                                                 |   |                                                |          |                                                         |   |                                                         |   |                                                |          |                                                 |   |   |   |   |   |   |
| **Significant                liabilities acquired:** |   |                                                |          |                                                         |   |                                                         |   |                                                |          |                                                 |   |   |   |   |   |   |
| **Deposits**                                         |   |                                                | **2,248,304** |                                                         |   | **882,075**                                                  |   |                                                | **1,366,229** |                                                 |   | **1,313,374** |   |   | **4** | **%** |
| Short-term                borrowings                 |   |                                                | 56,948        |                                                         |   | **16,010**                                                   |   |                                                | 40,938        |                                                 |   | 59,464 |   |   | (31 | )% |
| Long-term                debt                        |   |                                                | 476,602       |                                                         |   | **103,515**                                                  |   |                                                | 373,087       |                                                 |   | 399,085 |   |   | (7 | )% |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**Restructuring      and De-Leverage Strategy**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**STATEMENT      OF CONDITION—Nine Months ended September 30, 2005 and      2004**

|                                                            |   | **September** **30,** |      | **Change** |   |
|-----------------------------------------------------------------|--------|----------------------------|-----------|------------|--------|
|                                                            |   | **2005**                   |      | **2004**   |   | Volume |   | %  |   |
| Cash                and due from banks                          |   | $                          | 43,143    |       | $      | 36,19235,187 |   | $ | 6,951 |   |   | 19 | % |
| Federal                funds sold and other                     |   |                       | 67,706    |       |   | 8,124 |   |   | 59,582 |   |   | 733 | % |
| Investments                                                     |   |                       | 609,754   |       |   | 678,865 |   |   | (69,111 | ) |   | (10 | )% |
| Loans                held for sale                              |   |                       | 2,348     |       |   | 3,006 |   |   | (658 | ) |   | (22 | )% |
| Loans                                                           |   |                       | 1,548,283 |       |   | 1,138,093 |   |   | 410,190 |   |   | 36 | % |
| Allowance                for loan losses                        |   |                       | 17,530    |       |   | 14,025 |   |   | 3,505 |   |   | 25 | % |
| Net                loans                                        |   |                       | 1,530,753 |       |   | 1,124,068 |   |   | 406,685 |   |   | 36 | % |
| Goodwill                and identifiable intangibles            |   |                       | 89,136    |       |   | 4,858 |   |   | 84,278 |   |   | 1735 | % |
| Other                assets                                     |   |                       | 108,291   |       |   | 80,602 |   |   | 27,689 |   |   | 34 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Total                assets                                     |   | $                          | 2,451,131 |       | $      | 1,935,715 |   | $ | 515,416 |   |   | 27 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                deposits                     |   | $                          | 241,831   |       | $      | 174,611 |   | $ | 67,220 |   |   | 38 | % |
| Interest-bearing                deposits                        |   |                       | 1,411,891 |       |   | 1,118,495 |   |   | 293,396 |   |   | 26 | % |
| Short-term                borrowings                            |   |                       | 41,706    |       |   | 62,763 |   |   | (21,057 | ) |   | (34 | )% |
| Long-term                debt                                   |   |                       | 442,153   |       |   | 391,387 |   |   | 50,766 |   |   | 13 | % |
| Subordinated                debt                                |   |                       | 30,928    |       |   | 30,928 |   |   | --- |   |   | --- |   |
| Other                liabilities                                |   |                       | 16,677    |       |   | 13,716 |   |   | 2,961 |   |   | 22 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                |   |                       | 2,185,186 |       |   | 1,791,900 |   |   | 393,286 |   |   | 22 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity                       |   |                       | 265,945   |       |   | 143,815 |   |   | 122,130 |   |   | 85 | % |
|                                                            |   |                       |      |       |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders’ equity |   | $                          | 2,451,131 |       | $      | 1,935,715 |   | $ | 515,416 |   |   | 27 | % |

|                                   |   |     |      |     |   | **Change** |   |
|----------------------------------------|--------|----------|-----------|----------|--------|------------|--------|
|                                   |   | **2005** |      | **2004** |   | Amount     |   | %  |   |
| Commercial                             |   | $        | 533,916   |     | $      | 405,534    |   | $ | 128,382 |   |   | 32 | % |
| Commercial                real estate  |   |     | 489,780   |     |   | 298,111    |   |   | 191,669 |   |   | 64 | % |
| Residential                real estate |   |     | 119,234   |     |   | 96,162     |   |   | 23,072 |   |   | 24 | % |
| Consumer                               |   |     | 405,353   |     |   | 338,286    |   |   | 67,067 |   |   | 20 | % |
| Total                                  |   | $        | 1,548,283 |     | $      | 1,138,093  |   | $ | 410,190 |   |   | 36 | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

|                                      |   |     |      |     |   | **Change** |   |
|-------------------------------------------|--------|----------|-----------|----------|--------|------------|--------|
|                                      |   | **2005** |      | **2004** |   | Amount     |   | %  |   |
| Demand                                    |   | $        | 241,831   |     | $      | 174,611    |   | $ | 67,220 |   |   | 38 | % |
| Savings                & NOW accounts |   |     | 627,710   |     |   | 496,532    |   |   | 131,178 |   |   | 26 | % |
| Time                                      |   |     | 645,259   |     |   | 508,544    |   |   | 136,715 |   |   | 27 | % |
| Time                $100,000 or more      |   |     | 138,922   |     |   | 113,419    |   |   | 25,503 |   |   | 22 | % |
|                                      |   | $        | 1,653,722 |     | $      | 1,293,106  |   | $ | 360,616 |   |   | 28 | % |

----

**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-- Quarter ended September 30, 2005, compared to quarter ended      September 30, 2004**

**Net      Interest Income**

|  **Net                Interest Margin - Quarter to Date**                          |   |
|-----------------------------------------------------------------------------------------|--------|
|                                                                                    |   |   |   |   |   |   |   |
| (dollars                in thousands)                                                   |   |   |   | September                30, 2005 |   | September                30, 2004 |   |
|                                                                                    |   |   |   | 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 |   |   |   |   | $ | 100,263 |   | $ | 857 |   |   | 3.39 | % | $ | 6,013 |   | $ | 22 |   |   | 1.46 | % |
| Investment                securities                                                    |   |   |   |   |   | 632,779 |   |   | 8,760 |   |   | 5.49 | % |   | 663,153 |   |   | 8,854 |   |   | 5.31 | % |
| Loans                - commercial                                                       |   |   |   |   |   | 740,034 |   |   | 12,665 |   |   | 6.79 | % |   | 420,252 |   |   | 6,034 |   |   | 5.71 | % |
| -                commercial real estate                                                 |   |   |   |   |   | 731,449 |   |   | 12,135 |   |   | 6.58 | % |   | 308,927 |   |   | 4,667 |   |   | 6.01 | % |
| -                residential real estate                                                |   |   |   |   |   | 176,263 |   |   | 2,731 |   |   | 6.15 | % |   | 95,693 |   |   | 1,559 |   |   | 6.48 | % |
| -                consumer                                                               |   |   |   |   |   | 492,367 |   |   | 8,141 |   |   | 6.56 | % |   | 351,181 |   |   | 5,704 |   |   | 6.46 | % |
| Total                earning assets                                                     |   |   |   |   | $ | 2,873,155 |   | $ | 45,289 |   |   | 6.25 | % | $ | 1,845,219 |   | $ | 26,840 |   |   | 5.79 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      | $      | 850,801 |   | $ | 3,048 |   |   | 1.42 | % | $ | 515,917 |   | $ | 1,139 |   |   | 0.88 | % |
| -                time                                                                   |   |   |   |   |   | 1,040,770 |   |   | 7,945 |   |   | 3.03 | % |   | 615,023 |   |   | 4,530 |   |   | 2.93 | % |
| Short-term                borrowings                                                    |   |   |   |   |   | 56,948 |   |   | 452 |   |   | 3.15 | % |   | 59,464 |   |   | 202 |   |   | 1.35 | % |
| Long-term                debt                                                           |   |   |   |   |   | 476,602 |   |   | 5,109 |   |   | 4.25 | % |   | 399,085 |   |   | 4,655 |   |   | 4.64 | % |
| Subordinated                debt                                                        |   |   |   |   |   | 30,928 |   |   | 527 |   |   | 6.76 | % |   | 30,928 |   |   | 408 |   |   | 5.25 | % |
| Total                interest-bearing liabilities                                       |   |   |   |   | $ | 2,456,049 |   | $ | 17,081 |   |   | 2.76 | % | $ | 1,620,417 |   | $ | 10,934 |   |   | 2.68 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |   |   |   |   |   |   |   |   |   |   | 6.25 | % |   |   |   |   |   |   |   | 5.79 | % |
| Interest                expense to paying liabilities                                   |   |   |   |   |   |   |   |   |   |   |   | 2.76 | % |   |   |   |   |   |   |   | 2.68 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |   |   |   |   |   |   |   |   |   |   | 3.49 | % |   |   |   |   |   |   |   | 3.11 | % |
| Impact                of non-interest funds                                             |   |   |   |   |   |   |   |   |   |   |   | 0.40 | % |   |   |   |   |   |   |   | 0.32 | % |
| Net                interest margin                                                      |   |   |   |   |   |   |   | $ | 28,208 |   |   | 3.89 | % |   |   |   | $ | 15,906 |   |   | 3.43 | % |

----

**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**

----

**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**

|                                                         |   |                                                |   |                                                       |   | Comparison                                                       |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------|--------|------------------------------------------------------------|--------|------------------------------------------------------------------|--------|
|                  (in thousands)                         |   | Third                Qtr 2005 Non-interest Expenses |   | Less:                Estimated Pro Forma PennRock Expenses |   | **Adjusted                Third Qtr 2005 Non-interest Expenses** |   | **Third                Qtr 2004 Non-interest Expenses** |   | Percent                Increase (Decrease) from 2004 |   |
| Salaries                and employee benefits                |   | $                                                   | 11,808 |                                                       | $      | 4,500                                                            |   | **$** | **7,308** |   | **$** | **6,975** |   |   | 5 | % |
| Net                occupancy                                 |   |                                                | 3,364  |                                                       |   | 1,000                                                            |   |   | **2,364** |   |   | **2,039** |   |   | 16 | % |
| Marketing                expense                             |   |                                                | 528    |                                                       |   | 200                                                              |   |   | **328** |   |   | **611** |   |   | (46 | )% |
| Telecommunications                expense                    |   |                                                | 309    |                                                       |   | 100                                                              |   |   | **209** |   |   | **318** |   |   | (34 | )% |
| Amortization                of intangibles                   |   |                                                | 641    |                                                       |   | ---                                                              |   |   | **641** |   |   | **40** |   |   | NM* |   |
| Other                                                        |   |                                                | 4,186  |                                                       |   | 1,700                                                            |   |   | **2,486** |   |   | **2,547** |   |   | (2 | )% |
| Subtotal                                                     |   |                                                | 20,836 |                                                       |   | 7,500                                                            |   |   | **13,336** |   |   | **12,530** |   |   | 6 | % |
| Merger,                conversion and restructuring expenses |   |                                                | 248    |                                                       |   | ---                                                              |   |   | **248** |   |   | **---** |   |   | NM* |   |
| Total                non-interest expenses                   |   | $                                                   | 21,084 |                                                       | $      | 7,500                                                            |   | **$** | **13,584** |   | **$** | **12,530** |   |   | 8 | % |
|                                                         |   |                                                |   |                                                       |   |                                                             |   |   |   |   |   |   |   |   |   |   |
| *                Not Meaningful                              |   |                                                |   |                                                       |   |                                                             |   |   |   |   |   |   |   |   |   |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**Income      Taxes**

----

**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- Nine months ended September 30, 2005, compared to nine months      ended September 30, 2004**

| **Net                Interest Margin - Year to Date**                                   |   |
|-----------------------------------------------------------------------------------------|--------|
|                                                                                    |   |   |   |   |   |
|                                                                                    |   | September                30, 2005 |   | September                30, 2004 |   |
|                                                                                    |   | 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 |   | $ | 67,706 |   | $ | 1,591 |   |   | 3.14 | % | $ | 8,124 |   | $ | 61 |   |   | 1.00 | % |
| Investment                securities                                                    |   |   | 609,754 |   |   | 25,349 |   |   | 5.56 | % |   | 678,865 |   |   | 26,820 |   |   | 5.28 | % |
| Loans                - commercial                                                       |   |   | 533,916 |   |   | 26,109 |   |   | 6.54 | % |   | 405,534 |   |   | 17,132 |   |   | 5.64 | % |
| -                commercial real estate                                                 |   |   | 489,780 |   |   | 23,616 |   |   | 6.45 | % |   | 298,111 |   |   | 13,450 |   |   | 6.03 | % |
| -                residential real estate                                                |   |   | 119,234 |   |   | 5,702 |   |   | 6.39 | % |   | 96,162 |   |   | 4,808 |   |   | 6.68 | % |
| -                consumer                                                               |   |   | 407,257 |   |   | 19,925 |   |   | 6.53 | % |   | 340,820 |   |   | 16,693 |   |   | 6.54 | % |
| Total                earning assets                                                     |   | $ | 2,227,647 |   | $ | 102,292 |   |   | 6.14 | % | $ | 1,827,616 |   | $ | 78,964 |   |   | 5.77 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      |   | $ | 627,710 |   | $ | 6,081 |   |   | 1.30 | % | $ | 496,532 |   | $ | 3,155 |   |   | 0.85 | % |
| -                time                                                                   |   |   | 784,181 |   |   | 17,873 |   |   | 3.05 | % |   | 621,963 |   |   | 13,647 |   |   | 2.93 | % |
| Short-term                borrowings                                                    |   |   | 41,706 |   |   | 809 |   |   | 2.59 | % |   | 62,763 |   |   | 524 |   |   | 1.12 | % |
| Long-term                debt                                                           |   |   | 442,153 |   |   | 14,811 |   |   | 4.48 | % |   | 391,387 |   |   | 13,664 |   |   | 4.66 | % |
| Subordinated                debt                                                        |   |   | 30,928 |   |   | 1,481 |   |   | 6.40 | % |   | 30,928 |   |   | 1,163 |   |   | 5.02 | % |
| Total                interest-bearing liabilities                                       |   | $ | 1,926,678 |   | $ | 41,055 |   |   | 2.85 | % | $ | 1,603,573 |   | $ | 32,153 |   |   | 2.68 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |   |   |   |   |   |   |   | 6.14 | % |   |   |   |   |   |   |   | 5.77 | % |
| Interest                expense to paying liabilities                                   |   |   |   |   |   |   |   |   | 2.85 | % |   |   |   |   |   |   |   | 2.68 | % |
|                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |   |   |   |   |   |   |   | 3.29 | % |   |   |   |   |   |   |   | 3.09 | % |
| Impact                of non-interest funds                                             |   |   |   |   |   |   |   |   | 0.38 | % |   |   |   |   |   |   |   | 0.33 | % |
| Net                interest margin                                                      |   |   |   |   | $ | 61,237 |   |   | 3.67 | % |   |   |   | $ | 46,811 |   |   | 3.42 | % |

**Provision      for Loan Losses**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**Non-Interest      Income**

**Non-Interest      Expenses**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

|                                                         |   |                                                        |   |                                                       |   | Comparison                                                               |   |
|--------------------------------------------------------------|--------|-------------------------------------------------------------|--------|------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                  (in thousands)                         |   | 9/30/2005                Year-to-Date Non-interest Expenses |   | Less:                Estimated Pro Forma PennRock Expenses |   | **Adjusted                9/30/2005 Year-to-date Non-interest Expenses** |   | **9/30/2004                Year-to-date Non-interest Expenses** |   | Percent                Increase (Decrease) from 2004 |   |
| Salaries                and employee benefits                |   | $                                                           | 26,537 |                                                       | $      | 4,500                                                                    |   | **$** | **22,037** |   | **$** | **20,851** |   |   | 6 | % |
| Net                occupancy                                 |   |                                                        | 7,788  |                                                       |   | 1,000                                                                    |   |   | **6,788** |   |   | **6,217** |   |   | 9 | % |
| Marketing                expense                             |   |                                                        | 1,439  |                                                       |   | 200                                                                      |   |   | **1,239** |   |   | **1,900** |   |   | (35 | )% |
| Telecommunications                expense                    |   |                                                        | 870    |                                                       |   | 100                                                                      |   |   | **770** |   |   | **979** |   |   | (21 | )% |
| Amortization                of intangibles                   |   |                                                        | 728    |                                                       |   | ---                                                                      |   |   | **728** |   |   | **119** |   |   | NM* |   |
| Other                                                        |   |                                                        | 9,322  |                                                       |   | 1,700                                                                    |   |   | **7,622** |   |   | **7,309** |   |   | 4 | % |
| Subtotal                                                     |   |                                                        | 46,684 |                                                       |   | 7,500                                                                    |   |   | **39,184** |   |   | **37,375** |   |   | 5 | % |
| Merger,                conversion and restructuring expenses |   |                                                        | 8,205  |                                                       |   | ---                                                                      |   |   | **8,205** |   |   | **---** |   |   | NM* |   |
| Total                non-interest expenses                   |   | $                                                           | 54,889 |                                                       | $      | 7,500                                                                    |   | **$** | **47,389** |   | **$** | **37,375** |   |   | 27 | % |
|                                                         |   |                                                        |   |                                                       |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| *                Not Meaningful                              |   |                                                        |   |                                                       |   |                                                                     |   |   |   |   |   |   |   |   |   |   |

| ·   | The                prepayment penalty of $6 million was incurred to retire $60 million                of                FHLB advances that had a weighted average cost of 6.29% and a weighted                average maturity of nearly 5 years. These advances had conversion                features                that could result in maturities beyond the stated maturity at terms                not                necessarily favorable to Community. The 6.29% cost of funds on the                retired                advances was well in excess of Community’s incremental wholesale borrowing                rate, and made the prepayment advantageous in advance of the impending                merger. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                charges also included merger expenses of $1.3 million which related                principally to severance and retention payments to Community employees                being displaced in the merger. Additional expenses also included                those                associated with contract cancellations and closing of duplicate                facilities. Substantially all of the expected merger-associated expenses                were recognized in the second                quarter. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The                final component of the charges consisted of conversion expenses totaling                $800 thousand that related to training, asset dispositions, and other                costs incurred in connection with the conversion and updating of                Community’s core operating system. As of September 1, 2005, Community and                PennRock began operating on the same, fully-integrated core platform. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Income      Taxes**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**CAPITAL**

|                                            | **September                  30,****2005** | **Regulatory****Minimum** | **“Well****Capitalized”** |
|-------------------------------------------------|--------------------------------------------|---------------------------|---------------------------------------|
| Leverage                  ratio                 |                                       |                      |                                  |
| Community                  Banks, Inc.          | 8.2%                                       | 4%                        | 5%                                    |
| CommunityBanks                                  | 8.0%                                       | 4%                        | 5%                                    |
|                                            |                                       |                      |                                  |
| Tier                  1 capital ratio           |                                       |                      |                                  |
| Community                  Banks, Inc.          | 10.0%                                      | 4%                        | 6%                                    |
| CommunityBanks                                  | 9.7%                                       | 4%                        | 6%                                    |
|                                            |                                       |                      |                                  |
| Total                  risk-based capital ratio |                                       |                      |                                  |
| Community                  Banks, Inc.          | 10.9%                                      | 8%                        | 10%                                   |
| Community                  Banks                | 10.6%                                      | 8%                        | 10%                                   |

**CONTRACTUAL      OBLIGATIONS**

|                                       |   | Payments                due by period |      |
|--------------------------------------------|--------|---------------------------------------|-----------|
|                                       |   |  Total                           |      | Less                than1                year |   | 1-3years |   | 3-5years |   | More                than5                years |   |
|                                       |   |                                  |      |   |   |   |   |   |   |   |   |
| Long-term                debt              |   | $                                     | 457,728   |   | $ | 82,102 |   | $ | 77,749 |   | $ | 75,063 |   | $ | 222,814 |   |
| Operating                lease obligations |   |                                  | 14,887    |   |   | 1,525 |   |   | 2,480 |   |   | 2,224 |   |   | 8,658 |   |
| Subordinated                debt           |   |                                  | 30,928    |   |   | --- |   |   | --- |   |   | --- |   |   | 30,928 |   |
| Time                deposits               |   |                                  | 1,029,874 |   |   | 555,732 |   |   | 325,759 |   |   | 146,354 |   |   | 2,029 |   |
|                                       |   |                                  |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                      |   | $                                     | 1,533,417 |   | $ | 639,359 |   | $ | 405,988 |   | $ | 223,641 |   | $ | 264,429 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

**OFF-BALANCE      SHEET COMMITMENTS**

|                                                     |   | Contract                Amount |    |
|----------------------------------------------------------|--------|--------------------------------|---------|
| Commitments                to fund loans                 |   | $                              | 131,742 |   |
| Unused                lines of credit                    |   | $                              | 358,550 |   |
| Standby                letters of credit                 |   | $                              | 100,000 |   |
| Unadvanced                portions of construction loans |   | $                              | 120,841 |   |

----

**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:***

|                                                                        |   | **Three                Months Ended** |      | **Nine                Months Ended** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
|                                                                        |   | **September                30,**      |      | **September                30,**     |   |
|                                                                        |   | **2005**                              |      | **2004**                             |   | **2005** |   | **2004** |   |
| **Income                statement data:**                                   |   |                                  |      |                                 |   |   |   |   |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |
| **Net                income**                                               |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Net                income                                                   |   | $                                     | 10,332    |                                 | $      | 5,646 |   | $ | 14,680 |   | $ | 16,258 |   |
| Amortization                of core deposit and other intangible assets (1) |   |                                  | 519       |                                 |   | 26 |   |   | 590 |   |   | 77 |   |
| Merger,                conversion and restructuring expenses (1)            |   |                                  | 201       |                                 |   | --- |   |   | 6,646 |   |   | --- |   |
| Net                operating (tangible) income                              |   | $                                     | 11,052    |                                 | $      | 5,672 |   | $ | 21,916 |   | $ | 16,335 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Balance                sheet data:**                                      |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Average                assets**                                           |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Average                assets                                               |   | $                                     | 3,316,460 |                                 | $      | 1,957,935 |   | $ | 2,451,131 |   | $ | 1,935,715 |   |
| Goodwill                                                                    |   |                                  | (239,395  | )                                    |   | (3,513 | ) |   | (83,043 | ) |   | (3,369 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (15,252   | )                                    |   | (1,462 | ) |   | (6,093 | ) |   | (1,489 | ) |
| Deferred                taxes                                               |   |                                  | ---       |                                 |   | --- |   |   | --- |   |   | --- |   |
| Average                tangible assets                                      |   | $                                     | 3,061,813 |                                 | $      | 1,952,960 |   | $ | 2,361,995 |   | $ | 1,930,857 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Operating                return on average tangible assets**              |   |                                  | 1.43      | %                                    |   | 1.16 | % |   | 1.24 | % |   | 1.13 | % |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Average                equity**                                           |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Average                equity                                               |   | $                                     | 481,185   |                                 | $      | 141,808 |   | $ | 265,945 |   | $ | 143,815 |   |
| Goodwill                                                                    |   |                                  | (239,395  | )                                    |   | (3,513 | ) |   | (83,043 | ) |   | (3,369 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (15,252   | )                                    |   | (1,462 | ) |   | (6,093 | ) |   | (1,489 | ) |
| Deferred                taxes                                               |   |                                  | 1,677     |                                 |   | --- |   |   | 565 |   |   | --- |   |
| Average                tangible equity                                      |   | $                                     | 228,215   |                                 | $      | 136,833 |   | $ | 177,374 |   | $ | 138,957 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Operating                return on average tangible equity**              |   |                                  | 19.21     | %                                    |   | 16.49 | % |   | 16.52 | % |   | 15.70 | % |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **At                end of quarter:**                                       |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Total                assets**                                             |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Total                assets                                                 |   | $                                     | 3,291,232 |                                 | $      | 1,955,811 |   | $ | 3,291,232 |   | $ | 1,955,811 |   |
| Goodwill                                                                    |   |                                  | (243,107  | )                                    |   | (3,513 | ) |   | (243,107 | ) |   | (3,513 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (14,951   | )                                    |   | (1,523 | ) |   | (14,951 | ) |   | (1,523 | ) |
| Deferred                taxes                                               |   |                                  | ---       |                                 |   | --- |   |   | --- |   |   | --- |   |
| Total                tangible assets                                        |   | $                                     | 3,033,174 |                                 | $      | 1,950,775 |   | $ | 3,033,174 |   | $ | 1,950,775 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Total                equity**                                             |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| Total                equity                                                 |   | $                                     | 480,960   |                                 | $      | 149,419 |   | $ | 480,960 |   | $ | 149,419 |   |
| Goodwill                                                                    |   |                                  | (243,107  | )                                    |   | (3,513 | ) |   | (243,107 | ) |   | (3,513 | ) |
| Core                deposit and other intangible assets                     |   |                                  | (14,951   | )                                    |   | (1,523 | ) |   | (14,951 | ) |   | (1,523 | ) |
| Deferred                taxes                                               |   |                                  | 1,746     |                                 |   | --- |   |   | 1,746 |   |   | --- |   |
| Total                tangible equity                                        |   | $                                     | 224,648   |                                 | $      | 144,383 |   | $ | 224,648 |   | $ | 144,383 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
| **Tangible                book value at end of period**                     |   | $                                     | 9.73      |                                 | $      | 11.85 |   | $ | 9.73 |   | $ | 11.85 |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
|                                                                        |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |
|  (1)                Net of related tax effect                          |   |                                  |      |                                 |   |   |   |   |   |   |   |   |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

| **Interest                Rate Sensitivity**             |   |             |    |               |   |                            |   |                              |    |      |   |
|----------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------------------|--------|-----------------------------------|---------|-----------|--------|
|  **Dollars                in thousands**            |   | **1-90****days** |    | **90-180****days** |   | **180-365                days** |   | **1                year or more** |    | **Total** |   |
|                                                     |   |             |    |               |   |                            |   |                              |    |      |   |
| **Assets**                                               |   |             |    |               |   |                            |   |                              |    |      |   |
| Federal                funds sold                        |   | $                | 12,426  |               | $      | ---                             |   | $                                 | ---     |      | $      | --- |   | $ | 12,426 |   |
| Interest-bearing                deposits in other banks  |   |             | 24,956  |               |   | ---                             |   |                              | ---     |      |   | --- |   |   | 24,956 |   |
| Loans                held for sale                       |   |             | ---     |               |   | ---                             |   |                              | ---     |      |   | 2,944 |   |   | 2,944 |   |
| Investment                securities                     |   |             | 95,978  |               |   | 33,189                          |   |                              | 70,199  |      |   | 438,230 |   |   | 637,596 |   |
| Loans(1)                                                 |   |             | 863,843 |               |   | 95,744                          |   |                              | 172,199 |      |   | 1,033,644 |   |   | 2,165,430 |   |
| Earning                assets                            |   |             | 997,203 |               |   | 128,933                         |   |                              | 242,398 |      |   | 1,474,818 |   |   | 2,843,352 |   |
| Non-earning                assets                        |   |             | 578     |               |   | 578                             |   |                              | 1,095   |      |   | 445,629 |   |   | 447,880 |   |
| Total                assets                              |   | $                | 997,781 |               | $      | 129,511                         |   | $                                 | 243,493 |      | $      | 1,920,447 |   | $ | 3,291,232 |   |
| **Liabilities**                                          |   |             |    |               |   |                            |   |                              |    |      |   |   |   |   |   |   |
| Savings                                                  |   | $                | 319,624 |               | $      | ---                             |   | $                                 | ---     |      | $      | 536,399 |   | $ | 856,023 |   |
| Time                                                     |   |             | 120,164 |               |   | 100,933                         |   |                              | 236,578 |      |   | 396,188 |   |   | 853,863 |   |
| Time                in denominations of $100,000 or more |   |             | 32,074  |               |   | 16,644                          |   |                              | 50,861  |      |   | 76,432 |   |   | 176,011 |   |
| Short-term                borrowings                     |   |             | 58,087  |               |   | ---                             |   |                              | ---     |      |   | --- |   |   | 58,087 |   |
| Long-term                debt                            |   |             | 26,757  |               |   | 1,769                           |   |                              | 53,577  |      |   | 375,625 |   |   | 457,728 |   |
| Subordinated                debt                         |   |             | 23,196  |               |   | ---                             |   |                              | ---     |      |   | 7,732 |   |   | 30,928 |   |
| Interest                bearing liabilities              |   |             | 579,902 |               |   | 119,346                         |   |                              | 341,016 |      |   | 1,392,376 |   |   | 2,432,640 |   |
| Other                liabilities and equity              |   |             | 10,766  |               |   | 10,768                          |   |                              | 21,533  |      |   | 815,525 |   |   | 858,592 |   |
| Total                liabilities and equity              |   | $                | 590,668 |               | $      | 130,114                         |   | $                                 | 362,549 |      | $      | 2,207,901 |   | $ | 3,291,232 |   |

| **Interest                Sensitivity GAP**                                 |   |             |    |               |   |                            |   |
|-----------------------------------------------------------------------------|--------|------------------|---------|--------------------|--------|---------------------------------|--------|
| **Dollars                in thousands**                                     |   | **1-90****days** |    | **90-180****Days** |   | **180-365                days** |   |
|                                                                        |   |             |    |               |   |                            |   |   |   |   |
| Periodic                                                                    |   | $                | 407,113 |               | $      | (603                            | )      | $ | (119,056 | ) |
| Cumulative                                                                  |   |             |    |               |   | 406,510                         |   |   | 287,454 |   |
| Cumulative                GAP as a percentageof                total assets |   |             | 12.37   | %                  |   | 12.35                           | %      |   | 8.73 | % |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**
** **

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

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**PART      II - OTHER INFORMATION **

**Item      1 - Legal Proceedings**** **

**Item      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** |    |
|------------------|--------|-------------------------|---------|----------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|---------|
|             |   |                    |    |                                                                 |   |                                                                                                  |   |                                                                     |    |
| 07/1/05-07/31/05 |   |                    | ---     |                                                                 |   | ---                                                                                                   |   |                                                                     | ---     |   |   | 87,934 |   |
| 08/1/05-08/31/05 |   |                    | 166,600 |                                                                 | $      | 27.75                                                                                                 |   |                                                                     | 166,600 |   |   | 366,400 |   |
| 09/1/05-09/30/05 |   |                    | 172,300 |                                                                 | $      | 27.47                                                                                                 |   |                                                                     | 172,300 |   |   | 194,100 |   |

**Item      3 - Defaults Upon Senior      Securities**

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

**Item      5 - Other      Information**

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**PART      II - OTHER INFORMATION**

**(continued)**

**Item      6 - Exhibits**

| 2    | Merger                agreement between Community Banks, Inc. and PennRock Financial Services                Corp., dated November 16, 2004 (Incorporated by reference to Exhibit                10.1,                attached to Community’s Current Report on Form 8-K, filed with the                Commission on November 22, 2004) |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Amended                and Restated Articles of Incorporation (Incorporated by reference                to                Exhibit 3.1, attached to Community’s Quarterly Report on Form 10-Q for the                quarter ended June 30, 2005, filed with the Commission on August                9,                2005)              |
| 3.2  | Amended                By-Laws (Incorporated by reference to Exhibit 3.2, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended March 31, 2003,                filed                with the Commission on May 15, 2003)                                                                            |
| 10   | Long                Term Incentive Plan Stock Option Agreement with Melvin Pankuch                (Incorporated by reference to Exhibit 10, attached to Community’s Current                Report on Form 8-K filed with the Commission on August 8,                2005.)                                                               |
| 31.1 | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                                 |
| 31.2 | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                 |
| 32.1 | Section                1350 Certification (Chief Executive Officer)                                                                                                                                                                                                                                                                            |
| 32.2 | Section                1350 Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                             |

----

**SIGNATURES**

| Date   | November                9, 2005 |   | /s/    | Eddie                L. Dunklebarger     |
|--------|---------------------------------|--------|--------|------------------------------------------|
|   |                            |   |   | Eddie                L. Dunklebarger     |
|   |                            |   |   | Chairman                and President    |
|   |                            |   |   | (Chief                Executive Officer) |
|   |                            |   |   |                                     |
| Date   | November                9, 2005 |   | /s/    | Donald                F. Holt            |
|   |                            |   |   | Donald                F. Holt            |
|   |                            |   |   | Executive                Vice President  |
|   |                            |   |   | (Chief                Financial Officer) |

**EXHIBIT      INDEX**

| 2    | Merger                agreement between Community Banks, Inc. and PennRock Financial Services                Corp., dated November 16, 2004 (Incorporated by reference to Exhibit                10.1,                attached to Community’s Current Report on Form 8-K, filed with the                Commission on November 22, 2004) |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Amended                and Restated Articles of Incorporation (Incorporated by reference                to                Exhibit 3.1, attached to Community’s Quarterly Report on Form 10-Q for the                quarter ended June 30, 2005, filed with the Commission on August                9,                2005)              |
| 3.2  | Amended                By-Laws (Incorporated by reference to Exhibit 3.2, attached to Community’s                Quarterly Report on Form 10-Q for the quarter ended March 31, 2003,                filed                with the Commission on May 15, 2003)                                                                            |
| 10   | Long                Term Incentive Plan Stock Option Agreement with Melvin Pankuch                (Incorporated by reference to Exhibit 10, attached to Community’s Current                Report on Form 8-K filed with the Commission on August 8,                2005.)                                                               |
| 31.1 | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                                 |
| 31.2 | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                 |
| 32.1 | Section                1350 Certification (Chief Executive Officer)                                                                                                                                                                                                                                                                            |
| 32.2 | Section                1350 Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                             |