**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, 2007**

**001-11663**

**(Commission      File Number)**

**COMMUNITY      BANKS, INC.**

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

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

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

**(717)      920-5800**

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

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

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

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

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

**FORM      10-Q**

**INDEX**

| **PART                I – Financial                Information** | **Page**                                                                                            |
|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                   |                                                                                                |   |
| Item                1.                                                 | Financial                Statements                                                                 |   |
|                                                                   |                                                                                                |   |
|                                                                   | Consolidated                Balance Sheets                                                          | 3 |
|                                                                   | Consolidated Statements                of                Income                                | 4 |
|                                                                   | Consolidated Statements                of Changes in                Stockholders’ Equity | 5 |
|                                                                   | Consolidated Statements                of Cash                Flows                            | 6 |
|                                                                   | Notes                to                Consolidated Financial Statements                       | 7-13 |
|                                                                   |                                                                                                |   |
| Item                2.                                                 | Management’s                Discussion and Analysis of Financial Condition                and |   |
|                                                                   | Results                of                Operations                                                 | 14-26 |
|                                                                   |                                                                                                |   |
| Item                3.                                                 | Quantitative                and Qualitative Disclosures About Market                Risk            | 27 |
|                                                                   |                                                                                                |   |
| Item                4.                                                 | Controls                and Procedures                                                              | 28 |
|                                                                   |                                                                                                |   |
|                                                                   |                                                                                                |   |
| **PART                II – Other Information**                   |                                                                                                |
|                                                                   |                                                                                                |   |
| Item                1.                                                 | Legal                Proceedings                                                                    | 29 |
|                                                                   |                                                                                                |   |
| Item                1A.                                                | Risk                Factors                                                                         | 29 |
|                                                                   |                                                                                                |   |
| Item                2.                                                 | Unregistered                Sales of Equity Securities and Use of                Proceeds           | 29 |
|                                                                   |                                                                                                |   |
| Item                3.                                                 | Defaults                Upon Senior                Securities                                       | 30 |
|                                                                   |                                                                                                |   |
| Item                4.                                                 | Submission                of Matters to a Vote of Security                Holders                   | 30 |
|                                                                   |                                                                                                |   |
| Item                5.                                                 | Other                Information                                                                    | 30 |
|                                                                   |                                                                                                |   |
| Item                6.                                                 | Exhibits                                                                                            | 30 |
|                                                                   |                                                                                                |   |
|                                                                   |                                                                                                |   |
| **SIGNATURES**                                                         | 31                                                                                                  |
|                                                                   |                                                                                                |   |

----

**PART      I – FINANCIAL      INFORMATION**

**Item      1.  Financial      Statements**

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED BALANCE      SHEETS**

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

|                                                                                                                     |   | **September                30,** |      |   | **December                31,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|--------|---------------------------------|--------|
|                                                                                                                     |   | **2007**                         |      |   | **2006**                        |   |
| **ASSETS**                                                                                                               |   |                             |      |   |                            |   |
|                                                                                                                     |   |                             |      |   |                            |   |
| Cash                and due from banks                                                                                   |   | $                                | 66,810    |   |                            | $      | 73,608 |   |
| Interest-bearing                deposits in other banks                                                                  |   |                             | 5,383     |   |                            |   | 3,561 |   |
| Trading                assets                                                                                            |   |                             | 20,003    |   |                            |   | --- |   |
| Investment                securities, available for sale                                                                 |   |                             | 639,962   |   |                            |   | 636,066 |   |
| Investment                securities, held to maturity (fair valueapproximates                $22,729 and $23,415)       |   |                             | 23,100    |   |                            |   | 23,070 |   |
| Loans,                net of allowance for loan losses of $25,580 and $23,626                                            |   |                             | 2,584,164 |   |                            |   | 2,347,263 |   |
| Premises                and equipment, net                                                                               |   |                             | 50,097    |   |                            |   | 46,335 |   |
| Goodwill                and other intangible assets                                                                      |   |                             | 279,219   |   |                            |   | 259,406 |   |
| Accrued                interest receivable and other assets                                                              |   |                             | 120,896   |   |                            |   | 107,061 |   |
| Total                assets                                                                                              |   | $                                | 3,789,634 |   |                            | $      | 3,496,370 |   |
|                                                                                                                     |   |                             |      |   |                            |   |   |   |
| **LIABILITIES**                                                                                                          |   |                             |      |   |                            |   |   |   |
|                                                                                                                     |   |                             |      |   |                            |   |   |   |
| Deposits                                                                                                                 |   |                             |      |   |                            |   |   |   |
| Non-interest                bearing                                                                                      |   | $                                | 346,488   |   |                            | $      | 368,329 |   |
| Interest                bearing                                                                                          |   |                             | 2,280,300 |   |                            |   | 2,144,853 |   |
| Total                deposits                                                                                            |   |                             | 2,626,788 |   |                            |   | 2,513,182 |   |
| Short-term                borrowings                                                                                     |   |                             | 124,288   |   |                            |   | 108,927 |   |
| Long-term                debt (including $29,999                at                fair value at September 30, 2007)      |   |                             | 413,483   |   |                            |   | 315,079 |   |
| Subordinated                debt                                                                                         |   |                             | 75,260    |   |                            |   | 51,548 |   |
| Accrued                interest payable and other liabilities                                                            |   |                             | 23,340    |   |                            |   | 21,473 |   |
| Total                liabilities                                                                                         |   |                             | 3,263,159 |   |                            |   | 3,010,209 |   |
|                                                                                                                     |   |                             |      |   |                            |   |   |   |
| **STOCKHOLDERS’                EQUITY**                                                                            |   |                             |      |   |                            |   |   |   |
|                                                                                                                     |   |                             |      |   |                            |   |   |   |
| Preferred                stock, no par value; 500,000 shares                                                             |   |                             |      |   |                            |   |   |   |
| authorized;                no shares issued and outstanding                                                              |   |                             | ---       |   |                            |   | --- |   |
| Common                stock, $5.00 par value; 50,000,000 shares                                                          |   |                             |      |   |                            |   |   |   |
| authorized;                25,686,000 and 24,478,000 shares issued                                                       |   |                             | 128,430   |   |                            |   | 122,391 |   |
| Surplus                                                                                                                  |   |                             | 396,654   |   |                            |   | 373,142 |   |
| Retained                Earnings                                                                                         |   |                             | 28,635    |   |                            |   | 17,609 |   |
| Accumulated                other comprehensive loss, net of tax                                                          |   |                             | (4,692    | )      |                            |   | (1,806 | ) |
| Treasury                stock;  861,000 and 959,000 shares, at cost                                            |   |                             | (22,552   | )      |                            |   | (25,175 | ) |
| Total                stockholders’ equity                                                                          |   |                             | 526,475   |   |                            |   | 486,161 |   |
| Total                liabilities and stockholders’ equity                                                          |   | $                                | 3,789,634 |   |                            | $      | 3,496,370 |   |
|                                                                                                                     |   |                             |      |   |                            |   |   |   |
| The                accompanying notes are an integral part of the consolidated financial                statements. |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS      OF      INCOME**

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

|                                                                                                                     |   | **Three                Months Ended** |   |   | **Nine                Months Ended** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|
|                                                                                                                     |   | **September                30,**      |   |   | **September                30,**     |   |
|                                                                                                                     |   | **2007**                              |   |   | **2006**                             |   |   | **2007** |   |   | **2006** |   |
| **INTEREST                INCOME:**                                                                                      |   |                                  |   |   |                                 |   |   |   |   |   |   |   |
| Loans,                including fees                                                                                     |   | $                                     | 47,265 |   |                                 | $      | 42,915 |   |   | $ | 137,581 |   |   | $ | 123,109 |   |
| Investment                securities:                                                                                    |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                                                                                  |   |                                  | 5,705  |   |                                 |   | 4,322 |   |   |   | 16,702 |   |   |   | 13,116 |   |
| Tax                exempt                                                                                                |   |                                  | 2,747  |   |                                 |   | 2,205 |   |   |   | 8,040 |   |   |   | 6,778 |   |
| Dividends                                                                                                                |   |                                  | 339    |   |                                 |   | 611 |   |   |   | 1,265 |   |   |   | 1,841 |   |
| Trading                account securities                                                                                |   |                                  | 266    |   |                                 |   | --- |   |   |   | 498 |   |   |   | --- |   |
| Other                                                                                                                    |   |                                  | 346    |   |                                 |   | 390 |   |   |   | 1,524 |   |   |   | 1,426 |   |
| Total                interest income                                                                                     |   |                                  | 56,668 |   |                                 |   | 50,443 |   |   |   | 165,610 |   |   |   | 146,270 |   |
|                                                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **INTEREST                EXPENSE:**                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                 |   |                                  | 21,056 |   |                                 |   | 17,858 |   |   |   | 60,660 |   |   |   | 47,063 |   |
| Short-term                borrowings                                                                                     |   |                                  | 918    |   |                                 |   | 739 |   |   |   | 3,240 |   |   |   | 2,080 |   |
| Long-term                debt                                                                                            |   |                                  | 5,207  |   |                                 |   | 3,936 |   |   |   | 15,008 |   |   |   | 13,611 |   |
| Subordinated                debt                                                                                         |   |                                  | 1,351  |   |                                 |   | 972 |   |   |   | 3,720 |   |   |   | 2,707 |   |
| Total                interest expense                                                                                    |   |                                  | 28,532 |   |                                 |   | 23,505 |   |   |   | 82,628 |   |   |   | 65,461 |   |
| Net                interest income                                                                                       |   |                                  | 28,136 |   |                                 |   | 26,938 |   |   |   | 82,982 |   |   |   | 80,809 |   |
| Provision                for loan losses                                                                                 |   |                                  | 1,050  |   |                                 |   | 250 |   |   |   | 3,050 |   |   |   | 1,400 |   |
| Net                interest income after provision for loan losses                                                       |   |                                  | 27,086 |   |                                 |   | 26,688 |   |   |   | 79,932 |   |   |   | 79,409 |   |
|                                                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                INCOME:**                                                                                  |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Investment                management and trust services                                                                  |   |                                  | 1,211  |   |                                 |   | 968 |   |   |   | 4,259 |   |   |   | 3,069 |   |
| Service                charges on deposit accounts                                                                       |   |                                  | 4,278  |   |                                 |   | 3,037 |   |   |   | 11,951 |   |   |   | 8,423 |   |
| Other                service charges, commissions and fees                                                               |   |                                  | 2,209  |   |                                 |   | 1,817 |   |   |   | 6,494 |   |   |   | 5,420 |   |
| Insurance                premium income and commissions                                                                  |   |                                  | 1,079  |   |                                 |   | 1,053 |   |   |   | 3,318 |   |   |   | 3,098 |   |
| Mortgage                banking activities                                                                               |   |                                  | 459    |   |                                 |   | 533 |   |   |   | 1,701 |   |   |   | 1,581 |   |
| Earnings                on investment in life insurance                                                                  |   |                                  | 755    |   |                                 |   | 679 |   |   |   | 2,199 |   |   |   | 2,010 |   |
| Investment                security gains (losses)                                                                        |   |                                  | ---    |   |                                 |   | 28 |   |   |   | (4,388 | ) |   |   | 317 |   |
| Trading                activities gain                                                                                   |   |                                  | 38     |   |                                 |   | --- |   |   |   | 4 |   |   |   | --- |   |
| Other                                                                                                                    |   |                                  | 345    |   |                                 |   | 725 |   |   |   | 1,168 |   |   |   | 1,849 |   |
| Total                non-interest income                                                                                 |   |                                  | 10,374 |   |                                 |   | 8,840 |   |   |   | 26,706 |   |   |   | 25,767 |   |
|                                                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **NON-INTEREST                EXPENSES:**                                                                                |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Salaries                and employee benefits                                                                            |   |                                  | 12,419 |   |                                 |   | 11,611 |   |   |   | 37,497 |   |   |   | 34,280 |   |
| Net                occupancy and equipment expense                                                                       |   |                                  | 3,917  |   |                                 |   | 3,452 |   |   |   | 11,691 |   |   |   | 10,350 |   |
| Payment                card processing expense                                                                           |   |                                  | 848    |   |                                 |   | 553 |   |   |   | 2,235 |   |   |   | 1,391 |   |
| Marketing                expense                                                                                         |   |                                  | 350    |   |                                 |   | 354 |   |   |   | 1,407 |   |   |   | 1,194 |   |
| Telecommunications                expense                                                                                |   |                                  | 718    |   |                                 |   | 542 |   |   |   | 1,855 |   |   |   | 1,659 |   |
| Merger                expenses                                                                                           |   |                                  | 754    |   |                                 |   | --- |   |   |   | 754 |   |   |   | --- |   |
| Amortization                of intangibles                                                                               |   |                                  | 750    |   |                                 |   | 659 |   |   |   | 2,222 |   |   |   | 2,015 |   |
| Other                                                                                                                    |   |                                  | 3,930  |   |                                 |   | 4,001 |   |   |   | 12,657 |   |   |   | 11,514 |   |
| Total                non-interest expenses                                                                               |   |                                  | 23,686 |   |                                 |   | 21,172 |   |   |   | 70,318 |   |   |   | 62,403 |   |
|                                                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income                before income taxes                                                                                |   |                                  | 13,774 |   |                                 |   | 14,356 |   |   |   | 36,320 |   |   |   | 42,773 |   |
| Income                taxes                                                                                              |   |                                  | 3,281  |   |                                 |   | 3,798 |   |   |   | 8,290 |   |   |   | 11,142 |   |
| Net                income                                                                                                |   | $                                     | 10,493 |   |                                 | $      | 10,558 |   |   | $ | 28,030 |   |   | $ | 31,631 |   |
|                                                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                PER SHARE DATA**                                                                           |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                                                                                  |   | $                                     | 0.42   |   |                                 | $      | 0.45 |   |   | $ | 1.15 |   |   | $ | 1.34 |   |
| Diluted                earnings per share                                                                                |   | $                                     | 0.42   |   |                                 | $      | 0.45 |   |   | $ | 1.14 |   |   | $ | 1.32 |   |
| Dividends                declared                                                                                        |   | $                                     | 0.21   |   |                                 | $      | 0.20 |   |   | $ | 0.63 |   |   | $ | 0.59 |   |
|                                                                                                                     |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated financial                statements. |   |                                  |   |   |                                 |

----

**Community      Banks, Inc. and Subsidiaries**

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

**For      the Nine Months Ended September 30, 2007 and 2006**

**(Dollars      in Thousands)**

|                                                                                                                      |   | **Outstanding** |   |   | **Common** |   |    |        |   |   | **Retained** |   |   | **Accumulated****Other****Comprehensive** |    |   | **Treasury** |   |   | **Total**  |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|--------|------------|--------|---------|-------------|--------|--------|--------------|--------|--------|-------------------------------------------|---------|--------|--------------|--------|--------|------------|--------|
|                                                                                                                      |   | **Shares**      |   |   | **Stock**  |   |    | **Surplus** |   |   | **Earnings** |   |   | **Income                (Loss)**          |    |   | **Stock**    |   |   | **Equity** |   |
| **Balance,                January 1, 2006**                                                                               |   |            | 22,915 |   |       | $      | 116,572 |        |   | $      | 347,827      |   |   | $                                         | 27,031  |   |         | $      | (3,779 | )          |   | $ | (10,978 | ) |   | $ | 476,673 |   |
| Comprehensive                income:                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                 |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | 31,631  |   |         |   |   |       |   |   |   |   |   |   | 31,631 |   |
| Unrealized                gain on securities,  net of reclassification adjustment and tax                effect |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   | 1,109  |       |   |   |   |   |   |   | 1,109 |   |
| Total                comprehensive income                                                                                 |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   | 32,740 |   |
| Cash                dividends ($0.59 per share)                                                                           |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | (13,973 | )      |         |   |   |       |   |   |   |   |   |   | (13,973 | ) |
| 5%                stock dividend                                                                                          |   |            | 1,133  |   |       |   | 5,820   |        |   |   | 24,162       |   |   |                                      | (29,982 | )      |         |   |   |       |   |   |   |   |   |   | --- |   |
| Purchases                of treasury stock                                                                                |   |            | (668   | )      |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   | (17,922 | ) |   |   | (17,922 | ) |
| Exercise                of common stock options   and issuances under stock                purchase plan   |   |            | 98     |   |       |   |    |        |   |   |         |   |   |                                      | (1,291  | )      |         |   |   |       |   |   | 2,636 |   |   |   | 1,345 |   |
| Compensation                and tax benefits from employee stock transactions                                             |   |            |   |   |       |   |    |        |   |   | 721          |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   | 721 |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
| **Balance,                September 30, 2006**                                                                            |   |            | 23,478 |   |       | $      | 122,392 |        |   | $      | 372,710      |   |   | $                                         | 13,416  |   |         | $      | (2,670 | )          |   | $ | (26,264 | ) |   | $ | 479,584 |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
| **Balance,                January 1, 2007**                                                                               |   |            | 23,519 |   |       | $      | 122,391 |        |   | $      | 373,142      |   |   | $                                         | 17,609  |   |         | $      | (1,806 | )          |   | $ | (25,175 | ) |   | $ | 486,161 |   |
| Comprehensive                income:                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
| Net                income                                                                                                 |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | 28,030  |   |         |   |   |       |   |   |   |   |   |   | 28,030 |   |
| Unrealized                loss on securities,  net of reclassification adjustment and tax                effect |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   | (2,886 | )          |   |   |   |   |   |   | (2,886 | ) |
| Total                comprehensive income                                                                                 |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   | 25,144 |   |
| Cash                dividends ($0.63 per share)                                                                           |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      | (15,323 | )      |         |   |   |       |   |   |   |   |   |   | (15,323 | ) |
| Purchases                of treasury stock                                                                                |   |            | (12    | )      |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   | (299 | ) |   |   | (299 | ) |
| Exercise                of common stock options   and issuances under stock                purchase plan   |   |            | 102    |   |       |   | (41     | )           |   |   |         |   |   |                                      | (1,681  | )      |         |   |   |       |   |   | 3,234 |   |   |   | 1,512 |   |
| Compensation                and tax benefits from employee stock transactions                                             |   |            |   |   |       |   |    |        |   |   | 610          |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   | 610 |   |
| Acquisition                of BUCS Financial Corp                                                                         |   |            | 548    |   |       |   | 2,741   |        |   |   | 10,300       |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   | 13,041 |   |
| Acquisition                of East Prospect State Bank                                                                    |   |            | 668    |   |       |   | 3,339   |        |   |   | 12,602       |   |   |                                      |    |   |         |   |   |       |   |   | (312 | ) |   |   | 15,629 |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
| **Balance,                September 30, 2007**                                                                            |   |            | 24,825 |   |       | $      | 128,430 |        |   | $      | 396,654      |   |   | $                                         | 28,635  |   |         | $      | (4,692 | )          |   | $ | (22,552 | ) |   | $ | 526,475 |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
|                                                                                                                      |   |            |   |   |       |   |    |        |   |   |         |   |   |                                      |    |   |         |   |   |       |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated financial                statements.  |   |

----

**Community      Banks, Inc. and Subsidiaries**

**CONSOLIDATED STATEMENTS      OF CASH      FLOWS**

** (Dollars      in thousands)**

|                                                                                                                     |   | **Nine                Months Ended** |     |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                                                                     |   | **September                30,**     |     |
|                                                                                                                     |   | **2007**                             |     |   | **2006** |   |
|                                                                                                                     |   |                                 |     |   |   |   |
| **Operating                Activities:**                                                                                 |   |                                 |     |   |   |   |
| Net                income                                                                                                |   | $                                    | 28,030   |   |   | $ | 31,631 |   |
| Adjustments                to reconcile net income to net cash                                                           |   |                                 |     |   |   |   |   |   |
| provided                by operating activities:                                                                         |   |                                 |     |   |   |   |   |   |
| Provision                for loan losses                                                                                 |   |                                 | 3,050    |   |   |   | 1,400 |   |
| Depreciation                and amortization                                                                             |   |                                 | 5,950    |   |   |   | 5,475 |   |
| Stock                option expense                                                                                      |   |                                 | 610      |   |   |   | 478 |   |
| Net                amortization (accretion) of securities                                                                |   |                                 | (587     | ) |   |   | 321 |   |
| Realized                (gains) losses on sales of available-for-sale securities,                net                     |   |                                 | 4,388    |   |   |   | (317 | ) |
| Loans                originated for sale                                                                                 |   |                                 | (22,720  | ) |   |   | (8,665 | ) |
| Proceeds                from sales of loans held for sale                                                                |   |                                 | 21,695   |   |   |   | 6,444 |   |
| Gains                on loan sales                                                                                       |   |                                 | (975     | ) |   |   | (599 | ) |
| Earnings                on investment in life insurance                                                                  |   |                                 | (2,199   | ) |   |   | (2,010 | ) |
| Purchases                of trading assets                                                                               |   |                                 | (20,000  | ) |   |   | --- |   |
| Net                change in fair value of trading assets and liabilities                                                |   |                                 | (4       | ) |   |   | --- |   |
| Net                change in other assets and other liabilities, net                                                     |   |                                 | (2,033   | ) |   |   | 10,904 |   |
| Net                cash provided by operating activities                                                                 |   |                                 | 15,205   |   |   |   | 45,062 |   |
|                                                                                                                     |   |                                 |     |   |   |   |   |   |
| **Investing                Activities:**                                                                                 |   |                                 |     |   |   |   |   |   |
| Net                change in interest-bearing deposits in other banks                                                    |   |                                 | 279      |   |   |   | (30,351 | ) |
| Activity                in available-for-sale securities:                                                                |   |                                 |     |   |   |   |   |   |
| Sales                                                                                                                    |   |                                 | 225,149  |   |   |   | 64,914 |   |
| Maturities,                prepayments and calls                                                                         |   |                                 | 65,104   |   |   |   | 43,826 |   |
| Purchases                                                                                                                |   |                                 | (252,177 | ) |   |   | (45,518 | ) |
| Net                increase in total loans                                                                               |   |                                 | (111,199 | ) |   |   | (110,409 | ) |
| Proceeds                from sales of loans                                                                              |   |                                 | 1,441    |   |   |   | 1,267 |   |
| Additions                to premises and equipment                                                                       |   |                                 | (3,380   | ) |   |   | (6,364 | ) |
| Cash                acquired in acquisitions                                                                             |   |                                 | 8,208    |   |   |   | --- |   |
| Cash                paid for acquisitions                                                                                |   |                                 | (13,797  | ) |   |   | (2,440 | ) |
| Net                cash used in investing activities                                                                     |   |                                 | (80,372  | ) |   |   | (85,075 | ) |
|                                                                                                                     |   |                                 |     |   |   |   |   |   |
| **Financing                Activities:**                                                                                 |   |                                 |     |   |   |   |   |   |
| Net                increase (decrease) in deposits                                                                       |   |                                 | (51,902  | ) |   |   | 189,152 |   |
| Net                change in short-term borrowings                                                                       |   |                                 | 5,360    |   |   |   | (29,688 | ) |
| Proceeds                from issuance of long-term debt                                                                  |   |                                 | 175,619  |   |   |   | 75,620 |   |
| Repayment                of long-term debt                                                                               |   |                                 | (56,598  | ) |   |   | (148,765 | ) |
| Cash                dividends and cash paid in lieu of fractional shares                                                 |   |                                 | (15,323  | ) |   |   | (13,973 | ) |
| Purchases                of treasury stock                                                                               |   |                                 | (299     | ) |   |   | (17,922 | ) |
| Tax                benefits from employee stock transactions                                                             |   |                                 | ---      |   |   |   | 243 |   |
| Proceeds                from issuance of common stock                                                                    |   |                                 | 1,512    |   |   |   | 1,345 |   |
| Net                cash provided by financing activities                                                                 |   |                                 | 58,369   |   |   |   | 56,012 |   |
|                                                                                                                     |   |                                 |     |   |   |   |   |   |
| Net                change in cash and cash equivalents                                                                   |   |                                 | (6,798   | ) |   |   | 15,999 |   |
|                                                                                                                     |   |                                 |     |   |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                          |   |                                 | 73,608   |   |   |   | 76,820 |   |
| Cash                and cash equivalents at end of period                                                                |   | $                                    | 66,810   |   |   | $ | 92,819 |   |
|                                                                                                                     |   |                                 |     |   |   |   |   |   |
| The                accompanying notes are an integral part of the consolidated financial                statements. |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL      STATEMENTS**

**(Unaudited)**

**1.  Basis      of Presentation**

**2.      Fair Value Measurements**

*Fair Value Measurements*

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

*Fair      Value Measurements (SFAS No. 157)*

|     Trading                assets, consisting of Federal agency debt securities                                         | $   20,003 |
|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                                        |                      |
|     Federal                Home Loan Bank (“FHLB”) advances (contractual principal;                $30,000) | $   29,999 |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

| Description                                                          | Level                I | Level                II | Total    |
|----------------------------------------------------------------------|------------------------|-------------------------|----------|
| Trading                assets – Federal agency debt securities | $                ---   | $20,003                 | $20,003  |
| FHLB                borrowings                                       | $                ---   | $29,999                 | $29,999  |
| Available-for-sale                securities                         | $                ---   | $639,962                | $639,962 |

**3.      Summary of Significant Accounting Policies**

***Cash      Flows Information –***

***Earnings      Per Share -***

|                                                                    |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|-------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
|                                                                    |   | **2007**                                                              |   |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                    |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |
| Net                income                                               |   | $                                                                     | 10,493 |   |                                                                 | $      | 10,558 |   |   | $ | 28,030 |   |   | $ | 31,631 |   |
|                                                                    |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding  (basic)   |   |                                                                  | 24,815 |   |                                                                 |   | 23,459 |   |   |   | 24,376 |   |   |   | 23,693 |   |
| Effect                of dilutive stock options                         |   |                                                                  | 174    |   |                                                                 |   | 204 |   |   |   | 225 |   |   |   | 233 |   |
|                                                                    |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares outstanding  (diluted) |   |                                                                  | 24,989 |   |                                                                 |   | 23,663 |   |   |   | 24,601 |   |   |   | 23,926 |   |
|                                                                    |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Per                share information:                                   |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                                 |   | $                                                                     | 0.42   |   |                                                                 | $      | 0.45 |   |   | $ | 1.15 |   |   | $ | 1.34 |   |
| Diluted                earnings per share                               |   |                                                                  | 0.42   |   |                                                                 |   | 0.45 |   |   |   | 1.14 |   |   |   | 1.32 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

***Comprehensive      Income (Loss)***

|                                                 |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
|                                                 |   | **2007**                                                              |   |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
| Unrealized                holding gains (losses)     |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |
| on                available-for-sale securities      |   | $                                                                     | 5,551  |   |                                                                 | $      | 11,470 |   |   | $ | (8,828 | ) |   | $ | 2,023 |   |
| Reclassification                adjustments for      |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| losses                (gains) included in net income |   |                                                                  | ---    |   |                                                                 |   | (28 | ) |   |   | 4,388 |   |   |   | (317 | ) |
| Net                unrealized gains (losses)         |   |                                                                  | 5,551  |   |                                                                 |   | 11,442 |   |   |   | (4,440 | ) |   |   | 1,706 |   |
| Tax                effect                            |   |                                                                  | (1,943 | )      |                                                                 |   | (4,005 | ) |   |   | 1,554 |   |   |   | (597 | ) |
|                                                 |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net-of-tax                amount                     |   | $                                                                     | 3,608  |   |                                                                 | $      | 7,437 |   |   | $ | (2,886 | ) |   | $ | 1,109 |   |

|                                                                       |   | **September                30,****2007** |   |   | **December                31,****2006** |   |
|----------------------------------------------------------------------------|--------|------------------------------------------|--------|--------|-----------------------------------------|--------|
| Net                unrealized gain (loss) on available-for-sale securities |   | $                                        | (4,006 | )      |                                    | $      | 434 |   |
| Tax                effect                                                  |   |                                     | 1,402  |   |                                    |   | (152 | ) |
| Net-of-tax                amount                                           |   |                                     | (2,604 | )      |                                    |   | 282 |   |
|                                                                       |   |                                     |   |   |                                    |   |   |   |
| Unfunded                pension liability                                  |   |                                     | (3,213 | )      |                                    |   | (3,213 | ) |
| Tax                effect                                                  |   |                                     | 1,125  |   |                                    |   | 1,125 |   |
| Net-of-tax                amount                                           |   |                                     | (2,088 | )      |                                    |   | (2,088 | ) |
|                                                                       |   |                                     |   |   |                                    |   |   |   |
| Accumulated                other comprehensive loss                        |   | $                                        | (4,692 | )      |                                    | $      | (1,806 | ) |

***Reclassifications***

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**4.      Pending Merger**

**5.      Acquisitions**

|                                                 |   | **2007**                                                            |   |   | **2006**                                                             |   |
|------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
| (in                thousands, except per share data) |   | **Nine                Months Ended****September                30** |   |   | **Three                Months Ended****September                30** |   |   | **Nine                Months Ended****September                30** |   |
|                                                 |   |                                                                |   |   |                                                                 |   |   |   |   |
| Net                interest income                   |   | $                                                                   | 84,558 |   |                                                                 | $      | 28,522 |   |   | $ | 85,552 |   |
| Other                income                          |   |                                                                | 27,499 |   |                                                                 |   | 9,741 |   |   |   | 28,549 |   |
| Net                income                            |   |                                                                | 24,809 |   |                                                                 |   | 10,729 |   |   |   | 32,557 |   |
| Diluted                earnings per common share     |   | $                                                                   | 0.99   |   |                                                                 | $      | 0.43 |   |   | $ | 1.30 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**6.   Guarantees**

**7.   Long-Term      Debt**

| (in                thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **September                30,**** 2007** |        |   | **December                31,****2006** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|-------------|--------|-----------------------------------------|--------|
| Outstanding                advances from the FHLB of Pittsburgh mature from 2007 to                2017.  The advances are collateralized by FHLB stock, certain                first mortgage loans and both agency and mortgage-backed                securities.  The advance rates range from 2.85% to 6.35%, with a                weighted average interest rate of 4.74%.  Advances totaling $328                million are convertible advances.  Convertible advances with an                initial fixed-rate period are convertible to variable rate at the                option                of the FHLB.  Convertible advances with an initial variable-rate                period at LIBOR-100 basis points are convertible to fixed-rate or                to a                variable rate tied to a spread over LIBOR. Under the terms of the                arrangements, if the FHLB opts to convert advances to variable rate,                Community has the ability to prepay the advances at no                penalty.  At the current time no advances have been converted                and remain fixed rate. |   | **$**                                          | **413,483** |   |                                    | $      | 315,079 |   |

| September                30, 2008 |   | $      | 14,481  |   |
|-----------------------------------|--------|--------|---------|--------|
| September                30, 2009 |   |   | 70,079  |   |
| September                30, 2010 |   |   | 5,090   |   |
| September                30, 2011 |   |   | 25,092  |   |
| September                30, 2012 |   |   | 11,083  |   |
| Thereafter                        |   |   | 287,658 |   |
|                              |   | $      | 413,483 |   |

----

**Community      Banks, Inc. and Subsidiaries**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**8.      Stock-Based Plans**

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

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

**INTRODUCTION**

**GAAP      REPORTING ISSUES**

**Forward-Looking      Statements**

----

**Critical      Accounting Policies**

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

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

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

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

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

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

----

**GAAP      versus Non-GAAP**

**SUMMARY      OF FINANCIAL AND OPERATING RESULTS**

**Overview**

----

**BALANCE      SHEET**

**Three      Months Ended September 30:**

|                                                            |   | **September****30,** |      |   | **Change** |   |
|-----------------------------------------------------------------|--------|----------------------|-----------|--------|------------|--------|
| (in                thousands)                                   |   | **2007**             |      |   | **2006**   |   |   | **Volume** |   |   | **%** |   |
| Cash                and due from banks                          |   | $                    | 62,333    |   |       | $      | 62,636 |   |   | $ | (303 | ) |   |   | --- | % |
| Federal                funds sold and interest-bearing deposits |   |                 | 27,494    |   |       |   | 29,324 |   |   |   | (1,830 | ) |   |   | (6 | )% |
| Investments                (including trading assets)           |   |                 | 682,695   |   |       |   | 566,772 |   |   |   | 115,923 |   |   |   | 20 | % |
| Loans                                                           |   |                 | 2,578,729 |   |       |   | 2,339,352 |   |   |   | 239,377 |   |   |   | 10 | % |
| Allowance                for loan losses                        |   |                 | (25,490   | )      |       |   | (24,385 | ) |   |   | (1,105 | ) |   |   | 5 | % |
| Net                loans                                        |   |                 | 2,553,239 |   |       |   | 2,314,967 |   |   |   | 238,272 |   |   |   | 10 | % |
| Goodwill                and other intangible assets             |   |                 | 279,494   |   |       |   | 259,023 |   |   |   | 20,471 |   |   |   | 8 | % |
| Other                assets                                     |   |                 | 173,083   |   |       |   | 153,183 |   |   |   | 19,900 |   |   |   | 13 | % |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                     |   | $                    | 3,778,338 |   |       | $      | 3,385,905 |   |   | $ | 392,433 |   |   |   | 12 | % |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                deposits                     |   | $                    | 356,064   |   |       | $      | 344,708 |   |   | $ | 11,356 |   |   |   | 3 | % |
| Interest-bearing                deposits                        |   |                 | 2,282,324 |   |       |   | 2,093,349 |   |   |   | 188,975 |   |   |   | 9 | % |
| Short-term                borrowings                            |   |                 | 81,387    |   |       |   | 60,680 |   |   |   | 20,707 |   |   |   | 34 | % |
| Long-term                debt                                   |   |                 | 435,014   |   |       |   | 340,162 |   |   |   | 94,852 |   |   |   | 28 | % |
| Subordinated                debt                                |   |                 | 75,260    |   |       |   | 51,548 |   |   |   | 23,712 |   |   |   | 46 | % |
| Other                liabilities                                |   |                 | 27,200    |   |       |   | 23,547 |   |   |   | 3,653 |   |   |   | 3 | % |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                |   |                 | 3,257,249 |   |       |   | 2,913,994 |   |   |   | 343,255 |   |   |   | 12 | % |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity                       |   |                 | 521,089   |   |       |   | 471,911 |   |   |   | 49,178 |   |   |   | 10 | % |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders’ equity |   | $                    | 3,778,338 |   |       | $      | 3,385,905 |   |   | $ | 392,433 |   |   |   | 12 | % |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |   |                 |      |   |       |   |   |   |   |   |   |   |   |   |   |   |

----

|                                   |   |                                           |      |   |                                     |   |      | **Change** |   |
|----------------------------------------|--------|------------------------------------------------|-----------|--------|------------------------------------------|--------|-----------|------------|--------|
| (in                thousands)          |   | **September                 30,****2007** |      |   | **September                30,****2006** |   |      | **Amount** |   |   | **Annualized****%** |   |
| Commercial                             |   | $                                              | 958,605   |   |                                     | $      | 831,951   |       |   | $ | 126,654 |   |   |   | 15 | % |
| Commercial                real estate  |   |                                           | 807,618   |   |                                     |   | 831,288   |       |   |   | (23,670 | ) |   |   | (3 | )% |
| Residential                real estate |   |                                           | 178,487   |   |                                     |   | 150,926   |       |   |   | 27,561 |   |   |   | 18 | % |
| Consumer                               |   |                                           | 634,019   |   |                                     |   | 525,187   |       |   |   | 108,832 |   |   |   | 21 | % |
| Total                                  |   | $                                              | 2,578,729 |   |                                     | $      | 2,339,352 |       |   | $ | 239,377 |   |   |   | 10 | % |

|                                      |   |                                     |      |   |                                           |   |      | **Change** |   |
|-------------------------------------------|--------|------------------------------------------|-----------|--------|------------------------------------------------|--------|-----------|------------|--------|
| (in                thousands)             |   | **September                30,****2007** |      |   | **September                30,**** 2006** |   |      | **Amount** |   |   | **Annualized****%** |   |
| Demand                                    |   | $                                        | 356,064   |   |                                           | $      | 344,708   |       |   | $ | 11,356 |   |   |   | 3 | % |
| Savings                & NOW accounts |   |                                     | 937,362   |   |                                           |   | 873,670   |       |   |   | 63,692 |   |   |   | 7 | % |
| Time                                      |   |                                     | 1,038,140 |   |                                           |   | 984,415   |       |   |   | 53,725 |   |   |   | 5 | % |
| Time                $100,000 or more      |   |                                     | 306,822   |   |                                           |   | 235,264   |       |   |   | 71,558 |   |   |   | 30 | % |
|                                      |   | $                                        | 2,638,388 |   |                                           | $      | 2,438,057 |       |   | $ | 200,331 |   |   |   | 8 | % |

----

**Nine      Months Ended September 30:**

|                                                            |   | **September****30,** |           |   | **Change** |   |
|-----------------------------------------------------------------|--------|----------------------|----------------|--------|------------|--------|
| (in                thousands)                                   |   | **2007**             |           |   | **2006**   |   |   | **Volume** |   |   | **%** |   |
| Cash                and due from banks                          |   | $                    | 59,608         |   |       | $      | 60,462 |   |   | $ | (854 | ) |   |   | (1 | )% |
| Federal                funds sold and interest-bearing deposits |   |                 | 39,203         |   |       |   | 31,340 |   |   |   | 7,863 |   |   |   | 25 | % |
| Investments                (including trading assets)           |   |                 | 678,833        |   |       |   | 585,909 |   |   |   | 92,924 |   |   |   | 16 | % |
| Loans                                                           |   |                 | 2,519,749      |   |       |   | 2,314,258 |   |   |   | 205,491 |   |   |   | 9 | % |
| Allowance                for loan losses                        |   |                 | (25,170        | )      |       |   | (23,817 | ) |   |   | (1,353 | ) |   |   | 6 | % |
| Net                loans                                        |   |                 | 2,494,579      |   |       |   | 2,290,441 |   |   |   | 204,138 |   |   |   | 9 | % |
| Goodwill                and other intangible assets             |   |                 | 272,584        |   |       |   | 258,902 |   |   |   | 13,682 |   |   |   | 5 | % |
| Other                assets                                     |   |                 | 165,491        |   |       |   | 159,964 |   |   |   | 5,527 |   |   |   | 3 | % |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                     |   | $                    | 3,710,298      |   |       | $      | 3,387,018 |   |   | $ | 323,280 |   |   |   | 10 | % |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing                deposits                     |   | $                    | 353,370        |   |       | $      | 356,200 |   |   | $ | (2,830 | ) |   |   | (1 | )% |
| Interest-bearing                deposits                        |   |                 | 2,234,155      |   |       |   | 2,017,997 |   |   |   | 216,158 |   |   |   | 11 | % |
| Short-term                borrowings                            |   |                 | 90,304         |   |       |   | 62,340 |   |   |   | 27,964 |   |   |   | 45 | % |
| Long-term                debt                                   |   |                 | 427,820        |   |       |   | 403,828 |   |   |   | 23,992 |   |   |   | 6 | % |
| Subordinated                debt                                |   |                 | 69,180         |   |       |   | 49,282 |   |   |   | 19,898 |   |   |   | 40 | % |
| Other                liabilities                                |   |                 | 25,201 29 |   |       |   | 23,691 |   |   |   | 1,510 |   |   |   | 6 | % |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                |   |                 | 3,200,030      |   |       |   | 2,913,338 |   |   |   | 286,692 |   |   |   | 10 | % |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Stockholders’                equity                       |   |                 | 510,268        |   |       |   | 473,680 |   |   |   | 36,588 |   |   |   | 8 | % |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders’ equity |   | $                    | 3,710,298      |   |       | $      | 3,387,018 |   |   | $ | 323,280 |   |   |   | 10 | % |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |
|                                                            |   |                 |           |   |       |   |   |   |   |   |   |   |   |   |   |   |

**RESULTS      OF OPERATIONS**

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

----

|                                                                                    |   | **Net                Interest Margin – Quarter to Date** |      |   |                                        |   |
|-----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|-----------|--------|---------------------------------------------|--------|
|                                                                                    |   |                                                           |      |   |                                        |   |
| (in                thousands)                                                           |   | September                30, 2007                              |      |   | September                30, 2006           |   |
|                                                                                    |   | Average                Balance                                 |      |   | FTE                Interest Income/ Expense |   |   | Average                Rate Earned/Paid |   |   | Average                Balance |   |   | FTE                Interest Income/ Expense |   |   | Average                Rate Earned/Paid |   |
| Federal                funds sold and interest-bearing                deposits in banks |   | $                                                              | 27,494    |   |                                        | $      | 346 |   |   |   | 4.99 | % |   | $ | 29,324 |   |   | $ | 390 |   |   |   | 5.28 | % |
| Investment                securities                                                    |   |                                                           | 682,695   |   |                                        |   | 10,664 |   |   |   | 6.20 | % |   |   | 566,772 |   |   |   | 8,556 |   |   |   | 5.99 | % |
| Loans                - commercial                                                       |   |                                                           | 958,605   |   |                                        |   | 19,019 |   |   |   | 7.87 | % |   |   | 831,950 |   |   |   | 16,687 |   |   |   | 7.76 | % |
|  -                commercial real estate                                           |   |                                                           | 807,618   |   |                                        |   | 14,631 |   |   |   | 7.19 | % |   |   | 831,288 |   |   |   | 14,810 |   |   |   | 7.07 | % |
|  -                residential real estate                                          |   |                                                           | 178,487   |   |                                        |   | 2,709 |   |   |   | 6.02 | % |   |   | 150,926 |   |   |   | 2,364 |   |   |   | 6.21 | % |
|  -                consumer                                                         |   |                                                           | 634,019   |   |                                        |   | 11,559 |   |   |   | 7.23 | % |   |   | 525,188 |   |   |   | 9,552 |   |   |   | 7.22 | % |
| Total                earning assets                                                     |   | $                                                              | 3,288,918 |   |                                        | $      | 58,928 |   |   |   | 7.11 | % |   | $ | 2,935,448 |   |   | $ | 52,359 |   |   |   | 7.08 | % |
|                                                                                    |   |                                                           |      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      |   | $                                                              | 937,362   |   |                                        | $      | 5,659 |   |   |   | 2.40 | % |   | $ | 873,670 |   |   | $ | 4,969 |   |   |   | 2.26 | % |
| -  time                                                                       |   |                                                           | 1,344,962 |   |                                        |   | 15,397 |   |   |   | 4.54 | % |   |   | 1,219,679 |   |   |   | 12,889 |   |   |   | 4.19 | % |
| Short-term                borrowings                                                    |   |                                                           | 81,387    |   |                                        |   | 918 |   |   |   | 4.47 | % |   |   | 60,680 |   |   |   | 739 |   |   |   | 4.83 | % |
| Long-term                debt                                                           |   |                                                           | 435,014   |   |                                        |   | 5,207 |   |   |   | 4.75 | % |   |   | 340,162 |   |   |   | 3,936 |   |   |   | 4.59 | % |
| Subordinated                debt                                                        |   |                                                           | 75,260    |   |                                        |   | 1,351 |   |   |   | 7.12 | % |   |   | 51,548 |   |   |   | 972 |   |   |   | 7.48 | % |
| Total                interest-bearing liabilities                                       |   | $                                                              | 2,873,985 |   |                                        | $      | 28,532 |   |   |   | 3.94 | % |   | $ | 2,545,739 |   |   | $ | 23,505 |   |   |   | 3.66 | % |
|                                                                                    |   |                                                           |      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |                                                           |      |   |                                        |   |   |   |   |   | 7.11 | % |   |   |   |   |   |   |   |   |   |   | 7.08 | % |
| Interest                expense to paying liabilities                                   |   |                                                           |      |   |                                        |   |   |   |   |   | 3.94 | % |   |   |   |   |   |   |   |   |   |   | 3.66 | % |
|                                                                                    |   |                                                           |      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |                                                           |      |   |                                        |   |   |   |   |   | 3.17 | % |   |   |   |   |   |   |   |   |   |   | 3.42 | % |
| Impact                of non-interest funds                                             |   |                                                           |      |   |                                        |   |   |   |   |   | 0.50 | % |   |   |   |   |   |   |   |   |   |   | 0.48 | % |
| Net                interest margin                                                      |   |                                                           |      |   |                                        | $      | 30,396 |   |   |   | 3.67 | % |   |   |   |   |   | $ | 28,854 |   |   |   | 3.90 | % |

| o   | The                existence of a generally higher level of short-term interest rates                since                mid-year 2006 and the prolonged presence of an “inverted” or “flat" yield                curve throughout most of 2006 and into the first half of                2007.  This trend was then coupled with the more recent decline                in short-term rates during the third quarter of 2007.  These                dynamics contributed to a generally upward re-pricing of a significant                portion of the funding base.  At the same time, the more recent                declines in rates have undermined attempts to simultaneously increase                the                yields on the loan portfolio. |
|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o ** ** | The                Federal Open Market Committee’s more recent tightening of the benchmark                Federal Funds rate during the third quarter of                2007. |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

----

**Net      Interest Income - Nine Months Ended September 30:**

|                                                                                    |   | **Net                Interest Margin – Year to Date** |      |   |                                        |   |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|-----------|--------|---------------------------------------------|--------|
|                                                                                    |   |                                                        |      |   |                                        |   |
| (in                thousands)                                                           |   | September                30, 2007                           |      |   | September                30, 2006           |   |
|                                                                                    |   | Average                Balance                              |      |   | FTE                Interest Income/ Expense |   |   | Average                Rate Earned/Paid |   |   | Average                Balance |   |   | FTE                Interest Income/ Expense |   |   | Average                Rate Earned/Paid |   |
| Federal                funds sold and interest-bearing                deposits in banks |   | $                                                           | 39,203    |   |                                        | $      | 1,524 |   |   |   | 5.20 | % |   | $ | 39,340 |   |   | $ | 1,426 |   |   |   | 4.85 | % |
| Investment                securities                                                    |   |                                                        | 678,833   |   |                                        |   | 31,311 |   |   |   | 6.17 | % |   |   | 585,909 |   |   |   | 26,085 |   |   |   | 5.95 | % |
| Loans                - commercial                                                       |   |                                                        | 942,456   |   |                                        |   | 55,779 |   |   |   | 7.91 | % |   |   | 825,241 |   |   |   | 47,844 |   |   |   | 7.75 | % |
|  -                commercial real estate                                           |   |                                                        | 806,338   |   |                                        |   | 43,304 |   |   |   | 7.18 | % |   |   | 819,887 |   |   |   | 42,741 |   |   |   | 6.97 | % |
|  -                residential real estate                                          |   |                                                        | 169,051   |   |                                        |   | 7,892 |   |   |   | 6.24 | % |   |   | 151,751 |   |   |   | 6,933 |   |   |   | 6.11 | % |
|  -                consumer                                                         |   |                                                        | 601,904   |   |                                        |   | 32,547 |   |   |   | 7.23 | % |   |   | 517,378 |   |   |   | 27,045 |   |   |   | 6.99 | % |
| Total                earning assets                                                     |   | $                                                           | 3,237,785 |   |                                        | $      | 172,357 |   |   |   | 7.12 | % |   | $ | 2,939,506 |   |   | $ | 152,074 |   |   |   | 6.92 | % |
|                                                                                    |   |                                                        |      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                - savings and NOW accounts                                      |   | $                                                           | 912,949   |   |                                        | $      | 16,144 |   |   |   | 2.36 | % |   | $ | 840,397 |   |   | $ | 12,363 |   |   |   | 1.97 | % |
| -  time                                                                       |   |                                                        | 1,321,206 |   |                                        |   | 44,516 |   |   |   | 4.50 | % |   |   | 1,177,600 |   |   |   | 34,700 |   |   |   | 3.94 | % |
| Short-term                borrowings                                                    |   |                                                        | 90,304    |   |                                        |   | 3,240 |   |   |   | 4.80 | % |   |   | 62,340 |   |   |   | 2,080 |   |   |   | 4.46 | % |
| Long-term                debt                                                           |   |                                                        | 427,820   |   |                                        |   | 15,008 |   |   |   | 4.69 | % |   |   | 403,828 |   |   |   | 13,611 |   |   |   | 4.51 | % |
| Subordinated                debt                                                        |   |                                                        | 69,180    |   |                                        |   | 3,720 |   |   |   | 7.19 | % |   |   | 49,282 |   |   |   | 2,707 |   |   |   | 7.34 | % |
| Total                interest-bearing liabilities                                       |   | $                                                           | 2,821,459 |   |                                        | $      | 82,628 |   |   |   | 3.92 | % |   | $ | 2,533,447 |   |   | $ | 65,461 |   |   |   | 3.45 | % |
|                                                                                    |   |                                                        |      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                income to earning assets                                        |   |                                                        |      |   |                                        |   |   |   |   |   | 7.12 | % |   |   |   |   |   |   |   |   |   |   | 6.92 | % |
| Interest                expense to paying liabilities                                   |   |                                                        |      |   |                                        |   |   |   |   |   | 3.92 | % |   |   |   |   |   |   |   |   |   |   | 3.45 | % |
|                                                                                    |   |                                                        |      |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                spread                                                          |   |                                                        |      |   |                                        |   |   |   |   |   | 3.20 | % |   |   |   |   |   |   |   |   |   |   | 3.47 | % |
| Impact                of non-interest funds                                             |   |                                                        |      |   |                                        |   |   |   |   |   | 0.51 | % |   |   |   |   |   |   |   |   |   |   | 0.47 | % |
| Net                interest margin                                                      |   |                                                        |      |   |                                        | $      | 89,729 |   |   |   | 3.71 | % |   |   |   |   |   | $ | 86,613 |   |   |   | 3.94 | % |

----

**Provision      for Loan Losses**

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

|                                                                                                                     |   | **Three                Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
| (in                thousands)                                                                                            |   | **2007**                                            |   |   | **2006** |   |   | **Increase****(Decrease)** |   |
| Investment                management and trust services                                                                  |   | $                                                   | 1,211  |   |   | $ | 968 |   |   | $ | 243 |   |
| Service                charges on deposit accounts                                                                       |   |                                                | 4,278  |   |   |   | 3,037 |   |   |   | 1,241 |   |
| Other                service charges, commissions and fees                                                               |   |                                                | 2,209  |   |   |   | 1,817 |   |   |   | 392 |   |
| Insurance                premium income and commissions                                                                  |   |                                                | 1,079  |   |   |   | 1,053 |   |   |   | 26 |   |
| Mortgage                banking activities                                                                               |   |                                                | 459    |   |   |   | 533 |   |   |   | (74 | ) |
| Earnings                on investment in life insurance                                                                  |   |                                                | 755    |   |   |   | 679 |   |   |   | 76 |   |
| Trading                activities gains                                                                                  |   |                                                | 38     |   |   |   | --- |   |   |   | 38 |   |
| Other                                                                                                                    |   |                                                | 345    |   |   |   | 725 |   |   |   | (380 | ) |
| Total                non-interest income, excluding available-for-sale                investment security gains (losses) |   | $                                                   | 10,374 |   |   | $ | 8,812 |   |   | $ | 1,562 |   |

----

**Non-Interest      Income - Nine Months Ended September 30:**

|                                                                                                                     |   | **Nine                Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
| (in                thousands)                                                                                            |   | **2007**                                           |   |   | **2006** |   |   | **Increase****(Decrease)** |   |
| Investment                management and trust services                                                                  |   | $                                                  | 4,259  |   |   | $ | 3,069 |   |   | $ | 1,190 |   |
| Service                charges on deposit accounts                                                                       |   |                                               | 11,951 |   |   |   | 8,423 |   |   |   | 3,528 |   |
| Other                service charges, commissions and fees                                                               |   |                                               | 6,494  |   |   |   | 5,420 |   |   |   | 1,074 |   |
| Insurance                premium income and commissions                                                                  |   |                                               | 3,318  |   |   |   | 3,098 |   |   |   | 220 |   |
| Mortgage                banking activities                                                                               |   |                                               | 1,701  |   |   |   | 1,581 |   |   |   | 120 |   |
| Earnings                on investment in life insurance                                                                  |   |                                               | 2,199  |   |   |   | 2,010 |   |   |   | 189 |   |
| Trading                activities gains                                                                                  |   |                                               | 4      |   |   |   | --- |   |   |   | 4 |   |
| Other                                                                                                                    |   |                                               | 1,168  |   |   |   | 1,849 |   |   |   | (681 | ) |
| Total                non-interest income, excluding available-for-sale                investment security gains (losses) |   | $                                                  | 31,094 |   |   | $ | 25,450 |   |   | $ | 5,644 |   |

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

|                                                |   | **Three                Months Ended September 30,** |   |
|-----------------------------------------------------|--------|-----------------------------------------------------|--------|
| (in                thousands)                       |   | **2007**                                            |   |   | **2006** |   |   | **Increase                (Decrease)** |   |
| Salaries                and employee benefits       |   | $                                                   | 12,419 |   |   | $ | 11,611 |   |   | $ | 808 |   |
| Net                occupancy and equipment expenses |   |                                                | 3,917  |   |   |   | 3,452 |   |   |   | 465 |   |
| Payment                card processing expense      |   |                                                | 848    |   |   |   | 553 |   |   |   | 295 |   |
| Marketing                expense                    |   |                                                | 350    |   |   |   | 354 |   |   |   | (4 | ) |
| Telecommunications                expense           |   |                                                | 718    |   |   |   | 542 |   |   |   | 176 |   |
| Merger                expenses                      |   |                                                | 754    |   |   |   | --- |   |   |   | 754 |   |
| Amortization                of intangibles          |   |                                                | 750    |   |   |   | 659 |   |   |   | 91 |   |
| Other                                               |   |                                                | 3,930  |   |   |   | 4,001 |   |   |   | (71 | ) |
| Total                non-interest expenses          |   | $                                                   | 23,686 |   |   | $ | 21,172 |   |   | $ | 2,514 |   |

----

**Non-Interest      Expenses - Nine Months Ended September 30:**

|                                                |   | **Nine                Months Ended September 30,** |   |
|-----------------------------------------------------|--------|----------------------------------------------------|--------|
| (in                thousands)                       |   | **2007**                                           |   |   | **2006** |   |   | **Increase** |   |
| Salaries                and employee benefits       |   | $                                                  | 37,497 |   |   | $ | 34,280 |   |   | $ | 3,217 |   |
| Net                occupancy and equipment expenses |   |                                               | 11,691 |   |   |   | 10,350 |   |   |   | 1,341 |   |
| Payment                card processing expense      |   |                                               | 2,235  |   |   |   | 1,391 |   |   |   | 844 |   |
| Marketing                expense                    |   |                                               | 1,407  |   |   |   | 1,194 |   |   |   | 213 |   |
| Telecommunications                expense           |   |                                               | 1,855  |   |   |   | 1,659 |   |   |   | 196 |   |
| Merger                expenses                      |   |                                               | 754    |   |   |   | --- |   |   |   | 754 |   |
| Amortization                of intangibles          |   |                                               | 2,222  |   |   |   | 2,015 |   |   |   | 207 |   |
| Other                                               |   |                                               | 12,657 |   |   |   | 11,514 |   |   |   | 1,143 |   |
| Total                non-interest expenses          |   | $                                                  | 70,318 |   |   | $ | 62,403 |   |   | $ | 7,915 |   |

----

**Income      Taxes**

**CAPITAL**

|                                          | **September                30,****2007** | **Regulatory****Minimum** | **“Well****Capitalized”** |
|-----------------------------------------------|------------------------------------------|---------------------------|---------------------------------------|
| Leverage                ratio                 |                                     |                      |                                  |
| Community                Banks, Inc.          | 9.26%                                    | 4%                        | 5%                                    |
| CommunityBanks                                | 8.96%                                    | 4%                        | 5%                                    |
|                                          |                                     |                      |                                  |
| Tier                1 capital ratio           |                                     |                      |                                  |
| Community                Banks, Inc.          | 11.30%                                   | 4%                        | 6%                                    |
| CommunityBanks                                | 10.91%                                   | 4%                        | 6%                                    |
|                                          |                                     |                      |                                  |
| Total                risk-based capital ratio |                                     |                      |                                  |
| Community                Banks, Inc.          | 12.19%                                   | 8%                        | 10%                                   |
| CommunityBanks                                | 11.81%                                   | 8%                        | 10%                                   |

**CONTRACTUAL      OBLIGATIONS**

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

|                                       |   | **Payments                due by period** |      |
|--------------------------------------------|--------|-------------------------------------------|-----------|
|   (in                thousands)  |   | **Total**                                 |      |   | **Less                than****1                year** |   |   | **1-3****years** |   |   | **3-5****years** |   |   | **More                than****5                years** |   |
|                                       |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                debt              |   | $                                         | 413,483   |   |   | $ | 14,481 |   |   | $ | 75,169 |   |   | $ | 36,175 |   |   | $ | 287,658 |   |
| Operating                lease obligations |   |                                      | 38,435    |   |   |   | 2,115 |   |   |   | 4,243 |   |   |   | 3,892 |   |   |   | 28,185 |   |
| Subordinated                debt           |   |                                      | 75,260    |   |   |   | --- |   |   |   | --- |   |   |   | --- |   |   |   | 75,260 |   |
| Time                deposits               |   |                                      | 1,376,954 |   |   |   | 915,514 |   |   |   | 420,529 |   |   |   | 38,697 |   |   |   | 2,214 |   |
|                                       |   |                                      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                      |   | $                                         | 1,904,132 |   |   | $ | 932,110 |   |   | $ | 499,941 |   |   | $ | 78,764 |   |   | $ | 393,317 |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

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

|                                                                                   |   | **Three                Months Ended** |      |   | **Nine                Months Ended** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|--------|--------------------------------------|--------|
|                                                                                   |   | **September                30,**      |      |   | **September                30,**     |   |
|                                                                                   |   | **2007**                              |      |   | **2006**                             |   |   | **2007** |   |   | **2006** |   |
| **Income                statement data:**                                              |   |                                  |      |   |                                 |   |   |   |   |   |   |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |
| **Net                income**                                                          |   |                                  |      |   |                                 |   |   |   |   |   |   |   |
| Net                income                                                              |   | $                                     | 10,493    |   |                                 | $      | 10,558 |   |   | $ | 28,030 |   |   | $ | 31,631 |   |
| Amortization                of core deposit and other intangible assets  (1) |   |                                  | 488       |   |                                 |   | 428 |   |   |   | 1,445 |   |   |   | 1,309 |   |
| Merger                expenses  (1)                                          |   |                                  | 490       |   |                                 |   | --- |   |   |   | 490 |   |   |   | --- |   |
| Net                operating (tangible) income                                         |   | $                                     | 11,471    |   |                                 | $      | 10,986 |   |   | $ | 29,965 |   |   | $ | 32,940 |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Balance                sheet data:**                                                 |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Average                assets**                                                      |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Average                assets                                                          |   | $                                     | 3,778,338 |   |                                 | $      | 3,385,905 |   |   | $ | 3,710,298 |   |   | $ | 3,387,018 |   |
| Goodwill                                                                               |   |                                  | (265,048  | )      |                                 |   | (245,794 | ) |   |   | (258,449 | ) |   |   | (245,439 | ) |
| Core                deposit and other intangible assets                                |   |                                  | (14,446   | )      |                                 |   | (13,229 | ) |   |   | (14,135 | ) |   |   | (13,463 | ) |
|      Average                tangible assets                   |   | $                                     | 3,498,844 |   |                                 | $      | 3,126,882 |   |   | $ | 3,437,714 |   |   | $ | 3,128,116 |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                return on average tangible assets**                         |   |                                  | 1.30      | %      |                                 |   | 1.39 | % |   |   | 1.17 | % |   |   | 1.41 | % |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Average                equity**                                                      |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Average                equity                                                          |   | $                                     | 521,089   |   |                                 | $      | 471,911 |   |   | $ | 510,268 |   |   | $ | 473,680 |   |
| Goodwill                                                                               |   |                                  | (265,048  | )      |                                 |   | (245,794 | ) |   |   | (258,449 | ) |   |   | (245,439 | ) |
| Core                deposit and other intangible assets                                |   |                                  | (14,446   | )      |                                 |   | (13,229 | ) |   |   | (14,135 | ) |   |   | (13,463 | ) |
| Deferred                taxes                                                          |   |                                  | 2,349     |   |                                 |   | 1,755 |   |   |   | 2,124 |   |   |   | 1,775 |   |
|      Average                tangible equity                   |   | $                                     | 243,944   |   |                                 | $      | 214,643 |   |   | $ | 239,808 |   |   | $ | 216,553 |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Operating                return on average tangible equity**                         |   |                                  | 18.66     | %      |                                 |   | 20.31 | % |   |   | 16.71 | % |   |   | 20.34 | % |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **At                end of quarter:**                                                  |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Total                assets**                                                        |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Total                assets                                                            |   | $                                     | 3,789,634 |   |                                 | $      | 3,431,208 |   |   | $ | 3,789,634 |   |   | $ | 3,431,208 |   |
| Goodwill                                                                               |   |                                  | (265,136  | )      |                                 |   | (245,864 | ) |   |   | (265,136 | ) |   |   | (245,864 | ) |
| Core                deposit and other intangible assets                                |   |                                  | (14,083   | )      |                                 |   | (13,641 | ) |   |   | (14,083 | ) |   |   | (13,641 | ) |
|      Total                tangible assets                     |   | $                                     | 3,510,415 |   |                                 | $      | 3,171,703 |   |   | $ | 3,510,415 |   |   | $ | 3,171,703 |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Total                equity**                                                        |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Total                equity                                                            |   | $                                     | 526,475   |   |                                 | $      | 479,584 |   |   | $ | 526,475 |   |   | $ | 479,584 |   |
| Goodwill                                                                               |   |                                  | (265,136  | )      |                                 |   | (245,864 | ) |   |   | (265,136 | ) |   |   | (245,864 | ) |
| Core                deposit and other intangible assets                                |   |                                  | (14,083   | )      |                                 |   | (13,641 | ) |   |   | (14,083 | ) |   |   | (13,641 | ) |
| Deferred                taxes                                                          |   |                                  | 2,277     |   |                                 |   | 1,698 |   |   |   | 2,277 |   |   |   | 1,698 |   |
|      Total                tangible equity                     |   | $                                     | 249,533   |   |                                 | $      | 221,777 |   |   | $ | 249,533 |   |   | $ | 221,777 |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| **Tangible                book value at end of period**                                |   | $                                     | 10.05     |   |                                 | $      | 9.45 |   |   | $ | 10.05 |   |   | $ | 9.45 |   |
|                                                                                   |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|  (1)  Net                of related tax effect                          |   |                                  |      |   |                                 |   |   |   |   |   |   |   |   |   |   |   |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

| **Interest                Rate Sensitivity**                        |   |             |    |   |               |   |    |                |   |   |                                 |   |   |      |      |
|---------------------------------------------------------------------|--------|------------------|---------|--------|--------------------|--------|---------|---------------------|--------|--------|--------------------------------------|--------|--------|-----------|-----------|
|  **(in                thousands)**                             |   | **1-90****days** |    |   | **90-180****days** |   |    | **180-365****days** |   |   | **1                year or****more** |   |   | **Total** |      |
|                                                                |   |             |    |   |               |   |    |                |   |   |                                 |   |   |      |      |
| **Assets**                                                          |   |             |    |   |               |   |    |                |   |   |                                 |   |   |      |      |
| Interest-bearing                deposits in other banks             |   | $                | 5,383   |   |               |   | ---     |                |   |   | ---                                  |   |   |      | ---       |   |   | $ | 5,383 |   |
| Investment                securities (including trading assets)     |   |             | 71,746  |   |               |   | 22,308  |                |   |   | 43,471                               |   |   |      | 545,540   |   |   |   | 683,065 |   |
| Loans(1)                                                            |   |             | 764,274 |   |               |   | 106,730 |                |   |   | 241,199                              |   |   |      | 1,497,541 |   |   |   | 2,609,744 |   |
| Earning                assets                                       |   |             | 841,403 |   |               |   | 129,038 |                |   |   | 284,670                              |   |   |      | 2,043,081 |   |   |   | 3,298,192 |   |
| Non-earning                assets                                   |   |             | 720     |   |               |   | 720     |                |   |   | 1,351                                |   |   |      | 488,651   |   |   |   | 491,442 |   |
| Total                assets                                         |   | $                | 842,123 |   |               | $      | 129,758 |                |   | $      | 286,021                              |   |   | $         | 2,531,732 |   |   | $ | 3,789,634 |   |
| ** Liabilities**                                               |   |             |    |   |               |   |    |                |   |   |                                 |   |   |      |      |   |   |   |   |   |
| Savings                                                             |   | $                | 238,570 |   |               | $      | 39,305  |                |   | $      | 78,593                               |   |   | $         | 546,878   |   |   | $ | 903,346 |   |
| Time                                                                |   |             | 167,346 |   |               |   | 218,453 |                |   |   | 276,996                              |   |   |      | 367,101   |   |   |   | 1,029,896 |   |
| Time                in denominations of  $100,000 or more |   |             | 101,947 |   |               |   | 78,321  |                |   |   | 72,451                               |   |   |      | 94,339    |   |   |   | 347,058 |   |
| Short-term                borrowings                                |   |             | 124,288 |   |               |   | ---     |                |   |   | ---                                  |   |   |      | ---       |   |   |   | 124,288 |   |
| Long-term                debt                                       |   |             | 11,581  |   |               |   | 111,053 |                |   |   | 1,779                                |   |   |      | 289,070   |   |   |   | 413,483 |   |
| Subordinated                debt                                    |   |             | 23,196  |   |               |   | ---     |                |   |   | 3,093                                |   |   |      | 48,971    |   |   |   | 75,260 |   |
| Interest                bearing liabilities                         |   |             | 666,928 |   |               |   | 447,132 |                |   |   | 432,912                              |   |   |      | 1,346,359 |   |   |   | 2,893,331 |   |
| Other                liabilities and equity                         |   |             | 10,394  |   |               |   | 10,395  |                |   |   | 20,789                               |   |   |      | 854,725   |   |   |   | 896,303 |   |
| Total                liabilities and equity                         |   | $                | 677,322 |   |               | $      | 457,527 |                |   | $      | 453,701                              |   |   | $         | 2,201,084 |   |   | $ | 3,789,634 |   |

| **Interest                Sensitivity GAP**                                 |   |             |    |   |               |   |     |                |   |
|-----------------------------------------------------------------------------|--------|------------------|---------|--------|--------------------|--------|----------|---------------------|--------|
| **(in                thousands)**                                           |   | **1-90****days** |    |   | **90-180****days** |   |     | **180-365****days** |   |
|                                                                        |   |             |    |   |               |   |     |                |   |
| Periodic                                                                    |   | $                | 164,801 |   |               | $      | (327,769 | )                   |   | $ | (167,680 | ) |
| Cumulative                                                                  |   |             |    |   |               |   | (162,968 | )                   |   |   | (330,648 | ) |
| Cumulative                GAP as a percentageof                total assets |   |             | 4.4     | %      |               |   | (4.3     | )%                  |   |   | (8.7 | )% |

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

----

**COMMUNITY      BANKS, INC. AND SUBSIDIARIES**

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

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

**Item      1A – Risk Factors**

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

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

|                                        | **Total                Number of Shares****Purchased** | **Average                Price****Paid****Per                Share** | **Total                Number of****Shares                Purchased****as                Part of****Publicly****Announced                Plans****or  Programs** | **Capacity                to****Purchase****More                Shares****Under                Repurchase****Program** |
|---------------------------------------------|--------------------------------------------------------|----------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
|                                        |                                                   |                                                                 |                                                                                                                                                                       |                                                                                                                   |
|  7/1/07                - 7/31/07       | 306                                                    |  $29.63                                                         | 306                                                                                                                                                                        | 41,600                                                                                                                 |
|  8/1/07                – 8/31/07 | 273                                                    |  29.83                                                          | 273                                                                                                                                                                        | 41,600                                                                                                                 |
|  9/1/07                - 9/30/07       | 257                                                    |  30.19                                                          | 257                                                                                                                                                                        | 41,600                                                                                                                 |

----

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

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

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

**Item      5 – Other Information**

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

| 2.1    | Amended                and Restated Agreement and Plan of Merger between Susquehanna Bancshares,                Inc. and Community Banks, Inc., dated as of April 30, 2007, as amended                and                restated as of July 25, 2007. (Incorporated by reference to Annex                A,                attached to the Joint Proxy Statement/Prospectus of Community and                Susquehanna dated August 10, 2007, and filed by Susquehanna Bancshares,                Inc., (file No. 333-144397) with the Commission, pursuant to Rule                424(b)(3), on August 13, 2007) |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    | Amended                and Restated Articles of Incorporation  (Incorporated by                reference to Appendix A to Community’s 2006 Proxy Statement filed with the                Commission on March 31, 2006)                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2    | Amended                By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K filed with the Commission on                December 14, 2006)                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    | Supplemental                Provisions to Rights Agreement dated as of February 28, 2002 by and                between CommunityBanks, Inc. and CommunityBanks adopted by Community                on                August 7, 2007.                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2   | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32     | Section                1350 Certifications (Chief Executive Officer and Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

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

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

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

| Date   | November                9, 2007 |   | /s/    | Eddie                L. Dunklebarger     |
|--------|---------------------------------|--------|--------|------------------------------------------|
|   |                            |   |   | **Eddie                L. Dunklebarger** |
|   |                            |   |   | Chairman                and President    |
|   |                            |   |   | (Chief                Executive Officer) |
|   |                            |   |   |                                     |
| Date   | November                9, 2007 |   | /s/    | Donald                F. Holt            |
|   |                            |   |   | **Donald                F. Holt**        |
|   |                            |   |   | Executive                Vice President  |
|   |                            |   |   | (Chief                Financial Officer) |

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

| 2.1    | Amended                and Restated Agreement and Plan of Merger between Susquehanna Bancshares,                Inc. and Community Banks, Inc., dated as of April 30, 2007, as amended                and                restated as of July 25, 2007. (Incorporated by reference to Annex                A,                attached to the Joint Proxy Statement/Prospectus of Community and                Susquehanna dated August 10, 2007, and filed by Susquehanna Bancshares,                Inc., (file No. 333-144397) with the Commission, pursuant to Rule                424(b)(3), on August 13, 2007) |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1    | Amended                and Restated Articles of Incorporation  (Incorporated by                reference to Appendix A to Community’s 2006 Proxy Statement filed with the                Commission on March 31, 2006)                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2    | Amended                By-Laws (Incorporated by reference to Exhibit 3(ii), attached to                Community’s Current Report on Form 8-K filed with the Commission on                December 14, 2006)                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    | Supplemental                Provisions to Rights Agreement dated as of February 28, 2002 by and                between CommunityBanks, Inc. and CommunityBanks adopted by Community                on                August 7, 2007..                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1   | Rule                13a-14(a)/15d-14(a) Certification (Chief Executive                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2   | Rule                13a-14(a)/15d-14(a) Certification (Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32     | Section                1350 Certifications (Chief Executive Officer and Chief Financial                Officer)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----